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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997.
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[_] 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
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6840 DISTRICT BOULEVARD, BAKERSFIELD, CALIFORNIA 93313
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(805) 397-7955
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- - - - ------------------- -----------------------------------------
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $ .01 PAR VALUE PER SHARE
----------------------------------------
(TITLE OF 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 THAN 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
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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 IN ANY AMENDMENT TO THIS
FORM 10-K. [_]
AS OF APRIL 24,1997, 9,753,927 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING. NON-AFFILIATES OF THE REGISTRANT (I.E., EXCLUDING SHARES HELD
BY EXECUTIVE OFFICERS, DIRECTORS, AND CONTROL PERSONS AS DEFINED IN RULE 405)
HELD 4,676,853 SHARES OF COMMON STOCK ON THAT DATE. BECAUSE OF THE ABSENCE OF
AN ESTABLISHED TRADING MARKET, THE MARKET VALUE OF SUCH SHARES COULD NOT BE
DETERMINED; SEE ITEM 5 OF THIS FORM 10-K.
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
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in the Annual Report on Form 10-K, particularly under
Items 1 through 8, constitute "forward-looking statements" within the meaning of
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements, expressed or implied by such forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
As the result of a merger on January 8, 1997, discussed below, the business
of Video City, Inc. (the "Company") now consists of the ownership and operation
of a chain of 18 video specialty stores in California plus an additional six
stores owned by others which the Company manages under the Video City name, and
the exploitation of a film library consisting of 47 feature motion pictures and
numerous shorter film products.
The Company (originally known as Lee Video City. Inc.) was incorporated in
California on February 20, 1990. The Company opened its first two video
superstores in Bakersfield, California in 1990 and opened four additional
superstores in Bakersfield by the end of 1992. In 1993 the Company acquired
four existing superstores and opened another ten. In the first half of 1994,
the Company opened an additional eleven superstores, bringing its total store
count to thirty-one. In the fall of 1994, the Company sold two of its
superstores in Idaho, and ended the year with a total of twenty-nine
superstores. The Company owned and operated twenty-nine stores until June 1996
when it sold its eleven stores outside of California. These eleven stores were
sold to reduce debt and restructure the Company's operations by focusing all of
its attention on the "core stores" in California. On January 8, 1997, the
Company merged with and into Prism Entertainment Corporation ("Prism").
Prism, a Delaware Corporation, was incorporated on January 27, 1984. Prism
has been engaged in the in-house production of theatrical and television films
and other programming for distribution to the home video, pay and basic cable,
network television and syndication, and theatrical markets worldwide. Prism
also acquired from third parties rights to such programming, primarily for
distribution to the home video market. Prism concentrated on developing and
obtaining rights to programming which had not received as wide a theatrical
distribution, if any, as first-run theatrical products. Through subsidiaries,
Prism entered into development arrangements with film producers and others,
licensed certain of its films into the foreign marketplace, and acquired foreign
rights to films from independent producers supplementing Prism's own
productions.
In 1994, Prism experienced a substantial decline in sales of its
videocassettes to the domestic rental market. This trend continued into 1995
causing a material reduction in available cash and receivables from the sale of
product. The reduction in receivables decreased the borrowing base under its
credit line that prevented the production of new product. Prism lacked the
necessary cash to operate its business and pay its creditors. On December 1,
1995, Prism filed a voluntary Chapter 11 petition and commenced a case under
Chapter 11 of the United States Bankruptcy Code. During the course of the
Bankruptcy Proceedings, Prism operated as a debtor in possession and engaged in
only limited business activities consisting of the sale of its existing film
products to domestic markets as well as foreign rights to its existing film
library.
Lee Video City, Inc. determined that a merger with Prism would be
advantageous for the following reasons. First, the merger would afford an
opportunity to restructure a significant portion of its debt held by Ingram
Entertainment Incorporated ("Ingram") pursuant to which Ingram would convert
three million dollars of such debt to Common Stock of the Company and terminate
various restrictive covenants contained in a related loan agreement in favor of
a new loan agreement (see "Major Suppliers"). Second, the merger would enable
Lee Video City, Inc. to become a public company and to establish a trading
market for its shares. Third, the merger would result in gaining ownership of
the Prism film library and related accounts receivable and cash subject to the
assumption of Prism's bank indebtedness. Fourth, the
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merger would bring about the consent of other creditors of Lee Video City, Inc.
to convert approximately $819,000 of debt into Common Stock of the Company.
As a consequence, the Company joined with Prism in submitting a Plan of
Reorganization to the United States Bankruptcy Court-Los Angeles District. In
December 1996, the Bankruptcy Court entered an order confirming the Plan of
Reorganization of Prism, which provided for the merger with Lee Video City,
Inc., the issuance of Common Stock of the Company to unsecured creditors of
Prism in satisfaction of their creditor claims, the modification of Prism's
existing bank loan agreement, and other matters. Pursuant to the Plan of
Reorganization, Prism emerged from Chapter 11 at the time of its merger with Lee
Video City, Inc. on January 8, 1997.
The name of the Company and the Registrant was changed to Video City, Inc.
in conjunction with the merger of Lee Video City, Inc. into Prism Entertainment
Corporation.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company primarily operates in one industry segment, the video industry. Lee
Video City, Inc. has had no export sales. Prism has licensed and sold films in
foreign territories and Video City may continue to exploit the existing film
library in the foreign marketplace. Prism had foreign sales aggregating $
279,000, $ 2,699,000, and $ 4,353,000 during fiscal years ending January 31,
1997, 1996 and 1995. However, no foreign sales are included in revenues for the
thirteen months ended January 31, 1997 and the twelve months ended December 31,
1996 and 1995 as Prism had no foreign sales from January 9, 1997 through January
31, 1997.
NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company was formed in 1990 by Robbie Lee for the purpose of developing
a chain of video retail superstores that would serve secondary markets. A video
superstore generally has at least 4,500 square feet of floor area and over 7,500
units for rental or sale. Secondary markets are those metropolitan areas with a
total population of less than 500,000 people.
As a result of the merger on January 8, 1997, the business of Video City,
Inc. now consists of the ownership and operation of a chain of video specialty
stores in California and the exploitation of a film library consisting of 47
feature films and numerous shorter films.
As of January 8, 1997, the Company owned and operated 18 video specialty
superstores and operated an additional 6 "licensed" stores pursuant to
management agreements. All of the stores are located in California. The
Company's stores rent and sell a variety of videocassettes, game cartridges,
video players, game equipment, accessories and concessions.
The Company will continue to distribute the film library into domestic and
foreign markets. Management has no plans to resume the production of feature
films, but may consider licensing and selling some or all of the non-video store
assets. The primary focus of the Company will be the business of owning and
operating video superstores.
VIDEO RETAILING
Video Retailing: According to Paul Kagan Associates, Inc. ("Paul Kagan"),
a well known video industry analyst, the home video retail industry grew from
$0.7 billion in 1982 to $15.8 billion in 1996 and is expected to reach nearly
$22 billion by 2005. An estimated 82.5% of American households own VCR's,
providing a huge installed base. Currently, more than 65 million Americans
visit a video store every week.
Management believes that the video industry's economics favor larger chains
with larger stores. The video industry is highly fragmented with approximately
28,000 stores in the United States. Only six video specialty chains have over
100 stores, and only one chain has a market share in excess of two percent. As
the industry has matured, however, it has begun consolidating. The industry's
consolidation is in its early stages with few well-established chains, and only
one national chain. The Company believes there is an excellent opportunity for
a well-managed, well-capitalized company to become a major "regional" player.
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Movie Studio Dependence on Video Retailing: Sales to videocassette
retailers has become the single largest source of revenues for the movie
studios. According to Paul Kagan, the video retail industry is the single
largest source of domestic revenue to movie studios, representing approximately
$4.6 billion, or fifty-three percent of the $9.4 billion studio revenue in 1994.
Of the many movies produced by major studios and released in the United States
each year, relatively few are profitable for the studios based on box office
receipts alone. Video retailers purchase not only the hits, but also those
movies that did not do well at the box office, thus providing a source of
revenue for almost all their movies. Revenues from "B" titles (titles that do
not make the top 120 movies of the year) account for approximately 25% of the
studio revenue and are derived principally from movie rentals, not box office
revenues.
Rentals versus Sales: Although the industry includes both rentals and
sales, the consumer market has been primarily comprised of rentals. By setting
the wholesale prices, movie studios influence the relative levels of
videocassette rentals versus sales. Videocassettes released at a relatively
high price, typically $60 to $70, are purchased by video specialty stores and
are promoted primarily as rental titles. Videocassettes released at a
relatively low price, typically $5 to $18, are purchased by video specialty
stores and are promoted as both rental and sale titles. In general, movie
studios attempt to maximize total revenue from videocassette releases by
maintaining prices at a relatively high level during the first six months to one
year after release. During this time, sales are made primarily to video
specialty stores for rental. Subsequently, the movie studios re-release the
tapes at a lower price to promote sales.
FILM PRODUCTION AND DISTRIBUTION
Feature Film Licensing: Feature films are licensed and sold into the
foreign market place and to the domestic ancillary market, including pay-per-
view, pay and basic cable, free television and laser disc. The home video
distribution business involves the promotion and the sale of videocassettes and
video discs to local, regional, and national video retailers (e.g., video
specialty stores, convenience stores, record stores and other outlets), which
then rent or sell the videocassettes and video discs to consumers primarily for
private viewing.
Major feature films are usually scheduled for release in the home video
market within four to six months after theatrical release to capitalize on the
theatrical advertising and publicity for the film. Promotion of new releases is
generally undertaken during the nine to twelve weeks before the release date.
Videocassettes of feature films are generally sold to domestic wholesalers at
approximately $50 to $60 per unit and generally are rented by consumers for fees
ranging from $1 to $4 per day. Selected titles, including certain made-for-
video programs, can be priced significantly lower to encourage direct purchase
by consumers.
The Company will continue to distribute the film library into domestic and
foreign markets. Management has no plans to resume the production of feature
films, but may consider licensing and selling some or all of the non-video store
assets.
BUSINESS AND EXPANSION STRATEGY
Business Strategy The Company focuses on operating, building and acquiring
superstores. The Company believes superstores, stores generally in excess of
4,500 square feet, are the most commercially viable format for most locations.
The size generates enough traffic to permit leasing optimal locations. The
majority of the store operating expenses are substantially fixed and hence,
disproportionately lower in the larger format. As most video rental customers
use two to three stores, a superstore offers a more complete selection and
greater availability of new releases; therefore, they are better able to become
a customer's preferred store. In addition to selecting superior locations and
offering superior inventory selections, the Company places much emphasis on
offering its customers excellent service.
Expansion Strategy The Company has a three-pronged growth strategy, as
follows:
Development Program. In many regions, the Company believes there are
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significant opportunities to grow through internal development and smaller
acquisitions. Such internal growth will be the means of expansion in attractive
market areas where there are no strong acquisition candidates, good locations
are still available, the competition consists of small stores vulnerable to the
superstore approach, or stores with
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less experienced or under-capitalized operators. Historically, the opening of
new stores has fueled most of the Company's growth. The Company has selected
suitable locations, negotiated reasonable leases with the property owners,
retained contractors to remodel the interior of the stores into the Company's
superstore format, hired and trained store employees, advertised the stores
within their trade area, and opened the stores for business.
Acquisitions. The Company believes the highly fragmented nature of its
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industry presents the opportunity to acquire strategically located chains that
are market share leaders in their trade areas. Management believes that
acquiring such chains can be the most cost-effective means of entering an area,
particularly where the chain already occupies the most desirable locations. The
purchase of an existing chain enables the Company to immediately utilize the
assets of the acquired chain. Also, existing chains have established a customer
base that can substantially reduce the Company's advertising expenses. The
Company anticipates opening additional stores as necessary to fill in the market
areas of the acquired video chains so that operating efficiencies can be
maximized.
New Products In recent years, the Company began renting video game
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cartridges and discs, and selling videocassettes, thus generating additional
revenue. The Company anticipates that there will be future new products and
technological innovations, such as digital video discs, that will result in new
product lines, creating new revenue sources for the Company.
MERCHANDISING
Videocassette Rental. The Company's stores primary revenue source is the
rental of videocassettes. Each store currently offers from 8,000 to 14,000
videocassettes consisting of approximately 6,000 different titles. New release
videocassettes (videos within one year from release date) are displayed in the
prominent "New Release" section and are organized alphabetically by title.
Catalog videocassettes are displayed alphabetically by title within categories
such as "Action", "Comedy", "Drama", etc. The Company seeks to be known within
its markets as the chain with the most new releases. One promotional strategy
that management deems to be highly successful is to periodically guarantee the
availability of a popular new release.
Videocassette Sales. Video City offers new and previously viewed
videocassettes for sale. Previously viewed videocassettes are pulled from the
shelves several weeks after the release date depending on customer demand and
are sold to customers at a discount price.
Video Games. The Company's stores offer from 300 to 1,000 video game
cartridges, consisting of 250 to 500 different titles. Revenues generated from
game cartridges were on a continuous upward trend from 1992 to 1995. A decline
in video game rentals began in 1995 and continued through 1996 due to consumer
confusion on the direction of new hardware and formats. The Company anticipates
broadening its selection of game cartridges to include successful new formats as
they become available and grow in popularity.
Other Products. In addition to videocassette rentals and sales and video
game rentals, Video City stores also rent videocassette players, video game
players, and audio books in selected stores and sell a variety of video
accessories and confectionery items.
STORE LOCATIONS
All of the 18 stores currently owned and operated by the Company and the
six stores operated by the Company under management agreements are located in
California. Of the owned stores, nine are located in Bakersfield, three in
Fresno, and one store each in Delano, Palmdale, Taft, Tehachapi, Salinas, and
Santa Maria.
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MAJOR SUPPLIERS
The Company has supply agreements with its two major suppliers, Ingram
Entertainment ("Ingram") and Rentrak Corporation ("Rentrak"). The agreement
with Ingram requires the Company to purchase, under certain conditions,
approximately 80% of its yearly requirements for the video rental, video sell-
through, and video game products. As a result of the Company's rapid expansion
in 1993 and 1994, the Company's purchases from Ingram caused the Company's
accounts payable to Ingram to reach nearly seven million dollars by August 1994.
In February 1995, $7.1 million of accounts payable due to Ingram were converted
to a Senior Secured Note due December 31, 2000, pursuant to an agreement with
Ingram which contained numerous restrictive covenants which, among other things,
limited the Company's ability to finance the opening of additional stores. In
June 1996, in connection of the sale by the Company of 11 stores, the Company
reduced its debt to Ingram by $3.1 million. Upon effectiveness of the merger
with Prism, Ingram converted $3.0 million of debt to Common Stock of the
Company, and the Company entered into a new loan agreement with Ingram
containing substantially less restrictive covenants for the remaining debt of
approximately $1.5 million.
Pursuant to the Revenue Sharing Agreement with Rentrak, the Company is
obligated to pay Rentrak revenue sharing and handling fee payments that are
equal to on an annual basis at least 8% of total gross rental revenues; this
amount prior to the January 8, 1997 merger with Prism was 10% of the Company's
total gross rental revenues. The Ingram supply agreement expires June 30, 2001
unless terminated earlier by Ingram, and the Rentrak Revenue Sharing Agreement
expires May 31, 2016.
If the relationships with Ingram and Rentrak were terminated, the Company
believes that it could readily obtain its necessary inventory of videocassette
and video games from a number of other suppliers at prices and on terms
comparable to those available from Ingram or Rentrak. However, there can be no
assurance that any replacement supplier would provide service or payment terms
as favorable as those provided by Ingram or Rentrak.
MARKETING AND ADVERTISING
The Company primarily uses television, radio, newspaper and direct mail as
a means to advertise. Suppliers and movie studios provide advertising and market
development funds for certain movie titles that the Company uses to purchase the
television, radio, and newspaper advertising. Although there is no guarantee,
the Company believes its suppliers and the movie studios will continue to
provide these advertising and market development funds. In addition, the Company
benefits from the advertising and marketing by studios and theaters in
connection with their efforts to promote videos and films. The Company's
advertising emphasizes signature attributes such as movie reservations, rent and
return at any location, membership good at all locations, and guaranteed
availability of certain key new releases.
INVENTORY MANAGEMENT
Each videocassette and game cartridge is placed in a clear protective case
and has a magnetic security device and a unique optical bar code affixed to it
before being placed on the floor for rental. The unique bar code is used for
inventory management. For the most part, inventory is received and maintained
at the store level; whereas, inventory for new stores is processed by the
Company before it is placed on the shelves. The Company conducts physical
inventories on a quarterly basis. Inventory may be, and is, transferred between
locations based on demand or lack of demand to obtain maximum return on
investment.
MANAGEMENT INFORMATION SYSTEMS
It is critically important in video retailing to have accurate and timely
information relating to inventory management, sales, customer demographics, and
various other financial and operational data. Video City began development of a
sophisticated management information system in early 1992 and fully
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implemented its system in all superstores by mid-1994. Each superstore uses a
point-of-sale system ("POS") where all rental and sales transactions are
recorded using scanned bar code information. Nightly, the corporate system
electronically uploads data from each POS so data is available for management
review each morning. This data also provides customer information which is used
for direct marketing to these customers. This data is further used for audit
purposes and loss prevention. This POS is a sophisticated and complete system
that can be quickly implemented in new stores due to standard file layouts and
thorough documented procedures for training and staff utilization.
In each of the Company's multi-store markets, the stores' POS is linked to
a central computer enabling all product and customer data to be shared real
time. This sharing allows product to be rented from one store and returned to
another while tracking the product through the system. The Company believes it
is the only major chain of superstores that not only actively uses the real time
sharing so customers can rent and return at any location, and has successfully
promoted it to gain market share. The "linked" capability also allows stores to
locate rental and sale items which may not be available at one location but are
available at another location.
COMPETITION
The video retail industry is highly competitive. The Company competes with
other local and regional chains, such as Blockbuster Entertainment, a division
of Viacom, Inc. ("Blockbuster"), and with supermarkets, pharmacies, convenience
stores, bookstores, mass merchants, mail order companies and other retailers.
Some of the Company's competitors have significantly greater financial
resources, although the Company is generally the largest or second largest video
retailer in most of its markets. The Company believes success in competing with
other operators is principally a function of store location, number of copies of
popular titles, and customer service.
Approximately fifty percent of the Company's stores compete directly with
Blockbuster. One of Blockbuster's strengths, and also one of its weaknesses, is
its standardization of design, layout, look and business practices of each of
its stores regardless of location. This approach is easy to roll out and can be
cost efficient in many respects, but does not address many market-specific
issues. The Company believes regional flexibility is an important competitive
requirement in its industry and therefore is organized along geographic lines
with each region having significant autonomy.
The Company also competes with cable television, satellite and pay-per-
view, in which subscribers pay a fee to see a movie selected by the subscriber.
Pay-per-view at this time offers a limited number of channels only available to
households with a converter to unscramble an incoming signal. Recent
technological developments could permit cable companies, direct broadcast
satellite companies, telephone companies, and other telecommunications companies
to transmit a much greater number of movies to homes at more frequently
scheduled intervals throughout the day. Ultimately, these technologies could
lead to the availability of movies to consumers on demand. The Company believes
movie studios have a strong interest in maintaining a viable movie rental
business as the sale of videocassettes represents the studio's largest source of
revenue. As a result, the Company believes movie studios will continue to make
movie titles available to cable television and other distribution channels only
after the revenue has been derived from the sale of videocassettes to video
stores. Substantial technological developments will be necessary in order for
pay-per-view to match the low price, viewing convenience and selection available
through video rental.
The Company does not believe that Video on Demand ("VOD") represents a near
term threat to the video retailing industry. VOD has been the topic of much
publicity and at some point will probably become a factor in the distribution of
video entertainment, but the Company does not perceive it as a significant
threat over the next five years. Studios have indicated their intent, should
VOD technology prove feasible, of giving VOD a release slot after video
retailing but before cable. Also, VOD technology is evolutionary not
revolutionary. Management believes VOD is essentially a refinement of existing
products and will take years to gain broad-base acceptance. Finally, the costs
of current VOD pilot systems are prohibitive, and although they are projected to
decline substantially, the lower costs are expected to exceed the costs of
renting a video.
The Company's competitors related to licensing and sale of feature films
include major studios and their affiliates, such as Universal, Walt Disney,
Paramount, Warner Bros., CBS/Fox Video, Turner Broadcasting systems/New Line
Home Video and independent companies such as Trimark Entertainment.
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In addition, The Company faces competition from a number of privately held
production companies which target the home video market including Full Moon
Productions, Cinetel Films, Arrow Films Int'l., Vision Entertainment and Saban
Productions. Many of these private companies have distribution arrangements with
major studios. The Company's competitors have available for distribution "A"
quality films which have increasingly attracted the "buy" decisions of video
retailers thus limiting the market available to the Company.
In the international distribution market, the competition includes a wide
range of companies from small independent production companies to sales agents
acting as producers' representatives such as Atlas Int'l, and Betafilm
(Germany), Capitol Films (Britain), DB Media (Italy), and UCG Int'l. (France).
EMPLOYEES
As of January 31, 1997, the Company had approximately 207 employees, of
whom 190 are located in the retail stores and the remainder in the Company's
corporate administrative office. None of the Company's employees are
represented by a labor union, and the Company prides itself on its exemplary
relations with its employees.
SERVICE MARK
The Company owns a United States federal registration for its service mark
"Video City." The Company considers its service mark important to its continued
success.
ITEM 2. PROPERTIES
All of the Company's stores are leased pursuant to leases with initial
terms ranging from three to ten years with varying option renewal periods. Most
of the leases are "triple net" requiring the Company to pay all taxes,
insurance, and common area maintenance expenses associated with the properties.
The Company's corporate headquarters is located in Bakersfield, California
and consists of approximately 16,000 square feet of leased space.
Management considers the Company's corporate offices and stores to be
generally suitable and adequate for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in legal proceedings that management
believes could have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters requiring disclosure.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Lee Video City, Inc. was a privately held company until its merger with
Prism on January 8, 1997. Until November 30, 1995, Prism's common stock was
traded on the American Stock Exchange under the symbol "PRZ". In response to
the anticipated filing of the Bankruptcy Petition, the American Stock Exchange
suspended trading of Prism's common stock pending review of the Company's Plan
of Reorganization and its then eligibility for continued trading. Thereafter,
the Common Stock has traded on a very limited basis on the NASD Electronic
Bulletin Board. As of January 31, 1997 there was no established trading market
as the Company was delisted from the American Stock Exchange.
As of April 30, 1997, there were approximately 150 record holders of the
Registrant's common stock.
The Company has never paid any cash dividends, and the Board of Directors
intends to retain any earnings for use of the expansion of the Company's
business in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the years ended
December 31, 1992, 1993, 1994, 1995, and 1996 have been derived from the
consolidated financial statements of Lee Video City, Inc. The selected
historical financial data for the year ended January 31, 1997 was derived from
the consolidated financial statements of the Company. The information set forth
below should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto.
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Thirteen
Months
Ended
January 31, Year ended December 31,
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- ----------- -----------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Revenues 12,211 11,271 14,007 13,164 6,662 2,446
Operating income (loss) (522) (418) 141 (379) (1,126) 254
Income (loss) before income taxes (176) (43) (586) (1,310) (1,450) 248
Net income (loss) (176) (43) (586) (1,310) (1,450) 248
Net income (loss) per share (0.04) (0.01) (0.14) (0.32) (0.36) 0.06
Weighted average shares
Used in computation 4,569 4,234 4,127 4,080 4,080 4,080
OPERATING DATA:
Number of stores at end of period 18 18 29 29 20 6
Increase (decrease) in same 0.3% (1.2)% (1.9)% 5.2% 5.4% 11.3%
store revenues (2)
BALANCE SHEET DATA (3):
Cash and cash equivalents 1,247 59 418 93 457 56
Videocassette rental inventory 2,127 2,189 3,354 3,523 2,444 823
Total assets 11,080 4,010 7,335 7,705 4,725 1,709
Long-term debt, less current portion 3,341 5,804 7,954 9,028 5,827 210
Total liabilities 8,844 8,167 11,449 11,458 7,168 2,702
Stockholders' equity (deficit) 2,236 (4,157) (4,114) (3,753) (2,443) (993)
</TABLE>
(1) The Statement of Operations Data reflects the results of operations of Lee
Video City, Inc. for the twelve months ended December 31 1992, 1993, 1994,
1995, and 1996 and for 1997 reflects the results of operations of Lee Video
City, Inc. for the thirteen months ended January 31, 1997 and Prism
Entertainment Corporation for 23 days, January 8, 1997 through January 31,
1997. The twelve months ended December 31, 1992 and 1993 are unaudited.
(2) The increase (decrease) in same store revenues compares revenues from
stores opened and owned by the Company for twelve full months.
(3) The Balance Sheet Data for 1997 reflects the post merger combined accounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in the Annual Report on Form 10-K, particularly under
Items 1 through 8, constitute "forward-looking statements" within the meaning of
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks,
9
<PAGE>
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements, expressed or implied by such forward-
looking statements.
OVERVIEW
Lee Video City, Inc. opened its first video superstore in 1990. The
Company grew to as many as 31 superstores in 1994 and owned and operated 29
stores until June 1996 when it sold eleven stores outside of California. The
eleven stores were sold to reduce debt and restructure the Company's operations
by focusing all of its attention on the "core stores" in California. On January
8, 1997, Lee Video City, Inc. merged with and into Prism Entertainment
Corporation. Upon consummation of the merger, the name of the surviving
corporation ("the Company") was changed from Prism Entertainment Corporation to
Video City, Inc. The Company retained Prism's year-end of January 31 resulting
in the presentation of thirteen months for its statement of operations ended
January 31, 1997, including the accounts of Prism Entertainment Corporation for
the period January 9, 1997 through January 31, 1997.
As of January 31, 1997, the Company owned and operated 18 video
superstores in the State of California under the Video City name and logo. The
Company's revenues consist primarily of rental revenues and product sales
revenues. Rental revenues include revenue from rentals of videos, video games,
video players and video game machines and extended viewing fees. Product sales
revenues are derived from sales of new and used videos, including excess rental
inventory, concessions and accessory items.
Operating costs and expenses include operating expenses, cost of product
sales and general and administrative expenses. Operating expenses consist of
amortization of videos purchased for rental, fees and lease expenses for leased
videos and all store expenses, including occupancy, payroll, store opening
expenses and direct store advertising and promotion expenses.
Videocassette rental inventory, which includes video games, is recorded at
cost and amortized over its estimated economic life with no provision for
salvage value. Videocassettes that are considered base stock are amortized over
36 months on a straight-line basis. Purchases of new release videocassettes and
video games are amortized whereby the tenth and any succeeding copies of each
title per store are amortized over 9 months on an accelerated basis; the fourth
through ninth copies of each title per store are amortized over 36 months on an
accelerated basis; and copies one through three of each title per store are
amortized as base stock.
Certain videocassettes in the rental inventory are leased under a Revenue
Sharing Agreement with Rentrak Corporation. Under its agreement with Rentrak,
pursuant to which the Company leases videos for rental to its customers, the
Company pays a handling fee of $8.30 for each video. During the revenue sharing
period, which is one year, the movie studio that supplies the video to Rentrak
owns the video, and Rentrak and the Company on a predetermined basis share the
rental revenues. The Company may also sell excess copies of a video title and
share the sale proceeds with Rentrak on a predetermined basis. At the end of
the revenue sharing period for a video title, the Company may purchase remaining
copies of that title generally for less than $5 per copy. The handling fee per
video is amortized on a straight-line basis over the revenue sharing period, and
revenue sharing payments are expensed when incurred.
Cost of sales and leased product is comprised of the cost of videos sold to
customers and the cost of concessions and other products sold in the Company's
stores. The cost of a video is measured at its amortized basis when sold, if
previously used as a rental video, or at the Company's cost if purchased for
sell-through, or at a varying basis if a leased product, depending upon when in
the revenue sharing period it is sold.
General and administrative expenses are comprised of corporate office
expenses, including office equipment and facilities costs, management salaries
and benefits, professional fees and all other items of corporate expense.
10
<PAGE>
Prism Entertainment Corporation's operations for the period January 9, 1997
through January 31, 1997 includes $1,933 of sales, operating losses of $47,822,
interest expense of $23,744, which resulted in a net loss of $71,566.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) statement of
operations data expressed as a percentage of total revenues and (ii) the number
of stores open at the end of each period.
<TABLE>
<CAPTION>
Thirteen
Months
Ended Twelve Months Ended December 31,
January 31, --------------------------------
1997 1996 1995 1994
----------- --------------------------------
<S> <C> <C> <C> <C>
Rental revenues and product sales 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Store operating expenses 54.5% 55.2% 48.9% 51.5%
Amortization of videocassette rental
inventory 17.2% 17.6% 14.4% 19.5%
Cost of product sales 13.9% 13.8% 12.7% 9.8%
Cost of leased product 4.8% 4.9% 7.8% -
General and administrative 13.8% 12.1% 15.2% 22.1%
----------- --------------------------------
Total 104.3% 103.7% 99.0% 102.9%
----------- --------------------------------
Operating income (loss) (4.3)% (3.7)% 1.0% (2.9)%
Non-operating expense 2.9% 3.3% (5.2)% (7.1)%
----------- --------------------------------
Loss before income taxes (1.4)% (0.4)% (4.2)% (10.0)%
Number of stores open at end of period 18 18 29 29
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues for 1996 decreased $ 2,736,000, or 19.5%, to $ 11,271,000 compared
to $14,007,000 for 1995. The decreased revenues were primarily a result of the
sale of 11 stores by the Company in June 1996. Same store revenues were
basically unchanged for 1996.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory for 1996 decreased $29,000
or 1.5%, to $1,988,000, compared to $2,017,000 for 1995. Amortization of
videocassette rental inventory as a percentage of total revenue was 17.6% in
1996 compared to 14.4% in 1995. The increase as a percentage of total revenue
was due to the higher proportion of purchased videocassettes versus leased
videocassettes in 1996 compared to 1995.
Cost of Product Sales
The cost of product sales as a percentage of revenue increased to 13.8% for
1996 compared to 12.7% for 1995. This increase was primarily due to the Company
selling many previously viewed new
11
<PAGE>
release movies sooner than planned resulting in a loss on the sale of these
movies due to a high net book value at the time of sale. These sales enabled the
Company to generate needed working capital for operations.
Cost of Leased Product
Cost of leased product for 1996 decreased $530,000, or 48.8%, to $556,000
compared to $1,086,000 for 1995. The decrease was attributable to the Company's
sale of eleven stores in June 1996 and the Company buying less leased
videocassettes in 1996. Cost of leased product as a percentage of total revenue
was 4.9% in 1996 compared to 7.8% in 1995. The decrease as a percentage of
total revenue was due to the lower proportion of leased videocassettes versus
purchased videocassettes in 1996 compared to 1995.
Store Operating Expenses
Store operating expenses for fiscal 1996 decreased $ 629,000, or 9.2%, to
$6,221,000 compared to $ 6,850,000 for 1995. Store operating expenses as a
percentage of total revenues were 55.2% for 1996 compared to 48.9% for 1995 due
primarily to higher personnel costs and the payment of settlement fees of
$380,000 to landlords for the termination of two occupancy leases related to the
relocation of stores. The decrease in operating expenses was primarily due to
the sale of eleven stores by the Company in June 1996.
General and Administrative
General and administrative expenses for 1996 decreased $763,000, or 35.8%,
to $1,368,000 compared to $ 2,131,000 for 1995. General and administrative
expenses as a percentage of total revenue were 11.7% in 1996 compared to 15.2%
in 1995. The decrease was attributable to the sale of eleven stores by the
Company and management's efforts to reduce personnel costs and professional fees
to help improve the profitability of the Company.
Gain on Disposition of Assets
The gain on disposition of assets in 1996 is primarily related to the sale
of eleven out of state stores in June 1996. These stores were sold to eliminate
the added expense of operating stores outside of California, so that the Company
could streamline operations, reduce debt, and increase profitability
Interest Expense
Net interest expense decreased $240,000, or 25.8%, to $692,000 for 1996
compared to $932,000 for 1995. The decrease in interest expenses was primarily
due to the reduction of long-term debt of the Company which was paid down from
the proceeds from the sale of the 11 stores in June 1996.
Other
Other (income) expense was $17,000 in income in 1996 compared to $204,000
in income in 1995. The change of $187,000 was primarily attributable to the
expenses reducing other income.
Income Taxes
The Company had no income tax expense for 1996 or 1995 as it had no taxable
income in 1996 or 1995. The Company's effective income tax rate varied from the
statutory federal tax rate as a result of operating losses for which no tax has
been recognized due to the change in the valuation allowance on the net deferred
tax asset. A full valuation allowance has been established as it is more likely
than not that the deferred tax asset will not be realized.
12
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Revenue for 1995 increased $843,000, or 6.4%, to $14,007,000 compared to
$13,164,000 for 1994. The increase in revenue was primarily due to new stores
maturing and being open for a full year during 1995. Same store revenues were
down slightly, 1.9% for 1995.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory for 1995 decreased $551,000
or 21.5%, to $2,017,000, compared to $2,568,000 for 1994. The decrease was
attributed to the Company entering into a Revenue Sharing Agreement in December
1994 and thus leasing a portion of its videocassettes, resulting in less
amortization expense of owned videocassettes.
Cost of Product Sales
The cost of product sales as a percentage of revenue increased to 12.7% for
1995 compared to 9.8% for 1994. This increase was primarily due to the Company
selling many previously viewed new release movies sooner than planned resulting
in a loss on the sale of these movies due to a high net book value at the time
of sale. These sales enabled the Company to generate needed working capital for
operations.
Cost of Leased Product
Cost of leased product for 1995 was $1,086,000 compared to $0 for 1994.
This was due entirely to the fact that the Company did not have a Revenue
Sharing Agreement until December 1994 and therefore had no cost of leased
product expense for 1994. Cost of leased product as a percentage of total
revenue for 1995 was 7.8%.
Store Operating Expenses
Store operating expenses increased $74,000 to $6,850,000 for 1995 compared
to $6,776,000 for 1994. Operating expenses as a percentage of total revenues
were 48.9% for 1995 compared to 51.5% for 1994. Store operating expenses
decreased as a percentage of total revenue primarily due to better efficiencies
of operating the stores.
General and Administrative
General and administrative expenses decreased $774,000, or 26.7%, to
$2,130,000 in 1995 compared to $2,904,000 in 1994. General and administrative
expenses as a percentage of total revenue was 15.2% in 1995 compared to 22.1% in
1994. The decrease was the result of the Company not adding any new stores in
1995 and the decision of management to reduce general and administrative expense
to increase efficiencies and profitability of the Company.
Interest Expense
Net interest expenses increased $105,000 to $932,000 for 1995 compared to
$827,000 for 1994. This increase was primarily due to the Company incurring
interest on long-term debt for a full year in 1995 compared to a partial year in
1994. The Company's effective income tax rate varied from the statutory federal
tax rate as a result of operating losses for which no tax has been recognized
due to the change in the valuation allowance on the net deferred tax asset. A
full valuation allowance has been established as it is more likely than not that
the deferred tax asset will not be realized.
13
<PAGE>
Income Taxes
The Company had no income tax expense for 1995 or 1994 because it had no
taxable income in 1995 or 1994. Additionally, in 1995 the Company changed its
status from an S corporation to a C corporation. The Company's effective income
tax rate varied from the statutory federal tax rate as a result of operating
losses for which no tax has been recognized due to the change in the valuation
allowance on the net deferred tax asset. A full valuation allowance has been
established as it is more likely than not that the deferred tax asset will not
be realized.
ONE MONTH ENDED JANUARY 31, 1997 COMPARED TO ONE MONTH ENDED JANUARY 31, 1996
Revenues
Revenue for the one month ended January 31, 1997 decreased $145,000, or
13.4%, to $940,000 compared to $1,085,000 for the one month ended January 31,
1996. The reason for the decrease was the sale of the eleven stores by the
Company in June 1996. Same store revenue, however, for the one month ended
January 31, 1997 was up $131,000, or 19.2%, compared to the one month ended
January 31, 1996.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory for the one month ended
January 31, 1997 decreased $18,000, or 14.0%, to $111,000 compared to $129,000
for the one month ended January 31, 1996. The primary reason for the decrease
was the sale of eleven stores by the Company in June 1996.
Cost of Product Sales
Cost of product sales for the one month ended January 31, 1997 increased
$71,000 to $136,000 compared to $65,000 for the one month ended January 31,
1996. The increase was primarily due to the Company's expansion of its sell
through product lines in its stores.
Cost of Leased Product
Cost of leased product for the one month ended January 31, 1997 decreased
$64,000, or 63.9%, to 36,000 compared to $99,000 for the one month ended January
31, 1996. The decrease was due to the Company leasing a lower proportion of
videocassettes versus purchasing videocassettes in January 1997 compared to
January 1996.
Store Operating Expenses
Store operating expenses for the one month ended January 31, 1997 decreased
$138,000, or 23.9%, to $439,000 compared to $577,000 for the one month ended
January 31, 1996. Store operating expenses as a percentage of total revenues
was 46.7% in January 1997 compared to 53.1% in January 1996. The decrease was
primarily due to lower personnel costs and other controllable expenses.
General and Administrative
General and Administrative expenses for the one month ended January 31,
1997 increased $196,000 to $323,000 compared to $127,000 for the one month ended
January 31, 1996. The increase was primarily due to costs related to the merger
between Lee Video City, Inc. and Prism Entertainment Corporation.
Interest Expense
Interest expense for the one month ended January 31, 1997 decreased
$31,000, or 39.6%, to $46,000 compared to $77,000 for the one month ended
January 31, 1996. The decrease in interest expense
14
<PAGE>
was due to the Company having approximately $3,750,000 less in debt in January
1997 compared to January 1996.
Net Loss
The net loss for the one month ended January 31, 1997 of $133,000 compared
to net income for the one month ended January 31, 1996 of $28,000 was
attributable to the increased general and administrative expenses related to the
merger.
Liquidity and Capital Resources
The Company's primary long-term capital needs are for opening and acquiring
new stores. The Company expects to fund such needs through cash flows from
operations, the net proceeds from the possible sale of debt or equity
securities, bank credit facilities, trade credit, and equipment leases.
The Company funds its short-term working capital needs, including the
acquisition of videos and other inventory, primarily through cash from
operations. The Company expects that cash from operations will be sufficient to
fund future video and other inventory purchases and other working capital needs.
Videocassette rental inventories are accounted for as noncurrent assets under
generally accepted accounting principles because they are not assets which are
reasonably expected to be completely realized in cash or sold in the normal
business cycle. Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of these assets as
noncurrent excludes them from the computation of working capital. The
acquisition cost of videocassette rental inventories, however, is reported as a
current liability until paid and , accordingly, included in the computation of
working capital. Consequently, the Company believes working capital is not as
significant a measure of financial condition for companies in the video retail
industry as it is for companies in other industries. Because of the accounting
treatment of videocassette rental inventory as a noncurrent asset, the Company
anticipates that it will operate with a working capital deficit during fiscal
1998.
On January 8, 1997, in conjunction with the Company's merger with Prism
Entertainment Corporation, the Company entered into an amended and restated
credit and security agreement (the "Agreement") with Imperial Bank, covering
$3,066,000 of indebtedness that was owed by Prism. The Agreement calls for the
Company to pay all net collections received from accounts receivable and a
certain note receivable as well as additional accounts receivable generated from
licensing of the Company's film library, directly against the principal balance
of the loan. All principal outstanding as of July 1, 1998 shall be payable over
twelve equal monthly installments for the balance of the term. The outstanding
loan balance as of January 31, 1997 was $3,066,000. The Company's accounts
receivable and a certain note receivable available for payment on the above debt
at January 31, 1997 was $2,162,000.
The Company also received $785,000 in cash upon consummation of the merger
to be utilized for working capital purposes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net cash provided by operating activities decreased by approximately
$880,000 or 33.7% primarily due to a decrease in accounts payable and accrued
expenses, partially offset by a decrease in other assets. Net cash used in
investing activities decreased by $229,000 or 11.1% mainly due to proceeds
received from the sale of certain fixed assets that offset increased net
purchases of videocassette rental inventory made in 1996 versus 1995. Net cash
used in financing activities increased $33,000 or 14.5% mainly due to increased
principal payments made on obligations under capital leases.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net cash provided by operating activities increased by approximately
$307,000 or 13.3% primarily due to a decrease in notes receivable. Cash used in
investing activities increased by approximately $135,000 or 7.0% primarily due
to increased purchases of net videocassette rental inventory.
15
<PAGE>
Cash used in financing activities decreased by approximately $517,000 or 69.4%
primarily due to the decreased repayment of long-term debt.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY
The Company anticipates that its business will be affected by general
economic and other consumer trends. To date, the Company has not operated
during a period of high inflation but believes that it would generally be able
to pass on increased costs relating to inflation to its customers. Future
operating results may be affected by various factors, including variations in
the number and timing of new store openings, the performance of new or acquired
stores, the quality and number of new release titles available for rental and
sale, the expense associated with the acquisition of new release titles,
additional and existing competition, marketing programs, weather, special or
unusual events and other factors that may affect retailers in general. Any
concentration of new store openings and the related new store pre-opening costs
and other expenses associated with the opening of new stores near the end of a
fiscal quarter could have an adverse effect on the financial results for that
quarter and could, in certain circumstances, lead to fluctuations in quarterly
financial results.
The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change to Daylight Savings Time and the
improved weather, and in September and October, due in part to the start of
school, the football season and the introduction of new television programs.
The Company believes these seasonality trends will continue.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS No. 128) issued by the Financial Accounting Standards Board ("FASB") is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The statement requires restatement of all
prior period earnings per share (EPS) data presented. The new standard requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. The Company
does not expect adoption to have a material effect on its EPS computation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed with this report:
Reports of Independent Certified Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Video City, Inc.
We have audited the accompanying balance sheets of Video City, Inc. (formerly
Lee Video City, Inc.) as of January 31, 1997 and December 31, 1996 and the
related statements of operations, stockholders' deficit and cash flows for the
thirteen months and one month ended January 31, 1997 and the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Video City, Inc. as of January
31, 1997 and December 31, 1996 and the results of its operations and its cash
flows for each of the thirteen months and one month ended January 31, 1997
and the year ended December 31, 1996 then ended in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
April 11, 1997
17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Lee Video City, Inc.
We have audited the accompanying balance sheet of Lee Video City, Inc. as of
December 31, 1995 and the related statements of operations, stockholders'
deficit and cash flows for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lee Video City, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 9, 1996, except
for note 6, which is as of
May 28, 1996.
18
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS (NOTE 6)
CURRENT ASSETS
Cash $ 1,246,517 $ 59,273 $ 417,517
Accounts receivable, less allowance
for doubtful accounts of $325,422,
$0 and $0 in 1997, 1996 and 1995 (Note 6) 2,168,052 - -
Notes receivable, less allowance for
doubtful accounts of $0, $0 and
$25,000 in 1997, 1996 and 1995
(Note 5) 398,830 245,176 116,657
Merchandise inventories 58,976 49,597 71,061
Other 96,143 169,130 340,312
----------- ---------- ----------
Total current assets 3,968,518 523,176 945,547
VIDEOCASSETTE RENTAL INVENTORY, NET OF
ACCUMULATED AMORTIZATION 2,126,789 2,189,038 3,354,370
PROPERTY AND EQUIPMENT, NET (NOTE 4) 1,017,089 1,034,479 2,609,030
FILM INVENTORY (NOTE 6) 3,700,000 - -
NOTE RECEIVABLE (NOTE 5) - - 158,473
OTHER ASSETS 267,916 262,966 267,576
----------- ---------- ----------
TOTAL ASSETS $11,080,312 $4,009,659 $7,334,996
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,761,297 $ 1,192,156 $ 1,406,281
Accrued expenses 707,485 404,571 463,388
Current portion of long-term debt (Note 6) 2,258,850 614,916 1,445,736
----------- ----------- -----------
Total current liabilities 4,727,632 2,211,643 3,315,405
LONG-TERM DEBT (NOTE 6) 3,341,313 5,804,014 7,953,821
OTHER LIABILITIES 774,875 151,142 179,986
----------- ----------- -----------
TOTAL LIABILITIES 8,843,820 8,166,799 11,449,212
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 7)
Common stock, $.01 par value per share,
authorized 20,000,000 shares; issued and
outstanding 9,753,927 shares at 1997 and
4,234,024 shares at 1996 and 1995 97,539 42,340 42,340
Additional paid-in capital 7,035,935 564,660 564,660
Accumulated deficit (4,896,982) (4,764,140) (4,721,216)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,236,492 (4,157,140) (4,114,216)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,080,312 $ 4,009,659 $ 7,334,996
=========== =========== ===========
</TABLE>
See accompanying notes to financial statement.
20
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Rental revenues and product sales $11,271,229 $14,007,083 $13,164,490
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Store operating expenses 6,220,574 6,850,068 6,775,516
Amortization of videocassette rental inventory 1,987,407 2,016,660 2,567,613
Cost of product sales 1,557,062 1,782,260 1,294,814
Cost of leased product 556,248 1,085,814 -
General and administrative expenses 1,367,650 2,130,797 2,905,067
----------- ----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 11,688,941 13,865,599 13,543,010
INCOME (LOSS) FROM OPERATIONS (417,712) 141,484 (378,520)
OTHER (INCOME) EXPENSE
Gain on disposition of assets, net(Note 9) (1,049,295) - -
Interest expense 691,782 931,775 826,757
Other (17,275) (203,868) 104,590
----------- ----------- -----------
NET LOSS $ (42,924) $ (586,423) $(1,309,867)
=========== =========== ===========
NET LOSS PER SHARE $ (0.01) $ (0.14) $ (0.32)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,234,024 4,127,097 4,079,976
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen One One
Months ended month ended month ended
January 31, January 31, January 31,
1997 1997 1996
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
REVENUE
Rental revenues and product sales $12,211,369 $ 940,141 $1,085,250
----------- ---------- ----------
OPERATING COSTS AND EXPENSES
Store operating expenses 6,659,340 438,766 576,543
Amortization of videocassette rental inventory 2,098,441 111,034 129,145
Cost of product sales 1,692,955 135,894 65,301
Cost of leased product 592,112 35,864 99,425
General and administrative expenses 1,690,857 323,206 126,828
----------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 12,733,705 1,044,764 997,242
INCOME (LOSS) FROM OPERATIONS (522,336) (104,623) 88,008
OTHER (INCOME) EXPENSE
Gain on disposition of assets, net (Note 9) (1,049,295) - -
Interest expense 738,133 46,351 76,793
Other (35,408) (18,132) (17,192)
----------- ---------- ----------
NET INCOME (LOSS) $ (175,766) $ (132,842) $ 28,407
=========== ========== ==========
NET INCOME (LOSS) PER SHARE $ (0.04) $ (0.02) $ 0.01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,568,563 8,507,497 4,234,024
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Net
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 4,079,976 $40,800 $ 341,200 $(2,824,926) $(2,442,926)
Net Loss (1,309,867) (1,309,867)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1994 4,079,976 40,800 341,200 (4,134,793) (3,752,793)
Issuance of Lee Video City,
Inc. Common Stock 154,048 1,540 223,460 225,000
Net Loss (586,423) (586,423)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1995 4,234,024 42,340 564,660 (4,721,216) (4,114,216)
Net Loss (42,924) (42,924)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1996 4,234,024 42,340 564,660 (4,764,140) (4,157,140)
Stock issued in satisfaction of debt 1,500,000 15,000 2,985,000 3,000,000
Stock issued in conversion of debt and
Capital Contribution 773,653 7,737 811,263 819,000
Effect of the Merger 3,246,250 32,462 2,675,012 2,707,474
Net Loss (one month ended) (132,842) (132,842)
--------- ------- ---------- ----------- -----------
Balance at January 31, 1997 9,753,927 $97,539 $7,035,935 $(4,896,982) $ 2,236,492
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
INCREASE (DECREASE) IN CASH, 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (42,924) $ (586,423) $(1,309,867)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,518,068 2,667,050 3,121,693
(Gain) loss on disposal of assets (1,049,294) 14,281 109,588
Note issued for legal settlement 379,632 - -
Noncash interest - 135,000 305,238
Other - 18,805 -
Changes in assets and liabilities:
Decrease (increase) in notes receivable 29,954 55,295 (322,475)
Decrease in merchandise inventories 21,464 62,211 61,337
Increase in film library - - -
Decrease (increase) in other assets 175,792 (173,995) (316,832)
Increase in accounts payable (214,125) 287,206 451,396
Increase in accrued expenses (58,817) 146,574 203,505
Increase (decrease) in other liabilities (28,844) (15,235) -
----------- ----------- -----------
Total adjustments 1,773,830 3,197,192 3,613,450
----------- ----------- -----------
Net cash provided by operating activities 1,730,906 2,610,769 2,303,583
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of videocassette rental inventory, net (2,260,680) (1,976,677) (1,283,764)
Purchases of fixed assets (169,512) (81,642) (1,485,539)
Proceeds from sale of fixed assets 601,301 - 846,398
----------- ----------- -----------
Net cash used in investing activities (1,828,891) (2,058,319) (1,922,905)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on obligations under capital leases (299,751) (175,726) (225,895)
Repayment of long-term debt (1,034,939) (51,900) (579,209)
Proceeds from issuance of long-term debt 1,074,431 - 60,000
----------- ----------- -----------
Net cash used in financing activities (260,259) (227,626) (745,104)
NET INCREASE (DECREASE) IN CASH (358,244) 324,824 (364,426)
Cash at beginning of year 417,517 92,693 457,119
----------- ----------- -----------
Cash at end of year $ 59,273 $ 417,517 $ 92,693
=========== =========== ===========
</TABLE>
24
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31. December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR:
Interest $ 757,259 $ 820,202 $ 472,639
Income taxes 800 255,000 -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Videocassette rental inventory acquired
through issuance of long-term debt - - 3,129,832
Interest charges financed through issuance
of long-term debt - 135,000 305,238
Acquisition of assets by issuance of
long-term debt - - 300,000
Furniture, fixtures and equipment acquired
under capital lease - - 585,801
Professional services financed through
issuance of common stock - 25,000 -
Videocassette rental inventory acquired
through issuance of common stock - 200,000 -
Long-term debt issued for settlement
of lawsuit 379,632 - -
Sale of stores in exchange for
assignment of debt 3,100,000 - -
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirteen One
months ended month ended
January 31, January 31,
INCREASE (DECREASE) IN CASH, 1997 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (175,766) $ (132,842)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,660,134 142,065
(Gain) loss on disposal of assets (1,049,294) -
Noncash interest - -
Note issued for legal settlement 379,632 -
Other - -
Changes in assets and liabilities:
Increase in accounts receivable - -
Decrease (increase) in notes receivable (128,519) (5,913)
Decrease in merchandise inventories 12,085 (9,379)
Increase in film library - -
Decrease (increase) in other assets 244,169 68,037
Increase in accounts payable (333,865) (119,740)
Increase in accrued expenses (104,358) (45,540)
Increase (decrease) in other liabilities (28,844) -
------------ ------------
Total adjustments 1,651,140 29,530
------------ ------------
Net cash provided by (used in)
operating activities 1,475,374 (103,312)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of videocassette rental
inventory, net (3,355,216) (1,094,536)
Disposal of videocassette rental
inventory 1,224,304 1,072,084
Purchases of fixed assets (183,153) (13,641)
Cash received in merger 1,454,293 1,454,293
Proceeds from sale of fixed assets 601,301 -
------------ ------------
Net cash used in investing activities (258,471) 1,418,200
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on obligations
under capital leases (320,910) (21,159)
Repayment of long-term debt (1,078,924) (43,985)
Proceeds from issuance of
long-term debt 1,074,431 -
Payment of dissenter's shares (62,500) (62,500)
------------ ------------
Net cash used in financing activities (387,903) (127,644)
------------ ------------
NET INCREASE (DECREASE) IN CASH 829,000 1,187,244
Cash at beginning of year 417,517 59,273
------------ ------------
Cash at end of year $ 1,246,517 $ 1,246,517
============ ============
</TABLE>
26
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirteen One
months ended month ended
January 31, January 31,
1997 1997
------------ -----------
<S> <C> <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR:
Interest $ 692,202 $ 25,333
Income taxes 800 -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Videocassette rental inventory acquired
through issuance of long-term debt - -
Interest charges financed through issuance
of long-term debt - -
Acquisition of assets by issuance of
long-term debt - -
Furniture, fixtures and equipment acquired
under capital lease - -
Professional services financed through
issuance of common stock - -
Videocassette rental inventory acquired
through issuance of common stock - -
Long-term debt issued for settlement
of lawsuit 379,632 -
Long-term debt converted to common stock 3,819,000 3,819,000
In conjunction with the merger of Lee Video
City, Inc. into Prism Entertainment
Corporation common stock was issued and
the following fair value of non cash
net assets were acquired:
Assets acquired 5,868,705 5,868,705
Liabilities assumed (3,161,231) (3,161,231)
---------- ----------
Net assets acquired 2,707,474 2,707,474
Cash received (1,454,293) (1,454,293)
---------- ----------
Non-cash net assets 1,253,181 1,253,181
Sale of stores in exchange for
assignment of debt 3,100,000 -
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
VIDEO CITY, INC.
(FORMERLY LEE VIDEO CITY, INC.)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Video City, Inc. (the "Company"), originally known as Lee Video City, Inc., was
incorporated in California on February 20, 1990. The Company owns and operates
video specialty stores located primarily in secondary markets.
On January 8, 1997, the Company merged with and into Prism Entertainment
Corporation ("Prism"). Prism is an inactive film production and distribution
company. Prism's business is limited to the sale of its existing film products
to domestic markets and the licensing of foreign rights to its existing film
library. The film library consists of 47 feature films and numerous shorter
films.
As of January 31, 1997, the Company owned and operated 18 stores and managed an
additional 6 "licensed" stores pursuant to management agreements. All of the
stores are located in California.
2. MERGER
On December 1, 1995, Prism filed a voluntary Chapter 11 petition and commenced a
case under Chapter 11 of the United States Bankruptcy Code. During the course
of the Bankruptcy Proceedings, Prism operated as a debtor in possession and
engaged in only limited business activities consisting of the sale of its
existing film products to domestic markets as well as foreign rights to its
existing film library.
On January 8, 1997, Lee Video City, Inc. merged into Prism Entertainment
Corporation pursuant to an Agreement and Plan of Reorganization and Merger,
dated as of October 25, 1996 (the "Plan"). The merger was authorized by the
Plan and was a condition precedent to the effectiveness of the Plan.
The transaction was accounted for as a reverse acquisition. In a reverse
acquisition, the stock issued goes to the accounting acquirer. Accordingly,
since the reverse purchase accounting is the reverse of normal, it is the fair
market value (FMV) of the issuer's stock at date of acquisition that is valued
with a write up (write down) of the issuer's net assets depending on whether the
stock is trading in excess (less than) book value. If a FMV cannot be
determined for the stock and cost is determined based on the FMV of the issuer's
net assets, then goodwill is not recognized and the transaction is valued at the
issuer's net tangible assets. Due to the trading of Prism Entertainment
Corporation's common stock being suspended during the bankruptcy proceedings,
the FMV of the stock could not be determined. Accordingly, goodwill was not
recognized and the transaction was recorded at the fair value of the issuer's
net tangible assets. The existing shareholders of Lee Video City, Inc. received
4,234,024 of the common stock of Prism Entertainment Corporation or
approximately 43.4% of the Company's common stock. Upon consummation of the
merger, the name of the surviving corporation ("the Company") was changed from
Prism Entertainment Corporation to Video City, Inc.
The financial statements include the accounts of Lee Video City, Inc. for all
periods presented and the accounts of Prism Entertainment Corporation for the
period January 9, 1997 through January 31, 1997.
Prism Entertainment Corporation's operations for the period January 9, 1997
through January 31, 1997 includes $1,933 of sales, operating losses of $47,822,
interest expense of $23,744, which resulted in a net loss of $71,566.
28
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MERCHANDISE INVENTORIES
Merchandise inventories consisting primarily of prerecorded videocassettes and
video games held for sale are stated at the lower of cost (first-in, first-out)
or market.
VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory, which includes video games, is recorded at cost
and amortized over its estimated economic life with no provision for salvage
value. Videocassettes that are considered base stock are amortized over 36
months on a straight-line basis. Purchases of new release videocassettes and
video games are amortized whereby the tenth and any succeeding copies of each
title per store are amortized over 9 months on an accelerated basis; the fourth
through ninth copies of each title per store are amortized over 36 months on an
accelerated basis; and copies one through three of each title per store are
amortized as base stock.
Certain videocassettes in the rental inventory are leased under a revenue
sharing agreement with a vendor, as broker for various studios (Revenue Sharing
Agreement). During the revenue sharing period, which is generally one year, the
studios retain ownership of the videocassettes and the Company shares the rental
revenue with a vendor rather than purchasing the videocassettes for a fixed cost
per copy (typically approximately $60). Such revenue sharing amounts are
included as cost of leased product in the accompanying statements of operations.
The associated handling fee per leased videocassette is amortized on a straight-
line basis over the term of the lease and is included in amortization of
videocassette rental inventory in the accompanying statements of operations.
Amortization expense related to videocassette rental inventory totaled
approximately $2,098,000 for the thirteen months ended January 31, 1997 and
$1,987,000, $2,017,000 and $2,568,000 for the years ended December 31, 1996,
1995 and 1994. As videocassettes are sold or retired, the applicable cost and
accumulated amortization are eliminated from the accounts, and any gain or loss
is recorded.
FILM COSTS
Film costs are paid to obtain film license rights and are amortized in the same
proportion that current revenues bear to estimated remaining lifetime revenues.
Estimates of total lifetime revenues and expenses are periodically reviewed by
management and revised if warranted by changing conditions. Where all or a
portion of the film costs appear not to be recoverable through estimated
remaining lifetime revenues, the non-recoverable portion is charged to expense.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Furniture, fixtures and equipment
under capital leases are recorded at the lower of the present value of the
future minimum lease payments or the fair value of the asset at the inception of
the leases. Property and equipment are depreciated using the straight-line
method over estimated useful lives, ranging from five to ten years.
REVENUE RECOGNITION
Revenue is recognized at the time of rental or sale.
Revenues from licensing agreements, which provide for the receipt by the Company
of nonrefundable guaranteed amounts, are recognized when the programming becomes
available for exhibition and all other conditions of the sale have been met.
Deposits and cash advances received under such licensing contracts are deferred
until all conditions of sale have been met, and are reflected in the
accompanying financial statements as deferred income. Revenues are recorded
net of applicable rebates, returns and advertising allowance.
29
<PAGE>
STORE OPENING COSTS
Store opening costs, which consist primarily of payroll, advertising and
supplies, are expensed as incurred.
STOCK-BASED COMPENSATION
In 1996, the Company adopted for footnote disclosure purposes only, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. For accounting purposes,
the value of the stock based award is determined using the intrinsic value
method whereby compensation cost is the excess of the quoted market prices of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock.
INCOME TAXES
The Company records income taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the
asset and liability method of SFAS No. 109, deferred income taxes are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
LOSS PER SHARE
Loss per share computations are based on the weighted average number of common
and common equivalent shares outstanding. Loss per share computations do not
include any effect from the assumed exercise of stock options and warrants
because they are antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128) issued by the Financial Accounting Standards Board (FASB) is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. The statement requires restatement of all prior
period earnings per share (EPS) data presented. The new standard requires a
reconciliation of the numerator and denominator of the basic EPS computation
(EPS) to the numerator and denominator of the diluted EPS computation. The
Company does not expect adoption to have a material effect on its EPS
computation.
30
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Land $ - $ - $ 300,000
Furniture and fixtures 1,134,876 1,134,369 1,521,448
Equipment 683,330 678,695 1,339,501
Leasehold improvements 432,095 423,597 936,906
----------- ----------- ------------
$ 2,250,301 $ 2,236,661 $ 4,097,855
Accumulated depreciation (1,233,212) (1,202,182) (1,488,825)
----------- ----------- ------------
$ 1,017,089 $ 1,034,479 $ 2,609,030
=========== =========== ============
</TABLE>
Depreciation expense was $562,000, $531,000, $650,000, and $544,000 for the
thirteen months ended January 31, 1997 and the years ended December 31, 1996,
1995, and 1994.
5. NOTES RECEIVABLE
At January 31, 1997, December 31, 1996 and December 31, 1995, the Company had
unsecured employee loans aggregating approximately $86,700, $86,700 and $90,300,
bearing interest at 7%, and are due on demand. Also included in notes
receivable is a secured note amounting to approximately $158,500, $158,500 and
$184,800 as of January 31, 1997, December 31, 1996 and December 31, 1995,
bearing interest at 8%, and is due September 15, 1997, and other miscellaneous
unsecured notes receivable of approximately $26,300 as of December 31, 1995.
Prism Entertainment Corporation had a note receivable that was assumed by the
Company in the merger. This note bears interest at 10% and had a balance of
approximately $154,000 as of January 31, 1997.
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Promissory note, secured by all assets, bearing
interest at 10% per annum, interest only
payments monthly beginning January 31, 1997
through the year 2000. Principal balance due and
payable January 2000. 1,500,000 4,498,460 7,283,586
Promissory note, secured by the film library, accounts
receivable and the store inventory. All proceeds from
current and future accounts receivable collections as
well as from the sale of the film library are to be
applied to the outstanding principal until paid in full.
Any principal balance outstanding as of July 1, 1998
will be paid in twelve equal monthly installments.
The note bears interest at the bank's prime rate plus
3%. The interest rate on the note was 11.25% on
January 31, 1997. 3,066,338 - -
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Convertible, subordinated, unsecured notes to various
Individuals, maturing on January 31, 2001, interest
payable monthly, bearing interest at 5% to 10%.
converted on January 8, 1997 into common stock. - 851,510 859,000
Promissory note, secured by land, and personally
guaranteed by the primary stockholder of the
Company, bearing interest at 7%, principal and
interest were paid on May 27, 1996. - - 300,000
Other loans payable to various individuals for $160,000
(secured by property) and $50,000 (unsecured),
payable on February 29, 1996 and January 1, 1998,
respectively, bearing interest at 10% and 11%,
respectively, with personal guarantee by
primary stockholder of the Company 50,000 50,000 210,000
Other unsecured loans, payable in monthly
installments until September 15, 1997, bearing
interest at 8%. 42,850 48,166 109,283
Promissory notes payable, personally guaranteed by
the primary stockholder for $123,595 and $189,783,
payable in monthly installments until February
1, 1997, and February 1, 2000, respectively,
bearing interest at 10.25% 313,378 313,378 -
Other unsecured loans to fulfill settlement obligations
for $259,847 and $59,632, payable in monthly
installments until February 20, 2000 and December 15,
1998, respectively. 310,819 319,479 -
Capital lease obligations, payable in monthly installments,
with interest rates of 14% to 28%, secured by the respective
assets under the lease (Note 10) 316,778 337,937 637,688
- - - - ---------------------------------------------------------------------------------------------------------------------------
Total Debt 5,600,163 6,418,930 9,399,557
Less current portion (2,258,850) (614,916) (1,445,736)
- - - - ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 3,341,313 $ 5,804,014 $ 7,953,821
</TABLE>
Total maturities of remaining long-term debt for five years subsequent to
January 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending
January 31, Amount
- - - - -----------------------------------------------------
<S> <C>
1998 $2,258,850
1999 1,240,584
2000 590,163
2001 1,510,566
------------------------------------------------
$5,600,163
</TABLE>
32
<PAGE>
7. COMMON STOCK
During 1995, common stock was issued in exchange for videocassette rental
inventory and certain professional services. The videocassette rental inventory
and professional services have been valued at the approximate fair value.
During 1995, in conjunction with an addendum to the Revenue Sharing Agreement
(Note 3), the Company granted to the distributor a warrant to purchase shares of
common stock of the Company, representing 2% of the fully diluted issued and
outstanding shares of common stock at an exercise price of $400,000. The number
of shares issuable under this warrant is now fixed, 132,279 shares at an
exercise price of $3.02 per share. The warrant is exercisable during the period
commencing August 24, 1995 and ending on August 23, 2005.
In 1996, in conjunction with a second addendum to the Revenue Sharing Agreement
(Note 3), the Company granted to the distributor a warrant to purchase shares of
common stock at an exercise price of $30,795 for each 1% of the fully diluted
number of common shares outstanding, not to exceed 5% of the fully diluted
number of common shares outstanding. The number of shares issuable under this
warrant is now fixed at a maximum of 341,141 shares at a weighted average
exercise price of $0.45 per share. The warrant is exercisable during the period
commencing June 19, 1997 and ending on September 30, 2005. The vesting schedule
is as follows:
<TABLE>
<CAPTION>
Cumulative Percentage of
June 19, Total Shares Outstanding Purchase Price
-------------------------------------------------------------
<S> <C> <C>
1997 1 $ 30,795
1998 2 61,590
1999 3 92,385
2000 4 123,180
2001 5 153,975
</TABLE>
Additionally, during 1995 the Company issued a warrant to its major supplier to
purchase common stock at an exercise price of $30,795 for each 1% of the fully
diluted number of common shares outstanding, not to exceed 5% of the fully
diluted number of common shares outstanding. The warrant is exercisable during
the period commencing January 1, 1996 and ending on December 31, 2004. In 1996,
the Company amended this warrant under basically the same terms, except the
warrant shall not exceed 8.5% of the fully diluted common shares outstanding and
the warrant is fully vested as of December 31, 1996. As a result of the merger,
this warrant was then exchanged for a new warrant to purchase 404,403 shares of
the Company's stock from the principal stockholder of the Company at $0.6085 per
share. The grant date of this warrant is January 8, 1997 and expires five years
from that date.
In 1996, in conjunction with a second addendum to the Revenue Sharing Agreement
(Note 3), the Company granted to the distributor a warrant to purchase shares of
common stock at an exercise price of $30,795 for each 1% of the fully diluted
number of common shares outstanding, not to exceed 5% of the fully diluted
number of common shares outstanding. The warrant is exercisable during the
period commencing June 19, 1997 and ending on September 30, 2005. The vesting
schedule is as follows:
<TABLE>
<CAPTION>
Cumulative Percentage of
June 19, Total Shares Outstanding Purchase Price
-------------------------------------------------------------
<S> <C> <C>
1997 1 $ 30,795
1998 2 61,590
1999 3 92,385
2000 4 123,180
2001 5 153,975
</TABLE>
33
<PAGE>
As a result of the merger and effective on the merger date, the major supplier
also received a warrant to purchase up to an aggregate of 852,750 shares of the
Company's common stock. A summary of this warrant is as follows:
<TABLE>
<CAPTION>
Number of Shares Life (Years) Exercise Price
---------------------------------------------------
<S> <C> <C>
200,000 5.0 $2.00
200,000 6.0 2.25
200,000 7.0 2.50
114,240 5.0 0.51
54,360 5.0 1.03
15,000 5.0 1.00
69,150 5.0 2.00
</TABLE>
In 1995, the Company granted stock options to purchase the company's common
stock to key employees and consultants. The options expire five years after
date of grant and are fully vested. In 1996, the Company granted stock options
to purchase the Company's common stock to key employees and consultants. The
options expire five years after the date of grant and vest ratably over a three
year period. In 1996, the Company also granted options to consultants which
expire five years after date of grant and are fully vested. A summary of stock
options and warrants activity is as follows:
<TABLE>
<CAPTION>
January 31, 1997 1996 1995 1994
---------------- ---- ---- ----
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
- - - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 1,685,000 0.91 1,224,000 0.70 1,149,000 0.70 -
Granted 1,432,453 1.31 461,000 2.00 1,224,000 0.70 1,149,000 0.70
Exercised - - - - -
Terminated - 1,149,000 0.70 -
Outstanding at end
of period 3,117,153 1.18 1,685,000 1.06 1,224,000 0.70 1,149,000 0.70
Options exercisable
at period end 2,890,486 1.11 1,458,333 0.91 1,224,000 0.70 1,149,000 0.70
</TABLE>
Information relating to stock option and warrant at January 31, 1997 summarized
by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------- ------------------------------------------------------
Weighted Average Weighted Average
---------------- ----------------
Exercise Price
Per Share Shares Life Exercise Price Shares Exercise Price
- - - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.10 to $0.61 1,455,243 5.2 $0.49 1,455,243 $0.49
1.00 to 1.03 531,760 5.0 1.02 531,760 1.02
2.00 to 2.50 1,130,150 5.5 2.13 903,483 2.17
- - - - -----------------------------------------------------------------------------------------------------------------------
3,117,153 5.3 $1.18 2,890,486 $1.11
</TABLE>
34
<PAGE>
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value at the grant dates consistent with the methods of SFAS
123, the Company's net loss and loss per share would not be materially
different.
The fair value of option grants are estimated on the date of grant utilizing a
simple option pricing model with the expected life of option ranging from 3 to 5
years, expected volatility of 0%, risk-free interest rates ranging from 5.38% to
5.69%, and a 0% dividend yield. The weighted average fair value of options
granted ranged from $0 to $0.42.
8. INCOME TAXES
At December 16, 1994, the Company converted from an S Corporation to a C
Corporation. As a C Corporation, the Company is subject to Federal and State
income taxes at the corporate level.
Income tax expense differs from the "expected" benefit (computed by applying the
U.S. Federal corporate statutory income tax rate to loss before income taxes)
primarily due to an increase in the valuation allowance for deferred tax assets.
As of January 31, 1997, the Company had net operating loss carryforwards
generated by Lee Video City, Inc. of approximately $1,703,000 and $851,000 for
Federal and California income tax purposes and net operating loss carryforwards
generated by Prism Entertainment Corporation of approximately $4,675,000 for
Federal income tax purposes, which are available to offset future taxable income
through 2012. The Company's ability to utilize the net operating loss
carryforwards is dependent upon the ability to generate taxable income in future
periods which may be limited due to future ownership changes as defined under
Section 382 of the Internal Revenue Code of 1986. Such an ownership change
occurred on January 8, 1997 which results in an annual limitation per year. Any
unused annual limitation may be carried over to future years until the net
operating losses expire. Utilization of net operating losses may also be
limited in any one year by alternative minimum tax rules. Net operating loss
carryforwards of Prism would be lost if the historical business of Prism is not
continued for two years.
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and liabilities
which will result in future deductible amounts and operating loss and tax credit
carryforwards. A valuation allowance is then established to reduce that
deferred tax asset to the level at which it is "more likely than not" that the
tax benefits will be realized. Realization of tax benefits of deductible
temporary differences and operating loss or credit carryforwards depends on
having sufficient taxable income of an appropriate character within the
carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
difference, and (iii) future taxable income generated by future operations.
Based on an evaluation of the realizability of the deferred tax asset,
management has determined that it is not more likely than not that the Company
will realize this tax benefit. Therefore, a valuation allowance has been
established for the entire deferred tax asset.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1996 and 1995 are presented below:
35
<PAGE>
<TABLE>
<CAPTION>
January December December
1997 1996 1995
- - - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental inventory principally due to difference
in amortization $ 120,080 $ 119,641 $ 540,600
Fixed assets due to difference in depreciation 87,970 85,698 65,700
Section 481 adjustment 80,032 83,377 127,600
Deferred rent 74,013 73,755 74,100
Net operating loss carryforward 2,247,663 638,202 193,600
Other 16,169 19,205 36,800
- - - - -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax asset 2,625,927 1,019,878 1,038,400
Less valuation allowance (2,625,927) (1,019,878) (1,038,400)
- - - - -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ - $ -
</TABLE>
9. GAIN ON DISPOSITION OF ASSETS
During 1996, the Company sold 11 stores for cash and assignment of debt. The
resulting gain on sale of assets is included in the statement of operations.
10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various capital leases for certain fixtures and
equipment expiring at various dates through 1999. At December 31, 1996 and
1995, the gross amount of furniture, fixtures and equipment and related
accumulated amortization recorded under capital leases included in furniture,
fixtures and equipment was as follows:
<TABLE>
<CAPTION>
January 31, December 31, December 31,
1997 1996 1995
- - - - -------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 397,539 $ 397,539 $ 548,352
Equipment 405,167 405,167 558,873
- - - - -------------------------------------------------------------------------
802,706 802,706 1,107,225
Accumulated amortization (514,827) (502,930) (474,474)
- - - - -------------------------------------------------------------------------
$ 287,879 $ 299,776 $ 632,751
</TABLE>
The Company leases its facilities under noncancelable operating leases expiring
at various dates through 2005. Rent expense under operating leases was
approximately $1,471,000, $1,444,000, $1,597,000 and $1,472,000 for the thirteen
months ended January 31, 1997 and the years ended December 31, 1996, 1995 and
1994.
The present value of future minimum capital lease payments and future minimum
lease payments under noncancelable operating leases with initial lease terms in
excess of one year as of January 31, 1997 are as follows:
36
<PAGE>
<TABLE>
<CAPTION>
Year Ending Operating
January 31, Capital Leases Leases
- - - - --------------------------------------------- -------------- -----------
<S> <C> <C>
1998 $ 312,978 $1,154,475
1999 69,206 1,123,378
2000 257 992,908
2001 -- 678,435
Thereafter -- 1,316,750
- - - - --------------------------------------------- -------------- -----------
Total minimum lease payments $ 382,441 $5,265,946
Amount representing interest 65,663
- - - - --------------------------------------------- --------------
Present value of net minimum capital lease
payments (included in long-term debt) $ 316,778
- - - - --------------------------------------------- --------------
</TABLE>
Pursuant to the Revenue Sharing Agreement (Note 3), the Company is obligated to
pay the vendor revenue sharing and handling fee payments that are equal on an
annual basis to at least 8% of the Company's gross revenues.
On November 6, 1996, the Company amended the March 13, 1996 agreement with its
major supplier to purchase, under certain conditions, 80% of its yearly
requirements for the video rental, video sell-through and video game products.
The agreement expires on June 30, 2001.
If the relationships with Ingram and Rentrak were terminated, the Company
believes that it could readily obtain its necessary inventory of videocassette
and video games from a number of other suppliers at prices and on terms
comparable to those available from Ingram or Rentrak. However, there can be no
assurance that any replacement supplier would provide service or payment terms
as favorable as those provided by Ingram or Rentrak.
The Company, Robert Y. Lee, Barry Collier and Ingram entered into Override
Agreement dated November 19,1996 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 Prism 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, or such time as
Ingram's beneficial ownership interest in the Company's common stock, on a fully
diluted basis, is 4% or less.
Effective January 8, 1997, Robert Y. Lee entered into an Employment Agreement
with the Company pursuant to which he will serve for a period of three years in
the capacity as Chairman of the Board and Chief Executive Officer. Mr. Lee will
receive a base salary of $178,000 per year and an annual bonus of 3% of any
pre-tax profit in excess of $1,100,000 with respect to the fiscal year
commencing in 1997; 3% of any pre-tax profit in excess of $1,200,000 with
respect to the fiscal year commencing in 1998; and 3% of any pre-tax profit in
excess of $1,300,000 with respect to the fiscal year commencing in 1999. Mr.
Lee is also entitled to certain fringe benefits including payment of up to $500
per month for the use of one Company provided automobile.
Effective January 8, 1997, Barry Collier entered into an Employment Agreement
with the Company pursuant to which for a period of two years he will serve in
the capacity of President. He will receive a base salary of $178,000 per year.
In addition, Mr. Collier is entitled to an annual bonus equal to 12% of all
annual revenues (net of commissions and expenses related thereto) recorded in
excess of $625,000 from the licensing and/or transfer of rights to the Prism
film library; an annual bonus equal to 5% of any promotional advertising
development funds from any external source in excess of $350,000 received by or
37
<PAGE>
credited to the Company; and a bonus equal to 20% of proceeds in excess of
$3,700,000 (net of commissions and expenses of sale) received by the Company
generated from the sale of the Company's film library in its entirety. Mr.
Collier is also entitled to certain fringe benefits including payment of up to
$500 per month for the use of one Company provided automobile.
Effective January 8, 1997, James Craig Kelly entered into an Employment
Agreement with the Company pursuant to which he will serve for a period of three
years in the capacity of Senior Vice President and Chief Executive Officer. Mr.
Kelly will receive a base salary of $120,000 per year and a bonus of 3% of any
pre-tax profit in excess of $1,100,000 with respect to the fiscal year
commencing in 1997; 3% of any pre-tax profit in excess of $1,200,000 with
respect to the fiscal year commencing in 1998; and 3% of any pre-tax profit in
excess of $1,300,000 with respect to the fiscal year commending in 1999. Mr.
Kelly is also entitled to certain fringe benefits including payment of up to
$500 per month for the use of one Company provided automobile.
In the event that the employment of any of the above individuals is terminated
for any reason other than "material breach" or "cause" as defined in his
Employment Agreement, the Company will pay the remainder of the base salary to
such individual for the remaining term of his employment agreement.
11. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Notes receivable: Estimated discounting of future cash flow using the current
- - - - ----------------
rate at which similar loans would be made with similar credit risks and for the
same remaining maturities. The fair market value of employee notes cannot be
estimated due to their related party nature and terms.
Long-term debt: Estimated based upon current market borrowing rates for loans
- - - - --------------
with similar terms and maturities.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Notes Receivable $ 398,830 $ 399,282 $ 245,176 $ 245,454 $ 116,657 $ 113,867
Financial Liabilities:
Long-Term Debt 5,600,163 5,633,745 6,418,930 6,456,849 9,399,557 9,491,658
</TABLE>
12. PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma condensed statements of operations are based
on the historical income statements of Lee Video City, Inc. and Prism
Entertainment Corporation and assumes the reorganization and merger took place
January 1, 1996 for the thirteen months ended January 31, 1997, January 1, 1996
for the year ended December 31, 1996 and January 1, 1995 for the year ended
December 31, 1995.
The unaudited pro forma condensed statements of operations may not be indicative
of the actual results of the merger and there can be no assurance that the
foregoing results will be obtained.
The following unaudited pro forma condensed statements of operations should be
read in connection with the historical financial statements of Lee Video City,
Inc. and Prism Entertainment Corporation.
38
<PAGE>
(In thousands, except per share amount)
<TABLE>
<CAPTION>
Thirteen Months Year Ended Year Ended
Ended December 31, December 31,
January 31, 1997 1996 1995
------------------ ---------------- ----------------
<S> <C> <C> <C>
Revenue and product sales $ 13,582 $ 13,742 $ 29,805
Operating costs and expenses:
Store operating expenses 6,659 6,221 6,850
Amortization of videocassette
rental inventory 2,098 1,987 2,017
Cost of product sales 6,713 7,045 18,826
Cost of leased product 592 556 1,086
General & administrative 3,210 2,886 7,843
------------------ ---------------- ----------------
Total operating costs and expenses 19,272 18,695 36,622
Loss from operations (5,690) (4,953) (6,817)
Other (income) expense
Interest expense, net 665 573 688
Gain on disposition of assets (1,049) (1,049) -
Other (202) 80 (204)
------------------ ---------------- ----------------
Net loss $ (5,104) $ (4,557) $ (7,301)
================== ================ ================
Loss per share $ (0.52) $ (0.47) $ (0.75)
Weighted average number of shares 9,754 9,754 9,754
outstanding
</TABLE>
Prism Entertainment Corporation's cost of sales includes approximately
$2,600,000 of amortization for the writedown of the film library due to the
revision of the film library ultimates for the thirteen months ended January 31,
1997, and for the year ended December 31, 1996 respectively and $4,500,000 for
the year ended December 31,1995.
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In conjunction with the merger of Lee Video City, Inc. into Prism Entertainment
Corporation, the registrant's name was changed from Prism Entertainment
Corporation to Video City, Inc. BDO Seidman, LLP has been selected as the
independent certified public accountants for Lee Video City, Inc. for its fiscal
year ended December 31, 1996 and for Video City, Inc. for the fiscal year ended
January 31, 1997. BDO Seidman, LLP served as Prism Entertainment Corporation's
independent certified public accountants prior to the merger. KPMG Peat
Marwick, LLP served as Lee Video City, Inc.'s independent certified public
accountants for the fiscal years ending December 31, 1995 and 1994.
There were no disagreements with KPMG Peat Marwick, LLP and Lee Video City, Inc.
within the meaning of Item 304 of Regulation S-K on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure in connection with the audit of Lee Video City, Inc.'s financial
statements for the fiscal years ended December 31, 1995 and 1994, or for the
subsequent interim period through January 1997, which disagreements if not
resolved to their satisfaction would have caused KPMG Peat Marwick, LLP to issue
an adverse opinion or disclaimer of opinion, or was modified as to uncertainty,
audit scope or accounting principles.
During the two most recent fiscal years, there have been no reportable events
(as defined in Item 304 or Regulation S-K) with KPMG Peat Marwick, LLP. Lee
Video City, Inc. has not consulted with BDO Seidman, LLP regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the financial statements during the two
most recent fiscal years through the date of the merger.
A letter of KPMG Peat Marwick, LLP addressed to the Securities and Exchange
Commission was included as Exhibit 11.0 to the form 8-K.
The change in auditors was approved by the Board of Directors of Video City,
Inc. in January 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors are elected by the stockholders at the annual meeting and executive
officers are appointed by the Board of Directors.
<TABLE>
<CAPTION>
DIRECTORS
---------
Director of Other Positions
Name Age Registrant Since with Company
- - - - ---- --- ---------------- ---------------
<S> <C> <C> <C>
Robert Y. Lee 34 January 8, 1997 (1) Chief Executive Officer
Barry Collier 54 January 8, 1997 (1) President
James Craig Kelly 38 January 8, 1997 Chief Operating Officer
Steven E. Antongiovanni 39 January 8, 1997 Chief Financial Officer
and Secretary
Stephen C. Lehman 44 January 8, 1997 None
Gerald Weber 43 January 8, 1997 None
Charles Cooke 35 January 8, 1997 None
Michael Anderson 33 January 8, 1997 None
</TABLE>
40
<PAGE>
(1) See biographical summary below for prior service by Mr. Lee on the Board of
Lee Video City, Inc. and by Mr. Collier for prior service on the Board of Prism
Entertainment Corporation.
ROBERT Y. LEE purchased his first video store in 1983, and during the 1980's
opened and acquired more than 20 video stores in Southern California. In 1990,
Mr. Lee moved to Bakersfield, California and founded Lee Video City, Inc. to
exploit his secondary market growth strategy. He has been the Chairman of the
Board and Chief Executive Officer since Lee Video City, Inc. was founded. Mr.
Lee was elected Chairman of the Board of Video City, Inc. when Prism
Entertainment Inc. and Lee Video City, Inc. merged on January 8, 1997.
BARRY COLLIER was a director, President and Chief Operating Officer of Prism
Entertainment Corporation. from its inception. He served as Secretary from
Prism's inception until June 12, 1985, when he became Chief Executive Officer.
Mr. Collier served as Chairman of the Board from 1990-1994. As of the merger
between Prism and Lee Video City, Inc., Mr. Collier resigned as Chairman of the
Board and Chief Executive Officer and was elected President of Video City, Inc.
JAMES CRAIG KELLY joined Lee Video City in 1992 after 15 years with Wherehouse
Entertainment, a $500 million revenue retailer of music and video products.
From 1982 to 1984, Mr. Kelly was Director of Loss Prevention, and from 1984 to
1991, Mr. Kelly was Vice President and Regional Manager for Wherehouse.
STEVEN E. ANTONGIOVANNI is Chief Financial Officer of Video City. From 1980 to
1994, he was employed by Sun World International, Inc., an agribusiness with
annual revenues in excess of $225 million, where he rose from staff accountant
to Vice President and Assistant Controller. Mr. Antongiovanni joined the
Company as Chief Financial Officer in 1994. Mr. Antongiovanni was elected
Secretary on January 8, 1997.
STEPHEN LEHMAN has been President, Chief Executive Officer and Chairman of the
Board of Premiere Radio Networks, Inc., a producer of radio programming, since
its inception in January 1987. Prior to this, Mr. Lehman was 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,
he specialized in building radio networks for independent radio syndication.
GERALD WEBER is Senior Vice President of Retail Operations of AutoNation USA
where he is responsible for all AutoNation USA retail operations, including
sales, training, planning, hiring and loss prevention. Prior to joining
AutoNation USA, he was with Blockbuster Entertainment serving as President of
Blockbuster Music. During his employment with Blockbuster Entertainment, he
served in a number of management roles in the video retail division including
Zone Vice President of the East and Southeast Regions, Vice President of
Operations, and Senior Vice President of Domestic Retail.
CHARLES COOKE is a principal of Cooke & Grace Properties that 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.
MICHAEL ANDERSON is a principal in the law firm of Troop, Meisinger, Steuber, &
Pasich, LLP, 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.
41
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
Officer
Name Age Office Since
- - - - ---- --- ------ -------
<S> <C> <C> <C>
Robert Y. Lee 34 Chairman of the Board and
Chief Executive Officer January 8, 1997
Barry Collier 54 President January 8, 1997
James Craig Kelly 38 Senior Vice President and
Chief Operating Officer January 8, 1997
Steven E. Antongiovanni 39 Chief Financial Officer and
Secretary January 8, 1997
Rudy R. Patino 49 Chief Accounting Officer January 8, 1997
</TABLE>
The Company, Robert Y. Lee, Barry Collier, and Ingram have entered into a
Stockholders Agreement dated as of January 8, 1997 which provides, among other
things, that the Company's Board of Directors shall consist of eight members,
and that Ingram, Mr. Lee and Mr. Collier shall 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, Messrs. Cooke and Anderson are the designees
of Ingram; Messrs. Lee, Kelly, Antongiovanni and Lehman are the designees of Mr.
Lee; and Messrs. Collier and Weber are the designees of Mr. Collier. The same
parties also entered into an Override Agreement dated November 19,1996 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 Prism 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, or such time as Ingram's beneficial ownership
interest in the Company's common stock, on a fully diluted basis, is 4% or less.
ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information
concerning compensation paid (or earned by the named individuals) by the Company
for the thirteen months ended January 31, 1997 and the twelve months ended
December 31, 1995 and 1994 to individuals who were the chief executive officer
and the other executive officers of the Company during fiscal 1997 who earned
more than $100,000 (the "Named Executive Officers") for the last fiscal year:
42
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Shares
Fiscal Salary ($) Bonus Underlying
Name and Principal Position Year Ended ($) Options
- - - - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Y. Lee 1/31/97 186,891 - -
Chairman of the 12/31/95 203,935 - -
Board; Chief 12/31/94 153,958 - -
Executive Officer
Barry Collier (1) 1/31/97 315,432 - 175,000
President 12/31/95 436,645 - -
12/31/94 447,319 - -
James Craig Kelly 1/31/97 109,615 - 761,600
Senior Vice President; Chief 12/31/95 100,000 - -
Operating Officer 12/31/94 100,000 - -
Steven E. Antongiovanni 1/31/97 97,500 25,000 181,200
Chief Financial Officer; 12/31/95 90,000 - -
Secretary 12/31/94 N/A - -
</TABLE>
(1) Barry Collier received his compensation for all three periods as an employee
of Prism Entertainment Corporation
COMPENSATION OF DIRECTORS
During the fiscal year ended January 31, 1997, directors of the Company who
were also officers did not receive any compensation for their services as
directors. For the fiscal year ending January 31, 1998, each director of the
Company other than those who are officers of the Company will be entitled to
receive $ 5,000 in cash and stock options to purchase 5,000 shares of Common
Stock of the Company at an exercise price of $2.00 per share.
EMPLOYMENT AGREEMENTS
Effective January 8, 1997, Robert Y. Lee entered into an Employment
Agreement with the Company pursuant to which he will serve for a period of three
years in the capacity as Chairman of the Board and Chief Executive Officer. Mr.
Lee will receive a base salary of $178,000 per year and an annual bonus of 3% of
any pre-tax profit in excess of $1,100,000 with respect to the fiscal year
commencing in 1997; 3% of any pre-tax profit in excess of $1,200,000 with
respect to the fiscal year commencing in 1998; and 3% of any pre-tax profit in
excess of $1,300,000 with respect to the fiscal year commencing in 1999. Mr. Lee
is also entitled to certain fringe benefits including payment of up to $500 per
month for the use of one Company provided automobile.
Effective January 8, 1997, Barry Collier entered into an Employment
Agreement with the Company pursuant to which for a period of two years he will
serve in the capacity of President. He will receive a base salary of $178,000
per year. In addition, Mr. Collier is entitled to an annual bonus equal to 12%
of all annual revenues (net of commissions and expenses related thereto)
recorded in excess of $625,000 from the licensing and/or transfer of rights to
the Prism film library; an annual bonus equal to 5% of any promotional
advertising development funds from any external source in excess of $350,000
received by or credited to the Company; and a bonus equal to 20% of proceeds in
excess of $3,700,000 (net of commissions and expenses of sale) received by the
Company generated from the sale of the Company's film library in its entirety.
Mr. Collier is also entitled to certain fringe benefits including payment of up
to $500 per month for the use of one Company provided automobile.
Effective January 8, 1997, James Craig Kelly entered into an Employment
Agreement with the Company pursuant to which he will serve for a period of three
years in the capacity of Senior Vice
43
<PAGE>
President and Chief Executive Officer. Mr. Kelly will receive a base salary of
$120,000 per year and a bonus of 3% of any pre-tax profit in excess of
$1,100,000 with respect to the fiscal year commencing in 1997; 3% of any pre-tax
profit in excess of $1,200,000 with respect to the fiscal year commencing in
1998; and 3% of any pre-tax profit in excess of $1,300,000 with respect to the
fiscal year commencing in 1999. Mr. Kelly is also entitled to certain fringe
benefits including payment of up to $500 per month for the use of one Company
provided automobile.
In the event that the employment of any of the above individuals is
terminated for any reason other than "material breach" or "cause" as defined in
his Employment Agreement, the Company will pay the remainder of the base salary
to such individual for the remaining term of his employment agreement.
OPTION GRANTS IN FISCAL YEAR ENDED JANUARY 31, 1997
The following table sets forth all options to acquire shares of the
Company's common stock granted to the Named Executive Officers during fiscal
year ended January 31, 1997:
<TABLE>
<CAPTION>
Percentage of Total
Options Granted to
Employees in Fiscal Exercise Price Expiration Date
Name Granted Year ($/share)
- - - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barry Collier 175,000 11.1% $0.10 1/7/07
James Craig Kelly 761,600 48.2% $0.51 1/7/02
Steven E. Antongiovanni 181,200 11.5% $1.03 1/7/02
</TABLE>
All of the above options are nonqualified stock options and are exercisable in
full. None of these options have been exercised and their value at fiscal year
end, if any, cannot be estimated. Since there is currently no established
trading market for the Company's common stock, it is not possible to calculate
the potential realizable value of these options at assumed annual rates of 5%
and 10% stock appreciation over the current market value.
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
FY-End (#) at FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized ($) Unexercisable Unexercisable
- - - - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Y. Lee 0 0 0 0
Barry Collier 0 0 175,000 / 0 (1)
James Craig Kelly 0 0 761,600 / 0 (1)
Steven E. Antongiovanni 0 0 181,200 / 0 (1)
</TABLE>
(1) Since there currently is no established trading market for the Company's
common stock, it is not possible to calculate the value of the unexercised
options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information as of April 15, 1997, concerning the
ownership of the Company's common stock by (i) all persons or entities known to
the Company to be beneficial owners of more than 5% of the outstanding common
stock, (ii) each director of the Company, (iii) each of the Named Executive
44
<PAGE>
Officers, and (iv) all executive officers and directors of the Company as a
group. Except as otherwise indicated and subject to applicable community
property and similar laws, each of the persons or entities named have sole
voting and investment power with respect to the securities owned.
<TABLE>
<CAPTION>
Percentage of
Beneficial Owners (1) Number of Shares Class
- - - - -------------------------------------------------------- -------------
<S> <C> <C> <C>
Robert Y. Lee 3,319,024 (2) 34.0%
Barry Collier 993,050 (3) 10.0%
James Craig Kelly 761,600 (4) 7.2%
Steven E. Antongiovanni 181,200 (5) 1.8%
Stephen C. Lehman - *
Gerald Weber - *
Charles Cooke - *
Michael Anderson - *
Ingram Entertainment Inc. 2,757,153 (6) 26.0%
Rentrak Corporation 522,750 (7) 5.3%
Young C. Lee and Kay L. Lee 500,000 (8) 5.1%
All officers and directors as a group 4,694,874 43.2%
(8 persons)
* Less than 1%.
</TABLE>
(1) The address for each person listed in this table, except as otherwise
noted, is c/o Video City, Inc., 6840 District Boulevard, Bakersfield, California
93313. Mr. Lehman's address is c/o Premiere Radio Networks, Inc., 15260 Ventura
Boulevard, 5th Floor, Sherman Oaks, California 91403. Mr. Weber's address is
c/o AutoNation U.S.A., One Financial Plaza, Ft. Lauderdale, Florida 33394. Mr.
Cooke's address is c/o Cooke & Grace, 3309 Fairmont Drive, Nashville, Tennessee
37203. Mr. Anderson's address is c/o Troop Meisinger Steuber & Pasich, LLP,
10940 Wilshire Boulevard, Los Angeles, California 90024. Ingram Entertainment
Inc.'s address is Two Ingram Boulevard, La Vergne, Tennessee 37089. Rentrak
Corporation's address is P.O. Box 18888, Portland, Oregon 97218.
(2) Consists of 2,054,621 shares owned outright, of which 721,983 shares are
subject to restrictions on transfer pursuant to a lock-up agreement with Ingram;
404,403 shares which are held in escrow for a possible delivery to Ingram upon
exercise of a five-year warrant entitling Ingram to purchase such shares from
Mr. Lee; 250,000 shares which are held in an escrow subject to possible
cancellation of such shares if and as shares of the Company are issued upon
exercise of outstanding employee stock options; and 610,000 shares owned by
Barry Collier, as to which Mr. Collier has given Mr. Lee a ten-year irrevocable
proxy to vote such shares on all matters.
(3) Includes 818,050 shares owned outright by Mr. Collier, as to which he has
granted Robert Y. Lee a ten-year irrevocable proxy to vote 610,000 shares on all
matters; and a ten-year stock option to purchase 175,000 shares from the
Company.
(4) Consists of a currently exercisable stock option to purchase 761,600 shares
from the Company.
(5) Consists of a currently exercisable stock option to purchase 181,200 shares
of common stock from the Company.
(6) Consists of 1,500,000 shares owned outright by Ingram; a warrant to
purchase 404,403 shares from Robert Y. Lee; and a warrant to purchase 852,750
shares from the Company.
(7) Consists of a currently exercisable warrant to purchase 132,279 shares from
the Company; another warrant to purchase up to 341,141 shares from the Company,
of which Rentrak currently has the right to purchase 65,471 shares; and 325,000
shares owned by Mortco, Inc., a wholly owned subsidiary of Rentrak.
(8) Rev. and Mrs. Lee are the parents of Robert Y. Lee, the founder, Chairman
of the Board and Chief Executive Officer of the Company.
45
<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. As of December 31, 1995, the
Company owed Ingram $7.3 million. This amount was paid down to $4.5 million in
June 1996 with proceeds derived from the Company's sale of eleven stores. On
January 8, 1997, concurrent with the merger of Lee Video City, Inc. into Prism,
Ingram accepted 1,500,000 shares of common stock of the Company in cancellation
of $3 million of the Company's indebtedness to Ingram, reducing the Company's
remaining long- term indebtedness to Ingram to $1.5 million. At the same time,
Ingram also received warrants to purchase 852,750 shares of common stock from
the Company and 404,403 shares of common stock from Robert Y. Lee. See Note 7 of
Notes to Financial Statements of the Company contained in this Form 10-K Report.
In addition, the Company entered into a new long-term supply agreement with
Ingram for videocassettes and related products; Ingram released Mr. Lee from his
personal guarantee of the Company's indebtedness; and the parties entered into
the Stockholders Agreement and the Override Agreement referred to in Item 10 of
this Form 10-K Report, which among other things prohibit certain corporate
actions without the approval of Ingram or Ingram's designees on the Board of
Directors. All of these transactions and arrangements were entered into either
simultaneously with or prior to Ingram's receipt of stock of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements required to be filed by Item 8 of this
form are contained herein as follows:
Reports of Independent Certified Public Accountants
Balance sheets
Statements of Operations
Statements of Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
(b) The following reports on Form 8-K and Forms 8-K/A have been filed during
the last quarter of the period ending January 31, 1997:
Merger of Lee Video City, Inc. into Prism Entertainment Corporation
Changes in registrant's certifying accountant
Financial statements of Lee Video City, Inc.
Pro forma financial information
Change in fiscal year
(c) See Exhibit Index located on pages 44 through 45.
<TABLE>
<CAPTION>
Exhibit Page
Number Title Number
- - - - --------------------------------------------------------------------------------
<C> <S>
2.1 Amended Plan of Reorganization of Prism
Entertainment Corporation ("Prism") dated
October 25, 1996 (1)
2.2 Agreement and Plan of Reorganization and Merger
dated as of October 25, 1996 with amendments,
between Prism and Lee Video City, Inc. (1)
</TABLE>
46
<PAGE>
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Registrant, as amended through
December 31, 1986 (2)
3.2 By-laws of Registrant, as amended to date (2)
4.1 Certificate of Merger of Lee Video City, Inc. into Registrant (1)
10.1 $1,500,000 Promissory Note of Registrant dated January 8, 1997,
payable to Ingram Entertainment, Inc. ("Ingram")
10.2 Amended and Restated Credit Loan and Security Agreement dated as of
January 8, 1997, between Registrant and Imperial Bank (1)
10.3 Override Agreement dated as of November 19, 1996 among Lee Video City,
Inc., Robert Y. Lee, Prism and Ingram (1)
10.4 Stockholders Agreement dated as of January 8, 1997 by and among the
Registrant, Robert Y. Lee, Barry Collier and Ingram
10.5 Supply Agreement dated January 8, 1997 between Ingram and Registrant
10.6 National Account Agreement dated December 16, 1994, as amended to
date, between Rentrak Corporation ("Rentrak") and Lee Video City,
Inc.
10.7 Escrow and Warrant Agreement dated as of January 8, 1997, granted by
Robert Y. Lee to Ingram to purchase 404,403 shares of common stock of
Registrant
10.8 Warrant dated as of January 8, 1997, to purchase 852,750 shares of
common stock, by Registrant to Ingram
10.9 Stock Purchase Warrant dated August 24, 1995 issued by Lee Video City,
Inc. to Rentrak
10.10 Stock Purchase Warrant dated June 19, 1996 issued by Lee Video City,
Inc. to Rentrak
10.11 Stock Purchase Warrant dated March 14, 1995 issued by Prism to
Imperial Bank
10.12 Employment Agreement dated January 8, 1997 between Registrant and
Robert Y. Lee
10.13 Employment Agreement dated January 8, 1997 between Registrant and
James Craig Kelly
10.14 Employment Agreement dated January 8, 1997 between Registrant and
Barry Collier
10.15 1996 Stock Option Plan of Lee Video City, Inc.
10.16 Stock Option Agreement dated January 8, 1997 between Registrant and
Barry Collier
10.17 Irrevocable Proxy dated January 8, 1997 given by Barry Collier to
Robert Y. Lee
27 Financial Data Schedule
</TABLE>
47
<PAGE>
(1) Exhibits 2.1, 2.2, 4.1, 10.2, and 10.3 were filed as Exhibits to
Registrant's Form 8-K Report dated January 8, 1997 and are each
incorporated herein by this reference.
(2) Exhibits 3.1 and 3.2 were filed as exhibits to Prism Entertainment
Corporation's Annual Report on Form 10-K for the fiscal year ended January
31, 1988 and are each incorporated herein by this reference.
(d) All financial statement schedules required by Form 10-K Annual Report have
been omitted because they were not applicable, were included in the notes to the
financial statements, or were otherwise not required under the instructions
contained in Regulation S-X.
48
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Video City Inc.
--------------------
(Registrant)
By: /s/ Robert Y. Lee
-----------------------
Robert Y. Lee
Chief Executive Officer
By: /s/ Steven E. Antongiovanni
---------------------------
Steven E. Antongiovanni
Chief Financial Officer
Date: May 16, 1997
49
<PAGE>
EXHIBIT 10.1
PROMISSORY NOTE
$1,500,000 January 8, 1997
Maturity Date: January 8, 2000
1. FOR VALUE RECEIVED, Video City, Inc., a Delaware corporation (formerly
known as Prism Entertainment Corporation) ("Debtor"), promises to pay to the
order of Ingram Entertainment Inc. ("Creditor") at Creditor's office located at
Two Ingram Boulevard, La Vergne, Tennessee 37086, or at such other place as
Creditor from time to time may designate, the principal sum of One Million Five
Hundred Thousand Dollars ($1,500,000), plus interest as specified in this Note.
2. This Note is delivered pursuant to that certain Override Agreement
dated as of November 19, 1996 (the "Override Agreement") among Lee Video City
Inc., Robert Y. Lee, Prism Entertainment Corporation and Creditor. Unless
otherwise defined, all capitalized terms used in this Note shall have the
meanings ascribed to them in the Override Agreement. This note is further
evidenced or secured by (i) the Copyright Mortgages, and (ii) the New Security
Agreement, dated as of January 8, 1997, made by Debtor in favor of Creditor, as
amended from time to time, covering certain personal property as more
particularly therein described (the "Property").
3. The principal sum outstanding from time to time under this Note shall
bear interest, to the fullest extent permitted by applicable law, at the rate
(the "Interest Rate") of ten percent (10%) per annum prior to any Event of
Default (as defined in Section 10 of this Note) and, after any Event of Default,
at the rate (the "Default Rate") equal to the lesser of the maximum rate of
interest allowed by applicable law or four percent (4%) in excess of the Prime
Rate (as hereinafter defined), which Default Rate shall be adjusted on each date
that said Prime Rate changes. Interest shall be calculated on the basis of a
360-day year and actual days elapsed, which results in more interest than when a
365-day year is used. If any payment to be made by Debtor shall become due on a
day other than a Business Day, payments shall be made on the next succeeding
Business Day and the extension of time shall be reflected in computing interest.
As used herein, the "Prime Rate" shall mean the Prime Rate, as published from
time to time in the Wall Street Journal, or if such is no longer available for
any reason, as determined by Creditor with reference to such other publication
as Creditor may reasonably elect.
4. Interest (as provided for in Section 3 above) on the outstanding daily
unpaid principal amount of the indebtedness evidenced hereby shall be due and
<PAGE>
payable in monthly installments, with the first such installment being due on
February 7, 1997, and subsequent installments being due on the last day of each
succeeding month thereafter until January 8, 2000, at which time the entire
unpaid principal balance hereof, and all accrued and unpaid interest thereon,
shall immediately become due and payable in full. If any such accrued interest
is not paid when due, the same shall be added to the principal balance of this
Note and the entire sum, as so increased, shall thereafter bear interest at the
rates provided herein.
5. Debtor may prepay part or all of the principal under this Note at any
time or times without premium or penalty, provided that each prepayment of
principal shall be accompanied by payment of interest accrued through the date
of payment on the amount of principal so paid. All proceeds from the exercise
of all options or warrants to purchase capital stock of Debtor shall be
immediately delivered to Creditor and applied to the reduction of all amounts
due hereunder, first to any accrued unpaid interest and then to principal.
6. If Debtor fails to make any payment when due, Debtor agrees to pay a
late charge equal to five percent (5%) of the payment then due, payable upon
demand, with respect to each such payment.
7. From and after maturity of this Note, whether by acceleration or
otherwise, all sums then due and payable under this Note, including all
principal and all accrued and unpaid interest, shall bear interest until paid in
full at the Default Rate.
8. Unless otherwise directed by Creditor in writing, all payments made
hereunder shall be made by wire transfer to NationsBank Global Finance, Dallas,
Texas, ABA/Routing number: 111000012, for further credit to: Ingram
Entertainment Inc., Account Number: 3750696172, Attention: Jeffrey L. Bigach
(615) 287-4452, in lawful money of the United States of America, and shall be
deemed made when verified by Nations Bank Global Finance.
9. If any "Event of Default" occurs at the holder's option, exercisable
in its sole discretion, all sums of principal and interest under this Note shall
become immediately due and payable without notice of default, presentment or
demand for payment, protest or notice of nonpayment of dishonor, or other
notices or demands of any kind or character, all of which are hereby expressly
waived by Debtor.
10. Debtor agrees that, upon prior written notice to Debtor, the holder
of this Note may accept additional or substitute security for this Note, or
release any security or any party liable for this Note, or extend or renew this
Note, all without notice to Debtor and without affecting the liability of
Debtor.
2
<PAGE>
11. If any lawsuit, reference or arbitration is commenced which arises
out of or relates to this Note, the Security Agreement or the indebtedness
evidenced hereby, the prevailing party shall be entitled to recover from each
other party such sums as the court, referee or arbitrator may adjudge to be
reasonable attorneys' fees in the action, reference or arbitration, in addition
to costs and expenses otherwise allowed by law. In all other situations,
including any matter arising out of or relating to any insolvency proceeding,
Debtor agrees to pay all of Creditor's costs and expenses, including reasonable
attorneys' fees (including the allocated costs of in-house counsel), which may
be incurred in enforcing or protecting Creditor's rights or interests. From the
time(s) incurred until paid in full to Creditor, all such sums shall bear
interest at the Default Rate.
12. Whenever Debtor is obligated to pay or reimburse Creditor for any
attorneys' fees, those fees shall include the allocated costs for services of
in-house counsel.
13. This Note is governed by the laws of the State of California, without
regard to the choice of law rules of that State.
14. If Creditor delays in exercising or fails to exercise any of its
rights under this Note, that delay or failure shall not constitute a waiver of
any of Creditor's rights, or of any breach, default or failure of condition of
or under this Note. No waiver by Creditor of any of its rights, or of any such
breach, default or failure of condition shall be effective, unless the waiver is
expressly stated in a writing signed by Creditor. All of Creditor's remedies in
connection with this Note or under applicable law shall be cumulative, and
Creditor's exercise of any one or more of those remedies shall not constitute an
election of remedies.
15. This Note inures to and binds the heirs, legal representatives,
successors and assigns of Debtor and Creditor; provided, however, that Debtor
may not assign this Note, or assign or delegate any of its rights or
obligations, without the prior written consent of Creditor in each instance.
Creditor in its sole discretion may, upon prior written notice to Debtor,
transfer this Note, and may sell or assign participations or other interests in
all or part of the indebtedness evidenced hereby, on the terms and subject to
the conditions of the Security Agreement and this Agreement, all without notice
to or the consent of Debtor. Also without the consent of Debtor, Creditor may
disclose to any actual or prospective purchaser of any securities issued or to
be issued by Creditor, and to any actual or prospective purchaser or assignee of
any participation or other interest in this Note, the indebtedness evidenced
hereby or any other loans made by Creditor to Debtor (whether evidenced by this
Note or otherwise), any financial or other information, data or material in
Creditor's possession relating to Debtor, the indebtedness evidenced hereby. If
Creditor so requests, Debtor shall sign and deliver a new note to be issued in
exchange for this Note.
3
<PAGE>
16. As used in this Note, the terms "Creditor," "holder" and "holder of
this Note" are interchangeable. As used in this Note, the word "include(s)"
means "include(s), without limitation" and the word "including" means
"including, but not limited to."
17. Debtor has caused this Note to be executed by its officer, who is duly
authorized and directed to do so by a resolution of its Board of Directors which
was duly passed and adopted by the requisite number of members of the Board at a
meeting which was duly called, noticed and held.
"Debtor"
Video City, Inc.
By: /s/ Robert Y. Lee
----------------------------
Name: Robert Y. Lee
--------------------------
Title: CEO
-------------------------
Mail Address:
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Barry L. Collier
Telecopy: (805) 397-5982
4
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED CREDIT LOAN AND SECURITY AGREEMENT
-------------------------------------------------------
THIS AMENDED AND RESTATED CREDIT LOAN AND SECURITY AGREEMENT (the
"Agreement") is entered into as of the 8th day of January, 1997, by and between
VIDEO CITY, INC., formerly known as Prism Entertainment Corporation, a Delaware
Corporation (the "Borrower") , and IMPERIAL BANK, a California chartered bank
(the "Bank") , with reference to the following:
PREAMBLE
--------
A. Prism Entertainment Corporation ("Entertainment"),
Prism Pictures Corporation, and Prism Pictures International,
Ltd. (collectively, "Prism") each filed with United States
Bankruptcy Court, Central District of California (the "Court") a
voluntary petition for relief under chapter 11 of the Bankruptcy
Code on December 1, 1995.
B. Prism has jointly filed that certain Amended Plan of
Reorganization Dated October 25, 1996, which, as modified, has been confirmed by
the Court (as modified and confirmed, the "Plan"), pursuant to which the three
Prism entities will be substantively consolidated into Entertainment, then merge
with Lee Video City, Inc. ("VCI") , with Entertainment as the surviving entity
(the "Merger"), which will then change its name to Video City, Inc.
C. As of the date of this Agreement, the Borrower is indebted to
the Bank in the aggregate approximate amount of $2,742,430.44 plus fees and
expenses (the "Bank Debt"). The Obligations of the Borrower to the Bank with
respect to the Bank Debt are evidenced by that certain Revolving Credit Loan and
Security Agreement dated as February 24, 1995 between Prism and the Bank (the
"Original Agreement") and certain other loan and security documents, including
but not limited to those listed on Exhibit "1" hereto (together with the
Original Agreement, the "Original Loan Documents") .
D. The Borrower desires to restructure the Bank Debt in accordance
with the Plan, and, subject to the terms and conditions set forth in this
Agreement, the parties have agreed to such restructuring (the "Loan") .
NOW, THEREFORE, in consideration of the above facts, the mutual
covenants, agreements, representations and warranties contained herein, and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
-1-
<PAGE>
TERMS
-----
1. CERTAIN DEFINITIONS.
-------------------
Unless elsewhere defined herein, each capitalized term used in this
Agreement shall have the following meanings. Unless the context otherwise
requires, any of the following capitalized terms may be used in the singular or
the plural, depending on the reference. Capitalized terms not defined in this
Agreement shall have the meaning ascribed to them in the Original Loan
Documents.
1. DEFINITIONS.
-----------
"ACKNOWLEDGEMENT" shall mean an acknowledgement of an Irrevocable Authority
-----------------
executed by the applicable account debtor in substantially the form of
Exhibit E attached to the Original Agreement or such other form as may be
acceptable to the Bank in its sole and absolute discretion.
"AFFILIATE" shall mean any Person who directly or indirectly through one or
-----------
more intermediaries, controls, is under common control with or is
controlled by, the applicable Person.
"AMENDED AND RESTATED COPYRIGHT MORTGAGE" shall mean the document in
-----------------------------------------
respect of the Products and substantially in the form of Exhibit "2"
attached hereto or such other form as may be acceptable to the Bank in its
sole and absolute discretion.
"AMENDED AND RESTATED NOTE" shall have the meaning set forth in Section
---------------------------
2.1.5 hereof.
"APPROVED LICENSE AGREEMENTS" shall have the meaning set forth in the
-----------------------------
Original Loan Agreement.
"BANK" shall have the meaning set forth in the opening paragraph of this
------
Agreement.
"BANK NOTICE LETTER" shall mean a notice, in the form of Exhibit H attached
--------------------
to the Original Agreement or such other form as may be acceptable to the
Bank in its sole and absolute discretion, notifying a third party bank or
other financial institution at which any Borrower maintains a bank account
of the Bank's security interest therein.
"BORROWER" shall have the meaning set forth in the opening paragraph of
----------
this Agreement.
"BOUGH BREAKS II" shall mean that certain Product entitled "When the Bough
-----------------
Breaks II".
-2-
<PAGE>
"BOUGH BREAKS II PRODUCTION AGREEMENT" shall mean that certain letter
-------------------------------------
agreement dated August 16, 1996, between Prism and Meeker/Greene
Entertainment regarding the production of Bough Breaks II.
"BUSINESS DAY" shall mean a day when banks are not authorized or required
-------------
to close in the State of California.
"CLOSING" shall mean the date, not later than January 31, 1997 (without the
---------
prior written consent of the Bank), upon which all conditions of this
Agreement and to the Merger have been satisfied and the Borrower is
prepared for the Plan to go effective and upon which date the transactions
contemplated by this Agreement shall be consummated, which consummation
shall be deemed to take place concurrently with the Effective Date of the
Plan.
"CODE" shall mean the Uniform Commercial Code in effect from time to time
-----
in the relevant State or States.
"COLLATERAL" shall have the meaning set forth in Section 4.2 hereof.
----------
"CONFIRMATION ORDER" shall mean that certain order of the Court entered
-------------------
December 17, 1996 entitled "Order Confirming Debtors' Amended Joint Plan of
Reorganization Dated october 25, 1996, as Modified".
"COPYRIGHTS" shall have the meaning set forth in Section 4. 2.1.1 hereof.
----------
"COSTS" shall mean, collectively, all sums (other than Principal and
-------
Interest) payable by the Borrower pursuant to this Agreement including,
without limitation, sums payable pursuant to Sections 11 and 13.7 hereof.
"COURT" shall have the meaning set forth in Paragraph A hereof.
-----
"EFFECTIVE DATE" shall have the meaning set forth in the Plan.
--------------
"ENCUMBRANCES" shall mean security interests, mortgages, pledges, equities,
------------
encumbrances, conditional sales or other title retention agreements, leases
(excluding only operating leases for office equipment and real property),
rights, restrictions, reservations or charges or liens of any nature,
collectively.
"ENTERTAINMENT" shall have the meaning set forth in Paragraph A of this
-------------
Agreement.
-3-
<PAGE>
"ENVIRONMENTAL LAWS" shall mean any and all federal, state, provincial,
-------------------
local or municipal laws, rules, orders, regulations, statutes, ordinances,
codes, decrees or requirements of the United States, any State, foreign
country, state or province thereof or any municipality or other local
governmental division of any of the foregoing, or of any department,
commission, board, bureau, agency or instrumentality of the United States,
any State, foreign country, state or province thereof or municipality or
other local governmental division of any of the foregoing, regulating,
relating to or imposing liability or standards of conduct concerning any
Hazardous Material or environmental protection or health and safety, as now
or may at any time hereafter be in effect, including without limitation,
the Clean Water Act, also known as the Federal Water Pollution Control Act,
33 U.S.C. SS 1251 et seq.; the Clean Air Act, 42 U.S.C. SS 7401 et seq.;
-- --- -- ---
the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. S 136,
the Surface Mining Control and Reclamation Act of 1977, 30 U.S.C. SS 1201
et seq.; the Comprehensive Environmental Response, Compensation and
-- ---
Liability Act of 1980, 42 U.S.C. SS 9601 et seq.; the Superfund Amendments
-- ---
and Reauthorization Act of 1986, Pub.L.No. 99-499, 100 Stat. 1613; the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. SS 11001
et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. SS
-- ---
6901 et seq.; the Occupational Safety and Health Act of 1970 as amended, 29
-- ---
U.S.C. SS 655 and 657; the California Health & Safety Code SS 25300 et
--
seq., together, in each case, with any amendment thereto, and the
---
regulations and rules adopted and the official publications promulgated
thereunder and all substitutions thereof.
"ENVIRONMENTAL LIABILITIES" shall mean any claims, obligations or
--------------------------
liabilities, known or unknown, matured or not matured, absolute or
contingent, assessed or unassessed, where such claims, obligations or
liabilities would reasonably be expected to have a materially adverse
effect on the business or condition (financial or otherwise) of the
Borrower which have been or are imposed by reason of or based upon any
provision of any Environmental Law including, without limitation, any such
claims, obligations or liabilities relating to or arising out of or
attributable, in whole or in part, to the use, storage, treatment, release,
processing, distribution, transportation, manufacture, refinement,
handling, production or disposal of any Hazardous Materials by the Borrower
or any of its employees, agents, representatives or predecessors in
interest in connection with or in any way arising from or relating to the
Borrower or any of its properties, or relating to or arising from or
attributable, in whole or in part, to the use, storage, treatment, release,
processing, distribution, transportation,
-4-
<PAGE>
manufacture, refinement, handling, production or disposal of any such
Hazardous Materials, by any other Person on, under, at, from, or in any way
affecting, any of the properties owned or used by the Borrower or any other
location where such could have a materially adverse effect on the business
or condition (financial or otherwise) of the Borrower.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
heretofore and hereafter amended, and any regulations promulgated
thereunder.
"ERISA AFFILIATE" shall mean, with respect to the Borrower, all trades or
---------------
businesses (whether or not incorporated) which, together with the Borrower,
are treated as a single employer under Section 414(b), (c), (m) or (o) of
the Internal Revenue Code.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 8 hereof.
----------------
"EXCESS CASH AMOUNT" shall have the meaning set forth in the Plan.
------------------
"EXISTING PRODUCTS" shall mean all Theatrical Pictures, Video Pictures,
-----------------
made-for-television motion pictures and mini-series, all television series
and programs, and all other feature and non-feature length motion pictures
produced for release in any other medium in which the Borrower currently
has any right, title or interest including, without limitation, the
Products listed on Schedule 5.1.15 hereto.
"EXISTING LICENSE AGREEMENTS" shall have the meaning set forth in Section
---------------------------
5.1.11 hereof.
"FEDERAL RESERVE" shall have the meaning set forth in Section 2.4.1 hereof.
---------------
"FEE ORDER" shall mean the order of the Court regarding the allowance or
---------
disallowance of the Bank's fees and costs under the Original Loan
Documents.
"FOX LORBER" shall mean Fox Lorber Associates.
----------
"FOX LORBER NOTE" shall mean that certain Promissory Note dated July 15,
---------------
1994,executed by Fox Lorber in favor of Prism in the original principal
amount of $340,000.
"GAAP" shall mean generally accepted accounting principles consistently
----
applied (except for accounting changes in response to Financial Accounting
Standards Board releases or other authoritative pronouncements).
-5-
<PAGE>
"HAZARDOUS MATERIALS" shall mean (i) any chemical, compound, material,
--------------------
mixture or substance that is now or hereafter defined or listed in, or
otherwise classified pursuant to, any Environmental Laws (as hereinafter
defined) as a "hazardous substance" , "hazardous material" , "hazardous
waste", "extremely hazardous waste", "infectious waste", "toxic substance",
"toxic pollutant" or any other formulation intended to define, list, or
classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, toxicity,
reproductive toxicity, or "EP toxicity" and (ii) any petroleum, natural
gas, natural gas liquid, liquefied natural gas, synthetic gas usable for
fuel (or mixtures of natural gas and such synthetic gas) , ash produced by
a resource recovery facility utilizing a municipal solid waste stream, and
drilling fluids, produced waters, and other wastes associated with the
exploration, development or production of crude oil, natural gas, or
geothermal resources. The term "Hazardous Waste" specifically includes, but
is not limited to, each and every substance and material which constitutes
(a) a "hazardous substance" within the meaning of 42 US.C. S 9601(14); (b)
a "hazardous substance" within the meaning of California Health & Safety
Code S 25316; (c) a "hazardous waste" within the meaning of California
Health & Safety Code S 25117; (d) an "extremely hazardous waste" within the
meaning of California Health & Safety Code S 25115; and/or (e) a "hazardous
substance," "hazardous waste," or "extremely hazardous waste " under any
regulations promulgated pursuant to such statutory provisions, including
but not limited to all regulations adopted by the State of California
Department of Toxic Substances Control pursuant to California Health &
Safety Code S 25141.
"INDEBTEDNESS" shall mean, at any time and with respect to any Person, (i)
------------
indebtedness of such Person for borrowed money (whether by loan or the
issuance and sale of debt instruments and/or securities) or for the
deferred purchase price of property or services purchased, (ii) obligations
of such Person in respect of letters of credit, acceptance facilities, or
drafts or similar instruments issued or accepted by banks and other
financial institutions for the account of such Person, (iii) obligations of
such Person under capitalized leases, and (iv) indebtedness of others of
the type described in clauses (i), (ii) and (iii) hereof which (a) such
Person has directly or indirectly assumed or guaranteed and/or (b) is
secured by a lien on assets of such Person, whether or not such Person
shall have assumed or guaranteed such indebtedness.
"INDEMNIFIED LIABILITIES" shall have the meaning set forth in Section 11
-----------------------
hereof.
-6-
<PAGE>
"INDEMNITEES" shall have the meaning set forth in Section 11 hereof.
-----------
"INGRAM" shall mean Ingram Entertainment Inc., a Tennessee Corporation.
------
"INTEREST" shall mean all interest amounts required to be paid by the
--------
Borrower pursuant to this Agreement.
"INTEREST IMPOUND ACCOUNT" shall have the meaning set forth in Section
------------------------
2.2.2 hereof.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986 and
---------------------
the rules, regulations and notices issued thereunder, as now and hereafter
in effect, or any successor provision thereto.
"IRREVOCABLE AUTHORITY" shall mean an irrevocable authority executed by the
---------------------
Borrower instructing the applicable account debtor to remit License
Payments to the Master Collection Account in substantially the form of
Exhibit D to the Original Agreement or such other form as may be acceptable
to the Bank in its sole and absolute discretion.
"LABORATORY AUTHORIZATION LETTER" shall mean an agreement for a particular
-------------------------------
Product or Products in substantially the form of Exhibit G to the Original
Agreement, or such other form as may be acceptable to the Bank in its sole
and absolute discretion .
"LABORATORY PLEDGEHOLDER AGREEMENT" shall mean an agreement for a
---------------------------------
particular Product or Products in substantially the form of either of the
agreements attached to the Original Agreement as Exhibits F-1 and F-2, as
applicable, or such other form as may be acceptable to the Bank in its sole
and absolute discretion.
"LICENSE AGREEMENTS" shall mean any agreement, arrangement or
------------------
understanding now existing or hereafter entered into (including, without
limitation, so-called "output" or other multi-Product agreements), to which
the Borrower (or any agent of the Borrower acting on behalf of the
Borrower) is a party and pursuant to which the Borrower (or any agent of
the Borrower acting on behalf of the Borrower) has granted, sold, conveyed,
licensed, sublicensed, leased, subleased or otherwise transferred rights to
any Person with respect to the distribution, subdistribution, sale, rental,
lease, sublease, licensing, sublicensing, exhibition, telecast, broadcast ,
transmission (including, without limitation , by way of satellite or cable)
or other use, exploitation or disposition of any Product or any elements
thereof (including, but not limited to, all music and musical compositions;
negatives; soundtracks; and Literary
-7-
<PAGE>
Properties) and/or the Copyrights in any of the foregoing or any part
thereof in any media existing now or in the future and in any territory
(including, without limitation, motion picture, television, "home video"
and all other audio-visual device rights, merchandising and commercial tie-
ups, soundtrack album, music publishing, novelization and publishing
rights, trailer rights, and all other allied, incidental, ancillary and
subsidiary rights); such agreements shall include, without limitation, the
Existing License Agreements. License Agreements shall also include the
Turner License Agreement, the Fox Lorber Note, the Bough Breaks II
Production Agreement, and any and all instruments and notes payable to the
Borrower in connection with any License Agreement or Product.
"LICENSE PAYMENTS" shall mean all amounts (including, without limitation,
----------------
so-called "minimum guarantees" and "advances") payable to or for the
benefit of the Borrower pursuant to any License Agreement whether
characterized as accounts, accounts receivable, general intangibles or
otherwise; any and all sums, proceeds, money, products, profits or
increases payable to the Borrower pursuant to any License Agreement; all
chattel paper that may arise in connection with any License Agreement and
any and all amounts payable thereunder whether characterized as accounts,
accounts receivable, contracts receivable, general intangibles or
otherwise; and any and all proceeds of the foregoing payable to the
Borrower.
"LITERARY PROPERTIES" shall mean all literary and other properties which
-------------------
are or may form the basis of any Product or which are or may be
incorporated into any Product, including, without limitation, all scripts,
screenplays and/or photoplays based thereon in whole or in part; all
component parts of any Product consisting of such literary or other
properties; all motion picture, television, "home video" and other
audiovisual device rights in and to any story underlying any Product; all
treatments of said stories and other literary material, together with all
preliminary and final photoplays, treatments, scenarios, screenplays,
scripts, bibles and storybooks at every stage thereof used or to be used in
connection with any Product; and all other literary material upon which any
Product is or may be adapted or based in whole or in part; in each case
whether now in existence or hereafter made, produced, created or written
and whether or not in possession of the Borrower.
"LOAN" shall have the meaning set forth in Paragraph D hereof .
----
"LOAN AMOUNT" shall have the meaning set forth in Section 2.1.1 hereof.
-----------
-8-
<PAGE>
"LOAN DOCUMENTS" shall mean, collectively, this Agreement, the Amended and
--------------
Restated Note, all Irrevocable Authorities, Acknowledgements , Laboratory
Pledgeholder Agreements , Laboratory Authorization Letters, Bank Notice
Letters, Trademark Mortgages, UCC financing statements, Copyright
Mortgages, and any other certificates, financial statements, schedules,
exhibits, documents or agreements of any type or nature heretofore or
hereafter executed and/or delivered by or on behalf of the Borrower to the
Bank in any way relating to or in furtherance of this Agreement or
evidencing and/or securing any of the Obligations in each case either as
originally executed or as the same may be Modified from time to time.
"MASTER COLLECTION ACCOUNT" shall mean that certain operating account of
-------------------------
the Borrower established at the offices of the Bank pursuant to the
Original Loan Documents and numbered 0060071241.
"MERGER" shall have the meaning set forth in paragraph B hereof.
------
"MODIFICATIONS" shall mean amendments, alterations, supplements,
-------------
replacements , modifications or terminations , collectively.
"MODIFY" shall mean amend, alter, supplement, replace, modify or terminate,
------
collectively.
"NET COLLECTIONS" shall mean (i) the gross amount collected under License
---------------
Agreements in existence on the Effective Date, less only third party
participation claims and applicable royalties, if any, (ii) 50% of the
gross amount of the producer's fee due to the Borrower from Bough Breaks
II, and (iii) the gross amount collected under License Agreements entered
into by the Borrower after the Effective Date, less only third party
participations, applicable royalties, sales commissions, and residuals, if
any.
"NEW COLLATERAL" shall have the meaning set forth in Section 4.3 hereof.
--------------
"OBLIGATIONS" shall mean, collectively, the Principal , together with
-----------
accrued Interest and Costs.
"ORIGINAL AGREEMENT" shall have the meaning set forth in paragraph c
------------------
hereof.
"ORIGINAL LOAN DOCUMENTS" shall have the meaning set forth in paragraph C
-----------------------
hereof.
"ORIGINAL NOTES" shall mean, collectively, that certain $5,000,000
--------------
Promissory Note dated February 24, 1995 and that
-9-
<PAGE>
certain $1,000,000 Promissory Note dated February 24, 1995 executed by
Prism in favor of the Bank.
"PERMITTED ENCUMBRANCES" shall mean the Encumbrances granted to the Bank
----------------------
herein, the junior lien of Ingram on the Collateral, the senior lien of
Ingram on the New Collateral, and those Encumbrances set forth on Schedule
1 attached to the Original Agreement.
"PERSON" shall mean an individual or a corporation, association, limited
------
liability company, joint venture, partnership, trust or other private or
governmental entity.
"PHYSICAL MATERIALS" shall have the meaning set forth in Section 4.2.1.3
------------------
hereof.
"PLAN" shall have the meaning set forth in Paragraph B hereof .
----
"POTENTIAL EVENT OF DEFAULT" shall mean any event, act or condition which
--------------------------
with notice or lapse of time, or both, would constitute an Event of
Default.
"PRIME RATE" shall mean the fluctuating per annum commercial rate of
----------
interest announced by the Bank from time to time at its principal office as
the Bank's "prime rate".
"PRINCIPAL" shall have the meaning set forth in Section 2.1.1 hereof.
---------
"PRISM" shall have the meaning set forth in Paragraph A of this Agreement.
-----
"PRODUCER" shall mean any Person who has licensed or otherwise granted
--------
rights in a Product to the Borrower pursuant to a Rights-In Agreement.
"PRODUCTS" shall mean all Existing Products plus all of the Borrower's
--------
right, title or interest in Bough Breaks II.
"RELEVANT FOREIGN JURISDICTIONS" shall have the meaning set forth in
------------------------------
Section 5.1.1 hereof.
"RESTRICTED PAYMENT" shall mean (i) any distribution, dividend or other
------------------
direct or indirect payment in respect of any shares of any class of any
capital stock of the Borrower or any of its Subsidiaries now or hereafter
outstanding; (ii) any purchase, redemption or other acquisition or
reacquisition by the Borrower of any share of any class of any of its own
capital stock or other capital stock or equity interest of the Borrower now
or hereafter outstanding, (iii) any payment made to retire, or obtain the
surrender of any outstanding warrants, puts or options or
-10-
<PAGE>
other rights to purchase or acquire any shares of any class of any capital
stock of the Borrower now or hereafter outstanding, (iv) any loan by the
Borrower to the holder of any shares of any class of any capital stock of
the Borrower, and/or (v) any payment of principal or other retirement of
indebtedness of the Borrower which is subordinated by its terms, by
agreement or by operation of law (or is required by any Loan Document to be
subordinated) to the Obligations.
"RIGHTS-IN AGREEMENTS" shall mean any agreement, arrangement or
--------------------
understanding now existing or hereafter entered into (including, without
limitation, so-called "output" or other multi-Product agreements) , to
which the Borrower is a party and pursuant to which the Borrower has been
granted, sold, conveyed, licensed, sublicensed, leased, subleased or
otherwise transferred rights by any Person with respect to the
distribution, subdistribution, sale, rental, lease, sublease, licensing,
sublicensing, exhibition, telecast, broadcast, transmission (including,
without limitation, by way of satellite or cable) or other use,
exploitation or acquisition of any Product or any elements thereof
(including, but not limited to, all music and musical compositions;
negatives; soundtracks; and Literary Properties) and/or the Copyrights in
any of the foregoing or any part thereof in any media existing now or in
the future and in any territory (including, without limitation, motion
picture, television, "home video" and all other audio-visual device rights,
merchandising and commercial tie-ups, soundtrack album, music publishing,
novelization and publishing rights, trailer rights, and all other allied,
incidental, ancillary and subsidiary rights).
"STATE" shall mean any state of the United States.
-----
"SUBSIDIARY" shall mean any corporation, association, limited liability
----------
company, joint venture, partnership, trust or other entity which is
directly or indirectly through one or more intermediaries controlled by the
Person in question.
"THEATRICAL PICTURES" shall mean all feature and non-feature length motion
-------------------
pictures produced for theatrical release in which the Borrower now has any
right, title or interest. For avoidance of doubt, a Theatrical Picture may
also come within the definition of a Video Picture.
"TRADEMARK MORTGAGES" shall mean the documents in respect of each
-------------------
trademark, logo, tradename, service mark and/or service name of the
Borrower in substantially the form of Exhibit I attached to the Original
Agreement or in such other form as may be acceptable to the Bank in its
sole and absolute discretion.
-11-
<PAGE>
"TURNER" shall mean Turner Home Entertainment, Inc., a Georgia corporation.
------
"TURNER LICENSE AGREEMENT" shall mean that certain license agreement, dated
------------------------
as of November 8, 1994 by and between Prism Entertainment and Turner.
"TURNER PAYMENTS ASSIGNMENT AGREEMENT" shall mean that certain Assignment,
------------------------------------
Notice and Acknowledgement of Assignment entered into as of March, 1995, by
and among Prism, the Bank, and Turner.
"UNITED STATES" AND "U.S." shall mean the United States of America and its
------------------------
territories and possessions.
"VIDEO PICTURES" shall mean all feature and non-feature length motion
--------------
pictures produced for "home video" release on videotape, cassette,
cartridge, disc or other "home video" medium in which the Borrower now has
any right, title or interest. For the avoidance of doubt, a Video Picture
may also come within the definition of Theatrical Picture.
Unless the context otherwise requires, the following terms used in this
Agreement shall have the meanings ascribed to them in the Commercial Code of the
State of California: "account", "account debtor", "chattel paper", "general
intangibles", "goods", "instrument", inventory", "money", "proceeds", and
"products".
2. RESTRUCTURING OF DEBT.
---------------------
2.1 Terms of the Loan.
-----------------
2.1.1 Loan Amount. The aggregate principal amount of the Loan (the
-----------
"Loan Amount") will be the total amount of (i) two million seven hundred forty-
two thousand four hundred thirty dollars and forty-four cents ($2,742,430.44)
(the "Undisputed Principal"), plus (ii) all fees and costs of the Bank to which
objections are timely filed pursuant to Section 2.3 hereof or which are
subsequently allowed by order of the court (the "Supplemental Principal" and,
together with the Undisputed Principal, the "Principal") . The total amount of
Supplemental Principal asserted by the Bank is four hundred fifty thousand
dollars ($450,000) .
2.1.2 Interest Rate. So long as no Event of Default is continuing,
-------------
the Loan will bear interest at a rate per annum equal to the Prime Rate plus
3.0% (the "Loan Rate").
2.1.3 Default Rate. In the event of an Event of Default, the Loan
------------
will bear interest at a rate per annum equal to the Loan Rate plus 5%.
-12-
<PAGE>
2.1.4 Term. If not sooner paid pursuant to the terms set forth
----
below, all Obligations shall be payable on July 1, 1999 (the "Term").
2.1.5 Amended and Restated Note. The Borrower shall execute and
-------------------------
deliver to the Bank an amended and restated promissory note (the "Amended and
Restated Note") payable to the Bank in the form of Exhibit "3" hereto to
evidence the Borrower's obligation to repay the Loan Amount.
2.2 Payments.
--------
2.2.1 Excess Cash Amount. At Closing, the Borrower shall pay to the
------------------
Bank the Excess Cash Amount, if any, calculated under the Plan. The Borrower
shall promptly pay to the Bank any additional sums due the Bank after the
Closing pursuant to Section 6.01(d) of the Plan.
2.2.2 Monthly Interest Payments. Commencing on the twentieth day of
-------------------------
the first month following the Closing, and continuing on the first day of each
subsequent month through June, 1998, the Borrower shall make monthly Interest
payments from sources other than License Payments and exploitation of the
Products. Interest on the Undisputed Principal shall be paid directly to the
Bank. Interest on the full amount of the fees and costs as asserted by the Bank
as of the Closing shall be paid into a separate account maintained at the Bank
and designated as the "Interest Impound Account" pending the determination of
the Supplemental Principal amount under section 2.3 hereof.
2.2.3 Amortization of Remaining Principal. All Principal outstanding
-----------------------------------
as of July 1, 1998 shall be amortized by twelve equal monthly payments on the
twentieth of each month for the balance of the Term. Interest shall be payable
monthly on the amount of the Principal then outstanding.
2.2.4 Payments from Net Collections. The Borrower shall pay to the
-----------------------------
Bank all Net Collections during the Term. Through June 30, 1998, Net Collections
shall be applied to reduce the Principal. From and after July 1, 1998, Net
Collections shall be credited and applied to the next monthly payment of
Principal and Interest then due.
2.2.5 Payments from Sale of Collateral. The net proceeds of any
--------------------------------
sale of the Collateral or any portion thereof shall be paid to the Bank, and
shall be applied first to Costs, then to Interest, and then to Principal, until
the Obligations are fully satisfied.
2.2.6 Time and Place of Payments. The Borrower shall make each
--------------------------
payment hereunder (and under any instrument delivered hereunder) to the Bank at
the office of the Bank set forth in, or designated by the Bank pursuant to
Section 12 hereof, not later
-13-
<PAGE>
than 10:00 a.m. (Los Angeles time) on the day when due, in freely transferable
Dollars representing "same day" funds, and if necessary the Borrower shall
procure (from either the payor of such funds or from the Bank, at the election
of the Borrower) conversion of any payments from third parties into Dollars,
with the Borrower bearing all costs and risks of any and all such conversion.
Whenever any payment to be made hereunder or under any instrument delivered
hereunder shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day; and such extension of
time shall in each such case be included in the computation and payment of
Interest.
2.2.7 Application of Payments. Except as otherwise provided herein,
-----------------------
all payments made hereunder in respect of any of the Obligations (whether
optional or mandatory) shall be credited first to Costs to the extent that Costs
have not previously been paid, then to Interest to the extent that Interest on
all outstanding Principal under the Loan is accrued and unpaid, and then to
Principal.
2.2.8 No Offset by Borrower; Net Payments. All payments by the
-----------------------------------
Borrower under this Agreement shall be made without setoff or counterclaim and
in such amounts as may be necessary in order that all such payments (after
deduction or withholding for or on account of any present or future taxes of any
kind, imposts, levies, assessments, duties, fees, deductions or other charges,
restrictions, conditions of whatever nature now or hereafter imposed, levied,
collected or asserted to be due or payable by or for the account of the United
States or any foreign country, or any State or foreign state or province,
municipality or other political subdiviision or taxing authority thereof, and
including any penalty or fine or similar liabilities for the nonpayment thereof)
shall not be less than the amounts otherwise specified to be paid under this
Agreement. All payments under this Agreement shall be made under all
circumstances, irrespective of any restrictions then existing in any
jurisdiction and without regard to the nationality, residence or domicile of the
Bank or the Borrower, and without requiring any affidavit or the fulfillment or
any other formality except as otherwise expressly provided in this Agreement.
2.2.9 Prepayment Without Penalty. The Borrower may pay all or any
--------------------------
part of the outstanding Obligations at any time during the Term without penalty.
2.3 Objection to Fees. The Borrower may, within 60 days of the Effective
-----------------
Date, file an objection to the fees and costs of the Bank on the basis that such
fees and costs, or a portion thereof, should be disallowed pursuant to
Bankruptcy Code section 506(b). Such fees and costs as are allowed by the
Fee Order (or, if no timely objection is made, all of the Bank's fees and
costs), shall constitute the Supplemental Principal. Immediately
-14-
<PAGE>
upon the entry of the Fee Order, the Borrower shall pay to the Bank all Interest
accumulated on the Supplemental Principale If no timely objection is made
pursuant to this section 2.3, the Borrower shall, on the 61st day after the
Effective Date, pay to the Bank all Interest accumulated on the Supplemental
Principal.
2.4 Capital Adequacy and Increased Cost of the Commitments.
------------------------------------------------------
2.4.1 If, after the Closing, the adoption or implementation of any
applicable rule, law or regulation regarding capital requirements for banks or
bank holding companies, or any change therein (including any change according to
a prescribed schedule of increasing requirements, whether or not currently
known) or any change in the interpretation or administration thereof by any
foreign or domestic court, central bank (including, without limitation, the
Federal Reserve System of the United States (the "Federal Reserve")), monetary
authority or comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank with any request or directive of any such
Person regarding capital adequacy (whether or not having the force of law)
has the effect of reducing the return on the Bank's capital to a level below
that which the Bank could have achieved (taking into consideration the
Bank's policies with respect to capital adequacy immediately before such
adoption, implementation, change or compliance and assuming that the Bank's
capital was fully utilized prior to such adoption, implementation, change or
compliance) but for such adoption, implementation, change or compliance as a
consequence of the Loan or the Commitments by any amount, the Borrower shall pay
to the Bank as an additional fee from time to time on demand of the Bank such
amount as shall be necessary to compensate the Bank for such reduction. The
determination by the Bank of such amount, if done on the basis of any reasonable
averaging and attribution methods, shall in the absence of manifest error be
conclusive, and, at the Borrower's request, the Bank shall demonstrate the basis
of such determination.
2.4.2 If any present or future applicable law (which
expression, as used in this Section 2.4.2, includes statutes, rules and
regulations thereunder and interpretations thereof by any competent court or by
any governmental or other regulatory body or official charged with the
administration or the interpretation thereof and requests, directives,
instructions and notices at any time or from time to time hereafter made upon or
otherwise issued to the Bank by any central bank or other fiscal, monetary or
other authority (including, without limitation, the Federal Reserve) (whether or
not having the force of law)) shall:
2.4.2.1 subject the Bank to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this
Agreement, the Loan or the Amended and
-15-
<PAGE>
Restated Note (other than taxes based upon or measured by the income or profits
of the Bank); or
2.4.2.2 materially change the basis of taxation (except for
changes in taxes on income or profits) of payments to the Bank of Principal or
Interest or any other amounts payable to the Bank under this Agreement; or
2.4.2.3 impose or increase or render applicable any special
deposit, reserve, assessment liquidity or other similar requirements (whether or
not having the force of law) against assets held by, or deposits in or for the
account of the Bank, or the Loan or the Amended and Restated Note; or
2.4.2.4 impose on the Bank any other conditions or
requirements with respect to this Agreement, the Loan, or the Note or any class
of loans or commitments of which the Loan forms a part;
and the result of any of the foregoing is:
(i) to increase the cost to the Bank of making, funding,
issuing, renewing, extending or maintaining the Loan; or
(ii) to reduce the amount of Principal, Interest or other
amount payable to the Bank hereunder on account of any of the Loan; or
(iii) to require the Bank to make any payment or to
forego any Interest or other sum payable hereunder, the amount of which payment
or foregone Interest or other sum is calculated by reference to the gross amount
of any sum receivable or deemed received by the Bank from the Borrower
hereunder;
then, and in each such case, the Borrower will, upon demand following receipt of
written notice from the Bank, which written notice shall include calculations of
the amounts payable, pay to the Bank such additional amounts as will be
sufficient to compensate the Bank for such additional cost, reduction, payment
or foregone Interest or other sum, but without duplication of any amount payable
by the Borrower pursuant to Section 2.4.1 hereof. The determination by the Bank
of any such amount shall, in the absence of manifest error, be conclusive, and
at the Borrower's request the Bank shall demonstrate the basis for such
determination.
3. MASTER COLLECTION ACCOUNT.
-------------------------
3.1.1 The Borrower shall maintain the Master Collection Account, and
shall cause all License Payments to be directly remitted by the applicable
account debtors into the Master Collection Account. Except as permitted in
this
-16-
<PAGE>
Section 3.1.1 and in Section 4.5 hereof, the Borrower shall not be
permitted to deposit any funds in the Master Collection Account without the
prior written consent of the Bank.
3.1.2 The Borrower shall be entitled to withdraw from the Master
Collection Account with respect to a License Payment which has been
deposited in full the amount of third party participations, sales
commissions, and applicable royalties and other costs which the Borrower
may deduct to arrive at Net Collections. The balance of any License Payment
shall be released forthwith from the Master Collection Account for
application to the Amended and Restated Note in accordance with the terms
hereof. Other than as expressly provided in this Section 3.1.2, the
Borrower shall not be entitled to withdraw any portion of the funds
deposited in the Master Collection Account, and such account shall be under
the exclusive control of the Bank, until such time, if ever, as all of the
Obligations and all other sums, liabilities and other obligations owing by
the Borrower to the Bank under the Loan Documents shall have been
indefeasibly paid in full.
4. SECURITY INTEREST.
-----------------
4.1 Continuation of First Priority Security Interest As security for the
------------------------------------------------
full and timely payment and performance of all of the Obligations and any other
liabilities of or amounts owed by the Borrower to the Bank arising out of this
Agreement, or any of the other Loan Documents, whether now existing or hereafter
arising, the Borrower hereby acknowledges the validity and first priority of the
Bank's security interests in the "Collateral" and grants a continuing security
interest in and lien upon, and mortgages, pledges and assigns to the Bank for
security purposes, the "Collateral".
4.2 The Collateral. The term "Collateral" shall mean all of the
--------------
Borrower's now owned or hereafter acquired right, title and interest in and
relating to (i) the Master Collection Account, (ii) the Products, and (iii) the
License Agreements, and all proceeds of any and all of the foregoing property,
including, without limitation, all assets, accounts, accounts receivable,
contract receivables, goodwill, contract rights, general intangibles, inventory,
goods, documents, instruments, returned merchandise, chattel paper, cash,
deposit accounts, completion bonds, policies of insurance relating thereto or
arising therefrom and all products, replacements or substitutions for, and
accessions and additions to any and all of the foregoing property and interests
in property, and all payments under any indemnity, warranty or guarantee payable
by reason of loss or damage to or otherwise with respect to any of the foregoing
Collateral, and all books and records relating to any of the foregoing
Collateral. Without in any way limiting the generality
-17-
<PAGE>
of the foregoing, the Collateral shall specifically include all of the
Borrower's right, title and interest, now owned or hereafter acquired,
throughout the entire universe, in and to each and all of the following:
4.2.1 All Products (whether such Products are in preproduction,
production, principal photography , post-production or completed) and
Literary Properties, including, without limitation, all of the Borrower's
right, title and interest in and to:
4.2.1.1 All common law and statutory copyrights and copyright
registrations, and applications for registration, now existing or
hereafter arising, United States and foreign, obtained or to be
obtained on or in connection with the Products, the Literary
Properties or any parts thereof or any underlying or component element
of any Product or Literary Property, including, but not limited to,
all copyrights on the property described in Sections 4.2.1.2 through
4.2.1.5 hereof together with the right to copyright and all rights to
renew or extend such copyrights and the right (but not the obligation)
of the Bank to sue in its own name and/or in the name of the Borrower
for past, present and future infringements of copyright (collectively,
the "Copyrights");
4.2.1.2 All rights in and to all music, musical compositions,
lyrics and recordings used and to be used in, or derived from, any of
the Products, including, without limitation, all rights to record, re-
record, produce, reproduce, license, synchronize or publish all or any
of said music and musical compositions;
4.2.1.3 All physical properties of every kind or nature of or
relating to any of the Products and all versions thereof, to the
extent now or hereafter in existence, including, without limitation,
exposed film, developed film, positives, negatives, prints, answer
prints, special effects, pre-print materials (including, without
limitation, negatives, positives, duplicate negatives , inter-
negatives , inter-positives, color reversals, intermediates,
lavenders, fine grain master prints and matrixes, master tapes, discs,
cassettes and cartridges, soundtracks, recordings, audio and video
tapes, discs, cassettes and cartridges, master magnetic tracks, other
optical soundtrack recordings and music cue sheets, and all other
forms of pre-print elements used in any way to produce prints or other
copies or additional pre-print elements, whether now known or
hereafter devised or created) , audio and video tapes, cassettes and
discs (including, without limitation, 8mm, CD-I, CD-ROM and VHD) of
all types and
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<PAGE>
gauges, cut-outs, trims and any and all other physical properties of
every kind and nature relating to any of the Products in whatever
state of completion, and all duplicates, drafts, versions, variations
and copies of each thereof (all of the foregoing collectively referred
to as the "Physical Materials"), and any and all rights of access to
removal and transfer of, and duplication and reproduction of, any and
all of the Physical Materials;
4.2.1.4 All production, distribution, subdistribution, leasing,
subleasing, license, sublicense, exhibition, telecasting,
broadcasting, transmission (including, without limitation, by way of
satellite or cable), ancillary, publishing, spin-off, collateral,
allied, subsidiary, merchandising and other exploitation rights
pertinent or related to the Products, including, without limitation,
the following: (i) all rights to produce remakes, sequels, pre-sequels
or serials based in whole or in part upon the Products, the Literary
Properties, the theme of the Products or the text or any part of the
Literary Properties; (ii) all rights throughout the world to exhibit
the Products in theaters; (iii) all rights throughout the world to
telecast, broadcast , distribute , transmit (including, without
limitation, by way of microwave, satellite or cable) or reproduce by
means of television, including commercially sponsored, sustaining and
subscription, satellite, cable or "pay" television, by means of video
cassettes, video cartridges (including, without limitation, 8mm, video
and laser discs (including, without limitation, CD-I, CD-ROM and
VHD)), tapes, cartridges, interactive video (whether such interactive
video is "pay-per-view," computer generated, computer received,
received via cable television, supplied via computer modem,
incorporated into software, supplied via direct satellite reception or
is incorporated into a computer game, arcade game or home video game)
or any other scientific, mechanical, audiovisual or electronic means,
methods, processes or devices, now known or hereafter created,
conceived or devised, the Products and any remake of, sequel or pre-
sequel to or serialization of the Products; (iv) all rights to produce
primarily for television or similar use a motion picture or series of
motion pictures, by use of film, video, tape, disc (including, without
limitation, CD-I, CD-ROM and VHD), cassette, cartridge or any other
audiovisual or mechanical recording device now known or hereafter
devised, based upon the Products, the Literary Properties or any part
thereof, including, without limitation, based upon any treatment,
script, scenario or the like used in the Products; (v) all rights to
reissue any of the Products by means of film,
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<PAGE>
tape, disc (including, without limitation, CD-I, CD-ROM and VHD) or
any other devices now known or hereafter created, conceived or
devised; (vi) all merchandising rights, including, without limitation,
all rights to use, exploit and license others to use and exploit any
and all commercial tie-ups of any kind arising out of or connected
with the Literary Properties, the Products, the title or titles of the
Products and Literary Properties, and the characters of the Products
or of the Literary Properties; and (vii) the names or characteristics
of said characters in any of the Products or Literary Properties,
including, without limitation, any and all commercial tie-up,
sponsorships , publishing, merchandising and other exploitation in
connection with or related to the Products, any remake, prequel,
sequel or serialization thereof or the Literary Properties;
4.2.1.5 The dramatic , non-dramatic, stage, television, "home
video", radio and publishing riqhts in and to the Products, the
Literary Properties or any part thereof, and the right to obtain
Copyrights and renewals of Copyrights therein;
4.2.1.6 The titles of the Products and the Literary Properties
and all rights to the use thereof, including, without limitation,
rights protected by trademark and service mark laws against unfair
competition or any other applicable statutory or common law, or other
rule of principle of law; and all trademarks, tradenames, logos,
service marks and service names, at any time owned or used by any
Borrower in connection with any of the Products;
4.2.1.7 All accounts, accounts receivable, contracts
receivable, general intangibles, contract rights and other rights
which may arise or may have risen in connection with the creation,
production, delivery, distribution, exhibition of all or any part of
the Products, including, but not limited to, (i) all general
intangibles and contract rights for services or other performances by
any third parties, including Persons furnishing services or materials
or both, and actors, writers, directors, individual producers or any
and all other performing or non-performing artists in any way
connected with the Products or the Literary Properties, (ii) all
general intangibles and contract rights relating to licenses of sound
or other equipment, and licenses for photographic or other processes
relating to the Products, and (iii) any and all other such rights as
the Borrower has, the ownership or control of which is necessary or
desirable, in the opinion of the Bank, in order to
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<PAGE>
complete production and distribution of the Products; with respect to
each agreement that is a part of the Collateral, the Collateral shall
include the right (but not the obligation) of the Bank and the
Borrower, to modify such agreement, to perform thereunder, to compel
performance thereunder and otherwise to exercise all remedies
thereunder;
4.2.1.8 All documents issued by any pledgeholder or bailee with
respect to the Products or any of the Physical Materials; and
4.2.1.9 All insurance policies and completion bonds on or
connected with the Products or the production or distribution thereof
or the Physical Materials, and all proceeds which may be derived
therefrom.
4.2.2 All License Agreements, including, without limitation:
4.2.2.1 All presently existing and hereafter arising License
Payments, accounts, and other accounts receivable and general
intangibles or sums payable to the Borrower in respect of the License
Agreements; and all proceeds of any of the foregoing, of every kind
and character;
4.2.2.2 All sums, proceeds, money, products, profits and
increases, including money, profits or increases, or other property
presently owned or hereafter obtained from, in connection with or
related to the License Agreements;
4.2.2.3 All instruments, notes or chattel paper which may arise
in connection with any and all of the License Agreements;
4.2.2.4 All security interests granted to the Borrower under
any License Agreements or any other agreements; and
4.2.2.5 The Fox Lorber Note, which shall be pledged to the Bank
as security for the Obligations in a form satisfactory to the Bank in
its sole discretion.
4.2.3 All inventions, processes, formulae, licenses, patents, patent
rights, trademarks, trademark rights, trademark registrations, service
marks, service mark rights, service mark registrations, tradenames,
tradename rights, tradename registrations, service names, service name
rights, service name registration, logos, indicia, corporate and company
names, business source or business identifiers
-21-
<PAGE>
and renewals and extensions thereof, United States and foreign, and the
related goodwill and other like business property rights relating to the
Products, and the right (but not the obligation) to register claim under
any trademark, tradename, service mark, service name or patent and to renew
and extend such trademarks, tradenames, service marks, service names or
patents and the right (but not the obligation) to sue in the name of the
Borrower or in the name of the Bank for past, present or future
infringement of trademarks, tradenames, service marks, service names or
patents;
4.2.4 All cash, cash equivalents and bank accounts of the Borrower
wherever located, including, without limitation, the Master Collection
Account, which represent or include funds obtained from, in connection with
or related to the Products, and all drafts checks, certificates of deposit,
notes, bills of exchange and other writings which evidence a right to the
payment of money and are not themselves security agreements or leases and
are of a type which in the ordinary course of business is transferred by
delivery with any necessary endorsement or assignment obtained from, in
connection with or related to the Products, whether now owned or hereafter
acquired;
4.2.5 All inventory of prints, video laser discs (including (without
limitation) CD-I, CD-ROM and VHD), video cassettes, video cartridges, video
tapes, advertising materials and all other items of inventory relating to
the Products;
4.2.6 All books and records relating to any and all of the foregoing
Collateral;
4.2.7 All Rights-In Agreements (including, without limitation, all
security interests granted to the Borrower pursuant thereto or in
accordance therewith); and
4.2.8 All proceeds of, products of or accessions or additions to, any
and all of the foregoing collateral.
4.3 Granting of Security Interest in and Lien on Inventory. As
------------------------------------------------------
additional security for the full and timely payment and performance of all of
the Obligations and any other liabilities of or amounts owed by the Borrower to
the Bank arising out of this Agreement, or any of the other Loan Documents,
whether now existing or hereafter arising, the Borrower hereby grants a
continuing security interest in and lien upon all present and future inventory
and merchandise including, without limitation, all present and future goods held
for sale or lease or to be furnished under a contract of service, all raw
materials, work in progress and finished goods, all packing materials, supplies
and containers relating to or used in connection with any of the
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<PAGE>
foregoing, and all bills of lading, warehouse receipts or documents of title
relating to any of the foregoing, whether now owned or hereafter acquired by the
Borrower, wherever located, and all accessions or additions to, any and all of
the foregoing (the "New Collateral"). The lien on and security interest in the
New Collateral granted to the Bank shall be subject to and subordinate to the
lien therein of Ingram.
4.4 Security Documents. All currently existing documents and filings
------------------
which evidence and/or perfect the security interests and rights granted to the
Bank under the Original Loan Documents (the "Original Security Documents") shall
remain in full force and effect for purposes of evidencing and/or perfecting the
security interests and rights granted herein. For the purpose of further
evidencing or perfecting the security interests granted by the Borrower to the
Bank, the Borrower agrees, in the sole discretion of the Bank, to:
4.4.1 Execute and deliver, or cause to be executed and delivered, to
the Bank, Uniform Commercial Code financing statements and Bank Notice
Letters from all jurisdictions as may be, in the opinion of the Bank,
necessary to perfect and/or continue perfection of such security interests;
4.4.2 (i) Execute and deliver, or cause to be executed and delivered,
to the Bank, the Amended and Restated Copyright Mortgage, and (ii) cause to
be recorded in the United States Copyright Office and the United States
Patent and Trademark Office, as appropriate, an additional original copy of
such Amended and Restated Copyright Mortgage;
4.4.3 With respect to each License Payment, execute and deliver, and
cause all account debtors of each such License Payment to execute and
deliver, an Irrevocable Authority and Acknowledgment to the Bank pursuant
to which all such account debtors are instructed and agree to remit all
such License Payments directly to the Master Collection Account; and
4.4.4 Execute and deliver, or cause to be executed and delivered, to
the Bank, the Fox Lorber Note and such endorsement or other evidence of the
pledge thereof in favor of the Bank as the Bank deems necessary or
appropriate in its sole and absolute discretion, and any other instrument
or note evidencing a right to payment under any License Agreement.
4.4.5 Execute and deliver, or cause to be executed and delivered, to
the Bank, such other instruments and documents as the Bank may request to
carry out and fulfill
-23-
<PAGE>
the purposes of this Agreement, all in form and substance satisfactory to
the Bank.
4.5 Borrower to Deliver Funds to the Bank. In the event that the Borrower
-------------------------------------
receives any funds which should have been delivered directly to the Bank
pursuant to Section 3.1.1 or 4.4.3 hereof, the Borrower agrees that such funds
are being held in trust for the Bank, and the Borrower shall, promptly upon
receipt thereof, deliver the same to the Bank.
4.6 Filing and Recordation. The Borrower shall, in accordance with the
----------------------
Bank's instructions, execute and deliver all documents of whatever kind and
render such other assistance as may be necessary to cause all of the agreements,
instruments and documents executed pursuant to this Agreement to be duly
recorded and/or filed in all places necessary, in the opinion of the Bank, to
perfect and protect the security interests and liens of the Bank in the
Collateral and the New Collateral, and (without limiting the Borrower's
recording and/or filing obligations pursuant to Section 4.4 hereof or elsewhere
herein) the Bank is hereby authorized to file or record all of such agreements,
instruments and documents. In the event that any re-recording or re-filing
thereof (or the filing or recording of any additional agreements, instruments
and/or documents) required to protect and preserve any such lien or security
interest, the Borrower agrees that it shall again promptly execute and deliver
all documents of whatever kind and render such other assistance as may be
necessary to cause the same to be re-recorded and/or re-filed (or any additional
agreements, instruments and/or documents filed or recorded) at the time and in
the manner requested by the Bank. Notwithstanding the foregoing, the Borrower
hereby authorizes the Bank to execute (or re-execute) in the name of the
Borrower and/or to file or record (or re-file or re-record) any financing
statements, Copyright Mortgages, Trademark Mortgages or other documents or
instruments in respect of any security interests created pursuant to this
Agreement or any of the other Loan Documents which may at any time be required
in the opinion of the Bank, and the Borrower hereby irrevocably designates the
Bank, its agents, representatives and designees as agent and attorney-in-fact
for the Borrower for these purposes. Such appointment is coupled with an
interest and is therefore irrevocable.
4.7 Termination of Securitv Interest In All Collateral. Upon the
--------------------------------------------------
full and complete indefeasible satisfaction of all of the Obligations and any
other liabilities or obligations of or amounts owing by the Borrower to the Bank
pursuant to the Loan Documents, whether now existing or hereafter arising, and
submission by the Borrower to the Bank of appropriate termination statements or
other instruments reflecting the termination of the Bank's security interests in
the Collateral and the New Collateral, at the expense of the Borrower, the Bank
shall promptly execute and return such instruments, including, but not
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<PAGE>
limited to, the Amended and Restated Note marked "paid", to the Borrower.
5. REPRESENTATIONS AND WARRANTIES.
------------------------------
5.1 For the purpose of inducing the Bank to enter into this
Amendment, New Entertainment hereby represents and warrants to the Bank as of
the Closing as follows:
5.1.1 Good Standinq and Corporate Power. The Borrower is a corporation
---------------------------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and is qualified to transact business as
a foreign corporation in good standing in (i) the State of California and
(ii) in each other jurisdiction where the failure to be so qualified would
have a material adverse effect on it, its assets or properties, or the
conduct of its business (which jurisdictions together the State of
California are hereinafter collectively referred to as the "Relevant
Foreign Jurisdictions"). The corporate charter or right to conduct business
of the Borrower in its jurisdiction of incorporation and the Relevant
Foreign Jurisdictions has never been suspended, revoked or terminated. The
Borrower has the right, power and authority to own its properties and
assets and to transact the business in which it is engaged and proposes to
engage including, without limitation, the power to distribute and otherwise
exploit the Products in accordance with each License Agreement to which it
is a party.
5.1.2 Binding Agreement. This Agreement and the other Loan Documents
------------------
(to the extent such other Loan Documents are intended to be of a
contractual nature), when executed and delivered, will constitute the
valid and legally binding obligations of the Borrower and are enforceable
in accordance with their respective terms except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors rights generally.
5.1.3 Due Authorization; No conflicts or Violations. The execution,
---------------------------------------------
delivery and performance of this Agreement by the Borrower, the execution,
delivery and performance of each of the other Loan Documents to which the
Borrower is a party, and the grant of the security interests contemplated
by this Agreement and the other Loan Documents to which the Borrower is a
party, (i) have been duly authorized by all requisite actions by the board
of directors and stockholders of the Borrower and will not violate any
provision of any law, any order of any court or other agency of the United
States, any State or any foreign country, state or province having
jurisdiction, and (ii) will not violate any provision of the
certificate/articles
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<PAGE>
of incorporation, by-laws or other formation, charter or corporate
governance document of the Borrower, or any provision of any agreement or
instrument to which the Borrower is a party or by which the Borrower or any
of its properties or assets may be bound, or be in conflict with, result in
a breach of or constitute a default under, any such agreement or other
instrument.
5.1.4 Authorizations. All authorizations, approvals, registrations or
--------------
filings from or with (i) any governmental or public regulatory body or
authority of the United States, any State or of any foreign country, state,
province or other jurisdiction, or (ii) any other Person, required for the
execution, delivery or performance by the Borrower of the Loan Documents to
which the Borrower is a party, have been obtained or made and are in full
force and effect.
5.1.5 Necessary Rights. The Borrower owns and controls and has good,
----------------
valid and marketable title to, and will continue to own and control and
have good, valid and marketable title to, all rights necessary for the
development, production, distribution, subdistribution, sale, lease,
sublease, rental, license, sublicense, telecast, broadcast, transmission
(including, without limitation, by way of satellite or cable) and other
exploitation of all Products in accordance with the requirements contained
in any agreement relating to any Product to which the Borrower is a party,
including this Agreement, the License Agreements (including, without
limitation, all rights necessary to perform all of the Borrower's
obligations, to perform and observe all conditions referred to herein or
therein and to be in compliance with and observe all of the Borrower's
representations and warranties made herein or therein); and owns and
controls and has good, valid and marketable title to all other collateral.
5.1.6 The Security Interests. This Agreement and the other Loan
----------------------
Documents to be delivered to the Bank pursuant to Section 4.4 hereof, will
create and grant to the Bank valid security interests and charges in the
Collateral and New Collateral. The Bank shall have perfected first priority
security interests in and liens on the Collateral, and such Collateral
shall be subject only to the junior liens of the Permitted Encumbrances.
The Bank shall have a perfected second priority security interest in and
lien upon the New Collateral junior only to the security interest therein
and lien thereon of Ingram.
5.1.7 No Violation of Rights. As of the Closing, the Borrower is not
----------------------
aware of any violation or infringement by any of the Products or any of the
component parts thereof
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<PAGE>
upon any copyright, trademark, service mark, patent, tradename, service
name, performing right or any literary, dramatic, musical, artistic,
personal, private, civil, contract or property right or any other right of
any Person, and is not aware of any material contained in any of the
Products that is libelous or slanderous or that would invade the rights of
privacy of any Person.
5.1.8 No Judgments, Litigation, Etc. Except as set forth on Schedule
-----------------------------
5.1.8 attached hereto, there are no judgments or orders or actions at law
or in equity and no proceedings (including, without limitation, tax audits)
by or before any court, arbitrator, arbitration panel, governmental
commission, bureau or other administrative agency pending (or, to the best
knowledge of the Borrower after due inquiry, threatened) against the
Borrower that could have a material adverse impact on the financial
condition of the Borrower or on the overall value of the Collateral.
5.1.9 No Defaults. There does not exist any Event of Default, and the
-----------
Borrower is not in default in any material respect in the payment or
performance of any of its obligations under any agreement, instrument or
undertaking to which the Borrower is a party or by which it or any of its
assets may be bound which may materially and adversely affect its ability
to fully and timely perform all of its obligations under any Loan Document,
any License Agreement or which would materially and adversely affect the
value, on an overall basis, of the Collateral or New Collateral or the
Bank's security interests therein.
5.1.10 Trade Names and Trade Styles. As of the Closing, Schedule
----------------------------
5.1.10 hereto completely and accurately sets forth all trade names and
trade styles of the Borrower.
5.1.11 Existing License Agreements. As of the Closing, Schedule
---------------------------
5.1.11 hereto completely and accurately sets forth (i) a description of all
currently existing License Agreements (collectively, the "Existing License
Agreements"), and (ii) identifies each Existing License Agreement for which
there exists (as of the date of execution of this Agreement) payment
instructions thereby instructing an account debtor to remit one or more
License Payments to any Person (other than the Bank or the Borrower).
5.1.12 Furnishing of Documents. The Borrower has furnished the Bank
-----------------------
with true and complete copies of (i) the Borrower's certificate of
incorporation, by-laws or other corporate formation, charter or governance
documents together with all amendments thereto, and (ii) all License
Agreements required to be furnished hereunder to the extent
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<PAGE>
any such agreements are in existence on the date this representation and
warranty is deemed made. Each of the License Agreements is in full force
and effect and constitutes the binding obligations of all of the parties
thereto in accordance with their respective terms. There has been no
default or accrued right of termination under the License Agreements by the
Borrower or to the Borrower's knowledge, any other party under said
agreements.
5.1.13 Financial Statements. All financial statements provided to the
--------------------
Bank by the Borrower will be true, correct and complete except to the
extent expressly qualified therein.
5.1.14 ERISA Compliance. The Borrower and each ERISA Affiliate is in
----------------
compliance in all material respects with the provisions of ERISA which are
applicable to it. Neither the Borrower nor any of its ERISA Affiliates has
established (and does not maintain or contribute to) any employee benefit
plan or other plan covered by Title IV of ERISA, does not sponsor, maintain
or contribute to any "multi-employer plan", as such term is defined in
Section 414(f) of the Internal Revenue Code, and has not breached any
fiduciary duty imposed upon it under Title I of ERISA.
5.1.15 Existing Products. As of the Closing, Schedule 5.1.15 hereto
-----------------
completely and accurately sets forth all Products in which the Borrower has
any interest (collectively, the "Existing Products").
5.1.16 Location of Physical Materials. As of the Closing, Schedule
------------------------------
5.1.16 hereto completely and accurately sets forth the names and addresses
of all laboratories that have possession of any physical and/or sound
materials or elements related to or used in connection with any Product in
which the Borrower has any interest.
5.1.17 No Subsidiaries or Affiliates. As of the Closing, the Borrower
-----------------------------
has no Subsidiaries or Affiliates.
5.1.18 Disclosure Statement. As of the Closing, all financial
--------------------
information and projections contained in the disclosure statement for the
Plan and in the exhibits thereto are true and accurate.
5.1.19 Finality of Confirmation Order, etc. As of the Closing, the
-----------------------------------
Plan has been duly confirmed by the Confirmation Order, which has been
entered by the Court and has become final and non-appealable. All of the
Loan Documents to be executed and delivered by the Borrower in connection
with this Agreement are within the scope of authority granted to the
Borrower under the Plan and Confirmation Order. No modifications,
supplements or
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<PAGE>
corrections are required to the Plan or the Confirmation Order to grant the
Borrower authority to execute and deliver the Loan Documents.
5.1.20 Satisfaction of Conditions to Effective Date. All actions
--------------------------------------------
required to be taken and all conditions required to be satisfied for the
Effective Date to occur under the Plan have been taken and satisfied, with
the exception that the Merger will become effective contemporaneously with
the execution of this Agreement.
5.2 No Misrepresentations. No representation or warranty of the Borrower
---------------------
made herein or in any other Loan Documents, and none of such documents
themselves contains, or will contain, a misstatement by or on behalf of the
Borrower of a material fact or omits, or will omit to state a material fact
required to be stated herein or therein in order to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading in any respect.
5.3 Making of and Survival of Representations and Warranties. All
--------------------------------------------------------
representations and warranties of Borrower made herein and in the other Loan
Documents shall survive the execution and delivery of this Agreement.
6. AFFIRMATIVE COVENANTS.
---------------------
The Borrower hereby covenants to and agrees with the Bank that, until
indefeasible payment in full of all of the Obligations the Borrower will (unless
otherwise waived in writing by the Bank):
6.1 Existence. Do or cause to be done all things necessary to comply with
---------
all laws and regulations applicable the Borrower, and to preserve, renew and
keep in full force and effect (i) the corporate existence of the Borrower in its
place of incorporation and in all other jurisdictions where the Borrower
conducts business, and (ii) all rights, licenses, permits and franchises of the
Borrower.
6.2 Performance Covenants.
---------------------
6.2.1 Duly and timely comply with all the terms, conditions,
covenants and warranties set forth in this Agreement, the other Loan
Documents and the License Agreements, all at the times and places and in
the manner set forth herein and therein, and diligently protect the rights
of the Borrower and the Bank under such agreements where the failure to
protect such rights would have a material adverse effect on the Borrower's
or the Bank's interest therein;
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<PAGE>
6.2.2 At all times maintain or cause to be maintained in favor of
the Bank the security interests provided for under or pursuant to the Loan
Documents as valid and perfected first priority security interests in the
Collateral, and valid and perfected security interests in the New
Collateral junior only to the senior lien therein of Ingram and purchase
money security interests, if any, therein.
6.2.3 Diligently and timely defend the Collateral and New Collateral
and the Bank's right therein against any and all Encumbrances (other than
Permitted Encumbrances).
6.3 Books, Records and Other Information. Maintain at all times true and
------------------------------------
complete books, records and accounts in which true and correct entries shall be
made of the Borrower's transactions in accordance with GAAP, including, without
limitation, books and records with respect to all costs and expenditures
incurred in connection with each Product. The Borrower shall allow any
representative of the Bank to (i) examine all books, records, documents
(including, without limitation, License Agreements and Rights-In Agreements) and
files of the Borrower relating to the Collateral and to make copies thereof, at
such reasonable times and on reasonable prior notice during business hours and
as often as the Bank may request, and (ii) confirm directly with account debtors
all accounts receivable of the Borrower relating to the Collateral (including
accounts and contracts receivable not reflected on the Borrower's consolidated
balance sheet in accordance with GAAP). The Borrower shall promptly furnish
the Bank with such information respecting the Products or any other Collateral
or New Collateral or other information as the Bank may from time to time
reasonably request.
6.4 Insurance.
---------
6.4.1 Procure, comply with all terms of, pay all premiums due on and
maintain in full force and effect so long as any sums shall remain owing
hereunder all insurance (with financially sound and reputable insurers
acceptable to the Bank) customary in the motion picture and television
industries for each Product, or necessary to adequately protect the
Collateral, including, without limitation, errors and omissions insurance,
negative and soundtrack insurance (except where such insurance is provided
by the laboratories at which Physical Materials are stored), other
casualty insurance, third party property damage insurance, third party
liability insurance, and all risk floaters.
6.4.2 Cause (i) all such above-described insurance to provide
for the benefit of the Bank that 30 days' prior written notice of
suspension, cancellation, termination, modification, non-renewal or lapse
or material change of coverage shall be given to the Bank; and (ii) all
above-
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<PAGE>
described insurance to name the Bank as the loss payee, an additional
insured or a named beneficiary (as the case may be);
6.4.3 Upon the request of the Bank, render a statement, in such
detail as the Bank may request, as to all such insurance coverage; and
6.4.4. If the Borrower fails to pay any premium required by
such insurance policies, the Bank may, in its sole discretion, pay the same
and an amount equal to such payment shall be deemed a Cost hereunder.
6.5 Notice of Events, Etc. Promptly give notice in writing to the Bank of
---------------------
(i) the occurrence of any Event of Default or Potential Event of Default; (ii)
any action or event of which the Borrower has knowledge which might materially
and adversely affect the condition (whether financial or otherwise) of the
Borrower and/or the performance by the Borrower of any of its obligations under
any Loan Document or the security interests granted under any Loan Document;
(iii) any change in the name, chief executive office or the location of the
accounts, books and records of the Borrower, and (iv) any proposed Modification
to any agreement for which the consent of the Bank is required.
6.6 Financial Information. Cause to be delivered to the Bank:
---------------------
6.6.1 As soon as practicable and in any event within 51 days after
the end of each fiscal quarter of each fiscal year of the Borrower an
unaudited balance sheet of the Borrower as at the end of such period and
the related statements of operations, stockholders' equity (deficiency) and
cash flow of the Borrower for such quarter setting forth in each case in
comparative form the figures for the corresponding periods of the previous
fiscal year, all in reasonable detail and certified by the Chief Financial
Officer of the Borrower that they fairly present the financial condition of
the Borrower as at the dates indicated and the results of its operations
for the periods indicated, subject to changes resulting from audit and
normal year-end adjustment;
6.6.2 As soon as practicable and in any event within 105 days after
the end of each fiscal year of the Borrower, balance sheets of the Borrower
as at the end of such year and the related statements of operations,
stockholders' equity (deficiency) and cash flow of the Borrower for such
fiscal year, setting forth in each case, in comparative form the figures
for the previous year, all in reasonable detail and (i) in the case of such
financial statements, accompanied by a report thereon of BDO Seidman or
other independent certified public accountants of recognized
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international standing selected by the Borrower which reports shall state
that such financial statements present fairly the financial position of the
Borrower as at the dates indicated and the results of their operations and
cash flow for the periods indicated in conformity with GAAP applied on a
basis consistent with prior years (except as otherwise stated therein) and
that the examination by such accountants in connection with such financial
statements has been made in accordance with generally accepted auditing
standards and (ii) in the case of such financial statements, certified by
the chief financial or other senior officer of the Borrower, as applicable;
6.6.3 As soon as practicable and in any event within 30 days after
the end of each calendar month, a monthly statement comparing actual
collection of License Payments with projected collections.
6.7 Further Assurances. Duly execute and deliver, or cause to be duly
------------------
executed and delivered to the Bank such further agreements, documents,
instruments and information and do or cause to be done such further acts as may
be necessary or proper to evidence and/or perfect the security interests of the
Bank in the Collateral and New Collateral, to pursue rights or claims asserted
by the Bank against Turner relating to the Turner License Agreement or the
Turner Payments Assignment Agreement, or to otherwise carry out more effectively
the provisions and purposes of the Loan Documents as the Bank may from time to
time reasonably request.
6.8 Supporting Documents. Deliver to the Bank copies duly certified by
--------------------
representatives of the Borrower of any documents relating to the Products as the
Bank may reasonably request.
6.9 Payment of Obligations. Duly and punctually pay or cause to be
----------------------
paid all Obligations on the dates, at the places and in the manner set forth
herein.
6.10 Rights in Products. As soon as any Product or any Literary Property
------------------
may be registered for copyright, take any and all actions as may be necessary to
register and/or cause to be registered all of the Borrower's rights in such
Product or Literary Property- (subject to the Copyright Mortgages) including,
without limitation, the Borrower's rights in the copyrights thereof, all in
conformity with the laws of the United States and any and all relevant foreign
jurisdictions; and immediately deliver to the Bank written evidence of each such
filing for (and actual) registration of such rights, which rights shall
constitute part of the Collateral under the Loan Documents; and as soon as
practicable, execute and record or cause to be recorded all of the Copyright
Mortgages in conformity with the laws of the Untied States and any and all other
relevant jurisdictions, and immediately deliver to the Bank written
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evidence of the submission thereof for recording (and as soon as available, a
recorded copy of each such Copyright Mortgage).
6.11 Laboratories; No Removal. To the extent the Borrower has control over
------------------------
or rights to receive any of the physical elements of any Product, deliver or
cause to be delivered to a laboratory or laboratories all negative and preprint
material and all soundtrack material with respect thereto and prior to
requesting any such laboratory to deliver such negative or other preprint or
soundtrack material to another laboratory, the Borrower shall to the extent
necessary in the sole discretion of the Bank provide the bank with a Laboratory
Pledgeholder Agreement (and/or if applicable, Laboratory Authorization Letter)
executed by the Borrower and such other laboratory. The Borrower hereby agrees
that without the prior written consent of the Bank, the Borrower shall not
remove or cause the removal of any negative or preprint film material or sound
materials with respect to any Product (i) to a location outside the United
States or (ii) to any State where UCC-1 financing statements have not been filed
against the Borrower for the benefit of the Bank describing the Collateral.
6.12 Trademarks. Service Marks. Etc. Promptly notify the Bank upon each
------------------------------
registration or application for registration of any intangible rights including,
but not limited to, all trademarks, tradenames, logos, service marks, patents
and service names relating to any Product.
6.13 Trade Names and Trade Styles. Promptly notify the Bank of any
----------------------------
addition or change to any of the Borrower's trade names or trade styles.
6.14 Compliance With Laws. At all times comply with the requirements of
--------------------
all applicable laws, rules, regulations and orders of all governmental
authorities of the United States, the States, foreign countries, states,
provinces thereof and their respective counties, municipalities and other
subdivisions and of any other jurisdictions (whether domestic or foreign)
applicable to the Borrower.
6.15 Taxes and Claims. Timely file all tax returns and reports required to
----------------
be filed by the Borrower; and duly pay and discharge (i) all taxes, assessments
and governmental charges upon or against the Borrower or the Collateral or New
Collateral or any portion thereof prior to the date on which penalties attach
thereto, unless and to the extent that the same are being diligently contested
in good faith by appropriate proceedings promptly instituted and appropriate
reserves therefor as required by GAAP have been established so long as by reason
of such nonpayment and contest no material item or portion of the assets of the
Borrower is in jeopardy of being seized, levied upon or forfeited, and (ii) all
lawful claims, including but not limited to, those for labor, materials,
supplies, services or anything
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else which might or could if unpaid become an Encumbrance upon any portion of
the Collateral, unless and to the extent that the same are being diligently
contested in good faith by appropriate proceedings and appropriate reserves or
other appropriate provision promptly instituted as shall be required in
conformity with GAAP therefor have been established so long as by reason of such
non-payment and contest no material item or portion of the assets of the
Borrower is in jeopardy of being seized, levied upon or forfeited.
6.16 Notice of Litigation. Promptly give notice in writing to the Bank of
--------------------
all actual or threatened litigation to which the Borrower is (or may become) a
party, including any arbitration or other controversy, claim, suit or other
proceeding of which the Borrower has knowledge which may materially and
adversely affect the Borrower, the Collateral, the New Collateral, the
exploitation of any Product or the Bank's rights in the Collateral or New
Collateral and/or under any of the Loan Documents, and furnish to the Bank from
time to time all information reasonably requested by the Bank concerning the
status of any such litigation, arbitration or other proceeding.
6.17 Discharge of Liabilities. Do or cause to be done all things necessary
------------------------
to ensure that all costs, expenses, obligations and liabilities of the Borrower
including, without limitation, all costs of developing, producing and
exploiting the Products, shall be discharged as and when they fall due except
costs being diligently contested in good faith for which appropriate reserves
and provisions as required by GAAP have been made, so long as by reason of such
non-payment and contest no material item or portion of the assets of the
Borrower is in jeopardy of being seized, levied upon or forfeited.
6.18 Progress of Products. The Borrower shall (i) upon the request of the
--------------------
Bank, keep the Bank fully informed of the progress of the development,
production and distribution or other exploitation of each Product, (ii) deliver
to the Bank copies of all License Agreements and such other documents relating
to the development, production or exploitation of each Product or otherwise
relating to the Collateral as the Bank may request, and (iii) answer all
inquiries of, supply full details to, the Bank of financial and other matters
relating thereto as requested by the Bank.
6.19 Miscellaneous Collateral. Promptly (i) cause all License Payments to
------------------------
be paid by account debtors directly into the Master Collection Account, and (ii)
upon the occurrence and continuation of an Event of Default, deliver to the Bank
all cash and cash equivalents (including, without limitation, any and all
proceeds of License Payments) , drafts, checks, certificates of deposit, notes,
bills of exchange or other writings which evidence a right of the Borrower to
the payment of any money
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arising out of or relating to the Master Collection Account, License Agreements,
and/or the Products.
6.20 SEC Filings. Promptly upon their becoming available, furnish the
-----------
Bank with copies of all financial statements, reports, notices and proxy
statements sent or made available generally by the Borrower to any of its
security holders, of all regular and periodic reports and all registration
statements and prospectuses, if any, filed by the Borrower with any national or
regional securities exchange, any inter-dealer quotation system (including,
without limitation, the National Association of Securities Dealers, Inc.) or
with the SEC or any governmental authority succeeding to any of its functions or
similar authority (whether governmental or otherwise) in any other jurisdiction
and of all press releases and other statements made available generally by the
Borrower to the public concerning material developments in the business of the
Borrower.
6.21 Library Sales Agent. On or before January 31, 1997, the Borrower
-------------------
shall employ a sales agent reasonably satisfactory to the Bank on terms and
conditions reasonably satisfactory to the Bank to continue the exploitation of
the Products. The Bank has approved the retention of October Films as sales
agent for purposes of this Section 6.21, subject to the Borrower's providing the
Bank with a written agreement for such retention reasonably satisfactory to the
Bank.
6.22 Future Exploitation of the Products. All future sales or other
-----------------------------------
exploitation of the Products shall be pursuant to written agreements in the form
of the "Approved License Agreements" approved in the Original Agreement, or such
other written agreements as may be approved by the Bank, which approval shall
not be unreasonably withheld.
6.23 Collection of License Payments. The Borrower shall continue to
------------------------------
collect License Payments and make payments therefrom to the Bank in accordance
with section 2.2.4 hereof, and shall collect at least the following amounts of
License Payments during the following periods, calculated by deposits into the
Master Collection Account:
Quarter Minimum Collections
------- -------------------
First quarter 1997 $400,000
Second quarter 1997 $400,000
Third quarter 1997 $800,000
Fourth quarter 1997 $ 75,000
First quarter 1998 $160,000
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Second quarter 1998 $200,000
The Bank's share of the Bough Breaks II Producer's Fee shall not be counted
against the minimum collections required above. Any collections during a
quarter in excess of the minimum requirement for such quarter shall be credited
against the minimum amount required for the following quarter. In the event of
a shortfall from the minimum in any quarter, the Borrower shall have 60 days
from the end of such quarter in which to cure such shortfall by application of
collections during such 60 days. Any collections applied to cure a shortfall
for a preceding quarter shall not be counted in the calculation of collections
for the quarter in which such collections were made.
6.24 Intercreditor Agreement With Ingram. The Borrower shall cooperate
-----------------------------------
fully with the Bank and provide such assistance to the Bank as the Bank may
reasonably request in connection with the negotiation of all intercreditor
agreements or other agreements with Ingram that the Bank deems necessary or
advisable.
7. NEGATIVE COVENANTS.
------------------
The Borrower hereby covenants to and agrees with the Bank that, until
indefeasible payment in full of all of the Obligations, the Borrower will not
directly or indirectly without the prior written consent of the Bank:
7.1 Encumbrances. Create, incur, assume or suffer to exist
------------
(i) any Encumbrance upon the Collateral except for Permitted Encumbrances, or
(ii) any Encumbrance upon the New Collateral that is senior to the lien of the
Bank therein except for (a) the senior lien of Ingram therein, or (b) purchase
money security interests.
7.2 Prohibition of Modifications. Modify or permit or suffer to occur any
----------------------------
Modification (i) to any License Agreement, or (ii) to any other agreement to
which the Borrower is a party or which requires the consent or approval of the
Borrower to Modify that would materially and adversely (a) affect the condition
(financial or otherwise) of the Borrower, (b) lessen the ability of the Borrower
to perform its obligations under any Loan Document, (c) lessen any of the rights
granted to the Bank under any Loan Document, (d) affect the Collateral or New
Collateral, and/or (e) affect the Bank's interest in the Collateral or New
Collateral.
7.3 Affiliated Transactions. During a continuing Event of Default, deal
-----------------------
with any Affiliate on terms that are less favorable to the Borrower than those
that might be obtained from unaffiliated third parties.
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7.4 Place of Business. Take any action with a view toward establishing,
-----------------
or in fact establish, a new place of business outside of the state of
California, or change the name (or conduct business other than under the current
name) of the Borrower, without in each case giving the Bank at least thirty
(30) days prior written notice of such action.
7.5 Title of Products. Change or permit a change of the title of any
-----------------
Product without first providing the Bank with at least thirty (30) days' prior
written notice of the proposed change of title.
7.6 License Agreements. Enter into or agree to be bound in any way by any
------------------
License Agreement with any distributor or licensee who will not execute and
deliver to the Bank an Acknowledgement covering all License Payments relating to
such License Agreement.
7.7 Financial Performance. Fail to reflect in any balance sheet,
---------------------
statement, report, accounting or analysis provided to the Bank under sections
6.6.1 or 6.6.2 hereof a minimum of $100,000 in profits on a quarterly basis
(pre-tax and calculated in accordance with generally accepted accounting
methods) or a minimum of $750,000 in profits for each fiscal year (pre-tax and
before reduction for any accelerated write-downs of the value of the Collateral,
or extraordinary reduction, relating to amortization of existing video cassette
inventory, calculated in accordance with generally accepted accounting methods).
7.8 Restricted Payments. Make any Restricted Payment during a continuing
-------------------
Event of Default.
8. EVENTS OF DEFAULT.
-----------------
An "Event of Default" shall mean the occurrence of any of the following
Events:
8.1 A default in the payment when due and in the manner prescribed herein
of any installment of Principal or Interest or any other Obligation and such
default shall continue for ten (10) calendar days.
8.2 The failure, refusal or neglect of the Borrower to observe or perform
for any reason any of the material covenants, conditions, agreements or
provisions contained in any Loan Document, or in any of the other agreements or
instruments referenced herein or contemplated hereby (other than the payment of
Obligation of which the failure to pay constitutes an Event of Default described
in Section 8.1 hereof) or to execute and deliver any documents, agreements or
instruments requested by the Bank hereunder or thereunder, provided that if such
failure, refusal or neglect is capable of remedy the Borrower shall be entitled
to cure the same within 30 days of the Borrower's
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<PAGE>
receipt of written notice from the Bank of the occurrence of such failure,
refusal or neglect.
8.3 Any material representation or warranty made by the Borrower in any
Loan Document, or any report, certificate, financial statement or other
instrument furnished by or on behalf of the Borrower in connection with any Loan
Document shall prove to have been false or misleading in any material respect.
8.4 A default or breach (without regard to any notice or period of cure)
with respect to the payment of (i) any indebtedness of the Borrower to Ingram,
or (ii) any indebtedness for borrowed money of the Borrower to any third party
when due or in performance of any other obligation incurred in connection with
any such indebtedness for borrowed money by the Borrower which accelerates any
such indebtedness and would have a material adverse effect upon the Collateral
or New Collateral or the Borrower's ability to fully and timely perform all of
its Obligations under the Loan Documents.
8.5 The Bank shall cease to have valid and perfected first priority
security interests at any time for any reason in the Collateral or any portion
thereof, or shall cease to have a valid and perfected security interest (junior
only to the senior lien of Ingram and purchase money security interests, if any)
at any time for any reason in the New Collateral or any portion thereof.
8.6 If any judgment against the Borrower or any of its property or assets
which would or might materially and adversely affect (i) its ability to perform
its obligations or under any Loan Document, any License Agreement or any other
material agreement to which the Borrower is a party, and/or (ii) the overall
value of Collateral and the New Collateral and/or the Bank's rights therein,
remains unpaid, unstayed or undismissed for a period of more than 30 days.
8.7 The Borrower shall be dissolved or shall sustain the loss,
cancellation or forfeiture of its legal status or good standing by reason of any
judicial, extra-judicial or administrative proceedings or otherwise, or shall
(i) apply for or consent to the appointment of a receiver, trustee or liquidator
of the Borrower or of all or a substantial part of the Borrower's assets; (ii)
be unable to, or admit in writing its inability to, pay its debts as they
mature; (iii) make a general assignment for the benefit of creditors; (iv) be
adjudicated a bankrupt or insolvent; (v) file a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement for the
benefit of creditors or take advantage of any insolvency law in its capacity as
a debtor; (vi) interpose an answer admitting the material allegations of the
petition filed against the Borrower in any bankruptcy, reorganization or
insolvency proceedings; (vii) take any action which would have the effect of
dissolving the Borrower (or a stockholder thereof
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<PAGE>
takes any such action); or (viii) take any action for the purpose of effecting
any of the foregoing.
8.8 Any (i) involuntary petition is filed against the Borrower seeking to
subject the Borrower to any bankruptcy, insolvency or similar laws and such
petition shall remain unstayed or not be withdrawn for a period of thirty (30)
days; or (ii) an order, judgment or decree shall be entered against the Borrower
by any court of competent jurisdiction approving a petition seeking its
reorganization or appointment of a receiver, trustee or liquidator of the
Borrower or of all or a substantial part of its assets and such order, judgment
or decree shall continue and stay in effect for a period of thirty (30) days.
8.9 A material adverse change in the business, assets, condition
(financial or otherwise, and whether progressive, sudden or otherwise) of the
Borrower which would or might materially and adversely affect (i) the ability of
the Borrower to perform its obligations under any Loan Document, any License
Agreement or any other material agreement to which the Borrower is a party,
and/or (ii) the overall value of the Collateral and the New Collateral and/or
the Bank's rights therein.
8.10 Any Loan Document, at any time after its execution in delivery and
for any reason other than the agreement of the Bank or satisfaction in full of
all the Obligations of the Borrower thereunder, ceases to be in full force in
effect or is declared by a court of competent jurisdiction to be null and void,
invalid or unenforceable in any respect; or any party thereto denies that it has
any or further liability or obligation under any Loan Document, or purports to
revoke, terminate or resend same.
8.11 The Borrower shall claim that any Loan Document is ineffective or
unenforceable, in whole or in part, for any reason.
9. REMEDIES; APPLICATION OF PROCEEDS.
---------------------------------
9.1 The Bank may, upon the occurrence of an Event of Default, exercise
any one or more of the following rights and remedies:
9.1.1 Declare the Amended and Restated Note and all Obligations to be
forthwith due and payable, whereupon all such Obligations shall be
accelerated and shall become immediately due and payable without
presentation, demand or notice of any kind to the Borrower (all of which
are hereby waived by the Borrower), except that if an Event of Default
specified in Sections 8.7 or 8.8 shall occur with respect to the Borrower,
such acceleration shall be automatic and no declaration or other act of
any of the Bank shall be necessary to effect such acceleration;
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<PAGE>
9.1.2 Proceed to protect and enforce the rights of the Bank to payment
of Obligations and its rights to proceed against the Collateral and the New
Collateral and exercise it remedies whether by suit in equity or by action
at law, or both, whether for the specific performance of any covenant,
agreement or other provision of any of the Loan Documents or any other
legal or equitable right or remedy of the Bank;
9.1.3 In addition to those actions that may otherwise be permitted to
be taken by the Bank under any of the Loan Documents, with respect to the
Collateral and the New Collateral, take the following actions:
9.1.3.1 Collections. Etc. The Bank may demand, sue for, collect
-----------------
or receive, in the name of the Bank or in the name of the Borrower, or
otherwise, any money or property at any time payable or receivable on
account of or in exchange for, or make any compromise or settlement
deemed desirable with respect to, any of the Collateral and the New
Collateral (but the Bank shall be under no obligation to do so), or
extend the time of payment, arrange for payment in installments, or
otherwise modify the term of, or release, any of the Collateral and
the New Collateral, without thereby incurring responsibility to
discharge, or discharging, or otherwise affecting any liability of the
Borrower. The Bank shall not be required to take any steps to preserve
any rights against other parties to the Collateral and the New
Collateral. The Bank may (but is not obligated to) make such payments
and take all such actions as the Bank deems necessary to protect the
Bank's security interest in the Collateral and the New Collateral
and/or the value thereof, and the Bank is hereby authorized (without
limiting the general nature of the authority hereinabove conferred) to
pay, purchase, contest or compromise any Encumbrance; and
9.1.3.2 Possession and Sale of Collateral. Etc. The Bank may
---------------------------------------
exercise in respect of the Collateral and the New Collateral, all
other rights and remedies hereunder and all the rights and remedies of
a secured party under the Code. In addition, the Bank may notify any
and all account debtors of the Borrower to make all further License
Payments to the Bank, and enter upon each premises of wherever the
Collateral and/or the New Collateral may be and take possession of
the Collateral and/or the New Collateral and demand and receive such
possession from any Person who has possession thereof; and take such
measures as it may deem necessary or proper for the care or protection
thereof, including the right to remove all or any portion of the
Collateral and the New Collateral (but
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<PAGE>
the Bank shall not be obligated to do so). With or without taking such
possession, the Bank may sell or cause to be sold, whenever the Bank
shall decide, in one or more sales or parcels, and at such price or
prices and upon such other terms as the Bank may deem commercially
reasonable (irrespective of the impact of any such sales on the market
price of such assets), and for cash or on credit or for future
delivery, without assumption of any credit risk, all or any portion of
the Collateral and the New Collateral at any broker's board or at
public or private sale. The Bank may be the purchaser of any or all of
the Collateral and New Collateral so sold and shall be entitled, for
the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of such assets sold at any such
public or private sale, to use and apply any or all of the Obligations
as a credit on account of the purchase price payable by the Bank at
such sale. Each purchaser (including the Bank) at any such sales shall
thereafter hold the Collateral and/or the New Collateral purchased
absolutely free from any claim or right of whatever kind, including
any equity of redemption of the Borrower, any such demand, notice,
claim, right and equity being hereby expressly waived and released.
The Borrower agrees that, to the extent notice of sale shall be
required by law, at least ten (10) Business Days' notice of sale to
the Borrower of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. The Bank shall not be obligated to make any sale of the
Collateral or the New Collateral regardless of notice of sale having
been given. The Bank may adjourn any public or private sale from time
to time by announcement at the time and place fixed therefor, and such
sale may, without further notice be made at the time and place to
which it has so adjourned. The Borrower hereby waives any claims
against the Bank arising by reason of the fact that the price at which
any Collateral or New Collateral may have been sold at such a private
sale was less than the price which might have been obtained at a
public sale, even if the Bank accepts the first offer received and
does not offer such Collateral or New Collateral to more than one
offeree; and
9.1.4 The Bank may exercise all other rights and remedies available
at law or in equity (or both) pursuant to any applicable law, statute, rule
or regulation.
9.2 Appointment of Laboratory as Pledgeholder. Any laboratory which has
------------------------------------------
possession of any of the Collateral is hereby constituted and appointed by the
Borrower as pledgeholder for the Bank and upon the occurrence of any Event of
Default,
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each such pledgeholder is hereby authorized to sell all or any portion of the
Collateral upon the order and direction of the Bank and the Borrower hereby
waives any and all claims for damages or otherwise for any action taken by such
pledgeholder.
9.3 Appointment of a Receiver. Upon the occurrence of an Event of Default
-------------------------
the Bank shall be entitled to the appointment of a receiver, to take possession
of all or any portion of the Collateral and the New Collateral and to exercise
such powers as the court shall confer upon the receiver.
9.4 Power of Attorney. The Borrower does hereby irrevocable make,
-----------------
constitute, and appoint the Bank and its officers and designees as its true and
lawful attorney-in-fact, with full power in the name of the Bank and/or the
Borrower, to take the following actions upon the occurrence of an Event of
Default: to receive, open and dispose of all mail addressed to the Borrower;
and to endorse any notes, checks, drafts, money orders or other evidence of
payment relating to the Collateral and/or the New Collateral that may come into
the possession of the Bank with full power and right to cause the Borrower's
mail to be transferred to the Bank's own officers or otherwise; and to do any
and all other acts necessary or proper to carry out the intent of this
Agreement; to enforce all of the Borrower's rights under and pursuant to all
agreements with respect to the Collateral and/or the New Collateral, all for the
sole benefit of the Bank, and to enter into such other agreements as may be
necessary to complete the distribution, delivery and exploitation of the
Products, to enter into and perform such agreements as may be necessary in order
to carry out the terms, covenants, and conditions of this Agreement which are
required to be observed or performed by the Borrower, to execute such other and
further mortgages, pledges and assignments of the Collateral and/or the New
Collateral as the Bank may require for the purpose of protecting, maintaining,
or enforcing the security interests granted to the Bank by this Agreement and
the other Loan Documents, and to do any and all other things necessary or proper
to carry out the intention of this Agreement and the other Loan Documents; and
the Borrower hereby ratifies and confirms all that the Bank as such attorney-in-
fact or its substitutes shall properly do by virtue of this power of attorney.
Such powers of attorney are coupled with an interest and are therefore
irrevocable.
9.5 Rights and Remedies Cumulative; Limitation Regarding New Collateral.
-------------------------------------------------------------------
No right or remedy conferred upon the Bank herein or in any of the other Loan
Documents or otherwise available at law or in equity (or both) shall be
exclusive of any other right or remedy contained herein or therein or otherwise
made available. All such rights and remedies are cumulative and are not
exclusive of any right or remedy which the Bank may otherwise have. All such
rights and remedies shall be subject to the first priority lien of Ingram in the
New Collateral.
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9.6 Application of Proceeds After Event of Default. After the occurrence
----------------------------------------------
of an Event of Default, all Collateral and/or New Collateral in the form of
cash, all income on the Collateral and/or the New Collateral and all proceeds
from any sale or other disposition of the Collateral and/or the New Collateral
pursuant hereto shall be applied (in such order as the Bank shall in its sole
discretion determine) as follows:
9.6.1 To the payment of all Costs and to all other costs or expenses
incurred in connection with any sale of the Collateral and/or the New
Collateral, including, but not limited to, all court costs and the fees and
expenses of counsel for the Bank in connection therewith, to the extent
that such advances, costs, or expenses shall not have been paid previously
to the Bank;
9.6.2 To the payment of Interest;
9.6.3 To the repayment of Principal;
9.6.4 To the repayment of all other sums, liabilities and obligations
then owing by the Borrower to the Bank under any other agreements or
instruments.
Any amounts remaining after such applications shall be remitted to the
Borrower or as a court of competent jurisdiction may otherwise direct.
10. CONDITIONS PRECEDENT.
--------------------
The obligations of the Bank to consummate the transactions
contemplated herein on the Closing Date shall be subject to the performance of
the Borrower of all of its covenants to be performed hereunder, to the accuracy
of the representations and warranties herein contained, and to the fulfillment
to the satisfaction of the Bank in its sole and absolute discretion, on or
before the Closing Date, of each of the following conditions, unless waived in
writing by the Bank in its sole and absolute discretion:
10.1 Conditions to be Fulfilled by Borrower. Concurrently with the
--------------------------------------
execution of this Agreement, the Borrower shall have complied with each of the
following conditions precedent to the satisfaction of the Bank in its sole and
absolute discretion, unless otherwise waived in writing by the Bank in its sole
and absolute discretion:
10.1.1 Supporting Documents of the Borrower. The Bank shall have
------------------------------------
received certificates of a senior executive officer of the Borrower
acceptable to the Bank certifying: (i) that attached thereto is a true and
complete copy of resolutions of the board of directors of the Borrower
authorizing (x) the Borrower's performance of all of its
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<PAGE>
obligations under the Loan documents, (y) the entering into by the Borrower
of all Loan Documents to which the Borrower is a party, and (z) the
execution and delivery by an officer of the Borrower of all of the Loan
Documents to which the Borrower is a party; (ii) that attached thereto are
true and complete copies of the certificate of incorporation, the by-laws
or other corporate formation, charter or governance documents of the
Borrower together with all amendments thereto; and (iii) that the
representations and warranties set forth in Section 5 hereof are true and
correct.
10.1.2 Good Standing Certificates. The Bank shall have received from
--------------------------
the Borrower good standing certificates, dated as of a recent date, issued
by the Office of the Secretary of State or other appropriate governmental
authority of (i) the jurisdiction of incorporation of the Borrower, and
(ii) all other jurisdictions where the Borrower is qualified to do
business, in each case indicating that the Borrower is in good standing.
Where applicable, such good standing certificates shall list the
certificate of incorporation or other corporate formation, charter or other
governance documents, all amendments thereto and all other certificates and
documents filed which relate to the Borrower.
10.1.3 The Amended and Restated Note. The Amended and Restated Note
-----------------------------
shall have been duly executed by the Borrower and delivered to the Bank.
10.1.4 Opinions of Counsel for the Borrower. The Bank shall have
------------------------------------
received the favorable written opinions, addressed to the Bank and
satisfactory in form, scope and substance to the Bank and its counsel, of
counsel to the Borrower.
10.1.5 Security Instruments. The Bank shall have received (i) the
--------------------
agreements and documents set forth in Section 4.4 hereof, and (ii) evidence
of the completion of all recordings and filings as may be necessary or, in
the opinion of the Bank, desirable to perfect and/or continue the
perfection of the security interests created by the Loan Documents
including, but not limited to, any copyright filings and financing
statement filings and no report shall have been obtained by the Bank
listing the Borrower (by its present name or any previous name) as a debtor
and evidencing an Encumbrance on any of the Collateral or the New
Collateral (other than Permitted Encumbrances).
10.1.6 Insurance. The Bank shall have received such policies,
---------
binders, endorsements and certificates as it may request in its sole and
absolute discretion, to evidence the Borrower's compliance with the
insurance requirements of Section 6.4 hereof.
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<PAGE>
10.1.7 Approvals. The Borrower shall have procured the consents and
---------
approvals from all United States, State, provincial, municipal and foreign
governmental agencies and authorities as are necessary to consummate the
transactions contemplated by this Agreement, the Loan Documents and any
other agreements or documents referred to or contemplated herein or
therein.
10.1.8 Evidence of Merger and New Collateral Ownership; Lien Thereon.
-------------------------------------------------------------
The Borrower shall have provided the Bank with evidence satisfactory to the
Bank that, as of the Closing, (i) the merger contemplated by the Plan has
been or shall contemporaneously therewith be consummated, (ii) that the
Borrower is the owner of the New Collateral, and (iii) that the Bank has a
second priority lien (junior only to the first lien of Ingram) on the New
Collateral and a first priority lien on the Collateral.
10.1.9 The Borrower shall have provided to the Bank, prior to or at
the Closing, the schedules described in sections 5.1.8, 5.1.10, 5.1.11,
5.1.15, and 5.1.16 hereto.
10.1.10 Additional Documents. The Bank shall have received such
--------------------
additional documents, agreements and certificates as the Bank may request
in its sole and absolute discretion .
10.2 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Borrower contained in Section 5 hereof shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on the Closing.
10.3 Effective Date Not Later Than January 31, 1997. The Effective Date of
----------------------------------------------
the Plan shall have occurred not later than January 31, 1997.
10.4 Entry of Necessary Court Orders. The Bank shall have received a
-------------------------------
conformed copy of the entered order confirming the Plan and a conformed copy of
the Plan as confirmed.
11 . INDEMNIFICATION.
---------------
11.1 The Borrower agrees to, and hereby does, indemnify, pay and hold the
Bank and its officers, directors, employees and agents (collectively called the
"Indemnitees") harmless from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs (including,
without limitation, settlement costs and payments), expenses, fines and
disbursement of any kind or nature whatsoever, known or unknown, contingent or
otherwise (including, without limitation, the fees and disbursements of counsel
for such Indemnitees in
-45-
<PAGE>
connection with any investigative, administrative or judicial proceeding,
whether or not such Indemnitee shall be designated a party thereto), which may
be imposed on, incurred by, or asserted against that Indemnitee, arising out of,
or in any way related to, the Bank entering into this Agreement, or the Original
Loan Documents (including without limitation, any and all sums, losses and costs
incurred by the Bank pursuant to its indemnification obligations under the
Laboratory Pledgeholder Agreements) (the "Indemnified Liabilities"), except any
Indemnified Liabilities resulting solely from the gross negligence or willful
misconduct of the Bank. To the extent that the undertaking to indemnify, pay
and hold harmless set forth in the preceding sentence may be unenforceable
because it violates any law or public policy, the Borrower shall contribute the
maximum portion which it is permitted to pay and satisfy under applicable law to
the payment and satisfaction of all Indemnified Liabilities incurred by the
Indemnitees or any of them.
11.2 In the event that any suit, action, investigation, claim or proceeding
is begun, made or instituted as a result of which the Borrower may become
obligated to any Indemnitee hereunder, the Borrower agrees to defend, contest or
otherwise protect against any such suit, action, investigation, claim or
proceeding at their sole cost and expense, using counsel acceptable to the
Indemnitee. Each Indemnitee shall have the right, but not the obligation, to
participate, at its own expense, in the defense thereof by counsel of its
choice. In the event that the Borrowers fail timely to so defend, contest or
otherwise protect, the Indemnitee shall have to right to do so, including,
without limitation, the right to make any compromise or settlement thereof on
behalf of the Borrowers, and to recover all attorneys' fees, disbursements and
all amounts paid as a result thereof.
11.3 The indemnification contained in this Section 11 shall survive the
termination of the other provisions of this Agreement and the repayment of all
of the Obligations, and shall constitute separate and independent obligation of
the Borrower from its other obligations under this Agreement.
12. NOTICES.
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly give if telecopied or if delivered by messenger or courier delivery,
or sent by first class mail (or air mail where available), postage prepaid,
certified or registered, return receipt requested, as set forth below or at such
other address as may be furnished in writing:
-46-
<PAGE>
If to the Borrower:
------------------
Video City, Inc.
6851 McDivitt Drive
Suite A.
Bakersfield, California 93313
Attention: Robbie Lee, Chief Executive Officer
Barry Collier, President
Telecopier No.: (805) 397-5982
With a copy to:
--------------
Loeb & Loeb
1000 Wilshire Boulevard
18th Floor
Los Angeles, California 90017
Attention: David L. Ficksman, Esq.
Telecopier No.: (213) 688-3460
If to the Bank:
--------------
Imperial Bank
9920 South La Cienega Boulevard
Suite 623
Inglewood, California 90301
Attention: Cyndee Herles, Vice President
Telecopier No.: (310) 338-6160
With a copy to:
--------------
Sidley & Austin
555 West Fifth Street
40th Floor
Los Angeles, California 90013
Attention: Richard W. Havel and Stanley J. Wallach
Telecopier No.: (213) 896-6600
Any notice given by messenger or courier delivery as provided in this Section 12
shall be deemed given when delivered if during normal business hours on a
Business Day (or if not, the next Business Day after delivery); any notice given
by telecopiers as provided herein shall be deemed given when sent if during
normal business hours on a Business Day (or, if not, the next Business Day after
it is sent) , provided that at the time such telecopy is sent, the sending party
receives written confirmation of receipt and forwards a copy of the notice by
mail, messenger or courier delivery as provided herein; any notice given by
first class mail (or air mail where available) , postage prepaid, certified or
registered, return receipt requested shall be deemed given five (5) Business
Days after the date of mailing. Any party may by notice to the other change the
address at which notices and demands may be given to it.
-47-
<PAGE>
13. MISCELLANEOUS
13.1 No Waiver. No failure or delay on the part of the Bank in notifying
---------
the Borrower of an Event of Default or Potential Event of Default, or in
exercising, or partial exercise of, any right, power or privilege hereunder
shall operate as a wavier of any Event of Default, Potential Event of Default,
or privilege or right hereunder or otherwise or preclude any other or further
exercise of any other right power or privilege.
13.2 Governing Law; Successors and Assigns. This Agreement shall be
-------------------------------------
subject to, construed and governed by, the laws of the State of California
without giving effect to such state's conflicts of law provisions. This
Agreement may not be assigned, pledged, hypothecated or otherwise encumbered by
the Borrower. Subject to the foregoing sentence, this Agreement shall inure to
the benefit of the Bank (and its successors and assigns) and the Borrower, and
shall be binding upon the successors and assigns of the parties hereto.
13.3 Submission to Jurisdiction and Waiver of Jury Trial Rights.
----------------------------------------------------------
13.3.1 THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
THE COURTS OF THE SUPERIOR COURT OF LOS ANGELES COUNTY, STATE OF
CALIFORNIA, AND THE UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT
OF CALIFORNIA (THE "CALIFORNIA COURTS"), FOR THE PURPOSES OF ANY SUIT,
ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR
THE SUBJECT MATTER HEREOF BROUGHT BY THE BANK. THE BORROWER TO THE EXTENT
PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY
WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN SUCH COURTS, ANY CLAIM THAT IT IS NOT SUBJECT
PERSONALLY TO THE JURISDICTION OF THE CALIFORNIA COURTS, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE
SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS AGREEMENT OR THE
SUBJECT MATTER HEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURTS, AND (B)
HEREBY WAIVES THE RIGHT TO ASSERT IN ANY SUCH ACTION, SUIT OR PROCEEDING
ANY OFFSETS OR COUNTERCLAIMS EXCEPT COUNTERCLAIMS THAT ARE COMPULSORY OR
OTHERWISE ARISE FROM THE SAME SUBJECT MATTER. THE BORROWER HEREBY CONSENTS
TO SERVICE OF PROCESS BY MAIL AT ITS ADDRESS TO WHICH NOTICES ARE TO BE
GIVEN PURSUANT TO SECTION 12 HEREOF. THE BORROWER AGREES THAT ITS
SUBMISSION TO JURISDICTION AND CONSENT TO SERVICE OF PROCESS BY MAIL IS
MADE FOR THE EXPRESS BENEFIT OF THE BANK. FINAL JUDGMENT AGAINST THE
BORROWER IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND
MAY BE ENFORCED IN THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTIONS (A)
BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF
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<PAGE>
WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF
INDEBTEDNESS OR LIABILITY OF THE BORROWER THEREIN DESCRIBED OR (B) IN ANY
OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF THE STATE OF CALIFORNIA
OR SUCH OTHER JURISDICTIONS. NOTWITHSTANDING THE FOREGOING, THE BANK MAY AT
ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE
BORROWER OR ANY OF ITS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED
STATES OR OF ANY COUNTRY OR PLACE WHERE THE BORROWER OR SUCH ASSETS MAY BE
FOUND.
13.3.2 TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE
WAIVED, THE BORROWER AND THE BANK HEREBY IRREVOCABLY WAIVE, AND COVENANT
THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE),
ANY RIGHT TO A TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
RIGHT, POWER OR REMEDY OR DEFEND AGAINST ANY ISSUE, CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION OR PROCEEDING UNDER, IN CONNECTION WITH, ARISING OUT OF
OR BASED UPON THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE SUBJECT MATTER
HEREOF OR THEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING
OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE BORROWER ACKNOWLEDGES THAT
IT HAS BEEN INFORMED BY THE BANK THAT THE PROVISIONS OF THIS SECTION
CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE BANK HAS RELIED, IS RELYING
AND WILL RELY IN ENTERING INTO THIS AGREEMENT AND ANY OTHER LOAN DOCUMENTS
AND HONORING ITS COMMITMENTS . THE BANK MAY FILE AN ORIGINAL COUNTERPART OR
A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
THE BORROWER TO THE WAIVER OF ITS RIGHTS TO TRIAL BY JURY.
13.4 Headings. Section headings are included for the sake of convenience
--------
only and shall not affect the interpretation of any provision of this
Agreement.
13.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original Agreement, but all of
which together shall constitute one and the same instrument.
13.6 Entire Agreement. The Loan Documents and all other agreements and
----------------
documents referred to herein set forth the entire agreement and understanding of
the parties concerning the subject matter of this Agreement and supersede all
prior agreements, arrangements, and understandings regarding such subject matter
between the parties hereto, which agreements, arrangements and understandings
are merged herein.
13.7 Costs. Subject to Section 2.3 hereof, the Borrower agrees to pay all
-----
out-of-pocket costs and expenses incurred by the Bank in connection with the
transactions hereby contemplated
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<PAGE>
and the preparation, negotiation, execution and delivery of this Agreement, the
other Loan Documents and any other documentation contemplated hereby or thereby.
After the Closing, the Borrower shall pay all out-of-pocket costs and expenses
incurred by the Bank in connection with any administration, waiver or
Modification of the Loan Documents and/or the enforcement or protection of the
rights of the Bank in connection therewith, including but not limited to, any
fees and disbursements of counsel for the Bank, fees and expenses of technical
or other consultants engaged by the Bank as well as all out-of-pocket costs and
expenses incurred by the Bank in connection with any action which may be
instituted by any Person against the Bank in respect of the foregoing. The
Borrower agrees that it shall indemnify the Bank from and hold it harmless
against any documentary taxes, assessments or charges made by any governmental
authority by reason of the execution and delivery of this Agreement or any other
Loan Document. The obligation of the Borrower under this Section shall survive
the termination of this Agreement and/or the payment of the Obligations.
13.8 Release. The Borrower, for itself and on behalf of its predecessors,
-------
successors and assigns (collectively, the "Borrower Releasors"), does hereby
forever release, discharge, and acquit the Bank and its past and present
employees, agents, officers, directors, predecessors, successors and assigns,
(collectively, the "Bank Releasees") of and from any and all rights, claims,
causes of action, contracts, agreements, duties, demands, or liabilities
whatsoever of every kind and nature, including without limitation any so-called
"lender liability" claims or defenses, at law or in equity, known or unknown,
matured or unmatured, foreseeable or unforeseeable (collectively, "Claims"),
which the Borrower Releasors have, ever had, or may have had prior to the
Closing against the Bank Releasees by reason of any liability, act, omission,
matter, thing or circumstance arising out of or related to the execution,
administration and enforcement of the Original Loan Documents, and the assertion
and treatment of the Bank's claims in the chapter 11 cases. The Borrower
represents and warrants that there has been no assignment or other transfer of
any interest in any Claim which it may have against any of the Bank Releasees
and which was released by this Agreement, and the Borrower agrees to indemnify
and hold harmless the Bank Releasees, and each of them, from any Claims,
including attorneys' fees, incurred by the Bank Releasees, or any of them, as a
result of any person asserting any such assignment or transfer or any rights or
Claims under any such assignment or transfer. The Borrower acknowledges that
there is a risk that subsequent to the execution of this Agreement, the Borrower
will discover or suffer damage, loss or injury to persons or property which is
in some way caused by or connected with the Claims, but which is unknown or
unanticipated at the time of the execution of this Agreement. The Borrower does
hereby specifically assume such risk and agrees that this release shall and does
apply to all unknown or unanticipated
-50-
<PAGE>
Claims, as well as those currently known or anticipated. Accordingly, the
Borrower acknowledges that it has read the provisions of California Civil Code
section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR.
and knowingly and expressly waives, relinquishes and forfeits all rights and
benefits accorded by the provisions of California Civil Code section 1542, or
any similar federal or state statutes, and furthermore waives any rights that it
might have to invoke said provision now or in the future with respect to the
release contained herein.
13.9 Survival of Agreement, Representations and Warranties, Etc. All
----------------------------------------------------------
warranties, representations, covenants and agreements made by the Borrower
herein or in any certificate or other instrument delivered by the Borrower or on
its behalf in connection with this Agreement or any other Loan Documents shall
be considered to have been relied upon by the Bank, shall survive the making of
the Loan herein contemplated and the execution and delivery to the Bank of the
Notes regardless of any investigation made by the Bank or on its behalf and
shall continue in full force and effect. All statements in any such
certificates or other instrument shall constitute joint and several
representations and warranties by the Borrower hereunder.
13.10 Severability. Any provision of this Agreement or any other Loan
------------
Document which is invalid, illegal or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such invalidity,
illegality or unenforceability without invalidating the remaining provisions
hereof or thereof, and any such invalidity, illegality or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
13.11 Amendments. No Modification or waiver of any provision of this
----------
Agreement or any of the other Loan Documents, and no consent to any departure by
the Borrower herefrom or therefrom (including, without limitation, any
Modification to or deviation from any form of Loan Document required to be
delivered hereunder by the Borrower), shall in any event be effective unless
the same shall be in writing and signed by the Bank and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.
13.12 Maximum Interest Fees. Charges and Reimbursement.
------------------------------------------------
Notwithstanding anything contained herein or in any other Loan Documents to the
contrary, in no event shall the Bank be entitled
-51-
<PAGE>
to receive Interest or fees, other charges and cost reimbursements with respect
to the Loan in amounts which, when added to all of the other Interest, fees,
other charges or cost reimbursements charged, paid to or received by the Bank
on the Loan, causes the Interest and the fees, other charges and cost
reimbursements with respect to the Loan to exceed the highest lawful amount
thereof. The Borrower and the Bank intend to comply with the applicable law
governing the highest lawful amount of interest, fees, charges and cost
reimbursements. If the applicable law is ever judicially interpreted so as to
render usurious or unlawful any amount called for under the Loan Documents, or
contracted for, charged, taken, reserved or received with respect to the Loan,
or if acceleration of the term of the Loan or if any prepayment by the Borrower
results in the Borrower having paid or demand having been made on the Borrower
to pay, any interest, fees or other charges in excess of the amount permitted
by applicable law, then all excess amounts theretofore collected by the Bank
shall be credited on the Principal (or, if the Loan has been or would thereby be
paid in full, such excess amounts shall be refunded to the Borrower), and the
provision of the Loan and all other Loan Documents and any demand on the
Borrower shall immediately be deemed reformed and the amounts thereafter
collectible thereunder and hereunder shall be reduced, without the necessity of
the execution of any new documents, so as to comply with the applicable law, but
so as to permit the recovery of the fullest amount otherwise called for
thereunder and hereunder. The right to accelerate the Term of the Loan does not
include the right to accelerate any interest which has not otherwise accrued on
the date of such acceleration, and the Bank does not intend to collect any
unearned interest in the event of acceleration. All sums paid or agreed to be
paid to the Bank for the use, forbearance or extension of the Loan shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and spread
through the full term of the Loan until payment in full so that the rate or
amount of interest, fees and other charges on account of the Loan does not
exceed the applicable usury or other ceilings. By execution of this Agreement,
the Borrower acknowledges that it believes the Loan to be nonusurious and
otherwise lawful and agree that if, at any time, the Borrower should have reason
to believe that the Loan is in fact usurious or otherwise unlawful, it will give
the Bank written notice of its belief and the reasons why the Borrower believes
the Loan to be usurious or otherwise unlawful; and the Borrower agrees that the
Bank shall have ninety (90) days following its receipt of such written notice in
which to make appropriate refund or other adjustment in order to correct such
condition if it in fact exists.
13.13 Interpretation. Where the context or construction requires, all
--------------
words applied in the plural should begin to have been used in singular, and vice
versa; the masculine shall include the feminine and neuter, and vice versa; and
the present tenths shall include the past and future tenths; and vice versa.
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<PAGE>
13.14 No Third-Party Rights. Nothing in this Agreement, whether expressed
---------------------
or implied is intended to confer any rights or remedies under or by reason of
this Agreement on any Person other than the parties to it and their respective
successors and assigns, where as anything in this Agreement intended to relieve
or discharge to application or liability of any third Persons to any party to
this Agreement nor shall any provisions give and third Persons any right of
segregation or action over against any party to this Agreement.
13.15 Amendment and Restatement. The Original Agreement and the Original
-------------------------
Notes are amended and restated in their entirety by this Agreement and the
Amended and Restated Note.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
VIDEO CITY, INC.,
a Delaware corporation
By: /s/ Barry Collier
------------------------
Its: President
-----------------------
IMPERIAL BANK
By: /s/ Cyndee Herles
------------------------
Its: CYNDEE HERLES, Vice President
---------------------------------
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<PAGE>
EXHIBIT 10.3
OVERRIDE AGREEMENT
This Override Agreement (the "Agreement") is made and entered into as
of November 19, 1996, by and among Lee Video City, Inc., a California
corporation ("VCI"); Robert Y. Lee ("Lee"), an individual resident of California
on behalf of himself and as Trustee of the Robert Y. Lee Revocable Living Trust
UDT 1/9/91 (the "Trust"); Prism Entertainment Corporation, a Delaware
corporation ("Prism"); and Ingram Entertainment Inc., a Tennessee corporation
("Ingram"), with reference to the following:
A. Prism is a public company which on December 1, 1995 filed for
protection under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"), and is currently operating as debtor-in-possession.
B. Prism and VCI have entered into that certain Agreement and Plan of
Reorganization and Merger dated as of October 25, 1996, as amended by that
certain Amendment, dated as of November 19, 1996 (as amended, the "Merger
Agreement") with respect to a merger (the "Merger") of VCI into Prism.
C. As of the date of this Agreement, VCI is indebted to Ingram in the
aggregate approximate amount of $4,500,000 (the "VCI Debt"). The obligations of
VCI to Ingram with respect to the VCI Debt are secured by (a) a security
interest in substantially all of the personal property of VCI (the "Old
Collateral") pursuant to an Amended and Restated Security Agreement dated as of
February 7, 1995, as amended (the "Prior Security Agreement"); (b) a pledge
agreement dated as of February 7, 1995, as amended (the "Stock Pledge
Agreement") issued by the Trust in favor of Ingram as to 5,500 shares of the
Common Stock of VCI (the "Pledged Shares"); (c) a Pledge Agreement dated
February 7, 1995, as amended (the "Note Pledge Agreement") issued by VCI in
favor of Ingram as to a promissory note in favor of VCI (the "Pledged Note");
and (d) a Payment Guaranty issued by Lee dated February 7, 1995 (the "Lee
Guaranty").
D. VCI, Lee and Ingram have entered into that certain Workout Agreement
dated as of February 7, 1995 (the "Workout Agreement") with respect to the
rescheduling and payment of the then outstanding debt owed by VCI to Ingram.
E. Ingram is the holder of warrants issued by VCI dated November 14,
1996 to acquire shares of the Common Stock of VCI equal to 8.5% of the
outstanding shares of VCI (the "Old Warrants").
F. Subject to the terms and conditions set forth in this Agreement and
the consummation of the Merger, the parties have agreed to restructure the VCI
Debt.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions hereof, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. In addition to the definitions set forth in the
-------------
Recitals, for purposes of this Agreement, the following capitalized terms shall
have the following meaning:
"Additional Warrants" means warrants to purchase an aggregate of
-------------------
852,750 shares of the Common Stock of Reorganized Prism substantially in
the form of Exhibit A attached hereto.
---------
"Affiliate" means, as to any Person, any other Person which directly
---------
or indirectly controls, or is under common control with, or is controlled
by, such Person. As used in this definition, "control" (and its correlated
meanings, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person that owns, directly or
--------
indirectly, 10% or more of the securities having ordinary voting power for
the election of directors or other governing body of a corporation (other
than securities having such power only by reason of the happening of a
contingency), or 10% or more of the partnership or other ownership interest
of any other Person (other than as a limited partner of such other Person),
will be deemed to control such corporation or other Person.
"Assumed Options" means options of VCI to be assumed by Reorganized
---------------
Prism upon the Merger to purchase an aggregate of 1,685,000 shares of
Reorganized Prism.
"Business Day" means any Monday, Tuesday, Wednesday, Thursday or
------------
Friday on which Ingram is open for business at its address for notice
designated as provided herein.
"Closing" means the consummation of the transactions contemplated by
-------
this Agreement, which shall be deemed to take place concurrently with the
effectiveness of the Merger.
"Closing Date" means the date of Closing.
------------
2
<PAGE>
"Collateral Documents" means the New Security Agreement and Copyright
--------------------
Mortgages.
"Collier" means Barry Collier.
-------
"Copyright Mortgage" means a mortgage agreement, in form and substance
------------------
satisfactory to Ingram, granting to Ingram a security interest and lien on all
right, title and interest of Reorganized Prism in and to the Film Library and
the Film Library Accounts Receivable, including, without limitation, all
copyrights with respect to the Film Library in form and substance acceptable to
Ingram.
"Debt Documents" means, collectively, this Agreement, the Note, the
--------------
Collateral Documents, the Supply Agreement, the New Warrants, the Additional
Warrants and any other certificates, documents or agreement of any type or
nature heretofore or hereafter executed or delivered by Reorganized Prism or any
other Party to Ingram in any way relating to or in furtherance of this Agreement
and/or the Note, and in each case either as originally executed or as the same
may from time to time be supplemented, modified, amended, restated or extended.
"Disclosure Statement" means the Disclosure Statement for Prism's Amended
--------------------
Plan of Reorganization dated September 23, 1996, as may be amended.
"Effective Time" means the consummation of the Merger.
--------------
"Escrow and Warrant Agreement" means, as to the New Warrants, the Escrow
----------------------------
and Warrant Agreement substantially in the form of Exhibit B attached hereto.
"Event of Default" shall have the meaning provided in Section 7.1.
----------------
"Film Library" means the rights of Prism in the motion pictures listed on
------------
Schedule 5.25 to the Merger Agreement.
"Film Library Accounts Receivable" means all present and future accounts,
--------------------------------
accounts receivable, rights to payment, and all forms of obligations owing to
Reorganized Prism or in which Reorganized Prism may have any interest, however
created or arising, relating to the Film Library.
"Governmental Agency" means (a) any international, foreign, federal, state,
-------------------
county or municipal government, or political subdivision thereof, (b) any
3
<PAGE>
governmental or quasi-governmental agency, authority, board, bureau, commission,
department, instrumentality or public body, or (c) any court, administrative
tribunal or public utility.
"Guaranty Release" means the release by Ingram of the Lee Guaranty, the
----------------
Stock Pledge Agreement and the Note Pledge Agreement to be executed and
delivered at the Closing substantially in the form of Exhibit C attached hereto.
---------
"Ingram Shares" means 1,500,000 shares of the Common Stock of Reorganized
-------------
Prism.
"Laws" means, collectively, all international, foreign, federal, state and
----
local statutes, treaties, rules, regulations, ordinances, codes and
administrative or judicial precedents.
"Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment
----
for security, security interest, encumbrance, lien or charge of any kind,
whether voluntarily incurred or arising by operation of Law or otherwise,
affecting any property, including any agreement to grant any of the foregoing,
---------
any conditional sale or other title retention agreement, any lease in the nature
of a security interest, and/or the filing of, or agreement to, give any
financing statement (other than a precautionary financing statement with respect
----------
to a lease that is not in the nature of a security interest) under the Uniform
Commercial Code or comparable Law of any jurisdiction with respect to any
property.
"Lock-Up Agreement" means an agreement to be executed and delivered at the
-----------------
Closing between Lee, Collier and Ingram pursuant to which Lee (on his own behalf
and on behalf of the Trust) and Collier agree to refrain from selling, pledging
or encumbering the Lock-Up Shares, substantially in the form of Exhibit D
---------
attached hereto.
"Lock-Up Shares" means 1,026,983 shares of Common Stock of Reorganized
--------------
Prism, 721,983 shares of which will, upon the Closing, be held by Lee and
305,000 shares by Collier.
"New Collateral" means, collectively, a first lien on the property and
--------------
assets of Reorganized Prism described in Schedule A attached hereto (other than
the Film Library and the Film Library Accounts Receivable of Reorganized Prism)
and a second priority lien on the Film Library and the Film Library Accounts
Receivable of Reorganized Prism subject only to the lien of Imperial Bank, all
as more fully described in the New Security Agreement.
4
<PAGE>
"New Security Agreement" means the Security Agreement, dated as of the
----------------------
Closing Date, executed by Reorganized Prism in favor of Ingram, substantially in
the form of Exhibit E attached hereto, either as originally executed or as it
---------
may from time to time on or after the Closing Date be supplemented, modified,
amended, restated or extended.
"New Warrants" means warrants to purchase the New Warrant Shares to be
------------
delivered to Ingram at the Closing pursuant to the Escrow and Warrant Agreement.
"New Warrant Shares" means an aggregate of 8 1/2% of the number of shares
------------------
of the Common Stock of Reorganized Prism to be received by the VCI Shareholders
pursuant to the Merger, provided, however, that the aggregate number of shares
to be received by the VCI Shareholders will not be less than 4,930,000. The
number of New Warrant Shares is currently estimated to be 410,444.
"Note" means the promissory note of Reorganized Prism to be delivered to
----
Ingram at the Closing evidencing the Remaining Debt, substantially in the form
of Exhibit F attached hereto.
---------
"Party" means any Person (including Reorganized Prism and/or any Affiliate
-----
of Reorganized Prism), other than Ingram, which now or hereafter is party to any
of the Debt Documents.
"Person" means any entity, whether an individual, trustee, corporation,
------
general partnership, limited partnership, joint stock company, trust,
unincorporated organization, bank, business association, firm, joint venture,
governmental agency, or otherwise.
"Plan" means the Plan of Reorganization of Prism and its subsidiaries, as
----
may be amended.
"Registrable Securities" means the Ingram Shares, the New Warrant Shares
----------------------
and any securities issuable upon exercise of the Additional Warrants.
"Registration Rights Agreement" means an agreement between Prism and Ingram
-----------------------------
regarding the registration of the Registrable Securities substantially in the
form of Exhibit G attached hereto.
"Remaining Debt" means the difference between the VCI Debt and $3,000,000.
--------------
5
<PAGE>
"Reorganized Prism" means the surviving entity upon the consummation
-----------------
of the Merger.
"Reorganized Prism Securities" means the Ingram Shares, the New
----------------------------
Warrants, the New Warrant Shares, the Additional Warrants and any
securities issuable upon exercise of the Additional Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Stockholders Agreement" means an agreement to be executed and
----------------------
delivered at Closing among Reorganized Prism, Lee, Collier and Ingram
substantially in the form of Exhibit H attached hereto.
---------
"Supply Agreement" means the Supply Agreement between Reorganized
----------------
Prism and Ingram to be executed and delivered at the Closing substantially
in the form of Exhibit I attached hereto.
---------
"VCI Shareholders" means the shareholders of VCI immediately prior to
----------------
the Effective Time.
ARTICLE 2
RESTRUCTURING OF DEBT
2.1 Conversion of Debt; Release of Lee Guaranty and Old Collateral. At
--------------------------------------------------------------
the Closing, Ingram shall convert $3,000,000 of principal amount of the VCI Debt
into the Ingram Shares. In connection therewith, at the Closing, Ingram shall
release the Stock Pledge Agreement, the Note Pledge Agreement and the Lee
Guaranty pursuant to the Guaranty Release, redeliver and reassign to Lee the
Pledged Shares and to VCI the Pledged Note, and execute and deliver to
Reorganized Prism UCC-2 termination statements with respect to the Old
Collateral; and Reorganized Prism shall execute and deliver to Ingram the Note,
the New Security Agreement and UCC-1 financing statements covering the New
Collateral pursuant to which Reorganized Prism shall grant to Ingram first
priority liens and security interests in and to the New Collateral except that
the lien and security interest in the Film Library and the Film Library Accounts
Receivable shall be subject to and subordinate to the lien therein of Imperial
Bank.
2.2 Termination of Workout Agreement; Payment of Remaining Debt. The
-----------------------------------------------------------
Workout Agreement shall be terminated effective at the Closing, and Ingram shall
thereupon release all of its future claims thereunder. The Remaining Debt shall
be evidenced by the Note and payable as follows:
6
<PAGE>
(a) Interest shall be payable on the outstanding daily unpaid
principal amount of the Remaining Debt from the Closing until payment in full is
made, shall accrue and be payable at the rate of 10% per annum and shall be
payable monthly. Any accrued interest not paid on a date scheduled for the
payment of interest shall be added to the principal of the Remaining Debt and
all of such principal, as so increased shall thereafter bear interest at the
lesser of 4% in excess of the existing rate or the maximum rate permitted by
applicable law. All proceeds from the exercise of all options or warrants to
purchase capital stock of Reorganized Prism shall be applied to the reduction of
the Remaining Debt, first to any accrued unpaid interest and then to principal.
(b) If not sooner paid, the Remaining Debt and all accrued interest
thereon shall be payable on the third anniversary of the Closing.
(c) The Remaining Debt may, at any time and from time to time, be
paid or prepaid in whole or in part without premium or penalty, provided that
each prepayment of principal shall be accompanied by payment of interest accrued
through the date of payment on the amount of principal paid.
(d) Should any installment of principal or interest not be paid when
due, a late charge equal to 5% of the payment then due, payable on demand, shall
be charged with respect to such payment.
(e) All computations of interest shall be calculated on the basis of
a year of 360 days and the actual number of days elapsed.
(f) If any payment to be made by Reorganized Prism shall become due
on a day other than a Business Day, payment shall be made on the next succeeding
Business Day and the extension of time shall be reflected in computing interest.
(g) Each payment hereunder shall be made by Reorganized Prism by wire
transfer to Ingram or to such other account as Ingram may direct in writing.
All payments shall be made in lawful money of the United States of America and
shall be deemed made when verified by the receiving bank.
7
<PAGE>
ARTICLE 3
ISSUANCE OF NEW WARRANTS
At the Closing, certain of the VCI shareholders shall issue to Ingram the
New Warrants to purchase the New Warrant Shares pursuant to the Escrow and
Warrant Agreement. It is understood that certificates representing the New
Warrant Shares shall be issued at the Closing in the names of the VCI
Shareholders, but shall be delivered to an escrow agent acceptable to the
parties to be held pending exercise of the New Warrants by Ingram or the
expiration of the Warrant Period. For such time as the New Warrant Shares are
held in escrow, the VCI Shareholders shall be entitled to vote the New Warrant
Shares. Upon expiration of the Warrant Period, the escrow agent will be
authorized and instructed to deliver to the VCI Shareholders all New Warrant
Shares to the extent that the New Warrants have not been exercised therefor.
Any exercise by Ingram of the New Warrants shall be done on a ratable basis with
respect to the New Warrant Shares with the exercise price(s) therefor to be paid
to Reorganized Prism.
ARTICLE 4
ADDITIONAL WARRANTS
At the Closing, Reorganized Prism shall issue to Ingram the Additional
Warrants.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of VCI. VCI hereby represents and
-------------------------------------
warrants to the other parties hereto as follows:
(a) VCI has the full right, power and authority to enter into,
execute and deliver this Agreement and all the other Debt Documents to which VCI
is a party.
(b) VCI is a corporation duly organized, validly existing and in good
standing under the laws of the State of California, and has the corporate power
to own and operate its properties and to carry on its business as now conducted.
VCI is duly qualified to do business and in good standing in each state in which
a failure to
8
<PAGE>
be so qualified would have a material adverse effect on VCI's financial position
or its ability to conduct its business in the manner now conducted.
(c) VCI has taken all action necessary to authorize the entering into
and performance of its obligations under this Agreement and all other related
documents to which VCI is a party. This Agreement and all the other agreements,
documents, and instruments contemplated hereby to which VCI is a party, are, and
as of the Closing will be, the legal, valid and binding obligation of VCI,
enforceable in accordance with their respective terms.
(d) The representations and warranties of VCI set forth in the Merger
Agreement are true and correct as of the date hereof.
(e) The execution, delivery and performance by VCI of this Agreement
and the other Debt Documents does not and will not (i) contravene or conflict
with the Articles of Incorporation or bylaws of VCI, (ii) contravene or conflict
with or constitute a violation of any provision of any law, statute, rule,
regulation, judgment, injunction, order, writ or decree binding upon or
applicable to VCI or any part of its business, or (iii) contravene or conflict
with or constitute a violation, breach, or default under any agreement to which
VCI is bound.
5.2 Representations and Warrants of Prism. Prism hereby represents and
-------------------------------------
warrants to the other parties as follows:
(a) Prism is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, and has the corporate
power to own and operate its properties and to carry on its business as now
conducted. Prism is duly qualified to do business and in good standing in each
state in which a failure to be so qualified would have a material adverse effect
on Prism's financial position or its ability to conduct its business in the
manner now conducted.
(b) Prism has the full right, power and authority to enter into,
execute and deliver this Agreement and all other related documents to which
Prism is a party.
(c) Prism has taken all action necessary to authorize the entering
into and performance of its obligations under this Agreement and all other
related documents to which Prism is a party. This Agreement and all other
agreements, documents, and instruments contemplated hereby are, and as of the
Closing will be, the legal, valid and binding obligation of Prism, enforceable
in accordance with their respective terms.
9
<PAGE>
(d) The representations and warranties of Prism set forth in the
Merger Agreement are true and correct as of the date hereof.
(e) The Reorganized Prism Securities, when issued, shall be duly
authorized, validly issued, fully paid and non-assessable.
(f) The execution, delivery and performance by Prism of this
Agreement and the Debt Documents to which Prism is a party does not and will not
(i) contravene or conflict with the Certificate of Incorporation or bylaws of
Prism, (ii) contravene or conflict with or constitute a violation of any
provision of any law, statute, rule, regulation, judgment, injunction, order,
writ or decree binding upon or applicable to Prism or any part of its business,
except that the consummation of the transactions contemplated herein is subject
to the confirmation of the Plan, or (iii) contravene or conflict with or
constitute a violation, breach, or default under any agreement to which Prism is
bound.
(g) The Plan provides for sufficient number of shares of Common Stock
of Reorganized Prism in connection with the issuance of the New Warrant Shares,
the Ingram Shares and any securities issuable upon exercise of the Additional
Warrants.
(h) Place of Business. The records with respect to all intangible
-----------------
personal property constituting a part of the New Collateral are and will be
maintained at Reorganized Prism's chief place of business and chief executive
office, which has the address of 6851 McDivitt Drive, Suite A, Bakersfield,
California 93313. All tangible personal property constituting a part of the New
Collateral is or will be located at Reorganized Prism's chief place of business
and chief executive office and/or at any specific store locations.
(i) Imperial Bank. As of the date hereof, the total outstanding
-------------
principal amount of the indebtedness of Prism to Imperial Bank (the "Imperial
Indebtedness"), is no more than $3,100,000.
5.3 Representations and Warranties of Ingram. Ingram hereby represents
----------------------------------------
and warrants as follows:
(a) Ingram has the full right, power and authority to enter into,
execute and deliver this Agreement and all other related documents to which
Ingram is a party.
(b) Ingram has taken all action necessary to authorize the entering
into and performance of its obligations under this Agreement and all other
related documents to which Ingram is a party. This Agreement and such related
10
<PAGE>
documents are, and as of the Closing will be, the legal, valid and binding
obligation of Ingram, enforceable in accordance with their respective terms.
(c) Ingram understands and agrees that (subject to the Registration
Rights Agreement):
(i) The Reorganized Prism Securities shall not have been
registered under the Securities Act of 1933, as amended (the "Securities Act")
or the securities laws of any state, based upon an exemption from such
registration requirements under the Securities Act and applicable state
securities law;
(ii) The Reorganized Prism Securities are and will be
"restricted securities" as said term is defined in Rule 144 of the Rules and
Regulations promulgated under the Securities Act;
(iii) The Reorganized Prism Securities may not be sold or
otherwise transferred unless they have been first registered under the
Securities Act and applicable state securities laws, or unless exemption from
such registration provisions are available with respect to said resale or
transfer;
(iv) Prism is relying on the representation by Ingram that
Ingram has such knowledge and experience in financial or business matters that
Ingram is capable of evaluating the merits and risks involved in the investment
in the Reorganized Prism Securities;
(v) The Reorganized Prism Securities are and will be acquired
by Ingram for Ingram's own account and not with a view to, or for resale in
connection with, any distribution other than resales made in compliance with the
Securities Act and applicable state securities laws.
(vi) Ingram acknowledges that it has received the Disclosure
Statement, together with a copy of the Plan. Ingram has been, or will be prior
to Closing, furnished with such information and documents pertaining to
Reorganized Prism as Ingram has requested, and has been, or will be prior to
Closing, given the opportunity to meet with officials of Prism and VCI and to
have such persons answer questions regarding Reorganized Prism's affairs and
conditions.
11
<PAGE>
ARTICLE 6
COVENANTS BY PRISM
Unless Ingram otherwise consents in writing, which consent may be exercised
or withheld in Ingram's sole discretion, so long as Reorganized Prism is
indebted to Ingram under this Agreement, and until the payment in full of the
Remaining Debt (as to all covenants in this Article) and until the later to
occur of the termination of the Stockholders Agreement or the payment in full of
the Remaining Debt (as to Sections 6.11, 6.12, 6.14, 6.16, 6.17 and 6.18), Prism
covenants as follows:
6.1 Punctual Payment. Reorganized Prism shall punctually pay the
----------------
interest and principal of the Remaining Debt at the times and place and in the
manner specified herein and in the Note.
6.2 Accounting Records. Reorganized Prism shall maintain full and
------------------
complete books and accounts and other records reflecting all of its properties
and the results of its business in accordance with generally accepted accounting
principles consistently applied.
6.3 Financial Information. Reorganized Prism shall deliver, or cause to
---------------------
be delivered, to Ingram, in form and detail satisfactory to Ingram:
(a) As soon as available, but in any event not later than 105 days
after the end of each fiscal year, an audited balance sheet of Reorganized Prism
as at the end of such fiscal year, and statements of income and cash flow for
such fiscal year, together with the equivalent information for the prior fiscal
year, all in detail reasonably satisfactory to Ingram. Such balance sheet and
statements shall be prepared in accordance with generally accepted accounting
principles applied on a basis consistently maintained throughout the periods
involved and accompanied by a report of a certified public accountant of
recognized national standing reasonably satisfactory to Ingram.
(b) As soon as available, but in any event not later than 50 days
after the end of each fiscal quarter (except for the fourth quarter), an
unaudited balance sheet of Reorganized Prism as at the end of such fiscal
quarter (except for the fourth quarter) and a statement of income for such
fiscal quarter (except for the fourth quarter) and the year to date, together
with the equivalent information for the same period in the prior fiscal year,
all in accordance with generally accepted accounting principles consistently
maintained throughout the period involved, except for the absence of footnotes.
Such financial statements shall be certified by the chief financial officer of
Reorganized Prism as fairly presenting the financial condition and results of
12
<PAGE>
operations of Reorganized Prism in accordance with generally accepted accounting
principles, consistently applied, as at such date and for such periods, except
for the absence of footnotes. The foregoing may be satisfied by delivery of the
applicable Form 10-Q Report.
6.4 Existence. Reorganized Prism shall (a) preserve and maintain its
---------
existence and all of its material rights, licenses, privileges and franchises,
(b) continue to operate in substantially the same line of business as VCI
presently engages in, namely, the business of renting and selling prerecorded
video entertainment for consumer use, (c) comply with the requirements of all
applicable Laws of any Governmental Agency, and (d) use its best efforts to
conduct its business in an orderly, efficient, and regular manner.
6.5 Maintenance of Properties. Reorganized Prism shall maintain,
-------------------------
preserve and protect all of its properties and equipment in good order and
condition, subject to wear and tear in the ordinary course of business, and not
permit any waste of its properties, except that the failure to maintain,
------
preserve and protect a particular item of property or equipment that is not of
significant value, including property not of significant value due to its
technological obsolescence, either intrinsically or due to the operation of
Reorganized Prism, shall not constitute a violation of this covenant.
6.6 Taxes and Other Liabilities. Reorganized Prism shall pay and
---------------------------
discharge when due any and all indebtedness, obligations, assessments and taxes
including without limitation federal and state income taxes, and all such
obligations imposed by any Governmental Agency which are or may become a Lien
affecting Reorganized Prism's properties or any part thereof, except such as
------
Reorganized Prism may in good faith contest by appropriate proceedings, so long
as Reorganized Prism has established and maintains reserves adequate to pay any
such contested liabilities in accordance with generally accepted accounting
principles and, by reason of non-payment, none of Reorganized Prism's property
or the Liens of Ingram thereon are in danger of being lost or forfeited.
6.7 Reporting Requirements. Reorganized Prism shall cause to be
----------------------
delivered to Ingram, in form and detail satisfactory to Ingram:
(a) promptly upon Reorganized Prism's learning thereof, notice of:
(i) any material litigation affecting or relating to
Reorganized Prism, or any of its properties;
(ii) any dispute between Reorganized Prism and any Governmental
Agency relating to Reorganized Prism's property, the
13
<PAGE>
adverse determination of which might materially adversely affect such
property;
(iii) any change in senior management of Reorganized Prism;
(iv) any Default or Event of Default.
(b) written notice of any change in the location of Reorganized
Prism's principal place of business or any other place in which it
maintains any of the New Collateral or its books and records at least 30
days prior to the date of such change;
(c) such other information relating to Reorganized Prism, and/or its
properties as Ingram may reasonably request from time to time.
6.8 Insurance. Reorganized Prism shall provide or cause to be provided
---------
the following policies of insurance:
(a) public liability insurance in an amount deemed reasonably
necessary from time to time by Ingram;
(b) property damage and casualty insurance in an amount deemed
reasonably necessary from time to time by Ingram; and
(c) such other policies of insurance as Ingram may reasonably require
from time to time.
All insurance policies (i) shall be maintained throughout the term of the
Remaining Debt at Reorganized Prism's sole expense, (ii) shall be issued by
insurers of recognized responsibility which are reasonably satisfactory to
Ingram, (iii) shall be in form and substance reasonably satisfactory to Ingram,
and (iv) with respect to insurance coverage damage to the New Collateral, (A)
shall name Ingram as an additional insured and/or loss payee, as appropriate,
and (B) shall contain a "lender's loss payable" endorsement in form and
substance reasonably satisfactory to Ingram. Reorganized Prism shall deliver or
cause to be delivered to Ingram, from time to time at Ingram's reasonable
request, originals or copies of such policies or certificates in form reasonably
satisfactory to Ingram, evidencing the same. Such certifications shall provide
that such insurance coverage shall not be reduced, cancelled or terminated
without 30 days prior written notice to Ingram.
6.9 Inspection Rights. At any time during regular business hours and as
-----------------
often as reasonably requested, Reorganized Prism shall permit Ingram, or any
14
<PAGE>
employee, agent or representative of Ingram, to examine, audit and make copies
and abstracts from the records and books of account of, and to visit and inspect
the Properties of, Reorganized Prism and to discuss the affairs, finances and
accounts of Reorganized Prism with any of its officers and key employees, and,
upon request, furnish promptly to Ingram true copies of all financial
information and internal management reports made available to the management of
Reorganized Prism. As used herein, "key employees" means all employees at least
of Regional Manager or department head rank.
6.10 Compliance with Agreements, Duties and Obligations. Reorganized
--------------------------------------------------
Prism shall promptly and fully comply with all of its agreements, duties and
obligations under the Debt Documents and, in all material respects, under any
other material agreements, indentures, leases and/or instruments to which it and
Ingram are each a party. Reorganized Prism shall use its best efforts to
promptly and fully comply with all of its agreements, duties and obligations
under any material agreements, indentures, leases and/or instruments to which it
and another Person (other than Ingram) are each a party.
6.11 Mergers, Consolidations and Acquisitions. Reorganized Prism shall
----------------------------------------
not (a) enter into any transaction of merger or consolidation or contemplating
the sale or transfer of all or substantially all of its assets; or (c) make any
material change in the nature of its business as conducted and presently
proposed to be conducted; or (d) change the form of organization of its
business; provided, however, that nothing herein shall prevent Reorganized Prism
from selling the Film Library (subject, however, to the conditions set forth in
Section 6 of the Security Agreement), or from entering into a transaction of
merger where (i) Reorganized Prism is the surviving party; (ii) upon the
consummation of such merger, 50% or more in interest of the stockholders of
Reorganized Prism own and control 50% or more of the voting equity of the
combined company; (iii) a majority of the board of directors of the combined
company consist of directors of Reorganized Prism immediately prior to such
merger; and (iv) the terms of the Supply Agreement will continue to apply.
6.12 Redemption, Dividends, Distributions. Reorganized Prism shall not
------------------------------------
redeem or repurchase stock or other ownership interests, declare or pay any
dividends or make any other distribution, whether of capital, income or
otherwise, and whether in cash or other property.
6.13 Application of Exercise Prices. Reorganized Prism shall apply all
------------------------------
proceeds from the exercise of any options or warrants to purchase capital stock
of Reorganized Prism to the reduction of the Remaining Debt, first to any
accrued, unpaid interest and then to principal.
15
<PAGE>
6.14 Restriction on Employee Stock Options. Except for the Assumed
-------------------------------------
Options and the option in favor of Collier to purchase 175,000 shares (the
"Collier Option"), Reorganized Prism shall not issue any employee stock options
or warrants (a) at exercise prices below the greater of the book value per share
or the fair market value per share on the date of grant or (b) to the extent
that the total amount of shares issuable pursuant to the exercise of such new
stock options plus 461,000 shares exceeds 10% of the then issued and outstanding
shares of Reorganized Prism's Common Stock and Common Stock equivalents. No
options or warrants (including the Assumed Options and Collier Option) will be
repriced at an exercise price below the greater of the book value per share or
the fair market value on the date of original grant (subject to adjustments for
any stock splits, combinations, etc.) and provisions of vesting and forfeiture
of any such options shall not be amended or modified.
6.15 Imperial Indebtedness. In no event shall Reorganized Prism allow the
---------------------
aggregate principal amount of Imperial Indebtedness to exceed the amount
outstanding as of the date hereof except as to accrued interest and for costs
and expenses incurred by Imperial Bank from the date hereof. Reorganized Prism
shall promptly provide and deliver to Ingram any and all notices received from
the holder(s) of the Imperial Indebtedness of any default or Event of Default
under the documents, instruments and agreements evidencing, securing or
otherwise relating to the Imperial Indebtedness or of the exercise of remedies
with respect to any collateral therefor.
6.16 Employee Matters. Reorganized Prism shall not amend or modify the
----------------
employment agreements with Collier, Lee and Craig Kelly attached as exhibits to
the Merger Agreement. Reorganized Prism shall not extinguish, forgive or reduce
(except for payment made) any debt owed to Reorganized Prism from any employee.
6.17 Reservation of Shares. Reorganized Prism shall reserve a sufficient
---------------------
number of shares of its Common Stock issuable upon exercise of any Additional
Warrants.
6.18 Board Approval. Without the unanimous approval of the Board of
--------------
Directors of Reorganized Prism, Reorganized Prism shall not enter into any line
of business other than (i) the sale and rental of video product and related
goods and accessories, (ii) completion of the sole film Prism currently has
under way expected to be titled "When the Bough Breaks II," and (iii) the
exploitation of the Film Library.
16
<PAGE>
ARTICLE 7
EVENTS OF DEFAULT
7.1 Events of Default. The occurrence of any one or more of the
-----------------
following, whatever the reason therefor, shall constitute an "Event of Default"
hereunder in addition to any event of default described in any other document
relating to other transactions between the parties thereto:
(a) Reorganized Prism shall fail to pay any installment of principal
or interest on the Note when due, or any other amount owing under this
Agreement, the Note or the other Debt Documents when due; provided, however,
-------- -------
Reorganized Prism shall be allowed two times in any 12 month period to pay an
installment of principal or interest due under the Note not more than five days
after the due date for such payment provided that the late charge imposed by
Section 2.2 is paid; or
(b) Reorganized Prism shall fail to perform or observe any other
term, covenant or agreement contained in this Agreement or in any of the Debt
Documents on its part to be performed or observed, within 30 days after the date
the same was to have been performed or observed; provided, however, that if the
-------- -------
failure to perform is capable of being cured, but cannot reasonably be cured
within 30 days after the date the same was to have been performed or observed,
no Event of Default shall be deemed to have occurred if Reorganized Prism shall
have commenced to perform the same within 30 days after the date the same was to
have been performed or observed and shall diligently continue to complete the
performance or observance; or
(c) any representation or warranty in any of the Debt Documents or in
any certificate, agreement, instrument or other document made or delivered
pursuant to or in connection with any of the Debt Documents proves to have been
incorrect when made in any material respect; or
(d) Reorganized Prism (i) shall fail to pay the principal, or any
principal installment, of any present or future indebtedness for borrowed money
of $100,000 or more, or to fulfill its obligations under any guaranty of present
or future indebtedness for borrowed money of $100,000 or more, on its part to be
paid, when due (or within any stated grace period), whether at the stated
maturity, upon acceleration, by reason of required prepayment or otherwise or
(ii) shall fail to perform or observe any other term, covenant or agreement on
its part to be performed or observed in connection with any present or future
indebtedness for borrowed money of $100,000 or more, or of any guaranty of
present or future indebtedness for borrowed money of $100,000 or more, if as a
result of such failure any holder or holders thereof (or an agent or trustee on
its or their behalf) has the right to declare such indebtedness
17
<PAGE>
due before the date on which it otherwise would become due, or has commenced
judicial or nonjudicial action to collect such indebtedness or to foreclose or
otherwise realize upon security held therefor, or has taken or is taking such
other actions as might materially adversely affect the Collateral, the interests
of Ingram under the Debt Documents or the ability of Reorganized Prism to
perform its obligations under the Debt Documents; or
(e) Any Debt Document, at any time after its execution and delivery
and for any reason other than the agreement of Ingram or satisfaction in full of
all the obligations of Reorganized Prism thereunder, ceases to be in full force
and effect or is declared by a court of competent jurisdiction to be null and
void, invalid or unenforceable in any respect; or any Party thereto denies that
it has any or further liability or obligation under any Debt Document, or
purports to revoke, terminate or rescind same; or
(f) A final judgment against Reorganized Prism is entered for the
payment of money in excess of $250,000 and such judgment remains unsatisfied
without procurement of a stay of execution for 30 calendar days after the date
of entry of judgment; or
(g) All or a substantial portion of Reorganized Prism's property is
seized or appropriated by any Governmental Agency; or
(h) Reorganized Prism is dissolved or liquidated or all or
substantially all of the property of Reorganized Prism is sold or otherwise
transferred without Ingram's written consent; or
(i) Reorganized Prism is the subject of an order for relief by a
bankruptcy court that is not stayed within 30 days, or is unable or admits in
writing its inability to pay its debts as they mature, or makes an assignment
for the benefit of creditors; or Reorganized Prism applies for or consents to
the appointment of any receiver, trustee, custodian, conservator, liquidator,
rehabilitator or similar officer for it or for all or any part of its property;
or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or
similar officer is appointed without the application or consent of Reorganized
Prism and the appointment continues undischarged or unstayed for 60 calendar
days; or Reorganized Prism institutes or consents to any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution, custodianship,
conservatorship, liquidation, rehabilitation or similar proceedings relating to
it or to all or any part of its property under the Laws of any jurisdiction; or
any similar proceeding is instituted without the consent of Reorganized Prism
and continues undismissed or unstayed for 60 calendar days; or any judgment,
writ, attachment, execution or similar process is issued or levied against all
or any part of the property of Reorganized Prism and is not released, vacated or
fully bonded within
18
<PAGE>
30 calendar days after its issue or levy; or Reorganized Prism voluntarily
ceases to transact business for more than five consecutive days; or
(j) Reorganized Prism shall claim that any Debt Document is
ineffective or unenforceable, in whole or in part, for any reason.
ARTICLES 8
RIGHTS AND REMEDIES UPON DEFAULT
8.1 Remedies Generally. If an Event of Default shall occur, Ingram may,
------------------
at its option and without demand or notice to Reorganized Prism, which notice is
expressly waived, do any one or more of the following:
(a) accelerate and declare the principal of all amounts owing under
this Agreement, the Note and the other Debt Documents, including without
limitation all obligations secured by the Collateral Documents, together with
interest thereon, to be immediately due and payable, regardless of any other
specified maturity or due date, without presentment or demand for payment,
protest or notice of nonpayment or dishonor, or other notices or demands of any
kind or character, and without the necessity of prior recourse to any security;
(b) to the extent permitted by applicable Laws, proceed to protect,
exercise and enforce any or all of its rights and remedies under any or all of
the Debt Documents, including without limitation the right to notify any account
debtor of Ingram's security interest in all of Reorganized Prism's accounts and
effect collection of any account directly from such debtor, the right to take
possession of and protect, enforce and exercise its rights with respect to the
New Collateral, and such other rights and remedies as are provided by Law or
equity, all in such order and manner as Ingram in its sole discretion may
determine; and/or
(c) to the extent permitted by applicable Laws, exercise any and all
legal or equitable remedies afforded to Ingram as provided in any Collateral
Documents heretofore or hereafter entered into between Ingram, Reorganized
Prism, or as provided for under the Uniform Commercial Code, or under any other
applicable law.
8.1 Cumulative Remedies. The rights and remedies granted to Ingram are
-------------------
cumulative, and Ingram shall have the right to exercise any one or more of such
rights and remedies alternatively, successively or concurrently as Ingram may,
in its sole discretion, deem advisable.
19
<PAGE>
ARTICLE 9
CONDITIONS PRECEDENT TO INGRAM'S OBLIGATIONS
The obligations of Ingram to consummate the transactions contemplated
herein on the Closing Date shall be subject to the performance by Reorganized
Prism of all of its covenants to be performed hereunder, to the accuracy of the
representations and warranties herein contained, and to the fulfillment to
Ingram's satisfaction, on or before the Closing Date, of each of the following
conditions, unless waived by Ingram, in its sole discretion, in writing:
(a) Delivery to Ingram of an executed original of this Agreement, of
each of the following documents and of each of the exhibits, documents, and
ancillary agreements contemplated therein:
(i) the Note;
(ii) the New Security Agreement;
(iii) the Copyright Mortgages;
(iv) the Escrow and Warrant Agreement;
(v) the Additional Warrants;
(vi) the Lock-Up Agreement;
(vii) the Supply Agreement;
(viii) the Stockholders Agreement;
(ix) the Registration Rights Agreement;
(x) UCC-1 financing statements covering the New Collateral;
(xi) any other filings deemed necessary by Ingram to perfect
its lien and security interest in the Film Library and Film Library
Accounts Receivable;
(xii) opinion of counsel to Prism as to matters, and in such
form, as reasonably requested by Ingram;
20
<PAGE>
(xiii) evidence satisfactory to Ingram as to insurance coverage;
(xiv) incumbency certificate as to the officers of Reorganized
Prism;
(xv) certified copy of the Certificate of Incorporation and
Bylaws of Reorganized Prism and resolutions of Reorganized Prism, good
standing certificates of Reorganized Prism, authorizing the
transactions contemplated herein;
(xvi) any other instruments or documents reasonably requested by
Ingram in connection with the transactions contemplated hereby.
(b) The representations and warranties of VCI and Prism contained in
Sections 5.1 and 5.2 and in the Merger Agreement shall be true on and as of
the Closing Date with the same effect as though such representations and
warranties had been made on the Closing Date.
(c) All corporate and other proceedings, including adoption by the
Board of Directors of Prism and VCI of resolutions authorizing the
consummation of the transactions contemplated herein and authorizing the
performance by Prism and VCI of the covenants hereunder, and all actions
required to be taken in connection with the transactions contemplated
herein, and all documents incident thereto, shall be satisfactory in form
and substance to Ingram and its counsel and Ingram shall have received
certified copies of the same.
(d) All legal matters with respect to and all legal documents
executed in connection with the transactions contemplated by this Agreement
and the other Debt Documents shall be reasonably satisfactory to counsel
for Ingram.
(e) The entry of an order or orders of the Bankruptcy Court
confirming the Plan on terms reasonably acceptable to Ingram.
(f) The effectiveness of the Merger, pursuant to a Merger Agreement
in form and substance satisfactory to Ingram.
(g) No provision of any applicable law or regulation, and no
judgment, injunction, order or decree shall prohibit the consummation of
the transactions contemplated herein.
21
<PAGE>
(h) Immediately after the Closing, the Board of Directors of
Reorganized Prism shall consist of eight members, two of which shall be
designees of Ingram.
(i) Ingram shall have received satisfactory evidence that, upon
execution of the Debt Documents, Reorganized Prism will be the owner of the
New Collateral and that Ingram has a second priority lien (subject only to
the first lien of Imperial Bank) on the Film Library and the Film Library
Accounts Receivable and a first priority lien as to all other collateral.
(j) Ingram shall have been given a full and complete opportunity to
review the books, records, and operations of Prism and to review the
collateral security that will be the subject of the Collateral Documents
and shall be satisfied, in its reasonable discretion, with such review and
investigation.
ARTICLE 10
CONDITIONS PRECEDENT TO PRISM'S AND VCI'S OBLIGATIONS
The obligations of Prism and VCI to consummate the transactions
contemplated herein on the Closing Date shall be subject to the performance by
Ingram of all of its covenants to be performed hereunder, to the accuracy of the
representations and warranties herein contained, and to the fulfillment to
Prism's and VCI's satisfaction, on or before the Closing Date, of each of the
following conditions, unless waived by Prism and VCI, in their sole discretion,
in writing:
(a) Delivery by Ingram of an executed original of this Agreement and
of each of the following documents and of each of the exhibits, documents
and ancillary agreements contemplated therein:
(i) the Stockholders Agreement;
(ii) UCC-2 Termination Statements with respect to the Old
Collateral; and
(iii) the Guaranty Release.
(b) Delivery and reassignment by Ingram to Lee of the Pledged Shares
and to VCI of the Pledged Note.
22
<PAGE>
(c) The representations and warranties of Ingram contained in Section
5.3 shall be true on and as of the Closing Date with the same effect as
though such representations and warranties had been made on the Closing
Date.
(d) All corporate and other proceedings, including adoption by the
Board of Directors of Ingram of resolutions authorizing the consummation of
the transactions contemplated herein and authorizing the performance by
Ingram of the covenants hereunder, and all actions required to be taken in
connection with the transactions contemplated herein, and all documents
incident thereto, shall be satisfactory in form and substance to
Reorganized Prism and its counsel and Ingram shall have delivered certified
copies of the same to Reorganized Prism.
(e) All legal matters with respect to and all legal documents
executed in connection with the transactions contemplated by this Agreement
and the other Debt Documents shall be reasonably satisfactory to counsel
for Reorganized Prism.
(f) The entry of an order or orders of the Bankruptcy Court
confirming the Plan.
(g) The effectiveness of the Merger.
(h) No provision of any applicable law or regulation, and no
judgment, injunction, order or decree shall prohibit the consummation of
the transactions contemplated herein.
ARTICLE 11
MISCELLANEOUS
11.1 Notices. All notices, requests and other communications to any
-------
party hereunder shall be in writing and shall be given to such party at its
address or telecopier number set forth below, or such other address or
telecopier number as such party may hereinafter specify by notice to each other
party hereto:
23
<PAGE>
if to Prism, to:
Prism Entertainment Corporation
1888 Century Park East, Suite 350
Los Angeles, California 90067
Attention: Barry L. Collier
Telecopy: (310) 203-8036
a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard, Suite 1800
Los Angeles, California 90017
Attention: David L. Ficksman, Esq.
Telecopy: (213) 688-3460
if to VCI:
(prior to the Effective Time)
Lee Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Robbie Lee
Telecopy: (805) 397-7955
with a copy to:
Troy & Gould
1801 Century Park East, 16th Fl.
Los Angeles, California 90067
Attention: William J. Feis, Esq.
Telecopy: (310) 201-4746
if to Ingram:
Ingram Entertainment, Inc.
Two Ingram Boulevard
La Vergne, Tennessee 37089
Attention: John Fletcher, Esq., General Counsel
Telecopy: (615) 287-4465
24
<PAGE>
Each such notice, request or other communication shall be effective (i) if given
by telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answerback is received or, (ii) if given by mail, 72
hours after such communication is deposited in the mails with first class
postage prepaid, properly addressed or, (iii) if given by any other means, when
delivered at the address specified herein.
11.2 Amendments; No Waivers.
----------------------
(a) Any provision of this Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by each party hereto, or in the case of a waiver, by the party
against whom the waiver is to be effective.
(b) No failure or delay by any party hereto in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
11.3 Successors and Assigns. The provisions of this Agreement shall
----------------------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
11.4 Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of California, without giving effect
to the conflict of laws principles thereof.
11.5 Counterparts; Effectiveness. This Agreement may be signed in
---------------------------
any number of counterparts, each of which shall be an original and all of which
shall be deemed to be one and the same instrument, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
11.6 Entire Agreement. This Agreement (and all attached Exhibits
----------------
and Schedules, which are hereby incorporated herein) constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect to the subject matter of this
Agreement, including without limitation, the Letter of Intent dated September
16, 1996 the Workout Agreement, the Stock Pledge Agreement, the Note Pledge
Agreement, the prior Supply Agreement, the Old Warrants and the Old Security
Agreements. No representation, inducement, promise, understanding, condition or
warranty not set forth herein, or in the Merger Agreement,
25
<PAGE>
or in any other Debt Document has been made or relied upon by any party hereto.
Neither this Agreement nor any provision hereof is intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder.
11.7 Severability. If any one or more provisions of this Agreement
------------
shall, for any reasons, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement, but this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein.
11.8 Captions and Section References. The captions herein are
-------------------------------
included for convenience of reference only and shall be ignored in the
construction or interpretation hereof. All references to "Sections" without
further citation refer to sections of this Agreement.
11.9 Interpretation. Where the context or construction requires,
--------------
all words applied in the plural shall be deemed to have been used in the
singular, and vice versa; the masculine shall include the feminine and neuter,
and vice versa; and the present tense shall include the past and future tense,
and vice versa.
11.10 Attorneys' Fees. In the event of any litigation or legal
---------------
proceedings (including arbitration) between the parties hereto, the
nonprevailing party shall pay the expenses, including reasonable attorneys' fees
and court costs, of the prevailing party in connection therewith. Reorganized
Prism shall pay the attorneys' fees (up to $15,000) and expenses for Ingram's
outside counsel in connection with this Agreement and the other Debt Documents.
11.11 No Third-Party Rights. Nothing in this Agreement, whether
---------------------
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any Persons other than the parties to it and their
respective successors and assigns, nor is anything in this Agreement intended to
relieve or
26
<PAGE>
discharge the obligation or liability of any third Persons to any party to this
Agreement, nor shall any provision give any third Persons any right of
subrogation or action over against any party to this Agreement.
Lee Video City, Inc., a California
corporation
By /s/ Robert Y. Lee
--------------------------------
Its President
------------------------------
/s/ Robert Y. Lee
----------------------------------
Robert Y. Lee
Prism Entertainment Corporation, a
Delaware corporation
By /s/ Barry Collier
--------------------------------
Its President
------------------------------
Ingram Entertainment Inc., a Tennessee
corporation
By /s/ Thomas H. Lunn
--------------------------------
Its Vice Chairman
------------------------------
27
<PAGE>
SCHEDULE A
All present and future right, title and interest of Reorganized Prism
in or to any property or assets whatsoever, and all rights and powers of
Reorganized Prism to transfer any interest in or to any property or assets
whatsoever, including, without limitation, any and all of the following
---------
property, whether in existence, owned or held, or hereafter acquired, entered
into, created or arising, and wherever located:
(a) The Film Library;
(b) The Film Library Accounts Receivable and all other accounts
receivable, including, all present and future accounts, accounts
receivable, agreements, contracts, leases, contract rights, rights to
payment, instruments, documents, chattel paper, security agreements,
guaranties, undertakings, surety bonds, insurance policies, notes and
drafts, and all forms of obligations owing to Reorganized Prism or in which
Reorganized Prism may have any interest, however created or arising;
(c) All present and future accounts, accounts receivable, contract
rights, chattel paper, instruments, general intangibles, all tax refunds of
every kind and nature to which Reorganized Prism now or hereafter may
become entitled, however arising, all other refunds, and all deposits,
goodwill, choses in action, trade secrets, computer programs, software,
customer lists, trademarks, trade names, patents, licenses, copyrights,
technology, processes, proprietary information and insurance proceeds;
(d) All present and future deposit accounts of Reorganized Prism,
including, without limitation, any demand, time, savings, passbook or like
---------
account maintained by Reorganized Prism with any bank, savings and loan
association, credit union or like organization, and all money, cash and
cash equivalents of Reorganized Prism, whether or not deposited in any such
deposit account;
(e) All present and future books and records, including without
---------
limitation, books of account and ledgers of every kind and nature, all
electronically recorded data relating to Reorganized Prism or the business
thereof, all receptacles and containers for such records, and all files and
correspondence;
(f) All present and future goods, including, without limitation, all
---------
consumer goods, farm products, inventory, equipment,
28
<PAGE>
machinery, tools, molds, dies, furniture, furnishings, fixtures, trade
fixtures, motor vehicles and all other goods used in connection with or in
the conduct of Reorganized Prism's business, including without limitation,
---------
all goods as defined in the Uniform Commercial Code;
(g) All present and future inventory and merchandise including,
---------
without limitation, all present and future goods held for sale or lease or
to be furnished under a contract of service, all raw materials, work in
process and finished goods, all packing materials, supplies and containers
relating to or used in connection with any of the foregoing, and all bills
of lading, warehouse receipts or documents of title relating to any of the
foregoing;
(h) All present and future accessions, appurtenances, components,
repairs, repair parts, spare parts, replacements, substitutions, additions,
issue and/or improvements to or of or with respect to any of the foregoing;
(i) All other tangible and intangible property of Reorganized Prism;
(j) All rights, remedies, powers and/or privileges of Reorganized
Prism with respect to any of the foregoing; and
(k) Any and all proceeds and products of any of the foregoing,
including, without limitation, all money, accounts, general intangibles,
---------
deposit accounts, documents, instruments, chattel paper, goods, insurance
proceeds, and any other tangible or intangible property received upon the
sale or disposition of any of the foregoing;
provided that the term "New Collateral" shall not include the interest of
-----------------
Reorganized Prism in real property or real property leases ("real property" for
the purposes hereof having the same meaning as such term is used in California
Code of Civil Procedure Section 726).
29
<PAGE>
EXHIBIT 10.4
STOCKHOLDERS AGREEMENT
----------------------
This Stockholders Agreement ("Agreement") is made and entered into as of
January 8, 1997, by and among Video City, Inc., a Delaware corporation (formerly
Prism Entertainment Corporation) (the "Company"), Robert Y. Lee ("Lee"), an
individual and a resident of California, on behalf of himself and as Trustee of
the Robert Y. Lee Revocable Living Trust UDT 1/9/91 (the "Trust"), Barry Collier
("Collier"), an individual and a resident of California, and Ingram
Entertainment Inc., a Tennessee corporation ("Ingram") (such parties other than
the Company being collectively referred to herein as the "Stockholders," as
further defined in Article I) with respect to the following facts:
RECITALS
--------
A. VCI and the Company have entered into that certain Agreement and Plan
of Reorganization and Merger dated as of October 25, 1996, as amended by that
certain Agreement and Plan of Reorganization and Merger, dated December 20,
1996, and that certain Second Amended Agreement and Plan of Reorganization and
Merger, dated December 24, 1996, with respect to the merger (the "Merger") of
VCI into the Company.
B. As a result of the Merger, each of the Stockholders will own the
following number of issued and outstanding "Shares" (as further defined in
Article I) of Common Stock of the Company:
Stockholder Number of Shares
----------- ----------------
Collier 818,050
Lee and the Trust 2,719,024
Ingram 1,500,000
C. In order to provide for the stability of the Company and to promote
the continuity of its management and policies, the Company and the Stockholders
desire to, among other things, restrict the manner and means by which the Shares
may be sold, assigned or otherwise transferred.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
herefrom and of the mutual agreements hereinafter set forth, the parties hereto
hereby agree as follows:
<PAGE>
ARTICLE I
Definitions
-----------
Affiliate. An "Affiliate" of a Person shall mean (i) a Person directly or
---------
indirectly Controlling, Controlled by or under common Control with such Person;
(ii) a Person owning or Controlling 10% or more of the outstanding voting
securities of such Person; or (iii) an officer, director, or partner, or member
of the immediate family of an officer, director, or partner, of such Person.
When the Affiliate is an officer, director, or partner or member of the
immediate family of an officer, director, or partner, of such Person, any other
Person for which the Affiliate acts in that capacity shall also be considered
an Affiliate.
Agreement. The "Agreement" shall mean this Stockholders Agreement, as it
---------
may be amended from time to time hereafter.
Bona Fide Offer. A "Bona Fide Offer" shall mean an offer in writing to a
---------------
Stockholder, offering to purchase all or any part of the Shares owned by such
Stockholder or any interest of the Stockholder therein, and setting forth all
the relevant terms and conditions of the proposed purchase, from an offeror who
is ready, willing and able to consummate the purchase and who is neither the
Company nor an Affiliate of such Stockholder; provided, however, that a Bona
Fide Offer shall not include (a) the sale of Shares sold in a brokers'
transaction ("Brokers' Transaction") as such term is contemplated by Section
4(4) of the Securities Act of 1933, as amended, or to an underwriter pursuant to
an effective registration statement (an "Underwriter Transaction"); (b) the
surrender for cancellation of up to 250,000 shares as referred to in Section
8.2(g) of the Merger Agreement (a "Section 8.2(g) Surrender"); and (c) up to
410,444 shares to be delivered to Ingram by Lee pursuant to the exercise of
warrants in favor of Ingram (an "Ingram Warrant Exercise").
Common Stock. "Common Stock" shall mean the common stock of the Company.
------------
Control. "Control" of a Person shall mean the possession, direct or
-------
indirect, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by
contract or otherwise.
Person. A "Person" shall mean any entity, corporation, company,
------
association, joint venture, joint stock company, partnership, trust,
organization, individual (including personal representatives, executors and
heirs of a deceased individual), nation, state, government (including agencies,
departments, bureaus, boards, divisions and instrumentalities thereof), trustee,
receiver or liquidator.
2
<PAGE>
Stockholder. A "Stockholder" shall mean each of the persons specified in
-----------
the first paragraph of this Agreement and each other Person who succeeds to the
interest of such named Person in and to any Shares in a manner permitted by the
provisions of this Agreement.
Shares. The "Shares" shall mean the shares of the Common Stock specified
------
in Recital B above (exclusive of 208,050 shares owed by Collier or an affiliate
of Collier based on his pre-Merger interest in Prism Entertainment Corporation
(the "Old Collier Shares")), together with any other shares of the capital stock
of the Company hereafter acquired by any Stockholder and any other shares or
securities thereafter issued in respect of such shares in any reorganization,
recapitalization, reclassification, stock dividend, readjustment or other change
in a capital structure of the Company.
Transfer. A "Transfer" of Shares or any interest of a Stockholder therein
--------
shall mean any sale (other than pursuant to a Brokers' Transaction, and
Underwriter Transaction, a Section 8.2(g) Surrender, or an Ingram Warrant
Exercise), assignment, transfer, disposition, pledge, hypothecation or
encumbrance, whether direct or indirect, voluntary, involuntary or by operation
of law, and whether or not for value, of such Shares or such interest of a
Stockholder therein; except, the term Transfer shall not include (a) any pledge
of Common Stock made by a Stockholder pursuant to a bona fide loan transaction
---- ----
which creates a mere security interest, (b) any transfer of Common Stock to the
Company pursuant to a written agreement between the Company and a Stockholder
providing for the right of the Company to repurchase shares of its Common Stock,
(c) any transfer to a Stockholder's ancestors or descendants or spouse or to a
trustee for their benefit, (d) any bona fide gift of Common Stock or (e) any
---- ----
transfer by Ingram to an Ingram Affiliate; provided, that (i) the transferring
--------
Stockholder shall inform the other Stockholders of such pledge, transfer or gift
prior to effecting it and (ii) the pledgee, transferee or donee shall furnish
the other Stockholders and the Company with a written agreement to be bound by
and comply with all provisions of this Agreement applicable to the transferring
Stockholder. In each of the foregoing cases (a) through (e), such Transferred
Shares shall remain Shares subject to this Agreement and the permitted
transferees shall be treated as "Stockholders" for purposes of this Agreement.
ARTICLE II
Restriction on Transfer of Shares
---------------------------------
No Shares and no interest of a Stockholder in any Shares may be Transferred
except in accordance with the terms of this Agreement. Any such attempted
Transfer in violation of this Agreement shall be null and void ab initio, and
-- ------
3
<PAGE>
neither the Company nor any transfer agent of the Company shall give effect to
any such attempted Transfer in its stock records or for any other purpose
whatsoever.
ARTICLE III
Right of First Refusal of Lee and Collier
-----------------------------------------
3.1 Option to Purchase Shares. In the event Ingram proposes to Transfer
-------------------------
all or any part of its Shares or any interest therein ("Offered Shares"), the
following provisions shall apply:
3.1.1 Stockholder Sale Notice. In the event that Ingram negotiates a
-----------------------
Bona Fide Offer, Ingram shall give to the other Stockholders a written notice
(the "Stockholder Sale Notice") setting forth as to each Person to whom the sale
is proposed to be made: (a) the name and address of that Person and, if that
Person is a corporation or other entity, the owners of 10% or more thereof; (b)
the number of Offered Shares proposed to be sold to that Person; (c) the manner
in which the sale is proposed to be made; and (d) the price at which and the
material terms upon which the sale is proposed to be made.
3.1.2 Purchase Option - Other Stockholders. If the conditions
------------------------------------
prescribed in Section 3.1.1 hereof have been met in connection with the proposed
sale of the Offered Shares by Ingram, the remaining Stockholders, pro rata in
accordance with their respective ownership interests in the total number of
Shares owned by such Stockholders (as of the day immediately preceding the
receipt of the Stockholder Sale Notice) shall then have a purchase option (the
"Purchase Option"), for a period of ten (10) calendar days thereafter, to elect
to purchase all, or any part, of the Offered Shares at a purchase price that is
equal to 120% of the purchase price and otherwise substantially upon the terms
specified in the Stockholder Sale Notice. If all remaining Stockholders do not
exercise their Purchase Option as to the entire part of the Offered Shares to
which they are entitled, then the Stockholder electing to purchase shall have
the right to elect to purchase the remaining part of the Offered Shares
available for purchase. If the Stockholders so exercising their Purchase Option
shall, within the ten (10) calendar day period, deliver to Ingram an exercise
notice (the "Exercise Notice") so informing Ingram, then, at the time the
Exercise Notice is received by Ingram a binding agreement shall arise between
Ingram and the electing Stockholders concerning the sale of such Shares in
accordance with this Article.
Notwithstanding the foregoing, however, if the remaining Stockholders do
not elect to purchase all of the Offered Shares subject to the right of first
refusal pursuant to this Article III, Ingram may sell or dispose of all of the
Offered Shares to the Person described in the Stockholder Sale Notice and upon
the terms set forth in the Stockholder Sale Notice, which Shares shall be free
from any claim or restriction
4
<PAGE>
under this Agreement. Any such sale of the Offered Shares must be effected
within thirty (30) calendar days after the termination of the Stockholders'
Purchase Option. If no such sale is effected within said thirty (30) calendar
day period, or if the identity of the proposed purchaser or the terms of the
Bona Fide Offer change materially from those specified in the Stockholder Sale
Notice, or if a sale of the Offered Shares is effected upon terms materially
different from those set forth in the Stockholder Sale Notice, the Offered
Shares shall once again be subject to the provisions of this Article III.
3.2 Closing of Purchase Option. The closing of any purchase of the
--------------------------
Offered Shares pursuant to the Purchase Option shall take place at the principal
offices of the Company on the 10th calendar day following the delivery of the
last Exercise Notice. At the closing, Ingram shall deliver to the Stockholders
certificates representing the Offered Shares, duly endorsed for transfer or
accompanied by duly executed stock powers, and the purchasing Stockholders shall
deliver to Ingram the purchase price to be paid as herein provided.
ARTICLE IV
Co-Sale Rights of Ingram
------------------------
4.1 Notice of Purchase Offers. Should any Stockholder other than Ingram
-------------------------
propose to accept a Bona Fide Offer from any Person to purchase Shares owned by
such Stockholder (exclusive of any of the Old Collier Shares), then such
Stockholder (the "Selling Stockholder"), shall promptly give written notice to
Ingram of the terms and conditions of such Bona Fide Offer.
4.2 Right to Participate. Ingram shall have the right, exercisable upon
--------------------
written notice to the Selling Stockholder within ten (10) calendar days after
receipt of the notice of the Bona Fide Offer, to participate in the Selling
Stockholder's sale of Shares on the same terms and conditions contained in the
Bona Fide Offer. To the extent Ingram exercises such right of participation,
the number of Shares which the Selling Stockholder may sell pursuant to this
Article shall be correspondingly reduced. The right of participation of Ingram
shall be subject to the following terms and conditions:
(a) Ingram may sell all or any part of that number of Shares
equal to (as of the day immediately preceding the receipt of the written notice
described above) the aggregate number of Shares covered by the Bona Fide Offer
multiplied by that fraction, the numerator of which is the total number of
Shares owned by Ingram on a fully-diluted basis (including any Shares issuable
in connection with the exercise of any option, warrant or similar right), and
the denominator of which is all of such Ingram Shares plus the total number of
Shares owned by the
5
<PAGE>
Selling Stockholder on a fully-diluted basis (including any Shares issuable in
connection with the exercise of any option, warrant or similar right).
(b) Ingram may participate in the sale by delivering to the
Selling Stockholder for transfer to the purchase offeror one or more
certificates, properly endorsed for transfer, which represent the number of
Shares which Ingram elects to sell pursuant to this Section 4.2.
4.3 Consummation of Sale. The stock certificate or certificates which
--------------------
Ingram delivers to the Selling Stockholder pursuant to Section 4.2 shall be
delivered by the Selling Stockholder to the purchase offeror in consummation of
the sale of the Shares pursuant to the terms and conditions specified in the
written notice to Ingram, and the Selling Stockholder shall cause the purchase
offeror to pay to Ingram that portion of the sale proceeds to which Ingram is
entitled by reason of its participation in such sale.
4.4 Ongoing Rights. The exercise or non-exercise of the rights of Ingram
--------------
hereunder to participate in one or more sales of Shares made by a Selling
Stockholder shall not adversely affect its right to participate in subsequent
sales of Shares by a Selling Stockholder pursuant to Section 4.1 hereof.
ARTICLE V
Preemptive Rights of Ingram
---------------------------
In the event of the issuance, sale or distribution for cash by the Company
of any voting or other security of the Company or security convertible into or
exercisable for such security commenced or declared subsequent to the date
hereof, other than Shares or rights to Shares issued pursuant to an employee
benefit plan or otherwise for property (other than cash equivalents or evidences
of indebtedness) or services, Ingram shall be entitled to participate in such
issuance, sale or distribution on a pro rata basis in respect of the Shares
owned by Ingram so that following such issuance, sale or distribution Ingram
will, if it has elected to purchase the new securities to be issued, sold or
distributed, have the same percentage of the equity ownership of the Company as
Ingram had by reason of its ownership of Shares prior to such issuance, sale or
distribution.
6
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ARTICLE VI
Board of Directors
------------------
During the term of this Agreement, each Stockholder shall use its or his
best efforts to cause the number of directors of the Company to be eight and
shall vote, or cause to be voted, at each election of members of the Board of
Directors of the Company, all of his or its Shares in favor of two designees of
Ingram, four designees of Lee and two designees of Collier. Notwithstanding the
foregoing, Ingram shall have no right to so designate a member of the Board of
Directors upon and after Ingram's beneficial ownership interest (assuming, for
purposes of this calculation, the exercise or conversion of all options,
warrants, rights, or convertible securities held by Ingram) in the Company
Common Stock (together with that of any Affiliate of Ingram) is 4% or less of
the outstanding Common Stock. Additionally, subject to the exercise of their
fiduciary duties, Lee and Collier shall use their best efforts to appoint a
designee of Ingram to the Compensation Committee of the Company.
ARTICLE VII
Amendment of Employment Agreements
----------------------------------
Except for that certain Amendment to Agreement and Plan of Reorganization
and Merger, dated as of December 20, 1996, neither Collier nor Lee nor the
Company shall enter into any amendment, modification or waiver of their
Employment Agreements with the Company nor shall the Company extinguish, forgive
or reduce (except for payment made) any debt owed to the Company from any
employee without the prior written consent of Ingram.
ARTICLE VIII
Termination of Agreement
------------------------
This Agreement shall terminate, and the certificates representing the
Shares shall be released from the terms of this Agreement upon the first to
occur of the following events:
8.1 By Agreement. The written agreement of the Company and all of
------------
the Stockholders bound by the terms of this Agreement;
8.2 One Stockholder. At such time as there is only one remaining
---------------
Stockholder of the Company;
8.3 Liquidation. The liquidation and dissolution of the Company; or
-----------
7
<PAGE>
8.4 Ingram's Ownership Interest in the Company. Ingram's beneficial
------------------------------------------
ownership interest (assuming, for purposes of this calculation, the exercise of
conversion of all options, rights, warrants or convertible securities held by
Ingram or an Affiliate) in the Company's Common Stock is 4% or less.
Upon the termination of this Agreement for any of the above reasons, the
certificates of stock held by each Stockholder shall be surrendered to the
Company, and the Company shall issue new certificates for the same number of
Shares but without the legend required by this Agreement.
ARTICLE IX
Legend On Share Certificates
----------------------------
Each of the certificates representing the Shares shall bear the following
legend:
"None of the Shares represented by this certificate may be sold, assigned,
transferred, pledged, hypothecated or in any other way disposed of or
encumbered, voluntarily or involuntarily, by gift, bankruptcy, operation of
law, winding up of a corporation or otherwise, except in accordance with
the provisions of a Stockholders Agreement, dated January 8, 1997, which is
also a voting agreement, a copy of which may be inspected at the principal
office of this Company. All of the provisions of such Stockholders'
Agreement are incorporated herein by this reference."
A copy of this Agreement shall be delivered to the Secretary of the Company and
shall be shown by him to any person making inquiry concerning it.
ARTICLE X
General Provisions
------------------
10.1 Waiver. No waiver of any provision of this Agreement in any instance
------
shall be or for any purpose be deemed to be a waiver of the right of any party
hereto to enforce strict compliance with the provisions hereof in any subsequent
instance.
10.2 Agreement to Perform Necessary Acts. Each party hereto and the
-----------------------------------
heirs, executors or administrators of the Stockholders shall perform any further
acts
8
<PAGE>
and execute and deliver any documents or procure any court orders which may
reasonably be necessary to carry out the provisions of this Agreement.
10.3 Litigation and Attorneys' Fees. In the event of any litigation
------------------------------
between the parties hereto to enforce any provision or right hereunder, the
unsuccessful party to such litigation shall pay to the prevailing party therein
all costs and expenses actually incurred therein, including, but not limited to,
reasonable attorneys' fees actually incurred and court costs.
10.4 Modification. This Agreement may not be modified or amended except
------------
by a writing signed by all of the Stockholders and by an officer duly authorized
to act on behalf of the Company. In the event of the amendment or modification
of this Agreement in accordance with its terms, the Stockholders shall cause the
Board of Directors to meet within 30 days following such amendment or
modification or as soon thereafter as is practicable for the purpose of adopting
any amendment to the Certificate of Incorporation and By-Laws of the Company
that may be required as a result of such amendment or modification to this
Agreement, and, if required, proposing such amendments to the Stockholders
entitled to vote thereon.
10.5 Notices. All notices, requests and other communications hereunder
-------
shall be in writing and shall be deemed to have been given if delivered by
courier or other means of personal service, or if sent by telex or telecopy or
mailed first class, postage prepaid, by certified mail, return receipt
requested, addressed to:
The Company:
Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Barry L. Collier
Telecopy No.: (805) 397-5982
With a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard
Suite 1800
Los Angeles, California 90017
Attention: David L. Ficksman, Esq.
Telecopy No.: (213) 688-3460
9
<PAGE>
Ingram:
Ingram Entertainment Inc.
Two Ingram Boulevard
La Vergne, Tennessee 37089
Attention: John Fletcher, Esq., General Counsel
Telecopy No.: (615) 287-4465
Lee:
Robert Y. Lee
Lee Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Telecopy No.: (805) 397-5982
Collier:
Barry Collier
4033 Ocean Avenue
Oxnard, California 93035
Telecopy No.: (805) 985-1855
All notices, requests and other communications shall be deemed received on the
date of actual receipt as evidenced by written receipt, acknowledgement or other
evidence of actual receipt. Any party may change its address for notices by
notice to the other parties as provided in this Article.
10.6 Counterparts. This Agreement may be executed simultaneously in any
------------
number of counterparts, each of which shall be deemed an original of the party
of parties who executed such counterpart but all of which together shall
constitute one and the same instrument.
10.7 Severability. Each provision and part thereof of this Agreement is
------------
intended to be severable and if any term or all or part of any provision hereof
is held by judicial decision to be invalid, such invalidity shall not affect the
validity of the remainder of this Agreement.
10.8 Entire Agreement. This Agreement is intended by the parties hereto
----------------
as a final expression of their agreement and understanding with respect to the
subject matter hereof and as a complete and exclusive statement of the terms
thereof and supersedes any and all prior and contemporaneous agreements and
understandings, written or oral, express or implied.
10
<PAGE>
10.9 Governing Law. This Agreement shall be construed and interpreted in
-------------
accordance with the laws of the State of California.
10.10 Injunctive Relief. The parties acknowledge and agree that a
-----------------
violation of any of the terms of this Agreement will cause the parties
irreparable injury for which adequate remedy at law is not available.
Therefore, the parties agree that each party shall be entitled to an injunction,
restraining order or other equitable relief from any court of competent
jurisdiction, restraining any party from committing any violations of the
provisions of this Agreement.
10.11 Section Headings. The headings of the several sections of this
----------------
Agreement are inserted solely for convenience of reference and are not a part of
and are not intended to govern, limit or aid in the construction of any term or
provision hereof.
10.12 Construction. When necessary, the masculine shall include the
------------
feminine or neuter and the singular shall include the plural and vice versa.
10.13 Binding Effect. Subject to the restrictions on Transfer contained
--------------
herein, this Agreement shall be binding on and shall inure to the benefit of,
the parties
11
<PAGE>
hereto and their respective heirs, legal representatives, successors and
permitted assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first hereinabove written.
THE COMPANY:
Video City, Inc., a
Delaware corporation
By: /s/ Robert Lee
------------------------------
Name: Robert Lee
----------------------------
Its: CEO
-----------------------------
STOCKHOLDERS:
Ingram Entertainment Inc., a Tennessee
corporation
By: /s/ Thomas H. Lunn
------------------------------
Name: Thomas H. Lunn
----------------------------
Its: Vice Chairman
-----------------------------
/s/ Robert Y. Lee
---------------------------------
Robert Y. Lee
/s/ Robert Y. Lee
---------------------------------
Robert Y. Lee, Trustee of the Robert Y.
Lee Revocable Living Trust UDT 1/9/91
/s/ Barry Collier
---------------------------------
Barry Collier
12
<PAGE>
EXHIBIT 10.5
INGRAM ENTERTAINMENT INC.
Two Ingram Blvd. La Vergne, TN 37089 DAVID B. INGRAM
(615) 287-4610 Fax (615) 287-4985 Chairman and President
January 8, 1997
Mr. Robert Y. Lee
Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, CA 93313
Re: Supply Agreement
Dear Robbie:
The following is the supply agreement (the "Agreement") between Video City, Inc.
(formerly known as Prism Entertainment Corporation) on its own behalf and on
behalf of any present or future affiliated entities engaged in the sale or
rental of product described in this Agreement ("Video City") and Ingram
Entertainment Inc. ("Ingram"):
1. RENTAL PRICING:
Video City will receive a 34.5% discount off suggested retail price on all
rental product ($30 and higher). Video City will receive multi-pack pricing
and discounts on single purchases of multi-pack titles.
2. SELL-THROUGH PRICING:
Video City will receive a 37% discount off suggested retail price on catalog
sellthrough product ($29.99 and lower), subject to Paragraph 9 below. Feature
sellthrough titles (i.e. titles released for the first time to the home video
---
market at $29.99 and lower having grossed $50 million or more at the box
office) will be offered at specially discounted prices based on quantities
ordered. Video City may purchase feature sell-through titles from a source
other than Ingram provided Video City offers Ingram the right of first
refusal to match the price offered to Video City from the other source, which
offer must be arms length, written, and furnished to Ingram.
3. RETURNS:
Video City will receive a 50% return allowance on all unopened sell-through
product in mint, resalable condition, provided Ingram and Video City mutually
agree on purchase quantities eligible for returns. Returns of undamaged
product must be received by Ingram within three months after initial street
date. Video City will also receive return allowances for damaged product.
Damaged return product must be received by Ingram within 60 days of initial
street date. Ingram will issue
<PAGE>
Mr. Robert Y. Lee
Page 2
January 8, 1997
call tags for store damaged returns based on each store up to a maximum of
two damaged returns shipments per store per month. For all returned product,
credits will be applied to Video City's account within 15 business days of
receipt by Ingram.
4. VIDEO GAMES:
Video City will receive Ingram gross cost plus 7% pricing on all video game
rental and sell-through titles. Video City will receive a 100% return
allowance on all unopened video game sell-through product in mint, resalable
condition, provided Ingram and Video City mutually agree on purchase
quantities eligible for returns. Returns must be received by Ingram within 60
days after initial street date.
5. LASER:
Video City will receive a 25% discount off suggested retail price on laser
purchases and a 50% return allowance on all unopened laser product in mint,
resalable condition. Returns must be received by Ingram within three months
after initial street date.
6. AUDIO BOOKS:
Video City will receive a 40% discount off suggested retail price on audio
book rental product purchases (rental ready or non-rental ready). Video City
will receive a 20% return allowance on all unopened non-rental ready product
in mint, resalable condition. Returns must be received by Ingram within three
months after initial street date.
7. MULTIMEDIA:
Video City will receive a 35% discount off suggested retail price on CD ROM
product and net pricing on CDI, 3DO, and Jaguar product. Video City will
receive a 20% title-by-title return allowance on all unopened product in
mint, resalable condition. Returns must be received by Ingram within 9O days
after invoice date.
8. ACCESSORIES:
Video City will receive "end-lot" pricing on all accessories.
9. TERMS:
Payment terms will be net 60 days from invoice for all rental and sell-
through product purchases; provided, however, that for (i) catalog sell-
-------- -------
through product intended for new store openings; (ii) Christmas catalog sell-
through product; and (iii) catalog sell-through product intended for new
sell-through departments in existing stores, Video City will have a one time
right to elect either (a) payment
2
<PAGE>
Mr. Robert Y. Lee
Page 3
January 8, 1997
terms of net 9O days from invoice or (b) payment terms of net 120 days from
invoice; provided, further, that pricing for catalog sell-through product in
--------- -------
the event of alternative (b) shall be a 36.5% discount off suggested retail
price. Video City understands that its credit line with Ingram will be as
established or modified from time-to-time based upon Ingram's credit review
and credit policies. Any amounts not paid when due will bear interest at the
rate of 1 1/2% per month (18% per annum) on the overdue balance (or, if less,
at the maximum rate permitted by applicable law, with any payments in excess
of such maximum treated as principal payments on the past due amount).
Payments received from Video City will be credited first to unpaid interest
as set out above.
10.ADVERTISING:
Co-op on rental video titles will be handled "in-house" and will be paid at a
rate of 3% for titles that accrue co-op, following studio guidelines. For
sell-through titles, Video City will receive "pass-through" co-op and MDF
advertising funds, also following studio guidelines. Rental titles will also
receive "pass through" of MDF advertising funds, following studio guidelines.
11.RENTAL READY PROCESSING:
Rental ready processing is available and will be billed as a separate invoice
line item. If rental ready processing is desired, pricing will be determined
after an analysis of the specific requirements is made. Video City will be
entitled to Ingram's most favored customer pricing for this service.
12.FREIGHT:
Freight for all product will be pre paid to Video City locations, without
limitations as to the size or dollar amount of orders. Special orders may be
"piggybacked" by Ingram on new release shipments as long "available/on-hand"
special order titles are delivered within one week of the order.
13.PROGRAMS AND SERVICES:
Ingram will, when possible, extend terms on special programs such as holiday
promotions and new store start-up packages. Ingram will provide home office
services such as marketing, creative services and help with management
information systems requests whenever possible. Video City will receive free
monthly in-store "video guides" (average 1,200 per store). Video City
understands that it may not have an exclusive representative, but Ingram
intends that Video City will receive the same high level of hands-on
involvement and assistance that Lee Video City, Inc. ("VCI") has received
from Ingram representatives in the past. Ingram also intends to maintain the
same high level of representative service to
3
<PAGE>
Mr. Robert Y. Lee
Page 4
January 8, 1997
Video City as Video City encounters rapid growth and to consider appointment
of an exclusive representative as may be warranted by that growth. Video City
will be eligible to participate in any advertised programs offered by Ingram.
14.QUANTITY:
Video City agrees to purchase from Ingram 100% of its yearly requirements for
the video rental, video sell-through, game, and other products covered by
this Agreement, except in the following circumstances:
(a) The product is not carried by Ingram (such as adult product);
(b) Video City is required to purchase product from Rentrak Corporation
or its affiliates ("Rentrak") under the present terms of its
agreement with Rentrak by which Video City is bound due to the
merger of VCI into Video City, but only to the extent of minimum
purchases required under that agreement;
(c) Purchases of used product;
(d) Purchases of non-prerecorded product;
(e) Orders which Ingram is unable to fill in a reasonably timely manner;
(f) Orders in excess of the credit limit extended to Video City by
Ingram, provided that Video City is within its credit terms with
--------
Ingram; or
(g) Purchases of feature sell-through titles from a source other than
Ingram following Ingram's failure to exercise its right of first
refusal, as permitted by Paragraph 2.
15.PAYMENT IN CERTAIN EVENTS:
An "Extraordinary Transaction" for purposes of this Paragraph shall be deemed
to occur upon consummation of one of the following events:
(a) a sale or other disposition of retail locations by Video City other than
in the ordinary course of business, 90% of the proceeds from which are not
redeployed in a similar video business within 9O days of such transaction (an
"Asset Sale"); provided however, that a sale or other disposition of retail
-------- -------
locations in a transaction
4
<PAGE>
Mr. Robert Y. Lee
Page 5
January 8, 1997
or series of transactions, which locations in the aggregate accounted for
less than 20% of purchases under this Agreement over the 12 months preceding
such disposition, shall not constitute an Asset Sale; or
(b) a merger or consolidation of, into, or involving Video City, in which
Video City is not the surviving corporation.
Upon the consummation of an Extraordinary Transaction, Video City shall
immediately pay Ingram in cash the following amounts (the "Termination
Payment"):
EXTRAORDINARY TRANSACTION
ON OR BEFORE THE FOLLOWING
ANNIVERSARY OF THIS AGREEMENT TERMINATION PAYMENT DUE
----------------------------- -----------------------
First $1,300,000
Second 1,300,000
Third 1,200,000
Fourth 1,200,000
Fifth 1,000,000
Sixth 900,000
Seventh 800,000
Eighth 700,000
Ninth 600,000
Tenth 400,000
The parties have agreed to the above payments in lieu of a formula designed
to calculate the discounted present value of anticipated annual future
payments under this Agreement, due to the uncertainty inherent in any such
formula calculation.
The following shall apply notwithstanding the above:
(x) in the event of an Asset Sale of less than 100% of the retail locations
of Video City, the payment set out above shall be prorated based upon the
required payments made to Ingram under this Agreement by Video City, with
respect to the locations so sold, during the 12 months preceding the
Extraordinary Transaction, prorated for any partial year of the unexpired
term of this Agreement; and
(y) in the event of an Extraordinary Transaction in which this Agreement is
assigned to and assumed by a third party of credit quality at least equal to
that of
5
<PAGE>
Mr. Robert Y. Lee
Page 6
January 8, 1997
Video City on terms and conditions reasonably acceptable to Ingram, Video
City will not be required to make any payment pursuant to this Paragraph
unless and until subsequent annual payments by the assignee to Ingram under
this Agreement in each 12 month period after the Extraordinary Transaction
("Subsequent Annual Payments") fail to equal or exceed required payments made
to Ingram under this Agreement during the 12 months preceding the
Extraordinary Transaction ("Prior Annual Payments"). If in any such 12 month
period Subsequent Annual Payments are less than the Prior Annual Payments (a
"Shortage Period"), Video City shall pay to Ingram a pro rata portion of the
Termination Payment determined by multiplying the Termination Payment due as
if the Extraordinary Transaction had occurred at the beginning of the
Shortage Period by a fraction, the numerator of which is the amount of
Subsequent Annual Payments and the denominator of which is the amount of
Prior Annual Payments.
16.TERM OF AGREEMENT:
The term of this Agreement will commence on the date the merger of VCI with
and into Video City becomes effective, and shall terminate on the tenth
anniversary of that effective date. This Agreement may, however, be
terminated by Ingram at any time for any reason upon prior written notice to
Video City. Upon the commencement of this Agreement, the existing purchasing
contract, dated effective as of July 1, 1996, between Ingram and VCI, shall
be terminated.
17.ASSIGNMENT:
Video City may not assign this Agreement without the express written consent
of Ingram.
INGRAM ENTERTAINMENT INC. VIDEO CITY, INC.
/s/ David B. Ingram /s/ Robert Y. Lee
- - - - ------------------------------ ---------------------------------
David B. Ingram Robert Y. Lee
Chairman and President CEO
6
<PAGE>
EXHIBIT 10.6
- - - - -------------------------------------------------------------------------------
RENTRAK NATIONAL ACCOUNT AGREEMENT
- - - - -------------------------------------------------------------------------------
INSTRUCTIONS
- - - - -------------------------------------------------------------------------------
All shaded areas of this Agreement must be completed.
Processing fees are:
U.S. Fee
- - - - -------------------------------------------------------------------------------
First store:..........................................................$4,495.00
Multiple stores owned by the same Retailer:
a) Additional stores signed at the same time as first store.....$2,250.00
b) Additional stores signed at a later date.....................$4,495.00
- - - - -------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------
AGREEMENT
- - - - -------------------------------------------------------------------------------
This AGREEMENT by and between Rentrak Corporation ("Rentrak"), and
Lee Video City, Inc.
--------------------------------------------------------------------------
("Retailer") is made effective as of the date executed by Rentrak below.
Retailer operates a chain of video retail locations. This Agreement shall
cover the retail establishments ("Retail Location(s)") listed on Exhibit A
hereto. In addition, Retailer operates the central office (Office) and/or
warehouse facility (Warehouse) also listed on Exhibit A.
Rentrak distributes prerecorded videocassettes and other media (hereinafter
referred to as "Cassettes" or "PPT Product") to Retailers pursuant to a lease
arrangement known as Pay-Per-Transaction(SM) ("PPT" or the "PPT(R) System").
Retailer desires to participate in the PPT System.
In consideration of the mutual promises and agreements contained herein,
the parties agree as follows:
1. In the event Retailer does not meet Rentrak's credit minimum, annual
rental volume and/or automated reporting requirements prior to receiving a
Cassette from Rentrak, the processing fee will be refunded. In the event
Retailer meets such requirements, Cassettes offered for lease by Rentrak and
ordered by Retailer, subject to any ordering limitations which may be imposed,
will be shipped "FOB Destination" to Retailer's Warehouse or at Retailer's
request, to each Retail Location. Retailer's last order accepted and confirmed
by Rentrak shall be final. Rentrak will use its best efforts to assure delivery
of Cassettes to Retailer on or before the street date. If, for any reason,
Retailer's order or any portion thereof cannot be shipped, Rentrak or Retailer
may cancel the unfilled order upon notice and without further liability to the
other party.
2. Retailer agrees to:
a) Use Rentrak-approved computer hardware and Point-of-Sale ("POS") system
software. Retailer shall, prior to ordering Cassettes, complete, to Rentrak's
sole satisfaction, a test of Retailer's computer system and communication
ability. Retailer shall also install Rentrak's proprietary Rentrak Profit Maker
Software ("RPM") on its computer system (which inclusive with the hardware, RPM
and POS system software are collectively referred to as the "POS System"). The
RPM shall, at all times, remain the exclusive property of Rentrak.
b) Timely remit all amounts due Rentrak.
c) Comply with the reporting system (inclusive of the POS System)
established by Rentrak. Rentrak may modify the reporting system from time to
time, and Retailer must comply with such modification within ninety (90) days of
written notice from Rentrak. Retailer shall permit Rentrak to obtain all
reports required pursuant to this Agreement from each Retail Location's POS
System and at Rentrak's request from Retailer's central computer (meaning the
computer to which all Retail Locations are reporting their rental and sale
information, such computer being hereinafter referred to as the "Host
Computer"). If Retailer cannot deliver the required reporting to Rentrak within
seven (7) days of the due date, Rentrak may, at its sole election, cancel orders
and refuse to accept additional orders in process until the required reporting
is received.
d) Honor the designated street date for, and all copyrights applicable to,
Cassettes leased hereunder.
e) Pay all sales, use, property or other taxes of any kind or nature
assessed or levied by any taxing authority with respect to Cassettes acquired or
leased pursuant hereto, except for income taxes of Rentrak.
f) At the time of ordering, designate the number of Cassettes being ordered
by each individual Retail Location.
g) Within forty-eight (48) hours of receipt at its Warehouse or at its
Retailer Locations, whichever occurs first and prior to any rental thereof,
bar-code the Cassettes, enter them into both the designated Retail Location's
POS System and the Host Computer and except as limited by paragraph 2(d),
hereof, make them available for immediate rental. Cassettes retained at
Retailer's Warehouse may not be so retained longer than five (5) days after the
street date. Rentrak may provide, and Retailer shall use, identification codes
for the Cassettes. Rentrak may periodically prescribe a different
identification code, which Retailer will implement within thirty (30) days of
written notice.
h) Process through the appropriate Retail Location's POS System, at the
time of the transaction, the rental and sale of all Cassettes. Notwithstanding
the foregoing sentence, Retailer may utilize a processing system other than the
POS System for a period not to exceed two (2) business days in the event (and
only in the event) the Retailer's POS System is nonfunctioning. Retailer shall
immediately give Rentrak telephone notice if Retailer's POS System is
nonfunctioning. All rental and sale transactions occurring during the
nonoperational period will be processed through Retailer's POS System as soon as
it is again operational.
i) Not remove the Cassettes from the Retail Location except pursuant to
paragraph 19 or paragraph 20 hereof.
j) Use its best efforts to rent Cassettes at rates it determines
appropriate and prominently display the Cassettes supplied through Rentrak.
Retailer shall not rent the Cassettes for a period of longer than seven (7) days
in any single transaction to any customer or permit the Cassettes to be leased
to or by other video retailers.
k) Not order quantities of Cassettes in excess of those required to meet
anticipated rental demand.
l) Not disassemble, decompile, reverse engineer, or in any manner tamper
with or in any manner alter, copy, or use any hardware or software provided or
required by Rentrak except in the manner and for the specific purpose described
in this Agreement and in the Rentrak Profit Maker Manual, which by this
reference is incorporated into this Agreement. Retailer agrees that it will not
divulge or disclose or otherwise make available to any third party whatsoever,
or make any use whatsoever, copy or in any way replicate the RPM or allow any
third party to do the same. Except as directed by Rentrak, the POS System,
including the RPM, shall not be utilized to, in any manner, provide information
on rental or sale activity of any Cassettes at the Retail Location, regardless
of how the Cassettes were acquired, to any provider of Cassettes under any form
of revenue sharing plan or leasing system.
m) Maintain the Cassettes in good condition and repair.
n) Not use for any purpose, and not be licensed to use, any names,
trademarks, service marks, logos or commercial symbols that belong to or are
used by Rentrak or by any owner or supplier of Cassettes to Rentrak ("Program
Suppliers").
o) Retain and reveal certain information with respect to its business.
Retailer also acknowledges that accurate verifiable data as to rentals and sales
of the Cassettes is imperative and that inaccurate or incorrect reporting by
Retailer will cause substantial damage to Rentrak.
p) Cause all of the Retail Locations owned, controlled or operated as of
the date of this Agreement to participate in the PPT System within six (6)
months from receipt of Retailer's first cassette at its first Retail Location or
for all Retail Locations acquired (by ownership, control or operation) after the
date of this Agreement, to participate in the PPT System within thirty (30) days
of opening for business. Retailer agrees to immediately notify Rentrak in
writing whenever Retailer acquires (by ownership, control or operation) or
ceases ownership, control or operation of a Retail Location.
3. With respect to certain titles offered for lease hereunder, unique
credit, pricing terms and/or minimum/maximum ordering requirements may be
established. When ordering Cassettes, Retailer shall comply with such
minimum/maximum requirements. If the Retailer elects to order such a title and
fails to honor the unique terms, Rentrak, in its sole discretion, shall have the
right to reduce or increase the number of Cassettes ordered by Retailer.
Program Suppliers, in their sole discretion, respectively, shall have the right
to refuse to supply Retailer with PPT Product.
4. The rights granted to Retailer hereunder with respect to the leasing of
Cassettes are dependent upon the rights granted to Rentrak by the Program
Suppliers. In the event that Rentrak's PPT rights in and to certain Cassettes
terminate for any reason, Retailer's rights to certain Cassettes granted
pursuant to this Agreement shall be affected in the following manner. In
consideration of Retailer compensating Program Suppliers directly, or returning
Program Supplier(s)'s property (i.e., the Cassettes) directly to the Program
Supplier(s), which choice Retailer may be given the option of selecting, certain
Program Supplier(s) have agreed to permit Retailer to own some or all of those
Program Supplier(s)'s Cassettes in Retailer's possession after compensating
those Program Supplier(s)'s in accordance with a "purchase formula" or returning
the Cassettes Retailer elects not to purchase directly to that Program Supplier.
If Rentrak's rights to lease a Program Supplier(s)'s Cassettes terminate,
Retailer may be notified in writing by the Program Supplier, and instructed on
the choices and procedures to follow. In such event of termination, Rentrak may
at that time assign all of its rights as the lessor of Cassettes to the Program
Supplier, and Retailer will become a lessee of the Program Supplier.
5. Retailer is under no obligation to lease any Cassette offered hereto
and Rentrak is under no obligation to offer any Cassette to any particular
Retailer even if available to other Retailers. Retailer may order Cassettes of
a title for
<PAGE>
one or more of the other Retail Locations and not order Cassettes of the same
title for one or more of the Retail Locations. If a Retailer rents Cassettes to
the public at a store which was designated in Retailer's order as a PPT
participating store with respect to that title and which were obtained by means
other than this Agreement, and are of the same title as Cassettes which it has
also obtained under this Agreement, Retailer agrees that rentals of all
Cassettes of such title, regardless of how obtained, shall be reflected,
reported and revenue sharing paid as if the Cassettes were obtained under this
Agreement. Notwithstanding the above, with regard to certain Program Suppliers.
Retailer may be required to order a given title released by such Program
Suppliers for each Retail Location of similar or larger size if Retailer orders
the same title for one Retail Location (i.e., if Retail Location A, a store with
average monthly revenues of $10,000 from the rental and sale of Cassettes orders
a certain title from a certain Program Supplier, Retailer may be required to
order the same title for all of Retailer's Retail Locations of similar or larger
size to Retail Location A.). Cassettes shall be obtained by Retailer in full
compliance with any Program Supplier or Rentrak established minimum/maximum
ordering requirements as more fully set forth in paragraph 3 of this Agreement.
With respect to Cassettes leased hereunder, Retailer may not purchase the
Cassette and use it as rental inventory, remove the title from rental
availability except as provided herein, or take any other steps to deprive
Rentrak of all available revenue under the established terms for the title's
lease term except to the extent that, once "used sell-through" is permitted for
a particular title by its terms, Retailer may remove Cassettes no longer
required for rental use to Retailer's Warehouse for subsequent sale by recording
the same as a sale and making the required remittance to Rentrak upon transfer.
6. With respect to Cassettes which are offered pursuant hereto, Retailer
will be notified of the lease terms which may vary from title to title.
Generally, such terms will require the following:
a) Pay when due a "handling fee" for each Cassette leased. This handling
fee may vary from title to title. A portion of the handling fee may represent
sales, use or excise taxes.
b) Weekly payment of a "transaction fee" which may include a minimum lease
fee per transaction due regardless of the rental amount received by Retailer.
c) Weekly payment of a "sell-through fee" with respect to any Cassettes
leased pursuant hereto and sold by Retailer to the public. Rentrak may restrict
the sale of any Cassettes leased pursuant hereto, or the date of such sale.
Retailer shall establish its own sales price for the Cassettes sold pursuant to
this Agreement. Retailer may not, however, sell more than five (5) copies of any
title to any one customer within any thirty (30) day period. In all cases,
Retailer must retain, display, and make available for rental at least one of the
Cassettes of a title which it leased pursuant hereto at each Retail Location
designated as participating with respect to the particular title throughout the
term of the lease.
d) Pay, when due, and pursuant to the terms established, a "buy-out fee"
with respect to the purchase of some or all of the Cassettes leased pursuant to
this Agreement and offered for sale by Rentrak at the end of the lease term,
which shall not exceed two years. Retailer must either purchase such Cassettes
pursuant to the terms provided, if any, or return the Cassettes to Rentrak,
unless other instructions for disposal of the Cassettes are provided to
Retailer.
7. Retailer shall pay Rentrak its then current monthly access/users fee as
billed by Rentrak. Such fee is currently $36 per Retail Location. Fees are
subject to change without notice. In the event Retailer elects to communicate
for all of its locations from one central Host Computer, Retailer shall be
responsible for paying all costs incurred to deliver the data to Rentrak on a
daily basis in a form acceptable to Rentrak.
8. Retailer shall maintain insurance on all Cassettes in an amount of at
least equal to fifty percent (50%) of each Cassette's then current
manufacturer's suggested retail price ("Replacement Value"). Retailer shall pay
to Rentrak the Replacement Value for all Cassettes which are lost, stolen or
destroyed subsequent to delivery to Retailer. The Replacement Value shall be
paid to Rentrak immediately upon the destruction, loss or theft of a Cassette.
Cassettes discovered missing in the ordinary course of business are to be
recorded and paid for when discovered as if they had been sold to the public.
9. In the event Retailer receives defective Cassettes from Rentrak, it
may, within thirty (30) days or receipt, return them freight prepaid to Rentrak.
Rentrak will, at its election, replace the Cassettes, billing Retailer the
handling fee per Cassette and/or after determining that the defect was not
Retailer or consumer related, issue credit for the initial handling fee. In no
event will Rentrak be otherwise liable for such Cassettes or any loss of any
nature caused thereby. Defective Cassettes not delivered to Rentrak within
thirty (30) days of receipt may not be returned for replacement or credit.
10. Prior to Rentrak's approval of shipments to Retailer, Retailer shall
demonstrate to Rentrak's sole satisfaction that it has in operation a
comprehensive inventory tracking system which is able, on a demand basis
(meaning immediately upon Rentrak's request) to produce reports detailing the
information desired by Rentrak on a per Cassette basis and in a format
acceptable to Rentrak. Retailer agrees that Rentrak and/or any Program
Suppliers may employ shopping services and may, without prior notice to
Retailer, conduct during normal business hours, periodic audits of Retailer's
business operation and records to verify compliance with the terms of this
Agreement. Within twenty-four (24) hours of Rentrak's request, Retailer will
deliver to Rentrak at its principal office (or if requested by Rentrak, to its
on-site auditor) a list of every title leased pursuant to this Agreement, the
number of Cassettes of each leased title, the location of each Cassette,
including a list of the customers to whom Cassettes are then on rental, and the
location from which each Cassette was rented. Retailer agrees to pay the higher
of $2,000 multiplied by the number of Retail Locations, or actual costs to
conduct an audit in the event that an audit or shopper's report indicates any
breach of this Agreement.
In addition, Retailer agrees to pay Rentrak all costs associated with
processing, by Rentrak or any Program Supplier, rentals and/or sales of
cassettes, if any, not properly transmitted or accounted for, together with
liquidated damages in an amount equal to the manufacturer's suggested retail
price published by Program Supplier at the time of distribution to the Retailer
("Retail Price") for each and every Cassette not at the Retail Location, or
properly rented out or properly sold at the time of the audit. Retailer may
not return Cassettes which were missing at the audit, in satisfaction of the
liquidated damages due under this paragraph. The liquidated damages may be
assessed by Rentrak against the Retailer, if, in Rentrak's or any Program
Supplier's sole discretion, the breach is intentional. This Agreement may be
immediately terminated by Rentrak prior to the Termination Date, defined in
accordance with paragraph 16 herein, if any breach of this Agreement is
discovered by Rentrak or any Program Supplier at an audit of the Retail
Location.
11. As between Retailer and Rentrak, Retailer acknowledges that Rentrak
owns the RPM and that the RPM is proprietary to and a valuable asset of Rentrak
and that any unauthorized use (as defined herein) will cause Rentrak irreparable
harm and loss. Retailer agrees: (i) not to adapt, duplicate, copy, recreate,
and/or assimilate the RPM for use by Retailer or any third party; and (ii) to
exercise the highest degree of care in safeguarding the RPM against loss, theft,
or inadvertent or purposeful transfer or disclosure of the RPM to any third
party. Any acts inconsistent with the above shall constitute an unauthorized
use. In the event of any unauthorized use of the RPM by Retailer, Rentrak shall
have the right of specific performance of Retailer's obligations pursuant to
this paragraph 11 in addition to all other rights and remedies available to
Rentrak in either law or equity.
12. Retailer acknowledges that it is imperative that Program Suppliers,
other customers of Rentrak, the parties to this Agreement, the titles involved,
the reporting system established by Rentrak and any obligations of Retailer
pursuant to the Agreement remain confidential. Retailer agrees that during the
term of this Agreement and all times thereafter, it will not disclose to any
individual or entity (including but not limited to, business associates, friends
or relatives), the participants in PPT, the titles offered pursuant to this
Agreement, the reporting system, or any obligations of Retailer pursuant to this
Agreement. Notwithstanding the foregoing, Retailer may reveal this Agreement to
professional advisors for purposes of providing Retailer with advice regarding
execution of the Agreement, Retailer's obligations hereunder, or the performance
of Retailer's obligations pursuant to federal, state or local laws. Retailer
shall inform any such professional advisor of this confidentiality provision.
13. "Rentrak", "PPT", "Pay-Per-Transaction", "Ontrak" and "BudgetMaker"
are registered or pending trademarks of Rentrak (hereinafter collectively the
"Trademarks"). Retailer acknowledges and agrees that Rentrak is the exclusive
owner of the Trademarks and all goodwill associated therewith and that Retailer
is in no way authorized to use any of the Trademarks. Retailer further
acknowledges and agrees that any unauthorized use of the Trademarks is and shall
be deemed to be an infringement of the rights of Rentrak. Without limiting the
generality of the foregoing, Retailer shall not use any of the Trademarks as
part of Retailer's corporate, partnership, trade or other legal name of any
corporation, partnership or other entity in which the Retailer has a direct or
indirect interest, nor shall Retailer hold out or otherwise employ any of the
Trademarks to perform any activity, nor to incur any obligation or indebtedness
in such manner as could reasonably result in making Rentrak liable therefor.
Retailer shall not during the term of this Agreement, and after termination or
expiration of this Agreement for any reason whatsoever, dispute or contest for
any reason whatsoever, directly or indirectly, the validity, ownership or
enforceability of any of the Trademarks, nor directly or indirectly attempt to
dilute the value of the goodwill attached to the Trademarks, nor counsel,
procure or assist anyone else to do any of the foregoing.
14. During the term of this Agreement, Retailer shall obtain all its leased
Cassettes exclusively from Rentrak and for this period and for a period of two
(2) years after the term of this Agreement Retailer shall not obtain Cassettes
from any other source by lease, consignment, revenue sharing arrangement, or any
other manner which competes with, or is substantially similar to PPT, except
that during the two (2) year period after the term of this Agreement Retailer
may obtain Cassettes from a currently operating revenue sharing business on a
title by title basis if Retailer presents a competitive written offer from such
currently operating revenue sharing company on each title and Rentrak fails or
refuses to meet the terms of such offer. Notwithstanding the above, Retailer has
the absolute right in its sole discretion to purchase Cassettes from any source.
15. Upon termination of a title's lease period, Retailer shall cause to be
delivered to Rentrak within fifteen (15) days, all Cassettes thereof not validly
purchased or otherwise properly disposed as provided herein. The returned
Cassettes shall be rewound, in good condition (normal wear and tear accepted)
and shipped in their original packaging. The term "normal wear and tear" is
construed to allow Retailer to return manufacturer's defectives and customer
2
<PAGE>
defectives. The term "original packaging" shall be construed to include
"cut-box" packaging or with Retailer's labels affixed. Retailer shall ship the
Cassettes with all shipping and postage prepaid.
16. This Agreement shall expire on December 31, 2009 ("Termination Date"),
unless terminated prior thereto as provided herein.
a) This Agreement may be terminated by Rentrak, prior to the Termination
Date, by notice of termination to the Retailer.
b) Upon a breach by Retailer of any provision of this Agreement, any
addendum to this Agreement, or nay other agreement between Retailer and Rentrak,
Rentrak may in its sole discretion: (i) terminate this Agreement and demand
return of all Cassettes leased pursuant hereto; (ii) suspend all Retailer's
rights hereunder, including ordering privileges, until thirty (30) days after
such default has been cured; or (iii) in the event Retailer's breach of this
Agreement consists of ordering quantities of Cassettes in excess of those
required to meet anticipated rental demand (a determination that such breach has
occurred being in Rentrak's sole discretion) then Rentrak may, without notice to
Retailer, reduce Retailer's orders of Cassettes to amounts Rentrak deems
appropriate.
c) Retailer may terminate this Agreement if Rentrak has failed to cure, or
begun to cure, an event of default by Rentrak for which Retailer has given
Rentrak thirty (30) days written notice.
d) Upon termination of this Agreement, Retailer shall within ten (10) days
deliver to Rentrak, freight prepaid, all Cassettes leased hereunder that have
not been validly purchased or otherwise properly disposed prior to termination.
The returned Cassettes shall be rewound in good condition (normal wear and tear
accepted) and shipped in their original packaging. Retailer shall pay the then
current manufacturer's suggested retail price for any Cassettes not returned
to Rentrak within the time allowed herein, or any extension of such time granted
in writing by Rentrak, and shall pay all liabilities remaining due to Rentrak
within seven (7) days of termination. Under no circumstances shall Retailer be
entitled to or receive any refund or credit for any processing or ongoing fees
paid to Rentrak in connection with this Agreement, nor will Rentrak be held
liable for any costs associated with the Agreement incurred by Retailer.
e) If Retailer's breach consists of failure to report rental or sales
transactions, Retailer agrees to pay liquidated damages for lost revenue to
Rentrak of $.0822 per Cassette multiplied by the number of days that Retailer
fails to report to Rentrak, together with a late fee equivalent to five percent
(5%) of Retailer's average weekly revenues during the six (6) month period
preceding Retailer's failure to report rental or sales transactions multiplied
by the number of weeks, or any part thereof, Retailer has failed to report.
17. Rentrak has established, and will continue to establish from time to
time, minimum acceptable net worth requirements for Retailers and minimum
acceptable monthly rental revenues. In the event Retailer does not meet
Rentrak's established minimum acceptable net worth requirements, Retailer shall
provide Rentrak with a personal guarantee(s) satisfactory to Rentrak. In the
event Retailer does not meet Rentrak's minimum monthly rental revenue
requirements, Rentrak shall have the right, in its sole discretion, to terminate
this Agreement pursuant to paragraph 16, hereof.
18. Retailer, and the shareholders of Retailer, if it is a corporation, and
the partners of Retailer, if it is a partnership, shall not voluntarily or
involuntarily sell, transfer, assign, encumber, give, lease or sublease
(hereinafter collectively referred to as "Transfer") the whole or any part of
this Agreement or the Cassettes leased pursuant hereto without Rentrak's prior
written consent. Any attempted Transfer, voluntary or involuntary, without
Rentrak's prior written consent shall be a default under the terms of this
Agreement. Approval of any Transfer shall be in Rentrak's sole discretion and
will be subject to certain requirements, terms, and conditions which may be
established by Rentrak from time to time.
19. Retailer may, during the term if this Agreement, desire to conduct
centralized sales of Cassettes leased hereunder. Retailer shall have the right
to move Cassettes from a Retail Location for the purpose of conducting a sale
from a centralized location. Such removal must not last longer than five (5)
days and must be tracked by Retailer's previously approved inventory system on a
same day basis. A Cassette may not be moved for the purpose of a centralized
sale more than five (5) times during the lease term. With respect to any
Cassettes sold, such sales must be processed through the appropriate Retail
Location(s)'s POS System within seventy-two (72) hours of any sale.
20. Retailer may, during the term of this Agreement, desire to relocate one
or more of its Retail Locations. Prior to an during such relocation, Retailer
must comply with all of the following:
(a) Retailer must deliver to Rentrak written notice of the intended more at
least fifteen (15) days prior to the Cassettes leased pursuant hereto being not
available for rental as a result of such move;
(b) The period during which the Cassettes leased pursuant hereto are not
available for rental to the public must not exceed ten (10) days, and there may
not be more than one weekend (5PM Friday to the close of business on Sunday or
12:00 a.m. Sunday, whichever occurs later) during such ten (10) day period; and
(c) Retailer must comply with all other requirements which Rentrak may
impose with respect to the relocation of a Retail Location.
21. All notices, consents and approvals ("Notice") permitted or required to
be given under this Agreement shall be in writing and shall be deemed to be
sufficiently and duly given if set forth in writing and delivered personally or,
in the case of Retailer, if left with an adult person working at Retailer's
business, or, in the case of either party, if sent by prepaid registered or
certified mail or transmitted by telecopier or other form of recorded
communication tested prior to transmission, if to Rentrak addressed as follows:
Rentrak Corporation
7227 N.E. 55th Avenue, P.O. Box 18888, Portland, Oregon 97218
Attention: Legal Department
and if to Retailer, [enter Retailer's address]
Lee Video City, Inc.
- - - - ----------------------------------------------
6851 McDivitt Drive, Bakersfield, CA
- - - - ----------------------------------------------
93313 Attn: Legal Department
- - - - ----------------------------------------------
Any Notice so given or made shall be deemed to have been given or made and
received on the date of delivery or on the third (3rd) business day following
the day of mailing of the same, or on the day of transmission by telecopier or
other form of recorded communication service of the same, as the case may be.
Any party from time to time by Notice in writing given pursuant to the terms of
this Agreement may change its address for the purpose of this Agreement. In the
event of actual or threatened disruption of postal service, Notice shall be
delivered or sent by telecopier or other form of recorded communication.
22. Retailer acknowledges and agrees that no representation or warranty has
been made by Rentrak, its directors, officers, employees, shareholders, agents
or contractors regarding: (i) the effect upon Retailer's revenues or profits of
participation in PPT; or (ii) the Program Suppliers or tiles involved, or to be
involved, in PPT. Retailer acknowledges that Rentrak's services under this
Agreement are not, in any way or within any geographical area, exclusive to
Retailer. Retailer acknowledges and agrees that he has not relied upon any
representation or warranty except those received in writing and contained herein
and is relying solely upon his own investigation and that of his own advisors.
Further Retailer acknowledges: (1) that PPT was created and promoted by Rentrak
not by any Program Supplier to Rentrak; (2) that the terms of participation in
PPT, to the extent that compliance with them is required, are prescribed by
Rentrak, not by any Program Supplier; (3) that PPT is a system of distribution
of Cassettes to Retailer, and not a marketing plan or system for distribution to
the ultimate user; (4) that there is no substantial association between the
operation of Retailer's business and any trademark, service mark, trade name,
logotype, advertising or other commercial symbol designating Rentrak, any
Program Supplier or PPT; (5) that to the extent Retailer may use promotional
literature that contains a trademark, service mark, trade name, logotype,
advertising or other commercial symbol of a Program Supplier, such use is merely
to advertise the Cassettes available whether or not acquired by Retailer
as part of PPT and does not designate in any way PPT or the fact that any entity
is involved in or related to PPT; (6) that nothing in this Agreement, the
Rentrak Profit Maker Manual, or in PPT affects how Retailer markets or promotes
Cassettes to its customers; (7) that nothing in the reference guide entitled
"Strategies for Success with PPT" which will be provided to each Retailer
affects how Retailer markets or promotes Cassettes to its customers and that
ideas therein are suggestions only, not requirements; and (8) to the extent that
this Agreement, or Rentrak through this Agreement, imposes any requirements on
how Retailer conducts its business, such requirements are necessary, and no
broader than necessary, to allow Rentrak to monitor Retailer's obligations under
this Agreement.
23. If any fees or costs are incurred to enforce this Agreement, or if any
suit or action is brought to enforce any provision of this Agreement, or for
damages for the breach of any of the terms of this Agreements, the prevailing
party shall be entitled, at trial and on appeal, if any, to reasonable attorney
fees as awarded by the court. This Agreement is and shall be deemed accepted in
Oregon and interpreted and enforced in accordance with the laws of the State of
Oregon applicable to contracts to be made and to be performed entirely within
this state. The parties hereto agree that any suite, dispute, or action brought
pursuant to this Agreement shall be brought in the Circuit or District Court for
the County of Multnomah, State of Oregon, or the Federal Court for the District
of Oregon.
24. In the event that Retailer brings an action or asserts any claim
against Rentrak for damages arising out of this Agreement or from Retailer
entering into this Agreement with Rentrak, Retailer agrees to limit any damages
claimed to no more than the following percentage of the processing fee paid by
the Retailer: 1st day through and including the 91st day following date of
Rentrak Agreement - 100%; 92nd day through and including the 183rd day following
date of Rentrak Agreement - 75%; 184th day through and including the 275th day
following date of Rentrak Agreement - 50%; 275th day through each and every day
thereafter following date of Rentrak Agreement - 10%.
25. Should any term or provision of this Agreement be held to be
unenforceable as illegal or against public policy, that term shall be considered
served from the rest of this Agreement and the remaining portions of this
Agreement shall not be affected. The rights and obligations of Retailer and
Rentrak shall be construed and determined, if possible, as if this Agreement did
not contain the provision or term held to be invalid. This Agreement, as
3
<PAGE>
modified from time to time by authorized Rentrak materials or written addenda,
constitutes the entire Agreement and understanding of the parties with respect
to the subject matter of this Agreement. Nothing in this Agreement creates a
franchise relationship, fiduciary relationship, joint venture, or partnership
relationship.
26. Retailer certifies that the information furnished to Rentrak, including
any financial statements furnished herewith and the "credit information"
attached hereto, is true and correct. Retailer authorizes Rentrak to check
Retailer's credit history and trade and bank references for customary credit
information, to confirm the information contained herein and to release
information to other creditors regarding Applicant's credit experience with
Rentrak. Retailer authorizes any individuals or entities listed in the attached
credit information to provide information regarding Retailer's credit history to
Rentrak.
27. This Agreement will be guaranteed by the Guarantors listed below. Each
Guarantor agrees that if, now or later:
a) Retailer shall be or become insolvent: and
b) Any obligations under this Agreement shall not at all times, until paid
or performed, be fully secured by collateral pledged by Retailer. Guarantor
hereby forever waives and relinquishes in favor of Rentrak and Retailer and
their respective successors, any claim or right to payment Guarantor may now
have or later have or acquire against Retailer, by subrogation or otherwise, so
that at no time shall Guarantor be or become a "creditor" of Retailer within the
meaning of U.S.C.A (S) 547(b), or any successor provision of the Bankruptcy
Code.
4
<PAGE>
FIRST ADDENDUM TO RENTRAK
NATIONAL ACCOUNT AGREEMENT
--------------------------
This ADDENDUM is made as of this 16 day of December, 1994, by and
among Rentrak Corporation, an Oregon corporation, ("Rentrak"), Lee Video City,
Inc. ("Retailer"), a California corporation with its principal place of business
located at 6851 McDivitt Street, Suite A, Bakersfield, California 93313, and
Robert Y. Lee, the majority shareholder of Retailer (the "Shareholder").
RECITALS
A. Retailer desires to participate in Rentrak's Pay-Per-Transaction ("PPT")
System.
B. Rentrak and Retailer have agreed that Retailer shall enter into a Rentrak
National Account Agreement ("PPT Agreement"), along with an addendum
(this "Addendum") thereto supplementing and amending the PPT Agreement,
to evidence the terms and conditions, among other things, of Retailer's
video leasing arrangement under PPT with Rentrak.
C. It is the parties' intention that the terms and conditions of the PPT
Agreement together with this Addendum (as such may be amended and
supplemented from time to time) and Retailer's obligations thereunder and
hereunder shall apply to and be legally binding upon all Retail Locations
(as defined herein) owned, managed, operated or controlled by Retailer,
the Shareholder, all of their Affiliates (as such term is defined in
paragraph 3 below) and their permitted legal representatives, successors
and assigns.
D. This Addendum supplements and amends the PPT Agreement that Rentrak,
Retailer, and the Shareholder shall sign as of this same date.
AGREEMENT
Accordingly, in consideration of the mutual promises and
agreements contained herein and in the PPT Agreement, dated December 16, 1994,
entered into between the parties hereto, the parties agree as follows:
1. Effect of Addendum. This Addendum shall only be effective upon
------------------
execution by Rentrak, Retailer and the Shareholder of the PPT
Agreement and execution by Rentrak, Retailer and the Shareholder of
this Addendum. Unless otherwise stated herein, to the extent any
term or provision of this Addendum is inconsistent with or in
conflict with any term of the PPT Agreement, this Addendum shall
supersede and control any such provision in the PPT Agreement.
Unless
1
<PAGE>
otherwise modified herein, all terms and conditions contained in the PPT
Agreement shall remain in full force and effect.
2. Definitions. Any capitalized term used herein that is not otherwise
-----------
defined herein shall have the meaning set forth in the PPT Agreement.
3. Amendments to PPT Agreement. The PPT Agreement shall be amended as
---------------------------
follows:
INSTRUCTIONS - Processing fees shall be revised as follows:
------------
All initial processing fees to participate in PPT shall be waived for all
of Retailers current Retail Locations and all those new Retail Locations opened
during the term of this Agreement.
RECITALS - The first paragraph of the recitals section of the PPT
--------
Agreement is amended in its entirety and shall read as follows:
Retailer currently owns and operates a chain of sixteen (16) retail
stores identified on Exhibit A. In addition, Retailer operates the
central office (Office) and/or warehouse facility (Warehouse) listed
on Exhibit A. This Agreement shall apply to and be legally binding
upon (i) all current retail stores of Retailer that presently offer
the rental or sale of video cassettes or similar media, all of which
are listed on Exhibit A, (ii) all future retail stores owned,
operated, managed, controlled or acquired by Retailer and/or the
Shareholder, their successors and assigns or any of Retailer and/or
the Shareholder's Affiliates (as defined below in this paragraph),
that offer or otherwise make available the rental or sale of video
cassettes or similar media, including, without limitation, any
entity that is merged or consolidated with or into Retailer, and
(iii) any other retail stores that are owned, operated, managed or
controlled by any new businesses developed by Shareholder or
Retailer that offer or otherwise make available video cassettes or
similar media (collectively, the "Retail Locations"). An "Affiliate"
shall mean any individual or entity (a) directly or indirectly
controlling, controlled by, or under common control with, Retailer
or Shareholder; (b) directly or indirectly owning or holding twenty-
five percent (25%) or more of an equity interest in Retailer or (c)
twenty-five percent (25%) or more of whose voting stock or other
equity interest is directly or indirectly owned or held by Retailer
or Shareholder; provided, however, that Rentrak and any subsidiary
-----------------
of Rentrak shall not be deemed an Affiliate of Retailer.
"Affiliates" shall mean more than one Affiliate.
2
<PAGE>
SECTION 1 - Section 1 of the PPT Agreement is amended in its entirety and shall
- - - - ---------
read:
1. Subject to Section 5 below, Rentrak shall ship to Retailer prerecorded
Cassettes in such quantities and at such times as Program Suppliers (as defined
in Section 4 in this Agreement) make available to the PPT System and which
Retailer orders. All Cassettes will be shipped "FOB Destination" to Retailer's
Warehouse or at Retailer's request, to each Retail Location. Subject to Section
5 below, Retailer's last order accepted and confirmed by Rentrak shall be final.
Rentrak will use its best efforts to provide delivery of Cassettes to Retailer
on or before the street date. If, for any reason, Retailer's orders cannot be
shipped, Rentrak or Retailer may cancel the unfilled order upon notice and
without further liability to the other party.
SECTION 2 - The first line of Section 2 of the PPT Agreement is amended in its
- - - - ---------
entirety and shall read:
2. Retailer agrees to participate in the PPT System on the terms and
conditions established by this Agreement, any Rentrak PPT System Manual
delivered to Retailer (including any amendments or modifications thereto) and
any written notices delivered to Retailer by Rentrak from time to time;
provided, however, that the First Addendum to the
- - - - -------- -------
Agreement, entered into between Rentrak, Retailer and the Shareholder on the
same date as this Agreement ("Addendum"), shall be controlling to the extent
that any term or provision in this Agreement is inconsistent with the Addendum.
On or before the date of this Agreement, Retailer shall have, and the
Shareholder agrees to cause Retailer to have, all of its current Retail
Locations identified in Exhibit A to be fin full compliance with the terms,
procedures, and requirements, including but not limited to, specifications for
computer hardware and software, contained in this Agreement, as amended by the
Addendum. All future Retail Locations shall be in full compliance with this
Agreement, as amended by the Addendum, including but not limited to, being
active on the PPT System and placing their first order for Cassettes under the
PPT System, upon opening for business to the general public if the Retail
Location is established internally through direct ownership, franchise or
otherwise by Retailer or Shareholder, or if the new Retail Location is acquired,
within thirty (30) days of the closing date of the acquisition. Retailer agrees
to:
SECTION 2(a) - Paragraph (a) of Section 2 of the PPT Agreement is amended in its
entirety and shall read:
3
<PAGE>
a) Use Rentrak-approved computer hardware and Point of Sale ("POS") system
software. Upon the execution of this Agreement, Retailer shall have caused its
present Bonafide Management Systems, Inc. software used at any of its Retail
Locations to interface with and be approved by Rentrak for the PPT System.
Retailer shall, prior to ordering Cassettes, complete, to Rentrak's sole
satisfaction a test of Retailer's computer system and communication ability.
Retailer shall also install Rentrak's proprietary Rentrak Profit Maker Software
("RPM") on its computer system (which inclusive with the hardware, RPM and POS
system software are collectively referred to as the "POS System"). The RPM shall
at all times remain the exclusive property of Rentrak. Each Retail Location
listed on Exhibit A shall be active and in communication with Rentrak and shall
have placed its first order for Cassettes under the PPT System on or before the
date of this Agreement, all in strict compliance with Rentrak's specifications
and the terms and conditions of this Agreement (collectively, the "PPT
Requirement"). Failure by Retailer to satisfy the PPT Requirement shall be
deemed to be a breach of this Agreement. In addition to, and not in lieu of any
other damages suffered by Rentrak, the parties agree that for each calendar day
that any Retail Location remains inactive, the term of this Agreement and all of
the obligations hereunder, including all of the ordering obligations provided in
Section 5 hereunder shall be irrevocably and automatically extended seven (7)
additional days for each day that any of the Retail Locations listed on Exhibit
A are at any time after December 16, 1994 in "inactive" status with respect to
the PPT System, or any future Retail Locations are in "inactive" status with
respect to the PPT System after the time permitted in Section 2 of this
Agreement. The term "inactive" shall mean that the Retail Location is not a
participant in the PPT System because it has not placed its first order for
Cassettes within the time period designated in Section 2, has failed to install
and/or operate the POS Software, fails to meet Rentrak's computer interface
specifications or has otherwise failed to comply with the terms of this
Agreement. For example, by way of illustration only, if 5 Retail Locations were
inactive on a given day, the term of this Agreement, including, but not limited
to the purchase obligations in Section 5 of the Addendum would be automatically
extended 35 days for each day such Retail Locations remained inactive. Retailer
shall be responsible for all costs relating to computer hardware and software
used in connection with the Rentrak PPT System.
SECTION 2(b) - Paragraph (b) of Section 2 of the PPT Agreement is amended in its
- - - - ------------
entirety and shall read:
b) Timely remit all amounts due Rentrak. Rentrak and Retailer agree that any
"handling fee," "transaction fee," "sell-through fee," "end of term buy-out
fee" or other fees payable with respect to any Cassettes leased pursuant hereto
shall be payable one hundred eighty (180) days after the date of Rentrak's
invoice for such fee; provided, however, that
-----------------
4
<PAGE>
in the event Retailer does not make timely remittance of any and all amounts due
Rentrak, in addition to Rentrak's other rights hereunder, under any other
agreement between Rentrak and Retailer and under applicable law, Rentrak may
stop shipment of Cassettes to Retailer or ship Cassettes on a COD basis with the
amount due for such Cassettes to include (i) Rentrak's reasonable estimate of
future payments likely to be due with respect thereto and (ii) an amount
covering a portion, determined in Rentrak's sole discretion, of the amounts past
due Rentrak. Retailer shall pay interest of one percent (1%) per month on all
accounts receivable not paid pursuant to the terms of this Agreement and the
Addendum.
SECTION 5 - Section 5 of the PPT Agreement is amended in its entirety as
- - - - ---------
follows:
(a) For a period of ten (10) years from the date of this Agreement and the
Addendum, Retailer and its permitted legal representatives, successors and
assigns shall order and obtain from Rentrak and Retailer shall cause its
Affiliates to order and obtain from Rentrak for all Retail Locations, and
Shareholder shall cause Retailer and such other persons or entities that own,
operate, manage or control such Retail Locations to order, all of such Retail
Locations' requirements of cassettes of all rental priced video titles or other
media released to or otherwise made available under the PPT System, in full
compliance with all terms and conditions contained in this Agreement as modified
and supplemented by the Addendum and all Program Supplier or Rentrak established
minimum and maximum ordering limitations and/or requirements and monthly
communication charge requirements. "Rental priced" Cassettes shall mean any and
all Cassettes that have a manufacturer's suggested retail price of $35 or more.
With regard to ordering limitations imposed by certain Program Suppliers, if
Retailer elects to carry a particular title in a Retail Location, Retailer shall
be required to order a given title released by such Program Suppliers for each
Retail Location of similar or larger size if Retailer orders the same title for
one Retail Location (i.e. if Retail Location A, a store with average monthly
revenues of $10,000 from the rental and sale of video cassettes orders a certain
title from a certain Program Supplier, Retailer may be required to order the
same title for all of Retailer's Retail Locations of similar or larger size to
Retail Location A). In the event Rentrak or any of its subsidiaries offers any
non-video Cassettes through its PPT System (such as, for example, CDROM, SEGA,
Nintendo or other programming, including but not limited to interactive media
software), Retailer and Shareholder each agrees for a period of ten (10) years
from the date of this Agreement to cause all Retail Locations to order and
purchase all of their requirements of such non-video Cassettes exclusively from
Rentrak; provided, however, that, Retailer shall not be required to order a
-----------------
particular non-video Cassette from Rentrak if Retailer obtains such product from
a third party non-affiliated provider of such
5
<PAGE>
product for a price that matches or is more favorable than the price offered by
Rentrak. Each calendar quarter Rentrak shall provide Retailer with a price list
for its non-video Cassettes. As long as Rentrak's prices are better than the
prices offered by third party unaffiliated suppliers of such product, Retailer
shall order all of its requirements of such product exclusively from Rentrak
until it receives an equal or lower priced offer (a "Competing Offer"). Upon
receiving such an offer, Retailer shall notify Rentrak in writing of such offer
and provide sufficient evidence of the Competing Offer to Rentrak. Rentrak shall
have 24 hours upon receipt of the notice of Competing Offer to offer a price
that is lower than the one offered by the third party unaffiliated supplier.
Anytime Rentrak fails to offer a more favorable price and Retailer purchases
non-video Cassettes from another source, Retailer shall provide Rentrak with a
true copy of the invoice for such product upon the request of Rentrak.
(b) Section 3 of this Agreement shall not in any way limit or restrict
Retailer's obligations pursuant to Section 5(a) of the Addendum. In the event
Retailer elects not to obtain a particular rental priced title from a Program
Supplier, Retailer shall not obtain such title from any source other than
Rentrak.
(c) If a Retailer rents cassettes or other media to the public at a store
which was designated in Retailer's order as a Retail Location with respect to
that title, and which were obtained by means other than pursuant to this
Agreement and the Addendum, and are of the same title as Cassettes which
Retailer has also obtained under this Agreement and the Addendum, or could have
been so obtained, Retailer agrees that rentals of all cassettes or other media
of such title at that Retail Location, regardless of how obtained, shall be
reflected, reported and revenue sharing paid as if they were obtained under this
Agreement and the Addendum. With respect to Cassettes leased hereunder and under
the Addendum, Retailer may not purchase the cassettes or other media of such
title and use them as rental inventory, remove the title from rental
availability except as provided herein and in the Addendum, or take any other
steps to deprive Rentrak of all available revenue under the established terms
for the title's lease term except to the extent that, once "used sell-through"
is permitted for a particular title by its terms, Retailer may remove Cassettes
no longer required for rental use to Retailer's Warehouse for subsequent sale at
non-PPT locations by recording the same as a sale and making the required
remittance to Rentrak upon transfer.
SECTION 10 - The first paragraph of Section 10 is amended to require Rentrak to
give Retailer not less than twenty-four (24) hours
------------------------------------
notice of its request for a list of every title leased pursuant to this
Agreement, the number of cassettes of each leased title, the location of each
cassette, including a list of customers to whom cassettes are then on rental,
and the location from which each cassette was rented.
6
<PAGE>
SECTION 12 - Section 12 of the PPT Agreement is amended in its entirety and
shall read as follows:
Shareholder and Retailer acknowledges that it is imperative that Program
Suppliers, other customers of Rentrak, the parties to this Agreement and the
Addendum, the titles involved, the reporting system established by Rentrak, any
obligations of Retailer and Shareholder pursuant to this Agreement and the
Addendum, and all other aspects of execution, delivery and performance of this
Agreement and the Addendum, including the terms thereof, remain confidential.
Retailer and Shareholder hereby each agrees that during the term of this
Agreement and the Addendum and for twenty-four (24) months thereafter, it will
not disclose to any individual or entity (including but not limited to, business
associates, friends or relatives), any of the terms or conditions of this
Agreement and the Addendum or any of the participants in the PPT System, the
titles offered pursuant to this Agreement and the Addendum, the reporting
system, or any obligations of Retailer and Rentrak pursuant to this Agreement
and the Addendum, unless such disclosure is required by court order, federal or
state securities laws or franchising laws, or to professional advisors for
purposes of obtaining advice regarding execution, delivery and performance of
this Agreement and the Addendum, their obligations hereunder or the performance
of their obligations pursuant to federal, state and local laws. Retailer shall
inform such professional advisor of this confidentiality provision and obtain
from such professional advisor an agreement to comply with the terms hereof
(such agreement to be in a form satisfactory to Rentrak). With respect to
disclosures made under the securities laws, Retailer agrees to exercise its best
efforts to maintain the confidentiality of this Agreement, including its terms
by cooperating with Rentrak and seeking confidential treatment of the
contemplated disclosures from the SEC, if requested by Rentrak. [Retailer (and
its officers and directors) agree to endorse Rentrak and make positive
statements concerning Rentrak and the PPT System and shall not in any way
disparage Rentrak or the PPT System to the press, trade, public or anyone else,
except as may be required by applicable law.] These obligations contained in
this Section 12 shall survive the expiration and termination of this Agreement
and the Addendum and continue thereafter for a period of twenty-four (24)
months. In the event of an unauthorized disclosure of any of the confidential
terms stated in this Section 12, the terms of this Agreement may, in Rentrak's
sole discretion, be extended by a period of five (5) years. Notwithstanding the
foregoing, Retailer hereby agrees that Retailer (and its officers and directors)
shall confirm the existence of this Agreement at such time as requested by
Rentrak in writing.
7
<PAGE>
SECTION 14 - Section 14 of the PPT Agreement is amended in its entirety and
----------
shall read as follows:
In addition and subject to the obligations of Retailer, the Shareholder and
their Affiliates, and their permitted legal representatives, successors,
and assigns, set forth in Section 5 and Section 31 of this Agreement,
Retailer (a) during the term of this Agreement and this Addendum, shall
obtain all of their leased Cassettes for the Retail Locations exclusively
from Rentrak and shall not obtain Cassettes from any other source by lease,
consignment, revenue sharing arrangement, or any other manner which
competes with, or is substantially similar to PPT and (b) shall have the
absolute right in their sole discretion to purchase video cassettes and
other media from any source.
SECTION 16 - The following paragraph shall be added to Section 16 of the
----------
PPT Agreement to read in its entirety as follows:
f) Upon expiration or termination of this Agreement and the Addendum for
any reason, Rentrak and Retailer agree that they shall not make any
derogatory, negative, or otherwise disparaging remarks of any nature
whatsoever about each other.
4. Additional Terms of the PPT Agreement. The following additional terms
-------------------------------------
shall be added to the PPT Agreement:
SECTION 28 - Dissemination of Data. Rentrak may use financial and business
---------- ---------------------
data which it acquires from Retailer or its representatives including
revenue and quantities, hereinafter "Data", for the purpose of promoting
its PPT concept. Rentrak will not identify Retailer in the use of such
data. Rentrak will exercise reasonable efforts to protect Retailer's
competitive advantage of owning this Data. Retailer will use its best
efforts to promote the PPT concept and assist Rentrak in its relationship
with other retailers and movie studios as long as by doing so Retailer
would not jeopardize its competitive advantage. Rentrak may use quotes and
other testimonials given by Retailer to promote PPT. Prior to the use of
such data or quotes by Rentrak or its representatives, Rentrak will obtain
Retailer's approval, which shall not be unreasonably withheld.
SECTION 29 - Future Stores. Subject to the second sentence of this Section
---------- -------------
29, during the term of this Agreement as modified and supplemented by the
Addendum, all existing and future Retail Locations owned, operated,
managed, controlled or acquired by Retailer (including, without limitation,
all retail stores of any other entity that is merged or consolidated with
or into Retailer that offer or make available the sale or rental of video
cassettes or similar media), the Shareholder, their Affiliates and their
successors and assigns, shall, in the sole discretion of Rentrak, be
subject to and shall comply with (a) all of the terms and
8
<PAGE>
conditions set forth in this Agreement and the Addendum pertaining to Retailer
and the Retail Locations and Shareholder agrees to cause such Retail Locations
to be legally bound by the terms and conditions of this Agreement as modified
and supplemented by the Addendum, or (b) the terms of trade with regard to PPT
pursuant to existing agreements with Rentrak (the "Existing Agreement") then
applicable to the particular retailer and/or retail stores acquired by Retailer
(collectively, the "Acquired Retailer") or a particular retailer that acquires
Retailer or any of Retailer's Retail Locations (collectively, the "Acquiring
Retailer"). If the PPT terms of trade with Rentrak differ at any Acquired
Retailer or Acquiring Retailer, as the case may be, Rentrak may elect in its
sole discretion to (i) have the Existing Agreement continue to apply to the
Acquired Retailer or Acquiring Retailer, as the case may be, in accordance with
its terms, selectively on a store by store basis or storewide, and upon the
expiration of the Existing Agreement, the Acquired Retailer or Acquiring
Retailer, as the case may be, shall be subject to and shall comply with the
terms of this Agreement and Addendum for the remainder of its term, or (ii) have
the Acquired Retailer or Acquiring Retailer, as the case may be, assume and be
subject to and comply with the terms and conditions of this Agreement and
Addendum selectively on a store by store basis or storewide, in which event this
Agreement and Addendum shall control and supercede the Existing Agreement. Upon
the opening or acquisition of any Retail Location by the Shareholder or any
entity that is an Affiliate of the Shareholder, other than the Retailer, the
Shareholder agrees to execute or cause the person or entity that owns, operates
or manages the Retail Location to execute, this Agreement and the Addendum and
be legally bound to the terms thereof as though such Shareholder or Affiliate
was the Retailer. If as provided above, Rentrak elects to have an Acquiring
Retailer be subject to the terms of this Agreement and Addendum, Shareholder and
Retailer agree to cause any successor entity of Retailer through purchase of
assets, merger, consolidation, business combination or otherwise, to assume and
fully perform all obligations and agree to be legally bound by all terms and
conditions of this Agreement as amended and supplemented by the Addendum
pursuant to an Assumption Agreement, in form and substance reasonably
satisfactory to Rentrak.
SECTION 30 - Successors and Assigns. Subject to Rentrak's right in Section 29
- - - - ---------- ----------------------
to cause Acquired Retailers and Acquiring Retailers to remain subject to the
Existing Agreement, this Agreement and the Addendum shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
SECTION 31 - No Other Revenue Sharing. During the term of this Agreement,
- - - - ---------- ------------------------
as amended and supplemented by the Addendum (and any extensions hereof and
thereof), and for a period of two (2) years from the date of the termination or
expiration of this Agreement, as amended and supplemented by the Addendum,
Retailer, the Shareholder and their Affiliates shall not order for any Retail
9
<PAGE>
Location or other retail store or otherwise obtain from any source other than
Rentrak on a lease, consignment, revenue sharing or similar arrangement, any
prerecorded video titles whether on cassettes or other media. Retailer and the
Shareholder agree to cause all of their Affiliates and all of the Retail
Locations to comply with this Section 31.
SECTION 32 - Promotional Activity. The relationship between Rentrak and
- - - - ---------- --------------------
Retailer concerning its PPT activities shall be made public only at the
discretion of Rentrak. At Rentrak's request, Robert Y. Lee agrees to appear in
promotional advertisements, provided that the personal time commitment of
Robert Y. Lee to participate in such advertisements shall not exceed 24 hours
per year. Rentrak will pay all out-of-pocket costs associated with such
promotional activity.
SECTION 33 - Inventory. Rentrak shall have no obligation to ship Cassettes to
- - - - ---------- ---------
Retailer until Retailer until Retailer demonstrates to Rentrak's reasonable
satisfaction that Retailer has in operation a comprehensive inventory tracking
system which is able, on a demand basis (meaning immediately upon Rentrak's
request) to produce reports detailing the information desired by Rentrak on a
per video cassette basis in a format acceptable to Rentrak. Retailer shall not
shift or transfer any inventory of Cassettes between Retail Locations unless and
until Retailer establishes an inventory tracking system that is approved by
Rentrak in writing.
SECTION 34 - Press Release. Rentrak may in the exercise of its sole discretion
- - - - ---------- -------------
prepare and release a press release describing the transaction contemplated
herein and in the Stock Purchase Agreement.
SECTION 35 - Preservation of Business. For a term of ten (10) years from the
- - - - ---------- ------------------------
date of this Agreement, Retailer agrees to continue, and Shareholder agrees to
cause Retailer to continue, in the retail video business, including the rental
of Cassettes, with respect to all of the Retail Locations listed on Exhibit A.
SECTION 36 - Recitals as Part of Agreement. The recitals to this Addendum
- - - - ---------- -----------------------------
and the PPT Agreement are hereby incorporated into and made a legally binding
part of the PPT Agreement and Addendum.
SECTION 37 - Term of Agreement. Subject to being extended as provided in Section
- - - - ---------- -----------------
2(a) of the PPT Agreement as amended by this Addendum, Retailer's purchase
obligations pursuant to Section 5 of the PPT Agreement, shall continue for a
period of 10 years commencing on December 16, 1994 and ending on December 17,
2004, after which time the PPT Agreement may be terminated by Rentrak as
provided therein.
10
<PAGE>
SECTION 38 - Merger. Retailer shall not engage in a merger or any transfer
---------- ------
or sale of its assets outside of the ordinary course of business without
the prior written consent of Rentrak which consent shall not be
unreasonably withheld, provided however, for as long as any indebtedness
----------------
is outstanding or otherwise owed to Rentrak or any of its subsidiaries
including past due trade accounts, Rentrak may withhold its consent in
its sole discretion.
SECTION 39 - Termination Fee. Anything to the contrary set forth above
---------- ---------------
notwithstanding, in the event that Ron Berger ceases to be employed by
Rentrak and Retailer is acquired by or merges with another entity, and the
terms of that transaction require termination of the PPT Agreement before
its expiration date as set forth herein, Retailer may pay to Rentrak an
amount equal to .3% of the Annualized Trend Revenues (as defined below)
generated by Retailer's Retail Locations, prorated over the remainder of
the term of the PPT Agreement, as a termination fee. Upon Rentrak's receipt
of said termination fee, and any handling fees, transaction fees, sell-thru
fees, end of term buy-out fees, and any other fees owed to Rentrak under
the PPT Agreement as modified by this Addendum or pursuant to any other
agreement, the PPT Agreement and this Addendum shall terminate upon
payment, of such fees, and the parties shall be released of all further
obligations thereunder, except as set forth in Sections 12 and 31 which
provisions shall survive and continue as provided therein. Annualized Trend
Revenue shall be defined as the actual total gross revenue of the Retailer
for the previous calendar year, excluding sales tax, increased at the rate
of 15% per year for each year remaining under the term of the PPT Agreement
as modified by this Addendum. For purposes of computing Annualized Trend
Revenue, the year in which the termination is made shall be treated as a
full year for purposes of proration. For example, if Retailer had gross
revenues (excluding sales tax) of $100,000 for the previous calendar year
and termination was made as of September 30, 2003, the termination fee
would be $741.75 ($115,000 + $132,250 x .3%).
SECTION 40 - Key Main Life Insurance. During the term of this Agreement,
---------- -----------------------
the Company shall procure and maintain in full force and effect with all
premiums due fully paid, a key man life insurance policy insuring Robert Y.
Lee in the amount of $3 million, which policy shall name Rentrak as the
sole beneficiary. Proceeds from such policy shall be applied against any
indebtedness owed Rentrak by the Company and the surplus, if any, shall be
retained by Rentrak. A copy of such policy and evidence that all premiums
due have been fully paid shall be delivered to Rentrak on or before
December 30, 1994.
5. Counterparts. This Addendum may be executed in one or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute but one and the same instrument.
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Addendum to be
executed as of the day and year first written above.
RENTRAK: RENTRAK CORPORATION
By /s/Ron Berger
--------------------------
Ron Berger, President
RETAILER: LEE VIDEO CITY, INC.
By /s/Robert Y. Lee
-----------------------------
Robert Y. Lee, President
SHAREHOLDER: ROBERT Y. LEE
By /s/Robert Y. Lee
-----------------------------
Robert Y. Lee
12
<PAGE>
SECOND ADDENDUM TO RENTRAK
NATIONAL ACCOUNT AGREEMENT
THIS SECOND ADDENDUM is made as of this 24th day of August, 1995, between
Rentrak Corporation, an Oregon corporation ("Rentrak"), Lee Video City, Inc., a
corporation organized under the laws of California ("Retailer"), and Robert Y.
Lee, a majority shareholder of Retailer (the "Shareholder").
RECITALS
A. Retailer is currently a participant in Rentrak's pay-per-transaction
("PPT") system pursuant to Rentrak's National Account Agreement, dated
December 16, 1994 (the "PPT Agreement"), as amended and supplemented by the
First Addendum to Rentrak National Account Agreement, dated December 16,
1994 (the "First Addendum").
B. Rentrak and Retailer desire to modify and supplement certain of the terms
and conditions of Retailer's video leasing arrangements under PPT with
Rentrak by amending and supplementing the PPT Agreement and First Addendum
as set forth in this Second Addendum to Rentrak National Account
Agreement, dated August 24, 1995, as such may be further amended and
supplemented from time to time (collectively, this "Addendum"). The PPT
Agreement, as modified and amended by the First Addendum and Second
Addendum, are sometimes referred to herein as this "Agreement."
C. It is the parties' intention that the terms and conditions of the PPT
Agreement, the First Addendum and Second Addendum shall apply and be
legally binding upon all Retail Locations (as defined in the First
Addendum) owned, managed, operated or controlled by Retailer and
Shareholder, together with all of their Affiliates (as defined in Paragraph
3 of the First Addendum) and their permitted legal representatives,
successors and assigns.
AGREEMENT
Accordingly, in consideration of the mutual promises and agreements
contained herein and in the PPT Agreement, the parties agree as follows:
1. Effect of Second Addendum. Unless otherwise stated herein, to the extent
-------------------------
any term or provision of this Second Addendum is inconsistent with or in
conflict with any term of the PPT Agreement or First Addendum, this Second
Addendum shall supersede and control any such provision in the PPT
Agreement or First Addendum. Unless otherwise modified herein, all terms
and conditions contained in the PPT Agreement and First Addendum shall
remain in full force and effect. All transactions relating to PPT effected
between the parties under the PPT Agreement on or after the date of this
Second Addendum shall be governed by and subject to
Page 1 - SECOND ADDENDUM TO NATIONAL ACCOUNT AGREEMENT
<PAGE>
the PPT Agreement as modified and supplemented by the First Addendum and
Second Addendum.
2. Definitions. Any capitalized term used herein that is not otherwise defined
-----------
herein shall have the meaning set forth in the PPT Agreement.
3. Amendments to PPT Agreement. The PPT Agreement and First Addendum shall be
---------------------------
amended as follows:
SECTION 2(b) - Effective October 1, 1995, paragraph (b) of Section 2 of
------------
the First Addendum shall be amended to change the words "one hundred eighty
(180) days" in the fourth line of Section 2(b) in the First Addendum to
"sixty (60) days." All other provisions contained in Section 2(b) of the
First Addendum shall remain in full force and effect
SECTION 5 - Effective October 1, 1995, Section 5 of the First Addendum
---------
shall be amended in its entirety as follows:
SECTION 5(a) - For a period of ten (10) years, commencing October 1, 1995,
------------
and ending September 30, 2005, Retailer and its permitted legal
representatives, successors and assigns shall order and obtain from Rentrak
(and Retailer shall cause its Affiliates to order and obtain from Rentrak)
for all Retail Locations and Shareholder shall cause Retailer and such
other persons or entities that own, operate, manage or control such Retail
Locations to order a sufficient volume of Cassettes of rental priced video
titles released to or otherwise made available under the PPT System
("Product") necessary to cause Retailer to pay Rentrak revenue sharing and
handling fee payments that are equal on an annual basis to at least ten
percent (10%) of Retailer's gross revenues (the "Purchase Requirement").
The Retailer's Annual gross revenues shall be pro rated for any partial
years during which the Purchase Requirement is in effect. Retailer's annual
gross revenues shall be determined on a consolidated basis in accordance
with generally accepted accounting principles, consistently applied and
shall include revenues from all sources. For the period beginning October
1, 1995, through December 31, 1995, the determination of the Purchase
Requirement shall be based on audited financial statements for the fourth
quarter certified by a nationally recognized independent accounting firm.
Thereafter, the determination of Retailer's annual gross revenue shall be
based on audited financial statements certified by a nationally recognized
independent accounting firm. Rentrak shall have the right, upon five (5)
business days' advance written notice, to independently audit at its sole
cost and expense, the books and records of Retailer in order to verify and
confirm Retailer's gross revenues. As soon as they are available, but in no
event later than ninety (90) days after the end of each calendar year,
Retailer shall submit its audited financial statements (including balance
sheet, income statement and statement of cash flow) to Rentrak. If Retailer
fails to meet the Purchase Requirement for any given year (the "PPT
Deficiency"), Rentrak shall provide Retailer with an invoice setting forth
the amount of the PPT Deficiency. Retailer agrees to pay Rentrak an amount
equal to twenty percent
Page 2 - SECOND ADDENDUM TO NATIONAL ACCOUNT AGREEMENT
<PAGE>
(20%) of the PPT Deficiency within thirty (30) days of the date of such
invoice. For example, if Retailer had gross revenues equal to $10,000,000
and Retailer paid Rentrak $800,000 for Cassettes obtained pursuant to this
Agreement, the PPT Deficiency would be $200,000 and the payment to Rentrak
would be $40,000.
Upon successfully completing an initial public offering of the Retailer's
securities by filing a registration statement with the U.S. Securities and
Exchange Commission and causing such securities to be traded on the
National U.S. Stock Exchange or listed on the NASDAQ National Market System
(the "Initial Public Offering"), the Purchase Requirement applicable to
Retailer shall be reduced from ten percent (10%) to eight percent (8%).
Notwithstanding the ten year term set forth in the preceding paragraph or
any other provision herein to the contrary, the term of the Purchase
Requirement shall, in the event Retailer does not successfully complete an
Initial Public Offering prior to June 1, 1996, automatically change to a
new twenty (20) year term, commencing June 1, 1996 and ending May 31, 2016.
Retailer's ordering and purchase of Products shall be in full compliance
with all terms and conditions contained in the PPT Agreement and First
Addendum, as modified and supplemented by this Second Addendum and all
Program Supplier or Rentrak established minimum and maximum ordering
limitations and/or requirements and monthly communication charge
requirements. In addition to the Purchase Requirement contained herein,
Retailer may, but shall be under no obligation to order such other titles
under PPT as it may determine, which order shall comply with and be subject
to the terms of this Agreement, as modified and supplemented by the First
and Second Addendum.
With regard to ordering limitations imposed by certain Program Suppliers,
if Retailer elects to carry a particular title in a Retail Location,
Retailer shall be required to order a given title released by such Program
Suppliers for each Retail Location of similar or larger size if Retailer
orders the same title for one Retail Location (i.e. if Retail Location A, a
store with average monthly revenues of $10,000 from the rental and sale of
video cassettes, orders a certain title from a certain Program Supplier,
Retailer shall be required to order the same title for all of Retailer's
Retail Locations of similar or larger size to Retail Location A).
SECTION 5(b) - In the event Rentrak or any of its subsidiaries offers any
------------
non-video Cassettes through its PPT System (such as, for example, CDROM,
SEGA, Nintendo or other programming, including but not limited to
interactive media software), Retailer and Shareholder each agrees for a
period of twenty (20) years from the date of the PPT Agreement to cause all
Retail Locations to order and purchase all of their requirements of such
non-video Cassettes exclusively from Rentrak; provided, however, that,
-------- -------
Retailer shall not be required to order a particular non-video Cassette
from Rentrak if Retailer obtains such product from a third party non-
affiliated provider of such product for a price that matches or is more
favorable than the price offered by Rentrak. Each calendar quarter Rentrak
shall provide Retailer with a price list for its non-video Cassettes. As
long as Rentrak's prices are better than the
Page 3 - SECOND ADDENDUM TO NATIONAL ACCOUNT AGREEMENT
<PAGE>
prices offered by third party unaffiliated suppliers of such product,
Retailer shall order all of its requirements of such product exclusively
from Rentrak until it receives an equal or lower priced offer (a "Competing
Offer"). Upon receiving such an offer, Retailer shall notify Rentrak in
writing of such offer and provide sufficient evidence of the Competing
Offer to Rentrak. Rentrak shall have 24 hours upon receipt of notice of
Competing Offer to offer a price that is lower than the one offered by the
third party unaffiliated supplier. Anytime Rentrak fails to offer a more
favorable price and Retailer purchases non-video Cassettes from another
source, Retailer shall provide Rentrak with a true copy of the invoice for
such product upon the request of Rentrak. The order and purchase provisions
of the foregoing Section 5(a) can only be satisfied by the purchase of home
video cassettes for rental under the PPT system, not by purchase of any
non-video products under this Section 5(b).
SECTION 39 - Termination Fee. Effective immediately, Section 39 of the
---------- ---------------
First Addendum shall be amended in its entirety to read as follows:
"Anything to the contrary set forth above notwithstanding, in the event
that Ron Berger ceases to be employed by Rentrak and Retailer is acquired,
directly or indirectly, by merger or otherwise by another entity, and the
terms of that transaction require termination of the PPT Agreement before
its expiration date as set forth herein, Retailer shall pay to Rentrak an
amount equal to .3% of the Annualized Trend Revenues (as defined below)
generated by Retailer's Retail Locations, prorated over the remainder of
the term of the PPT Agreement up to a maximum amount of $1 million, as a
termination fee. Rentrak may, in such event, elect to sell all of the
shares of common stock that it then owns in Retailer (the "Stock") to
Retailer and Retailer shall, in the event Rentrak makes such election to
sell, purchase the Stock from Rentrak for a purchase price (the "Purchase
Price") equal to the greater of (i) the total, aggregate consideration
that Rentrak has paid for the Stock (whether cash, debt, debt forgiveness
or otherwise), or (ii) an amount equal to the total, aggregate
consideration to be paid by the entity acquiring or merging with Retailer
under the terms of the acquisition or merger (whether cash, debt, debt
forgiveness, stock or otherwise) multiplied by Rentrak's percentage stock
ownership interest in Retailer. Rentrak shall have sole and absolute
discretion in electing whether or not to sell the Stock to Retailer under
the foregoing sentence and may, in its sole discretion, decide to retain
ownership of the Stock. Upon Rentrak's receipt of said termination fee,
and any handling fees, transaction fees, sell-thru fees, end of term buy-
---
out fees, and any and all other fees, loans, accounts payable or other
---
obligations owed to Rentrak under the PPT Agreement as modified by this
Addendum or pursuant to any other agreement, including without limitation
all agreements between Rentrak and Sulpizio One, Inc. and (in the event
---
Rentrak elects to sell the Stock to Retailer under the terms of this
Section 39) cash payment of the Purchase Price of the Stock, the PPT
Agreement and this Addendum shall terminate, and the parties shall be
released of all further obligations thereunder, except as set forth in
Sections 12 and 31 which provisions shall survive and continue as provided
therein. Annualized Trend Revenues shall be defined as the actual total
gross
Page 4 - SECOND ADDENDUM TO NATIONAL ACCOUNT AGREEMENT
<PAGE>
revenue of the Retailer for the previous calendar year, excluding sales
tax, increased at the rate of 15% per year for each year remaining under
the term of the PPT Agreement as modified by this Addendum. For purposes of
computing Annualized Trend Revenue, the year in which the termination is
made shall be treated as a full year for purposes of proration. For
example, if Retailer had gross revenues (excluding sales tax) of $100,000
for the previous calendar year and termination was made as of September 30,
2003, the termination fee would be $741.75 ($115,000 + $132,250 x .3%).
4. Additional Terms of the PPT Agreement. The following additional terms shall
-------------------------------------
be added to the PPT Agreement and First Addendum:
SECTION 41 - Amendment to Exhibit A. Exhibit A to the First Addendum is
---------- ----------------------
hereby amended by adding to Exhibit A the thirteen (13) additional Retail
stores, the locations of which are set forth on Schedule 1 to this Second
Addendum. The effect of said amendment is to cause such retail stores to
be Retail Locations (as defined in the First Addendum) and subject to all
of the terms contained in the PPT Agreement, First Addendum and Second
Addendum.
Page 5 - SECOND ADDENDUM TO NATIONAL ACCOUNT AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Addendum to be executed as
of the day and year first written above.
RENTRAK: RENTAL CORPORATION
By /s/ [illegible]
-----------------------------
Chief Accounting Officer
By /s/ Ron Berger
-----------------------------
Ron Berger, President
RETAILER: LEE VIDEO CITY, INC.
By /s/ Robert Y. Lee
-----------------------------
Robert Y. Lee, President
SHAREHOLDER: ROBERT Y. LEE
By /s/ Robert Y. Lee
-----------------------------
Robert Y. Lee
Page 6 - SECOND ADDENDUM TO NATIONAL ACCOUNT AGREEMENT
<PAGE>
SCHEDULE 1
1. #12, 156 Caldwell, Nampa, Idaho 83651
2. #14, 2412 S. Apple Street, Boise, ID 83706
3. #15, 4024 Fleur Drive, Des Moines, IA 50321
4. #16, 2503 Easton Blvd., Des Moines, IA 50317
5. #18, 3321 N. Cole Road, Boise, ID 83704
6. #19, 1493 5. Broadway, Santa Maria, CA 93454
7. #22, 1264 W. 14th Street, Des Moines, IA 50316
8. #23, 1713 Sycamore Ave., Sioux Falls, SD 57103
9. #24, 5403 W. 41st Street, Sioux Falls, SD 57106
10. #26, 210 W. Sunshine, Suite A-D, Springfield, MO 65807
11. #30, 1135 N. Quincy, Ottumwa, IA 52501
12. #37, 1801 Hamilton Blvd., Sioux City, IA 51103
13. #38, 1819 Morningside, Sioux City, IA 51106
<PAGE>
THIRD ADDENDUM TO RENTRAK
NATIONAL ACCOUNT AGREEMENT AND
MODIFICATION OF FIRST RIGHT
OF REFUSAL
THIS THIRD ADDENDUM is made and entered into effective the 19 day of June,
1996, by and between RENTRAK CORPORATION, an Oregon corporation ("Rentrak"),
MORTCO, INC., an Oregon corporation, and a wholly-owned subsidiary of Rentrak
("Mortco") and LEE VIDEO CITY, INC., a California corporation ("Retailer") and
ROBERT Y. LEE, the majority shareholder of Retailer (the "Shareholder").
RECITALS:
WHEREAS, Rentrak and Retailer entered into a Rentrak National Account
Agreement and First Addendum to Rentrak National Account Agreement (the "First
Addendum"), both made as of December 16, 1994 and a Second Addendum to Rentrak
National Account Agreement (the "Second Addendum") dated as of August 24, 1995
(as amended, the "National Account Agreement"), which agreement was guaranteed
by Shareholder pursuant to the terms of the First Addendum;
WHEREAS, Mortco and Retailer entered into a Right of First Refusal and Co-
Sale Agreement dated December 16, 1994 (the "Right of First Refusal");
WHEREAS, Mortco and Retailer entered into a Stock Purchase Agreement dated
August 24, 1995 (the "Stock Purchase Agreement");
WHEREAS, Retailer now wishes to sell eleven Video City retail locations
(the "Non-California Stores") to Cianci's Videoland, Inc. ("Videoland");
WHEREAS, the consent of Rentrak to such disposition is required under the
terms of the National Account Agreement and the Stock Purchase Agreement; and
WHEREAS, it is the intention of the parties that the terms and conditions
of the National Account Agreement (as amended) and the Right of First Refusal
Agreement each be modified as set forth herein to effect the sale of the Non-
California Stores.
AGREEMENT
Accordingly, in consideration of the mutual promises and agreements
contained herein, the parties hereto agree as follows:
<PAGE>
1) Rentrak agrees and consents to the sale of the Non-California stores
pursuant to the terms and conditions of that Sale Agreement dated June 19, 1996,
which has been previously supplied to Rentrak (the "Sale Agreement"), and
further subject to execution by Videoland of the Assumption Agreement attached
hereto as Exhibit A.
2) Attached hereto as Exhibit B is a current list of all Lee Video City
Retail Locations following completion of the Videoland transaction. That exhibit
is and shall be incorporated into the National Account Agreement as Exhibit A
and replaces Exhibit A currently appended thereto in its entirety.
3) The personal guaranty of Robert Y. Lee set forth in the First
Addendum to Rentrak National Account Agreement is and shall continue in force
until Retailer has both (1) paid revenues in the sum of $194,106 per annum to
Rentrak under the National Account Agreement from new retail locations not
listed on Exhibit B to replace the revenues previously generated by the Non-
California stores; and (2) Retailer has achieved four full consecutive calendar
quarters of profitability as reflected in its financial statements prepared in
accordance with generally accepted accounting principles consistently applied.
For purposes of this Third Addendum, Retailer shall have replaced the revenues
previously generated by the Non-California Stores when Retailer has paid Rentrak
revenue sharing and handling fee payments equal to at least $194,106 for a full
calendar year of the term of the National Account Agreement attributable from
video cassette rentals under the National Account Agreement, which payments are
derived solely from new Retailer Locations not currently participating or
required to participate as of the date hereof on PPT under the National Account
Agreement (e.g. Retail Locations not listed on Exhibit B hereto).
4) Section 5 of the National Account Agreement is amended by adding the
following Section 5(d):
In addition to and not in substitution or modification of any other
provision contained in this Section 5, for any month in which Rentrak
or any of its subsidiaries offers at least two video Cassette titles
through its PPT System which are video Cassette titles with box office
revenues in excess of $10 million (as designated by Rentrak),
Retailer and Shareholder each agree that, for such month, they shall
cause all Retail Locations to order and purchase all of their
requirements of at least one of such video Cassette titles exclusively
from Rentrak. The revenues generated to Rentrak pursuant to complying
with the provisions of this Section 5(d) shall be counted and credited
toward the overall purchase requirement set forth in Section 5(a)
hereof, provided, however, that ordering of and remitting payment for
such titles shall be in addition to and not in substitution for any
other ordering requirements set forth in this Section 5.
2
<PAGE>
5) The Right of First Refusal is modified by deleting existing Section
1.1 and substituting the following language:
The term of this Agreement shall commence on the date hereof and shall
continue thereafter for a period ending on the date on which shares of
the Company's common stock or preferred stock or any securities
exercisable for or convertible into shares of such common or preferred
stock (such common and preferred stock and such securities exercisable
for or convertible into shares of such common or preferred stock being
collectively referred to herein as the "Capital Stock") become, or are
converted into, securities which have been registered under the
Securities Exchange Act of 1934 and are fully tradable on
internationally recognized securities exchange or on the National
Association of Securities Dealers, in national market system and are
not subject to any "lock-up" agreement or arrangement which would, in
any way, limit the rights of Mortco to dispose of such stock (such
time period being referred to as the "Rights Period").
6) Unless defined herein, all capitalized term used herein have the
meanings assigned to them in the document amended thereby.
7) Unless otherwise stated herein, to the extent any term or provision of
this Addendum is inconsistent with or in conflict with any term of the National
Account Agreement, the First or Second Addendum, the Right of First Refusal or
the Stock Purchase Agreement, this Third Addendum shall supersede and control
any such provision is such other Agreement. Unless otherwise modified herein,
all terms and conditions contained in the National Account Agreement, as
amended, the Stock Purchase Agreement and the Right of First Refusal, shall
remain in full force and effect. All transactions relating to PPT effected
between the parties under the National Account Agreement on or after the
effective date of this Third Addendum shall be governed by and subject to the
National Account Agreement as modified and supplemented by the First, Second and
this Third Addendum.
3
<PAGE>
8) This Third Addendum may be signed in counterparts, each of which may
be considered an original, but all of which together shall form one and the same
document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
RENTRAK CORPORATION
By
-----------------------------
Title
--------------------------
MORTCO, INC.
By
-----------------------------
Title
--------------------------
LEE VIDEO CITY, INC.
By /s/ Robert Y. Lee
-----------------------------
Title
--------------------------
SHAREHOLDER
/s/ Robert Y. Lee
-------------------------------
ROBERT Y. LEE
/s/ Robert Y. Lee
-------------------------------
ROBERT Y. LEE, as Guarantor
4
<PAGE>
EXHIBIT 10.7
ESCROW AND WARRANT AGREEMENT
This Escrow and Warrant Agreement (the "Agreement") is made and entered
into as of January 8, 1997 by and among Video City, Inc., a Delaware corporation
(formerly known as Prism Entertainment Corporation) (the "Company"); Robert Y.
Lee, an individual resident of California, on behalf of himself and as Trustee
of the Robert Y. Lee Revocable Living Trust UDT 1/9/91 (collectively, with the
Trust, "Lee" or "grantor"); Ingram Entertainment Inc., a Tennessee corporation
("Ingram") and Loeb & Loeb LLP, a California limited liability partnership
("Escrow Agent") with reference to the following:
RECITALS
A. Lee Video City, Inc. ("VCI") and the Company have entered into that
certain Agreement and Plan of Reorganization and Merger dated as of October 25,
1996, as amended by that certain Amendment to Agreement and Plan of
Reorganization and Merger, dated December 20, 1996, and that certain Second
Amendment to Agreement and Plan of Reorganization and Merger, dated December 24,
1996, with respect to the merger of VCI into the Company (the "Merger").
B. In connection with the Merger, the Grantor will be issued and own
shares of the Common Stock of the Company (the "Common Stock").
C. Pursuant to that certain Override Agreement dated as of November 19,
1996 (the "Override Agreement"), among the Company, VCI, Lee and Ingram, the
Grantor has agreed to grant to Ingram a warrant to purchase the number of fully
paid and nonassessable shares ("Shares") of the Common Stock as hereinafter
provided.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
herefrom and the mutual agreements hereinafter set forth, the parties hereto
hereby agree as follows:
1. Deposit of Shares. Simultaneously with the consummation of the
-----------------
Merger, the Company, on behalf of the Grantor, will deposit in escrow (the
"Escrow") with the Escrow Agent an aggregate of 404,403 Shares (the "Warrant
Shares") of Common Stock representing 8.5% of the aggregate number of shares of
Common Stock (net of 250,000 shares of Lee that are subject to redemption
pursuant to (s) 8.2(g) of the Merger Agreement) issued to the shareholders of
VCI pursuant to the Merger. Certificates representing the Warrant Shares shall
be issued in the names of the Grantor. Receipt of the Warrant Shares is hereby
acknowledged by the Escrow Agent. Escrow Agent shall hold the Warrant Shares as
provided in this Agreement. Ingram, Lee and the Grantor understand and agree
that the Warrant Shares are
<PAGE>
"restricted securities" as defined under Rule 144 of the Securities Act of 1933
as amended (the "Securities Act") and the certificate(s) evidencing the Warrant
Shares shall bear a legend to the following effect:
THE SHARES OF COMMON STOCK
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS AND MAY NOT BE TRANSFERRED UNTIL (i) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES
ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
SHALL HAVE BECOME EFFECTIVE WITH REGARD
THERETO, OR (ii) IN THE OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY REGISTRATION
UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE
STATED SECURITIES LAWS IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER.
2. Grant of Warrant. Grantor hereby grants to Ingram, subject to the
----------------
terms set forth below, a warrant (the "Warrant") to purchase the Warrant Shares
from the Grantor at any time and from time to time, in whole or in part, but not
before 12:01 a.m., Los Angeles, California time, on January 8, 1997 and not
after 5:00 p.m., Los Angeles, California time, on January 8, 2002, which date
is the expiration date of this Warrant (the "Expiration Date") at an exercise
price of $.6085 per share. This Warrant is being granted in substitution for,
and in cancellation of, a previous warrant which VCI had granted to Ingram to
purchase 8.5% of the aggregate fully diluted capital stock of VCI.
3. Number of Shares Issuable Upon Exercise of Warrant.
--------------------------------------------------
Upon exercise of this Warrant, the holder hereof shall receive, in
addition to the number of Warrant Shares which it is entitled to receive
hereunder and to the extent the following distributions are otherwise
distributed to the Grantor, such additional number of shares of capital stock or
other securities or property (other than cash) distributed by the Company from
time to time after the original date of this Agreement with respect to the
Common Stock which the holder of this Warrant would have received had the holder
exercised the Warrant immediately prior to distribution or issuance of any such
shares, securities or property by the Company with respect to the number of
Warrant Shares. Grantor shall deposit with the Escrow Agent upon receipt thereof
all such additional shares of capital stock or other securities or property.
2
<PAGE>
4. Adjustment for Reorganization, Consolidation, Merger, Etc.
----------------------------------------------------------
In case of capital reorganization or reclassification of the Common
Stock, or in case of any consolidation or merger of the Company with or into any
other corporation, or in case of any sale to another corporation of the
properties and assets of the Company as or substantially as an entirety, and,
with respect to all of the foregoing, to the extent the following right would
otherwise inure to the benefit of the Grantor, then, and in each such case, the
holder of this Warrant shall have the right to receive upon the exercise hereof,
at any time after the consummation of such reorganization, reclassification,
consolidation, merger or sale, the kind and amount of shares of stock or other
securities or property receivable upon such reorganization, reclassification,
consolidation, merger or sale by a holder of the number of shares issuable upon
exercise of this Warrant if such number of shares had been held by such holder
immediately prior to such reorganization, reclassification, consolidation,
merger or sale; and in any such case, if necessary, the provisions set forth
herein with respect to the rights and interests thereafter of the holder of this
Warrant shall be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of stock or other securities or property thereafter
receivable upon the exercise of this Warrant. The above provisions of this
Section 5 shall similarly apply to successive reclassifications and changes of
Common Stock and to successive consolidations, mergers, sales or conveyances.
Grantor shall deposit with the Escrow Agent upon receipt thereof all such
additional shares of capital stock or other securities or property.
5. Notice of Dividends, Subscriptions, Reclassifications,
------------------------------------------------------
Consolidations, Merger, Etc.
- - - - ----------------------------
In case the Company shall pay any dividend or make any distribution
(including a cash dividend) to the holders of its Common Stock, or shall offer
for subscription to the holders of its Common Stock or any stock of any class of
the Company or any other securities, or in the case of any capital
reorganization or reclassification of the capital stock of the Company or a
consolidation or merger of the Company with another corporation, or the final
dissolution, liquidation or winding up of the Company, or a sale of all or
substantially all its assets (whether voluntary or involuntary), then in any one
or more of said cases, the Company shall mail (first class, postage prepaid) a
notice thereof to the holder of this Warrant at the address of said holder on
the records of the Company, at least ten days prior to the date on which the
books of the Company shall close (or a record shall be taken) for such dividend,
distribution or subscription rights, or such reorganization, reclassification,
consolidation, merger, dissolution, liquidation, winding up or sale shall take
place, as the case may be. Such notice shall also specify the date as of which
stockholders of record shall be entitled to participate in such dividend,
distribution or subscription rights or to exchange their Shares for other
securities or property pursuant to such reorganization, reclassification,
consolidation, or merger, or to receive their respective distributive
3
<PAGE>
shares in the event of such dissolution, liquidation, winding up or sale, as the
case may be. Such notice shall also set forth a statement of the effect of such
action (the extent then known), if any, on the exercise price and on the
kind and amount of shares of capital stock and property receivable upon exercise
of this Warrant.
6. Covenants of Grantor.
--------------------
The Grantor covenants and agrees that he will at all times have
deposited in Escrow with the Escrow Agent the Warrant Shares, together with such
duly executed and endorsed stock powers and other instruments of assignment or
transfer relating thereto as the holder hereof may reasonably require to provide
for the exercise of the rights represented by this Warrant. Grantor will not
seek to avoid the observance or performance of any of the terms of this Warrant
but will at all times in good faith carry out all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant.
7. Warrant Holder Not Deemed a Stockholder
---------------------------------------
No holder of this Warrant as such shall be entitled to vote or receive
dividends or be deemed the holder of the Warrant Shares for any purpose, nor
shall anything contained in this Warrant be construed to confer upon the holder
hereof, as such, any of the rights of a stockholder of the Company or any right
to vote, give or withhold consent to any corporate action (whether any
reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise), receive notice of meetings, receive dividends
or subscription rights, or otherwise, prior to the issuance of record to the
holder of this Warrant of the Warrant Shares which he is then entitled to
receive upon the due exercise of this Warrant.
8. Exercise of Warrant.
-------------------
(a) Full Exercise. This Warrant may be exercised in
-------------
accordance with Section 2 by the holder of this Warrant by delivering the form
of subscription at the end hereof duly executed by such holder, to the Escrow
Agent at any time on or prior to 5:00 p.m., Los Angeles, California time, on the
Expiration Date, at the principal office of the Escrow Agent accompanied by
payment in cash or by certified or official bank check, payable to the order of
the Company, of the sum called by Section 2. The Grantor agrees to notify the
holder of this Warrant as to any change in the address of the Escrow Agent's
principal office.
(b) Partial Exercise. This Warrant also may be exercised in
----------------
part in the manner specified in subsection (a) of this Section 8, except that
the number of shares of Common Stock or other securities or property receivable
upon any subsequent exercise of this Warrant as a whole shall be proportionately
reduced.
4
<PAGE>
(c) Delivery of Stock Certificates, Etc. As soon as
------------------------------------
practicable after any exercise of this Warrant and payment of the sum payable
upon such exercise, and in any event with 10 days thereafter, the Escrow Agent
at the Grantor's expense (including the payment by it of any applicable issue
taxes), will cause to be issued in the name of and delivered to the holder
hereof, a certificate or certificates for the number of fully paid and non-
assessable Warrant Shares or other securities or property to which such holder
shall be entitled upon such exercise. No fractional shares will be issued
hereunder to any holder hereof; if the number of shares to be issued hereunder
includes a fractional amount, such amount shall be automatically rounded up to
the next whole number, and the resultant whole number of Warrant Shares shall be
issued to the holder, otherwise in accordance herewith.
9. Transfer of Warrants.
--------------------
Subject to the provisions of Section 3 hereof, upon notice of
assignment to the Escrow Agent's principal office, the holder of this Warrant
may transfer all or part of its right to the Warrant.
10. Notices.
-------
All communications hereunder shall be in writing and, if sent to
Ingram Entertainment Inc., shall be mailed by registered or certified mail or
delivered or telegraphed and confirmed in writing to Two Ingram Boulevard, La
Vergne, Tennessee 37089, Attention: Chief Financial Officer, and if sent to the
Grantor, shall be mailed by registered or certified mail or delivered or
telegraphed and confirmed in writing to Robert Y. Lee, Lee Video City, Inc.,
6851 McDivitt Drive, Suite A, Bakersfield, California 93313, and if sent to the
Escrow Agent, addressed to the principal office of the Escrow Agent.
11. Provisions Regarding Escrow Agent. The following provisions
---------------------------------
shall control with respect to the rights, duties and liabilities of the Escrow
Agent:
(a) No Responsibility For Validating or Sufficiency. The
------------------------------------------------
Escrow Agent shall have no duty to know or determine the performance or
non-performance of any provision of any agreement between the other parties
hereto, including, but not limited to, the Override Agreement, and the original
or a copy of any such agreement deposited with the Escrow Agent shall not bind
the Escrow Agent in any manner. The Escrow Agent assumes no responsibility for
the validity or sufficiency of any documents or papers or payments deposited or
called for hereunder except as may be expressly and specifically set forth
herein, and the duties and responsibilities of the Escrow Agent hereunder are
limited to those expressly stated herein.
5
<PAGE>
(b) Modification and Amendments. The provisions of this
---------------------------
Agreement may be supplemented, altered, amended modified or revoked only by a
writing signed by the Grantor and Ingram and approved in writing by the Escrow
Agent.
(c) Exculpation of Escrow Agent. The Escrow Agent shall
---------------------------
not be personally liable for any act it may do or omit to do hereunder as such
agent while acting in good faith and in the exercise of its own best judgement,
and any act done or omitted by it pursuant to the written advice of its own
attorneys shall be conclusive evidence of such good faith. The Escrow Agent
shall have the right at any time to consult with its counsel upon any question
arising hereunder and shall incur no liability for any delay reasonably required
to obtain the advice of counsel.
(d) Conflicting Notices. Other than those which are
-------------------
specifically referred to in this Escrow Agreement, the Escrow Agent is hereby
authorized to disregard any and all notices or warnings given by the Grantor or
Ingram, or by any other person, firm or corporation, except that the Escrow
Agent is hereby expressly authorized to comply with any and all final processes,
orders, judgments or decrees of any court. To the extent the Escrow Agent obeys
or complies with any process, order, judgment or decree of any court, it shall
not be liable to any other party hereto or to any other person, firm or
corporation by reason of such compliance.
(e) Fees and Expenses of Escrow Agent. In consideration of
---------------------------------
the acceptance of this Escrow by the Escrow Agent (as evidenced by its signature
below), the Company shall, for itself and its successors and assigns, pay Escrow
Agent its reasonable charges, fees, and expenses hereunder.
(f) Authority of Signing Parties. The Escrow Agent shall be
----------------------------
under no duty or obligation to ascertain the identity, authority or right of the
Grantor, Ingram or the Company (or their agents) to execute or deliver this
Agreement or any documents, certificates, or payments deposited, delivered or
given hereunder.
(g) No Liability for Lapse of Rights. The Escrow Agent
--------------------------------
shall not be liable for the lapse of any rights under any statue of limitations
or by reason of laches with respect to this Agreement or any funds, securities,
documents or papers deposited, delivered or given hereunder.
(h) Duties in Event of Dispute. In the event of any dispute
--------------------------
among the parties hereto as to any fact or matter relating hereto or to the
transactions contemplated in the Override Agreement, the Escrow Agent is
instructed that it shall be under no obligation to act except under process or
order of court, or if there be no such process or order, until it has filed or
caused to be filed an appropriate action
6
<PAGE>
impleading the Grantor, Ingram and the Company. the Escrow Agent shall sustain
no liability for its failure to act pending such process of court, order or
impleader action.
(i) Resignation. The Escrow Agent, or any successor Escrow
-----------
Agent, may at any time resign by giving notice in writing to the Grantor, the
Company and Ingram and shall be discharged from its duties under this Escrow
Agreement on the first to occur of the appointment of a successor Escrow Agent
as provided in this Section, or the expiration of thirty (30) calendar days
after such resignation notice is given. In the event of any such resignation, a
successor Escrow Agent shall be appointed within thirty (30) days by the
agreement of the Grantor and Ingram. Any successor Escrow Agent shall deliver to
the Company, the Grantor and Ingram a written instrument accepting appointment
under this Agreement, and thereupon it shall succeed to all the rights and
duties of the Escrow Agent hereunder and shall be entitled to receive any funds,
securities, documents, instruments, certificates, checks, or agreements held by
the predecessor Escrow Agent.
(j) Replacement. At their option, the Grantor and Ingram
-----------
may terminate the appointment of Escrow Agent hereunder and appoint another
person as escrow agent in its place. Upon any such appointment, the escrow agent
so replaced shall deliver to the successor escrow agent all of the Warrant
Shares and such other documents, certificates and agreements held by it
hereunder and the successor escrow agent shall assume all rights and duties of
"Escrow Agent" hereunder.
(k) Waiver of Right to Set-Off. Escrow Agent hereby waives
--------------------------
the benefit of, and any right to, any setoff or recoupment or any other claim it
may have now or herafter have in or with respect to the Warrant Shares.
(l) Discharge. Escrow Agent, having delivered all of the
---------
funds, securities, documents, instruments, checks, certificates or agreements
pursuant to the terms of this Agreement, shall be discharged from any further
obligation hereunder.
(m) Indemnity. In the event Escrow Agent becomes involved
---------
in litigation in connection with this Escrow Agreement, or any transaction
related in any way hereto, the Company, the Grantor and Ingram, jointly and
severally, shall indemnify and save the Escrow Agent harmless from all loss,
cost, damage, expense and attorneys' fees suffered or incurred by the Escrow
Agent as a result thereof, except for any loss, cost, damage, or expense
resulting from the Escrow Agent's breach of this Agreement or its willful
misconduct or gross negligence.
7
<PAGE>
12. Return of Warrant Shares. The Escrow Agent shall return to the
------------------------
Grantor or their designees all Warrant Shares remaining after the Expiration
Date.
Dated: January 8, 1997
/s/ Robert Y. Lee
-------------------------------------------
Robert Y. Lee, individually
/s/ Robert Y. Lee
-------------------------------------------
Robert Y. Lee, Trustee of the Robert Y. Lee
Revocable Living Trust UDT 1/9/91
Escrow Agent
Loeb & Loeb LLP, a California limited liability
partnership
By: /s/illegible
-----------------------------------------
Name: /s/illegible
---------------------------------------
Title: Partner
--------------------------------------
INGRAM ENTERTAINMENT INC.
By: /s/Thomas H. Lunn
-----------------------------------------
Name: Thomas H. Lunn
---------------------------------------
Title: Vice Chairman
--------------------------------------
VIDEO CITY, INC.
By: /s/Robert Y. Lee
-----------------------------------------
Name: Robert Y. Lee
---------------------------------------
Title: CEO
--------------------------------------
8
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED [ ]
-------------------------------------------
hereby sells, assigns and transfers unto [ ]
-------------------------------
the within Warrant and does hereby irrevocably constitute and appoint
[ ], Attorney, to transfer the
-----------------------------------------------
said Warrant on the books of the within named corporation with full power of
substitution in the premises.
Dated: [ , ]
----------------------
[ ]
-------------------------------------
Signature
NOTICE: The signature of this assignment must correspond
with the name as written upon the face of the Certificate, in
every particular, without alteration or enlargement or any
change whatever.
9
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER
IF IT DESIRES TO EXERCISE THIS WARRANT
VIDEO CITY, INC.
To: [ESCROW AGENT]
The undersigned hereby exercises the right to purchase the shares of Common
Stock covered by this Warrant according to the conditions thereof and herewith
makes payment of the Exercise Price of such shares of Common Stock in full.
---------------------------------------
Signature
---------------------------------------
Address
---------------------------------------
Number of shares of Common Stock Being
Purchased
Dated: [ , ]
--------------------
10
<PAGE>
EXHIBIT 10.8
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNTIL (i) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES
ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED TRANSFER.
Void after 5:00 p.m., Los Angeles, California Time,
on January 8, 2004
VIDEO CITY, INC.
Warrant to Purchase Common Stock
--------------------------------
Video City, Inc., a Delaware corporation (formerly known as Prism
Entertainment Corporation) (the "Company"), hereby certifies that Ingram
Entertainment Inc., a Tennessee corporation ("Ingram"), and its successors and
assigns, is entitled, subject to the terms set forth below and provided that
this Warrant has not become void pursuant to the provisions of Section 6 below,
to purchase from the Company upon surrender of this Warrant, at any time or
times but not before 12:01 a.m., Los Angeles, California time, on January 8,
1997 and not after 5:00 p.m., Los Angeles, California time, on January 8, 2004,
which date is the expiration date of this Warrant, the number of fully paid and
nonassessable shares (the "Shares") of the Common Stock, par value $.01 per
share, of the Company (the "Common Stock") as hereinafter provided.
As used herein, the term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder, and the term
"Common Stock" includes all stock of any class or classes (however designated)
of the Company, the holders of which shall have the right (without limitation as
to amount) either to all or to a share of the balance of current dividends and
liquidating distributions after the payment of dividends and distributions on
any shares entitled to preference.
1. Compliance with the Securities Act of 1933.
------------------------------------------
The holder of this Warrant agrees that the Company will authorize transfers
of this Warrant and all Shares purchased upon exercise hereof only when the
securities which the holder desires to transfer have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state or other
<PAGE>
jurisdiction's securities laws or when the request for transfer is accompanied
by an opinion of counsel (which opinion and the counsel rendering such opinion
shall be reasonably acceptable to the Company) to the effect that the sale or
proposed transfer does not require registration under the Securities Act or any
state or other jurisdiction's securities laws, and the holder agrees that the
following legend to such effect, if the Company so desires, may be placed on the
certificate or certificates representing any of the Shares purchased upon
exercise of this Warrant and a stop transfer order may be placed with respect
thereto.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNTIL
(i) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
2. Number of Shares Issuable Upon Exercise of Warrant; Price.
---------------------------------------------------------
This Warrant may be exercised from time to time, in whole or in part, for
up to an aggregate of 852,750 shares of Common Stock at any time, prior to or on
such dates, and in such amounts and at such prices, as set forth below:
<TABLE>
<CAPTION>
A. Number of Shares Latest Exercise Date Exercise Price
---------------- -------------------- --------------
<S> <C> <C> <C>
200,000 January 8, 2002 $2.00
200,000 January 8, 2003 $2.25
200,000 January 8, 2004 $2.50
</TABLE>
B. With regard to the Warrant to purchase the remaining 252,750 shares, the
holder of the Warrant may exercise this Warrant in whole or in part, in its sole
discretion in any order, as follows:
2
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Vesting Schedule Exercise Price
- - - - ------------------- ---------------- --------------
<S> <C> <C>
114,240 fully vested $ .51
54,360 fully vested $1.03
15,000 fully vested $1.00
69,150 - one third on $2.00
the date hereof
- one third on
the first anniversary
of the date hereof
- one third on
the second anniversary
of the date hereof
</TABLE>
Subject to the vesting schedule set forth above, all of the Warrants
referred to in this subparagraph B shall be exercisable at any time and from
time to time for a five year period from the date hereof.
Upon exercise of this Warrant, the holder hereof shall receive, in addition
to the number of shares of Common Stock which it is entitled to receive
hereunder, such additional number of shares of capital stock or other securities
or property (other than cash) distributed by the Company from time to time after
the original issue date of this Warrant with respect to the Common Stock which
the holder of this Warrant would have received had the holder exercised the
Warrant immediately prior to distribution or issuance of any such shares,
securities or property by the Company with respect to the number of shares of
Common Stock received upon exercise of this Warrant.
3. Adjustment for Reorganization, Consolidation, Merger, Etc.
----------------------------------------------------------
In case of any capital reorganization or reclassification of the Common
Stock of the Company, or in case of any consolidation or merger of the Company
with or into any other corporation, or in case of any sale to another
corporation of the properties and assets of the Company as or substantially as
an entirety, then, and in each such case, the holder of this Warrant shall have
the right to receive upon the exercise hereof as provided in Section 9 hereof,
at any time after the consummation of such reorganization, reclassification,
consolidation, merger or sale, the kind and amount of shares of stock or other
securities or property receivable upon such reorganization. reclassification,
consolidation, merger or sale by a holder of the number of Shares issuable upon
exercise of this Warrant if such number of Shares had been held by such holder
immediately prior to such reorganization, reclassification, consolidation,
merger or sale; and in any such case, if necessary, the provisions set forth
herein with respect to the rights and interests thereafter of the holder of this
3
<PAGE>
Warrant shall be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of stock or other securities or property thereafter
receivable upon the exercise of this Warrant. The above provisions of this
Section 3 shall similarly apply to successive reclassifications and changes of
Common Stock and to successive consolidations, mergers, sales or conveyances.
4. Notice of Dividends, Subscriptions, Reclassifications,
------------------------------------------------------
Consolidations, Merger, Etc.
- - - - ----------------------------
In case the Company shall pay any dividend or make any distribution
(including a cash dividend) to the holders of its Common Stock, or shall offer
for subscription to the holders of its Common Stock or any stock of any class of
the Company or any other securities, or in the case of any capital
reorganization or reclassification of the capital stock of the Company or a
consolidation or merger of the Company with another corporation, or the final
dissolution, liquidation or winding up of the Company, or a sale of all or
substantially all its assets (whether voluntary or involuntary), then in any one
or more of said cases, the Company shall mail (first class, postage prepaid) a
notice thereof to the holder of this Warrant at the address of said holder on
the records of the Company, at least ten days prior to the date on which the
books of the Company shall close (or a record shall be taken) for such dividend,
distribution or subscription rights, or such reorganization, reclassification,
consolidation, merger, dissolution, liquidation, winding up or sale shall take
place, as the case may be. Such notice shall also specify the date as of which
stockholders of record shall be entitled to participate in such dividend,
distribution or subscription rights or to exchange their Shares for other
securities or property pursuant to such reorganization, reclassification,
consolidation or merger, or to receive their respective distributive shares in
the event of such dissolution, liquidation, winding up or sale, as the case may
be. Such notice shall also set forth a statement of the effect of such action
(to the extent then known), if any, on the exercise price and on the kind and
amount of shares of capital stock and property receivable upon exercise of this
Warrant.
5. Covenants of the Company.
------------------------
The Company covenants and agrees that all Shares which may be issued upon
the exercise of this Warrant shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable and free from all preemptive rights of any
stockholder and all taxes, liens and charges with respect to the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue). The Company further covenants and agrees that it will at all times
have authorized and reserved, a sufficient number of shares of its Common Stock
to provide for the exercise of the rights represented by this Warrant. The
Company will not, by amendment to its Charter or through any reorganization,
reclassification, consolidation, merger, sale of assets, dissolution. issue or
sale of securities or other voluntary action,
4
<PAGE>
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith carry out all such terms and take
all such action as may be necessary or appropriate in order to protect the
rights of the holder of this Warrant.
6. Expiration.
----------
This Warrant shall be void after 5:00 p.m., Los Angeles, California time,
on January 8, 2004, and no rights herein given to the holder of this Warrant
shall exist thereafter.
7. Warrant Holder Not Deemed a Stockholder.
---------------------------------------
No holder of this Warrant as such, shall be entitled to vote or receive
dividends or be deemed the holder of shares of Common Stock of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder hereof, as such, any of the rights of a shareholder of the
Company or any right to vote, give or withhold consent to any corporate action
(whether any reorganization, issue of stock, reclassification of stock,
consolidation, merger, conveyance or otherwise), receive notice of meetings,
receive dividends or subscription rights, or otherwise, prior to the issuance of
record to the holder of this Warrant of the Shares which he is then entitled to
receive upon the due exercise of this Warrant.
8. No Limitation on Corporate Action.
---------------------------------
No provisions of this Warrant and no right or option granted or conferred
hereunder shall in any way limit, affect or abridge the exercise by the Company
of any of its corporate rights or powers to recapitalize, amend its Charter,
reorganize, consolidate or merge with or into another corporation, or to
transfer all or any part of its property or assets, or the exercise of any other
of its corporate rights and powers.
9. Exercise of Warrant.
-------------------
(a) Full Exercise. This Warrant may be exercised in accordance with
-------------
Section 2 by the holder of this Warrant by surrendering this Warrant, with the
form of subscription at the end hereof duly executed by such holder, to the
Company at any time on or prior to 5:00 p.m., Los Angeles, California time, on
January 8, 2004, at the principal office of the Company's transfer agent (the
"Transfer Agent") accompanied by payment either (i) in cash or by certified or
official bank check, payable to the order of the Company, or (ii) by the whole
or partial tender of that certain Promissory Note of the Company, dated as of
January 8, 1997, in the original principal amount of $1,503,708.22 (the "Note"),
valued at the then outstanding principal balance thereof, plus accrued and
unpaid interest thereon, or (iii) any
5
<PAGE>
combination of (i) and (ii) above, in any case in the amount of the sum called
for by Section 2. Partial tenders of the Note shall be first applied against
outstanding accrued interest. The Company agrees to notify the holder of this
Warrant as to the address of the Transfer Agent's principal office.
(b) Partial Exercise. This Warrant also may be exercised in part by
----------------
surrendering this Warrant in the manner specified in subsection (a) of this
Section 9, except that the number of shares of Common Stock or other securities
or property receivable upon the exercise of this Warrant as a whole shall be
proportionately reduced. On any such partial exercise, the Company, at its
expense, will forthwith issue to the holder hereof a new Warrant or Warrants of
like tenor calling in the aggregate for the number of shares of Common Stock for
which this Warrant shall not have been exercised, issued in the name of the
holder hereof or as such holder (upon payment by such holder of any applicable
transfer taxes and subject to the provisions of Section 1 hereof) may direct.
(c) Delivery of Stock Certificates, Etc. As soon as practicable after
------------------------------------
any exercise of this Warrant and payment of the sum payable upon such exercise,
and in any event within 10 days thereafter, the Company, at its expense
(including the payment by it of any applicable issue taxes), will cause to be
issued in the name of and delivered to the holder hereof, or as such holder
(upon payment by such holder of any applicable transfer taxes) may direct, a
certificate or certificates for the number of fully paid and nonassessable
Shares or other securities or property to which such holder shall be entitled
upon such exercise. No fractional Shares will be issued hereunder to any holder
hereof; if the number of Shares to be issued hereunder includes a fractional
amount, such amount shall be automatically rounded up to the next whole number,
and the resultant whole number of Shares shall be issued to the holder,
otherwise in accordance herewith.
10. Exchange and Transfer of Warrants.
---------------------------------
Subject to the provisions of Section 1 hereof, upon surrender for exchange
of this Warrant (in negotiable form, if not surrendered by the holder named on
the face thereof) to the Company or its Transfer Agent's principal office, the
Company, at its expense, will issue and deliver new Warrants of like tenor,
calling in the aggregate for the same number of shares of Common Stock in the
denomination or denominations requested, to or on the order of such holder and
in the name of such holder or as such holder (upon payment to such holder of any
applicable transfer taxes) may direct. Until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder of this
Warrant as absolute owner for all purposes without being affected by any notice
to the contrary.
6
<PAGE>
11. Notices.
-------
All communications hereunder shall be in writing and, if sent to Ingram
Entertainment Inc., shall be mailed by registered or certified mail or delivered
or telegraphed and confirmed in writing to Two Ingram Boulevard, La Vergne,
Tennessee 37086, Attention: Chief Financial Officer, and if sent to the
Company, shall be mailed by registered or certified mail or delivered or
telegraphed and confirmed in writing to the Company at Video City, Inc., 6851
McDivitt Drive, Suite A, Bakersfield, California 93313.
12. Registration Rights.
-------------------
The shares of Common Stock issuable upon exercise of this Warrant
constitute "Restricted Stock" as defined in that certain Registration Rights
Agreement between the Company and Ingram and the holder of this Warrant is
entitled to the registration rights provided by such agreement.
Dated: January 8, 1997
VIDEO CITY, INC.
By: /s/Robert Lee
----------------------------
Name: Robert Lee
--------------------------
Title: CEO
-------------------------
7
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED hereby sells,
------------------------------------
assigns and transfers unto the within
--------------------------------------
Warrant and does hereby irrevocably constitute and appoint
, Attorney, to transfer the said
- - - - -----------------------------------------
Warrant on the books of the within named corporation with full power of
substitution in the premises.
Dated: ,
------------- ----
-------------------------------
Signature
NOTICE: The signature of this assignment must correspond with the
name as written upon the face of the Certificate, in every
particular, without alteration or enlargement or any change
whatever.
8
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER
IF HE DESIRES TO EXERCISE THIS WARRANT
VIDEO CITY, INC.
The undersigned hereby exercises the right to purchase shares of Common
----
Stock covered by this Warrant according to the conditions thereof and herewith
makes payment of the Purchase Price of such shares of Common Stock in full.
-------------------------------
Signature
-------------------------------
Address
Dated: ,
------------- ----
9
<PAGE>
THE TRANSFER OF THIS WARRANT IS RESTRICTED EXHIBIT 10.9
AS PROVIDED IN SECTIONS 7 AND 8
GRANT DATE: August 24, 1995
WARRANT CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
LEE VIDEO CITY, INC.
In consideration of $10, certain amendments contained in the Second
Addendum to Rentrak National Account Agreement, dated August 24, 1995 and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, LEE VIDEO CITY, INC., a California
corporation (the "Company"), grants to RENTRAK CORPORATION, an Oregon
corporation ("Rentrak"), the right, subject to the terms and conditions of this
Warrant, to purchase at any time during the period commencing August 24, 1995
(the "Grant Date"), and ending on August 23, 2005 (the "Expiration Date"), for
an aggregate purchase price of $400,000 (the "Aggregate Exercise Price"), that
number of shares of the Company's Common Stock which, immediately following the
exercise hereof, will equal two percent (2%) of the fully diluted issued and
outstanding Common Stock of the Company calculated on a fully diluted basis
determined in accordance with generally accepted accounting principles in effect
on the date hereof.
Section 1. DEFINITIONS. As used in this Warrant, unless the context
otherwise requires:
1.1 "AGGREGATE EXERCISE PRICE" is defined in the first paragraph of
this Warrant.
1.2 "CALL NOTICE" is defined in Section 2.4.
1.3 "CALL PRICE" means the greater of (a) the Fair Market Price on
the date of the Call Notice multiplied by that number of shares of the Company's
Common Stock which, immediately after the exercise of this Warrant, would equal
two percent (2%) of the fully diluted issued and outstanding Common Stock of the
Company calculated on a fully diluted basis determined in accordance with
generally accepted accounting principles in effect on the date hereof; and (b)
twice the IPO Price multiplied by that number of shares
Page 1 - WARRANT CERTIFICATE
<PAGE>
of the Company's Common Stock which, immediately after the exercise of this
Warrant, would equal two percent (2%) of the fully diluted issued and
outstanding Common Stock of the Company calculated on a fully diluted basis
determined in accordance with generally accepted accounting principles in effect
on the date hereof
1.4 "CALL RIGHT" is defined in Section 2.4.
1.5 "COMMON STOCK" means the Common Stock (no par value) of the
Company.
1.6 "COMPANY" is defined in the first paragraph of this Warrant.
1.7 "EXERCISE DATE" means the date when this Warrant is
exercised in the manner indicated in Section 2.2.
1.8 "EXERCISE PERIOD" means the period commencing on the date on
which the Company closes its Initial Public Offering and ending on the
Expiration Date.
1.9 "EXERCISE PRICE" means the price per Warrant Share equal to the
quotient of (a) the Aggregate Exercise Price divided by (b) that number of
shares of the Company's Common Stock which, immediately following the exercise
hereof, will equal two percent (2%) of the fully diluted issued and outstanding
Common Stock of the Company calculated on a fully diluted basis determined in
accordance with generally accepted accounting principles in effect on the date
hereof.
1.10 "EXPIRATION DATE" is defined in the first paragraph of this
Warrant.
1.11 "FAIR MARKET PRICE" means, on any given date, (a) the average on
such date of the high and low prices of the IPO Stock on the principal national
U.S. securities exchange on which the IPO Stock is then traded, if the IPO Stock
is then traded on such an exchange; or (b) the last reported sale price on such
date of the IPO Stock on the NASDAQ National Market List, if the IPO Stock is
not then traded on a national U.S. securities exchange.
1.12 "GRANT DATE" is defined in the first paragraph of this Warrant.
1.13 "HOLDER" means initially Rentrak and its subsequent transferees.
1.14 "INITIAL PUBLIC OFFERING" means an initial public offering by the
Company of its Common Stock by filing a registration statement with the U.S.
Securities and Exchange Commission and causing such Common Stock to be traded on
a national U.S. stock exchange or listed on the NASDAQ National Market System.
1.15 "IPO PRICE" means the price at which each share of IPO Stock
was sold pursuant to the Initial Public Offering.
Page 2 - WARRANT CERTIFICATE
<PAGE>
1.16 "IPO STOCK" means the Common Stock sold pursuant to the Initial
Public Offering.
1.17 "MORTCO" means Mortco, Inc., an Oregon corporation and a
wholly-owned subsidiary of Rentrak.
1.18 "RELATED WARRANT" means any other Warrant executed and delivered
by the Company on terms identical with the terms of this Warrant (except as to
the identity of the Holder, number of Warrant Shares or execution date) that is
granted pursuant to Section 6 of this Agreement.
1.19 "RELATED WARRANT SHARES" means any shares of Common Stock or
other securities issued or issuable upon exercise of any Related Warrant.
1.20 "RENTRAK" is defined in the first paragraph of this Warrant.
1.21 "SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, and all rules and regulations promulgated thereunder, or any
act, rules or regulations that replace the Securities Act or any such rules and
regulations.
1.22 "WARRANT" means this Common Stock Warrant and each previously
executed and cancelled Common Stock Warrant, if any, for which this Warrant has
been exchanged.
1.23 "WARRANT SHARES" means any shares of Common Stock or other
securities issued or subject to issuance upon exercise of this Warrant or upon
exchange of a Warrant Share for Warrant Shares of different denominations.
Section 2. DURATION AND EXERCISE OF WARRANT; COMPUTATION OF SHARES.
2.1 VESTING. This Warrant shall vest on the Grant Date, and expire on
the Expiration Date.
2.2 EXERCISE OF WARRANT. This Warrant shall be immediately
exercisable by Rentrak at any time during the Exercise Period.
This Warrant may be exercised by the Holder during the Exercise
Period, by (i) surrendering this Warrant to the Company, (ii) tendering to the
Company the payment due with regard to the Aggregate Exercise Price, and (iii)
executing and delivering to the Company the attached Exercise Form.
2.3 NUMBER OF SHARES. The number of shares for which this Warrant may
be exercised shall be that number of shares of the Company's Common Stock which,
immediately following the exercise hereof, will equal two percent (2%) of the
fully diluted issued and outstanding Common Stock of the Company calculated on a
fully diluted basis determined in accordance with generally accepted accounting
principles in effect on the date hereof.
Page 3 - WARRANT CERTIFICATE
<PAGE>
2.4 CALL RIGHT. At any time after which the Company has completed an
Initial Public Offering and the IPO Stock has traded at a price equal to or
greater than twice the IPO Price, the Company shall, after the expiration of ten
(10) days prior written notice delivered to the Holder (the "Call Notice"), have
the right (the "Call Right") to repurchase this Warrant at a price equal to the
Call Price; provided, however, that the Call Right shall terminate immediately
--------- -------
upon the exercise of this Warrant by the Holder pursuant to Section 2.2, which
exercise may occur any time prior to the date of the repurchase of this Warrant
by the Company pursuant to the Call Right. Within ten (10) days of the Holder's
receipt of the Call Notice pursuant to this Section 2.4, the Holder shall either
exercise this Warrant pursuant to Section 2.2 or surrender this Warrant to the
Company whereupon the Company shall pay to the Holder, by check or wire
transfer, the Call Price.
2.5 CERTIFICATES. Within a reasonable time but no more than fifteen
(15) days after exercise, certificates for such Warrant Shares shall be
delivered to the Holder.
2.6 SECURITIES ACT COMPLIANCE. Unless the issuance or transfer of the
Warrant Shares shall have been registered under the Securities Act, as a
condition of its delivery of the certificates for the Warrant Shares, the
Company may require the Holder (including any transferee of the Warrant Shares
in whose name the Warrant Shares are to be registered) to deliver to the
Company, in writing, representations regarding the purchaser's sophistication,
investment intent, acquisition for its own account and such other matters as are
reasonable and customary for purchasers of securities in an unregistered private
offering, and the Company may place conspicuously upon each certificate
representing the Warrant Shares a legend substantially in the following form,
the terms of which are agreed to by the Holder (including such transferee):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ISSUED WITHOUT REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND THE BLUE SKY LAWS OF ANY
JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED OR OTHERWISE DISPOSED OF, BENEFICIALLY OR
ON THE RECORDS OF THE COMPANY, UNLESS THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
OR QUALIFIED UNDER THE SECURITIES ACT AND APPLICABLE
BLUE SKY LAWS OR THERE HAS BEEN DELIVERED TO THE
COMPANY AN OPINION OF COUNSEL, SATISFACTORY TO THE
COMPANY, TO THE EFFECT THAT SUCH REGISTRATION AND
QUALIFICATION IS NOT REQUIRED.
The Company need not register a transfer of this Warrant or the Warrant Share
unless the conditions specified in such legend and in Section 8 are satisfied.
Section 3. VALIDITY AND RESERVATION OF WARRANT SHARES. The Company
covenants that this Warrant and any Warrant Shares will be validly issued
fully paid, nonassessable
Page 4 - WARRANT CERTIFICATE
<PAGE>
and free of preemptive rights. The Company agrees that so long as this Warrant
may be exercised, the Company will have authorized and reserved for issuance
upon exercise of this Warrant a sufficient number of Warrant Shares to provide
for exercise in full.
Section 4. FRACTIONAL SHARES. No fractional Warrant Share shall be issued
upon the exercise of this Warrant. With respect to any fraction of a Warrant
Share otherwise issuable upon any such exercise, the Company shall pay to the
Holder an amount in cash equal to such fraction multiplied by the Exercise
Price.
Section 5. LIMITED RIGHTS OF THE WARRANT HOLDER. The Holder shall not,
solely by virtue of being the Holder of this Warrant, have any of the rights of
a holder of Common Stock of the Company, either at law or equity, until such
Warrant shall have been exercised and the Holder shall have been issued
certificates representing the Warrant Shares and the Holder shall be deemed to
be the holder of record of Warrant Shares as provided in this Warrant, at which
time the person or persons in whose name or names the certificate or
certificates for Warrant Shares being purchased are to be issued shall be deemed
the holder or holders of record of such shares for all purposes.
Section 6. ADJUSTMENTS UPON CERTAIN EVENTS.
(a) If this Warrant shall be exercised subsequent to any stock split,
stock dividend, recapitalization, combination of shares of the Company, or
other similar event, occurring after the date hereof, then the Holder
exercising this Warrant shall receive upon the exercise of this Warrant and
payment of no additional consideration other than the Aggregate Exercise
Price, the aggregate number and class of shares which such Holder would
have received if this Warrant had been exercised immediately prior to such
stock split, stock dividend, recapitalization, combination of shares, or
other similar event. If any adjustment under this Section 6(a), would
create a fractional share of Common Stock or a right to acquire a
fractional share subject to this Warrant shall be the next higher number of
shares, rounding all fractions upward. Whenever there shall be an
adjustment pursuant to this Section 6(a), the Company shall forthwith
notify the Holder or Holders of this Warrant of such adjustment, setting
forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated.
(b) If this Warrant shall be exercised subsequent to any merger,
consolidation, exchange of shares, separation, reorganization or
liquidation of the Company, or other similar event, occurring after the
Grant Date, as a result of which shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class
or classes of securities of the Company or another entity, then the Holder
exercising this Warrant shall receive, upon the exercise of this Warrant
and payment of no additional consideration other than the Aggregate
Exercise Price, the aggregate number and class of shares which such Holder
would have received if this Warrant had been exercised immediately prior to
such merger, consolidation, exchange of shares, separation, reorganization
or liquidation, or other similar event. If any adjustment under this
Section 6(b) would create a fractional share of Common Stock or a right to
acquire a fractional share of
Page 5 - WARRANT CERTIFICATE
<PAGE>
Common Stock, such fractional share shall be disregarded and the number of
shares subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment
pursuant to this Section 6(b), the Company shall forthwith notify the
Holder or Holders of this Warrant of such adjustment, setting forth in
reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated.
Section 7. EXCHANGE, TRANSFER OR LOSS OF WARRANT.
7.1 EXCHANGE. This Warrant is exchangeable, without expense to the
Holder and upon surrender hereof to the Company, for Related Warrants of
different denominations entitling the Holder to purchase Related Warrant Shares
equal in total number and identical in type to the Warrant Shares covered by
this Warrant.
7.2 TRANSFER. Subject to the provisions of Section 8, upon surrender
of this Warrant to the Company with the attached Assignment Form duly executed,
the Company shall, without charge, execute and deliver a Related Warrant to the
assignee named in such Assignment Form, and this Warrant shall promptly be
cancelled.
7.3 LOSS, THEFT, DESTRUCTION OR MUTILATION. Upon receipt by
the Company of satisfactory evidence of the loss, theft, destruction or
mutilation of this Warrant and either (in the case of loss, theft or
destruction) indemnification or bond in form and substance acceptable to the
Company, or (in the case of mutilation) the surrender of this Warrant for
cancellation, the Company will execute and deliver to the Holder, without
charge, a Related Warrant of like denomination. Any such Related Warrant
executed and delivered shall constitute an additional obligation of the Company,
whether or not this Warrant, reportedly lost, stolen, destroyed or mutilated,
shall be at any time presented by anyone to the Company for exercise.
Section 8. TRANSFER RESTRICTION.
8.1 GENERAL. Anything contained hereto to the contrary
notwithstanding, this Warrant may not be assigned, transferred (by operation of
law or otherwise), hypothecated or sold (other than to a wholly-owned subsidiary
of Rentrak), except as set forth in Section 8.2. Any such assignment or transfer
shall be made by surrender of this Warrant to the Company or at the office of
its transfer agent, if any, with the Form of Assignment annexed hereto duly
executed and funds sufficient to pay any transfer tax, whereupon the Company
shall, without charge, execute and deliver a Related Warrant in the name of the
assignee and this Warrant shall promptly be cancelled.
Page 6 - WARRANT CERTIFICATE
<PAGE>
8.2 SECURITIES LAW COMPLIANCE. Except pursuant to the requirements of
Rule 144 of the Securities Act, the Warrant and Warrant Shares may not be sold,
transferred, assigned or otherwise disposed of except as follows:
(a) to a person who, in the opinion of counsel satisfactory to
the Company and in the opinion of the Company's counsel, is a person to whom the
Warrant or Warrant Shares may legally be transferred without registration under
the Securities Act and without the delivery of a current prospectus with respect
thereto; or
(b) to any person upon delivery of a prospectus then meeting the
requirements of the Securities Act relating to such securities (as to which a
registration statement under the Securities Act shall then be in effect) and the
offering thereof for such sale or disposition.
The Holder agrees that it will not at any time offer to sell, sell,
transfer, pledge or otherwise dispose of this Warrant, or, upon receipt of the
Warrant Shares after exercise hereof, any of such Warrant Shares, except
pursuant to either (a) an effective registration statement under the Securities
Act or (b) an opinion of counsel satisfactory to the Company to the effect that
such registration is not required. The Holder acknowledges that, in taking this
unregistered Warrant, or in taking unregistered Warrant Shares upon exercise
hereof, the Holder must continue to bear the economic risk of such investments
for what may be an indefinite period of time. The Holder further agrees hereby
that, prior to any transfer of this Warrant or any Warrant Shares received upon
any exercise hereof (if such Warrant and/or Warrant Shares are not registered
under the Securities Act), it will give written notice to the Company of its
intention to effect such transfer. Upon receipt of such notice, the Company will
promptly present it to counsel for the Company and counsel for the Holder and if
the Company receives the opinion of such counsel, in form and substance
satisfactory to the Company, that the proposed transfer may be effected without
registration under the Securities Act and applicable state law, the Holder shall
be promptly notified and shall be entitled to effect the transfer of this
Warrant and/or the Warrant Shares in accordance with the terms specified in the
notice delivered to the Company. The provisions of this Section 8.2 shall be
binding upon all subsequent Holders of this Warrant and upon all subsequent
holders of the certificates for the Common Stock bearing the legend specified in
Section 2.6 hereof.
8.3 REPRESENTATIONS OF HOLDER. The Holder represents that it has
acquired this Warrant for investment purposes only, for its own account, and not
with any present view to, or any offer to sell in connection with, the
distribution thereof. The Holder represents that it is a "accredited investor"
as that term is defined under Regulation D of the Securities Act.
Page 7 - WARRANT CERTIFICATE
<PAGE>
Section 9. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to Rentrak the following:
9.1 AUTHORITY. The Company has full right, power and authority to
enter into this Agreement and to perform all of its obligations hereunder or
contemplated hereby; this Agreement has been duly authorized, executed and
delivered by the Company and is enforceable in accordance with its terms.
9.2 VALID AGREEMENT. This Warrant, and the issue and delivery thereof
has been duly and validly authorized, and this Warrant, when issued and
delivered as provided in this Agreement, will be duly and validly issued and
outstanding, and will constitute a valid and binding obligation of the Company.
Section 10. REGISTRATION RIGHTS. The Warrant Shares shall have all of the
registration rights granted to Mortco under that certain Registration Rights
Agreement, dated as of August 24, 1995 (the "Rights Agreement"), by and between
Mortco and the Company, the terms of which are incorporated herein by this
reference as if fully set forth herein; provided, however, that (a) the term
-------- -------
"Shares" used in the Rights Agreement shall mean the Warrant Shares, (b) the
term "Holder" used in the Rights Agreement shall mean a Holder as defined
herein, (c) the term "Mortco" used in the Rights Agreement shall mean Rentrak as
defined herein, and (d) the term "Agreement" used in the Rights Agreement shall
mean this Warrant.
Section 11. MISCELLANEOUS.
11.1 SUCCESSORS AND ASSIGNS. All the covenants and provisions of this
Warrant that are by or for the benefit of the Company shall bind and inure to
the benefit of its successors and assigns hereunder.
11.2 NOTICE. Notice or demand pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed, until another address is
designated in writing by the Company, as follows:
Page 8 - WARRANT CERTIFICATE
<PAGE>
Lee Video City, Inc.
6851 McDivitt Street, Suite A
Bakersfield, CA 93313
Attention: Robbie Lee
Any notice or demand authorized by this Warrant to be given or made by the
Company to or on the Holder shall be given to the Holder by first-class mail,
postage prepaid, addressed, until another address is designated in writing by
the Company, as follows:
Rentrak Corporation
Attention: Ron Berger
7227 N.E. 55th Ave.
Portland, OR 97218
and to any other Holder addressed at his last known address as it shall appear
on the books of the Company, until another address is designated in writing,
with a copy to Rentrak Corporation by like mail.
11.3 Applicable Law. The validity, interpretation and performance of
this Warrant shall be governed by the laws of the State of Oregon. For any
action related to the judicial enforcement or interpretation of this Agreement,
the parties hereby expressly submit themselves to the jurisdiction of the
Circuit Court for the County of Multnomah, State of Oregon or the Federal Court
for the District of Oregon.
11.4 Headings. The article headings herein are for convenience only
and are not part of this Warrant and shall not affect the interpretation
thereof.
This Warrant is executed as of August ____, 1995.
AGREED AND ACCEPTED:
COMPANY: RENTRAK:
Lee Video City, Inc. Rentrak Corporation
By /s/ Robert Y. Lee By /s/ illegible Sr. V.P.
----------------------------- -----------------------------
Robert Y. Lee, President Ron Berger, President
/s/ illegible Chief Accounting Officer
<PAGE>
EXHIBIT 10.10
THE TRANSFER OF THIS WARRANT IS RESTRICTED
AS PROVIDED IN SECTIONS 7 AND 8
GRANT DATE: June 19, 1996
WARRANT CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
LEE VIDEO CITY, INC.
In consideration of $10, certain amendments and consents contained in the
Third Addendum to Rentrak National Account Agreement, dated June 19, 1996 and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the parties hereto, LEE VIDEO CITY, INC., a California
corporation (the "Company"), grants to RENTRAK CORPORATION, an Oregon
corporation ("Rentrak"), the right, subject to the terms and conditions of this
Warrant, to purchase at any time during the period commencing June ___, 1996
(the "Grant Date"), and ending on September 30, 2005 (the "Expiration Date"),
for the Aggregate Purchase Price, that number of shares of the Company's Common
Stock specified in Section 2.3 below. The number and character of the Shares
which may be purchased upon exercise of this Warrant and payment of the
Aggregate Purchase Price per share in effect from time to time are subject to
adjustment from time to time as hereinafter provided.
Section 1. Definitions. As used in this Warrant, unless the context
otherwise requires:
1.1 "Aggregate Exercise Price" means $30,795 for each 1% of the fully
diluted Common Stock after taking into account and giving effect to the exercise
thereof up to a maximum of $153,975 for 5% of the fully diluted Common Stock.
The Aggregate Exercise Price shall be pro rated for any partial exercise of this
Warrant. For example, in the event this Warrant is exercised for .5% of the
fully diluted Common Stock, the Aggregate Exercise Price would be $15,397.50.
1.2 "Common Stock" means the Common Stock (no par value) of the
Company.
Page 1 - WARRANT CERTIFICATE
<PAGE>
1.3 "Company" is defined in the first paragraph of this Warrant.
1.4 "Exercise Date" means the date when this Warrant is exercised in
the manner indicated in Section 2.2.
1.5 "Exercise Period" means the period commencing on the Grant Date
and ending on the Expiration Date.
1.6 "Exercise Price" means the price per Warrant Share equal to the
quotient of (a) the Aggregate Exercise Price divided by (b) that number of
shares of the Company's Common Stock which, immediately following the exercise
hereof, equal the Shares acquired pursuant to Section 2.3.
1.7 "Expiration Date" is defined in the first paragraph of this
Warrant.
1.8 "Grant Date" is defined in the first paragraph of this Warrant.
1.9 "Holder" means initially Rentrak and its subsequent transferees.
1.10 "Mortco" means Mortco, Inc., an Oregon corporation and a wholly-
owned subsidiary of Rentrak.
1.11 "Related Warrant" means any other Warrant executed and delivered
by the Company on terms identical with the terms of this Warrant (except as to
the identity of the Holder, number of Warrant Shares or execution date) that is
granted pursuant to Section 6 of this Agreement.
1.12 "Related Warrant Shares" means any shares of Common Stock or
other securities issued or issuable upon exercise of any Related Warrant.
1.13 "Rentrak" is defined in the first paragraph of this Warrant.
1.14 "Securities Act" means the Securities Act of 1933, as amended
from time to time, and all rules and regulations promulgated thereunder, or any
act, rules or regulations that replace the Securities Act or any such rules and
regulations.
1.15 "Warrant" means this Common Stock Warrant and each previously
executed and cancelled Common Stock Warrant, if any, for which this Warrant has
been exchanged.
1.16 "Warrant Shares" means any shares of Common Stock or other
securities issued or subject to issuance upon exercise of this Warrant or upon
exchange of a Warrant Share for Warrant Shares of different denominations.
Page 2 - WARRANT CERTIFICATE
<PAGE>
Section 2. Duration and Exercise of Warrant; Computation of Shares.
2.1 Vesting. This Warrant shall vest in its entirety on the Grant
Date and expire on the Expiration Date.
2.2 Exercise of Warrant. This Warrant shall be immediately
exercisable by Rentrak, in whole or in part, at any time during the Exercise
Period.
This Warrant may be exercised by the Holder during the Exercise
Period, by (i) surrendering this Warrant to the Company, (ii) tendering to the
Company the payment due with regard to the Aggregate Exercise Price, and (iii)
executing and delivering to the Company the attached Exercise Form.
2.3 Number of Shares. The number of shares for which this Warrant may
be exercised shall be that number of shares of the Company's Common Stock which,
immediately following and giving full effect to the exercise thereof, will equal
the applicable percentage of the Company's Common Stock then in effect when the
Revenue Replacement Requirement is satisfied according to the Schedule below,
calculated on a fully diluted basis (as defined below):
<TABLE>
<CAPTION>
Time Period During
Which Revenue Replacement Percentage of Shares
Requirement is Satisfied of Common Stock
------------------------ ---------------
<S> <C>
June 19, 1996 through June 18, 1997 1%
June 19, 1997 through June 18, 1998 2%
June 19, 1998 through June 18, 1999 3%
June 19, 1999 through June 18, 2000 4%
After June 18, 2000 5%
</TABLE>
The "Revenue Replacement Requirement" shall mean that the Company has made
revenue sharing and handling fee payments to Rentrak pursuant to the Rentrak
National Account Agreement, as amended, in the amount of at least $192,500
during any consecutive twelve (12) month period after the Grant Date, which
payments are derived solely from the Company's Retail Locations (as defined in
the National Account Agreement, as amended) not currently participating or
required to participate as of the Grant Date on Rentrak's PPT System pursuant to
the Rentrak PPT Agreement. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN
THIS WARRANT, ONCE THE COMPANY HAS SATISFIED THE REVENUE REPLACEMENT
REQUIREMENT, THIS WARRANT SHALL BE EXERCISED FOR THAT NUMBER OF SHARES OF THE
COMPANY'S COMMON STOCK WHICH, IMMEDIATELY FOLLOWING AND GIVING FULL EFFECT TO
THE EXERCISE THEREOF, WILL EQUAL ONE-HALF OF ONE PERCENT (.5%) OF THE COMPANY'S
COMMON STOCK, CALCULATED ON A FULLY DILUTED BASIS.
As used herein, the term "calculated on a fully diluted basis" shall
include the sum of the number of shares of Common Stock actually outstanding at
such time (without regard to any shares held in the treasury of the Company),
including any shares of Common Stock issued upon prior exercises of this
Warrant, plus the number of shares of Common Stock
Page 3 - WARRANT CERTIFICATE
<PAGE>
which may be purchased at such time upon the exercise of any outstanding rights
or options to purchase securities of the Company (other than this Warrant) plus
any shares of Common Stock which may be issuable at such time upon the
conversion or exchange of any outstanding securities convertible or
exchangeable, in whole or part, into shares of Common Stock.
Upon exercise of this Warrant, the holder hereof shall receive, in addition
to the number of shares of Common Stock which it is entitled to receive
hereunder, such additional number of shares of capital stock or other securities
or property (other than cash) distributed by the Company from time to time after
the Grant Date of this Warrant with respect to the Common Stock which the holder
of this Warrant would have received had the holder exercised the Warrant
immediately prior to distribution or issuance of any such shares, securities or
property by the Company with respect to the number of shares of Common Stock
received upon exercise of this Warrant.
2.4 CERTIFICATES. Within a reasonable time but no more than fifteen
(15) days after exercise, certificates for such Warrant Shares shall be
delivered to the Holder.
2.5 SECURITIES ACT COMPLIANCE. Unless the issuance or transfer of the
Warrant Shares shall have been registered under the Securities Act, as a
condition of its delivery of the certificates for the Warrant Shares, the
Company may require the Holder (including any transferee of the Warrant Shares
in whose name the Warrant Shares are to be registered) to deliver to the
Company, in writing, representations regarding the purchaser's sophistication,
investment intent, acquisition for its own account and such other matters as are
reasonable and customary for purchasers of securities in an unregistered private
offering, and the Company may place conspicuously upon each certificate
representing the Warrant Shares a legend substantially in the following form,
the terms of which are agreed to by the Holder (including such transferee):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ISSUED WITHOUT REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND THE BLUE SKY LAWS OF ANY JURISDICTION. SUCH
SECURITIES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR
OTHERWISE DISPOSED OF, BENEFICIALLY OR ON THE RECORDS OF
THE COMPANY, UNLESS THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS OR THERE
HAS BEEN DELIVERED TO THE COMPANY AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY, TO THE EFFECT
THAT SUCH REGISTRATION AND QUALIFICATION IS NOT
REQUIRED.
The Company need not register a transfer of this Warrant or the Warrant Share
unless the conditions specified in such legend and in Section 8 are satisfied.
Page 4 - WARRANT CERTIFICATE
<PAGE>
Section 3. VALIDITY AND RESERVATION OF WARRANT SHARES. The Company
covenants that this Warrant and any Warrant Shares will be validly issued, fully
paid, nonassessable and free of preemptive rights. The Company agrees that so
long as this Warrant may be exercised, the Company will have authorized and
reserved for issuance upon exercise of this Warrant a sufficient number of
Warrant Shares to provide for exercise in full.
Section 4. FRACTIONAL SHARES. No fractional Warrant Share shall be issued
upon the exercise of this Warrant. With respect to any fraction of a Warrant
Share otherwise issuable upon any such exercise, the Company shall pay to the
Holder an amount in cash equal to such fraction multiplied by the Exercise
Price.
Section 5. LIMITED RIGHTS OF THE WARRANT HOLDER. The Holder shall not,
solely by virtue of being the Holder of this Warrant, have any of the rights of
a holder of Common Stock of the Company, either at law or equity, until such
Warrant shall have been exercised and the Holder shall have been issued
certificates representing the Warrant Shares and the Holder shall be deemed to
be the holder of record of Warrant Shares as provided in this Warrant, at which
time the person or persons in whose name or names the certificate or
certificates for Warrant Shares being purchased are to be issued shall be deemed
the holder or holders of record of such shares for all purposes.
Section 6. ADJUSTMENTS UPON CERTAIN EVENTS.
(a) If this Warrant shall be exercised subsequent to any stock split,
stock dividend, recapitalization, combination of shares of the Company, or
other similar event, occurring after the date hereof, then the Holder
exercising this Warrant shall receive upon the exercise of this Warrant and
payment of no additional consideration other than the Aggregate Exercise
Price, the aggregate number and class of shares which such Holder would
have received if this Warrant had been exercised immediately prior to such
stock split, stock dividend, recapitalization, combination of shares, or
other similar event. If any adjustment under this Section 6(a), would
create a fractional share of Common Stock or a right to acquire a
fractional share subject to this Warrant shall be the next higher number of
shares, rounding all fractions upward. Whenever there shall be an
adjustment pursuant to this Section 6(a), the Company shall forthwith
notify the Holder or Holders of this Warrant of such adjustment, setting
forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated.
(b) If this Warrant shall be exercised subsequent to any merger,
consolidation, exchange of shares, separation, reorganization, sale of all
or substantially all of the Company's assets, liquidation of the Company,
or other similar event, occurring after the Grant Date, as a result of
which shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of securities of
the Company or another entity or are otherwise entitled to receive shares
of stock or other securities or property, then the Holder exercising this
Warrant shall receive, upon the exercise of this Warrant and payment of no
additional consideration other than the Aggregate Exercise Price, the
aggregate number and class of shares or other property which such Holder
would have received if this Warrant had
Page 5 - WARRANT CERTIFICATE
<PAGE>
been exercised immediately prior to such merger, consolidation, exchange of
shares, separation, reorganization, sale of all or substantially all of the
Company's assets, or liquidation, or other similar event. If any adjustment
under this Section 6(b) would create a fractional share of Common Stock or
a right to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares subject to this Warrant
shall be the next higher number of shares, rounding all fractions upward.
Whenever there shall be an adjustment pursuant to this Section 6(b), the
Company shall forthwith notify the Holder or Holders of this Warrant of
such adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated. The
above provisions of this Section 6(b) shall apply to successive events
described above.
Section 7. EXCHANGE, TRANSFER OR LOSS OF WARRANT.
7.1 EXCHANGE. This Warrant is exchangeable, without expense to the
Holder and upon surrender hereof to the Company, for Related Warrants of
different denominations entitling the Holder to purchase Related Warrant Shares
equal in total number and identical in type to the Warrant Shares covered by
this Warrant.
7.2 TRANSFER. Subject to the provisions of Section 8, upon surrender
of this Warrant to the Company with the attached Assignment Form duly executed,
the Company shall, without charge, execute and deliver a Related Warrant to the
assignee named in such Assignment Form, and this Warrant shall promptly be
cancelled.
7.3 LOSS, THEFT, DESTRUCTION OR MUTILATION. Upon receipt by the
Company of satisfactory evidence of the loss, theft, destruction or mutilation
of this Warrant and either (in the case of loss, theft or destruction)
indemnification or bond in form and substance acceptable to the Company, or (in
the case of mutilation) the surrender of this Warrant for cancellation, the
Company will execute and deliver to the Holder, without charge, a Related
Warrant of like denomination. Any such Related Warrant executed and delivered
shall constitute an additional obligation of the Company, whether or not this
Warrant, reportedly lost, stolen, destroyed or mutilated, shall be at any time
presented by anyone to the Company for exercise.
Section 8. TRANSFER RESTRICTION.
8.1 GENERAL. Anything contained hereto to the contrary
notwithstanding, this Warrant may not be assigned, transferred (by operation of
law or otherwise), hypothecated or sold (other than to a wholly-owned subsidiary
of Rentrak), except as set forth in Section 8.2. Any such assignment or transfer
shall be made by surrender of this Warrant to the Company or at the office of
its transfer agent, if any, with the Form of Assignment annexed hereto duly
executed and funds sufficient to pay any transfer tax, whereupon the Company
shall, without charge, execute and deliver a Related Warrant in the name of the
assignee and this Warrant shall promptly be cancelled.
Page 6 - WARRANT CERTIFICATE
<PAGE>
8.2 Securities Law Compliance. Except pursuant to the requirements of
Rule 144 of the Securities Act, the Warrant and Warrant Shares may not be sold,
transferred, assigned or otherwise disposed of except as follows:
(a) to a person who, in the opinion of counsel satisfactory to
the Company and in the opinion of the Company's counsel, is a person to whom the
Warrant or Warrant Shares may legally be transferred without registration under
the Securities Act and without the delivery of a current prospectus with respect
thereto; or
(b) to any person upon delivery of a prospectus then meeting the
requirements of the Securities Act relating to such securities (as to which a
registration statement under the Securities Act shall then be in effect) and the
offering thereof for such sale or disposition.
The Holder agrees that it will not at any time offer to sell, sell,
transfer, pledge or otherwise dispose of this Warrant, or, upon receipt of the
Warrant Shares after exercise hereof, any of such Warrant Shares, except
pursuant to either (a) an effective registration statement under the Securities
Act or (b) an opinion of counsel satisfactory to the Company to the effect that
such registration is not required. The Holder acknowledges that, in taking this
unregistered Warrant, or in taking unregistered Warrant Shares upon exercise
hereof, the Holder must continue to bear the economic risk of such investments
for what may be an indefinite period of time. The Holder further agrees hereby
that, prior to any transfer of this Warrant or any Warrant Shares received upon
any exercise hereof (if such Warrant and/or Warrant Shares are not registered
under the Securities Act), it will give written notice to the Company of its
intention to effect such transfer. Upon receipt of such notice, the Company will
promptly present it to counsel for the Company and counsel for the Holder and if
the Company receives the opinion of such counsel, in form and substance
satisfactory to the Company, that the proposed transfer may be effected without
registration under the Securities Act and applicable state law, the Holder shall
be promptly notified and shall be entitled to effect the transfer of this
Warrant and/or the Warrant Shares in accordance with the terms specified in the
notice delivered to the Company. The provisions of this Section 8.2 shall be
binding upon all subsequent Holders of this Warrant and upon all subsequent
holders of the certificates for the Common Stock bearing the legend specified in
Section 2.5 hereof.
8.3 Representations of Holder. The Holder represents that it has
acquired this Warrant for investment purposes only, for its own account, and not
with any present view to, or any offer to sell in connection with, the
distribution thereof. The Holder represents that it is a "accredited investor"
as that term is defined under Regulation D of the Securities Act.
Section 9. Representations and Warranties. The Company represents and
warrants to Rentrak the following:
9.1 Authority. The Company has full right, power and authority to
enter into this Agreement and to perform all of its obligations hereunder or
contemplated hereby; this Agreement has been duly authorized, executed and
delivered by the Company and is enforceable in accordance with its terms.
Page 7 - WARRANT CERTIFICATE
<PAGE>
9.2 Valid Agreement. This Warrant, and the issue and delivery thereof
has been duly and validly authorized, and this Warrant, when issued and
delivered as provided in this Agreement, will be duly and validly issued and
outstanding, and will constitute a valid and binding obligation of the Company.
Section 10. Registration Rights. The Warrant Shares are hereby granted and
shall have all of the registration rights previously granted to Mortco under
that certain Registration Rights Agreement, dated as of August 24, 1995 (the
"Rights Agreement"), by and between Mortco and the Company, the terms of which
are incorporated herein by this reference as if fully set forth herein;
provided, however, that (a) the term "Shares" used in the Rights Agreement shall
- - - - -------- -------
mean the Warrant Shares, (b) the term "Holder" used in the Rights Agreement
shall mean a Holder as defined herein, (C) the term "Mortco" used in the Rights
Agreement shall mean Rentrak as defined herein, and (d) the term "Agreement"
used in the Rights Agreement shall mean this Warrant.
Section 11. Miscellaneous.
11.1 Successors and Assigns. All the covenants and provisions of this
Warrant that are by or for the benefit of the Company shall bind and inure to
the benefit of its successors and assigns hereunder.
11.2 Notice. Notice or demand pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed, until another address is
designated in writing by the Company, as follows:
Lee Video City, Inc.
6851 McDivitt Street, Suite A
Bakersfield, CA 93313
Attention: Robert Y. Lee
Any notice or demand authorized by this Warrant to be given or made by the
Company to or on the Holder shall be given to the Holder by first-class mail,
postage prepaid, addressed, until another address is designated in writing by
the Company, as follows:
Rentrak Corporation
Attention: Ron Berger
7227 N.E. 55th Ave.
Portland, OR 97218
and to any other Holder addressed at his last known address as it shall appear
on the books of the Company, until another address is designated in writing,
with a copy to Rentrak Corporation by like mail.
Page 8 - WARRANT CERTIFICATE
<PAGE>
[Signature Page to Warrant Certificate]
11.3 Applicable Law. The validity, interpretation and performance of
this Warrant shall be governed by the laws of the State of Oregon. For any
action related to the judicial enforcement or interpretation of this Agreement,
the parties hereby expressly submit themselves to the jurisdiction of the
Circuit Court for the County of Multnomah, State of Oregon or the Federal Court
for the District of Oregon.
11.4 Headings. The article headings herein are for convenience only
and are not part of this Warrant and shall not affect the interpretation
thereof.
This Warrant is executed as of June 19 , 1996.
AGREED AND ACCEPTED:
COMPANY: RENTRAK:
Lee Video City, Inc. Rentrak Corporation
By /s/ Robert Y. Lee By
----------------------------- -----------------------------
Robert Y. Lee, President Ron Berger, President
Page 9 - WARRANT CERTIFICATE
<PAGE>
EXHIBIT 10.11
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO A
NON-PUBLIC OFFERING IN ACCORDANCE WITH "THE PRIVATE OFFERING EXEMPTIONS UNDER
SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES HAVE NOT BEEN REGISTERED WITH "THE SECURITIES AND EXCHANGE
COMMISSION. THE REGISTERED HOLDER OF SUCH SECURITIES HAS EXECUTED AN INVESTMENT
REPRESENTATION WITH RESPECT THERETO. ACCORDINGLY "THE SALE, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION OF SAID SECURITIES IS RESTRICTED AND MAY NOT
BE ACCOMPLISHED EXCEPT IN ACCORDANCE WITH SUCH INVESTMENT REPRESENTATION.
STOCK PURCHASE WARRANT ("WARRANT")
DATE OF ISSUANCE: March 14,1995
FOR VALUE RECEIVED, Prism Entertainment Corporation, a Delaware corporation
(the "Company"), hereby grants to Imperial Bank, a California chartered bank
(the "Bank"), its successors or assigns with respect to this Warrant (the Bank
and such successors and assigns sometimes referred to herein individually, a
"Registered Holder" and, collectively, the "Registered Holders") the right to
purchase from the Company a certain number of shares of Common Stock at a price
per share (the "Exercise Price") determined pursuant to this Warrant. This
Warrant is issued as partial consideration for the extension of loans from the
Bank to the Company, and Prism Pictures Corporation, a Delaware corporation, and
Prism Pictures International, Ltd., a California corporation (collectively, the
"Subsidiaries"), pursuant to that certain Revolving Credit Loan and Security
Agreement, dated as of February 24, 1995, by and between the Company, the
Subsidiaries and the Bank (the "Credit Loan Agreement"). The amount and kind of
securities purchasable pursuant to the rights granted hereunder and the Exercise
Price for such securities are subject to adjustment pursuant to the provisions
contained in this Warrant.
This Warrant is subject to the following provisions.
SECTION 1. CERTAIN DEFINITIONS.
-------------------
When used in this Warrant, the following terms, when capitalized, shall
have the meanings set forth below. Certain other terms are defined in the text
of this Warrant.
1
<PAGE>
"Act" means the Securities Act of 1933, as amended, and any successor law
---
or statute thereto.
"Assignment" means an assignment in the form of Exhibit II hereto.
----------
"Average Closing Price" means, as of any date, (i) if shares of Common
---------------------
Stock are listed or admitted for trading on a national securities exchange, the
average of the composite prices therefor as reported in the Wall Street Journal
on the principal national securities exchange on which such shares are traded,
on the last ten (10) trading days before such date, (ii) if such shares are not
listed or admitted for trading on a national security exchange, but are quoted
through the NASDAQ National Market System, the average of the closing prices
therefor on the last ten (10) trading days before such date or (iii) if such
shares are not listed on either a national securities exchange or quoted through
the NASDAQ National Market System, the average of the bid and asked prices
therefor on the last twenty (20) trading days before such date.
"Bank Affiliate" means any Person who, directly or indirectly, controls, is
-------------
controlled by, or is under common control with the Bank.
"Common Stock" means the Company's common stock, par value $0.01 per share,
------------
and any capital stock of the Company hereafter authorized as common stock.
"Company" means Prism Entertainment Corporation, a Delaware corporation,
-------
and any other corporation or any other entity which shall succeed to or assume
the rights or obligations of the Company.
"Convertible Securities" shall have the meaning set forth in Section 4.
----------------------
"Exercise Agreement" means an agreement in the form of Exhibit I, as the
------------------
same may be modified in accordance with Section 2.3 hereof.
"Exercise Period" means the period set forth in Section 2.1 hereof.
---------------
"Exercise Price" means the price set forth in Section 3.1 hereof, as the
--------------
same may be adjusted in accordance with Section 4 hereof.
"Exercise Time" means the time when the Company has received all of the
-------------
items set forth in Section 2.2(a) hereof.
"Fair Market Value Per Share of Outstanding Common Stock" means (A) if on
-------------------------------------------------------
the date of determination, the Common Stock shall not be publicly traded or the
Average Closing Price cannot be determined, the fair market value of the Common
Stock, divided by the number of shares of Common Stock then outstanding, which
fair market value of the Common Stock shall be determined (i) by the Board of
Directors of the Company, in good faith, provided that the Registered Holder
agrees with the Board's determination within 30 days of receipt thereof, or (ii)
if such determination is not
2
<PAGE>
agreed to by the Registered Holder, by an investment banking firm mutually
selected by the Company and said Registered Holder, or (B) if on the date of
determination the Common Stock shall be publicly traded, the Average Closing
Price on such date. The fees of such investment banking firm shall be paid by
the Company.
"Options" shall have the meaning set forth in Section 4 hereof.
-------
"Person" means an individual, a partnership, a joint venture, a limited
------
liability company, a corporation, a trust, an unincorporated organization, a
government or any department or agency thereof or any other entity.
"Strike Price" means $2.00 as the same may be adjusted in accordance with
------------
Section 4.1 hereof.
SECTION 2. EXERCISE OF WARRANT.
-------------------
2.1. Exercise Period. The Registered Holder may exercise, in whole or in part,
---------------
the purchase rights represented by this Warrant at any time and from time
to time after the Date of Issuance to and including the third (3rd)
anniversary of the Date of Issuance (the "Exercise Period").
2.2 Exercise Procedure.
------------------
(a) This Warrant will be deemed to have been exercised at the time
the Company has received all of the following items (the
"Exercise Time"):
(i) a completed Exercise Agreement, as described in Section 2.3
below, executed by the Person exercising all or part of the
purchase rights represented by this Warrant (the
"Purchaser");
(ii) this Warrant;
(iii) If this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set
forth in Exhibit II hereto evidencing the assignment of
this Warrant to the Purchaser, in which case the Registered
Holder shall have complied with the provisions set forth in
Section 12 hereof; and
(iv) a check payable to the Company in an amount equal to the
product of the Exercise Price multiplied by the number of
shares of Common Stock being purchased upon such exercise.
3
<PAGE>
(b) Certificates for shares of Common Stock purchased upon exercise of
this Warrant will be delivered by the Company to the Purchaser within five (5)
business days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company will prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
expired or been exercised and will, within such five (5) business day period,
deliver such new Warrant to the Person designated for delivery in the Exercise
Agreement.
(c) The shares of Common Stock issuable upon the exercise of this Warrant
will be deemed to have been issued to the Purchaser at the Exercise Time, and
the Purchaser will be deemed for all purposes to have become the record holder
of such shares at the Exercise Time.
(d) The issuance of certificates for Common Stock upon exercise of this
Warrant will be made without charge to the Registered Holder or the Purchaser
for any issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of Common Stock. Each
share of Common Stock issuable upon exercise of this Warrant shall, upon payment
of the Exercise Price therefor, be fully paid and non-assessable and free from
all liens and charges with respect to the issuance thereof.
(e) The Company will not close its books with respect to the transfer of
this Warrant or of any shares of Common Stock issued or issuable upon the
exercise of this Warrant in any manner which interferes with the timely exercise
of this Warrant. The Company will from time to time take all such action as may
be necessary to assure that the par value per share of the unissued Common Stock
issuable upon exercise of this Warrant is at all time equal to or less than the
Exercise Price then in effect.
2.3. Exercise Agreement. Upon any exercise of this Warrant, the Exercise
------------------
Agreement will be substantially in the form set forth in Exhibit I hereto,
except that if the shares are not to be issued in the name of the Person in
whose name this Warrant is registered, the Exercise Agreement will also state
the name of the Person to whom the certificates for shares are to be issued, and
if the number of shares to be issued does not include all the shares purchasable
hereunder, it will also state the name of the Person to whom a new Warrant for
the unexercised portion of the rights hereunder is to be delivered. Such
Exercise Agreement will be dated the actual date of the execution thereof.
2.4. Fractional Shares. If a fractional share would be issuable upon
-----------------
exercise of the rights represented by this Warrant, the Company will, within
five (5) business days after the date of the Exercise Time, deliver to the
Purchaser a check payable to the Purchaser in lieu of such fractional share in
an amount equal to such fraction multiplied by the Fair Market Value Per Share
of Outstanding Common Stock as of the date of the Exercise Time.
4
<PAGE>
SECTION 3. INITIAL EXERCISE PRICE AND NUMBER OF SHARES
3.1. Exercise Price. The initial Exercise Price per share of Common
--------------
Stock shall be $2.00, as the same may be adjusted in accordance with
Section 4 hereof.
3.2. Number of Shares. On the Date of Issuance, the number of
----------------
shares of Common Stock for which this Warrant can be exercised shall be
221, 324 shares, as the same may be adjusted in accordance with Section 4
hereof.
SECTION 4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES.
The Exercise Price, the Strike Price and the number of shares issuable
upon exercise or conversion of this Warrant shall be subject to adjustment
from time to time in order to prevent dilution of the rights granted under
this Warrant as provided in this Section 4.
4.1. Common Stock Reorganization. If the Company shall subdivide its
---------------------------
outstanding shares of Common Stock into a greater number of shares or
consolidate its outstanding shares of Common Stock into a smaller number of
shares (any such event being called a "Common Stock Reorganization"), then
(a) the Exercise Price and the Strike Price, as the case may be, shall be
adjusted, effective immediately after the record date at which the holders
of shares of Common Stock are determined for purposes of such Common Stock
Reorganization, to a price determined by multiplying the Exercise Price and
the Strike Price, as the case may be, in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding on such record date before giving effect
to such Common Stock Reorganization and the denominator of which shall be
the number of shares of Common Stock outstanding after giving effect to
such Common Stock Reorganization, and (b) the number of shares of Common
Stock subject to purchase or issuance upon exercise or conversion of this
Warrant shall be adjusted, effective at such time, to a number determined
by multiplying the number of shares of Common Stock subject to purchase or
issuance immediately before such Common Stock Reorganization by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding after giving effect to such Common Stock Reorganization and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately before such Common Stock Reorganization.
4.2. Common Stock Distribution. (a) If the Company shall issue or
-------------------------
otherwise sell or distribute any shares of Common Stock, other than
pursuant to a Common Stock Reorganization (any such event, including any
event described in paragraphs (b) and (c) below, being herein called a
"Common Stock Distribution") for no consideration or a consideration per
share less than the
5
<PAGE>
Strike Price on the date of such issue, sale or distribution (before giving
effect to such issue, sale or distribution), then, effective upon such
issue, sale or distribution, the Exercise Price shall be reduced to the
lower of the prices (calculated to the nearest cent) determined as provided
in clauses (i) and (ii) below:
(i) by dividing (A) an amount equal to the sum of (1) the number
of shares of Common Stock outstanding immediately prior to such Common
Stock Distribution multiplied by the then existing Exercise Price, plus (2)
the consideration, if any, received by the Company upon such Common Stock
Distribution by (B) the total number of shares of Common Stock outstanding
immediately after such Common Stock Distribution; and
(ii) by multiplying the Exercise Price in effect immediately
prior to such Common Stock Distribution by a fraction, the numerator of
which shall be the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such Common Stock Distribution multiplied
by the Strike Price on the date of such Common Stock Distribution, plus (B)
the consideration received by the Company upon such Common Stock
Distribution, and the denominator of which shall be the product of (1) the
total number of shares of Common Stock outstanding immediately after such
Common Stock Distribution, multiplied by (2) the Strike Price on the date
of such Common Stock Distribution.
No adjustment of the Exercise Price shall be made in an amount less than 1%
of such Exercise Price, but any such lesser adjustment shall be carried forward
and shall be made at the time and together with the next subsequent adjustment
which together with any adjustments so carried forward shall amount to 1% of
such Exercise Price or more.
If any Common Stock Distribution shall require an adjustment to the
Exercise Price pursuant to the foregoing provisions of this paragraph (a), then,
effective at the time such adjustment is made, the number of shares of Common
Stock subject to purchase or issuance upon exercise or conversion of this
Warrant shall be increased to a number determined by multiplying the number of
shares of Common Stock subject to purchase or issuance immediately before such
Common Stock Distribution by a fraction, the numerator of which shall be the
Exercise Price in effect immediately before giving effect to such Common Stock
Distribution and the denominator shall be the Exercise Price in effect
immediately after giving effect to such Common Stock Distribution.
The provisions of this paragraph (a), including by operation of paragraph
(b) or (c) below, shall not operate to increase the Exercise Price or the Strike
Price or reduce the number of shares of Common Stock subject to purchase upon
exercise of this Warrant or subject to issuance upon conversion of this Warrant.
(b) if the Company shall issue, sell, distribute or otherwise grant in any
manner (whether directly or by assumption in a merger or otherwise) any rights
to subscribe for or to purchase, or any warrants or options for the purchase of,
Common
6
<PAGE>
Stock or any stock, securities or indebtedness convertible into or exchangeable
for Common Stock (such rights, warrants or options being herein called "Options"
and such convertible or exchangeable stock, securities or indebtedness being
herein called "Convertible Securities"), whether or not such Options or the
rights to convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities (determined by dividing (i) the aggregate amount, if any, received or
receivable by the Company as consideration for the granting of such Options,
plus the minimum aggregate amount of additional consideration payable to the
Company upon the exercise of all such Options, plus, in the case of Options to
acquire Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Strike Price
on the date of granting such Options (before giving effect to such grant), then,
for purposes of paragraph (a) above, the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to have been issued as of the
date of granting of such Options and thereafter shall be deemed to be
outstanding and the Company shall be deemed to have received as consideration
such price per share, determined as provided above, therefor.
(c) If the Company shall issue, sell or otherwise distribute (whether
directly or by assumption in a merger or otherwise) any Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the aggregate amount
received or receivable by the Company as consideration for the issue, sale or
distribution of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Company upon the conversion
or exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Strike Price on the date of such issue, sale or
distribution (before giving effect to such issue, sale or distribution), then,
for purposes of paragraph (a) above, the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the date of the issue, sale
or distribution of such Convertible Securities and thereafter shall be deemed to
be outstanding and the Company shall be deemed to have received as consideration
such price per share, determined as provided above, therefor.
(d) If the minimum purchase price provided for in any Option referred to
in paragraph (b) above, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in paragraph
(b) or (c) above, or the rate at which any Convertible Securities referred to in
paragraph (b) or (c) above are
7
<PAGE>
convertible into or exchangeable for Common Stock shall change at any time, the
Exercise Price then in effect shall forthwith be readjusted (effective only with
respect to any exercise or conversion of this Warrant after such readjustment)
to the Exercise Price which would then be in effect had the adjustment made upon
the issue, sale, distribution or grant of such Options or Convertible Securities
been made based upon such changed purchase price, additional consideration or
conversion rate, as the case may be; provided, however, that such readjustment
shall give effect to such change only with respect to such Options and
Convertible Securities as then remain outstanding.
(e) If the Company shall pay a dividend or make any other distribution
upon any capital stock of the Company payable in Common Stock, Options or
Convertible Securities, then, for purposes of paragraph (a) above, such Common
Stock, Options or Convertible Securities, as the case may be, shall be deemed to
have been issued or sold without consideration.
(f) If any shares of Common Stock, Options or Convertible Securities shall
be issued, sold or distributed for cash, the consideration received therefor
shall be deemed to be the amount received by the Company therefor, after
deduction therefrom of any expenses incurred and any underwriting commissions or
concessions paid or allowed by the Company in connection therewith. If any
shares of Common Stock, Options or Convertible Securities shall be issued, sold
or distributed for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to be the
fair market value of such consideration (as determined in good faith by the
Board of Directors of the Company), after deduction of any expenses incurred and
any underwriting commissions or concessions paid or allowed by the Company in
connection therewith. If any shares of Common Stock, Options or Convertible
Securities shall be issued in connection with any merger in which the Company is
the surviving corporation, the amount of consideration therefor shall be deemed
to be the fair market value (as determined in good faith by the Board of
Directors of the Company) of such portion of the assets and business of the non-
surviving corporation as shall be attributable to such Common Stock, Option or
Convertible Securities, as the case may be. If any Options shall be issued in
connection with the issue and sale of other securities of the Company, together
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be deemed
to have been issued without consideration.
(g) If the Company shall set a record date for the holders of the Common
Stock for the purpose of entitling them to receive a dividend or other
distribution payable in Common Stock, Options or Convertible Securities or to
subscribe for or purchase Common Stock, Options or Convertible Securities, then
such record date shall be deemed to be the date of the issue, sale, distribution
or grant of the shares of Common Stock deemed to have been issued or sold upon
the declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
8
<PAGE>
4.3. Special Dividends. If the Company shall issue or distribute to any
-----------------
holders of shares of Common Stock, evidences of indebtedness, any other
securities of the Company or any cash, property or other assets, and if such
issuance or distribution does not constitute (x) a cash dividend or cash
distribution out of earned surplus or net profits legally available therefor,
(y) a Common Stock Reorganization or (z) a Common Stock Distribution (any such
non-excluded event being herein called a "Special Dividend"), then at the option
of the Registered Holder:
(a)(i) the Exercise Price shall be decreased, effective immediately
after the record date at which the holders of shares of Common Stock are
determined for purposes of such Special Dividend, to a price determined by
multiplying the Exercise Price then in effect by a fraction, the numerator
of which shall be the greater of (A) $0.001 and (B) the excess of the
Strike Price on such record date over the then fair market value (as
determined in good faith by the Board of Directors of the Company) of the
evidences of indebtedness, securities or property or other assets issued or
distributed in such Special Dividend with respect to one share of Common
Stock, and the denominator of which shall be the Strike Price on such
record date, and (ii) the number of shares of Common Stock subject to
purchase or issuance upon exercise or conversion of this Warrant shall be
increased to a number determined by multiplying the number of shares of
Common Stock subject to purchase or issuance immediately before such
Special Dividend by a fraction, the numerator of which shall be the
Exercise Price in effect immediately before such Special Dividend and the
denominator of which shall be the Exercise Price in effect immediately
after such Special Dividend; or
(b) the Company shall pay over to the Registered Holder, on the
date such Special Dividend is paid, the cash, stock or other securities and
other property which the Registered Holder would have received if the
Registered Holder had exercised this Warrant in full to purchase Common
Stock and had been the record holder of such Common Stock on the record
date at which the holders of shares of Common Stock are determined for
purposes of such Special Dividend.
4.4. Capital Reorganizations. If there shall be any consolidation or
-----------------------
merger to which the Company is a party, other than a consolidation or a merger
in which the Company is a continuing corporation and which does not result in
any reclassification of, or change (other than a Common Stock Reorganization)
in, outstanding shares of Common Stock, or any sale or conveyance of the
property of the Company as an entirety or substantially as an entirety (any such
event being called a "Capital Reorganization"), then, effective upon the
effective date of such Capital Reorganization, the Registered Holder shall have
the right to purchase, upon exercise or conversion of this Warrant, the kind and
amount of shares of stock and other securities and property (including cash)
which the Registered Holder would have owned or have been entitled to receive
after such Capital Reorganization if this Warrant had been exercised or
converted immediately prior to such Capital Reorganization. As a condition to
effecting
9
<PAGE>
any Capital Reorganization, the Company or the successor or surviving
corporation, as the case may be, shall execute and deliver to each Registered
Holder an agreement as to the Registered Holders' rights in accordance with this
Section 4.4, providing for subsequent adjustments as nearly equivalent as may be
practicable to the adjustments provided for in this Section 4. The provisions of
this Section 4.4 shall similarly apply to successive Capital Reorganizations.
4.5. Reclassifications, Exchanges and Substitutions. If the Common Stock
----------------------------------------------
issuable upon exercise or conversion of this Warrant is changed into the same or
a different number of shares of the same or any other class or classes of stock,
whether by recapitalization, reclassification or otherwise (other than a Common
Stock Reorganization, a Common Stock Distribution, a Special Dividend, or a
Capital Reorganization) (herein a "Reclassification") provision shall be made so
that the Registered Holders shall have the right thereafter, upon exercise or
conversion of this Warrant to receive in lieu of the shares of Common Stock
which they would have been entitled to receive prior to the Reclassification,
the kind and amount of stock and other securities and property receivable upon
such Reclassification in an amount equal to the amount that such Registered
Holders would have been entitled to had they exercised or converted this Warrant
immediately prior to such Reclassification upon the exercise or conversion of
this Warrant, but only to the extent the Warrant is actually exercised or
converted, all subject to further adjustment as provided herein.
4.6. Certain Other Events. If any event occurs as to which the foregoing
--------------------
provisions of this Section 4 are not strictly applicable or, if strictly
applicable, would not, in the good faith judgment of the Board of Directors of
the Company, fairly protect the purchase and conversion rights of the Warrants
in accordance with the essential intent and principles of such provisions, then
such Board shall make such adjustments in the application of such provisions, in
accordance with such essential intent and principles, as shall be reasonably
necessary, in the good faith opinion of such Board, to protect such purchase and
conversion rights as aforesaid, but in no event shall any such adjustment have
the effect of increasing the Exercise Price or decreasing the number of shares
of Common Stock subject to purchase or issuance upon exercise or upon conversion
of this Warrant.
4.7. Adjustment Rules.
----------------
(a) Any adjustments pursuant to this Section 4 shall be made
successively whenever an event referred to herein shall occur.
(b) No adjustment shall be made pursuant to this Section 4 in respect
of the issuance from time to time of shares of Common Stock upon (i) the
exercise or conversion of this Warrant, (ii) the conversion of any Convertible
Security outstanding on the Date of Issuance at the conversion rate in effect,
and for the number of shares of Common Stock issuable upon conversion of such
Convertible Security, on the Date of Issuance or (iii) the exercise of any
Option outstanding on the Date of Issuance at the
10
<PAGE>
rate and for the number of shares for which such Option may be exercised on the
Date of Issuance.
(c) If the Company shall set a record date to determine the holders
of shares of Common Stock for purposes of a Common Stock Reorganization, Common
Stock Distribution, Special Dividend, Capital Reorganization or Reclassification
and shall legally abandon such action prior to effecting such action, then no
adjustment shall be made pursuant to this Section 4 in respect of such action.
4.8. Proceeding Prior to Any Action Requiring Adjustment. As a condition
---------------------------------------------------
precedent to the taking of any action which would require an adjustment pursuant
to this Section 4, the Company shall take any action which may be necessary,
including obtaining regulatory approvals or exemptions, in order that the
Company may thereafter validly and legally issue as fully paid and nonassessable
all shares of Common Stock which the holders of this Warrant are entitled to
receive upon exercise or conversion thereof.
4.9. Notice of Adjustment. Not less than twenty (20) nor more than ninety
--------------------
(90) days prior to the effective date or fifteen (15) days prior to the record
date, as the case may be, of any action which requires or might require an
adjustment or readjustment pursuant to this Section 4, the Company shall give
notice to each Registered Holder of such event, describing such event in
reasonable detail and specifying the record date or effective date, as the case
may be, and, if determinable, the required adjustment and the computation
thereof. If the required adjustment is not determinable at the time of such
notice, the Company shall give notice to each Registered Holder of such
adjustment and computation promptly after such adjustment becomes determinable.
SECTION 5. PURCHASE RIGHTS.
If at any time the Company grants, issues or sells any Options or
Convertible Securities to the record holders of Common Stock (the "Purchase
Rights"), then each Registered Holder of this Warrant will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Registered Holder could have acquired if such
Registered Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issuance or sale of such Purchase Rights. Each
Registered Holder shall have the right to elect the rights available under this
Section 5 in lieu of rights available under Section 4 (to the extent applicable)
in the event of the grant, issuance or sale of any Options or Convertible
Securities to record holders of Common Stock.
11
<PAGE>
SECTION 6. CONVERSION RIGHT
6.1 Conversion of Warrant. In lieu of exercising this Warrant as specified
---------------------
in Section 2 hereof, the Registered Holder may from time to time convert this
Warrant into a number of shares of Common Stock determined by dividing (i) the
amount obtained by subtracting the then aggregate Exercise Price of this Warrant
from the product of (1) the number of shares of Common Stock then issuable upon
exercise of this Warrant multiplied by (2) the Fair Market Value Per Share of
Outstanding Common Stock as of the date the Registered Holder executes the
Conversion Agreement referenced in Section 6.2 hereof (the "Conversion Date") by
(ii) the Fair Market Value Per Share of Outstanding Common Stock as of the
Conversion Date. The issuance of certificates for Common Stock upon conversion
of this Warrant will be made without charge to the Registered Holder or the
Person to whom such certificates are delivered for any issuance tax in respect
thereof or other costs incurred by the Company in connection with such
conversion and the related issuance of Common Stock. Each share of Common Stock
issuable upon conversion of this Warrant shall be fully paid and non-assessable
and free from all liens and charges with respect to the issuance thereof.
6.2 Conversion Agreement. Upon any conversion of this Warrant, the
--------------------
Registered Holder shall deliver this Warrant to the Company together with a
Conversion Agreement substantially in the form set forth in Exhibit IV hereto,
except that if the shares are not to be issued in the name of the Person in
whose name this Warrant is registered, the Conversion Agreement will also state
the name of the Person to whom the certificates for shares are to be issued.
Such Conversion Agreement will be dated the actual date of the execution
thereof.
6.3 Fractional Shares. If a Fractional Share would be issuable upon the
-----------------
conversion of this Warrant, the Company will, within five (5) business days
after the Conversion Date deliver to the Person to whom the shares of Common
Stock upon conversion of this Warrant are to be.delivered a check payable to
said Person in lieu of such fractional share in an amount equal to such fraction
multiplied by the Fair Market Value Per Share of Outstanding Common Stock as of
the Conversion Date.
SECTION 7. NOTICE OF CERTAIN EVENTS
7.1 Adjustment of Exercise Price. Immediately upon any adjustment of the
----------------------------
Exercise Price, the Strike Price or the number of shares for which this Warrant
is exercisable, the Company will give written notice thereof to the Registered
Holders.
7.2 Dividend Distributions, etc. The Company will give written notice to
---------------------------
the Registered Holders at least ten (10) calendar days prior to the date on
which the Company closes its books or takes a record (i) with respect to any
dividend or distribution upon the Common Stock, (ii) with respect to any pro
rata subscription offer to holders of Common Stock or (iii) for determining
rights to vote with respect to any
12
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dissolution, liquidation, capital reorganization, reclassification,
consolidation or merger or sale of all or substantially all of the Company's
assets.
7.3 Other Events. The Company will give written notice to the Registered
------------
Holders at least twenty (20) calendar days prior to the date on which any
dissolution, liquidation or issuance of additional shares of Common Stock,
Options or Convertible Securities, Common Stock Reorganization, Special
Dividends, Capital Reorganization, reclassification, consolidation or merger or
sale of all or substantially all of the Company's assets will take place.
SECTION 8. AVAILABLE SHARES.
During the period within which the rights represented by this Warrant may
be exercised, the Company shall at all times reserve and keep available out of
its authorized capital stock, solely for the purpose of issuance upon exercise
or conversion of this Warrant, such number of shares of Common Stock as shall be
issuable upon the exercise or conversion of this Warrant, and at its expense
will obtain the listing thereof on all national securities exchanges, if any, on
which the shares are then listed. If at any time the number of authorized shares
shall not be sufficient to effect the exercise or conversion of this Warrant,
the Company will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
SECTION 9. ISSUANCE OF SHARES.
------------------
(a) The Company represents and warrants that there are no
restrictions in the Company's certificate of incorporation or bylaws which
prevent the Company from issuing shares for the purpose of enabling it to
satisfy any obligation to issue shares upon exercise or conversion of this
Warrant during the Exercise Period. The Company covenants and agrees that
it will not amend its certificate of incorporation or bylaws in any manner,
or take any other action, which could adversely affect the Company's
ability to issue shares upon exercise or conversion of this Warrant.
(b) The Company represents and warrants that all shares issued upon
exercise or conversion of this Warrant will, upon issuance in accordance
with the terms of this Warrant, (i) be legally issued and free from all
taxes, liens, charges, encumbrances and security interests created by the
Company with respect to the issuance thereof, and (II) be duly and validly
issued, fully paid and non-assessable shares of Common Stock as to which no
Registered Holder shall have any liability other than payment of the
Exercise Price, if applicable.
13
<PAGE>
(c) All original issue taxes payable in respect of the issuance of
shares upon the exercise of the rights represented by this Warrant shall be
paid by the Company.
(d) The Company represents and warrants that, on the Date of
Issuance, the Company has authorized 20,000,000 shares of Common Stock, of
which 2,213,263 are issued and outstanding.
All of the issued shares of capital stock of the Company have been validly
issued and are fully paid and non-assessable. Except as set forth on Exhibit III
hereto, there are no outstanding subscriptions, options, warrants, or other
rights or agreements of any kind obligating the Company to sell or issue any
additional shares of capital stock of any class, or any securities or
indebtedness convertible into or exchangeable for any shares of capital stock of
any class, of the Company.
SECTION 10. CERTAIN COVENANTS.
-----------------
The Company covenants and agrees that it shall not permit any of its
subsidiaries to issue, sell, distribute or otherwise grant in any manner
(whether directly or by assumption in a merger or otherwise) any rights to
subscribe for or to purchase, or any warrants or options for the purchase of,
any of such subsidiary's capital stock or any securities convertible or
exchangeable for any of such subsidiary's capital stock, whether or not such
rights, warrants or options, or the rights to convert or exchange such
convertible or exchangeable securities, are immediately exercisable.
SECTION 11. NO VOTING RIGHTS; LIMITATION OF LIABILITY.
-----------------------------------------
This Warrant will not entitle the holder hereof to any voting rights or
other rights as a stockholder of the Company. No provisions hereof, in the
absence of affirmative action by the Registered Holders to purchase shares, and
no enumeration herein of the rights or privileges of the Registered Holders
shall give rise to any liability of such Registered Holders for the Exercise
Price of shares acquirable by exercise hereof or as a stockholder of the
Company.
SECTION 12. COMPLIANCE WITH THE ACT; TRANSFERABILITY.
----------------------------------------
12.1 Compliance With the Act. The Registered Holders acknowledge that
-----------------------
neither this Warrant nor the shares of Common Stock issuable upon exercise or
conversion of this Warrant have been registered under the Act and agree that
this Warrant and all shares purchased upon exercise or conversion hereof shall
be disposed of only in accordance with the Act and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder. The Registered
Holders further agree not to offer, sell, transfer or otherwise dispose of this
Warrant or any shares issuable
14
<PAGE>
upon exercise or conversion of this Warrant to any other Person unless a
registration statement covering the sale, transfer or other disposition shall
then be effective under the Act, or there shall have been delivered to the
Company an opinion of counsel reasonably acceptable to the Company to the effect
that such offer, sale, transfer or other disposition may be affected without
compliance with the registration and prospectus deliver requirements of the Act.
Each certificate evidencing shares upon exercise or conversion of this Warrant
shall bear a legend to the foregoing effect, and the Registered Holders and any
other Person to whom, in accordance with Sections 2.3 or 6.2, a certificate for
shares or a new Warrant is to be delivered shall be required, at or before
receipt of such certificate or Warrant, to execute and deliver to the Company a
letter to the effect that it is acquiring the shares evidenced by such
certificate or such Warrant for its own account and not with a view to, or for
resale in connection with, any distribution thereof in violation of the Act.
12.2 Right of First Refusal. In the event the Bank desires to sell this
----------------------
Warrant to a Person other than a Bank Affiliate or another bank or financial
institution to which the Bank has transferred or assigned the "Loan" (as that
term is defined in the Credit Loan Agreement) (any such non-excluded Person
being herein called a "Non-Affiliated Person"), the Bank first shall give to
the Company written notice (the "Sales Notice") of the price and other terms on
which it would be willing to sell this Warrant. Within ten (10) days of the
Company's receipt of the Sales Notice, the Company may elect to purchase this
Warrant for the price and on the terms set forth in the Sales Notice by giving
to the Bank within said ten (10) day period written notice of its election to so
purchase this Warrant. In the event the Company does not elect to purchase this
Warrant within said ten (10) day period as provided above or fails to consummate
the purchase of this Warrant at the price and on the terms set forth in the
Sales Notice (the "No Election or Purchase Event"), the Bank shall be free to
sell this Warrant to any Non-Affiliated Person at a price and on terms no more
favorable to the purchaser than the ones set forth in the Sales Notice during
the ninety (90) day period immediately following the occurrence of the No
Election or Purchase Event. The purchase price set forth in the Sales Notice
must be an all cash purchase price. Notwithstanding the Bank's delivery of a
Sales Notice to the Company, the Company shall not have the right to purchase
this Warrant pursuant to this Section 12.2 and during the ninety (90) day period
immediately following the Company's receipt of a Sales Notice the Bank shall be
free to sell this Warrant to any Non-Affiliated Person on terms no more
favorable to the purchaser than the ones set forth in the Sales Notice, in the
event the Company as of the date of the Company's receipt of the Sales Notice is
not legally permitted to purchase this Warrant pursuant to the Delaware General
Corporation law or the California General Corporation Law. This Section 12.2
shall be binding upon any Bank Affiliate who acquires this Warrant from the Bank
or another Bank Affiliate, but no Non-Affiliated Person who acquires this
Warrant shall be subject to this Section 12.2 with respect to any subsequent
sales or transfers of this Warrant. For the avoidance of doubt neither the Bank
nor any Bank Affiliate shall be obligated to comply with this Section 12.2 in
the event it sells, transfers or assigns this Warrant to any Bank Affiliate or
another bank or financial institution to which the Bank shall transfer or assign
the
15
<PAGE>
Loan. The Company's rights to purchase the Warrant set forth in this Section
12.2 may be assigned or transferred to another Person.
12.3 Registration Rights and Other Rights. The Registered Holders are
------------------------------------
entitled to all of the rights granted to the Bank under that certain
Registration Rights Agreement by and between the Company, and the Bank as
amended, supplemented or modified from time to time in accordance with its
terms.
12.4 Transferability. Subject to the foregoing transfer conditions, this
---------------
Warrant and all rights hereunder are transferable, in whole or in part, without
charge to the Registered Holders, upon surrender of this Warrant with a properly
executed Assignment (in the form of Exhibit II hereof) at the principal office
of the Company.
SECTION 13. WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS.
This Warrant is exchangeable, upon the surrender hereof by the Registered
Holders, at the principal office of the Company, for new warrant of like kind
representing in the aggregate the purchase rights hereunder, and each of such
new warrant will represent such portion of such rights as is designated by the
Registered Holders at the time of such surrender. The date the Company initially
issues this Warrant will be deemed to be the "Date of Issuance" hereof
regardless of the number of times new certificates representing the unexpired
and unexercised rights formerly represented by this Warrant shall be issued. All
warrants representing portions of the rights hereunder shall be included in the
term "Warrant."
SECTION 14. REPLACEMENT.
Upon receipt of evidence reasonably satisfactory to the Company (it being
understood that an affidavit of the Registered Holders will be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, the Company will (at its expense) execute and deliver
in lieu of such certificate a new certificate of like kind representing the same
rights represented by such lost, stolen, destroyed or mutilated certificate and
dated the date of such lost, stolen, destroyed or mutilated certificate. The
Company may require as a condition of the issuance of such replacement
certificate, indemnification sufficient to protect it against any claim made
against the Company on account of any lost, stolen, or destroyed certificate.
SECTION 15. IMPAIRMENT.
The Company shall not, by amendment of its certificate of incorporation or
through any reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed
16
<PAGE>
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Registered Holders against impairment.
SECTION 16. NOTICES.
Except as otherwise expressly provided herein, all notices referred to in
this Warrant will be in writing and will be delivered to personally, mailed by
registered or certified first class mail, return receipt requested, postage
prepaid or transmitted by telecopy, and will be deemed to have been given when
so delivered, mailed or transmitted (a) to the Company, at its principal
executive offices and (b) to the Registered Holders of this Warrant, at such
holder's address as it appears in the records of the Company.
SECTION 17. AMENDMENT AND WAIVER.
No amendment or waiver of the terms of this Warrant shall be effective
unless made by an instrument in writing executed by the Company and the
Registered Holder of this Warrant.
SECTION 18. DESCRIPTIVE HEADINGS; GOVERNING LAW.
The descriptive headings of the several parts and paragraphs of this
Warrant are inserted for convenience only and do not constitute a part of this
Warrant. The
17
<PAGE>
construction, validity and interpretation of this Warrant will be governed by
the internal law of the California (without regard to laws on the conflict of
laws).
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
attested by its duly authorized officers under its corporate seal and be dated
the Date of Issuance hereof.
PRISM ENTERTAINMENT CORPORATION
By: /s/ Barry Collier
---------------------------
Name: Barry Collier
Title: President
ATTEST: /s/ Earl Rosenstein
------------------------
Name: Earl Rosenstein
Title: Sr. Vice Pres.
18
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
TO: DATED:
The undersigned, pursuant to the provisions set forth in the attached Warrant
(Certificate No. ), hereby agrees to subscribe for the purchase of ___ shares of
the Common Stock covered by such Warrant and makes payment herewith in full
therefor at the exercise price per share provided by such Warrant.
[NAME OF ENTITY OR PERSON]
By
-----------------------------
Name:
Title:
[ADDRESS]
19
<PAGE>
EXHIBIT II
ASSIGNMENT
----------
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfer the
rights of the undersigned under the attached Warrant (Certificate No.___) with
respect to the number of shares of Common Stock of Prism Entertainment
Corporation, a Delaware corporation, covered thereby set forth below, unto:
Social Number
Security No. of
Name of Assignee or Tax I.D. No. Address Shares
- - - - ---------------- --------------- ------- ------
[NAME OF ENTITY OR PERSON]
By:
----------------------------
Name:
Title:
Dated:
--------------------
[ADDRESS]
20
<PAGE>
EXHIBIT III
The options, warrants and convertible debt listed on Schedule 6.1.25 to the
Credit Loan Agreement.
21
<PAGE>
EXHIBIT IV
CONVERSION AGREEMENT
TO: DATED:
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. __) hereby agrees to convert the Warrant into ___
shares of Common Stock covered by such Warrant.
[NAME OF ENTITY OR PERSON]
By:
----------------------------
Name:
Title:
[ADDRESS]
22
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 7th day of January, 1997, by and between Prism Entertainment Corporation, a
Delaware corporation (the "Company"), and Robert Y. Lee ("Lee").
1. Term of Employment. The Company hereby employs Lee, and Lee
------------------
hereby agrees to serve the Company, under and subject to all of the terms,
conditions and provisions of this Agreement for a period of three years from the
date hereof, in the capacity of Chairman of the Board and Chief Executive
Officer of the Company, or to serve in such other executive capacity with the
Company as the Company's board of directors (the "Board") may from time to time
designate, provided such assignment is consistent with Lee's level of experience
and expertise. In the performance of his duties and the exercise of his
discretion, Lee shall be under the supervision and control of, and shall report
only to, the Board of Directors. Lee's duties shall be designated by the Board
of Directors and shall be subject to such policies and directions as may be
established or given by the Board of Directors from time to time.
2. Devotion of Time to Company Business. Lee shall devote substantially
------------------------------------
all of his productive time, ability and attention to the business of the Company
during the term of this Agreement. Lee shall not, without the prior written
consent of the Board of Directors, directly or indirectly render any services of
a business, commercial or professional nature to any other person or
organization, whether for compensation or otherwise, which may compete or
conflict with the Company's business or with Lee's duties to the Company.
3. Compensation. For all services rendered by Lee under this Agreement,
------------
the Company shall pay Lee the following amounts:
3.1 Base Salary. A base salary ("Base Salary"), payable semi-
-----------
monthly, at the rate of $178,000 per year.
3.2 Bonus. In addition to the Base Salary, the Company shall pay Lee
-----
an annual bonus ("Bonus") with respect to any pretax profit generated by the
Company (any such pretax profit to be determined in accordance with the usual
and customary accounting practices of the Company and consistent with generally
accepted accounting principles except that all bonuses paid to any employee
based on pretax profits shall be deducted in determining pretax profit for this
purpose) as follows:
(a) an amount equal to 3% of any pretax profit of the Company in
excess of $1,100,000 with respect to the fiscal year commencing in 1997;
(b) an amount equal to 3% of any pretax profit of the Company in
excess of $1,200,000 with respect to the fiscal year commencing in 1998; and
(c) an amount equal to 3% of any pretax profit of the Company in
excess of $1,300,000 with respect to the fiscal year commencing in 1999.
<PAGE>
4. Benefits.
--------
(a) In addition to the Base Salary and the Bonus, if any, Lee
will be entitled to participate in all benefits of employment available to other
members of the Company's management, on a commensurate basis as they may be
offered from time to time by the Board of Directors to the Company's other
management employees. Such benefits include, but are not limited to, full
medical, dental and long term disability insurance for Lee and his immediate
family, participation in group life insurance and retirement plans, and term
life insurance of $1,000,000 payable to Lee's designees. During the period of
his employment hereunder, Lee will be reimbursed for reasonable business, travel
and entertainment expenses incurred in accordance with Company policy on behalf
of the Company in connection with his employment, and will be required to submit
appropriate expense reports for approval by signature of the Chief Financial
Officer as a condition of reimbursement of such expenses.
(b) The Company will pay up to $500 per month (including all
maintenance and operating expenses) for Lee to have the use of one Company
provided automobile (or an equivalent expense allowance for an automobile owned
by Lee).
(c) If the Company's headquarters is moved from Bakersfield,
California, such that Lee must relocate, the Company shall pay his reasonable
relocation costs, including, but not limited to, moving expenses.
5. Authority. So long as Lee serves as Chief Executive Officer of the
---------
Company under this Agreement, he shall have the authority specified in the
Bylaws of the Company, except that he shall not proceed with any matters, or
permit the Company to take any actions, which are prohibited by, or are in
conflict with, resolutions or guidelines adopted by the Board of Directors,
6. Termination. This Agreement shall terminate in advance of the
-----------
time specified in Section 1 above (and except as provided in Sections 6(c) and
6(d) below, Lee shall have no right to receive any compensation not due and
payable to him or to his estate at the time of such termination) under any of
the following circumstances:
(a) Upon the death of Lee.
(b) In the event that Lee shall become either physically or
mentally incapacitated so as to not be capable of performing his duties as
required hereunder, and if such incapacity shall continue for a period of six
months consecutively, the Company may, at its option, terminate this Agreement
by written notice to Lee at that time or at any time thereafter while such
incapacity continues. In case of termination under this Section 6(b) or under
Section 6(a), Lee or his estate shall be entitled to receive Base Salary or any
other compensation accrued or earned as of or to the date of termination for six
months following such termination, or until the expiration of the term of this
Agreement, whichever is earlier.
2
<PAGE>
(c) By Lee, if the Company shall have materially breached
any of the provisions of this Agreement, and such termination shall have the
same effect on the payment of Lee's Base Salary and Bonus as a termination by
the Company under Section 6(f).
(d) By the Company for Cause. The term "Cause" used in this
Section 6(e) means Lee, (i) after repeated notices and warnings, fails to
perform his reasonably assigned duties as reasonably determined by the Company,
(ii) materially breaches any of the terms or conditions of Sections 1 or 2 of
this Agreement, or (iii) commits or engages in a felony or any intentionally
dishonest or fraudulent act which materially damages the Company's reputation.
If the Company terminates Lee for Cause, no payments or benefits under this
Agreement shall become payable after the date of Lee's termination. The Company
may terminate Lee's employment under this Section 6(e)(i) or (ii) only if
written notice of the facts constituting the basis for such termination has been
given to Lee and Lee shall have been afforded 30 days opportunity to take such
action as may be reasonable under the circumstances to furnish assurance to the
Board of Directors that such basis for termination has been corrected or cured
(to the extent susceptible to cure) and will not recur.
(e) By the Company at any time, without Cause; provided, that the
--------
Company shall pay Lee his Base Salary and any Bonus which would otherwise have
become payable under Section 3.2 above through the remaining term of this
Agreement.
7. Attorney Fees. The successful party in any litigation relating
-------------
to matters covered by this Agreement shall be entitled to an award of reasonable
attorneys' fees in such action.
8. Assignment. Neither this Agreement nor any of the rights or
----------
obligations of either party hereunder shall be assignable by either Lee or the
Company, except that this Agreement shall be assignable by the Company to and
shall inure to the benefit of and be binding upon (i) any successor of the
Company by way of merger, consolidation or transfer of all or substantially all
of the assets of the Company to an entity other than any parent, subsidiary or
affiliate of the Company and (ii) any parent, subsidiary or affiliate of the
Company to which the Company may transfer its rights hereunder.
9. Binding Effect. The terms, conditions, covenants and agreements
--------------
set forth herein shall inure to the benefit of, and be binding upon, the heirs,
administrators, successors and assigns of each of the parties hereto, and upon
any corporation, entity or person with which the Company may become merged,
consolidated, combined or otherwise affiliated.
10. Amendment. This Agreement may not be altered or modified except
---------
by further written agreement between the parties.
11. Notices. Any notice required or permitted to be given under this
-------
Agreement by one party to the other shall be sufficient if given or confirmed in
writing and delivered personally or mailed by first class mail, registered or
certified, return receipt requested (if mailed from the United States), postage
prepaid, addressed to such party as respectively indicated below or as otherwise
designated by such party in writing.
3
<PAGE>
If to the Company, to:
Prism Entertainment Corporation
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Barry Collier, President
Fax: (805) 397-5982
If to Lee, to:
Robert Y. Lee
c/o Prism Entertainment Corporation
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Fax: (805) 397-5982
12. California Law. This Agreement is being executed and delivered
--------------
and is intended to be performed and shall be governed by and construed in
accordance with the laws of the State of California.
13. Board of Directors. On any matter calling for authorization,
------------------
approval, decision, determination or other action of the Board of Directors
under the provisions of this Agreement, Lee's vote as a director shall not be
counted.
14. Indemnification Agreement. The Company shall enter into an
-------------------------
Indemnification Agreement with Lee indemnifying him against personal liability
to the fullest extent permissible under applicable corporate law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
PRISM ENTERTAINMENT CORPORATION
By: /s/ Barry Collier
----------------------------
Barry Collier, President
/s/ Robert Y. Lee
-------------------------------
Robert Y. Lee
4
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
7th day of January, 1997, by and between Prism Entertainment Corporation, a
Delaware corporation (the "Company"), and James Craig Kelly ("Kelly").
1. Term of Employment. The Company hereby employs Kelly, and Kelly
------------------
hereby agrees to serve the Company, under and subject to all of the terms,
conditions and provisions of this Agreement for a period of three years from the
date hereof, in the capacity of Senior Vice President and Chief Operating
Officer of the Company, or to serve in such other executive capacity with the
Company as the Company's board of directors (the "Board of Directors") may from
time to time designate, provided such assignment is consistent with Kelly's
level of experience and expertise. In the performance of his duties and the
exercise of his discretion, Kelly shall be under the supervision and control of,
and shall report only to, the Chairman of the Board. Kelly's duties shall be
designated by the Chairman of the Board and shall be subject to such policies
and directions as may be established or given by the Board of Directors from
time to time.
2. Devotion of Time to Company Business. Kelly shall devote
------------------------------------
substantially all of his productive time, ability and attention to the business
of the Company during the term of this Agreement. Kelly shall not, without the
prior written consent of the Board of Directors, directly or indirectly render
any services of a business, commercial or professional nature to any other
person or organization, whether for compensation or otherwise, which may compete
or conflict with the Company's business or with Kelly's duties to the Company.
3. Compensation.
------------
3.1 Base Salary. For all services rendered by Kelly under this
-----------
Agreement, the Company shall pay Kelly a base salary ("Base Salary"), payable
semi-monthly, at the rate of $120,000.
3.2 Bonus. In addition to the Base Salary, the Company shall pay
-----
Kelly an annual bonus ("Bonus") with respect to any pretax profit of the Company
(any such pretax profit to be determined in accordance with the usual and
customary accounting practices of the Company and consistent with generally
accepted accounting principles) as follows:
(a) an amount equal to 3% of any pretax profit of the Company in
excess of $1,100,000 with respect to the fiscal year commencing in 1997;
<PAGE>
(b) an amount equal to 3% of any pretax profit of the Company in
excess of $1,200,000 with respect to the fiscal year commencing in 1998; and
(c) an amount equal to 3% of any pretax profit of the Company in
excess of $1,300,000 with respect to the fiscal year commencing in 1999.
4. Benefits.
--------
(a) In addition to the Base Salary and the Bonus, if any, Kelly
will be entitled to participate in all benefits of employment available to other
members of the Company's management, on a commensurate basis as they may be
offered from time to time by the Board of Directors to the Company's other
management employees. Such benefits include, but are not limited to, full
medical, dental and long term disability insurance for Kelly and his immediate
family, participation in group life insurance and retirement plans, and term
life insurance of $500,000 payable to Kelly's designees. During the period of
his employment hereunder, Kelly will be reimbursed for reasonable business,
travel and entertainment expenses incurred in accordance with Company policy on
behalf of the Company in connection with his employment, and will be required to
submit appropriate expense reports for approval by signature of the Chairman of
the Board as a condition of reimbursement of such expenses.
(b) The Company will pay up to $500 per month (including all
maintenance and operating expenses) for Kelly to have the use of one Company-
provided automobile (or an equivalent expense allowance for an automobile owned
by Kelly).
(c) If the Company's headquarters is moved from Bakersfield,
California, such that Kelly must relocate, the Company shall pay his reasonable
relocation costs, including, but not limited to, moving expenses.
5. Authority. So long as Kelly serves as Chief Operating Officer of the
---------
Company under this Agreement, he shall have the authority specified in the
Bylaws of the Company, except that he shall not proceed with any matters, or
permit the Company to take any actions, which are prohibited by, or are in
conflict with, resolutions or guidelines adopted by the Board of Directors,
6. Termination. This Agreement shall terminate in advance of the time
-----------
specified in Section 1 above (and except as provided in Sections 6(c) and 6(d)
below, Kelly shall have no right to receive any compensation not due and payable
to him or to his estate at the time of such termination) under any of the
following circumstances:
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(a) Upon the death of Kelly.
(b) In the event that Kelly shall become either physically or
mentally incapacitated so as to not be capable of performing his duties as
required hereunder, and if such incapacity shall continue for a period of six
months consecutively, the Company may, at its option, terminate this Agreement
by written notice to Kelly at that time or at any time thereafter while such
incapacity continues. In case of termination under this Section 6(b) or under
Section 6(a), Kelly or his estate shall be entitled to receive Base Salary or
any other compensation accrued or earned as of or to the date of any termination
for six months following such termination, or until the expiration of the term
of this Agreement, whichever is earlier.
(c) By Kelly, if the Company shall have materially breached any
of the provisions of this Agreement, and such termination shall have the same
effect on the payment of Kelly's Base Salary and Bonus as a termination by the
Company under Section 6(e).
(d) By the Company for Cause. The term "Cause" used in this
Section 6(e) means Kelly, (i) after repeated notices and warnings, fails to
perform his reasonably assigned duties as reasonably determined by the Company,
(ii) materially breaches any of the terms or conditions of Sections 1 or 2 of
this Agreement, or (iii) commits or engages in a felony or any intentionally
dishonest or fraudulent act which materially damages the Company's reputation.
If the Company terminates Kelly for Cause, no payments or benefits under this
Agreement shall become payable after the date of Kelly's termination. The
Company may terminate Kelly's employment under this Section 6(e)(i) or (ii) only
if written notice of the facts constituting the basis for such termination has
been given to Kelly and Kelly shall have been afforded 30 days opportunity to
take such action as may be reasonable under the circumstances to furnish
assurance to the Board of Directors that such basis for termination has been
corrected or cured (to the extent susceptible to cure) and will not recur.
(e) By the Company at any time, without Cause; provided, that
--------
the Company shall pay Kelly his Base Salary and any Bonus which would otherwise
have become payable under Section 3.2 above through the remaining term of this
Agreement.
7. Attorney Fees. The successful party in any litigation relating to
-------------
matters covered by this Agreement shall be entitled to an award of reasonable
attorneys' fees in such action.
8. Assignment. Neither this Agreement nor any of the rights or
----------
obligations of either party hereunder shall be assignable by either Kelly or the
3
<PAGE>
Company, except that this Agreement shall be assignable by the Company to and
shall inure to the benefit of and be binding upon (i) any successor of the
Company by way of merger, consolidation or transfer of all or substantially all
of the assets of the Company to an entity other than any parent, subsidiary or
affiliate of the Company and (ii) any parent, subsidiary or affiliate of the
Company to which the Company may transfer its rights hereunder.
9. Binding Effect. The terms, conditions, covenants and agreements set
--------------
forth herein shall inure to the benefit of, and be binding upon, the heirs,
administrators, successors and assigns of each of the parties hereto, and upon
any corporation, entity or person with which the Company may become merged,
consolidated, combined or otherwise affiliated.
10. Amendment. This Agreement may not be altered or modified except by
---------
further written agreement between the parties.
11. Notices. Any notice required or permitted to be given under this
-------
Agreement by one party to the other shall be sufficient if given or confirmed in
writing and delivered personally or mailed by first class mail, registered or
certified, return receipt requested (if mailed from the United States), postage
prepaid, addressed to such party as respectively indicated below or as otherwise
designated by such party in writing.
If to the Company, to:
Prism Entertainment Corporation
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Robert Y. Lee
Fax: (805) 397-5982
If to Kelly, to:
Craig Y. Kelly
-------------------------------
-------------------------------
-------------------------------
12. California Law. This Agreement is being executed and delivered and
--------------
is intended to be performed and shall be governed by and construed in accordance
with the laws of the State of California.
4
<PAGE>
13. Board of Directors. On any matter calling for authorization,
------------------
approval, decision, determination or other action of the Board of Directors
under the provisions of this Agreement, Kelly's vote as a director shall not be
counted.
14. Indemnification Agreement. The Company shall enter into an
-------------------------
Indemnification Agreement with Kelly indemnifying him against personal liability
to the fullest extent permissible under applicable corporate law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
PRISM ENTERTAINMENT CORPORATION
By: /s/ Barry Collier
----------------------------
Name: Barry Collier
--------------------------
Title: President
-------------------------
/s/ James Craig Kelly
-------------------------------
James Craig Kelly
5
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
7th day of January, 1997, by and between Prism Entertainment Corporation, a
Delaware corporation (the "Company"), and Barry Collier ("Collier").
1. Term of Employment. The Company hereby employs Collier, and Collier
------------------
hereby agrees to serve the Company, under and subject to all of the terms,
conditions and provisions of this Agreement for a period of two (2) years from
the date hereof, in the capacity of President of the Company, or to serve in
such other executive capacity with the Company as the Company's board of
directors (the "Board") may from time to time designate, provided such
assignment is consistent with Collier's level of experience and expertise. In
the performance of his duties and the exercise of his discretion, Collier shall
be under the supervision and control of, and shall report only to, the Chairman
of the Board. Collier's duties shall be designated by the Chairman of the Board
and shall be subject to such policies and directions as may be established or
given by the Board of Directors from time to time.
2. Devotion of Time to Company Business. Collier shall devote
------------------------------------
substantially all of his productive time, ability and attention to the business
of the Company during the term of this Agreement. Collier shall not, without
the prior written consent of the Board of Directors, directly or indirectly
render any services of a business, commercial or professional nature to any
other person or organization, whether for compensation or otherwise, which may
compete or conflict with the Company's business or with Collier's duties to the
Company.
3. Compensation.
------------
3.1 Base Salary. For all services rendered by Collier under this
-----------
Agreement, the Company shall pay Collier a salary ("Base Salary"), payable semi-
monthly, at the rate of $178,000 per year.
3.2 Bonus. In addition to the Base Salary, the Company shall pay
-----
Collier the following bonuses ("Bonuses"):
(a) an annual bonus equal to 12% of all revenues (net of
commissions and expenses related thereto) recorded in excess of $625,000 from
the licensing of and/or transfer of rights to the Film Library accrued for each
fiscal year during the term hereof;
(b) an annual bonus equal to 5% of any (MDF) marketing
development funds from any source in excess of $350,000 received by or credited
to the Company for each fiscal year during the term hereof; and
<PAGE>
(c) a bonus equal to 20% of proceeds in excess of $3,700,000
(net of commissions and expenses of sale) received by the Company generated by
the sale of the Film Library in its entirety.
As used herein, Film Library means the rights of the Company in the motion
pictures listed on Schedule 5.25 to the Merger Agreement dated as of October 25,
1996 between the Company and Lee Video City, Inc.
4. Benefits.
--------
(a) In addition to the Base Salary and the Bonus, if any,
Collier will be entitled to participate in all benefits of employment available
to other members of the Company's management, on a commensurate basis as they
may be offered from time to time by the Board of Directors to the Company's
other management employees. Such benefits include, but are not limited to, full
medical, dental and long term disability insurance for Collier and his immediate
family and participation in group life insurance and retirement plans. During
the period of his employment hereunder, Collier will be reimbursed for
reasonable business, travel and entertainment expenses incurred in accordance
with Company policy on behalf of the Company in connection with his employment,
and will be required to submit appropriate expense reports for approval by
signature of the Chairman of the Board as a condition of reimbursement of such
expenses.
(b) The Company will pay up to $500 per month (including all
maintenance and operating expenses) for Collier to have the use of one Company
provided automobile (or an equivalent expense allowance for an automobile owned
by Collier).
5. Authority. So long as Collier serves as an officer of the Company
---------
under this Agreement, he shall have the authority specified in the Bylaws of the
Company, except that he shall not proceed with any matters, or permit the
Company to take any actions, which are prohibited by, or are in conflict with,
resolutions or guidelines adopted by the Board of Directors.
6. Termination. This Agreement shall terminate in advance of the time
-----------
specified in Section I above (and except as provided in Sections 6(c) and 6(d)
below, Collier shall have no right to receive any compensation not due and
payable to him or to his estate at the time of such termination) under any of
the following circumstances:
(a) Upon the death of Collier.
2
<PAGE>
(b) In the event that Collier shall become either physically or
mentally incapacitated so as to not be capable of performing his duties as
required hereunder, and if such incapacity shall continue for a period of six
months consecutively, the Company may, at its option, terminate this Agreement
by written notice to Collier at that time or at any time thereafter while such
incapacity continues. In case of termination under this Section 6(b) or under
Section 6(a), Collier or his estate shall be entitled to receive Base Salary or
any other compensation accrued or earned as of or to the date of termination for
six months following such termination, or until the expiration of the term of
this Agreement, whichever is earlier.
(c) By Collier, if the Company shall have materially breached
any of the provisions of this Agreement, and such termination shall have the
same effect on the payment of Collier's Salary as a termination by the Company
under Section 6(f).
(d) By the Company for Cause. The term "Cause" used in this
Section 6(e) means Collier, (i) after repeated notices and warnings, fails to
perform his reasonably assigned duties as reasonably determined by the Company,
(ii) materially breaches any of the terms or conditions of Sections 1 or 2 of
this Agreement, or (iii) commits or engages in a felony or any intentionally
dishonest or fraudulent act which materially damages the Company's reputation.
If the Company terminates Collier for Cause, no payments or benefits under this
Agreement shall become payable after the date of Collier's termination. The
Company may terminate Collier's employment under this Section 6(e)(i) or (ii)
only if written notice of the facts constituting the basis for such termination
has been given to Collier and Collier shall have been afforded 30 days
opportunity to take such action as may be reasonable under the circumstances to
furnish assurance to the Board of Directors that such basis for termination has
been corrected or cured (to the extent susceptible to cure) and will not recur.
(e) By the Company at any time, without Cause; provided, that
--------
the Company shall pay Collier his Salary through the remaining term of this
Agreement.
7. Attorney Fees. The successful party in any litigation relating to
-------------
matters covered by this Agreement shall be entitled to an award of reasonable
attorneys' fees in such action.
8. Assignment. Neither this Agreement nor any of the rights or
----------
obligations of either party hereunder shall be assignable by either Collier or
the Company, except that this Agreement shall be assignable by the Company to
and shall inure to the benefit of and be binding upon (i) any successor of the
Company by way of merger, consolidation or transfer of all or substantially all
of the assets of the
3
<PAGE>
Company to an entity other than any parent, subsidiary or affiliate of the
Company and (ii) any parent, subsidiary or affiliate of the Company to which the
Company may transfer its rights hereunder.
9. Binding-Effect. The terms, conditions, covenants and agreements set
--------------
forth herein shall inure to the benefit of, and be binding upon, the heirs,
administrators, successors and assigns of each of the parties hereto, and upon
any corporation, entity or person with which the Company may become merged,
consolidated, combined or otherwise affiliated.
10. Amendment. This Agreement may not be altered or modified except by
---------
further written agreement between the parties.
11. Notices. Any notice required or permitted to be given under this
-------
Agreement by one party to the other shall be sufficient if given or confirmed in
writing and delivered personally or mailed by first class mail, registered or
certified, return receipt requested (if mailed from the United States), postage
prepaid, addressed to such party as respectively indicated below or as otherwise
designated by such party in writing.
If to the Company, to:
Prism Entertainment Corporation
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Robert Y. Lee
Fax: (805) 397-5982
If to Collier, to:
Barry Collier
4033 Ocean Drive
Oxnard, California 93035
12. California Law. This Agreement is being executed and delivered and
--------------
is intended to be performed and shall be governed by and construed in accordance
with the laws of the State of California.
13. Board of Directors. On any matter calling for authorization,
------------------
approval, decision, determination or other action of the Board of Directors
under the provisions of this Agreement, Collier's vote as a director shall not
be counted.
4
<PAGE>
14. Indemnification Agreement. The Company shall enter into an
-------------------------
Indemnification Agreement with Collier indemnifying him against personal
liability to the fullest extent permissible under applicable corporate law.
15. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings and negotiations, both written and oral,
between the parties with respect to the subject matter of this Agreement,
including without limitation the employment agreement, bonus arrangement and
termination arrangement referred to in Schedules 5.18 and 5.21 to the Agreement
and Plan of Reorganization and Merger dated as of October 29, 1996 by and
between the Company and Lee Video City, Inc.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
PRISM ENTERTAINMENT CORPORATION
By: /s/ Barry Collier
----------------------------
Barry Collier, President
/s/ Barry Collier
-------------------------------
Barry Collier
5
<PAGE>
EXHIBIT 10.15
1996 STOCK OPTION PLAN
OF
LEE VIDEO CITY, INC.
1. PURPOSES OF THE PLAN
--------------------
The purposes of the 1996 Stock Option Plan (the "Plan") of Lee Video City,
Inc., a California corporation (the "Company"), are to:
(a) Encourage selected employees, directors and consultants to
improve operations and increase profits of the Company;
(b) Encourage selected employees, directors and consultants to accept
or continue employment or association with the Company or its Affiliates; and
(c) Increase the interest of selected employees, directors and
consultants in the Company's welfare through participation in the growth in
value of the common stock of the Company (the "Common Stock").
Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified
options" ("NQOs").
At the time the Plan is being adopted, the Company is not subject to the
reporting requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and is not an investment company
registered or required to be registered under the Investment Company Act of
1940. As such, the Company's offers and sales of Common Stock under the Plan
are, to the extent determined by the Administrator (as defined below) in
accordance with applicable laws, intended to be exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
under Rule 701 under the Securities Act.
2. ELIGIBLE PERSONS
----------------
Every person who at the date of grant of an Option is a full-time employee
of the Company or of any Affiliate (as defined below) of the Company is eligible
to receive NQOs or ISOs under this Plan. Every person who at the date of grant
is a consultant to, or non-employee director of, the Company or any Affiliate
(as defined below) of the Company is eligible to receive NQOs under this Plan.
The term "Affiliate" as used in the Plan means a parent or subsidiary
corporation as defined in the applicable provisions (currently Sections 424(e)
and (f), respectively) of the Code. The term "employee" includes an officer or
director who is an employee, of the Company. The term "consultant" includes
persons employed by, or otherwise affiliated with, a consultant.
<PAGE>
3. STOCK SUBJECT TO THIS PLAN
--------------------------
Subject to the provisions of Section 6.1.1 of the Plan, the total number of
shares of stock which may be issued under options granted pursuant to this Plan
shall not exceed 351,741 shares of Common Stock. The shares covered by the
portion of any grant under the Plan which expires unexercised shall become
available again for grants under the Plan. Where the exercise price of an
Option is paid by means of the optionee's surrender of previously owned shares
of Common Stock or the Company's withholding of shares otherwise issuable upon
exercise of the Option as permitted herein, only the net number of shares issued
and which remain outstanding in connection with such exercise shall be deemed
"issued" and no longer available for issuance under the Plan.
4. ADMINISTRATION
--------------
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board"), either in its entirety or by a committee (the
"Committee") to which administration of the Plan, or of part of the Plan, is
delegated (in either case, the "Administrator"). The Board shall appoint and
remove members of the Committee in its discretion subject only to the
requirements set forth herein. In the event and for so long as the Common Stock
is registered under the Exchange Act, the Committee shall be comprised of two or
more "Non-Employee Directors" of the Board as defined in Rule 16b-3 (or any
successor rule) promulgated by the Securities and Exchange Commission pursuant
to the Exchange Act, or such other persons as may be permitted under Rule 16b-3,
as such may be amended from time to time, in order to preserve the status of
this Plan as a 16b-3 Plan.
(b) Subject to the other provisions of this Plan, the Administrator
shall have the authority, in its discretion: (i) to grant options; (ii) to
determine the fair market value of the Common Stock subject to options; (iii) to
determine the exercise price of Options granted; (iv) to determine the persons
to whom, and the time or times at which, Options shall be granted, and the
number of shares subject to each Option; (v) to interpret this Plan; (vi) to
prescribe, amend, and rescind rules and regulations relating to this Plan; (vii)
to determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to, the time or times at which Options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any Option; (ix) to defer (with the consent of the optionee) the exercise
date of any option; (x) to authorize any person to execute on behalf of the
Company any instrument evidencing the grant of an Option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of
this Plan. The Administrator may delegate nondiscretionary administrative duties
to such employees of the Company as it deems proper.
2
<PAGE>
(c) All questions of interpretation, implementation, and application
of this Plan shall be determined by the Administrator. Such determinations shall
be final and binding on all persons.
(d) With respect to persons subject to Section 16 of the Exchange
Act, if any, transactions under this Plan are intended to comply with the
applicable conditions of Rule 16b-3, or any successor rule thereto. To the
extent any provision of this Plan or action by the Administrator fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Administrator. Notwithstanding the above, it shall be
the responsibility of such persons, not of the Company or the Administrator, to
comply with the requirements of Section 16 of the Exchange Act; and neither the
Company nor the Administrator shall be liable if this Plan or any transaction
under this Plan fails to comply with the applicable conditions of Rule 16b-3 or
any successor rule thereto, or if any such person incurs any liability under
Section 16 of the Exchange Act.
5. GRANTING OF OPTIONS; OPTION AGREEMENT
-------------------------------------
(a) No Options shall be granted under this Plan after ten years from
the date of adoption of this Plan by the Board.
(b) Each Option shall be evidenced by a written stock option
agreement, in form satisfactory to the Company, executed by the Company and the
person to whom such Option is granted; provided, however, that the failure by
the Company, the optionee, or both to execute such an agreement shall not
invalidate the granting of an option, although the exercise of each option shall
be subject to Section 6.1.3.
(c) The stock option agreement shall specify whether each option it
evidences is a NQO or an ISO.
(d) Subject to Section 6.3.3 with respect to ISOs, the Administrator
may approve the grant of Options under this Plan to persons who are expected to
become employees, directors or consultants of the Company, but are not
employees, directors or consultants at the date of approval, and the date of
approval shall be deemed to be the date of grant unless otherwise specified by
the Administrator.
6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option granted under this Plan shall be subject to the terms and
conditions set forth in Section 6.1. NQOs shall be also subject to the terms
and conditions set forth in Section 6.2, but not those set forth in Section 6.3.
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.
3
<PAGE>
6.1 Terms and Conditions to Which All Options Are Subject. All Options
-----------------------------------------------------
granted under this Plan shall be subject to the following terms and conditions:
6.1.1 Changes in Capital Structure. Subject to Section 6.1.2, if
----------------------------
the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, combination or reclassification,
appropriate adjustments shall be made by the Board in (a) the number and class
of shares of stock subject to this Plan and each Option outstanding under this
Plan, and (b) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a result of
any such adjustments. Each such adjustment shall be subject to approval by the
Board in its sole discretion.
6.1.2 Corporate Transactions. In the event of the proposed
----------------------
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action. To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action. In the event of a merger or consolidation
of the Company with or into another corporation or entity in which the Company
does not survive, or in the event of a sale of all or substantially all of the
assets of the Company in which the stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all Options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity). If such successor does not agree to assume the Options or to
substitute equivalent options therefor, unless the Administrator shall determine
otherwise, the options will expire upon such event.
6.1.3 Time of Option Exercise. Subject to Section 5 and Section
-----------------------
6.3.4, Options granted under this Plan shall be exercisable (a) immediately as
of the effective date of the stock option agreement granting the Option, or (b)
in accordance with a schedule related to the date of the grant of the Option,
the date of first employment, or such other date as may be set by the
Administrator (in any case, the "Vesting Base Date") and specified in the
written stock option agreement relating to such Option; provided, however, that
the right to exercise an option must vest at the rate of at least 20% per year
over five years from the date the option was granted. In any case, no Option
shall be exercisable until a written stock option agreement in form satisfactory
to the Company is executed by the Company and the optionee.
6.1.4 Option Grant Date. Except in the case of advance approvals
-----------------
described in Section 5(d), the date of grant of an Option under this Plan shall
be the date as of which the Administrator approves the grant.
6.1.5 Nontransferability of Option Rights. No Option granted under
-----------------------------------
this Plan shall be assignable or otherwise transferable by the optionee except
4
<PAGE>
by will or by the laws of descent and distribution. During the life of the
optionee, an Option shall be exercisable only by the optionee.
6.1.6 Payment. Except as provided below, payment in full, in cash,
-------
shall be made for all stock purchased at the time written notice of exercise of
an option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company. At the time an Option is granted or exercised,
the Administrator, in the exercise of its absolute discretion after considering
any tax or accounting consequences, may authorize any one or more of the
following additional methods of payment:
(a) Acceptance of the optionee's full recourse promissory
note for all or part of the Option price, payable on such terms and bearing such
interest rate as determined by the Administrator (but in no event less than the
minimum interest rate specified under the Code at which no additional interest
would be imputed), which promissory note may be either secured or unsecured in
such manner as the Administrator shall approve (including, without limitation,
by a security interest in the shares of the Company); and
(b) Subject to the discretion of the Administrator and the
terms of the stock option agreement granting the Option, delivery by the
optionee of Common Stock already owned by the optionee for all or part of the
option price, provided the value (determined as set forth in Section 6.1.11) of
such Common Stock is equal on the date of exercise to the option price, or such
portion thereof as the optionee is authorized to pay by delivery of such stock.
6.1.7 Termination of Employment. If for any reason other than death
-------------------------
or permanent and total disability, an optionee ceases to be employed by the
Company or any of its Affiliates (such event being called a "Termination"),
Options held at the date of Termination (to the extent then exercisable) may be
exercised in whole or in part at any time within three months of the date of
such Termination, or such other period of not less than 30 days after the date
of such Termination as is specified in the Option Agreement (but in no event
after the Expiration Date); provided, that if such exercise of the Option would
result in liability for the optionee under Section 16(b) of the Exchange Act,
then such three-month period automatically shall be extended until the tenth day
following the last date upon which optionee has any liability under Section
16(b) (but in no event after the Expiration Date). If an optionee dies or
becomes permanently and totally disabled (within the meaning of Section 22(e)(3)
of the Code) while employed by the Company or an Affiliate or within the period
that the Option remains exercisable after Termination, Options then held (to the
extent then exercisable) may be exercised, in whole or in part, by the optionee,
by the optionee's personal representative or by the person to whom the option is
transferred by devise or the laws of descent and distribution, at any time
within six months after the death or six months after the permanent and total
disability of the optionee or any longer period
5
<PAGE>
specified in the Option Agreement (but in no event after the Expiration Date).
For purposes of this Section 6.1.7, "employment" includes service as a director
or as a consultant. For purposes of this Section 6.1.7, an optionee's employment
shall not be deemed to terminate by reason of sick leave, military leave or
other leave of absence approved by the Administrator, if the period of any such
leave does not exceed 90 days or, if longer, if the optionee's right to
reemployment by the Company or any Affiliate is guaranteed either contractually
or by statute.
6.1.8 Withholding and Employment Taxes. At the time of exercise of
--------------------------------
an Option or at such other time as the amount of such obligations becomes
determinable (the "Tax Date"), the optionee shall remit to the Company in cash
all applicable federal and state withholding and employment taxes. If
authorized by the Administrator in its sole discretion after considering any tax
or accounting consequences, an optionee may elect to (i) deliver a promissory
note on such terms as the Administrator deems appropriate, (ii) tender to the
Company previously owned shares of Stock or other securities of the company, or
(iii) have shares of Common Stock which are acquired upon exercise of the option
withheld by the Company of all of the amount of tax that is required by law to
be withheld by the Company as a result of the exercise of such Option, subject
to the following limitations:
(a) Any election pursuant to clause (iii) above by an
optionee subject to Section 16 of the Exchange Act shall either (x) be made at
least six months before the Tax Date and shall be irrevocable; or (y) shall be
made in (or made earlier to take effect in) any 10-day period beginning on the
third business day following the date of release for publication of the
Company's quarterly or annual summary statements of earnings and shall be
subject to approval by the Administrator, which approval may be given at any
time after such election has been made. In addition, in the case of (y), the
Option shall be held at least six months prior to the Tax Date.
(b) Any election pursuant to clause (ii) above, where the
optionee is tendering Common Stock issued pursuant to the exercise of an option,
shall require that such shares be held at least six months prior to the Tax
Date.
Any of the foregoing limitations may be waived (or additional limitations
may be imposed) by the Administrator, in its sole discretion, if the
Administrator determines that such foregoing limitations are not required (or
that such additional limitations are required) in order that the transaction
shall be exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3,
or any successor rule thereto. In addition, any of the foregoing limitations
may be waived by the Administrator, in its sole discretion, if the Administrator
determines that Rule 16b-3, or any successor rule thereto, is not applicable to
the exercise of the Option by the optionee or for any other reason.
6
<PAGE>
Any securities tendered or withheld in accordance with this Section 6.1.8
shall be valued by the Company as of the Tax Date.
6.1.9 Other Provisions. Each option granted under this Plan may
----------------
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator, and each ISO granted under this
Plan shall include such provisions and conditions as are necessary to qualify
the Option as an "incentive stock option" within the meaning of Section 422 of
the Code.
6.1.10 Determination of Value. For purposes of the Plan, the value
----------------------
of Common Stock or other securities of the Company shall be determined as
follows:
(a) If the stock of the Company is listed on a national
securities exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq National Market System, its fair market
value shall be the last reported sale price of the stock on such exchange on the
date the value is to be determined (or if no such sale is made on such day or no
closing price is quoted, the average of the closing bid and asked prices for
such day on such exchange or system).
(b) If the stock of the Company is regularly quoted by a
recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding business day on which
there were quoted prices).
(c) In the absence of an established market for the stock,
the fair market value thereof shall be determined in good faith by the
Administrator, with reference to the Company's net worth, prospective earning
power, dividend-paying capacity, and other relevant factors, including the
goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry, the Company's management, and the values of
stock of other corporations in the same or a similar line of business.
6.1.11 Option Term. Subject to Section 6.3.5, no option shall be
-----------
exercisable more than 10 years after the date of grant, or such lesser period of
time as is set forth in the stock option agreement (the end of the maximum
exercise period stated in the stock option agreement is referred to in this Plan
as the "Expiration Date").
6.1.12 Exercise Price. The exercise price of any option granted to
--------------
any person who owns, directly or by attribution under the Code (currently
Section 424(d)), stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company or of any Affiliate (a "Ten
Percent
7
<PAGE>
Stockholder") shall in no event be less than 110% of the fair market value
(determined in accordance with Section 6.1.10) of the stock covered by the
Option at the time the Option is granted.
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted
---------------------------------------------------
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
6.2.1 Exercise Price. Except as set forth in Section 6.1.13, the
--------------
exercise price of a NQO shall be not less than 85% of the fair market value
(determined in accordance with Section 6.1.11) of the stock subject to the
Option on the date of grant.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted
---------------------------------------------------
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
6.3.1 Exercise Price. Except as set forth in Section 6.1.13, the
--------------
exercise price of an ISO shall be determined in accordance with the applicable
provisions of the Code and shall in no event be less than the fair market value
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.
6.3.2 Disqualifying Dispositions. If stock acquired by exercise of
--------------------------
an ISO granted pursuant to this Plan is disposed of in a "disqualifying
disposition" within the meaning of Section 422 of the Code, the holder of the
stock immediately before the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the Option as the Company may reasonably require.
6.3.3 Grant Date. If an ISO is granted in anticipation of
----------
employment as provided in Section 5(d), the option shall be deemed granted,
without further approval, on the date the grantee assumes the employment
relationship forming the basis for such grant, and, in addition, satisfies all
requirements of this Plan for Options granted on that date.
6.3.4 Vesting. Notwithstanding any other provision of this Plan,
-------
ISOs granted under all incentive stock option plans of the Company and its
subsidiaries may not "vest" for more than $100,000 in fair market value of stock
(measured on the grant dates(s)) in any calendar year. For purposes of the
preceding sentence, an option "vests" when it first becomes exercisable. If, by
their terms, such ISOs taken together would vest to a greater extent in a
calendar year, and unless otherwise provided by the Administrator, the vesting
limitation described above shall be applied by deferring the exercisability of
those ISOs or portions of ISOs which have the highest per share exercise prices;
but in no event shall more
8
<PAGE>
than $100,000 in fair market value of stock (measured on the grant date(s)) vest
in any calendar year. The ISOs or portions of ISOs whose exercisability is so
deferred shall become exercisable on the first day of the first subsequent
calendar year during which they may be exercised, as determined by applying
these same principles and all other provisions of this Plan including those
relating to the expiration and termination of ISOs. In no event, however, will
the operation of this Section 6.3.4 cause an ISO to vest before its terms or,
having vested, cease to be vested.
6.3.5 Term. Notwithstanding Section 6.1.12, no ISO granted to any
----
Ten Percent Stockholder shall be exercisable more than five years after the date
of grant.
7. MANNER OF EXERCISE
------------------
(a) An optionee wishing to exercise an Option shall give
written notice to the Company at its principal executive office, to the
attention of the officer of the Company designated by the Administrator,
accompanied by payment of the exercise price as provided in Section 6.1.6. The
date the Company receives written notice of an exercise hereunder accompanied by
payment of the exercise price will be considered as the date such Option was
exercised.
(b) Promptly after receipt of written notice of exercise of
an Option, the Company shall, without stock issue or transfer taxes to the
optionee or other person entitled to exercise the Option, deliver to the
optionee or such other person a certificate or certificates for the requisite
number of shares of stock. An optionee or permitted transferee of an optionee
shall not have any privileges as a stockholder with respect to any shares of
stock covered by the Option until the date of issuance (as evidenced by the
appropriate entry on the books of the Company or a duly authorized transfer
agent) of such shares.
(c) Unless exempted by the Administrator, if an officer or
director who is subject to the provisions of Section 16(b) of the Exchange Act
exercises an Option within six months of the grant of such Option, the shares
acquired upon exercise of such Option may not be disposed of until six months
after the date of grant of such Option.
8. EMPLOYMENT OR CONSULTING RELATIONSHIP
-------------------------------------
Nothing in this Plan or any Option granted hereunder shall interfere with
or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates.
9
<PAGE>
9. CONDITIONS UPON ISSUANCE OF SHARES
----------------------------------
Shares of Common Stock shall not be issued pursuant to the exercise of an
Option unless the exercise of such Option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act.
10. NONEXCLUSIVITY OF THE PLAN
--------------------------
The adoption of the Plan shall not be construed as creating any limitations
on the power of the Company to adopt such other incentive arrangements as it may
deem desirable, including, without limitation, the granting of stock options
other than under the Plan.
11. MARKET STANDOFF
---------------
Each optionee, if so requested by the Company or any representative of the
underwriters in connection with any registration of the offering of any
securities of the Company under the Securities Act shall not sell or otherwise
transfer any shares of Common Stock acquired upon exercise of Options during the
180-day period following the effective date of a registration statement of the
Company filed under the Securities Act; provided, however, that such restriction
shall apply only to the first registration statement of the Company to become
effective under the Securities Act after the date of adoption of this Plan which
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restriction until the end of such 180-day period.
12. AMENDMENTS TO PLAN
------------------
The Board may at any time amend, alter, suspend or discontinue this Plan.
Without the consent of an optionee, no amendment, alteration, suspension or
discontinuance may adversely affect outstanding Options except to conform this
Plan and ISOs granted under this Plan to the requirements of federal or other
tax laws relating to incentive stock options. No amendment, alteration,
suspension or discontinuance shall require stockholder approval unless (a)
stockholder approval is required to preserve incentive stock option treatment
for federal income tax purposes, or (b) the Board otherwise concludes that
stockholder approval is advisable; provided, however, that no such amendment
shall, without the approval of the stockholders of the Company, effectuate a
change for which stockholder approval is required in order for the Plan to
continue to qualify under Rule 16b-3 (while it is in effect) or any successor
rule thereto.
10
<PAGE>
13. EFFECTIVE DATE OF PLAN
----------------------
This Plan shall become effective upon adoption by the Board, provided,
however, that no Option shall be exercisable unless and until written consent of
the stockholders of the Company, or approval of stockholders of the Company
voting at a validly called stockholders' meeting, is obtained within 12 months
after adoption by the Board. If such stockholder approval is not obtained
within such time, options granted hereunder shall terminate and be of no force
and effect from and after expiration of such 12-month period. Options may be
granted and exercised under this Plan only after there has been compliance with
all applicable federal and state securities laws.
11
<PAGE>
EXHIBIT 10.16
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered into as
of January 8, 1997, by and between Video City, Inc., a Delaware corporation
(formerly known as Prism Entertainment Corporation) (the "Company"), and Barry
Collier ("Optionee") with reference to the following facts:
A. Optionee is an officer of the Company.
B. The Company is willing to grant to Optionee an option to acquire
shares of the common stock of the Company, subject to the terms and conditions
set forth herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Grant and Vesting of Option. The Company hereby grants to
---------------------------
Optionee on the date hereof ("Grant Date") an option (the "Option") to purchase
up to 175,000 shares ("Shares") of the Company's common stock at the exercise
price (the "Exercise Price") of Ten Cents ($0.10) per share. Optionee's right
to purchase the Shares subject to the Option shall be fully vested on the date
hereof.
2. Exercise of Option. The Option shall be exercisable only
------------------
during the Option Period (as hereafter defined), and during such Option Period,
the exercisability of the Option shall be subject to the limitations set forth
below. The "Option Period" shall mean the period commencing on the Grant Date
and, except as provided in Section 5, terminating 10 years from the Grant Date.
Notwithstanding the foregoing, the Company may at any time, in its sole
discretion, extend the Option Period. The exercise of the Option shall be
subject to the following terms and conditions:
(a) The Option may be exercised only as to all or any portion of
the Shares for which no prior exercise has been made;
(b) The Option may be exercised only as to a whole number of
Shares and no fractional shares shall be issued upon any exercise of the Option;
(c) The Company shall have received written notice from Optionee
advising the Company of the irrevocable exercise of the Option ("Exercise
Notice") specifying the whole number of Shares then being purchased (the
"Purchased Shares"); and
(d) Subject to Section 3, the Company shall have received
payment in full in same day funds of the Exercise Price for the Purchased
Shares, together with all applicable federal, state, local and foreign
withholding taxes.
<PAGE>
3. Cashless Exercise and Gross-Up.
------------------------------
(a) In lieu of making the payment for the Purchased Shares set
forth in Section 2(d), Optionee may elect, upon the exercise of all or part of
the Option, to receive that number of Shares equal to (i) the whole number of
Shares designated in the Exercise Notice, less (ii) that number of Shares equal
----
to the fraction, the numerator of which is the aggregate exercise price for the
portion of the Option exercised, and the denominator of which is the Fair Market
Value (as defined below) per share of the common stock of the Company at the
time of the exercise of the Option.
Example: Optionee delivers an Exercise Notice specifying 100,000
-------
as the number of Shares then being purchased. The aggregate
exercise price for such 100,000 shares is equal to $10,000 ($.10
x 100,000). The Fair Market Value of each Share at such time is
$.20. Without making any payment at all to the Company, Optionee
would receive 50,000 Shares.
$10,000/$.20 = 50,000.
(b) Upon the exercise from time to time of all or any part of
the Option, the Company shall grant to Optionee an additional option
(individually, an "Additional Option," and collectively, the "Additional
Options") to purchase, at an exercise price of Two Dollars ($2.00) per share,
that number of Shares equal to the fraction, the numerator of which is 17,500,
and the denominator of which is the Fair Market Value per share of the common
stock of the Company at that time, less Two Dollars ($2.00), but in no event
----
shall the number of shares exceed 7,500. The Additional Options shall be deemed
to be a part of the Option and accordingly shall be subject to all of the terms
and conditions of this Agreement applicable to the Option; provided, that, upon
--------
the exercise of an Additional Option, Optionee shall not be granted a new
Additional Option pursuant to this Section 3(b).
(c) For purposes of this Agreement, "Fair Market Value" of a
Share on any date, if the common stock of the Company is then listed on a
national securities exchange or traded on the NASDAQ National Market, shall be
equal to the closing sale price of a Share at the close of trading on the last
trading day prior to the date of exercise or, if such common stock is not then
listed on a national securities exchange or such system on such date, but is
otherwise publicly traded, the mean between the high bid and low asked prices on
the last trading day prior to the date of exercise. In the absence of any
trading market, the fair market value of a Share on such date shall
2
<PAGE>
be determined in good faith by the mutual agreement of the Company and Optionee.
If the Company and Optionee are unable to agree as to the Fair Market Value,
such question of valuation shall be submitted to arbitration.
4. Delivery of Certificate(s). As soon as practicable after
--------------------------
satisfaction of the conditions set forth in Sections 2 or 3, as applicable, the
Company shall deliver to Optionee at the principal office of the Company, or at
such other place as may be mutually acceptable to the Company and Optionee, a
certificate or certificates for the Purchased Shares; provided, however, that
the time of such delivery may be postponed by the Company for such period as may
be required for it with reasonable diligence to comply with applicable
registration or exemption requirements under the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended,
any applicable listing requirements of any national securities exchange, and
requirements under any other law or regulation applicable to the issuance or
transfer of the Purchased Shares.
5. Term of Option. This Agreement and the Option Period shall
--------------
expire automatically, without notice or demand, upon the occurrence of any event
described in Section 6(c) hereof.
6. Adjustments Upon Recapitalization. The number of Shares
---------------------------------
purchasable upon exercise of the Option and the Exercise Price shall be subject
to adjustment from time to time as set forth below:
(a) In the event of any stock dividend or distribution (other
than cash), stock split, reverse stock split or reclassification with respect to
or affecting the shares of the Company of the same class of stock as the Shares
subject to the Option (or any other shares, or other securities or other
property at the time receivable upon exercise of the Option hereunder),
appropriate adjustments shall be made in the number of Shares, nature of Shares
and price of the Shares, other securities or other property receivable upon
exercise of the Option hereunder such that, upon exercise of the Option,
Optionee shall be entitled to receive the same proportional interest in the
shares or other securities or other property following such stock dividend or
distribution, stock split, reverse stock split or reclassification as Optionee
would have been entitled to receive had Optionee exercised the Option
immediately prior to such event.
(b) In the event of any reorganization of the Company (or any
other corporation or entity the shares or other securities or ownership
interests of which are at the time deliverable upon exercise of the Option
hereunder) other than as described in Section 6(a) hereof, or in the event that
the Company (or any such other corporation or entity) shall consolidate with or
merge into any other corporation or entity pursuant to a transaction in which
the Company shall be deemed to be the "surviving entity" pursuant to Section
6(g) hereof, then and in each such case (a "Reorganization"), Optionee, upon
3
<PAGE>
the exercise of the Option hereunder at any time after the consummation of such
Reorganization, shall be entitled to receive the shares or other securities or
other non-cash consideration to which Optionee would have been entitled had
Optionee exercised the Option hereunder immediately prior to any such
Reorganization.
(c) If the Company (i) is dissolved or liquidated, or is a party
to a merger or consolidation in which the Company is not the "surviving entity"
(as defined in Section 6(g) hereof), or (ii) sells all or substantially all of
its assets to any other person or entity, or (iii) effects a firmly underwritten
initial public offering of its common stock pursuant to an effective
registration statement under the Securities Act, resulting in gross aggregate
proceeds, before deducting underwriting discounts and expenses, of at least
$5,000,000 payable to the Company and/or to the Company's shareholders, then the
Option and this Agreement shall terminate on the effective date of any such
dissolution, liquidation, sale, merger, consolidation or public offering
("Termination Date"); provided, however, Optionee shall have the right,
exercisable within 30 days prior to the Termination Date, and conditioned upon
the occurrence of any such dissolution, liquidation, sale, merger, consolidation
or public offering, to exercise all or any part of the Option in the manner set
forth in Sections 2 or 3. In the event that any such dissolution, liquidation,
sale, merger, consolidation or public offering does not occur, Optionee may
elect for (i) the Company to promptly refund to Optionee all sums paid to the
Company by Optionee during such 30-day period pursuant to Section 2(d), or (ii)
in the case where Optionee has received Shares pursuant to Section 3(a), the
Optionee shall return to the Company all Shares so received and Optionee shall
continue to have an Option as to the Shares so returned, in each case, in
seeking to exercise the Option prior to the Termination Date.
(d) To the extent that the adjustments in Sections 6(a) or
6(b) relate to stock or securities of the Company, the Board of Directors of the
Company or a committee thereof (the "Board") excluding the vote of Optionee, if
Optionee is then a director of the Company, may issue a statement of the effect
of such adjustment on the Option and any such statement shall be deemed an
addendum to this Agreement and shall be final and binding upon Optionee.
(e) The grant of the Option shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure, or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or assets or to engage in any public offering of its stock.
Nothing set forth in this Agreement shall operate or be deemed to limit or
restrict in any manner the Company's right to sell or issue, or to require any
adjustment as a result of any sale or issuance by the Company of, its common
stock (or any other security) to any person or at any price, including, without
limitation, any sale or issuance at a price per share which is less than that
effectively payable by Optionee hereunder.
4
<PAGE>
(f) The determination as to which party to a Reorganization is
the "surviving entity" shall be made by the Board excluding the vote of
Optionee, if Optionee is then a director of the Company, on the basis of the
relative equity interests of the shareholders in the corporation or other entity
existing after the Reorganization, as follows: If, following any Reorganization,
the holders of the outstanding voting securities of the Company prior to the
Reorganization own equity interests possessing more than 50%, in the aggregate,
of the voting power of the corporation or other entity existing after the
Reorganization, then, for purposes of this Agreement, the Company shall be
deemed to be the surviving entity. In all other cases, the Company shall not be
deemed to be the surviving entity.
7. Compliance with Securities Laws. Optionee, by acceptance
-------------------------------
hereof, represents and warrants to the Company and agrees that the Option and
the Shares to be issued upon exercise of the Option are being acquired by
Optionee for Optionee's own account, for investment purposes only, not with a
view to or for sale in connection with any distribution and not in response to
any published advertisement, and that Optionee shall not offer, sell or
otherwise dispose of any Shares to be issued upon exercise of the Option except
under circumstances which will not result in a violation of any federal or state
securities laws. All Shares issued upon exercise of the Option (unless
registered under the Securities Act) shall bear a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
RESTRICTED SECURITIES AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR
TRANSFERRED UNLESS SO REGISTERED OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT IS AVAILABLE.
As a condition to any exercise of the Option, Optionee shall make such
additional representations as the Company may request.
8. No Shareholder or Employment Rights. The Option granted
-----------------------------------
hereunder shall not be construed to give Optionee any rights as a shareholder of
the Company (including, without limitation, any right to vote or any right to
receive dividends, other distributions or information), nor shall it be
construed so as to confer upon Optionee any right to continue in the employ of
the Company.
5
<PAGE>
9. General Provisions.
------------------
(a) Further Assurances. Optionee shall promptly take all
------------------
actions and execute all documents reasonably requested by the Company to
effectuate the terms and intent of this Agreement.
(b) Notice. All notices and other communications required
------
or permitted under this Agreement shall be in writing, served personally on, or
mailed by certified or registered United States mail, return receipt requested,
to, the party to be charged with receipt thereof at the address set forth below.
In the case of personal service, delivery shall be deemed complete on the date
of actual delivery. In the case of service by certified or registered mail,
service shall be deemed complete at the earlier of (i) the expiration of the 4th
business day after the date of mailing or (ii) the date of delivery as shown by
the return receipt.
If to the Company: Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Attention: Robert Y. Lee
Telecopy: (805) 397-5982
If to Optionee: Barry L. Collier
4033 Ocean Drive
Oxnard, California 93035-3939
Telecopy: (805) 985-8155
Either party may change said party's address for purposes of this Section by
giving to the other party, in the manner provided herein, a written notice of
such change.
(c) Character of Option. The Option is not intended to
-------------------
qualify as an "incentive stock option" as that term is defined in Section 422A
of the Internal Revenue Code of 1986, as amended.
(d) Severability. All Sections, clauses thereof and
------------
covenants contained in this Agreement are severable, and in the event any of
them shall be held to be invalid by any court, this Agreement shall be
interpreted as if such invalid Sections, clauses or covenants were not contained
herein.
(e) Successors. Except to the extent specifically limited by the
----------
terms and provisions of this Agreement, this Agreement shall be binding upon and
shall inure to the benefit of the parties to this Agreement and their respective
successors, assigns, heirs and personal representatives.
6
<PAGE>
(f) Choice of Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California applicable to
contracts made in, and to be performed within, that State.
(g) Attorneys' Fees. If any legal action or other proceeding is
---------------
brought for the enforcement of this Agreement, or because of any dispute,
breach, default or misrepresentation in connection with this Agreement, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs it incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
(h) Interpretation. This Agreement constitutes the complete
--------------
agreement among the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements, understandings and
representations, written or oral, with respect thereto.
(i) Captions. Titles, captions and section headings contained in
--------
this Agreement are inserted only as a matter of convenience and for reference,
and in no way define, limit, extend or describe the scope of this Agreement or
the intent of any provision hereof.
(j) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties have executed this Stock Option
Agreement effective as of the date first set forth above.
VIDEO CITY, INC.,
a Delaware corporation
By: /s/ Robert Y. Lee
----------------------------
Robert Y. Lee,
Chief Executive Officer
/s/ Barry Collier
-------------------------------
Barry Collier
7
<PAGE>
EXHIBIT 10.17
IRREVOCABLE PROXY
The undersigned, on behalf of himself as record owner of 610,000 shares of
Common Stock of Prism Entertainment Corporation, a Delaware corporation
("Prism"), (the "Proxy Shares"), and with sole respect to the Proxy Shares,
hereby revokes any previous proxies and appoints Robert Y. Lee, as the proxy of
the undersigned to attend any and all meetings of the stockholders of Prism and
to represent, vote, execute consents and waivers, and otherwise to act for the
undersigned on all matters in such proxy's sole and absolute discretion, in the
same manner and with the same effect as if the undersigned were personally
present at any such meeting and voting the Proxy Shares or personally acting on
any matters submitted to stockholders for approval or consent. Such proxy, in
voting on the election of directors of Prism and on any other matter expressly
dealt with in that certain Stockholders Agreement dated as of January 7, 1997,
by and among the undersigned, Robert Y. Lee (on behalf of himself and as Trustee
of the Robert Y. Lee Revocable Living trust U/D/T 1/9/91), Ingram Entertainment,
Inc. and Prism, shall vote the Proxy Shares in compliance with the Stockholders
Agreement.
The undersigned authorizes such proxy to appoint or substitute any other
person to act hereunder, to revoke any such appointment or substitution, and to
file this proxy and any appointment, substitution or revocation with the
Secretary of Prism.
This proxy is irrevocable until January 7, 2007, and is given in connection
with the merger with and into Prism of Lee Video City, Inc., a California
corporation controlled by Robert Y. Lee. This proxy shall not be revoked by the
death or incapacity of the undersigned.
Dated: January 8, 1997 /s/ Barry Collier
____________________________________
BARRY COLLIER
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 1,246,517
<SECURITIES> 0
<RECEIVABLES> 2,988,447
<ALLOWANCES> (325,422)
<INVENTORY> 58,976
<CURRENT-ASSETS> 3,968,518
<PP&E> 1,017,089
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,080,312
<CURRENT-LIABILITIES> 4,727,632
<BONDS> 0
0
0
<COMMON> 97,539
<OTHER-SE> 2,138,953
<TOTAL-LIABILITY-AND-EQUITY> 11,080,312
<SALES> 12,211,369
<TOTAL-REVENUES> 12,211,369
<CGS> 11,042,848
<TOTAL-COSTS> 12,733,705
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 738,133
<INCOME-PRETAX> (522,336)
<INCOME-TAX> 0
<INCOME-CONTINUING> (522,336)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (175,766)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
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