<PAGE>
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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 0-14023
VIDEO CITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3897052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Amapola Avenue, Suite 208, Torrance, California 90501
(Address of principal executive offices) (Zip Code)
(310) 533-3900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO ___
---
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of May 10, 1999, was approximately $14,051,000.
The number of shares of common stock outstanding as of May 10, 1999 was
13,846,936 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________
Documents incorporated by reference: None
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<PAGE>
PART III
Safe Harbor Statement under the Private Securities Litigation Reform Act of
---------------------------------------------------------------------------
1995.
----
This Amendment to the Annual Report contains forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, such as statements of the Company's plans,
objectives, expectations and intentions, that involve risks and uncertainties
that could cause actual results to differ materially from those discussed in
such forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled "Special Considerations" as well as those discussed elsewhere in the
Annual Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management of the Company
The following sets forth certain information with respect to the directors
and executive officers of Video City, Inc. (the "Company"):
<TABLE>
<CAPTION>
Director
Name Age Positions with the Company Since
---- --- -------------------------- -------
<S> <C> <C> <C>
Robert Y. Lee 36 Chairman of the Board and 1997(1)
Chief Executive Officer
Stephen C. Lehman 47 Director 1997
Gerald W. B. Weber 48 Director 1997
Barry L. Collier 56 Director 1997(2)
John T. Sheehy 56 Director 1997
Charles E. Cooke 37 Director 1997
Michael T. Anderson 36 Director 1997
James Craig Kelly 41 Chief Operating Officer, Senior Vice 1997
President and Director
David A. Ballstadt 59 Senior Vice President and Director 1998
Timothy J. Denari 40 Chief Financial Officer --
Young J. Kim 30 Senior Vice President, General Counsel and --
Secretary
</TABLE>
______________
(1) Mr. Lee has served as a director of the Company's predecessor, Lee Video
City, Inc., since 1990. Lee Video City, Inc. merged with and into Prism
Entertainment Corporation in January 1997 and the surviving corporation
changed its name to Video City, Inc.
(2) Mr. Collier has served as a director of the Company's predecessor, Prism
Entertainment Corporation, since 1984. Lee Video City, Inc. merged with and
into Prism Entertainment
<PAGE>
Corporation in January 1997 and the surviving corporation changed its name
to Video City, Inc.
Robert Y. Lee has served as the Company's Chairman of the Board and Chief
Executive Officer since the merger (the "Merger") of the Company's predecessor,
Lee Video City, Inc. ("Lee Video City"), with and into Prism Entertainment
Corporation ("Prism") in January 1997. Mr. Lee founded Lee Video City, Inc. and
served as its Chairman of the Board and Chief Executive Officer from its
inception in 1990. Mr. Lee purchased his first video store in 1983, and during
the 1980s opened and acquired more than 20 video stores in Southern California.
Stephen C. Lehman has served as a director of the Company since the Merger
in January 1997. Since August 1998, Mr. Lehman has served as Chairman of the
Board and Chief Executive Officer of e4L, Inc. (formerly known as National Media
Corporation), a provider of transactional television programming. Mr. Lehman
served as the President, Chief Executive Officer and Chairman of the Board of
Premiere Radio Networks, Inc., a producer of radio programming, from its
formation in 1987 until August 1998. Prior to this, he was the President of
Stephen Lehman Productions, a syndicated radio program company while also
serving as on-air personality at KIIS AM and FM/Los Angeles. From 1982 to 1984,
Mr. Lehman specialized in building radio networks for independent radio
syndication.
Gerald W. B. Weber has served as a director of the Company since the Merger
in January 1997. Mr. Weber is the founding partner and Chief Operating Officer
of CarSpa, Inc., a retail automobile service company. Mr. Weber was the founding
partner of AutoNation USA, an automobile retailer, and from 1995 to 1997 served
as the Senior Vice President of AutoNation USA, where he was responsible for all
AutoNation USA retail operations, including sales, training, planning, hiring
and loss prevention. From 1987 to 1995, Mr. Weber held various management
positions with Blockbuster Entertainment Corp., including President of
Blockbuster Music and Senior Vice President of Blockbuster Video. Mr. Weber has
over 25 years of experience in retail operations and marketing.
Barry L. Collier has served as a director of the Company since the Merger
in January 1997. From January 1997 to April 1999, Mr. Collier served as the
President of the Company. Mr. Collier served as the President, Chief Operating
Officer and as a director of Prism from its inception in 1984 until the Merger.
He served as the Secretary of Prism from 1984 to 1985 and was appointed as the
Chief Executive Officer of Prism from 1985 until the Merger. Mr. Collier served
as the Chairman of the Board of Prism from 1990 until 1994. Prism filed a
voluntary petition under Chapter 11 of the Bankruptcy Code in December 1995 and
emerged from Chapter 11 upon the consummation of the Merger.
John T. Sheehy has served as a director of the Company since November 1997.
Mr. Sheehy has been the Managing Director of The Value Group, LLC, an investment
banking firm, since April 1996. Mr. Sheehy currently serves as a director of The
First Australia Fund, Inc., The First Australia Prime Income Fund, Inc., The
First Commonwealth Fund, Inc. and The First Australia Prime Income Investment
Company Limited, all of which are publicly-held companies. Mr. Sheehy was
formerly a Managing Director of Bear Stearns & Co. Inc.
Charles E. Cooke has served as a director of the Company since the Merger
in January 1997. Mr. Cooke is a principal of Cooke & Grace Properties which
owns, manages, sells and leases commercial real property. From 1985 to 1994, Mr.
Cooke was affiliated with Dobson & Johnson, Inc. as a commercial real estate
broker. Mr. Cooke currently serves as a director of Nashville Bank of Commerce,
a publicly-held company.
<PAGE>
Michael T. Anderson has served as a director of the Company since the
Merger in January 1997. Mr. Anderson is a partner at the law firm of Troop
Steuber Pasich Reddick & Tobey, LLP, in Los Angeles, California, where he
specializes in commercial litigation. Prior to joining this firm, Mr. Anderson
was associated with the law firm of DeCastro, West, Chodorow & Burns, and was
also an associate at the Boston Consulting Group, a management consulting firm.
James Craig Kelly has served as the Chief Operating Officer and Senior Vice
President and as a director of the Company since the Merger in January 1997, and
as its Secretary from January 1997 to April 1997 and from November 1997 to March
1999. Mr. Kelly served as the Chief Operating Officer of Lee Video City from
1992 until the Merger. For fifteen years, Mr. Kelly held various positions with
Wherehouse Entertainment, a $500 million revenue retailer of music and video
products, including Director of Loss Prevention from 1982 to 1984, and Vice
President and Regional Manager for Wherehouse from 1984 to 1991.
David A. Ballstadt has served as the Senior Vice President and as a
director of the Company since the acquisition by the Company of Adventures in
Video, Inc. and KDDJ Investments, Inc., in March 1998. Mr. Ballstadt founded and
served as the President and Chief Executive Officer of Adventures in Video, Inc.
and KDDJ Investments, Inc. until their sale to the Company.
Timothy J. Denari has served as the Chief Financial Officer of the Company
since October 1997. Prior to joining the Company, he was the corporate
controller for Fleet Card Fuels, a $100 million fuel sales corporation. Between
1993 and 1995, he was the Chief Financial Officer and Controller of the
Company's predecessor, Lee Video City. Between 1990 and 1993, Mr. Denari was an
Account Executive for Merrill Lynch and Shearson Lehman, managing over $30
million in private client assets. Between 1985 and 1990, he was Vice President
of the Bank of Stockdale. In November 1997, Mr. Denari filed a voluntary
petition under Chapter 7 of the Bankruptcy Code.
Young J. Kim has served as the Senior Vice President and General Counsel of
the Company since September 1998 and as the Secretary of the Company since March
1999. From February 1996 to September 1998, he practiced corporate law at the
law firm of Troy & Gould. From 1994 to 1996, Mr. Kim was an associate at the law
firm of Latham & Watkins.
The Company, Robert Y. Lee, Barry L. Collier and Ingram Entertainment, Inc.
("Ingram") have entered into a Shareholders Agreement, dated as of January 8,
1997, which provides that the Company's Board of Directors shall consist of
eight members and that Ingram, Mr. Lee and Mr. Collier shall collectively vote
their shares in favor of two designees of Ingram, four designees of Mr. Lee and
two designees of Mr. Collier. Of the present Board of Directors, Charles E.
Cooke and Michael T. Anderson are the designees of Ingram; Mr. Lee, James Craig
Kelly, John T. Sheehy and Stephen C. Lehman are the designees of Mr. Lee; and
Barry L. Collier and Gerald W. B. Weber are the designees of Mr. Collier.
Effective March 25, 1998, the Board was increased to nine members and David A.
Ballstadt was elected to fill that vacancy. The same parties also entered into
an Override Agreement, dated November 19, 1996 (the "Override Agreement"), which
provides, subject to certain exceptions, that without the written consent of
Ingram, the Company shall not enter into a merger or a sale or transfer of all
or substantially all of its assets, or make any material change in the nature of
its business as now conducted, or change the form of organization of its
business; and that without unanimous approval of the Board of Directors, the
Company shall not enter into any line of business other than the sale and rental
of video product and related goods, the completion of one film that the
Company's predecessor, Prism Entertainment Corporation, had under way, and the
exploitation of Prism's film library (which the Company sold in March 1998);
these provisions will
<PAGE>
remain in force until the later of the payment in full of the Company's
$1,500,000 debt to Ingram (which was paid in full in March 1998), or such time
as Ingram's beneficial ownership interest in the Company's common stock, on a
fully diluted basis, is 4 percent or less.
The Agreements of Merger and Plan of Reorganization entered into by the
Company in connection with the acquisition by the Company of Adventures in
Video, Inc. and KDDJ Investments, Inc. from David A. Ballstadt and members of
his immediate family provide that Mr. Ballstadt shall be elected as a director
of the Company effective upon the closing of such acquisitions. Concurrent with
the completion of the acquisitions on March 25, 1998, the Board of Directors of
the Company was expanded from eight to nine members and Mr. Ballstadt was
elected to fill this vacancy. Mr. Ballstadt has served as a director of the
Company since the consummation of the acquisitions.
Directors serve until the next annual meeting of the Company's shareholders
or until their successors are elected or appointed. Officers are elected by and
serve at the discretion of the Board of Directors. There are no family
relationships among the officers or directors of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than 10 percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission"). Directors, executive officers and
greater than 10 percent shareholders are required by the Commission's
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on a review of the copies of the forms furnished to the
Company and the representations made by the reporting persons to the Company,
the Company believes that during the fiscal year ended January 31, 1999, its
directors, executive officers and 10 percent shareholders complied with all
filing requirements under Section 16(a) of the Exchange Act, with the exception
of the following: each of the non-employee members of the Board of Directors
filed the grant of director stock options on a late Form 5; and certain members
of the Board of Directors who invested in the Company reported their investment
in preferred stock and warrants of the Company on a late Form 5.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal years ended
January 31, 1999, January 31, 1998 and December 31, 1996 paid by the Company to
its Chief Executive Officer and the other executive officers of the Company who
earned in excess of $100,000 (collectively, the "Named Executive Officers")
based on salary and bonus for the fiscal year ended January 31, 1999:
<TABLE>
<CAPTION>
Name and long-Term
Principal Position Annual Compensation(1) Compensation
- --------------------------- ----------------------------------------------------- ------------
Securities
Period Underlying
Ended(2) Salary($) Bonus Options (#)
----------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Robert Y. Lee (3) January 31, 1999 $ 178,000 $ -- --
Chief Executive Officer January 31, 1998 178,000 -- --
December 31, 1996 172,701 -- --
Barry L. Collier(4) January 31, 1999 178,000 -- --
President January 31, 1998 178,000 -- --
December 31, 1996 291,168 -- 175,000
James Craig Kelly(5) January 31, 1999 120,000 -- --
Chief Operating Officer January 31, 1998 120,000 -- --
December 31, 1996 101,282 -- 761,600
Timothy J. Denari(6) January 31, 1999 117,500 -- 250,000
Chief Financial Officer January 31, 1998 39,166 -- --
</TABLE>
___________
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the foregoing
executive officers which are available generally to all employees of the
Company and certain perquisites and other personal benefits received by the
foregoing executive officers of the Company, the value of which did not
exceed the lesser of $50,000 or 10% of the executive officer's cash
compensation in the table.
(2) Upon the consummation of the merger of Lee Video City, Inc. with and into
Prism Entertainment Corporation on January 8, 1997, the Company changed its
fiscal year end from December 31 to January 31.
(3) Mr. Lee served as the Chief Executive Officer of the Company's predecessor,
Lee Video City, before the Merger. Mr. Lee's compensation during the fiscal
year ended December 31, 1996 reflects compensation paid to Mr. Lee by Lee
Video City.
(4) Mr. Collier served as the Chief Executive Officer of the Company's
predecessor, Prism, before the Merger. Mr. Collier's compensation during
the fiscal year ended December 31, 1996 reflects compensation paid to Mr.
Collier by Prism.
(5) Mr. Kelly served as the Chief Operating Officer of the Company's
predecessor, Lee Video City, before the Merger. Mr. Kelly's compensation
during the fiscal year ended December 31, 1996 reflects compensation paid
to Mr. Kelly by Lee Video City.
(6) Mr. Denari served as the Chief Financial Officer of the Company since
October 1997.
Option Grants
The following table sets forth certain information regarding grants of
options to the Named Executive
<PAGE>
Officers during the fiscal year ended January 31, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees Price Expiration for Option Term(1)
---------------------
Name Granted (#) in Fiscal Year ($/Share) Date 5%($) 10%($)
- -------------------- ----------- -------------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Timothy J. Denari... 250,000(2) 27.4% $ 2.00 12/31/02 $ 0 $ 0
</TABLE>
____________________
(1) Sets forth potential option gains based on assumed annualized rates of
stock price appreciation from the market price ($0.8125) at the date of
grant of 5% and 10% (compounded annually) over the full term of the grant
with appreciation determined as of the expiration date. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission, and do not represent the Company's estimate or
projection of future Common Stock prices.
(2) 125,000 of the options are exercisable beginning on October 1, 1998, and
the remaining options are exercisable beginning on October 1, 1999.
Option Exercises and Fiscal Year-End Values
No stock options were exercised by any of the Named Executive Officers
during the fiscal year ended January 31, 1999. The following table sets forth
certain information regarding stock options held by the Named Executive Officers
as of January 31, 1999:
Fiscal Year-End Options
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Name Year-End (#) Fiscal Year End ($)(1)
---- --------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Y. Lee................... 0 0 -- --
Barry L. Collier................ 175,000 0 $ 288,750 --
James Craig Kelly............... 761,600 0 $ 940,980 --
Timothy J. Denari............... 125,000 125,000 0 0
</TABLE>
___________________
(1) Amounts are shown as the positive spread between the exercise price and the
last sale price of the Company's Common Stock ($1.75) as reported on the
OTC Bulletin Board on February 1, 1999. January 31, 1999 was not a trading
day.
Director Compensation
Directors, other than directors who are employees of the Company, receive
cash compensation in the amount of $5,000 per year for serving on the Board of
Directors and are also entitled to participate in the Company's stock option
plans and from time to time to receive grants of options thereunder to purchase
shares of the Company's Common Stock. In February and June 1998, Stephen C.
Lehman, Gerald W. B. Weber, Charles E. Cooke, Michael T. Anderson and John T.
Sheehy each received options to purchase 5,000 and 15,000 shares, respectively,
of the Company's Common Stock at $2.00 per share. In March 1999, Messrs. Lehman,
Weber, Cooke, Anderson and Sheehy each received options to purchase 20,000
shares of
<PAGE>
the Company's Common Stock at $2.00 per share. Messrs. Lehman and Weber received
additional compensation as consultants pursuant to consulting agreements entered
into with the Company. See "Certain Relationships and Related Transactions."
Employment Agreements
The Company entered into an employment agreement (the "Lee Employment
Agreement") with Robert Y. Lee pursuant to which Mr. Lee serves as the Chairman
of the Board and Chief Executive Officer of the Company for a term of three
years commencing January 1997. The Lee Employment Agreement provides for a base
salary of $178,000 per year and an annual bonus of 3 percent of any pre-tax
profit in excess of $1,100,000 with respect to the fiscal year commencing
February 1997; 3 percent of any pre-tax profit in excess of $1,200,000 with
respect to the fiscal year commencing February 1998; and 3 percent of any pre-
tax profit in excess of $1,300,000 with respect to the fiscal year commencing
February 1999. The Lee Employment Agreement also provides that Mr. Lee shall be
entitled to certain fringe benefits including payments of up to $500 per month
for the use of an automobile.
The Company entered into an employment agreement (the "Collier Employment
Agreement") with Barry L. Collier pursuant to which Mr. Collier served as the
President of the Company for a term of two years commencing January 1997. The
Collier Employment Agreement and a related noncompetition agreement provided for
compensation of $178,000 per year and provide that Mr. Collier shall be entitled
to certain fringe benefits including payments of up to $500 per month for the
use of an automobile.
The Company entered into an employment agreement (the "Kelly Employment
Agreement") with James Craig Kelly pursuant to which Mr. Kelly serves as the
Senior Vice President and Chief Operating Officer of the Company for a term of
three years commencing January 1997. The Kelly Employment Agreement provides for
a base salary of $120,000 per year and an annual bonus of 3 percent of any pre-
tax profit in excess of $1,100,000 with respect to the fiscal year commencing
February 1997; 3 percent of any pre-tax profit in excess of $1,200,000 with
respect to the fiscal year commencing February 1998; and 3 percent of any pre-
tax profit in excess of $1,300,000 with respect to the fiscal year commencing
February 1999. The Kelly Employment Agreement also provides that Mr. Kelly shall
be entitled to certain fringe benefits including payments of up to $500 per
month for the use of an automobile.
The Company entered into an employment agreement (the "Denari Employment
Agreement") with Timothy J. Denari pursuant to which Mr. Denari serves as the
Chief Financial Officer of the Company for a term of two years commencing
January 1998. The Denari Employment Agreement provides for a base salary of
$117,500 per year and an annual bonus of 2.5 percent of any pre-tax profit in
excess of $1,100,000 with respect to the fiscal year commencing February 1997;
2.5 percent of any pre-tax profit in excess of $1,200,000 with respect to the
fiscal year commencing February 1998; and 2.5 percent of any pre-tax profit in
excess of $1,300,000 with respect to the fiscal year commencing February 1999.
The Denari Employment Agreement also provides that Mr. Denari shall be entitled
to certain fringe benefits including payments of up to $500 per month for the
use of an automobile.
In the event that the employment of Messrs. Lee, Collier, Kelly or Denari
is terminated for any reason other than "material breach" or "cause" as defined
in his employment agreement, the Company shall pay the remainder of the base
salary to such individual for the remaining term of such employment agreement.
<PAGE>
Stock Option Plan
1996 Stock Option Plan. In November 1996, the Board of Directors and
shareholders of the Company's predecessor, Lee Video City, adopted its 1996
Stock Option Plan. The 1996 Stock Option Plan, which was assumed by the Company,
provides for the grant of options to directors, officers, other employees and
consultants of the Company to purchase up to an aggregate of 1,000,000 shares of
Common Stock. The purpose of the 1996 Stock Option Plan is to provide
participants with incentives which will encourage them to acquire a proprietary
interest in, and continue to provide services to, the Company. The 1996 Stock
Option Plan is administered by the Board of Directors, or a committee of the
Board, which has discretion to select optionees and to establish the terms and
conditions of each option, subject to the provisions of the 1996 Stock Option
Plan. Options granted under the 1996 Stock Option Plan may be "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or nonqualified options.
The exercise price of incentive stock options may not be less than the fair
market value of Common Stock as of the date of grant (110% of the fair market
value if the grant is to an employee who owns more than 10 percent of the total
combined voting power of all classes of capital stock of the Company). The Code
currently limits to $100,000 the aggregate value of Common Stock that may become
exercisable in any one year pursuant to incentive stock options under the 1996
Stock Option Plan or any other option plan adopted by the Company. Nonqualified
options may be granted under the 1996 Stock Option Plan at an exercise price of
not less than 85% of the fair market value of the Common Stock on the date of
grant. Nonqualified options may be granted without regard to any restriction on
the amount of Common Stock that may become exercisable pursuant to such options
in any one year. Options may not be exercised more than ten years after the date
of grant (five years after the date of grant if the grant is an incentive stock
option to an employee who owns more than 10 percent of the total combined voting
power of all classes of capital stock of the Company), or such lesser period of
time as is set forth in the applicable stock option agreement. Options granted
under the 1996 Stock Option Plan generally are nontransferable except by will or
by the laws of descent and distribution. Shares subject to options that expire
unexercised under the 1996 Stock Option Plan are available for future grant
under the 1996 Stock Option Plan. The number of options outstanding and the
exercise price thereof are subject to adjustment in the case of certain
transactions such as recapitalizations, stock splits or stock dividends. The
1996 Stock Option Plan is effective for ten years, unless sooner terminated or
suspended.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination will immediately terminate, and any options that are exercisable
will terminate not less than three months (six months in the case of termination
by reason of death or disability) following termination of employment, or such
other period of not less than 30 days after the date of termination as is
specified in the applicable stock option agreement.
1998 Stock Option Plan. In June 1998, the Company's Board of Directors
unanimously approved the Company's 1998 Stock Option Plan. In August 1998 the
Company's shareholders approved the 1998 Stock Option Plan. The purpose of the
1998 Stock Option Plan is to enable the Company to attract and retain top-
quality employees, officers, directors and consultants and to provide them with
an incentive to enhance shareholder return.
The 1998 Stock Option Plan provides for the grant of options to officers,
directors, other employees and consultants of the Company to purchase up to an
aggregate of 1,200,000 shares of Common Stock. In March 1999, the Board of
Directors increased the number of shares covered under
<PAGE>
the 1998 Stock Option Plan to 2,700,000. The 1998 Stock Option Plan is
administered by the Board of Directors or a committee of the Board, and is
currently administered by the Compensation Committee of the Board of Directors,
which has complete discretion to select the optionees and to establish the terms
and conditions of each option, subject to the provisions of the 1998 Stock
Option Plan. Options granted under the 1998 Stock Option Plan may be "incentive
stock options" as defined in Section 422 of the Code, or nonqualified options,
and will be designated as such.
The exercise price of incentive stock options may not be less than the fair
market value of the Company's Common Stock as of the date of grant (110% of the
fair market value if the grant is to an employee who owns more than 10% of the
total combined voting power of all classes of capital stock of the Company). The
Code currently limits to $100,000 the aggregate value of Common Stock that may
become exercisable for the first time in any one year pursuant to incentive
stock options under the 1998 Stock Option Plan or any other option plan adopted
by the Company. Nonqualified options may be granted under the 1998 Stock Option
Plan at an exercise price less than the fair market value of the Common Stock on
the date of grant. Nonqualified options also may be granted without regard to
any restriction on the amount of Common Stock that may become exercisable
pursuant to such options in any one year.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (six months in the case of termination by reason of
death or disability) following termination of employment.
Options may not be exercised more than ten years after the grant (five
years after the grant if the grant is an incentive stock option to an employee
who owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the 1998 Stock Option Plan
are not transferable and may be exercised only by the respective grantees during
their lifetime or by their heirs, executors or administrators in the event of
death. Under the 1998 Stock Option Plan, shares subject to cancelled or
terminated options are available for subsequently granted options. The number of
options outstanding and the exercise price thereof are subject to adjustment in
the case of certain transactions such as recapitalizations, stock splits or
stock dividends. The 1998 Stock Option Plan is effective for ten years, unless
sooner terminated or suspended. The 1998 Stock Option Plan provides that options
covering no more than 600,000 shares of Common Stock may be granted to any one
employee in any twelve month period.
Compensation Committee Interlocks and Insider Participation
The Company's compensation committee was formed to make recommendations to
the Board concerning salaries and incentive compensation for officers of the
Company, including the grant of stock options to the Company's executive
officers under the Company's stock option plans. From February 1998 to June
1998, the compensation committee consisted of Charles E. Cooke and Stephen C.
Lehman. In June 1998, Michael T. Anderson replaced Mr. Lehman as a member of the
compensation committee. Mr. Lehman provided finance, acquisitions and corporate
development consulting services to the Company pursuant to a consulting
agreement entered into between the Company and Mr. Lehman. The consulting
agreement, as amended, provides for compensation in the form of options to
purchase 90,000 shares of the Company's Common Stock at $2.00 per share and
warrants to purchase 100,000 shares of the Company's Common Stock at $2.00 per
share. In addition, the Company sold the rights to its library of 47 feature
films and other properties and related accounts receivable to an entity owned
and controlled by Mr. Lehman. The Company retained the law firm of Troop Steuber
Pasich Reddick & Tobey, LLP ("Troop Steuber") to
<PAGE>
render legal services to the Company on real estate, litigation and other
matters. Mr. Anderson is a partner at Troop Steuber. See "Certain Relationships
and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 10, 1999, by (i) each person
who is known by the Company to own beneficially more than five percent of the
Company's outstanding Common Stock, (ii) each of the directors of the Company,
(iii) each of the Named Executive Officers, and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address(1) Beneficially Owned(2) Outstanding
- ------------------------------------------------ ---------------------------- ---------------------
<S> <C> <C>
Robert Y. Lee................................... 2,971,524(3) 21.5%
Barry L. Collier................................ 955,577(4) 6.8%
James Craig Kelly............................... 761,600(4) 5.2%
David A. Ballstadt.............................. 660,325 4.8%
Stephen C. Lehman............................... 535,000(4)(5) 3.7%
Gerald W. B. Weber.............................. 320,000(4)(6) 2.3%
Timothy J. Denari............................... 225,000(4)(7) 1.6%
Michael T. Anderson............................. 70,000(4)(8) *
John T. Sheehy.................................. 55,000(4) *
Charles E. Cooke................................ 45,000(4) *
Ingram Entertainment Inc.(9).................... 3,161,378(9) 20.9%
Mortco, Inc.(10)................................ 2,628,444(10) 17.2%
Victor J. Cianci................................ 1,200,000(11) 8.0%
Evvy R. Cianci.................................. 1,200,000(11) 8.0%
Andrew T. Baruffi............................... 1,050,000 7.6%
All Directors and Executive Officers as a group 5,939,026 37.4%
(11 persons)...................................
</TABLE>
_____________
* Less than one percent.
(1) Except as otherwise indicated, the address of each principal shareholder of
the Company is c/o Video City, Inc. at 370 Amapola Avenue, Suite 208,
Torrance, California 90501.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities. Shares of Common Stock
subject to options or warrants that are currently exercisable or are
exercisable within 60 days of May 10, 1999, are deemed outstanding for
computing the percentage of the person holding such options or warrants but
are
<PAGE>
not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote and subject to community property laws
where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(3) Includes a proxy to vote 610,000 shares owned by Mr. Collier.
(4) Includes the following currently exercisable stock options to purchase
shares from the Company: Mr. Collier, 175,000 shares; Mr. Kelly, 761,600
shares; Mr. Lehman, 135,000 shares; Mr. Weber, 120,000 shares; Mr. Denari,
125,000 shares; Mr. Anderson, 45,000 shares; Mr. Sheehy, 40,000 shares; and
Mr. Cooke, 45,000 shares.
(5) Includes 125,000 shares of Common Stock issuable upon conversion of
outstanding shares of the Company's Series AA Convertible Redeemable
Preferred Stock ("Series AA Preferred Stock") and 225,000 shares of Common
Stock issuable upon exercise of warrants. Mr. Lehman beneficially owns
2,500 shares of Series AA Preferred Stock. As of May 10, 1999, there 7,750
shares of Series AA Preferred Stock issued and outstanding.
(6) Includes 100,000 shares of Common Stock issuable upon conversion of
outstanding shares of the Company's Series AA Preferred Stock and 100,000
shares of Common Stock issuable upon exercise of warrants. Mr. Weber
beneficially owns 2,000 shares of Series AA Preferred Stock.
(7) Includes an option by Mr. Denari to purchase 50,000 shares of Common Stock
from Mr. Lee.
(8) Includes 12,500 shares of Common Stock issuable upon conversion of
outstanding shares of the Company's Series AA Preferred Stock and 12,500
shares of Common Stock issuable upon exercise of warrants. Mr. Anderson
beneficially owns 250 shares of Series AA Preferred Stock.
(9) Consists of 1,500,000 shares owned outright; a warrant to purchase 404,403
shares from Mr. Lee; and warrants to purchase 1,256,975 shares from the
Company. Ingram Entertainment Inc.'s address is Two Ingram Boulevard, La
Vergne, Tennessee 37089.
(10) Consists of 1,190,217 shares owned outright; 37,500 shares issuable upon
conversion of outstanding shares of the Series AA Preferred Stock; 666,667
shares issuable upon conversion of outstanding shares of the Series D
Convertible Redeemable Preferred Stock; and 734,060 shares issuable from
the Company upon exercise of warrants. Mortco, Inc. beneficially owns 750
shares of Series AA Preferred Stock. Mortco, Inc.'s address is One Airport
Center, 7700 N.E. Ambassador Place, Portland, Oregon 97220. Mortco, Inc. is
a wholly-owned subsidiary of Rentrak Corporation.
(11) Consists of shares of Common Stock issuable upon conversion of outstanding
shares of the Company's Series B Convertible Redeemable Preferred Stock.
The following table sets forth the beneficial owners of all outstanding
shares of the Company's Series B Convertible Redeemable Preferred Stock ("Series
B Preferred Stock") as of May 10, 1999:
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address(1) Beneficially Owned(2) Outstanding
- ------------------------------------------------ ------------------------ ---------------
<S> <C> <C>
Victor J. Cianci................................ 38,000 50.0%
Evvy R. Cianci.................................. 38,000 50.0%
</TABLE>
___________________________
(1) Except as otherwise indicated, the address of each principal shareholder of
the Company is c/o Video City, Inc. at 370 Amapola Avenue, Suite 208,
Torrance, California 90501.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities. Except as indicated by
footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of the Company's Series B Preferred Stock shown as
beneficially owned by them.
The Company does not know of any arrangements that may at a subsequent date
result in a change of control of the Company.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ingram Entertainment Inc. has been the principal supplier of videocassettes
and related equipment to the Company for a number of years, and has been a
secured creditor of the Company since August 1991. During the fiscal year ended
January 31, 1999, the Company purchased approximately $4,660,000 of products
from Ingram Entertainment Inc. and approximately $1,035,000 of products from
Rentrak Corporation ("Rentrak"). Ingram and Rentrak's wholly-owned subsidiary,
Mortco, Inc., are principal shareholders of the Company. In March 1998, the
Company used funds obtained from a credit facility with FINOVA Capital
Corporation to pay off a term loan in the amount of $1,500,000 owed to Ingram.
In March 1998, the Company sold the rights to its library of 47 feature
films and other properties and related accounts receivable to an entity owned
and controlled by Stephen C. Lehman, a member of the Company's board of
directors, for $1,350,000 in cash. The library was the principal asset of Prism
prior to the merger in January 1997 of Lee Video City with and into Prism.
In March 1998, the Company also entered into a restructured debt agreement
with Rentrak, a major lessor of videocassettes under a revenue sharing
arrangement. Prior to the acquisition of the five companies in March 1998, the
Company and Sulpizio One, Inc. (one of the acquired companies) were parties to
such arrangements with Rentrak. As part of the restructuring, Rentrak agreed to
accept 194,950 shares of the Company's Common Stock in settlement of a lawsuit
Rentrak had previously filed against Adventures in Video, Inc. (one of the
acquired companies), and 470,162 shares of the Company's Common Stock in
satisfaction of indebtedness owed to Rentrak by Sulpizio One, Inc. As part of
the restructured debt agreement, Rentrak also agreed to a deferral of certain
amounts owed to it by Sulpizio One, Inc. and the Company, and obtained a
security interest in the assets of the Company to secure such amounts. Rentrak
also released Robert Y. Lee, the Company's Chairman of the Board and Chief
Executive Officer, from personal guaranties of the Company's indebtedness that
Mr. Lee had previously given. Rentrak's wholly-owned subsidiary, Mortco, Inc.,
is a principal shareholder of the Company.
In April 1997, the Company entered into three year consulting agreements
with Gerald W. B. Weber and Stephen C. Lehman pursuant to which Messrs. Weber
and Lehman shall provide finance, acquisition and corporate development
consulting services to the Company. The consulting agreements of Messrs. Weber
and Lehman provide for compensation in the form of options to purchase an
aggregate of 75,000 and 90,000 shares, respectively, of the Company's Common
Stock at $2.00 per share. Options to purchase one-third of such shares of Common
Stock vest each year commencing in April 1997 and any unexercised portions
terminate in April 2002. Each consulting agreement also provides that the
Company shall reimburse the consultant for reasonable out-of-pocket expenses
incurred in performing his consulting services, that the Company shall indemnify
the consultant with respect to any claims made against the consultant arising in
connection with the consulting service, and that either party may terminate the
consulting agreement by providing 30 days notice to the other party. In March
1998, Mr. Lehman's consulting agreement was amended to provide Mr. Lehman
additional compensation in the form of warrants to purchase 100,000 shares of
the Company's Common Stock at $2.00 per share. Messrs. Weber and Lehman are
directors of the Company.
In April 1998, the Company entered into an engagement agreement with The
Value Group, LLC ("Value Group"), pursuant to which Value Group shall act as the
financial advisor to the Company providing financial management, acquisition and
financing advisory services for a period of one year commencing April 1998 and
for such additional one year terms as may be mutually agreed to by Value Group
and the Company. The engagement agreement provides for a base fee of $2,500 per
month which
<PAGE>
shall be credited against any transaction fees to which Value Group may be
entitled upon consummation of any acquisition or financing transaction. The
engagement agreement also provides that the Company would reimburse Value Group
for reasonable out-of-pocket expenses incurred in performing its financial
advisory services and that either party may terminate the engagement by
providing 45 days notice to the other party. During the fiscal year ended
January 31, 1999, the Company paid Value Group fees in the amount of
approximately $29,300 in cash and 9,375 shares of the Company's Common Stock.
John T. Sheehy serves as a director of the Company and is a Managing Director of
Value Group.
In May 1998, the Company commenced a private placement financing of the
Company's securities in which Ridgewood Capital Funding, Inc. ("Ridgewood") has
agreed to serve as the placement agent. John T. Sheehy, a member of the Board of
Directors of the Company, assisted Ridgewood in conducting the offering, acting
as a registered broker under Ridgewood's broker-dealership. In addition, certain
directors of the Company, Value Group and Mortco, Inc. participated in the
private placement financing by investing in the Company's securities. See
"Security Ownership of Certain Beneficial Owners and Management."
In September 1998, the Company acquired substantially all of the assets of
Game City, Inc. ("Game City") for a purchase price of cash in the amount of
$7,500, the assumption of certain indebtedness to third parties and to the
Company in the total amount of $117,500, and a promissory note in the principal
amount of $150,000. Game City owned a retail video store located in Bakersfield,
California, which was previously managed by the Company under a management
agreement. Game City was owned by Young C. and Kay L. Lee, who are the parents
of Robert Y. Lee, the Company's Chief Executive Officer. The acquisition was
approved by the Company's Board of Directors and the Company believes that this
acquisition represented an arm's length transaction on terms and valuation
comparable to other completed acquisitions for the year ended January 31, 1999.
In September 1998, the Company acquired all of the outstanding shares of
capital stock of Video Tyme Inc. for a purchase price consisting of 1,050,000
shares of the Company's Common Stock and cash in the amount of $1,000,000. Part
of the cash component of the purchase price for the acquisition in the amount of
$300,000 was borrowed by the Company from Mortco, Inc.. The promissory note for
the $300,000 loan provided for an interest rate equal to nine percent per annum.
The loan was secured by all of the assets of Video Tyme Inc. Mortco, Inc. is a
principal shareholder of the Company.
In December 1998, the Company acquired Cianci's Videoland, Inc.
("Videoland") from Victor J. Cianci and Evvy R. Cianci, in a transaction
structured as a reverse triangular merger, with a newly formed subsidiary of the
Company merging into Videoland. In connection with the acquisition, the Company
issued to Ingram Entertainment Inc. warrants to purchase 404,225 shares of the
Company's Common Stock at an exercise price of $2.00 per share. The warrant also
provides that in the event the Company is unable to pay in full, on or before
June 30, 1999, certain amounts due to Ingram by Videoland in the amount of
approximately $3,600,000, the number of shares covered by the warrant shall
increase to 808,450 shares of the Company's Common Stock. Ingram was the
principal supplier and creditor of Videoland before the acquisition. Ingram is a
principal shareholder and supplier of the Company.
In March 1999, the Company acquired Video Galaxy, Inc. ("Video Galaxy")
from the shareholders of Video Galaxy at a purchase price consisting of 360,667
shares of the Company's Common Stock (subject to post-closing adjustments, if
any) and assumption and payment of indebtedness of Video Galaxy by the Company
in the amount of $4,833,000. In connection with the acquisition, the Company
borrowed $1,700,000 from Ingram Entertainment Inc. to pay off certain amounts
owed to Video Galaxy's creditors and other parties. The promissory note for the
$1,700,000 loan provides for an annual interest rate equal
<PAGE>
to the prime rate, as published in "The Wall Street Journal" from time to time,
plus 1.5 percent and a maturity date of June 30, 1999. The promissory note also
provides that in the event of default, the Company shall grant to Ingram
warrants to purchase up to 474,000 shares of the Company's Common Stock at an
exercise price of $2.00 per share. The Company also agreed to pay Ingram a
management information system fee in the amount of $85,000. In connection with
the acquisition of Video Galaxy, the Company paid Mortco, Inc. indebtedness owed
by Video Galaxy to Mortco, Inc. in the amount of $1,117,000. In addition, the
Company issued 2,000 shares of the Company's Series D Convertible Redeemable
Preferred Stock, $1,000 stated value per share, and warrants to purchase 500,000
shares of the Company's Common Stock at an exercise price of $3.00 per share, to
Mortco, Inc. in consideration for the cancellation by Mortco, Inc. and Rentrak
of amounts due from Video Galaxy to such parties in the amount of $2,000,000.
Rentrak and its wholly-owned subsidiary, Mortco, Inc., were the supplier and
creditor of Video Galaxy before the acquisition. Mortco, Inc. is a principal
shareholder of the Company.
From February 1999 through June 1999, the Company entered into consulting
agreements with Victor J. Cianci and Evvy R. Cianci pursuant to which Victor J.
Cianci and Evvy R. Cianci provide retail video rental and sales consulting
services to the Company. The consulting agreements provide for the payment by
the Company of $25,333.33 per month to each Victor J Cianci and Evvy R. Cianci,
which payments constitute the consultants' waiver and discharge of the Company's
obligation to pay a like amount of monthly dividends otherwise payable on the
Series B Preferred Stock held by the consultants. Victor J Cianci and Evvy R.
Cianci are each principal shareholders of the Company.
During the fiscal year ended January 31, 1999, the Company retained the law
firm of Troop Steuber Pasich Reddick & Tobey, LLP to render legal services to
the Company on real estate, litigation and other matters. Michael T. Anderson is
a partner at Troop Steuber and serves as a director of the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to the
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIDEO CITY, INC.
By /s/ Robert Y. Lee
-------------------
Robert Y. Lee
Chairman of the Board
and Chief Executive Officer
Date: May 28, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to the Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert Y. Lee Chairman of the Board and May 28, 1999
- --------------------------------
Robert Y. Lee Chief Executive Officer (Principal
Executive Officer)
/s/ Timothy J. Denari Chief Financial Officer (Principal May 28, 1999
- --------------------------------
Timothy J. Denari Financial and Accounting Officer)
/s/ James Craig Kelly
________________________________ Director May 28, 1999
James Craig Kelly
/s/ David A. Ballstadt
________________________________ Director May 28, 1999
David A. Ballstadt
________________________________ Director May 28, 1999
Michael T. Anderson
/s/ Barry L. Collier
________________________________ Director May 28, 1999
Barry L. Collier
/s/ Charles E. Cooke
________________________________ Director May 28, 1999
Charles E. Cooke
/s/ Stephen C. Lehman
________________________________ Director May 28, 1999
Stephen C. Lehman
________________________________ Director May 28, 1999
John T. Sheehy
/s/ Gerald W.B. Weber
________________________________ Director May 28, 1999
Gerald W.B. Weber
</TABLE>
