<PAGE>
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, 2000
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.)
9998 Global Road, 2/nd/ Floor, Philadelphia, 19115
Pennsylvania
(Address of principal executive offices) (Zip Code)
(215) 856-2560
(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, 2000, was approximately $2,882,573.
The number of shares of common stock outstanding on May 10, 2000 was 16,107,998
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. X
---
Documents incorporated by reference: None.
<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>
Name Age Positions with the Company Director
---- --- -------------------------- Since
-----
<S> <C> <C> <C>
Robert Y. Lee 37 Chairman of the Board and 1997
Chief Executive Officer
Richard Gibson 37 President and Chief Operating Officer --
Timothy J. Denari (1) 41 Chief Financial Officer --
James Craig Kelly 42 Executive Vice President and Director 1997
Young J. Kim (2) 31 Senior Vice President, General Counsel and
Secretary --
David A. Ballstadt 60 Director 1998
Michael T. Anderson 37 Director 1997
Barry L. Collier 57 Director 1997
Charles E. Cooke 38 Director 1997
John T. Sheehy 57 Director 1997
Gerald W. B. Weber 49 Director 1997
</TABLE>
______________________
(1) Mr. Denari resigned as Chief Financial Officer in March 2000.
(2) Mr. Kim resigned as Senior Vice President, General Counsel and Secretary in
March 2000
<PAGE>
Robert Y. Lee has served as the Company's chairman of the board and chief
executive officer since 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 since its inception in February 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.
Richard Gibson has served as the Company's president and chief operating
officer since June 1999. Prior to joining the Company, Mr. Gibson served as
global controller for Nike Retail, an $800 million division of Nike, Inc., where
he was head of financial operations and strategic planning. These included
director of finance for the U.K. Film Distribution Division, European Director
of Finance and Operations of Warner Brothers European Studio Stores, and finally
four year as Vice President of Warner Brothers Studio Stores International
Division.
Timothy J. Denari has served as the chief financial officer of the Company
since October 1997 to March 2000. 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 March 2000, Mr. Denari resigned
from his position as chief financial officer.
James Craig Kelly has served as a senior vice president and as a director
of Video City since the Prism merger in January 1997, and as its secretary from
January 1997 to April 16, 1997 and from November 20, 1997 to March 25, 1999.
Since July 1999 Mr. Kelly has served as an executive vice president of Video
City. Mr. Kelly served as the chief operating officer of Lee Video City from
1992 until the Prism merger, and as chief operating officer of Video City from
the Prism merger to July 1999. 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 from 1984 to 1991.
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. Prior to joining the Company, he practiced corporate law at the law firm
of Troy & Gould since February 1996. From 1994 to 1996, Mr. Kim was an associate
at the law firm of Latham and Watkins. In March 2000, Mr. Kim resigned from his
position as Senior Vice President, General Counsel and Secretary.
David A. Ballstadt has served and as a director of the Company since the
acquisition by the Company of its subsidiaries, Adventures in Video, Inc. and
KDDJ Investments, Inc., in March 1998. Mr. Ballstadt served as president of the
Company from January 1997 to January 1999. 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.
Michael T. Anderson has served as a director of the Company since the Prism
merger in January 1997. Mr. Anderson is a partner in the law firm of Troop
Meisinger Steuber & Pasich, LLP, in Los Angeles, California, where he
specializes in commercial litigation. Prior to joining this firm, Mr. Anderson
<PAGE>
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.
Barry L. Collier has served as a director of the Company since the Prism
merger in January 1997. Mr. Collier served as the president, chief operating
officer and as a director of Prism since its inception in 1984 until the Prism
merger, and as president of Video City from January 1997 to July 1999. 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 Prism 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 Prism merger.
Charles E. Cooke has served as a director of the Company since the Prism
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.
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 1997. 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.
Gerald W. B. Weber has served as a director of the Company since the Prism
merger in January 1997. Since October 1998, Mr. Weber has served as a chief
operating officer of CarSpa, Inc. Mr. Weber was the Senior Vice President of
Retail Operations of AutoNation USA, where he was responsible for all AutoNation
USA retail operations, including sales, training, planning, hiring and loss
prevention. Prior to joining AutoNation USA, Mr. Weber held various management
positions with Blockbuster Entertainment, including Zone Vice President of the
East and Southeast Regions, vice president of operations, and senior vice
president of domestic retail for the video retail division and president of
Blockbuster Music.
Video City, Robert Y. Lee, Barry L. Collier and Ingram Entertainment, Inc.
("Ingram") have entered into a Stockholders 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 and John T. Sheehy are the designees of Mr.Lee; and Barry L. Collier and
Gerald W. B. Weber are the designees of Mr. Collier. Effective December 1999,
Stephen C. Lehman, who had been a designee of Mr. Lee, resigned from the board
and has not been replaced. With the resignation of Mr. Lehman, the Board was
decreased to eight members. 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
<PAGE>
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; these
provisions will 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 on March 25, 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.
Directors serve until the next annual meeting of the Company's stockholders
or until their successors are elected or appointed. Officers are elected by and
serve at the discretion of the Board of Directors.
Meetings; Attendance; Committees
During the fiscal year ended January 31, 2000, the Board of Directors of
the Company met five times. Mr. Lehman was unable to attend 3 meetings and Mr.
Anderson was unable to attend 2 meetings. No other incumbent member who was a
director during the past fiscal year attended fewer than 75% of the aggregate of
all meetings of the Board of Directors and all meetings of the committees of the
Board of Directors on which he served.
The Company's compensation committee was formed to make recommendations to
the Board concerning salaries and incentive compensation for officers and
employees of the Company, including the grant of stock options to the Company's
executive officers under the Company's stock option plans. The compensation
committee currently consists of Charles E. Cooke, Michael T. Anderson and John
T. Sheehy. The audit committee reviews the scope of the audit and other
accounting related matters. The Company's audit committee currently consists of
Michael T. Anderson and of its Board of Directors.
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 stockholders 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, 2000, its
directors, executive officers and 10 percent stockholders 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 Video City board
reported the grant of director stock options on a late Form 5; and certain
members of the Video City board who invested in Video City reported their
investment in preferred stock and warrants on Video City on a late Form 5.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal years ended
January 31, 2000, January 31, 1999 and January 31, 1998 paid by the Company to
its chief executive officer and the other executive officers of the Company who
earned in excess of $100,000 (collectively, the "Named Executive Officers")
based on salary and bonus for the fiscal year ended January 31, 2000:
<TABLE>
<CAPTION>
Name and Long-Term
Principal Position Annual Compensation(1) Compensation
--------------------------- ------------------------------------------------- ----------------
Securities
Period Underlying
Ended Salary($) Bonus Options (#)
-------------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Robert Y. Lee January 31, 2000 $ 231,000 -- --
Chief Executive Officer January 31, 1999 178,000 $ 30,000 --
January 31, 1998 178,000 -- --
Richard Gibson January 31, 2000 145,000 -- 600,000
President
Chief Operating Officer
Young J. Kim (4) January 31, 2000 115,000 -- --
Senior Vice President January 31, 1999 42,000 -- 100,000
General Counsel --
Secretary
James Craig Kelly (2) January 31, 2000 168,000 -- --
Executive Vice President January 31, 1999 120,000 20,000 --
January 31, 1998 120,000 -- 761,600
Timothy J. Denari(3) January 31, 2000 160,000 -- --
Chief Financial Officer January 31, 1999 117,500 20,000 250,000
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 $50,000 or 10% of the executive officer's cash
compensation in the table.
(2) Mr. Kelly served as executive vice president since July 1999.
(3) Mr. Denari served as the chief financial officer of the Company from
October 1997 to July 1999. He was reinstated as chief financial officer of
the Company in December 1999, and then resigned in March 2000.
(4) Mr. Kim served as senior vice president and general counsel since September
1998 and as secretary since March 1999. In March 2000, Mr. Kim resigned as
senior vice president, general counsel and secretary.
<PAGE>
Option Grants
The following table sets forth certain information regarding grants of options
to the Named Executive Officers during the fiscal year ended January 31, 2000:
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for
Options Employees in Price Expiration Option Term/(1)/
----------------
Name Granted (#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ----------- ----------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert Y. Lee 750,000/(3)/ 10.9% $ 2.00 5/9/04 $ 0 $ 0
Richard Gibson 200,000/(4)/ 2.9% $ 2.00 11/30/04 $ 0 $ 0
Richard Gibson 200,000/(5)/ 2.9% $ 2.312 11/1/09 $ 0 $ 0
Richard Gibson 200,000/(6)/ 2.9% $ 2.312 6/15/09 $ 0 $ 0
Timothy J. Denari 250,000/(2)/ 3.6% $ 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 ($0.8125) at the date of
grant of 5% and 10% (compounded annually) over the full term of the grant
with appreciation determined as of the expiration date. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission, and do not represent Video City's estimate or
projection of future Common Stock prices.
(2) 125,000 of the options are exercisable beginning on October 1, 1998, and
the remaining options are exercisable beginning on October 1, 1999.
(3) 500,000 of the options are exercisable beginning May 10, 1999, and the
remaining options are exercisable beginning May 10,2000.
(4) 200,000 of the options are exercisable beginning December 1, 1999.
(5) 50,000 of the options are exercisable beginning November 1, 2000, 50,000 of
the options are exercisable beginning November 1, 2001, 50,000 of the
options are exercisable beginning November 1,2002, and the remaining
options are exercisable beginning November 1, 20003.
(6) 100,000 of the options are exercisable beginning June 16, 2000, and the
remaining options are exercisable beginning June 16, 2001.
<PAGE>
Option Exercises and Fiscal Year-End Values
No stock options were exercised by any of the Named Executive Officers
during the fiscal year ended January 31, 2000. The following table sets forth
certain information regarding stock options held by the Named Executive Officers
as of January 31, 2000:
<TABLE>
<CAPTION>
Fiscal Year-End Options
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Name Year-End (#) Fiscal Year End ($)(1)
---- ----------------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Y. Lee............... 500,000 250,000 -- --
Young J. Kim................ 50,000 50,000 $ 1,500 --
James Craig Kelly........... 761,600 -- $22,830 --
Richard Gibson 200,000 400,000 -- --
Timothy J. Denari........... 250,000 -- -- --
</TABLE>
___________________
(1) Amounts are shown as the positive spread between the exercise price and the
last sale price of the Company's Common Stock as reported on the OTC
Bulletin Board on January 31, 2000 ($0.54).
Director Compensation
Directors, other than directors who are employees of Video City, receive
cash compensation in the amount of $5,000 per year for serving on the Video City
board and are also entitled to participate in Video City's stock option plans
and from time to time to receive grants of options thereunder to purchase shares
of Video City'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
Video City'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 Video City's common stock at $2.00 per share. Messrs. Lehman and Weber
received additional compensation as consultants pursuant to consulting
agreements entered into with Video City. See "Certain Relationships and Related
Transactions."
Employment Agreements
The Company entered into an employment agreement (the "Gibson Employment
Agreement") with Richard Gibson pursuant to which Mr. Gibson served as president
and chief operation officer of the Company for a term of two years commencing
June 1999. The Gibson Employment Agreement provided a base salary of $250,000
per year and annual bonuses dependent on achieving certain earnings targets, non
of which were achieved. The Gibson Employment Agreement also provides that Mr.
Gibson shall be entitled to certain fringe benefits including payments of
reasonable automobile expenses.
The Company entered into an employment agreement (the "Lee Employment
Agreement") with Robert Y. Lee pursuant to which Mr. Lee served 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
<PAGE>
provided for a base salary of $178,000 per year and annual bonuses dependent on
achieving certain earnings targets, non of which were achieved. Mr. Lee's
compensation was increased, upon approval of the board of directors, to a base
salary of $231,000 per year in February 1999. The Lee Employment Agreement also
provided 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 Lee
Employment Agreement expired on January 31, 2000 and a new employment agreement
is under negotiation.
The Company entered into an employment agreement (the "Kelly Employment
Agreement") with James Craig Kelly pursuant to which Mr. Kelly served as the
senior vice president of Video City for a term of three years commencing January
1997. The Kelly Employment Agreement provided for a base salary of $120,000 per
year and annual bonuses dependent on achieving certain earnings targets, non of
which were achieved. Mr. Kelly's compensation was increased, upon approval of
the board of directors, to a base salary of $168,000 per year in 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 Kelly Employment Agreement expired on January 31, 2000.
The Company entered into a new employment agreement with Mr. Kelly pursuant to
which Mr. Kelly served as executive vice president of Video City for a term of
two year commencing January 2000. Mr. Kelly's new employment agreement provided
for a base salary of $168,000 per year, annual bonuses dependent on achieving
certain earning targets and certain fringe benefits including an allowance for
the use of an automobile and payments of up to $3,500 per month for a housing
allowance related to the Company's relocation from Torrance, California to
Philadelphia, Pennsylvania.
Video City entered into an employment agreement (the "Denari employment
agreement") with Timothy J. Denari pursuant to which Mr. Denari served as an
officer of Video City for a term of two years commencing January 1998. The
Denari employment agreement provided for a base salary of $117,500 per year and
annual bonuses dependent on achieving certain earnings targets, non of which
were achieved. Mr. Denari's compensation was increased, upon approval of the
board of directors, to a base salary of $160,000 per year in 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. The Denari Employment Agreement expired in January 2000 and
Mr. Denari resigned in March 2000.
Stock Option Plan
1996 Stock Option Plan. In November 1996, the Video City board and
shareholders of Video City's predecessor, Lee Video City, adopted its 1996 Stock
Option Plan. The 1996 Stock Option Plan, which was assumed by Video City,
provides for the grant of options to directors, officers, other employees and
consultants of Video City to purchase up to an aggregate of 1,000,000 shares of
its 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, Video City. The 1996 Stock
Option Plan is administered by the Video City board 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 Video
<PAGE>
City 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 Video City). The Code currently
limits to $100,000 the aggregate value of Video City 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 Video City.
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 Video City
common stock on the date of grant. Nonqualified options may be granted without
regard to any restriction on the amount of Video City 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 Video City), 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, Video City's board unanimously
approved Video City's 1998 Stock Option Plan. In August 1998 Video City's
shareholders approved the 1998 Stock Option Plan. The purpose of the 1998 Stock
Option Plan is to enable Video City 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 originally provided for
the grant of options to officers, directors, other employees and consultants of
Video City to purchase up to an aggregate of 1,200,000 shares of Video City
common stock. In March 1999, the Video City board increased the number of shares
covered under the 1998 Stock Option Plan to 2,700,000. The 1998 Stock Option
Plan is administered by the Video City board or a committee of the Board, and is
currently administered by the compensation committee of the Video City board,
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 Video City'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 Video City). The
Code currently limits to $100,000 the aggregate value of Video City common stock
that may become exercisable for the first time in any one year pursuant to
incentive stock options under the 1998 Stock
<PAGE>
Option Plan or any other option plan adopted by Video City. Nonqualified options
may be granted under the 1998 Stock Option Plan at an exercise price less than
the fair market value of Video City common stock on the date of grant.
Nonqualified options also may be granted without regard to any restriction on
the amount of Video City 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 Video City). 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 Video City common stock may be granted
to any one employee in any twelve month period. In accordance with Rule
260.140.45 of the California Commissioner of Corporations, the 1998 Stock Option
Plan provides that at no time shall the total number of shares issuable upon
exercise of all outstanding options and the total number of shares provided for
under any stock bonus or similar plan of Video City exceed 30% of the then
outstanding shares of Video City (with convertible preferred shares being
counted on an as if converted basis) as calculated in accordance with this rule,
based on the shares of Video City which are outstanding at the time the
calculation is made.
Compensation Committee Interlocks and Insider Participation
Video City's compensation committee was formed to make recommendations to
the Video City board concerning salaries and incentive compensation for officers
of Video City, including the grant of stock options to Video City's executive
officers under Video City'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 and in March 1999 John T. Sheehy was added to the
compensation committee. Mr. Lehman provided finance, acquisitions and corporate
development consulting services to Video City pursuant to a consulting agreement
entered into between Video City and Mr. Lehman. The consulting agreement, as
amended, provides for compensation in the form of options to purchase 90,000
shares of Video City's common stock at $2.00 per share and warrants to purchase
100,000 shares of Video City's common stock at $2.00 per share. In addition,
Video City 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. Video City retained the law firm of Troop Steuber Pasich Reddick &
Tobey, LLP to render legal services to Video City on real estate, litigation and
other matters. Mr. Anderson is a partner at Troop Steuber.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Video City's common stock as of May 10, 2000, by (i) each person
who is known by Video City to own beneficially more than 5% of Video City's
outstanding Video City common stock, (ii) each of the directors of Video City,
(iii) each of the Named Executive Officers, and (iv) all officers and directors
of Video City as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address(1) Beneficially Owned(2) Ownership
------------------ --------------------- ---------
<S> <C> <C>
Robert Y. Lee......................................... 3,376,524(3)(4)(5) 20.0%
Richard Gibson........................................ 1,225,000(4)(6)(10) 7.1%
Barry L. Collier...................................... 955,577(4) 5.9%
James Craig Kelly..................................... 761,600(4) 4.5%
David A. Ballstadt.................................... 660,325 4.1%
Gerald W.B. Weber..................................... 322,023(4)(7) 2.0%
Michael T. Anderson................................... 70,253(4)(8) *
John T. Sheehy........................................ 55,000(4)(9) *
Charles E. Cooke...................................... 45,000(4) *
Ingram Entertainment Inc.(9).......................... 5,262,864(11) 27.0%
Mortco, Inc.(10)...................................... 2,500,133(12) 14.2%
Victor J. Cianci...................................... 1,200,000(13) 6.9%
Evvy R. Cianci........................................ 1,200,000(13) 6.9%
Andrew T. Baruffi..................................... 1,050,000 6.5%
All Directors and Executive Officers as a group (10 7,011,302 36.2%
persons).............................................
</TABLE>
____________________
* Less than one percent.
(1) Except as otherwise indicated, the address of each principal shareholder of
Video City is c/o Video City, Inc. at 9998 Global Road, 2/nd/ Floor,
Philadelphia, Pennsylvania 19115.
<PAGE>
(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 Video City
common stock subject to options or warrants that are currently exercisable
or are exercisable within 60 days of May 10, 2000 are deemed outstanding
for computing the percentage of the person holding such options or warrants
but are 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 Video City 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 Video City: Mr. Lee 750,000; Mr. Collier, 175,000 shares; Mr.
Kelly, 761,600 shares; Mr. Weber, 120,000 shares; Mr. Anderson, 45,000
shares; Mr. Sheehy, 40,000 shares; and Mr. Cooke, 45,000 shares and Mr.
Gibson 200,000.
(5) Includes 1,357,282 shares of Video City common stock pledged by Mr. Lee to
certain persons who served as former management of West Coast
Entertainment, Inc. The shares were pledged by Mr. Lee to gaurentee that
the Company will make payments to the former management of WestCoast
Entertainment under the terms of the Consulting Agreement and the Non-
Compete Agreement. Mr. Lee retains voting rights of the pledged shares of
common stock.
(6) Includes 1,000,000 shares of Video City common stock issuable upon exercise
of warrants.
(7) Includes 100,000 shares of Video City common stock issuable upon exercise
of warrants.
(8) Includes 12,500 shares of Video City common stock issuable upon conversion
of outstanding shares of Video City's Series AA preferred stock and 12,500
shares of Video City common stock issuable upon exercise of warrants. Mr.
Anderson beneficially owns 250 shares of Series AA preferred stock.
(9) Does not include shares of Video City common stock beneficially owned by
the Value Group. Mr. Sheehy is a Managing Director of the Value Group.
(10) Consists of 25,000 shares of Video City common stock issuable upon
conversion of outstanding shares of our Series C preferred stock held by
Mr. Gibson's spouse
(11) Consists of 1,500,000 shares of Video City common stock owned outright; a
warrant to purchase 404,403 shares from Mr. Lee; and warrants to purchase
3,358,461 shares from Video City. Ingram Entertainment Inc.'s address is
Two Ingram Boulevard, La Vergne, Tennessee 37089.
(12) Consists of 1,061,906 shares Video City common stock 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 by Video City 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.
(13) Consists of shares of Video City common stock issuable upon conversion of
outstanding shares of Video City's Series B convertible redeemable
preferred stock.
<PAGE>
The following table sets forth the beneficial owners of all outstanding shares
of Video City's Series B convertible redeemable preferred stock as of May 10,
2000:
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address(1) Beneficially Owned(2) Ownership
------------------- -------------------- ---------
<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
Video City is c/o Video City, Inc. at 9998 Global Road, 2/nd/ Floor,
Philadelphia, Pennsylvania 19115.
(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 Video City's Series B preferred stock shown as
beneficially owned by them.
Video City does not know of any arrangements that may at a subsequent date
result in a change of control of Video City.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ingram Entertainment Inc. has been the principal supplier of videocassettes
and related equipment to Video City for a number of years, and has been a
secured creditor of Video City since August 1991. During the fiscal year ended
January 31, 2000, Video City purchased approximately $5.7 million of products
from Ingram and approximately $3.4 million of products from Rentrak Corporation.
Ingram and Rentrak's wholly-owned subsidiary, Mortco, Inc., are principal
shareholders of Video City. In March 1998, Video City 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, Video City 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 Video City's board, 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, Video City entered into a restructured debt agreement with
Rentrak, a major lessor of videocassettes under a revenue sharing arrangement.
Prior to the acquisition of five companies in March 1998, Video City and
Sulpizio One, Inc., were parties to revenue sharing arrangements with Rentrak.
As part of the restructuring, Rentrak accepted 194,950 shares of Video City's
common stock in settlement of a lawsuit Rentrak had previously filed against
Adventures in Video, Inc., and 470,162 shares of Video City'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 Video City, and obtained a security
interest in the assets of Video City to secure such amounts. Rentrak also
released Robert Y. Lee, Video City's Chairman of the Board and Chief Executive
Officer, from personal guaranties of Video City's indebtedness that Mr. Lee had
previously given.
<PAGE>
Rentrak's wholly-owned subsidiary, Mortco, Inc., is a principal shareholder of
Video City.
In April 1997, Video City entered into three year consulting agreements
with Gerald W. B. Weber and Stephen C. Lehman pursuant to which Messrs. Weber
and Lehman provide finance, acquisition and corporate development consulting
services to Video City. 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 Video City's common stock at $2.00
per share. Options to purchase one-third of such shares of Video City common
stock vest each year commencing in April 1997 and any unexercised portions
terminate in April 2002. Each consulting agreement also provides that Video City
will reimburse the consultant for reasonable out-of-pocket expenses incurred in
performing his consulting services, that Video City will indemnify the
consultant against any claims arising in connection with the consulting service,
and that either party may terminate the consulting agreement on 30 days notice.
In March 1998, Mr. Lehman's consulting agreement was amended to provide him with
additional compensation in the form of warrants to purchase 100,000 shares of
Video City's common stock at $2.00 per share. Mr. Weber is a director of Video
City and Mr. Lehman was a director of Video City until his resignation in
December 1998.
In April 1997, Video City engaged The Value Group, LLC to act as financial
advisor providing financial management, acquisition and financing advisory
services for one year commencing April 1997 and for additional one year terms as
mutually agreed to by Value Group and Video City. Video City paid a base fee of
$5,000 per month which was to be credited against any transaction fees to which
Value Group may become entitled. Video City reimbursed Value Group for
reasonable out-of-pocket expenses incurred in performing its financial advisory
services. Either party may terminate this engagement on 45 days notice. In April
1998, Video City discontinued the payment of the $5,000 base fee to Value Group,
but agreed to reimburse Value Group for reasonable out-of-pocket expenses and to
compensate Value Group on a success basis for completed transactions. During the
fiscal year ended January 31, 1999, Video City paid Value Group fees of $29,300
in cash and 9,375 shares of Video City's common stock. In June 1999 Video City
issued 303 shares of its Series C convertible redeemable preferred stock, $1,000
stated value per share, and warrants to purchase 57,312 shares of Video City
common stock at an exercise price of $2.00 per share, to Value Group in
consideration for cancellation of certain trade payables owed by Video City to
Value Group. In addition, in July 1999 Value Group participated in Video City's
private placement financing by purchasing 75 shares of Video City's Series C
preferred stock for $75,000. John T. Sheehy serves as a director of Video City
and is a managing director of Value Group.
Value Group is acting as Video City's financial advisor with respect to the
upcoming merger with West Coast Entertainment, Inc. ("West Coast") and
negotiations relating to the structured bank payment to be entered into with
West Coast's senior bank syndicate. Upon the completion of the merger with West
Coast and the structured bank payment, each of which is conditioned upon the
occurrence of other events, the aggregate fees payable to Value Group will be
approximately $1.2 million in cash and Video City stock. In addition, Video City
agreed to issue warrants to purchase 125,000 shares of Video City common stock
at an exercise price to be determined to Value Group and 50 shares of Video
City's Series C preferred stock, each share having a stated value of $1,000, to
Mr. Sheehy.
In May 1998, Video City commenced a private placement financing of its
securities in which Ridgewood Capital Funding, Inc. has agreed to serve as the
placement agent. John T. Sheehy, a member of the Video City board, assisted
Ridgewood in conducting the offering, acting as a registered broker under
<PAGE>
Ridgewood's broker-dealership. In addition, Value Group, Mortco, Inc. and
certain directors of Video City participated in this financing by investing in
Video City's securities. See " Security Ownership of Certain Beneficial Owners
and Management."
In September 1998, Video City acquired substantially all of the assets of
Game City, Inc. for $7,500 in cash, a promissory note for $150,000, and the
assumption of a total of $117,500 of indebtedness to third parties and to Video
City. Game City owned a retail video store in Bakersfield, California, which was
previously managed by Video City under a management agreement. Game City was
owned by the parents of Robert Y. Lee, Video City's Chief Executive Officer. The
acquisition was approved by Video City's board and Video City believes that this
acquisition represented an arm's length transaction on terms and valuation
comparable to other completed acquisitions during the year ended January 31,
1999.
In September 1998, Video City acquired all of the outstanding shares of
capital stock of Video Tyme Inc. for a purchase price consisting of 1,050,000
shares of Video City's common stock and cash in the amount of $1,000,000. Part
of the cash component of the purchase price was $300,000 borrowed by Video City
from Mortco, Inc. The $300,000 loan provides for an interest rate of nine
percent per annum and is secured by all of the assets of Video Tyme Inc. Mortco,
Inc. is a principal shareholder of Video City.
In December 1998, Video City acquired Cianci's Videoland, Inc. from Victor
J. Cianci and Evvy R. Cianci. In connection with the acquisition, Video City has
issued to Ingram Entertainment Inc. warrants to purchase 1,048,451 shares of
Video City's common stock at an exercise price of $2.00 per share. Ingram was
the principal supplier and creditor of Videoland before the acquisition. Ingram
is a principal shareholder and supplier of Video City.
In March 1999, Video City acquired Video Galaxy, Inc. for 360,667 shares of
Video City's common stock and the assumption of $4,833,000 of indebtedness. In
connection with this acquisition, Video City borrowed $1,700,000 from Ingram
Entertainment Inc. to pay off certain amounts owed to Video Galaxy's creditors
and other parties. The interest rate on the $1,700,000 loan was prime plus 1.5
percent. Video City repaid this loan on its maturity date of June 30, 1999.
Video City also paid Ingram a management information system fee in the amount of
$85,000. Also in connection with this acquisition, Video City paid $1,117,000 to
Mortco, Inc. in partial payment of indebtedness owed by Video Galaxy to Mortco.
In addition, Video City issued to Mortco 2,000 shares of Series D convertible
redeemable preferred stock, $1,000 stated value per share, convertible into
666,667 shares of Video City common stock, and warrants to purchase 500,000
shares of Video City common stock at $3.00 per share, in consideration for the
cancellation by Mortco, Inc. and Rentrak of $2,000,000 owed to them by Video
Galaxy. 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 Video City.
From February 1999 through June 1999, Video City had consulting agreements
with Victor J. Cianci and Evvy R. Cianci pursuant to which they provide retail
video rental and sales consulting services to Video City. The consulting
agreements provide for the payment by Video City of $25,333 per month to each of
them, and the consultants granted a waiver of a like amount of dividends payable
on the Series B Preferred Stock. Victor J. Cianci and Evvy R. Cianci are each
principal shareholders of Video City.
During the fiscal year ended January 31, 1999, Video City retained the law
firm of Troop Steuber Pasich Reddick & Tobey, LLP to render legal services to it
on real estate, litigation and other matters.
<PAGE>
Michael T. Anderson is a partner at Troop Steuber and serves as a director of
Video City.
In November 1999, the Company issued warrants to purchase 2,000,000 shares
of the Company's common stock, at an exercise price of $.875 per share
(1,000,000 shares to Ingram Entertainment and 1,000,000 shares to an officer of
the Company). Ingram Entertainment agreed to provide an additional $2 million
trade credit to the Company of which up to $1 million was guaranteed by an
officer of the Company.
In July 1999, Video City issued 625 shares of its Series C Convertible
Redeemable Preferred Stock, $1,000 stated value per share, to eight accredited
investors for cash in the amount of $625,000 in a private placement transaction.
An officer and a director of the Company participated in the private placement
financing by investing $50,000 and $75,000, respectively.
On March 3, 2000, Robert Y. Lee entered into a Security Agreement with
Ralph W. Standley, III, and T. Kyle Standley, whereby Mr. Lee pledges, assigns
and transfers 1,357,282 shares of Video City common stock ("Security Interest")
to Mr. Ralph and Kyle Standley. The Security Interest shall secure the due and
punctual payment and performance of any an all present and future obligations
and liabilities of Video City arising under or in connection with the Consulting
and Non-Compete agreements. As long as there is no default of this agreement,
Mr. Lee shall continue to be entitled to exercise the sole and exclusive
voting rights with respect to the pledged common stock.
<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 30, 2000
<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
__________________________________ Chief Executive Officer (Principal May 30, 1999
Robert Y. Lee Executive Officer)
/s/ Robert Y. Lee Acting Chief Financial Officer
__________________________________ (Principal Financial and Accounting May 30, 1999
Robert Y. Lee Officer)
/s/ James Craig Kelly Director
__________________________________ May 30, 1999
James Craig Kelly
/s/ David A. Ballstadt Director
__________________________________ May 30, 1999
David A. Ballstadt
/s/ Michael T. Anderson Director
__________________________________ May 30, 1999
Michael T. Anderson
/s/ Barry L. Collier Director
__________________________________ May 30, 1999
Barry L. Collier
__________________________________ Director
Charles E. Cooke May __, 1999
/s/ John T. Sheehy Director
__________________________________ May 30, 1999
John T. Sheehy
/s/ Gerald W.B. Weber Director
__________________________________ May 30, 1999
Gerald W.B. Weber
</TABLE>
