<PAGE>
OMB APPROVAL
-------------------------
OMB Number: 3235-0145
Exp: December 31, 1997
Estimated average burden
hours per response...14.90
--------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. ________)*
Video City, Inc. (formerly Prism Entertainment Corporation)
-----------------------------------------------------------------------
(Name of Issuer)
Common Stock
-----------------------------------------------------------------------
(Title of Class of Securities)
92653W 10 6
--------------
(CUSIP Number)
James Craig Kelly, 6851 McDivitt Drive, Suite A, Bakersfield, CA 93313
-----------------------------------------------------------------------
(805) 397-7955
--------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
January 8, 1997
---------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [_].
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
Page 1 of 5 Pages
<PAGE>
- ----------------------- ---------------------
CUSIP NO. 92653W 10 6 PAGE 2 OF 5 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
James Craig Kelly
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
PF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(d) or 2(E) [_]
5
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
U.S.A.
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 761,600
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 761,600
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
761,600
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
[_]
12
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
7.1%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
IN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 2 of 5 Pages
<PAGE>
Item 1. Security and Issuer.
- ----------------------------
This report relates to the Common Stock of Video City, Inc., a Delaware
corporation (the "Issuer"), formerly known as Prism Entertainment Corporation,
whose principal executive offices are located at 6851 McDivitt Drive, Suite A,
Bakersfield, CA 93313.
Item 2. Identity and Background.
- --------------------------------
(a) The person filing this statement is James Craig Kelly.
(b) The principal business address of Mr. Kelly is 6851 McDivitt
Drive, Suite A, Bakersfield, CA 93313.
(c) Mr. Kelly's principal occupation is as Senior Vice President,
Chief Operating Officer and a Director of the Issuer.
(d) Mr. Kelly has not, during the last five years, been convicted in a
criminal proceeding (excluding traffic violations or similar
misdemeanors).
(e) Mr. Kelly was not, during the last five years, a party to a civil
proceeding of a judicial or administrative body of competent
jurisdiction as a result of which he was subject to a judgement,
decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, federal or state
securities laws.
(f) Mr. Kelly is a citizen of the United States.
Item 3. Source and Amount of Funds or Other Consideration.
- ----------------------------------------------------------
Mr. Kelly was previously the Chief Operating Officer of Lee Video City,
Inc. ("VCI"), a privately held California corporation, and held a stock option
to purchase shares of VCI. On January 8, 1997, VCI merged with and into the
Issuer and, pursuant to the Merger, Mr. Kelly's option was exchanged for a new
stock option, to purchase 761,600 shares of Common Stock of the Issuer at an
exercise price of $.51447 per share. The option is exercisable in full and will
expire on January 7, 2002. Mr. Kelly has paid nothing for his present option or
for the previous option to purchase VCI stock. If and when he exercises his
present option, he expects to use personal funds for such purpose.
Item 4. Purpose of Transaction.
- -------------------------------
Mr. Kelly has no present plans or proposals which relate to or would
result in:
(a) The acquisition by any person of additional securities of the
Issuer, or the disposition of securities of the Issuer;
(b) An extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Issuer or any of its
subsidiaries;
(c) A sale or transfer of a material amount of assets of the Issuer or
any of its subsidiaries;
(d) Any change in the present board of directors or management of the
Issuer, including any plans or proposals to change the number or
term of directors or to fill any existing vacancies on the board;
(e) Any material change in the present capitalization or dividend
policy of the Issuer;
(f) Any other material change in the Issuer's business or corporate
structure;
Page 3 of 5 Pages
<PAGE>
(g) Changes in the Issuer's charter, bylaws or instruments
corresponding thereto or other actions which may impede the
acquisition of control of the Issuer by any person;
(h) Causing a class of securities of the Issuer to be delisted from a
national securities exchange or to cease to be authorized to be
quoted in an inter-dealer quotation system of a registered
national securities association;
(i) A class of equity securities of the Issuer becoming eligible for
termination of registration pursuant to Section 12(g)(4) of the
Act; or
(j) Any action similar to any of those enumerated above.
Item 5. Interest in Securities of the Issuer.
- ---------------------------------------------
(a) As the holder of a presently exercisable stock option, Mr. Kelly
is the beneficial owner of 761,600 shares of Common Stock of the
Issuer, constituting 7.1% of such class.
(b) Mr. Kelly's option is not transferrable, and he has no right to
vote or dispose of the underlying Common Stock until he exercises
the option. Upon such exercise, Mr. Kelly will have sole power to
vote, direct the vote of, dispose of, and direct the disposition
of the shares.
(c) During the 60 days preceding the filing of this report, Mr. Kelly
acquired the stock option described herein, giving him beneficial
ownership of the shares reported herein.
(d) Not applicable.
(e) Not applicable.
Item 6. Contracts, Arrangements, Understanding or Relationships with
------------------------------------------------------------
Respect to Securities of the Issuer.
-----------------------------------
None.
Item 7. Material to be Filed as Exhibits.
- -----------------------------------------
None.
Page 4 of 5 Pages
<PAGE>
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: January 16, 1997
/s/ James Craig Kelly
---------------------
James Craig Kelly
Page 5 of 5 Pages
<PAGE>
OMB APPROVAL
--------------------------
OMB Number: 3235-0145
Exp: December 31, 1997
Estimated average burden
hours per response...14.90
--------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. ________)*
Video City, Inc. (formerly Prism Entertainment Corporation)
-------------------------------------------------------------------
(Name of Issuer)
Common Stock
-------------------------------------------------------------------
(Title of Class of Securities)
92653W 10 6
--------------
(CUSIP Number)
Robert Y. Lee, 6851 McDivitt Drive, Suite A, Bakersfield, CA 93313
-------------------------------------------------------------------
(805) 397-7955
--------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
January 8, 1997
---------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box[_].
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
Exhibit index is on page 6
Page 1 of 29 Pages
<PAGE>
Schedule 13D
- ----------------------- ---------------------
CUSIP NO. 92653W 10 6 PAGE 2 OF 29 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Robert Y. Lee
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
OO
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(d) or 2(E)
5 [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
U.S.A.
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 3,319,024
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 2,709,024
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
3,319,024
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [_]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
33.8%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
IN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 2 of 29 Pages
<PAGE>
Item 1. Security and Issuer.
- ----------------------------
This report relates to the Common Stock of Video City, Inc., a Delaware
corporation (the "Issuer"), formerly known as Prism Entertainment Corporation,
whose principal executive offices are located at 6851 McDivitt Drive, Suite A,
Bakersfield, CA 93313.
Item 2. Identity and Background.
- --------------------------------
(a) The person filing this statement is Robert Y. Lee, individually
and as Trustee of the Robert Y. Lee Separate Property Trust, U/D/T
dated January 9, 1991, as amended.
(b) The principal business address of Mr. Lee is 6851 McDivitt Drive,
Suite A, Bakersfield, CA 93313.
(c) Mr. Lee's principal occupation is as Chief Executive Officer and
Chairman of the Board of the Issuer.
(d) Mr. Lee has not, during the last five years, been convicted in a
criminal proceeding (excluding traffic violations or similar
misdemeanors).
(e) Mr. Lee was not, during the last five years, a party to a civil
proceeding of a judicial or administrative body of competent
jurisdiction as a result of which he was subject to a judgement,
decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, federal or state
securities laws.
(f) Mr. Lee is a citizen of the United States.
Item 3. Source and Amount of Funds or Other Consideration.
- ----------------------------------------------------------
Mr. Lee, as Trustee of the Trust referred to in Item 2(a) above, owned
more than 80% of the outstanding stock of Lee Video City, Inc., a California
corporation ("VCI"). On January 8, 1997, VCI merged with and into the Issuer
and, pursuant to the Merger, Mr. Lee's shares of VCI were converted into
2,709,024 shares of Common Stock of the Issuer. Mr. Lee had founded VCI and its
predecessor more than six years prior to the Merger. Also in connection with
the Merger, Mr. Lee received an irrevocable proxy from Barry Collier to vote
610,000 shares of Common Stock of the Issuer which Mr. Collier owns.
Item 4. Purpose of Transaction.
- -------------------------------
Mr. Lee acquired the shares reported herein in connection with the
Merger of VCI into the Issuer. Upon the Merger, Mr. Lee became the Chief
Executive Officer of the Issuer, and intends to remain active in the business of
the Issuer. He has acquired 2,709,024 shares reported herein for purposes of
investment. Other than the changes in the business, management and composition
of the Board of Directors of the Issuer which resulted from the Merger, and the
change in the Bylaws referred to in the last paragraph of Item 6 below, Mr. Lee
has no present plans or proposals which relate to or would result in:
(a) The acquisition by any person of additional securities of the
Issuer, or the disposition of securities of the Issuer;
Page 3 of 29 Pages
<PAGE>
(b) An extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Issuer or any of its
subsidiaries;
(c) A sale or transfer of a material amount of assets of the Issuer or
any of its subsidiaries;
(d) Any change in the present board of directors or management of the
Issuer, including any plans or proposals to change the number or
term of directors or to fill any existing vacancies on the board;
(e) Any material change in the present capitalization or dividend
policy of the Issuer;
(f) Any other material change in the Issuer's business or corporate
structure;
(g) Changes in the Issuer's charter, bylaws or instruments
corresponding thereto or other actions which may impede the
acquisition of control of the Issuer by any person;
(h) Causing a class of securities of the Issuer to be delisted from a
national securities exchange or to cease to be authorized to be
quoted in an inter-dealer quotation system of a registered
national securities association;
(i) A class of equity securities of the Issuer becoming eligible for
termination of registration pursuant to Section 12(g)(4) of the
Act; or
(j) Any action similar to any of those enumerated above.
Item 5. Interest in Securities of the Issuer.
- ---------------------------------------------
(a) Mr. Lee is the beneficial owner of 3,319,024 shares of Common
Stock of the Issuer, constituting 33.5% of such class. Of such
shares, Mr. Lee has a pecuniary interest in 2,709,024 shares.
(b) Mr. Lee has sole power to vote, direct the vote of, dispose of,
and direct the disposition of the 2,709,024 shares described in
(a) above, and in addition, holds an irrevocable proxy giving him
the sole power for up to ten years to vote 610,000 shares owned by
Mr. Collier.
(c) During the 60 days preceding the filing of this report, Mr. Lee
acquired the beneficial ownership of the shares reported herein
upon the consummation of the merger of VCI into the Issuer.
(d) Not applicable.
(e) Not applicable.
Page 4 of 29 Pages
<PAGE>
Item 6. Contracts, Arrangements, Understanding or Relationships with
------------------------------------------------------------
Respect to Securities of the Issuer.
-----------------------------------
Mr. Lee, Mr. Collier and Ingram Entertainment Inc. ("Ingram") have
entered into certain agreements regarding transfers of shares. Currently, Mr.
Lee, as Trustee, owns 2,709,024 shares of the Issuer; Mr. Collier owns 818,050
shares and has an option to purchase an additional 175,000 shares of the Issuer;
and Ingram owns 1,500,000 of the Issuer. Ingram is a secured creditor of the
Issuer. Pursuant to a Lock-Up Agreement, until at least 80% of the Issuer's
indebtedness to Ingram (currently approximately $1,500,000) has been paid,
721,983 shares held by Mr. Lee and 305,000 shares held by Mr. Collier must be
held in an escrow which prohibits the sale, assignment, transfer, pledge or
other disposition of any of such shares without the prior written consent of
Ingram. In addition, the Issuer has issued a stock purchase warrant to Ingram,
giving Ingram the right to purchase 404,403 shares owned by Mr. Lee, which are
held in another escrow; the warrant is exercisable at an exercise price of
$.6085 per share at any time through January 7, 2002. In addition, 250,000 of
the shares owned by Mr. Lee are subject to cancellation, if and as a
corresponding number of shares are issued upon exercise of existing five-year
options that VCI granted to key employees and consultants. The remaining
1,332,638 shares owned by Mr. Lee as Trustee are not subject to such
restrictions on transfer. Notwithstanding these restrictions, Mr. Lee has sole
voting power for all 2,709,024 shares until and to the extent that Ingram
exercises its warrant or employees exercise their stock options.
Pursuant to a Stockholders Agreement by and among the Issuer, Mr. Lee,
Mr. Collier and Ingram, if Ingram proposes to sell or transfer any of its shares
of the Issuer, it must first give Messrs. Lee and Collier the option to purchase
such shares at a price that is equal to 120% of the price at which Ingram
proposes to sell its shares. This Agreement also provides that if Mr. Lee or
Mr. Collier proposes to sell certain of his shares pursuant to a bona fide
offer, Ingram will have the right to participate in such sale, in proportion to
the fully diluted ownership of Mr. Lee, Mr. Collier and Ingram. The Agreement
also provides that if the Issuer proposes to issue any securities for cash
(other than shares or rights issued pursuant to an employee benefit plan or
otherwise for property or services), Ingram shall be entitled to purchase a
portion of such securities in order to maintain its percentage ownership in the
Issuer.
With regard to the voting of the shares, as previously stated, Mr.
Collier has given a ten-year irrevocable proxy to Mr. Lee to vote 610,000 shares
of the Issuer which Mr. Collier owns. Mr. Lee, Mr. Collier and Ingram have
agreed in the Stockholders Agreement to use their best efforts to cause the
number of directors of the Issuer to be eight, and to elect to the Board of
Directors four designees of Mr. Lee, two designees of Mr. Collier and two
designees of Ingram. In addition, Messrs. Lee and Collier have agreed to use
their best efforts to appoint a designee of Ingram to the Compensation Committee
of the Issuer. The Stockholders Agreement will terminate when Ingram's
beneficial ownership interest in the Issuer's Common Stock (assuming, for
purposes of this calculation, the exercise or conversion of all options,
warrants, rights or convertible securities held by Ingram or any Affiliate) is
4% or less of the outstanding Common Stock of the Issuer.
The Issuer, Mr. Lee, Mr. Collier and Ingram have agreed that without
the unanimous approval of the Board of Directors of the Issuer, the Issuer shall
not enter into any line of business other than the sale and rental of video
product and related goods and accessories, the completion of the sole film that
the Issuer currently has under way, and the exploitation of the Issuer's film
library. The Issuer's Bylaws will be amended to so provide.
Page 5 of 29 Pages
<PAGE>
Item 7. Material to be Filed as Exhibits.
- -----------------------------------------
(a) Stockholders Agreement dated as of January 8, 1997 by and among
the Issuer, Mr. Lee, Mr. Collier and Ingram.
(b) Lock-Up Agreement dated as of January 8, 1997 by and among Mr.
Lee, Mr. Collier and Ingram.
(c) Irrevocable proxy from Mr. Collier in favor of Mr. Lee.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: January 16, 1997
/s/ Robert Y. Lee
------------------------------------------
Robert Y. Lee, Individually and as Trustee
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
A. Stockholders Agreement dated as of January 8, 1997
by and among the Issuer, Mr. Lee, Mr. Collier
and Ingram 1
B. Lock-Up Agreement dated as of January 8, 1997 by
and among Mr. Lee, Mr. Collier and Ingram 13
C. Irrevocable proxy from Mr. Collier in favor of Mr. Lee 22
</TABLE>
Page 6 of 29 Pages
<PAGE>
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:
<TABLE>
<CAPTION>
Stockholder Number of Shares
----------- ----------------
<S> <C>
Collier 818,050
Lee and the Trust 2,719,024
Ingram 1,500,000
</TABLE>
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, an
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
<PAGE>
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 or
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 or 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>
LOCK-UP AGREEMENT
This Lock-Up Agreement ("Agreement") is entered into as of January 8,
1997, by and between Robert Y. Lee ("Lee"), an individual and a resident of
California, Barry Collier ("Collier"), an individual and a resident of
California, and Ingram Entertainment Inc., a Tennessee corporation ("Ingram"),
with respect to the following facts:
RECITALS
--------
A. Unless otherwise defined, all capitalized terms used in this
Agreement shall have the meanings ascribed to them in that certain override
agreement (the "Override Agreement") dated as of November 19, 1996, by and among
Lee Video City, Inc., a California corporation ("VCI"), Lee 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.
B. VCI and Prism 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 (the "Merger Agreement"), with respect to the
merger (the "Merger") of VCI into Prism.
C. In connection with the Merger, VCI, Lee, Prism and Ingram have
entered into the Override Agreement which sets forth the terms and conditions
upon which such parties have agreed to, among other things, restructure the VCI
Debt.
D. This Agreement is being delivered pursuant to Article 9 of the
Override Agreement.
NOW, THEREFORE, in consideration of the promises and mutual covenants
and obligations set forth in the Override Agreement and in this Agreement, Lee,
Collier and Ingram hereby agree as follows:
1. Lock-Up.
-------
1.1 Except as expressly provided for in this Agreement, Lee
(including the Trust) and Collier shall not, without the prior written consent
of Ingram, directly or indirectly, issue, offer to sell, sell, grant an option
for the purchase of, assign, transfer, pledge, hypothecate or otherwise encumber
or dispose (pursuant to Rule 144 of the regulations under the Securities Act, or
otherwise) of any of their respective Lock-Up Shares, or dispose of any
beneficial interest therein.
<PAGE>
1.2 This Agreement, and all of the restrictions relating to the
Lock-Up Shares contained herein, shall terminate on that date which is the
earlier of (i) ninety days after Lee ceases to be an employee or consultant on a
substantially full time basis with the Company or (ii) that date upon which 80%
of the Remaining Debt has been paid to Ingram. Immediately after any
termination of this Agreement pursuant to this Section, the legend imposed
pursuant to Section 1.3 below shall, upon request of Lee or Collier, as
applicable, be removed from any stock certificates representing the Lock-Up
Shares.
1.3 Lee and Collier understand and agree that the following
legend, or such other legend as shall be in a form and substance satisfactory to
Ingram, shall be set forth on each certificate representing the respective Lock-
Up Shares registered in the name of, or beneficially owned by, as applicable,
Lee or Collier.
THE HOLDER OF THIS CERTIFICATE HAS AGREED, NOT TO DIRECTLY OR
INDIRECTLY OFFER TO SELL, GRANT AN OPTION FOR THE SALE OF, ASSIGN,
TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE ENCUMBER OR DISPOSE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE, OR TO DISPOSE OF ANY
BENEFICIAL INTEREST THEREIN, PURSUANT TO RULE 144 OF THE SECURITIES
ACT OF 1933, AS AMENDED, OR OTHERWISE, EXCEPT (A) WITH THE PRIOR
WRITTEN CONSENT OF INGRAM ENTERTAINMENT INC. OR (B) AS PERMITTED BY
THAT CERTAIN LOCK-UP AGREEMENT DATED JANUARY 8, 1996, ENTERED INTO BY
THE HOLDER HEREOF AND INGRAM ENTERTAINMENT INC.
2. Escrow Agent. At all times during the term of this Agreement, the
------------
Lock-Up Shares subject to this Agreement will be held by Loeb & Loeb LLP, a
California limited liability partnership, or such other escrow agent that is
mutually acceptable to Lee, Collier and Ingram, pursuant to the terms and
conditions of an escrow agreement substantially in the form, and containing the
substance, of Exhibit A, which is attached hereto and incorporated herein by
this reference.
3. Miscellaneous.
-------------
3.1 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:
2
<PAGE>
if to Lee:
Robbie Lee
Lee Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Telecopy: (805) 397-5982
with a copy to:
Troy & Gould
1801 Century Park East, 16th Fl.
Los Angeles, California 90067
Attention: William I. Feis, Esq.
Telecopy: (310) 201-4746
if to Collier:
Barry Collier
Video City, Inc.
6851 McDivitt Drive, Suite A
Bakersfield, California 93313
Telecopy: (805) 397-5982
if to Ingram:
Ingram Entertainment Inc.
Two Ingram Boulevard
La Vergne, Tennessee 37089
Attention: John Fletcher, Esq., General Counsel
Telecopy: (615) 287-4465
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.
3
<PAGE>
3.2 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.
3.3 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 permitted assigns.
3.4 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.
3.5 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.
3.6 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous 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 has been made
or relied upon by any party hereto.
3.7 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.
4
<PAGE>
3.8 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.
3.9 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.
3.10 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.
3.11 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 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
/s/ Robert Y. Lee
--------------------------------
Robert Y. Lee
/s/ Barry Collier
--------------------------------
Barry Collier
Ingram Entertainment Inc., a Tennessee
corporation
By: /s/ Thomas H. Lunn
----------------------------
Name: Thomas H. Lunn
-------------------------
Title: Vice Chairman
-------------------------
5
<PAGE>
EXHIBIT A
ESCROW AGREEMENT
<PAGE>
ESCROW AGREEMENT - LOCK-UP SHARES
This Escrow Agreement ("Escrow Agreement") is made and entered into as
of this 8th day of January 1997, by and among Loeb & Loeb LLP ("Escrow Agent"),
a California limited liability partnership, Robert Y. Lee ("Lee"), an individual
and resident of California, Barry Collier ("Collier"), an individual and a
resident of California, and Ingram Entertainment Inc., a Tennessee corporation
("Ingram") with respect to the following facts:
RECITALS
A. Unless otherwise defined, all capitalized terms used in this
Agreement shall have the meanings ascribed to them in that certain Override
Agreement (the "Override Agreement") dated as of November 19, 1996, by and among
Lee Video City, Inc., a California corporation ("VCI"), Lee on behalf of himself
and as trustee of the Robert Y. Lee Revocable Living Trust UDT 1/9/91, Prism
Entertainment Corporation, a Delaware corporation, and Ingram.
B. Pursuant to the Override Agreement, Lee, Collier and Ingram
have entered into that certain Lock-Up Agreement dated as of the date hereof
(the "Lock-Up Agreement") pursuant to which, among other things, Collier and Lee
have agreed to deposit with the Escrow Agent the Lock-Up Shares to be held
pursuant to the terms and conditions of this Agreement.
C. The Escrow Agent is willing to serve in the capacity as escrow
agent upon the terms and conditions set forth below.
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Act. The Escrow Agent agrees to act as escrow
----------------
agent pursuant to the terms of this Agreement.
2. Receipt of Lock-Up Shares. Upon issuance thereof, Collier
-------------------------
and Lee agree to promptly deposit the Lock-Up Shares with the Escrow Agent to be
held by the Escrow Agent in accordance with the provisions of the Lock-Up
Agreement and this Agreement. Upon receipt of written notice from all parties
hereto of the termination of the Lock-Up Agreement pursuant to Section 1.2
thereof, the Escrow Agent shall return the Lock-Up Shares to Collier and Lee, as
the case may be, or their respective designees.
3. 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-
<PAGE>
performance of any provision of any agreement between the other parties hereto,
including, but not limited to, the Override Agreement and the Lock-Up 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.
b. Modification and Amendments. The provisions of this
---------------------------
Agreement may be supplemented, altered, amended modified or revoked only by a
writing signed by Collier, Lee 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 judgment,
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 Collier, Lee 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
Collier, Lee or Ingram, (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 statute of limitations
or by
2
<PAGE>
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 or the Lock-Up
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 impleading
Collier, Lee and Ingram. 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 Collier, Lee
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
Collier, Lee and Ingram. Any successor Escrow Agent shall deliver to Collier,
Lee 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, Collier, Lee 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 Lock-Up
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 hereafter have in or with respect to the Lock-Up
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, Collier, Lee and Ingram, jointly and severally, shall
indemnify and
3
<PAGE>
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.
4. Notices. All communications hereunder shall be in writing and,
-------
if sent to Ingram, 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; if sent to Lee, shall be
mailed by registered or certified mail or delivered or telegraphed and confirmed
in writing to Robert Y. Lee, Video City, Inc., 6851 McDivitt Drive, Suite A,
Bakersfield, California 93313; if sent to Collier, shall be mailed by registered
or certified mail or delivered or telegraphed and confirmed in writing to Barry
Collier, Video City, Inc., 6851 McDivitt Drive, Suite A, Bakersfield, California
93313; and if sent to the Escrow Agent, shall be mailed by registered or
certified mail or delivered or telegraphed and confirmed in writing to Loeb &
Loeb LLP, 1000 Wilshire Boulevard, Suite 1800, Los Angeles, California 90017,
Attention: David L. Ficksman, Esq.
Loeb & Loeb LLP, a California limited liability
partnership
By: -----------------------------------------
David L. Ficksman, a Partner of the Firm
----------------------------------------------
Robert Y. Lee
----------------------------------------------
Barry Collier
Ingram Entertainment Inc., a Tennessee corporation
By: -----------------------------------------
Its: -----------------------------------------
4
<PAGE>
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
