<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
March 25, 1998
------------------------------------------------
Date of Report (date of earliest event reported)
Video City, Inc.
----------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-14023 95-3897052
- ----------------- ------------------ ----------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
Incorporation) Number)
6840 DISTRICT BOULEVARD, BAKERSFIELD, CALIFORNIA 93313
------------------------------------------------------
(Address of principal executive offices)
(805) 397-7955
--------------
(Registrant's telephone number, including area code)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
---------------------------------------------
Acquisitions of Five Companies. On March 25, 1998, Video City, Inc.
------------------------------
("Video City" or the "Company") acquired five corporations owning and operating
an aggregate of 29 retail video stores. These acquisitions increased Video
City's chain of retail video stores from 18 to 47 stores and (on a pro forma
basis had the acquisitions taken place at the beginning of the respective fiscal
periods of the companies) would have increased Video City's annual level of
revenues from approximately $10 million to approximately $21 million, based on
results for the 12 months ended January 31, 1998 (in the case of Video City) or
December 31, 1997 (in the case of the five acquired companies). Each of the
acquisitions was structured as a reverse triangular merger, with a newly formed
subsidiary of Video City merging into the acquired corporation. The
consideration consisted of a combination of Video City common stock, assumption
of indebtedness (some of which was paid off by Video City at the closings in
accordance with the respective Merger Agreements), and in one instance cash and
in another in stance cash and a short-term note.
Each of the five acquisitions was made in accordance with an Agreement of
Merger and Plan of Reorganization (referred to herein as a "Merger Agreement")
by and among Video City, a newly formed subsidiary of Video City, the acquired
corporation, and one or more of its principal shareholders. The following sets
forth certain additional information:
(a) Adventures in Video, Inc. and KDDJ Investments, Inc. These two
----------------------------------------------------
companies were owned by David A. Ballstadt and members of his immediate family.
These are the only two acquisitions that were related to one another.
Adventures in Video owns and operates 13 stores in Minnesota in the greater
Minneapolis metropolitan area. The purchase price for Adventures in Video was
440,000 shares of Video City common stock, plus an additional 426,000 shares
that will become issuable if either (a) the gross revenues of such stores during
the three months of April through June 1998 exceed their gross revenues during
the corresponding three months of 1997, or (b) if Video City fails to make
certain specified upgrades of the stores. KDDJ owns and operates three stores
in San Francisco, California. The purchase price for KDDJ was 110,000 shares of
Video City common stock plus an additional 106,500 shares that will become
issuable if those three stores meet targets substantially the same as the
contingent share targets described above for Adventures in Video. The two
Merger Agreements provide for an adjust ment in the number of Video City shares
if and to the extent that the aggregate liabilities of the two companies as of
the closing is greater or less than $1,200,000. Pursuant to
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the Adventures in Video Merger Agreement, Video City paid off existing
indebtedness of approximately $449,000 that Adventures in Video owed to
Marquette Bank, N.A.
Concurrently with these two acquisitions, the Board of Directors of Video
City was expanded from eight to nine members and David A. Ballstadt was elected
to fill this vacancy. Video City also entered into a two-year employment
agreement with Mr. Ballstadt at a salary of $100,000 per year plus a possible
bonus of up to $100,000 per year based on increases, if any, in certain dealer
allowances, and certain additional benefits.
(b) Leptis Magna, Inc. This company owns and operates five stores under
------------------
the name "Video Unlimited" in Colorado. This company was owned by G. Wayne
Bailey and Orawan Bailey. The purchase price in the merger consisted of $75,000
in cash, a one-year promissory note for $75,000 payable in twelve equal monthly
installments, and an amount of Video City common stock to be determined within
90 days after the closing; of this amount of common stock, Video City advanced
150,000 shares at the closing, with the actual number of shares to be
determined. Pursuant to the Merger Agreement, Video City paid off existing
indebtedness including $112,000 owed to Norwest Bank Colorado, N.A.
(c) Old Republic Entertainment, Inc. This company owns and operates four
--------------------------------
stores in and around Ventura, Cali fornia, under the name "Video Tyme." The
company is wholly owned by C. Anthony Anderson. The purchase price consisted of
350,000 shares of Video City common stock, $150,000 in cash, and the assumption
of certain debt. Pursuant to the Merger Agreement, Video City paid off
approximately $741,000 of existing indebtedness owed to three creditors of the
acquired company.
(d) Sulpizio One, Inc. This company owns and operates four stores in
------------------
Lancaster, Santa Barbara, and Los Banos, California. The purchase price
consisted of 100,000 shares of Video City common stock plus the assumption of
all li abilities including the amounts owing to Rentrak Corporation which are
described under "Restructured Agreement With Rentrak" below. For more than
three years prior to this acquisition, these stores were managed by Video City
under a management agreement and operated under the name "Video City."
Sale of Film Library. Concurrently, Video City sold the rights to its
--------------------
library of 47 feature films and other properties and related accounts receivable
to an entity owned and controlled by Stephen Lehman, a member of Video City's
board of directors, for $1,350,000 in cash. The
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library was the principal asset of Prism Entertainment Corporation ("Prism"),
the former name of the Company prior to the merger in January 1997 of Lee Video
City, Inc., the retail video company, into Prism. Prism's primary business
prior to the merger was the production and distribution of films. In December
1995, Prism had filed for protection under Chapter 11 of the federal Bankruptcy
Code and had substantially ceased all film production operations. As a result
of the sale of the film library, Video City is now engaged exclusively in the
operation of its retail video sale and rental stores. Under the agreement by
which Video City sold its film rights, Video City has a right to buy back the
film library at any time through February 4, 1999 at escalating prices ranging
from $1,650,000 to $1,850,000, less amounts actually received and collected by
the buyer on account of the accounts receivable or other exploitation of the
film library; Video City would exercise this right only if it expects to be able
to resell the film library at a profit, since management no longer intends to
remain in the film production or distribution business.
New Credit Facility. Concurrently, the Company and its five newly acquired
-------------------
subsidiaries entered into a $7,500,000 Loan and Security Agreement with FINOVA
Capital Corporation, secured by all of the assets of the Company and its subsid
iaries. Of these funds, $5,700,000 has been or may be used to pay the cash
portion of the acquisition purchase prices, to repay other existing indebtedness
of Video City, to repay certain existing indebtedness of the acquired companies,
and to provide inventory financing and working capital for the expanded retail
operation of the combined companies. The remaining $1,800,000 of the credit
facility may be used only to finance future acquisitions, if any.
The credit facility consists of (i) a revolving loan equal to the lesser of
$500,000 or 65% of the value of eligible inventory held for sale; (ii) a five-
year loan in the initial principal amount of $3,465,000, providing for monthly
payments of interest only until maturity, provided that an annual appraisal of
eligible rental video tape and game inventory shall be made and principal must
be paid if and to the extent it exceeds 50% of the orderly liquidation value of
such inventory; (iii) a five-year loan in the initial principal amount of
$1,735,000, providing for 60 equal monthly installments of principal, together
with interest, provided that an annual appraisal of eligible rental video tape
and game inventory shall be made and principal must be paid if and to the extent
it exceeds 25% of the orderly liquidation value of such inventory; and (iv) one
or more loans to be made in the future in amounts not to exceed 75% of the value
of eligible rental video tape and game inventory acquired by the Company in
future retail store acquisitions and approved by FINOVA in its discretion,
4
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provided that the aggregate principal amount of such loans shall not exceed the
lesser of (a) $7,000,000 less the aggregate outstanding principal balance of the
loans re ferred to in clauses (ii) and (iii) of this paragraph, or (b) 75% of
such rental video tape and game inventory as appraised annually, such loans to
provide for equal monthly payments of principal based on a 15-year amortization
of the original principal amount, plus interest, with the entire principal
balance due in March 2001. The interest rate on all of these loans shall be at
a per annum rate of 2.75% in excess of the prime rate of Citibank, N.A., from
time to time. In addition, the Company is obligated to pay various closing,
monthly and annual fees. As part of the new credit facility, Video City issued
to FINOVA a warrant which gives FINOVA the right either (i) to require Video
City to repur chase the warrant for $600,000 at any time commencing March 25,
2001 and expiring March 25, 2005, or (ii) to purchase 520,720 shares of Video
City Common Stock at a price of $.01 per share but only if, prior to March 25,
2005, Robert Y. Lee's ownership of the Company's outstanding Common Stock
decreases to 10% or less, or the Company makes a public offering of shares of
its Common Stock, or the Company terminates the Loan and Security Agreement with
FINOVA, or the Company recapitalizes, refinances, reorganizes, or sells
substantially all of its assets.
Restructured Agreement With Rentrak. Concurrently with the acquisitions,
-----------------------------------
the Company also entered into a restruc tured debt agreement with Rentrak
Corporation, a major lessor of videocassettes under a revenue sharing arrange
ment. Prior to the acquisitions, Video City and Sulpizio One, Inc. (one of the
acquired companies) were parties to such arrangements with Rentrak. With the
expanded group of stores, management expects to increase its leasing of video
cassettes from Rentrak. As part of the restructuring, Rentrak agreed to accept
194,950 shares of Video City common stock in settlement of a lawsuit Rentrak had
previously filed against Adventures in Video, Inc. (one of the acquired
companies), and 470,162 shares of Video common stock in payment of $940,324 of
indebtedness owed to Rentrak by Sulpizio One, Inc. (The $2.00 per share
valuation of the Video City common stock was a figure negotiated by Video City
and Rentrak, and does not reflect the market price of the Video City stock.
Video City makes no representation as to what the market price of its stock is
or will be.) As part of the restructured debt agreement, Rentrak also agreed to
a deferral of certain amounts owed to it by Sulpizio One, Inc. and Video City,
and obtained a security interest in the assets of Video City to secure such
amounts. Rentrak also released Robert Y. Lee, Video City's chief executive offi
cer, from personal guaranties of Video City's indebtedness that Mr. Lee had
previously given.
5
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Consequences of These Transactions. As a result of the transactions
----------------------------------
reported herein, Video City had a total of 11,589,039 shares of its Common Stock
outstanding as of the date of this report; this figure does not include any
remaining shares that may be issued in the Leptis Magna acquisition or the
532,500 contingent shares that may be issued in connection with the acquisitions
of Adventures in Video and KDDJ. The Company used the proceeds of the sale of
the film library and approximately $24,000 of additional funds to pay off all
amounts owing to Imperial Bank, which was the principal creditor of Prism
Entertainment Corpora tion prior to the January 1997 merger. Video City used
$1,500,000 of the FINOVA credit facility to pay off a term loan owing to Ingram
Entertainment Corporation.
Item 5. Other Events.
- ----------------------
See Item 2 regarding the new credit facility with Finova Capital
Corporation and the restructured debt agree ment with Rentrak Corporation.
Item 7. Financial Statements and Exhibits.
- ------------------------------------------
(a) Financial Statements of Businesses Acquired. It is impractical at the
-------------------------------------------
present time to provide this informa tion. This information will be filed as
soon as practica ble, but in any event not later than June 8, 1998.
(b) Pro forma Financial Information. It is impracti cal at the present
-------------------------------
time to provide this information. This information will be filed as soon as
practicable, but in any event not later than June 8, 1998.
(c) Exhibits:
--------
Numbers Description
- ------- -----------
10.1 Agreement of Merger and Plan of Reorganization among Video City, Inc.,
Video Adventures Corp., Adventures in Video, Inc. and David A.
Ballstadt, dated as of March 25, 1998.
10.2 Agreement of Merger and Plan of Reorganization among Video City, Inc.,
Video Ballstadt Corp., KDDJ Investments, Inc. and David A. Ballstadt,
dated as of March 25, 1998.
10.3 Agreement of Merger and Plan of Reorganization among Video City, Inc.,
Video Acquisition Corp., Leptis Magna, Inc. d/b/a Video Unlimited and
G. Wayne Bailey and Orawan Bailey, dated as of March 25, 1998.
6
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10.4 Agreement of Merger and Plan of Reorganization among Video City, Inc.,
Video Republic Corp., Old Republic Entertainment, Inc. and C. Anthony
Anderson, dated as of March 25, 1998.
10.5 Agreement of Merger and Plan of Reorganization among Video City, Inc.,
Video Sulpizio Corp., Sulpizio One, Inc., Dennis Rhoton and Edward
Rheinhardt, dated as of March 25, 1998.
10.6 Film Rights Transfer Agreement dated as of March 23, 1998 by and among
Conrad Entertainment, LLC and Video City, Inc.
10.7 Loan and Security Agreement dated as of March 24, 1998 by and among
FINOVA Capital Corporation and Video City, Inc., Adventures in Video,
Inc., KDDJ Investments, Inc., Leptis Magna, Inc., Old Repub lic
Entertainment, Inc. and Sulpizio One, Inc.
10.8 Warrant issued to FINOVA Capital Corporation.
10.9 Restructured Debt Agreement dated March 25, 1998, by and between
Rentrak Corporation, Mortco, Inc., Video City, Inc., Sulpizio One,
Inc. and Adven tures in Video, Inc.
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 hereunto duly authorized.
April 9, 1998 VIDEO CITY, INC.
- ---------------------- ------------------------------
(Date) (Registrant)
By /s/ Robert Y. Lee
---------------------------
Robert Y. Lee
Chairman of the Board and
Chief Executive Officer
7
<PAGE>
EXHIBIT 10.1
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
between
VIDEO CITY, INC.,
VIDEO ADVENTURES CORP.,
ADVENTURES IN VIDEO, INC.
and
DAVID A. BALLSTADT
Dated as of March 25, 1998
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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Page
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<C> <S> <C>
ARTICLE I DEFINITIONS................................. 1
1.1 Defined Terms............................... 1
1.2 Other Defined Terms......................... 4
ARTICLE II PLAN OF REORGANIZATION...................... 5
2.1 Adoption of Plan............................ 5
2.2 The Merger.................................. 5
2.3 Effective Time.............................. 7
2.4 Certificate of Incorporation and Bylaws..... 7
2.5 Directors and Officers...................... 7
2.6 The Closing................................. 8
2.7 Earnout Shares.............................. 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ADV....... 9
3.1 Corporate Existence and Power............... 9
3.2 Corporate Authorization..................... 9
3.3 Governmental Authorization.................. 9
3.4 Non-Contravention........................... 9
3.5 ADV Capitalization.......................... 10
3.6 Subsidiaries................................ 10
3.7 Consents.................................... 10
3.8 Financial Statements........................ 10
3.9 Absence of Certain Changes.................. 11
3.10 Title to Assets............................. 12
3.11 Real Property............................... 12
3.12 Litigation.................................. 12
3.13 Contracts................................... 13
3.14 Licenses and Permits........................ 13
3.15 Compliance with Laws........................ 13
3.16 Intangible Property......................... 13
3.17 Employees................................... 14
3.18 Prepaids.................................... 14
3.19 Taxes....................................... 14
3.20 Environmental Compliance.................... 15
3.21 Labor and Employment Matters................ 16
3.22 Pension and Benefit Plans................... 17
3.23 Insurance................................... 20
3.24 Books and Records........................... 21
3.25 Inventory................................... 21
3.26 Accuracy and Provision of Information....... 22
3.27 Shareholder Approval........................ 22
3.28 Investor Representations.................... 22
3.29 No Brokers.................................. 22
</TABLE>
i.
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF VCI....... 23
4.1 Organization of VCI and Video Sub........... 23
4.2 VCI and Video Sub Capital Stock............. 23
4.3 Authorization Relative to this Agreement.... 23
4.4 No Conflict or Violation.................... 23
4.5 Litigation.................................. 24
4.6 Board Approval.............................. 24
4.7 Validity of Shares Issued to Selling
Shareholders................................ 24
4.8 VCI Shareholder Approval.................... 24
ARTICLE V COVENANTS OF EACH PARTY..................... 25
5.1 Notification of Certain Matters............. 25
5.2 Confidential Information.................... 25
5.3 Employment Agreement........................ 26
ARTICLE VI ADDITIONAL COVENANTS OF ADV................. 26
6.1 Conduct of Business......................... 26
6.2 Public Statements and Press Releases........ 28
6.3 No Solicitation............................. 29
6.4 Delivery of ADV Common Stock................ 29
6.5 Noncompetition Agreements................... 29
6.6 Piggyback Registration...................... 29
6.7 Insurance................................... 30
6.8 Reporting and Compliance With Law........... 30
6.9 Approval of Shareholders of ADV............. 30
6.10 Termination of Employee Benefit Plans
Prior to Effective Time..................... 30
6.11 Access to Information....................... 31
ARTICLE VII (Intentionally Omitted)..................... 31
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF ADV
AND THE SELLING SHAREHOLDERS................ 31
8.1 Representations, Warranties and Covenants... 31
8.2 Permits..................................... 31
8.3 No Governmental Actions..................... 31
8.4 No Material Adverse Change.................. 32
8.5 Seat on VCI Board........................... 32
ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF VCI........ 32
9.1 Representations, Warranties and Covenants... 32
9.2 Permits..................................... 32
9.3 Opinion of Counsel.......................... 32
9.4 No Governmental Actions..................... 32
9.5 No Material Adverse Change.................. 33
9.6 Corporate Resolutions....................... 33
9.7 Selling Shareholder Approval................ 33
</TABLE>
ii.
<PAGE>
<TABLE>
<C> <S> <C>
9.8 Employment Agreements....................... 33
9.9 Delivery of Stock Certificates.............. 33
9.10 Inventory................................... 33
9.11 Store Lease Assignments..................... 33
9.12 Due Diligence............................... 33
9.13 Financing................................... 33
9.14 Rentrak Matter.............................. 34
ARTICLE X TERMINATION, AMENDMENTS, WAIVERS AND
POST-CLOSING COVENANTS...................... 34
10.1 Termination................................. 34
10.2 Amendments.................................. 35
10.3 Waivers..................................... 35
10.4 Releases and Indemnification Regarding
Personal Guarantees......................... 35
11.1 Survival of Representations, Etc............ 36
11.2 Indemnification by.......................... 36
11.3 Indemnification by VCI...................... 36
11.4 Basket and Cap.............................. 37
11.5 Indemnification Procedure................... 37
ARTICLE XII GENERAL PROVISIONS.......................... 38
12.1 Assignment.................................. 38
12.2 Notices..................................... 38
12.3 Choice of Law............................... 39
12.4 Multiple Counterparts....................... 39
12.5 Expenses.................................... 39
12.6 Invalidity.................................. 39
12.7 Titles...................................... 39
12.8 Cumulative Remedies......................... 39
12.9 Entire Agreement............................ 40
12.10 Attorneys' Fees............................. 40
12.11 Waiver of Right to Trial by Jury............ 40
</TABLE>
iii.
<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION, dated as of March 25,
1998 is by and among VIDEO CITY, INC., a Delaware corporation ("VCI"), VIDEO
ADVENTURES CORP., a California corporation ("Video Sub"), ADVENTURES IN VIDEO,
INC. a Minnesota corporation ("ADV") and DAVID A. BALLSTADT ("Ballstadt"), with
reference to the following facts:
A. Ballstadt is the chief executive officer and a principal shareholder
of ADV.
B. ADV owns and operates 13 retail video sales and rental stores in the
locations listed in Schedule 3.11 hereto.
C. VCI, ADV and Ballstadt believe that it is in their best interests to
adopt and consummate a plan of reorganization that provides for the merger (the
"Merger") of Video Sub, a newly formed subsidiary of VCI, into ADV, with Video
Sub disappearing and ADV surviving, and the conversion of all ADV shares into
the Merger Consideration.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
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1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, and in the masculine or feminine gender,
depending upon the reference.
"Action" shall mean any action, order, writ, injunction, judgment or
------
decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation.
"ADV Common Stock" shall mean shares of common stock, $1.00 par value
----------------
per share, of ADV.
"ADV Disclosure Schedule" shall mean all Disclosure Schedules
-----------------------
delivered by ADV pursuant to this Agreement.
"ADV Documents" shall mean this Agreement, the Certificate of Merger,
-------------
the Agreement of Merger and any other documents, instruments or certificates to
be delivered by ADV in connection with this Agreement.
1.
<PAGE>
"ADV Intangible Property" means all intangible property owned by ADV
-----------------------
or in which ADV has any interest (including the right to use) or owned by any
Selling Shareholder and used in ADV's business (other than intangible property
owned by third parties and available generally for commercial license from
others), including without limitation, (i) ADV's name and all Marks; (ii) all
statutory, common law and registered copyrights and mask work rights, and all
applications for the registration thereof; (iii) all patents and applications
therefor; (iv) all software; (v) all other inventories, discoveries,
improvements, processes, formulae (secret or otherwise), trade secrets,
information, know-how and ideas (including those in the possession of third
parties, but that are the property of ADV); and (vi) all technical documentation
relating thereto.
"Affiliate" shall mean, with respect to any Person, a Person that
---------
directly or indirectly controls, is controlled by or is under common control
with such Person.
"Agreement" shall mean this Agreement of Merger and Plan of
---------
Reorganization, together with all schedules (including the Disclosure Schedule)
and exhibits referenced herein.
"Agreement of Merger" shall mean that certain document describing the
-------------------
Merger to be filed with the Secretary of State of the State of California.
"Books and Records" shall mean all books and records, stock transfer
-----------------
books, minute books, copies of outstanding stock certificates, ledgers, employee
records, customer lists, files, correspondence, and other written records of
every kind.
"Certificate of Merger" shall mean that certain document describing
---------------------
the Merger to be filed with the Secretary of State of the State of Minnesota.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
"Contracts" shall mean all executory agreements, contracts, leases,
---------
commitments, evidences of indebtedness, letters of credit, franchise agreements,
purchase agreements and purchase orders, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules
-------------------
attached hereto and delivered by the parties as of the date hereof which set
forth the exceptions to the representations and warranties contained in Article
III hereof (as to ADV) and Article IV hereof (as to VCI and Video Sub) and
certain other information called for by this Agreement. Unless otherwise
specified, each reference in this Agreement to any numbered schedule is a
reference to that numbered schedule which is included in the Disclosure
Schedule. Any information disclosed
2.
<PAGE>
on a particular schedule on the Disclosure Schedule or subparts thereof shall be
deemed disclosed on any and all schedules.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
-----------
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance, restriction or other right of third parties, whether voluntarily
incurred or arising by operation of law, and includes, without limitation, any
agreement to give any of the foregoing in the future, and any contingent sale or
other title retention agreement or lease in the nature thereof, except liens for
current taxes, assessments, governmental charges or levies on property not yet
due and payable.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
the same may be amended from time to time.
"ERISA Affiliate" shall mean any entity that is a member of a group
---------------
of which ADV is a member and which is under common control with ADV, within the
meaning of the regulations promulgated under Section 414 of the Code.
"ERISA Plans" shall mean, collectively, all Pension Plans and all
-----------
Welfare Plans required to be disclosed on Schedule 3.22.
"Marks" means all registered and unregistered trademarks, service
-----
marks, trade names, and slogans, all applications therefor, and all goodwill
associated therewith.
"Material" shall mean, unless otherwise specifically defined herein,
--------
any amounts of $10,000 or more as to ADV, and any amounts of $100,000 or more as
to VCI, except that where the context requires, "material" shall mean an effect
resulting in loss, liability, payment, damage or expense of $10,000 or more in
the case of ADV, and $100,000 or more in the case of VCI and Video Sub.
"Material Adverse Change" means a material adverse change in the
-----------------------
business, assets, financial condition or results of operations of ADV or its
business which involves a loss or exposure of more than $10,000 or of VCI or its
business which involves a loss or exposure of more than $100,000.
"Pension Plan" shall mean any employee pension benefit plan within
------------
the meaning of Section 3(2) of ERISA.
"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings under all
federal, state, local or foreign laws with governmental or regulatory bodies, or
any other Person.
3.
<PAGE>
"Person" shall mean an individual, a partnership, a limited liability
------
company, a joint venture, a corporation, a trust, an unincorporated
organization, a government or any department or agency thereof or any other
entity.
"Representative" shall mean any officer, director, principal,
--------------
attorney, accountant, agent, employee or other representative.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Selling Shareholders" shall mean all of the shareholders of ADV.
--------------------
"Tax" or "Taxes" shall mean any federal, state, local, foreign or
--- -----
other tax, levy, impost, fee, assessment or other government charge, including
without limitation income, estimated income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, use, import duty,
employment, commercial rent, occupancy, franchise or withholding taxes, and any
premium, including without limitation interest, penalties and additions in
connection therewith.
"VCI Common Stock" shall mean shares of common stock, $.01 par value
----------------
per share, of VCI.
"VCI Documents" shall mean this Agreement, the Certificate of Merger,
-------------
the Agreement of Merger and any other documents, instruments or certificates to
be delivered by VCI in connection with this Agreement.
"Welfare Plan" shall mean any employee welfare benefit plan within
------------
the meaning of Section 3(1) of ERISA.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
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<S> <C>
ADV Consent 3.7
ADV Financial Statements 3.8(a)
ADV Indemnified Parties 11.3
ADV Permits 3.14
Basket Amount 11.4
California Law 2.3
Claim 11.5
Closing 2.6
Effective Time 2.3
Employment Agreement 5.3
Losses 11.2
Merger Consideration 2.2(b)
Minnesota Law 2.3
</TABLE>
4.
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<TABLE>
<S> <C>
Noncompetition Agreement 6.5
Surviving Corporation 2.2(a)
Termination Date 6.1
VCI Indemnified Parties 11.2
Video Sub 2.2(a)
</TABLE>
ARTICLE II
PLAN OF REORGANIZATION
----------------------
2.1 Adoption of Plan. VCI, ADV and Ballstadt believe that it is in their
----------------
best interests to adopt and consummate the Merger.
2.2 The Merger.
----------
(a) VCI shall form a wholly owned subsidiary called Video Adventures
Corp. ("Video Sub") under the laws of the State of California. VCI shall cause
Video Sub to be merged with and into ADV with ADV as the surviving corporation
in the Merger (the "Surviving Corporation"), and as of the Effective Time as a
result thereof, ADV shall become a wholly owned subsidiary of VCI. From and
after the Effective Time, the name of the Surviving Corporation shall be
Adventures in Video, Inc. until changed or amended in accordance with applicable
law.
(b) Pursuant to the Merger, the shares of ADV Common Stock issued and
outstanding immediately prior to the Effective Time shall thereupon be converted
into and become an aggregate of (i) 440,000 shares of VCI Common Stock and (ii)
the right to receive an additional 426,000 shares of VCI Common Stock as
provided in Section 2.7 (collectively, the "Merger Consideration").
(c) ADV will cause all stock certificates representing issued and
outstanding shares of ADV Common Stock to be delivered, free and clear of all
Encumbrances, to VCI at or prior to the Effective Time. Each certificate which
immediately prior to the Effective Time represents outstanding shares of ADV
Common Stock shall at and after the Effective Time be deemed to represent only
the number of shares of VCI Common Stock into which such shares of ADV Common
Stock shall have the right to be converted pursuant to Section 2.2(b) above.
From and after the Effective Time, VCI shall be entitled to treat ADV Common
Stock certificates as evidencing the ownership of the whole number of shares of
VCI Common Stock into which such shares of ADV Common Stock have been converted.
Certificates representing 440,000 shares of VCI Common Stock will be delivered
to the Selling Shareholders upon surrender to VCI of valid stock certificates
representing their shares of ADV Common Stock. At the Closing, certificates
representing VCI Common Stock will bear a legend as follows:
5.
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE."
(d) At the Effective Time, each share of common stock of Video Sub
that is issued and outstanding will be converted into one newly issued share of
ADV Common Stock. From and after the Effective Time, VCI, as the sole
shareholder of ADV, shall be entitled to receive one or more certificates
representing the ADV Common Stock into which such shares have been converted.
(e) The parties hereto have agreed that the aggregate liabilities of
ADV and of KDDJ Investments, Inc., a Minnesota corporation owned and controlled
by some of the Selling Shareholders ("KDDJ"), immediately prior to the Effective
Time, including amounts that may be owed to any of the Selling Shareholders,
shall in no event exceed $1,200,000. The parties agree that the cash of ADV and
KDDJ plus an additional sum of $4,926.18 shall be applied as follows: first, ADV
and KDDJ may distribute up to $80,000 in the aggregate to their shareholders
during the period from January 1, 1998 to Effective Time; second, the remaining
cash shall be used to pay the aggregate liabilities of ADV and KDDJ down to an
amount reasonably estimated in good faith by Ballstadt to be not more than
$1,200,000; third, $20,000 of cash shall be retained in ADV and/or KDDJ for a
period of 90 days following the Effective Time as a reserve to pay liabilities
of either ADV or KDDJ in excess of $1,200,000 in the aggregate, if VCI
determines after the Closing that the actual liabilities of ADV and KDDJ
exceeded said figure; and fourth, any cash in excess of said $20,000 reserve
shall be distributed to the Selling Shareholders immediately prior to the
Effective Time. If and to the extent that the $20,000 reserve is not needed to
pay such excess liabilities, VCI shall cause ADV and KDDJ to distribute the
unused portion of the reserve to the Selling Shareholders within the 30 days
after the end of said 90-day period, as Ballstadt may direct. If the $20,000
reserve is exhausted and the aggregate amount of remaining liabilities as of the
Effective Time is ultimately determined to exceed $1,200,000, then the number of
shares issuable under Section 2.7 of this Agreement shall be reduced (with the
VCI Common Stock being valued at $2.00 per share for this purpose) by an amount
equal to such excess liabilities (or if no additional shares become issuable
under Sections 2.2(b)(ii) and 2.7, then the Selling Shareholders shall return to
VCI an equivalent number of the shares issued to them under Section 2.2(b)(i));
and if the aggregate amount of remaining liabilities as of the Effective Time is
determined to be less than $1,200,000, then the number of shares issuable under
this Agreement shall be increased (with the VCI Common Stock being valued at
$2.00 per share for this purpose) by an amount equal to the amount by which such
liabilities are less than $1,200,000.
6.
<PAGE>
(f) In addition to the foregoing adjustments the parties agree to the
following cash adjustments at Closing:
(i) The parties agree to make adjustments for the cost of
movies and inventory purchased by ADV, during the two
weeks preceding Closing as described below. The Selling
Shareholders shall receive at Closing a reimbursement of
the invoice cost in excess of $23,579 for movie inventory
purchased the week of March 9, 1998. VCI shall be solely
responsible for the invoice cost of movies purchased the
week of March 16, 1998, and the same shall not be deemed
part of the ADV/KDDJ liabilities calculation set forth in
Article 2.2(e) above.
(ii) VCI agrees to reimburse the Selling Shareholders the
reasonable cost to ADV for the ADV employee training
conducted by VCI prior to Closing. ADV shall at or as
soon after Closing as possible submit said costs in
writing to VCI. Said costs shall be based upon the
applicable hourly rates and the number of hours each ADV
employee was involved in such training prior to Closing.
2.3 Effective Time. The Merger shall become effective (such time and
--------------
date are referred to herein as the "Effective Time") on the business day (which
day shall be on or before March 31, 1998 unless such date is extended by mutual
agreement by the parties) on which (a) all conditions to the Closing of the
transactions contemplated by this Agreement shall have occurred, and (b) the
Agreement of Merger, the Certificate of Merger and any other documents necessary
to effect the Merger shall be filed in accordance with the California General
Corporation Law (the "California Law") and the Minnesota Business Corporation
Act (the "Minnesota Law"), as the case may be.
2.4 Certificate of Incorporation and Bylaws. From and after the
---------------------------------------
Effective Time, the Certificate of Incorporation of ADV set forth in Exhibit A
shall be the Certificate of Incorporation of the Surviving Corporation and the
Bylaws of ADV set forth in Exhibit B shall be the Bylaws of the Surviving
Corporation, until changed or amended as provided therein or under the Minnesota
Law.
2.5 Directors and Officers. From and after the Effective Time, the
----------------------
directors and officers of ADV immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation, in each case until
their successors shall have been elected and shall qualify or until otherwise
provided
7.
<PAGE>
by law or the Certificate of Incorporation or Bylaws of the Surviving
Corporation.
2.6 The Closing. The closing of the transactions contem plated by this
-----------
Agreement (the "Closing") shall be held at 9:00 a.m. local time on the date of
the Effective Time at the offices of Troy & Gould Professional Corporation, 1801
Century Park East, Suite 1600, Los Angeles, California 90067, or at such other
date, place and time as the parties may agree.
2.7 Earnout Shares. As provided in clause (ii) of Section 2.2(b), the
--------------
Selling Shareholders shall receive an additional 426,000 shares of VCI Common
Stock as part of the Merger Consideration, under the following conditions:
(a) VCI shall:
(i) Within 120 days following the Effective Time, install
operating adult video departments in all 13 ADV locations. Said adult video
departments shall contain the quantity and quality of displays, titles and
merchandise equal to or greater than those existing at the VCI location at 1st
and Shields, Fresno, California (Store #42) as of January 30, 1998; and
(ii) install operating sell-through departments in all 13 ADV
stores within 90 days after the Effective Time. Said sell-through departments
shall contain the quantity and quality of displays, titles and merchandise equal
to or greater than those existing at VCI Store #42 as of January 30, 1998; and
(iii) implement aggressive marketing programs in the market
areas of ADV stores during the first 90 days following the Effective Time.
During the first 90 days following the Effective Time, said marketing programs
shall include radio, television and print advertising expenditures in an
aggregate amount equal to or greater than 2.5% of the Gross Revenues of the 13
ADV stores institutionally during said 90 day period plus a pro rata share of
VCI's chain-wide co-op and MDF advertising funds.
If VCI fails to fully complete each and every requirement set forth in
paragraph 2.7(a) above during the applicable time periods, the additional
426,000 shares of VCI Common Stock shall be issued to the Selling Shareholders
as part of the Merger Consideration no later than 120 days following the
Effective Time.
(b) In the event VCI fully completes each and every requirement set forth
in paragraph 2.7(a) above within the applicable time periods, the Selling
Shareholders shall receive the additional 426,000 shares of VCI Common Stock no
later than 120 days following the Effective Time, provided that the
8.
<PAGE>
aggregate Gross Revenues (as defined below) from the 13 ADV store locations
during the first three full calendar months following the Effective Time is
greater than the aggregate Gross Revenues from the same locations during the
corresponding three month period of 1997. As used herein, "Gross Revenues"
shall mean all revenues and receipts from the ADV stores for sales and rentals,
less deductions for returns and sales tax collected, if any. The right to
receive the additional shares shall not be transferable except by will or the
laws of descent and distribution.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ADV
-------------------------------------
AND BALLSTADT
-------------
Subject to the exceptions set forth in the ADV Disclosure Schedules, ADV
and Ballstadt, and solely with respect to Sections 3.27 and 3.28 Ballstadt,
hereby represent and warrant to VCI that:
3.1 Corporate Existence and Power. ADV is a corporation duly organized,
-----------------------------
validly existing and in good standing under the laws of the State of Minnesota
and has all corporate power and authority and all governmental licenses,
authorizations, consents and approvals required to carry on its business and
operations as now conducted. Schedule 3.1 sets forth those jurisdictions in
which ADV is required to be qualified to do business as a foreign corporation
because of the character of the property owned or leased by ADV or the nature of
its activities; ADV is duly qualified to do business in each of these
jurisdictions.
3.2 Corporate Authorization. The execution, delivery and performance by
-----------------------
ADV of this Agreement and all of the other ADV Documents and the consummation by
ADV of the transactions contemplated hereby and thereby are within the corporate
powers of ADV and have been duly authorized by all necessary corporate action on
the part of ADV. This Agreement is, and as of the Closing the other ADV
Documents shall be, the legal, valid and binding obligations of ADV, enforceable
against ADV in accordance with their respective terms.
3.3 Governmental Authorization. The execution, delivery and performance
--------------------------
by ADV of this Agreement and the other ADV Documents require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than the filing of the Certificate of Merger with the Secretary of State
of Minnesota and the filing of the Agreement of Merger with the Secretary of
State of the State of California as contemplated by Section 2.3.
3.4 Non-Contravention. The execution, delivery and performance by ADV of
-----------------
this Agreement and the other ADV Documents does not and will not (i) contravene
or conflict with the
9.
<PAGE>
Certificate of Incorporation or Bylaws of ADV, (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 ADV or any part of its business, (iii) assuming the obtaining of
all ADV Consents, constitute a default under or breach of, or violate or give
rise to any right of termination, cancellation or acceleration of any right or
obligation of ADV, or to a loss of any benefit relating to its business or
operations to which ADV is entitled under any provision of any Contract to which
ADV is a party or by which any of its assets is or may be bound or (iv) result
in the creation or imposition of any Encumbrance on any of ADV's assets.
3.5 ADV Capitalization. The authorized capital stock of ADV consists
------------------
solely of 25,000 shares of ADV Common Stock, of which 5,000 shares are issued
and outstanding. All such outstanding shares are duly authorized, validly
issued, fully paid and non-assessable. Schedule 3.5 lists the Selling
Shareholders and the number of shares of ADV Common Stock owned by each of them
as of the date of this Agreement. All outstanding shares of ADV Common Stock
have been issued in compliance with all federal and state securities laws and
are not subject to any rights or obligations that require the registration of
such shares. Except as set forth on Schedule 3.5, there are no outstanding
options, warrants or other rights in or with respect to any shares of ADV Common
Stock or any securities convertible into such stock, and ADV is not obligated to
issue any additional shares of ADV Common Stock or any options, warrants or
other rights to acquire stock or any other securities convertible into such
stock.
3.6 Subsidiaries. ADV does not own, directly or indirectly, securities
------------
or other ownership interests in any other entity, nor is ADV a party to any
agreement relating to the formation of any other entity or joint venture.
3.7 Consents. Schedule 3.7 sets forth each Contract of ADV and each of
--------
the ADV Permits that requires a consent, approval, authorization, order or other
action of or filing with any Person as a result of the execution, delivery and
performance of this Agreement or any of the other ADV Documents or the
consummation of the transactions contemplated hereby or thereby (each of the
foregoing, an "ADV Consent").
3.8 Financial Statements.
--------------------
(a) ADV has delivered to VCI financial statements of ADV consisting
of (i) audited balance sheets as of December 31, 1994, 1995 and 1996, and
statements of operations, stockholders' equity and cash flows for each of the
years then ended, and (ii) unaudited balance sheets, statements of operations
and statements of cash flows as of and for the nine months ended September 30,
1997 and 1996 (collectively, the ADV Financial Statements"). The
10.
<PAGE>
ADV Financial Statements fairly present, in conformity with general accepted
accounting principles applied on a consistent basis, the financial position of
ADV as of the dates thereof and the results of operations of ADV for the periods
then ended.
(b) Except for (i) those liabilities specifically reflected or
reserved against on the ADV balance sheet as of December 31, 1997 (the "ADV
Balance Sheet"), (ii) those current liabilities for trade or business
obligations incurred since December 31, 1997 in connection with the purchase of
goods or services in the ordinary course of ADV's business and consistent with
past practices (none of which is, individually or in the aggregate, material and
none of which is for breach of contract, breach of warranty, tort or
infringement), (iii) those liabilities arising under any Contract (none of which
liabilities is for breach of contract, breach of warranty, tort or infringement)
or (iv) those matters otherwise disclosed on Schedule 3.8 (none of which
liabilities, except as stated in a Schedule hereto, is for breach of contract,
breach of warranty, tort or infringement), ADV does not have, as of the date
hereof, any direct or indirect indebtedness, liabilities, claims, losses,
damages, deficiencies, obligations (including, without limitation, the
obligation to indemnify any other Person for any liabilities or expenses which
have been or may in the future be incurred by or asserted against such other
Person, or responsibilities, known or unknown, liquidated or unliquidated,
accrued, absolute, contingent or otherwise, and whether or not of a kind
required by generally accepted accounting principles to be set forth on a
financial statement), which individually or in the aggregate are material to the
condition (financial or otherwise), assets, liabilities, business or operations
of ADV. To the best knowledge of ADV, there are no circumstances, conditions,
events or arrangements which may hereafter give rise to any liabilities of ADV
except in the ordinary course of business or as otherwise set forth in this
Section 3.8 or in a Schedule to this Agreement.
3.9 Absence of Certain Changes. Except as set forth on Schedule 3.9,
--------------------------
since September 30, 1997, ADV has conducted its business in the ordinary course
consistent with past practices, and there has not been:
(a) any Material Adverse Change or any event, occurrence, development
or state of circumstances or facts which could reasonably be expected to result
in a Material Adverse Change;
(b) any dividend or other distribution declared or paid with respect
to any of the ADV Common Stock;
(c) any loan or forgiveness of indebtedness to any holder of ADV
Common Stock or any Affiliate thereof;
11.
<PAGE>
(d) any bonus, salary or other compensation paid or agreed to be paid
to any employee except in accordance with Schedule 3.17 hereto;
(e) any incurrence of indebtedness for borrowed money;
(f) any creation or other incurrence of any Encumbrance on any of its
assets;
(g) any transaction, Contract entered into, or commitment made, by
ADV relating to its business, operations or any of its assets (including the
acquisition or disposition of any assets) or any relinquishment by ADV of any
contract or other right, in either case other than transactions and commitments
in the ordinary course of business consistent with past practices and those
contemplated by this Agreement (other than payments of compensation); or
(h) any transfer of any assets of ADV to any Person who is a
shareholder or other Affiliate of ADV.
3.10 Title to Assets. ADV has good and marketable title to its material
---------------
properties and assets owned or stated to be owned by ADV, free and clear of all
Encumbrances except: (i) as set forth in the ADV Financial Statements, (ii)
Encumbrances for current taxes not yet due, (iii) Encumbrances incurred in the
ordinary course of business, (iv) Encumbrances that are not substantial in
character, amount or extent (individually or collectively) and that do not
(individually or collectively) materially detract from the value, or interfere
with present use, of the property subject thereto or affected thereby, or
otherwise materially impair the conduct of business of ADV, or (v) as set forth
on Schedule 3.10. All of the material properties and assets used by ADV or held
by ADV, other than any leased assets listed on Schedule 3.10, are owned by ADV,
free and clear of any Encumbrances except as set forth on Schedule 3.10.
3.11 Real Property. Schedule 3.11 sets forth a true and complete list of
-------------
all leaseholds owned by ADV. ADV has valid leasehold interest in such
leaseholds, free and clear of all Encumbrances, except: (i) for rights of
lessors and such matters that are reflected in the relevant lease, (ii) current
Taxes not yet due and payable, (iii) Encumbrances of public record, (iv)
Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property, and (v) as set forth
on Schedule 3.11.
3.12 Litigation. Other than as set forth on Schedule 3.12, there is no
----------
action, suit, investigation, hearing or proceeding pending against or, to the
best knowledge of ADV, threatened against or affecting, ADV, any of its
officers, directors, or shareholders, its business or any assets or any Contract
before
12.
<PAGE>
any court or arbitrator or any governmental body, agency official, which would
have a Material Adverse Effect, or in any manner challenges or seeks to prevent,
enjoin, alter or delay the transactions contemplated by this Agreement. There
are no outstanding judgments against ADV.
3.13 Contracts. Each Contract of ADV is a valid and binding agreement of
---------
ADV, and is in full force and effect, and ADV is not in default (whether with or
without the passage of time or the giving of notice or both) under the terms of
any such Contract. ADV has not assigned, delegated, or otherwise transferred
any of its rights or obligations with respect to any Contracts, or granted any
power of attorney with respect thereto. Schedule 3.13 is a true and correct
list of all Contracts involving an outstanding monetary obligation greater than
$25,000 or with a remaining term greater than one year.
3.14 Licenses and Permits. Schedule 3.14 correctly lists each material
--------------------
license, franchise, permit or other similar authorization affecting, or relating
in any way to ADV's business, together with the name of the governmental agency
or entity issuing such license or permit (the "ADV Permits"). The ADV Permits
are valid and in full force and effect and, assuming the related ADV Consents
have been obtained prior to the Closing, will not be terminated or impaired or
become terminable as a result of the transactions contemplated by this
Agreement.
3.15 Compliance with Laws. ADV is not in material violation of, has not
--------------------
violated, and is neither under investigation with respect to nor has been
threatened to be charged with or given notice of any violation of, any law,
rule, statute, ordinance or regulation, or judgment, order or decree entered by
any court, arbitrator or governmental authority, domestic or foreign, materially
applicable to ADV's assets or the conduct of its business.
3.16 Intangible Property.
-------------------
(a) Schedule 3.16 sets forth all material ADV Intangible Property and
identifies each material contract to which ADV is a party relating to any item
of ADV Intangible Property. No Contract requires ADV to (or will require VCI
to) pay, or entitles it to receive any material royalty, license fee, or other
compensation with respect to the ADV Intangible Property. Except as set forth
on Schedule 3.16, no ADV Intangible Property development was funded by a third
Person (other than any shareholder of ADV) or was conducted by or as a joint
venture, in partnership, or otherwise in collaboration, with any other Person
(except an employee solely in his or her capacity as such). The transactions
contemplated hereby will not adversely affect in any manner any item or part of
the ADV Intangible Property or the nature or usefulness thereof in the hands of
VCI.
13.
<PAGE>
(b) All ADV Intangible Property and all federal, state and foreign
registrations with respect thereto, and all applications therefor are valid and
in full force and effect and are not subject to any taxes, maintenance fees or
actions.
(c) None of the ADV Intangible Property which is purportedly an asset
of ADV was developed or conceived by any ADV employee, officer or director while
employed by any other Person and no Selling Shareholder has violated any
agreement with any former employer which pertains to any of such property.
3.17 Employees.
---------
(a) Schedule 3.17 sets forth a true and complete list of the names,
titles, annual salaries or wage rates and other compensation and office location
of all employees of ADV, indicating part-time and full-time employment, and all
changes in salaries and wage rates per employee since December 31, 1996.
(b) Except as set forth on Schedule 3.17, ADV is not a party to or
subject to any employment contract, consulting agreement, collective bargaining
agreement, confidentiality agreement restricting the activities of ADV, non-
competition agreement restricting the activities of ADV, or any similar
agreement.
3.18 Prepaids. Except as set forth on Schedule 3.18, ADV has not received
--------
any material payments with respect to any services to be rendered or goods to be
provided after the Closing.
3.19 Taxes.
-----
(a) ADV has filed all federal and foreign income tax returns, all
state and local franchise and income tax, real and personal property tax, sales
and use tax, premium tax, excise tax, employment tax and other tax returns of
every character required to be filed by it and has paid in full all Taxes
(including, without limitation, all tax deposits), together with any interest
and penalties owing in connection therewith, shown on such returns to be due in
respect of the periods covered by such returns, other than Taxes which are being
contested in good faith and for which adequate reserves have been established.
Adequate provision has been made in the Books and Records of ADV and, to the
extent required by generally accepted accounting principles, reflected in the
ADV Financial Statements, for all Tax liabilities, including interest or
penalties, whether or not due and payable and whether or not disputed, with
respect to any and all Taxes for the periods covered by the ADV Financial
Statements and for all prior periods. Schedule 3.19 sets forth the date or
dates through which the Internal Revenue Service has examined the federal income
taxes of ADV and the date or dates through which any foreign, state, local or
other taxing authority
14.
<PAGE>
has examined any other tax returns of ADV. Schedule 3.19 also contains a
complete list of each year for which any federal, state, local or foreign tax
authority has obtained or has requested an extension of the statute of
limitations from ADV and lists each tax case of ADV currently pending in audit,
at the administrative appeals level or in litigation. Schedule 3.19 further
lists the date and issuing authority of each statutory notice of deficiency,
notice or proposal assessment and revenue agent's report issued to ADV within
the last twelve months. Except as set forth on Schedule 3.19, to ADV's best
knowledge, neither the Internal Revenue Service nor any foreign, state, local or
other taxing authority has, during the past three years, examined or is in the
process of examining any federal, foreign, state, local or other tax returns of
ADV. Neither the Internal Revenue Service nor any foreign, state, local or
other taxing authority is now asserting or threatening to assert any deficiency
or claim for additional taxes (or interest thereon or penalties in connection
therewith) except as set forth on Schedule 3.19.
(b) ADV has not made any requests for rulings, and ADV has not
received any subpoenas or requests for information, or notices of proposed
reassessment of any property owned or leased by ADV. There are no Liens for
Taxes upon any property or assets of ADV (other than for real property taxes,
not yet due, on premises leased by ADV for which ADV will be liable under the
terms of the applicable leases).
(c) ADV has delivered to VCI true and complete copies of all federal,
state and foreign income tax returns (together with any Revenue Agent's Reports)
filed by ADV relating to its operations for taxable years ended 1995 and 1996.
(d) ADV has not filed a consent pursuant to Section 341(f) of the
Code, and has not filed, and would not be deemed to have filed, any election
under Section 338 of the Code.
(e) ADV has never been, nor is ADV currently, bound by or subject to
any obligation under any agreement relating to the sharing of any liability for,
or payment of, Taxes with any other Person.
(f) ADV has withheld or will withhold, and has paid over or will pay
over to applicable taxing authorities amounts from its employees and has filed
or will file all federal, foreign, state, and local returns and reports with
respect to employee income tax withholding and social security and unemployment
Taxes for all periods (or portions thereof) ending on or before the Effective
Time, in compliance with the provisions of the Code and other applicable
federal, foreign, state and local laws.
15.
<PAGE>
3.20 Environmental Compliance. ADV has not received any notice that it or
------------------------
any of its properties have not been or are not now in complete compliance with
all applicable environmental law.
3.21 Labor and Employment Matters.
----------------------------
(a) Except as set forth on Schedule 3.21, as of the date hereof;
(1) The employment of each employee of ADV may be terminated
immediately by ADV, except as otherwise provided by statute or decisional
authority;
(2) To ADV's best knowledge, no key executive employee of ADV
and no group of employees of ADV has plans to terminate his or her employment at
or prior to the Closing, whether or not as a result of the transactions
contemplated herein;
(3) ADV has not had any material labor relations problems; and
(4) ADV has complied in all material respects with all
collective bargaining agreements and all applicable laws and orders relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of Taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate governmental authorities, or is holding for payment not yet due to
such governmental authorities, all amounts required to be withheld from such
employees of ADV and is not liable for any arrears of wages, Taxes, penalties or
other sums for failure to comply with any of the foregoing. No present or former
employee, officer or director of ADV has notified ADV that he or she has or will
have at the Effective Time, any claim against ADV for any matter, including but
not limited to (i) overtime pay for work done through the Effective Time; (ii)
wages or salary for the work done through the Effective Time; (iii) vacation
time off or pay in lieu of vacation time off for the period through the
Effective Time; (iv) any violation of any statute, ordinance or relation
relating to minimum wages or maximum hours or work-place conditions; or (v)
injuries or other damages which are not fully covered by ADV's insurance
policies; except, in the case of clauses (i) and (ii), for amounts accrued in
the current pay period that are not yet due and payable, and in the case of
clause (iii), for vacation accrued in accordance with ADV's policies and set
forth in Schedule 3.21, which its employees have not yet taken.
(b) Except as disclosed on Schedule 3.21, as of the date hereof, ADV
has not received any notice of any:
16.
<PAGE>
(1) unfair labor practice complaint against ADV pending before
the National Labor Relations Board or any state or local agency;
(2) pending labor strike or other material labor trouble
affecting ADV;
(3) material labor grievance pending against ADV;
(4) pending representation question respecting the employees
of ADV; or
(5) pending arbitration proceedings arising out of or under
any collective bargaining agreement to which ADV is a party.
(c) In addition: (i) none of the matters specified in clauses (b) (1)
through (5) is threatened against ADV; (ii) no union organizing activities have
taken place with respect to ADV; and (iii) no basis exists for which a claim may
be made under any collective bargaining agreement to which ADV is a party.
3.22 Pension and Benefit Plans.
-------------------------
(a) All accrued obligations of ADV applicable to its employees,
whether arising by operation of law, by contract, by past custom or otherwise,
for payments by ADV to trusts or other funds or to any governmental agency, with
respect to unemployment compensation benefits, social security benefits or any
other benefits for its employees with respect to the employment of said
employees through the date hereof have been paid or adequate accruals therefor
have been made on, as applicable, the Books and Records of ADV and the ADV
Financial Statements.
(b) Except as disclosed on Schedule 3.22, as of the date hereof:
(1) Neither ADV nor any of its ERISA Affiliates maintains or
has any obligations to contribute to, or has in effect or has committed to
adopt, any Pension Plan or any Welfare Plan;
(2) Each ERISA Plan conforms in all material respects to all
applicable laws and orders, including ERISA and the applicable provisions of the
Code. All notices, reports, returns, applications and disclosures have been
timely made which are required to be made to the Internal Revenue Service, the
U.S. Department of Labor, the Pension Benefit Guaranty Corporation, any
participants in the ERISA Plans, any trustee, or any insurer with respect to the
ERISA Plans;
17.
<PAGE>
(3) ADV and its ERISA Affiliates have made or provided for
(with fully-funded reserves) all contributions heretofore required to have been
made under all of the ERISA Plans, and will, by the Closing, have made or
provided for (with fully-funded reserves) all contributions required to be made
on or before the Closing under all such plans;
(4) No ERISA Plan nor any trust created thereunder, nor any
trustee or administrator thereof has engaged in a transaction which may subject
any of such ERISA Plans, any such trust, or any party dealing with such ERISA
Plans or any such trust, to the Tax or penalty on prohibited transactions
imposed by Section 4975 of the Code or to a civil penalty imposed by Section 502
of ERISA;
(5) There are no material actions, claims or lawsuits which
have been asserted or instituted against the assets of any of the trusts under
the ERISA Plans, and no basis for such action, claim or lawsuit exists, and no
such action, claim or lawsuit has been threatened;
(6) ADV has not agreed to indemnify any other party for any
liabilities or expenses which have been or may in the future be incurred by or
asserted against such other party in respect of any ERISA Plan;
(7) Each Pension Plan constituting one of the ERISA Plans is
qualified under Section 401 of the Code, each of the trusts maintained with
respect thereto is exempt from federal income taxation under Section 501 of the
Code, and nothing has occurred which would cause the loss of such qualification
or exemption or the imposition of any penalty under Section 4971 of the Code;
(8) The assets of each Pension Plan constituting one of the
ERISA Plans (including Pension Plans maintained by an ERISA Affiliate) are
sufficient to pay all liabilities of the plan, including, without limitation,
all liabilities to pay benefits to any past or present participant or
beneficiary in such plan, any expense incurred in administering the plan, and
any liabilities for Taxes which may be imposed on the plan or on any trust
maintained in connection with the plan;
(9) The value of all accrued benefits under each Pension Plan
constituting one of the ERISA Plans (including Pension Plans maintained by an
ERISA Affiliate) which is a "defined benefit plan" within the meaning of Section
3(35) of ERISA, including each "multi-employer plan" within the meaning of
Section 3(37) of ERISA, does not exceed, on an accrual basis, the aggregate
value of the assets of each such plan;
(10) There has been no "reportable event," within the meaning
of Section 4043(b) of ERISA, with respect to
18.
<PAGE>
any Pension Plan which constitutes one of the ERISA Plans since the effective
date of Section 4043(b) of ERISA;
(11) The transaction contemplated by this Agreement will not
result in a reportable event, within the meaning of ERISA Section 4043, other
than a reportable event with respect to which (i) the ERISA Section 4043
reportable event notice requirement has been waived or (ii) the Pension Benefit
Guaranty Corporation will not apply a penalty for failure to satisfy the
reportable event notice requirement;
(12) Neither ADV nor any of its ERISA Affiliates has any
liability to the Pension Benefit Guaranty Corporation pursuant to Title IV of
ERISA in respect of any Pension Plan constituting one of the ERISA Plans
(including Pension Plans maintained, or formerly maintained, by an ERISA
Affiliate);
(13) Neither ADV nor any of its ERISA Affiliates maintains or
has any obligation to contribute to any multi-employer plan;
(14) Neither ADV nor any of its ERISA Affiliates has terminated
a defined benefit plan or multi-employer plan or suffered or otherwise caused a
"complete withdrawal" or "partial withdrawal" as such terms are respectively
defined in Sections 4203 and 4205 of ERISA from any multi-employer plan. Since
April 1, 1979, neither ADV nor any of its ERISA Affiliates has complied with
Section 4204 of ERISA in order to avoid any such "complete withdrawal" or
"partial withdrawal";
(15) The transaction contemplated by this Agreement will not
result in a ADV liability for severance or termination pay or result in
increased employee benefits becoming payable to any employees of ADV;
(16) Neither ADV nor any of its ERISA Affiliates has any unpaid
liability in respect of any employee for any contributions and/or premiums due
under any Welfare Plan constituting one of the ERISA Plans;
(17) Neither ADV nor its ERISA Affiliates has any liability as
to any benefits to which any employee may be entitled under any Welfare Plan
constituting one of the ERISA Plans, whether for benefits due or claims filed;
and
(18) ADV does not maintain any health or life insurance plan
that provides for continuing benefits or coverage for any participant or any
spouse, dependent or beneficiary under such plan after termination of
employment, other than as may be required under Section 4980B of the Code and
regulations thereunder ("COBRA"). ADV is in compliance with the COBRA notice and
continuation coverage requirements with respect to Plans maintained by ADV.
19.
<PAGE>
(c) True, correct and complete copies of the following documents,
with respect to each of the ERISA Plans, have been delivered to VCI:
(1) Each ERISA Plan document, employment contract, policy,
procedure or other governing instrument relating to an ERISA Plan, including all
amendments, supplements, collective bargaining agreements, letters, memoranda,
understandings and any other document reasonably necessary to reflect the terms
and conditions of each ERISA Plan.
(2) The most recent summary plan description of each ERISA
Plan for which a summary plan description is required under ERISA, and summaries
of material modification thereto.
(3) All instruments under which the assets of any ERISA Plan
are held or managed and benefits provided, including, but not limited to,
insurance contracts, trust agreements, custodial contracts and investment
management agreements.
(4) The two most recent Forms 5500, 5500-C or 5500-R for each
ERISA Plan for which such filing is required, with all attachments and schedules
thereto.
(5) The two most recent annual financial statements for each
ERISA Plan, if not included with such Form 5500 (5500-C or 5500-R).
(6) The most recent actuarial valuation report for each ERISA
Plan (as applicable).
(7) With respect to each ERISA Plan that has received a
determination letter under Section 401(a) of the Code, and any voluntary
employee benefit association trust that has received a determination letter
under Section 501(c) of the Code, the most recent Internal Revenue Service
determination letter (including any letter concerning the tax-exempt status of
any trust under Section 501(a) of the Code), the application submitted when
requesting such determination letter, and any subsequently filed determination
letter request.
(d) All Pension Plans shall be terminated by ADV prior to the
Effective Time.
3.23 Insurance. Schedule 3.23 sets forth a true and correct list of all
---------
policies or binders of fire, liability, workers' compensation, vehicular or
other insurance held by or on behalf of ADV specifying the insurer, the policy
number or covering note number with respect to binders, and describing each
pending claim thereunder of more than $5,000. Such policies and binders are in
full force and effect. No such policy is
20.
<PAGE>
terminable or cancelable by the insurer by virtue of the consummation of the
transactions contemplated herein.
3.24 Books and Records. ADV has heretofore furnished or made available to
-----------------
VCI for its examination the following, each of which is, and will be maintained
so as to remain until the Closing, accurate and complete in all material
respects:
(a) copies of the Certificate of Incorporation and Bylaws, as in
effect on the date of this Agreement;
(b) the minute books of ADV containing all proceedings, consents,
actions and meetings of its shareholders and Boards of Directors;
(c) copies of all ADV Permits, orders and consents with respect to
ADV's securities issued by any administrative agency or governmental body
regulating the issuance or transfer of such securities and all applications for
such permits, orders and consents;
(d) the stock transfer books of ADV setting forth all transfers of
its securities;
(e) copies of all agreements and documents referred to in any ADV
Disclosure Schedule;
(f) all other Books and Records of ADV; and
(g) an accurate list of all of the incumbent officers and directors
of ADV.
3.25 Inventory. The inventory of ADV reflected on the ADV Balance Sheet,
---------
as well as other inventory items acquired since the date of the ADV Balance
Sheet that are now the property of ADV, are of such quality and held in such
quantities as are being used and will be usable and salable or rentable in the
ordinary course of the business of ADV. The inventory excludes obsolete items,
and is recorded at cost and amortized over the estimated life of the inventory
items, with no provision for salvage value. Videocassettes which 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 nine months on
a straight line basis, the first through ninth copies of each title per store
are amortized as base stock. Since the date of the ADV Balance Sheet, ADV has
continued to replenish its inventories in a normal and customary manner
consistent with practice prevailing in the retail video sales and rental
industry.
21.
<PAGE>
3.26 Accuracy and Provision of Information. None of the documents or
-------------------------------------
other information made available to VCI or its Affiliates, attorneys,
accountants, agents or representatives in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained therein not misleading. ADV has provided VCI all material information
regarding its business and operations.
3.27 Shareholder Approval. The Selling Shareholders holding 100% of the
--------------------
shares of ADV Common Stock have approved this Agreement and the transactions
contemplated hereby.
3.28 Investor Representations. Each Selling Shareholder who receives VCI
------------------------
Common Stock in connection with the transactions contemplated by this Agreement
represents that (i) he is an accredited investor as defined in Regulation D
under the Securities Act, or (ii) by reason of his business and financial
experience, and the business and financial experience of those persons
unaffiliated with VCI retained by him, if any, to advise him with respect to his
investment in the shares of VCI Common Stock, such Selling Shareholder together
with such advisers have such knowledge, sophistication and experience in
business and financial matters as to be capable of evaluating the merits and
risk of the prospective investment, and that he is acquiring the shares of VCI
Common Stock for his own account or for one or more separate accounts maintained
by him, if any, for investment and not with a view to the distribution thereof
except in compliance with the Securities Act or an exemption available
thereunder. Each Selling Shareholder who receives VCI Common Stock in
connection with the transactions contemplated by this Agreement understands and
agrees that the shares of VCI Common Stock have not been registered under the
Securities Act and may be resold only if registered pursuant to the applicable
provisions of the Securities Act or if an exemption from registration is
available.
3.29 No Brokers. Except for the possible claim by Robert Stahl referred
----------
to in Schedule 3.12 hereto (which claim would be fully disputed by ADV, KDDJ and
Ballstadt, and as to which Ballstadt shall indemnify ADV, KDDJ and VCI as stated
in said Schedule 3.12), neither ADV or the Selling Shareholders nor any of their
respective Representatives or Affiliates has employed or made any agreement with
any broker, finder or similar agent, person or firm or incurred any liability
for any finder's fee, brokerage fees or commission or similar payment in
connection with the transactions contemplated hereby which would result in any
liability of ADV, VCI or Video Sub.
22.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VCI
-------------------------------------
Except as set forth in a Disclosure Schedule delivered by VCI hereunder,
and except for the transactions contemplated by this Agreement, VCI hereby
represents and warrants to ADV as follows:
4.1 Organization of VCI and Video Sub. Each of VCI and VCI Sub is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and California, respectively, has full corporate power
and authority to conduct its business as it is presently being conducted and to
own, lease and operate its properties and assets, and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not result in a Material Adverse Change to VCI or its business.
4.2 VCI and Video Sub Capital Stock. The authorized capital stock of VCI
-------------------------------
consists solely of 20,000,000 shares of common stock, $.01 par value per share,
9,773,927 shares of which were issued and outstanding as of the date of this
Agreement. No shares of any other class or series of capital stock are
authorized, issued or outstanding.
The authorized capital stock of Video Sub consists of 1,000 shares of
common stock, 100 shares of which were issued and out standing as of the date of
this Agreement. All of the issued and outstanding shares of common stock of
Video Sub are owned by VCI free and clear of all Encumbrances. All of the
outstanding shares of common stock of Video Sub have been duly and validly
authorized and issued and are fully paid and nonassessable.
4.3 Authorization Relative to this Agreement. The execution, delivery
----------------------------------------
and performance by VCI and Video Sub of this Agreement and all of the other VCI
Documents and the consummation by VCI and Video Sub of the transactions
contemplated hereby and thereby are within the corporate powers of VCI and Video
Sub and have been duly authorized by all necessary corporate action on the part
of VCI and Video Sub. This Agreement is, and as of the Closing the other VCI
Documents shall be, the legal, valid and binding obligations of VCI and Video
Sub, enforceable against VCI and Video Sub, as the case may be, in accordance
with their respective terms.
4.4 No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement, the Agreement of Merger or the Certificate of Merger nor the
consummation of the transactions contemplated hereby or thereby will result in
(a) a violation of or a conflict with any provision of the Certificate of
23.
<PAGE>
Incorporation, Bylaws or other organizational document of VCI, (b) a breach of,
or a default under, any Material term or provision of any Material Contract,
indebtedness, Encumbrance, Permit or concession to which VCI is a party or is
subject or by which any assets of VCI are bound, including, without limitation,
any such breach or default which would interfere in any way with its ability to
consummate the transactions contemplated by this Agreement, the Agreement of
Merger or the Certificate of Merger, (c) a Material violation by VCI of any
statute, rule, regulation, ordinance, code, order, judgment, writ, injunction,
decree or award, including any violation which would interfere with its ability
to consummate the transactions contemplated by this Agreement, the Agreement of
Merger or the Certificate of Merger, (d) the imposition of any Material
Encumbrance, restriction or charge on the business or assets of VCI, or (e) give
rise to any right of termination, cancellation or acceleration under any
Material Contract or other agreement to which VCI is a party or by or to which
they or any of their Material assets or properties may be bound or subject.
4.5 Litigation. There are no Actions pending, or to the best of VCI's
----------
knowledge, threatened (a) against, related to or affecting VCI, which Actions,
if determined adversely to VCI, would be reasonably likely to have a Material
adverse effect on VCI, or (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement, including any derivative suits brought by or on
behalf of VCI. VCI is not in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against VCI involving amounts in excess
of $100,000. For purposes of this Section 4.5, an Action will be deemed to have
an "adverse effect" on VCI if in connection with such Action, VCI or Video Sub
is reasonably likely to pay $100,000 or more in the aggregate with respect to
the defense, settlement, dismissal or other disposition or satisfaction of such
Action.
4.6 Board Approval. The Boards of Directors of VCI and Video Sub have
--------------
approved and adopted this Agreement.
4.7 Validity of Shares Issued to Selling Shareholders. The shares of VCI
-------------------------------------------------
Common Stock to be issued to the Selling Shareholders hereunder will, when
issued and paid for in accordance with this Agreement, be duly and validly
issued, nonassessable shares free and clear of any and all Encumbrances (other
than Encumbrances which may exist prior to the Closing on the ADV Common Stock),
and will be issued in compliance with all applicable federal and state
securities laws.
4.8 VCI Shareholder Approval. No approval of the shareholders of VCI is
------------------------
required for the consummation of the transactions under this Agreement.
24.
<PAGE>
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
ADV and VCI each covenant with the other for the period from the date
hereof through the Effective Time as follows:
5.1 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Time, ADV and VCI shall each give prompt notice to the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
ADV of its business that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.12 or that relate to
the consummation of the transactions contemplated by this Agreement.
5.2 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the performance of obligations hereunder,
each of the parties hereto acknowledges that it will have access to confidential
information relating to the other parties. Each party shall treat such
information as confidential, preserve the confidentiality thereof and not
disclose such information, except to its respective Representatives and
Affiliates in connection with the transactions contemplated hereby. Each party
agrees to maintain in confidence, and not to disclose to any third party, any
ideas, methods, developments, inventions, improvements and business plans and
information which are the confidential information of the other parties. If,
however, confidential information is disclosed, the disclosing party shall
immediately notify the other parties in writing and take all reasonable steps
required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Time or the Termination Date, all confidential information shall remain the
property of the party who originally possessed such information. In the event
of the termination of this Agreement for any reason whatsoever, ADV shall return
to VCI, and VCI shall return to ADV, all documents, work papers and other
material (including all copies thereof)
25.
<PAGE>
obtained from the other party in connection with the transactions contemplated
hereby and will use all reasonable efforts, including, without limitation,
instructing its employees and others who have had access to such information, to
keep confidential and not to use any such information, unless such information
is now, or is hereafter disclosed, through no act or omission of such party, in
any manner making it available to the general public. If VCI or any of its
Affiliates is required by legal process or by operation of law to disclose any
confidential information in anticipation of a possible acquisition of ADV by VCI
or any such Affiliate, VCI shall provide ADV with written notice of such request
at least 48 hours prior to making such disclosure (or, if it is not practicable
to give at least 48 hours' prior notice, written notice shall be given as
promptly as practicable) and, without any need to obtain the consent of such
other parties, shall be entitled to make such disclosure. If any party is
compelled by legal process to disclose any confidential information, such party
shall provide the other parties with prompt written notice of such request and,
without any need to obtain the consent of such other parties, shall be entitled
to make such disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such information to, deliver to such other party all documents, work
papers and other material (including copies of extracts and summaries thereof)
obtained by or on behalf of any of them directly or indirectly as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof.
5.3 Employment Agreements. At or prior to the Effective Time, VCI shall
---------------------
execute employment agreements (the "Employment Agreements") substantially in the
form of Exhibits C and D hereto with David A. Ballstadt, Keith D. Ballstadt and
Donald Ballstadt. VCI also agrees to retain Jeffrey Ballstadt as an employee
for 30 days following the Effective Time at his regular rate of pay and
benefits.
ARTICLE VI
ADDITIONAL COVENANTS OF ADV
---------------------------
6.1 Conduct of Business. From the date hereof through the Effective Time
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination
26.
<PAGE>
Date"), except as contemplated or as may be required by this Agreement, or as
set forth on Schedule 6.1, or as consented to by VCI in writing, ADV shall
diligently carry on its business and in the ordinary course only, and will use
its best efforts to preserve its present business organization intact and to
keep available the services of its present officers, agents or employees
(nothing herein implying an obligation of ADV to maintain or retain any specific
officer, agent or employee), and preserve its present relationships with
customers and other Persons having business dealings with it, and will not take
any action inconsistent with this Agreement or with the consummation of the
transactions contemplated hereby. Without limiting the generality of the
foregoing, ADV shall not, except as specifically contemplated by this Agreement:
(a) change or amend its Certificate of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) Material
Contract, except in the ordinary course of business, or (ii) any Contract
involving $10,000 or more;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any Material assets, or any interests therein,
and, without limiting the generality of the foregoing, ADV will maintain and
sell or rent inventory consistent with its past practices and in accordance with
any other provision in this Agreement;
(d) incur any obligations or liability for long-term indebtedness, or
incur any other obligation or liability of $10,000 or more except in the
ordinary course of business;
(e) (i) grant any bonus, severance or termination pay or increase
in any manner the compensation or fringe benefits of any employee or pay any
benefit not required by any existing ADV Employee Plan or policy;
(ii) make any change in the key management structure of ADV,
including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any ADV Employee Plan,
agreement (including, without limitation, any collective bargaining or
employment agreement), trust, fund or other arrangement for the benefit or
welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
Material assets or business of any corporation, partnership, association or
other business organi zation or division thereof;
27.
<PAGE>
(g) declare, set aside, make or pay any dividend or other
distribution in respect of ADV's capital stock;
(h) fail to expend funds for budgeted capital expenditures or
commitments that have been disclosed to VCI;
(i) willingly allow or permit any of ADV's insurance policies to be
suspended, impaired or canceled;
(j) fail to pay its accounts payable and any debts owed or
obligations due to it, or pay or discharge when due any liabilities, in the
ordinary course of business;
(k) enter into, renew, modify or revise any agreement or transaction
with any of its Affiliates;
(l) fail to maintain any assets in substantially their current state
of repair, excepting normal wear and tear or fail to replace consistent with
ADV's past practice inoperable, worn-out or obsolete or destroyed assets;
(m) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
(n) make any Material income tax election or settlement or compromise
with tax authorities;
(o) fail to comply in any Material respect with all laws applicable
to it;
(p) intentionally do any other act which would cause any
representation or warranty of ADV in this Agreement to be or become untrue in
any Material respect;
(q) issue any shares of ADV Common Stock or any options, warrants,
rights or other securities convertible into, or exercisable or exchangeable for,
ADV Common Stock; or
(r) enter into any agreement, arrangement or under standing or
otherwise become obligated, to do any action prohibited hereunder.
6.2 Public Statements and Press Releases. Except as pro vided for
------------------------------------
hereinbelow, ADV and the Selling Shareholders shall not from and after the date
hereof make, issue or release any public announcement, press release, statement
or acknowledgment of the existence of, or reveal publicly the terms, conditions
and status of, the transactions provided for herein, without the prior written
consent of VCI as to the content and time of release of such statement or
announcement.
28.
<PAGE>
6.3 No Solicitation. Prior to the Effective Time (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither ADV nor any
of its Affiliates or Representatives shall directly or indirectly solicit or
initiate any discussions, offers or negotiations with, or participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise encourage any effort or attempt by, any
Person other than VCI, concerning any Alternative Transaction with respect to
ADV. ADV shall promptly notify VCI if any proposal, offer, inquiry or other
contact is received by ADV in respect of an Alternative Transaction, and shall
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep VCI informed on a current basis of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations.
6.4 Delivery of ADV Common Stock. The Selling Shareholders shall deliver
----------------------------
stock certificates representing all issued and outstanding capital stock of ADV
at or prior to the Effective Time.
6.5 Noncompetition Agreements. At or prior to the Effective Time, each
-------------------------
of David A. Ballstadt, Keith D. Ballstadt and Donald E. Ballstadt shall have
executed noncompetition agreements in favor of VCI substantially in the form of
Exhibit E hereto (the "Noncompetition Agreements").
6.6 Piggyback Registration. Each time that VCI proposes to file a
----------------------
registration statement under the Securities Act of 1933 with respect to an
offering of VCI Common Stock either by VCI or by shareholders of VCI on a form
that would also permit the registration of shares held by the Selling
Shareholders, VCI will give written notice of such proposal to each Selling
Shareholder. Each Selling Shareholder may, by written request given within ten
business days after receipt of any such notice, require VCI to use its best
efforts to cause all or part of such person's shares to be included in such
registration statement. Notwithstanding the foregoing, if the managing
underwriter or underwriters, if any, of such offering advise VCI in writing that
inclusion of such shares would (a) make it impracticable to conduct an
underwritten offering of the VCI Common Stock being registered at the price at
which such VCI Common Stock could be sold without such inclusion, or (b)
materially and adversely interfere with the offering, then the number of shares
requested to be included in such registration by the Selling Shareholders may be
reduced or eliminated. In connection with any registration pursuant to this
Section 6.6 covering an underwritten public offering, VCI and each Selling
Shareholder whose shares are included therein shall enter into a written
agreement with a managing underwriter containing such provisions as are
customary in the securities business for such an arrangement. In connection
with any such registration, each such Selling Shareholder shall (a) provide
29.
<PAGE>
such information and execute such documents as may be reasonably required in
connection with such registration, (b) agree to sell such shares on the basis
provided in any underwriting arrangements, and (c) complete and execute all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
Notwithstanding the foregoing, the registration rights set forth in this Section
6.6 shall terminate at such time as the Selling Shareholders are eligible,
pursuant to Rule 144(k) under the Securities Act, to resell their shares without
restriction under the federal securities laws.
6.7 Insurance. From the date hereof through the Effective Time, ADV
---------
shall maintain in force (including necessary renewals thereof) the insurance
policies listed on Schedule 3.23.
6.8 Reporting and Compliance With Law. From the date hereof through the
---------------------------------
Effective Time, ADV shall duly and timely file all tax returns required to be
filed with governmental authorities and duly observe and conform in all material
respects to all applicable laws and orders.
6.9 Approval of Shareholders of ADV. ADV shall take all action
-------------------------------
necessary, in accordance with the Minnesota Law and its Certificate of
Incorporation and Bylaws, to obtain the approval of 100% of the ADV Common Stock
for this Agreement, the Agreement of Merger and the Certificate of Merger and
the transactions con templated hereby and thereby, and ADV shall provide the
Selling Shareholders with full disclosure of all terms of this transaction.
6.10 Termination of Employee Benefit Plans Prior to Effective Time. ADV
-------------------------------------------------------------
agrees that its employee benefit plans, pro grams and arrangements (in addition
to those for non-employee directors) (and if required by such plans, programs or
arrange ments, any agreements entered thereunder and awards and options granted
thereunder) shall be terminated or amended as of the Effective Time, to the
extent necessary or appropriate, to reflect the transactions contemplated by
this Agreement. From and after the Closing, VCI shall cause ADV to provide
employees who were employed by ADV immediately prior to the Closing, and who
will be eligible for coverage under VCI's programs, with substantially the same
level of employee medical and dental insurance coverage as is provided by VCI to
its employees of comparable status and seniority; provided that, to the extent
there is any period of delayed eligibility for coverage of such persons under
VCI's medical and dental insurance programs, VCI shall notify such persons that
they may continue their previous coverage during such transition period pursuant
to the Consolidated Omnibus Reconciliation Act of 1985 (COBRA), with premiums
for such coverage to be paid by the employee and/or ADV in accordance with VCI's
company-wide policies and practices.
30.
<PAGE>
6.11 Access to Information. ADV shall afford VCI and its Representatives
---------------------
reasonable access during normal business hours, throughout the period prior to
the earlier of the Effective Time or the Termination Date (as hereinafter
defined), to its personnel, facilities, contracts, commitments, books, computer
software application systems, files and records and to furnish such financial
and operating data and other information with respect to its business, assets
and properties, and shall use its best efforts to cause its Representatives to
furnish promptly to VCI and its Representatives such additional financial and
operating data and other information as to its business and properties as the
other or its duly authorized Representatives may from time to time reasonably
request.
ARTICLE VII
[Intentionally omitted]
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF ADV
------------------------------------
AND THE SELLING SHAREHOLDERS
----------------------------
The obligations of ADV and the Selling Shareholders to con summate the
transactions provided for hereby are subject, in the discretion of ADV, to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any of which may be waived by ADV:
8.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of VCI contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Effective Time as if such
representations and warranties were made at and as of the Effective Time, and
VCI shall have performed all agreements and covenants required hereby to be
performed by it prior to or at the Effective Time.
8.2 Permits. All Material Permits, waivers and approvals from
-------
governmental authorities and other parties necessary to permit VCI to consummate
the transactions contemplated hereby shall have been obtained.
8.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
31.
<PAGE>
8.4 No Material Adverse Change. Since January 31, 1997, there shall not
--------------------------
have occurred any change in the business, financial condition or prospects of
VCI taken as a whole, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, resulted in a Material Adverse
Change to the business, financial condition or prospects of VCI.
8.5 Seat on VCI Board. Ballstadt shall have been elected to the VCI
-----------------
Board of Directors, effective upon the Closing.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF VCI
------------------------------------
The obligations of VCI to consummate the transactions provided for hereby
are subject, in the discretion of VCI, to the satisfaction, at or prior to the
Effective Time, of each of the following conditions, any of which may be waived
by VCI:
9.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of ADV contained in this Agreement shall be true and correct at and
as of the date of this Agreement, all representations and warranties of
Ballstadt con tained in this Agreement shall be true and correct at and as of
the Effective Time as if such representations and warranties were made at and as
of the Effective Time, and ADV and the Selling Shareholders shall have performed
all agreements and covenants required hereby to be performed by them prior to or
at the Effective Time, and ADV shall have delivered a certificate signed by
Ballstadt to such effect.
9.2 Permits. All Permits, waivers and approvals from governmental
-------
authorities and other parties, necessary to permit ADV and the Selling
Shareholders to consummate the transactions contemplated hereby shall have been
obtained.
9.3 Opinion of Counsel. ADV shall have delivered to VCI an opinion of
------------------
Huffman, Usem, Saboe, Crawford & Greenberg, P.A., counsel to ADV and the Selling
Shareholders, in substantially the form attached hereto as Exhibit G, which
opinion shall set forth, among other things, that all ADV Documents and the
consummation by ADV of the transactions contemplated hereby are within the
corporate powers of ADV and have been duly authorized by all necessary corporate
and shareholder action on the part of ADV and that all transactions contemplated
by the Merger are being consummated in accordance with Minnesota Law.
9.4 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
32.
<PAGE>
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.5 No Material Adverse Change. Since September 30, 1997, there shall
--------------------------
not have occurred any change in the business, financial condition or prospects
of ADV, except for changes contemplated hereby or changes which have not had a
material adverse effect on the business, financial condition or prospects of
ADV.
9.6 Corporate Resolutions. VCI shall have received from ADV certified
---------------------
resolutions adopted by the Board of Directors of ADV approving this Agreement
and the transactions contemplated hereby.
9.7 Selling Shareholder Approval. This Agreement, the Agreement of
----------------------------
Merger, the Certificate of Merger and the transactions contemplated hereby and
thereby shall have been approved and adopted by the vote or consent of 100% of
the outstanding shares of ADV Common Stock and an officer's certifi cate as to
such approval shall be delivered by ADV to VCI.
9.8 Employment Agreements. The Employment Agreements shall be in effect.
---------------------
9.9 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of ADV shall have been delivered to
VCI.
9.10 Inventory. Notwithstanding any other provision in this Agreement,
---------
ADV's rental and sale inventory at the Closing will be not less than the amount
set forth on the ADV Balance Sheet as of December 31, 1997, which shall be not
less than the amount set forth on the ADV balance sheet as of September 30,
1997.
9.11 Store Lease Assignments. VCI shall have received from ADV copies of
-----------------------
all necessary third party consents to the assignment to VCI pursuant to the
Merger of any store leases held by ADV. Other than such consents, there are no
other change of control or similar provisions in any Contracts of ADV which
would prevent the assignment to VCI of any store leases held by ADV.
9.12 Due Diligence. VCI and its counsel shall have found satisfaction
-------------
with the results of their due diligence investigation of the financial
condition, assets and operations of ADV.
9.13 Financing. VCI shall have obtained or arranged for new financing in
---------
an amount of at least $8,000,000 on terms acceptable to VCI.
33.
<PAGE>
9.14 Rentrak Matter. ADV shall have resolved its current dispute with
--------------
Rentrak Corporation ("Rentrak"), and the pending lawsuit by Rentrak against ADV,
as set forth in the ADV Disclosure Schedule, shall have been dismissed, in each
case on terms acceptable to VCI.
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
shareholders of ADV, this Agreement and the Merger and other transactions
contemplated hereby may be terminated at any time prior to the Effective Time:
(1) By mutual written consent of the Boards of Directors of
ADV and VCI;
(2) By either ADV or VCI, if the Closing shall not have
occurred on or before March 31, 1998 unless such date is extended by the mutual
agreement of the parties; provided however, that this provision shall not be
available to ADV if there is then a breach of this Agreement under clause (4) of
this Section 10.1(a), and this provision shall not be available to VCI if there
is then a breach of this Agreement under clause (3) of this Section 10.1(a);
(3) By ADV, if there is a breach of any representation or
warranty set forth in Article IV hereof or any covenant or agreement to be
complied with or performed by VCI pursuant to the terms of this Agreement or an
occurrence of any event which results or would result in the failure of a
condition set forth in Article VIII to be satisfied at or prior to the Effective
Time; or
(4) By VCI, if there is a breach of any representation or
warranty set forth in Article III hereof or of any covenant or agreement to be
complied with or performed by ADV or the Selling Shareholders pursuant to the
terms of this Agreement or the occurrence of any event which results or would
result in the failure of a condition set forth in Article IX to be satisfied at
or prior to the Effective Time.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any willful breach of this Agreement occurring
prior to or as a result of termination of this Agreement, and except that:
34.
<PAGE>
(1) Each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same; and
(2) The provisions of Sections 5.2 and 12.5 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the avail ability of
specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Time, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
10.4 Releases and Indemnification Regarding Personal Guarantees. Within
----------------------------------------------------------
60 days following the Closing, VCI will use its best efforts to obtain releases
from lessors, lenders, vendors and any other third parties, of any personal
guarantees or personal liabilities of Ballstadt or any other Selling Shareholder
with respect to any obligations of ADV, insofar as such personal guarantees or
liabilities are described in the ADV Disclosure Schedule; and VCI shall in any
event, as set forth in Article 11.3 below, indemnify and hold harmless Ballstadt
and/or such other Selling Shareholders from any personal liability with respect
to such described guarantees and liabilities, unless and to the extent that VCI
and ADV are entitled to be indemnified under Article XI of this Agreement.
Notwithstanding the foregoing, VCI's indemnification in this Section 10.4 shall
not be limited to two years, and the same shall continue for the term of any
remaining personal guarantee. See Schedule 10.4 attached hereto.
35.
<PAGE>
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of ADV, Ballstadt and VCI contained herein and the
indemnification by Ballstadt under Section 11.2 with respect thereto, and the
indemnification by VCI under Section 11.3 with respect thereto, shall survive
the Effective Time for two years; provided, however, that the representations
and warranties of ADV and Ballstadt in Section 3.19 and the indemnification by
Ballstadt with respect thereto shall survive until the applicable statutes of
limitations have expired, and those contained in Section 3.5 and the
indemnification by Ballstadt with respect thereto shall survive without any
limitation in time. For purposes of this Article XI, "representations" and
"warranties" of ADV and Ballstadt shall mean collectively those representations
and warranties of ADV and Ballstadt set forth in Article III, the Disclosure
Schedules referenced therein, and "representations" and "warranties" of VCI
shall mean collectively those representa tions and warranties of VCI set forth
in Article IV, the Disclosure Schedules referenced therein.
11.2 Indemnification by Ballstadt. Subject to, and in the manner
----------------------------
described in, this Article XI, for a period of two years from the Effective Time
except as otherwise provided in Section 11.1, Ballstadt shall indemnify and hold
harmless VCI and its Representatives and Affiliates (the "VCI Indemnified
Parties") to the fullest extent lawful, from and against any and all losses,
damages, diminution in value, claims, liabilities, actions and expenses
(including, without limitation, costs of investigating, preparing or defending
any such claim or action, costs of settlement, judgments, and reasonable legal
fees and expenses), net of any amounts actually received under any insurance
policy as a result of such loss, damage, diminution in value, claim, liability,
action, or expense (collectively "Losses") arising out of or in connection with
the breach of any representation, warranty, covenant or agreement of ADV or
Ballstadt contained in this Agreement. The term "Losses" as used in this
Section 11.2 is not limited to matters asserted by third parties against a VCI
Indemnified Party, but includes Losses incurred or sustained by a VCI
Indemnified Party in the absence of third party claims.
11.3 Indemnification by VCI. Subject to, and in the manner described in,
----------------------
this Article XI, for a period of two years from the Effective Time, VCI shall
indemnify and hold harmless the Selling Shareholders and their respective
Representatives and Affiliates (the "ADV Indemnified Parties") to the fullest
extent lawful, from and against any and all Losses (as defined in Section 11.2)
arising out of or in connection with the breach of any representation, warranty,
covenant or agreement of VCI. The term "Losses" as used in this Section 11.3 is
not limited to matters asserted by third parties against a ADV Indemnified
Party, but
36.
<PAGE>
includes Losses incurred or sustained by a ADV Indemnified Party in the absence
of third party claims.
11.4 Basket and Cap. VCI shall be indemnified by Ballstadt and the
--------------
Selling Shareholders shall be indemnified by VCI, in each case to the extent
that the aggregate of all Losses, determined without regard to whether any Loss
was Material or not, exceeds $10,000 (the "Basket Amount"), provided that in no
circumstance shall the aggregate liability of Ballstadt or VCI exceed
$1,500,000. Notwithstanding the foregoing, there shall be no Basket Amount
applicable to any Loss resulting from a breach of representations and warranties
in Sections 3.5 or 3.19 or from a failure to make any adjustment required under
Section 2.2(e).
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party
for which indemnification would be available under this Article XI (a "Claim"),
the indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be represented by the indemnifying
party, such indemnified party shall have the right to assume control of the
defense of such Claim and to have its expenses reimbursed promptly with respect
to such Claim to the extent entitled thereto. In addition, in the event that
such indemnifying party, within a reasonable time after notice that any such
Claim or the total Losses incurred exceeds the Basket Amount, fails to defend
any indemnified party, such indemnified party will (upon further notice to such
indemnifying party) have the right to undertake its defense of such Claim for
the account of such indemnifying party and to have its expenses reimbursed
promptly with respect to such Claim to the extent entitled thereto. Regardless
of which party is controlling the defense of any Claim, (i) both the
indemnifying party and the indemnified party shall act in good faith; (ii) no
settlement of such Claim may be agreed to without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld; and (iii)
no part of any Claim shall be paid without such consent or unless a final
judgment from which no appeal may be taken is entered on such Claim against the
indemnified party. The controlling party shall deliver, or cause to be
delivered, to the other party copies of all correspondence, pleadings, motions,
briefs, appeals or other written statements relating to or submitted in
connection with the defense of any such Claim, and timely notices of any hearing
or other court proceeding relating to such Claim.
37.
<PAGE>
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within 90 days of the discovery of the Loss of the nature and
extent thereof, and the other party shall repay such Losses within 90 days
thereafter to the extent the Losses exceed the Basket Amount, or shall inform
the party seeking indemnification that it is denying in good faith all or a
portion of such Claim. If the party seeking indemnification disputes the denial
of such Claim, it may thereupon proceed to enforce its rights under this
Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns, and no other Person shall have any
right, benefit or obligation under this Agreement as a third party beneficiary
or otherwise.
12.2 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express); and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
If to ADV or the Selling Shareholders, addressed to:
David A. Ballstadt
3904 The Strand
Manhattan Beach, CA 90266
With a copy to:
Craig D. Greenberg, Esq.
Huffman, Usem, Saboe, Crawford &
Greenberg, P.A.
1000 Water Park Place
5101 Olson Memorial Highway
Minneapolis, Minnesota 55422
FAX: (612) 545-2720
38.
<PAGE>
If to VCI, addressed to:
Robert Y. Lee
Video City, Inc.
6840 District Blvd.
Bakersfield, CA 93313
FAX: (805) 397-5982
With a copy to:
William J. Feis, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
FAX: (310) 201-4746
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.3 Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without reference to choice
of law provisions.
12.4 Multiple 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 instrument.
12.5 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement into effect.
12.6 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
12.7 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.8 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
39.
<PAGE>
12.9 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, including, without
limitation, the letter of intent dated November 17, 1997.
12.10 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.11 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
-----------------------------
Robert Y. Lee,
Chairman and Chief
Executive Officer
VIDEO ADVENTURES CORP.
By: /s/ Robert Y. Lee
-----------------------------
Robert Y. Lee,
President
ADVENTURES IN VIDEO, INC.
By: /s/ David A. Ballstadt
-----------------------------
David A. Ballstadt,
President
BALLSTADT:
/s/ David A. Ballstadt
-----------------------------
David A. Ballstadt
40.
<PAGE>
EXHIBIT 10.2
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
between
VIDEO CITY, INC.,
VIDEO BALLSTADT CORP.,
KDDJ INVESTMENTS, INC.
and
DAVID A. BALLSTADT
Dated as of March 25, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I DEFINITIONS.......................................... 1
1.1 Defined Terms........................................ 1
1.2 Other Defined Terms.................................. 4
ARTICLE II PLAN OF REORGANIZATION............................... 5
2.1 Adoption of Plan..................................... 5
2.2 The Merger........................................... 5
2.3 Effective Time....................................... 7
2.4 Certificate of Incorporation and Bylaws.............. 7
2.5 Directors and Officers............................... 8
2.6 The Closing.......................................... 8
2.7 Earnout Shares....................................... 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF KDDJ............... 9
3.1 Corporate Existence and Power........................ 9
3.2 Corporate Authorization.............................. 9
3.3 Governmental Authorization........................... 9
3.4 Non-Contravention.................................... 10
3.5 KDDJ Capitalization.................................. 10
3.6 Subsidiaries......................................... 10
3.7 Consents............................................. 10
3.8 Financial Statements................................. 10
3.9 Absence of Certain Changes........................... 11
3.10 Title to Assets...................................... 12
3.11 Real Property........................................ 12
3.12 Litigation........................................... 12
3.13 Contracts............................................ 13
3.14 Licenses and Permits................................. 13
3.15 Compliance with Laws................................. 13
3.16 Intangible Property.................................. 13
3.17 Employees............................................ 14
3.18 Prepaids............................................. 14
3.19 Taxes................................................ 14
3.20 Environmental Compliance............................. 16
3.21 Labor and Employment Matters......................... 16
3.22 Pension and Benefit Plans............................ 17
3.23 Insurance............................................ 20
3.24 Books and Records.................................... 21
3.25 Inventory............................................ 21
3.26 Accuracy and Provision of Information................ 22
3.27 Shareholder Approval................................. 22
3.28 Investor Representations............................. 22
3.29 No Brokers........................................... 22
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF VCI............... 23
4.1 Organization of VCI and Video Sub................... 23
4.2 VCI and Video Sub Capital Stock..................... 23
4.3 Authorization Relative to this Agreement............ 23
4.4 No Conflict or Violation............................ 23
4.5 Litigation.......................................... 24
4.6 Board Approval...................................... 24
4.7 Validity of Shares Issued to Selling Shareholders... 24
4.8 VCI Shareholder Approval............................ 24
ARTICLE V COVENANTS OF EACH PARTY............................. 25
5.1 Notification of Certain Matters..................... 25
5.2 Confidential Information............................ 25
5.3 Employment Agreement................................ 26
ARTICLE VI ADDITIONAL COVENANTS OF KDDJ........................ 26
6.1 Conduct of Business................................. 26
6.2 Public Statements and Press Releases................ 28
6.3 No Solicitation..................................... 29
6.4 Delivery of KDDJ Common Stock....................... 29
6.5 Noncompetition Agreements........................... 29
6.6 Piggyback Registration.............................. 29
6.7 Insurance........................................... 30
6.8 Reporting and Compliance With Law................... 30
6.9 Approval of Shareholders of KDDJ.................... 30
6.10 Termination of Employee Benefit Plans
Prior to Effective Time............................. 30
6.11 Access to Information............................... 31
ARTICLE VII [Intentionally omitted]............................. 31
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF KDDJ
AND THE SELLING SHAREHOLDERS........................ 31
8.1 Representations, Warranties and Covenants........... 31
8.2 Permits............................................. 31
8.3 No Governmental Actions............................. 31
8.4 No Material Adverse Change.......................... 32
8.5 Seat on VCI Board................................... 32
ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF VCI................ 32
9.1 Representations, Warranties and Covenants........... 32
9.2 Permits............................................. 32
9.3 Opinion of Counsel.................................. 32
9.4 No Governmental Actions............................. 32
9.5 No Material Adverse Change.......................... 33
9.6 Corporate Resolutions............................... 33
9.7 Selling Shareholder Approval........................ 33
9.8 Employment Agreements............................... 33
</TABLE>
ii.
<PAGE>
<TABLE>
<C> <S> <C>
9.9 Delivery of Stock Certificates...................... 33
9.10 Inventory........................................... 33
9.11 Store Lease Assignments............................. 33
9.12 Due Diligence....................................... 33
9.13 Financing........................................... 33
ARTICLE X TERMINATION, AMENDMENTS, WAIVERS AND
POST-CLOSING COVENANTS.............................. 34
10.1 Termination......................................... 34
10.2 Amendments.......................................... 35
10.3 Waivers............................................. 35
10.4 Releases and Indemnification Regarding
Personal Guarantees................................. 35
ARTICLE XI INDEMNIFICATION; SURVIVAL........................... 35
11.1 Survival of Representations, Etc.................... 35
11.2 Indemnification by.................................. 36
11.3 Indemnification by VCI.............................. 36
11.4 Basket and Cap...................................... 36
11.5 Indemnification Procedure........................... 37
ARTICLE XII GENERAL PROVISIONS.................................. 38
12.1 Assignment.......................................... 38
12.2 Notices............................................. 38
12.3 Choice of Law....................................... 39
12.4 Multiple Counterparts............................... 39
12.5 Expenses............................................ 39
12.6 Invalidity.......................................... 39
12.7 Titles.............................................. 39
12.8 Cumulative Remedies................................. 39
12.9 Entire Agreement.................................... 40
12.10 Attorneys' Fees..................................... 40
12.11 Waiver of Right to Trial by Jury.................... 40
</TABLE>
iii.
<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION, dated as of March 25,
1998 is by and among VIDEO CITY, INC., a Delaware corporation ("VCI"), VIDEO
BALLSTADT CORP., a California corporation ("Video Sub"), KDDJ INVESTMENTS, INC.
a Minnesota corporation ("KDDJ") and DAVID A. BALLSTADT ("Ballstadt"), with
reference to the following facts:
A. Ballstadt is the chief executive officer and a principal shareholder
of KDDJ.
B. KDDJ owns and operates three retail video sales and rental stores in
the locations listed in Schedule 3.11 hereto.
C. VCI, KDDJ and Ballstadt believe that it is in their best interests to
adopt and consummate a plan of reorganization that provides for the merger (the
"Merger") of Video Sub, a newly formed subsidiary of VCI, into KDDJ, with Video
Sub disappearing and KDDJ surviving, and the conversion of all KDDJ shares into
the Merger Consideration.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, and in the masculine or feminine gender,
depending upon the reference.
"Action" shall mean any action, order, writ, injunction, judgment or
------
decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation.
"KDDJ Common Stock" shall mean shares of common stock, $1.00 par
-----------------
value per share, of KDDJ.
"KDDJ Disclosure Schedule" shall mean all Disclosure Schedules
------------------------
delivered by KDDJ pursuant to this Agreement.
"KDDJ Documents" shall mean this Agreement, the Certificate of Merger,
--------------
the Agreement of Merger and any other documents, instruments or certificates to
be delivered by KDDJ in connection with this Agreement.
1.
<PAGE>
"KDDJ Intangible Property" means all intangible property owned by KDDJ
------------------------
or in which KDDJ has any interest (including the right to use) or owned by any
Selling Shareholder and used in KDDJ's business (other than intangible property
owned by third parties and available generally for commercial license from
others), including without limitation, (i) KDDJ's name and all Marks; (ii) all
statutory, common law and registered copyrights and mask work rights, and all
applications for the registration thereof; (iii) all patents and applications
therefor; (iv) all software; (v) all other inventories, discoveries,
improvements, processes, formulae (secret or otherwise), trade secrets,
information, know-how and ideas (including those in the possession of third
parties, but that are the property of KDDJ); and (vi) all technical
documentation relating thereto.
"Affiliate" shall mean, with respect to any Person, a Person that
---------
directly or indirectly controls, is controlled by or is under common control
with such Person.
"Agreement" shall mean this Agreement of Merger and Plan of
---------
Reorganization, together with all schedules (including the Disclosure Schedule)
and exhibits referenced herein.
"Agreement of Merger" shall mean that certain document describing the
-------------------
Merger to be filed with the Secretary of State of the State of California.
"Books and Records" shall mean all books and records, stock transfer
-----------------
books, minute books, copies of outstanding stock certificates, ledgers, employee
records, customer lists, files, correspondence, and other written records of
every kind.
"Certificate of Merger" shall mean that certain document describing
---------------------
the Merger to be filed with the Secretary of State of the State of Minnesota.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
"Contracts" shall mean all executory agreements, contracts, leases,
---------
commitments, evidences of indebtedness, letters of credit, franchise agreements,
purchase agreements and purchase orders, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules attached
-------------------
hereto and delivered by the parties as of the date hereof which set forth the
exceptions to the representations and warranties contained in Article III hereof
(as to KDDJ) and Article IV hereof (as to VCI and Video Sub) and certain other
information called for by this Agreement. Unless otherwise specified, each
reference in this Agreement to any numbered schedule is a reference to that
numbered schedule which is
2.
<PAGE>
included in the Disclosure Schedule. Any information disclosed on a particular
schedule on the Disclosure Schedule or subparts thereof shall be deemed
disclosed on any and all schedules.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
-----------
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance, restriction or other right of third parties, whether voluntarily
incurred or arising by operation of law, and includes, without limitation, any
agreement to give any of the foregoing in the future, and any contingent sale or
other title retention agreement or lease in the nature thereof, except liens for
current taxes, assessments, governmental charges or levies on property not yet
due and payable.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
the same may be amended from time to time.
"ERISA Affiliate" shall mean any entity that is a member of a group of
---------------
which KDDJ is a member and which is under common control with KDDJ, within the
meaning of the regulations promulgated under Section 414 of the Code.
"ERISA Plans" shall mean, collectively, all Pension Plans and all
-----------
Welfare Plans required to be disclosed on Schedule 3.22.
"Marks" means all registered and unregistered trademarks, service
-----
marks, trade names, and slogans, all applications therefor, and all goodwill
associated therewith.
"Material" shall mean, unless otherwise specifically defined herein,
--------
any amounts of $10,000 or more as to KDDJ, and any amounts of $100,000 or more
as to VCI, except that where the context requires, "material" shall mean an
effect resulting in loss, liability, payment, damage or expense of $10,000 or
more in the case of KDDJ, and $100,000 or more in the case of VCI and Video Sub.
"Material Adverse Change" means a material adverse change in the
-----------------------
business, assets, financial condition or results of operations of KDDJ or its
business which involves a loss or exposure of more than $10,000 or of VCI or its
business which involves a loss or exposure of more than $100,000.
"Pension Plan" shall mean any employee pension benefit plan within
-------------
the meaning of Section 3(2) of ERISA.
"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings under all
federal, state, local or
3.
<PAGE>
foreign laws with governmental or regulatory bodies, or any other Person.
"Person" shall mean an individual, a partnership, a limited liability
------
company, a joint venture, a corporation, a trust, an unincorporated
organization, a government or any department or agency thereof or any other
entity.
"Representative" shall mean any officer, director, principal,
--------------
attorney, accountant, agent, employee or other representative.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Selling Shareholders" shall mean all of the shareholders of KDDJ.
--------------------
"Tax" or "Taxes" shall mean any federal, state, local, foreign or
--- -----
other tax, levy, impost, fee, assessment or other government charge, including
without limitation income, estimated income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, use, import duty,
employment, commercial rent, occupancy, franchise or withholding taxes, and any
premium, including without limitation interest, penalties and additions in
connection therewith.
"VCI Common Stock" shall mean shares of common stock, $.01 par value
----------------
per share, of VCI.
"VCI Documents" shall mean this Agreement, the Certificate of Merger,
-------------
the Agreement of Merger and any other documents, instruments or certificates to
be delivered by VCI in connection with this Agreement.
"Welfare Plan" shall mean any employee welfare benefit plan within
------------
the meaning of Section 3(1) of ERISA.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
KDDJ Consent 3.7
KDDJ Financial Statements 3.8(a)
KDDJ Indemnified Parties 11.3
KDDJ Permits 3.14
Basket Amount 11.4
California Law 2.3
Claim 11.5
Closing 2.6
Effective Time 2.3
Employment Agreement 5.3
</TABLE>
4.
<PAGE>
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Losses 11.2
Merger Consideration 2.2(b)
Minnesota Law 2.3
Noncompetition Agreement 6.5
Surviving Corporation 2.2(a)
Termination Date 6.1
VCI Indemnified Parties 11.2
Video Sub 2.2(a)
</TABLE>
ARTICLE II
PLAN OF REORGANIZATION
----------------------
2.1 Adoption of Plan. VCI, KDDJ and Ballstadt believe that it is in
----------------
their best interests to adopt and consummate the Merger.
2.2 The Merger.
----------
(a) VCI shall form a wholly owned subsidiary called Video Ballstadt
Corp. ("Video Sub") under the laws of the State of California. VCI shall cause
Video Sub to be merged with and into KDDJ with KDDJ as the surviving corporation
in the Merger (the "Surviving Corporation"), and as of the Effective Time as a
result thereof, KDDJ shall become a wholly owned subsidiary of VCI. From and
after the Effective Time, the name of the Surviving Corporation shall be KDDJ
Investments, Inc. until changed or amended in accordance with applicable law.
(b) Pursuant to the Merger, the shares of KDDJ Common Stock issued and
outstanding immediately prior to the Effective Time shall thereupon be converted
into and become an aggregate of (i) 110,000 shares of VCI Common Stock and (ii)
the right to receive an additional 106,500 shares of VCI Common Stock as
provided in Section 2.7 (collectively, the "Merger Consideration").
(c) KDDJ will cause all stock certificates representing issued and
outstanding shares of KDDJ Common Stock to be delivered, free and clear of all
Encumbrances, to VCI at or prior to the Effective Time. Each certificate which
immediately prior to the Effective Time represents outstanding shares of KDDJ
Common Stock shall at and after the Effective Time be deemed to represent only
the number of shares of VCI Common Stock into which such shares of KDDJ Common
Stock shall have the right to be converted pursuant to Section 2.2(b) above.
From and after the Effective Time, VCI shall be entitled to treat KDDJ Common
Stock certificates as evidencing the ownership of the whole number of shares of
VCI Common Stock into which such shares of KDDJ Common Stock have been
converted. Certificates representing 110,000 shares of VCI Common Stock will be
delivered to the Selling Shareholders upon surrender to VCI of valid stock
certificates
5.
<PAGE>
representing their shares of KDDJ Common Stock. At the Closing, certificates
representing VCI Common Stock will bear a legend as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE."
(d) At the Effective Time, each share of common stock of Video Sub
that is issued and outstanding will be converted into one newly issued share of
KDDJ Common Stock. From and after the Effective Time, VCI, as the sole
shareholder of KDDJ, shall be entitled to receive one or more certificates
representing the KDDJ Common Stock into which such shares have been converted.
(e) The parties hereto have agreed that the aggregate liabilities of
KDDJ and of Adventures in Video, Inc., a Minnesota corporation owned and
controlled by some of the Selling Shareholders ("ADV"), immediately prior to the
Effective Time, including amounts that may be owed to any of the Selling
Shareholders, shall in no event exceed $1,200,000. The parties agree that the
cash of KDDJ and ADV plus an additional sum of $4,926.18 shall be applied as
follows: first, ADV and KDDJ may distribute up to $80,000 in the aggregate to
their shareholders during the period from January 1, 1998 to Effective Time;
second, the remaining cash shall be used to pay the aggregate liabilities of ADV
and KDDJ down to an amount reasonably estimated in good faith by Ballstadt to be
not more than $1,200,000; third, $20,000 of cash shall be retained in ADV and/or
KDDJ for a period of 90 days following the Effective Time as a reserve to pay
liabilities of either ADV or KDDJ in excess of $1,200,000 in the aggregate, if
VCI determines after the Closing that the actual liabilities of ADV and KDDJ
exceeded said figure; and fourth, any cash in excess of said $20,000 reserve
shall be distributed to the Selling Shareholders immediately prior to the
Effective Time. If and to the extent that the $20,000 reserve is not needed to
pay such excess liabilities, VCI shall cause ADV and KDDJ to distribute the
unused portion of the reserve to the Selling Shareholders within the 30 days
after the end of said 90-day period, as Ballstadt may direct. If the $20,000
reserve is exhausted and the aggregate amount of remaining liabilities as of the
Effective Time is ultimately determined to exceed $1,200,000, then the number of
shares issuable under Section 2.7 of the Agreement of Merger and Plan of
Reorganization between VCI, Video Adventures, Inc., ADV and Ballstadt (the "ADV
Agreement") shall be reduced (with the VCI Common Stock being valued at $2.00
per share for this purpose) by an amount equal to such excess liabilities (or if
no additional shares become issuable under Sections 2.2(b)(ii) and 2.7, then the
Selling Shareholders shall return to VCI an equivalent number of the shares
issued to them under Section 2.2(b)(i)); and if the aggregate amount of
6.
<PAGE>
remaining liabilities as of the Effective Time is determined to be less than
$1,200,000, then the number of shares issuable under this Agreement shall be
increased (with the VCI Common Stock being valued at $2.00 per share for this
purpose) by an amount equal to the amount by which such liabilities are less
than $1,200,000.
(f) In addition to the foregoing adjustments the parties agree to the
following cash adjustments at Closing:
(i) The parties agree to make adjustments for the cost of movies
and inventory purchased by ADV, during the two weeks
preceding Closing as described below. The Selling
Shareholders shall receive at Closing a reimbursement of the
invoice cost in excess of $23,579 for movie inventory
purchased the week of March 9, 1998. VCI shall be solely
responsible for the invoice cost of movies purchased the
week of March 16, 1998, and the same shall not be deemed
part of the ADV/KDDJ liabilities calculation set forth in
Article 2.2(e) above.
(ii) VCI agrees to reimburse the Selling Shareholders the
reasonable cost to ADV for the ADV employee training
conducted by VCI prior to Closing. ADV shall at or as soon
after Closing as possible submit said costs in writing to
VCI. Said costs shall be based upon the applicable hourly
rates and the number of hours each ADV employee was involved
in such training prior to Closing.
2.3 Effective Time. The Merger shall become effective (such time and
--------------
date are referred to herein as the "Effective Time") on the business day (which
day shall be on or before March 31, 1998 unless such date is extended by mutual
agreement by the parties) on which (a) all conditions to the Closing of the
transactions contemplated by this Agreement shall have occurred, and (b) the
Agreement of Merger, the Certificate of Merger and any other documents necessary
to effect the Merger shall be filed in accordance with the California General
Corporation Law (the "California Law") and the Minnesota Business Corporation
Act (the "Minnesota Law"), as the case may be.
2.4 Certificate of Incorporation and Bylaws. From and after the
---------------------------------------
Effective Time, the Certificate of Incorporation of KDDJ set forth in Exhibit A
shall be the Certificate of Incorporation of the Surviving Corporation and the
Bylaws of KDDJ set forth in Exhibit B shall be the Bylaws of the Surviving
Corporation, until changed or amended as provided therein or under the Minnesota
Law.
7.
<PAGE>
2.5 Directors and Officers. From and after the Effective Time, the
----------------------
directors and officers of KDDJ immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation, in each case until
their successors shall have been elected and shall qualify or until otherwise
provided by law or the Certificate of Incorporation or Bylaws of the Surviving
Corporation.
2.6 The Closing. The closing of the transactions contem plated by this
-----------
Agreement (the "Closing") shall be held at 9:00 a.m. local time on the date of
the Effective Time at the offices of Troy & Gould Professional Corporation, 1801
Century Park East, Suite 1600, Los Angeles, California 90067, or at such other
date, place and time as the parties may agree.
2.7 Earnout Shares. As provided in clause (ii) of Section 2.2(b), the
--------------
Selling Shareholders shall receive an additional 106,500 shares of VCI Common
Stock as part of the Merger Consideration, under the following conditions:
(a) VCI shall:
(i) Within 120 days following the Effective Time, install
operating adult video departments in all three KDDJ locations. Said adult video
departments shall contain the quantity and quality of displays, titles and
merchandise equal to or greater than those existing at the VCI location at 1st
and Shields, Fresno, California (Store #42) as of January 30, 1998; and
(ii) install operating sell-through departments in all three
KDDJ stores within 90 days after the Effective Time. Said sell-through
departments shall contain the quantity and quality of displays, titles and
merchandise equal to or greater than those existing at VCI Store #42 as of
January 30, 1998; and
(iii) implement aggressive marketing programs in the market areas
of KDDJ stores during the first 90 days following the Effective Time. During the
first 90 days following the Effective Time, said marketing programs shall
include radio, television and print advertising expenditures in an aggregate
amount equal to or greater than 2.5% of the Gross Revenues of the three KDDJ
stores institutionally during said 90 day period plus a pro rata share of VCI's
chain-wide co-op and MDF advertising funds.
If VCI fails to fully complete each and every requirement set forth in
paragraph 2.7(a) above during the applicable time periods, the additional
106,500 shares of VCI Common Stock shall be issued to the Selling Shareholders
as part of the Merger Consideration no later than 120 days following the
Effective Time.
8.
<PAGE>
(b) In the event VCI fully completes each and every requirement set forth
in paragraph 2.7(a) above within the applicable time periods, the Selling
Shareholders shall receive the additional 106,500 shares of VCI Common Stock no
later than 120 days following the Effective Time, provided that the aggregate
Gross Revenues (as defined below) from the three KDDJ store locations during the
first three full calendar months following the Effective Time is greater than
the aggregate Gross Revenues from the same locations during the corresponding
three month period of 1997. As used herein, "Gross Revenues" shall mean all
revenues and receipts from the KDDJ stores for sales and rentals, less
deductions for returns and sales tax collected, if any. The right to receive
the additional shares shall not be transferable except by will or the laws of
descent and distribution.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KDDJ
--------------------------------------
AND BALLSTADT
-------------
Subject to the exceptions set forth in the KDDJ Disclosure Schedules, KDDJ
and Ballstadt, and solely with respect to Sections 3.27 and 3.28 Ballstadt,
hereby represent and warrant to VCI that:
3.1 Corporate Existence and Power. KDDJ is a corporation duly organized,
-----------------------------
validly existing and in good standing under the laws of the State of Minnesota
and has all corporate power and authority and all governmental licenses,
authorizations, consents and approvals required to carry on its business and
operations as now conducted. Schedule 3.1 sets forth those jurisdictions in
which KDDJ is required to be qualified to do business as a foreign corporation
because of the character of the property owned or leased by KDDJ or the nature
of its activities; KDDJ is duly qualified to do business in each of these
jurisdictions.
3.2 Corporate Authorization. The execution, delivery and performance by
-----------------------
KDDJ of this Agreement and all of the other KDDJ Documents and the consummation
by KDDJ of the transactions contemplated hereby and thereby are within the
corporate powers of KDDJ and have been duly authorized by all necessary
corporate action on the part of KDDJ. This Agreement is, and as of the Closing
the other KDDJ Documents shall be, the legal, valid and binding obligations of
KDDJ, enforceable against KDDJ in accordance with their respective terms.
3.3 Governmental Authorization. The execution, delivery and performance
--------------------------
by KDDJ of this Agreement and the other KDDJ Documents require no action by or
in respect of, or filing with, any governmental body, agency, official or
authority other than the filing of the Certificate of Merger with the Secretary
of State of Minnesota and the filing of the Agreement of Merger with
9.
<PAGE>
the Secretary of State of the State of California as contemplated by Section
2.3.
3.4 Non-Contravention. The execution, delivery and performance by KDDJ
-----------------
of this Agreement and the other KDDJ Documents does not and will not (i)
contravene or conflict with the Certificate of Incorporation or Bylaws of KDDJ,
(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 KDDJ or any part of its business, (iii) assuming
the obtaining of all KDDJ Consents, constitute a default under or breach of, or
violate or give rise to any right of termination, cancellation or acceleration
of any right or obligation of KDDJ, or to a loss of any benefit relating to its
business or operations to which KDDJ is entitled under any provision of any
Contract to which KDDJ is a party or by which any of its assets is or may be
bound or (iv) result in the creation or imposition of any Encumbrance on any of
KDDJ's assets.
3.5 KDDJ Capitalization. The authorized capital stock of KDDJ consists
-------------------
solely of 25,000 shares of KDDJ Common Stock, of which 800 shares are issued and
outstanding. All such outstanding shares are duly authorized, validly issued,
fully paid and non-assessable. Schedule 3.5 lists the Selling Shareholders and
the number of shares of KDDJ Common Stock owned by each of them as of the date
of this Agreement. All outstanding shares of KDDJ Common Stock have been issued
in compliance with all federal and state securities laws and are not subject to
any rights or obligations that require the registration of such shares. Except
as set forth on Schedule 3.5, there are no outstanding options, warrants or
other rights in or with respect to any shares of KDDJ Common Stock or any
securities convertible into such stock, and KDDJ is not obligated to issue any
additional shares of KDDJ Common Stock or any options, warrants or other rights
to acquire stock or any other securities convertible into such stock.
3.6 Subsidiaries. KDDJ does not own, directly or indirectly, securities
------------
or other ownership interests in any other entity, nor is KDDJ a party to any
agreement relating to the formation of any other entity or joint venture.
3.7 Consents. Schedule 3.7 sets forth each Contract of KDDJ and each of
--------
the KDDJ Permits that requires a consent, approval, authorization, order or
other action of or filing with any Person as a result of the execution, delivery
and performance of this Agreement or any of the other KDDJ Documents or the
consummation of the transactions contemplated hereby or thereby (each of the
foregoing, an "KDDJ Consent").
3.8 Financial Statements.
--------------------
(a) KDDJ has delivered to VCI financial statements of KDDJ consisting
of (i) audited balance sheets as of December 31, 1994, 1995 and 1996, and
statements of operations, stockholders' equity and cash
10.
<PAGE>
flows for each of the years then ended, and (ii) unaudited balance sheets,
statements of operations and statements of cash flows as of and for the nine
months ended September 30, 1997 and 1996 (collectively, the KDDJ Financial
Statements"). The KDDJ Financial Statements fairly present, in conformity with
general accepted accounting principles applied on a consistent basis, the
financial position of KDDJ as of the dates thereof and the results of operations
of KDDJ for the periods then ended.
(b) Except for (i) those liabilities specifically reflected or
reserved against on the KDDJ balance sheet as of December 31, 1997 (the "KDDJ
Balance Sheet"), (ii) those current liabilities for trade or business
obligations incurred since December 31, 1997 in connection with the purchase of
goods or services in the ordinary course of KDDJ's business and consistent with
past practices (none of which is, individually or in the aggregate, material and
none of which is for breach of contract, breach of warranty, tort or
infringement), (iii) those liabilities arising under any Contract (none of which
liabilities is for breach of contract, breach of warranty, tort or infringement)
or (iv) those matters otherwise disclosed on Schedule 3.8 (none of which
liabilities, except as stated in a Schedule hereto, is for breach of contract,
breach of warranty, tort or infringement), KDDJ does not have, as of the date
hereof, any direct or indirect indebtedness, liabilities, claims, losses,
damages, deficiencies, obligations (including, without limitation, the
obligation to indemnify any other Person for any liabilities or expenses which
have been or may in the future be incurred by or asserted against such other
Person, or responsibilities, known or unknown, liquidated or unliquidated,
accrued, absolute, contingent or otherwise, and whether or not of a kind
required by generally accepted accounting principles to be set forth on a
financial statement), which individually or in the aggregate are material to the
condition (financial or otherwise), assets, liabilities, business or operations
of KDDJ. To the best knowledge of KDDJ, there are no circumstances, conditions,
events or arrangements which may hereafter give rise to any liabilities of KDDJ
except in the ordinary course of business or as otherwise set forth in this
Section 3.8 or in a Schedule to this Agreement.
3.9 Absence of Certain Changes. Except as set forth on Schedule 3.9,
--------------------------
since September 30, 1997, KDDJ has conducted its business in the ordinary course
consistent with past practices, and there has not been:
(a) any Material Adverse Change or any event, occurrence, development
or state of circumstances or facts which could reasonably be expected to result
in a Material Adverse Change;
(b) any dividend or other distribution declared or paid with respect
to any of the KDDJ Common Stock;
11.
<PAGE>
(c) any loan or forgiveness of indebtedness to any holder of KDDJ
Common Stock or any Affiliate thereof;
(d) any bonus, salary or other compensation paid or agreed to be paid
to any employee except in accordance with Schedule 3.17 hereto;
(e) any incurrence of indebtedness for borrowed money;
(f) any creation or other incurrence of any Encumbrance on any of its
assets;
(g) any transaction, Contract entered into, or commitment made, by
KDDJ relating to its business, operations or any of its assets (including the
acquisition or disposition of any assets) or any relinquishment by KDDJ of any
contract or other right, in either case other than transactions and commitments
in the ordinary course of business consistent with past practices and those
contemplated by this Agreement (other than payments of compensation); or
(h) any transfer of any assets of KDDJ to any Person who is a
shareholder or other Affiliate of KDDJ.
3.10 Title to Assets. KDDJ has good and marketable title to its material
---------------
properties and assets owned or stated to be owned by KDDJ, free and clear of all
Encumbrances except: (i) as set forth in the KDDJ Financial Statements, (ii)
Encumbrances for current taxes not yet due, (iii) Encumbrances incurred in the
ordinary course of business, (iv) Encumbrances that are not substantial in
character, amount or extent (individually or collectively) and that do not
(individually or collectively) materially detract from the value, or interfere
with present use, of the property subject thereto or affected thereby, or
otherwise materially impair the conduct of business of KDDJ, or (v) as set forth
on Schedule 3.10. All of the material properties and assets used by KDDJ or
held by KDDJ, other than any leased assets listed on Schedule 3.10, are owned by
KDDJ, free and clear of any Encumbrances except as set forth on Schedule 3.10.
3.11 Real Property. Schedule 3.11 sets forth a true and complete list of
-------------
all leaseholds owned by KDDJ. KDDJ has valid leasehold interest in such
leaseholds, free and clear of all Encumbrances, except: (i) for rights of
lessors and such matters that are reflected in the relevant lease, (ii) current
Taxes not yet due and payable, (iii) Encumbrances of public record, (iv)
Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property, and (v) as set forth
on Schedule 3.11.
12.
<PAGE>
3.12 Litigation. Other than as set forth on Schedule 3.12, there is no
----------
action, suit, investigation, hearing or proceeding pending against or, to the
best knowledge of KDDJ, threatened against or affecting, KDDJ, any of its
officers, directors, or shareholders, its business or any assets or any Contract
before any court or arbitrator or any governmental body, agency official, which
would have a Material Adverse Effect, or in any manner challenges or seeks to
prevent, enjoin, alter or delay the transactions contemplated by this Agreement.
There are no outstanding judgments against KDDJ.
3.13 Contracts. Each Contract of KDDJ is a valid and binding agreement of
---------
KDDJ, and is in full force and effect, and KDDJ is not in default (whether with
or without the passage of time or the giving of notice or both) under the terms
of any such Contract. KDDJ has not assigned, delegated, or otherwise
transferred any of its rights or obligations with respect to any Contracts, or
granted any power of attorney with respect thereto. Schedule 3.13 is a true and
correct list of all Contracts involving an outstanding monetary obligation
greater than $25,000 or with a remaining term greater than one year.
3.14 Licenses and Permits. Schedule 3.14 correctly lists each material
--------------------
license, franchise, permit or other similar authorization affecting, or relating
in any way to KDDJ's business, together with the name of the governmental agency
or entity issuing such license or permit (the "KDDJ Permits"). The KDDJ Permits
are valid and in full force and effect and, assuming the related KDDJ Consents
have been obtained prior to the Closing, will not be terminated or impaired or
become terminable as a result of the transactions contemplated by this
Agreement.
3.15 Compliance with Laws. KDDJ is not in material violation of, has not
--------------------
violated, and is neither under investigation with respect to nor has been
threatened to be charged with or given notice of any violation of, any law,
rule, statute, ordinance or regulation, or judgment, order or decree entered by
any court, arbitrator or governmental authority, domestic or foreign, materially
applicable to KDDJ's assets or the conduct of its business.
3.16 Intangible Property.
-------------------
(a) Schedule 3.16 sets forth all material KDDJ Intangible Property
and identifies each material contract to which KDDJ is a party relating to any
item of KDDJ Intangible Property. No Contract requires KDDJ to (or will require
VCI to) pay, or entitles it to receive any material royalty, license fee, or
other compensation with respect to the KDDJ Intangible Property. Except as set
forth on Schedule 3.16, no KDDJ Intangible Property development was funded by a
third Person (other than any shareholder of KDDJ) or was conducted by or as a
joint venture, in partnership, or otherwise in collaboration,
13.
<PAGE>
with any other Person (except an employee solely in his or her capacity as
such). The transactions contemplated hereby will not adversely affect in any
manner any item or part of the KDDJ Intangible Property or the nature or
usefulness thereof in the hands of VCI.
(b) All KDDJ Intangible Property and all federal, state and foreign
registrations with respect thereto, and all applications therefor are valid and
in full force and effect and are not subject to any taxes, maintenance fees or
actions.
(c) None of the KDDJ Intangible Property which is purportedly an
asset of KDDJ was developed or conceived by any KDDJ employee, officer or
director while employed by any other Person and no Selling Shareholder has
violated any agreement with any former employer which pertains to any of such
property.
3.17 Employees.
---------
(a) Schedule 3.17 sets forth a true and complete list of the names,
titles, annual salaries or wage rates and other compensation and office location
of all employees of KDDJ, indicating part-time and full-time employment, and all
changes in salaries and wage rates per employee since December 31, 1996.
(b) Except as set forth on Schedule 3.17, KDDJ is not a party to or
subject to any employment contract, consulting agreement, collective bargaining
agreement, confidentiality agreement restricting the activities of KDDJ, non-
competition agreement restricting the activities of KDDJ, or any similar
agreement.
3.18 Prepaids. Except as set forth on Schedule 3.18, KDDJ has not
--------
received any material payments with respect to any services to be rendered or
goods to be provided after the Closing.
3.19 Taxes.
-----
(a) KDDJ has filed all federal and foreign income tax returns, all
state and local franchise and income tax, real and personal property tax, sales
and use tax, premium tax, excise tax, employment tax and other tax returns of
every character required to be filed by it and has paid in full all Taxes
(including, without limitation, all tax deposits), together with any interest
and penalties owing in connection therewith, shown on such returns to be due in
respect of the periods covered by such returns, other than Taxes which are being
contested in good faith and for which adequate reserves have been established.
Adequate provision has been made in the Books and Records of KDDJ and, to the
extent required by generally accepted accounting principles, reflected in the
KDDJ Financial Statements, for all Tax liabilities, including interest or
penalties, whether or not
14.
<PAGE>
due and payable and whether or not disputed, with respect to any and all Taxes
for the periods covered by the KDDJ Financial Statements and for all prior
periods. Schedule 3.19 sets forth the date or dates through which the Internal
Revenue Service has examined the federal income taxes of KDDJ and the date or
dates through which any foreign, state, local or other taxing authority has
examined any other tax returns of KDDJ. Schedule 3.19 also contains a complete
list of each year for which any federal, state, local or foreign tax authority
has obtained or has requested an extension of the statute of limitations from
KDDJ and lists each tax case of KDDJ currently pending in audit, at the
administrative appeals level or in litigation. Schedule 3.19 further lists the
date and issuing authority of each statutory notice of deficiency, notice or
proposal assessment and revenue agent's report issued to KDDJ within the last
twelve months. Except as set forth on Schedule 3.19, to KDDJ's best knowledge,
neither the Internal Revenue Service nor any foreign, state, local or other
taxing authority has, during the past three years, examined or is in the process
of examining any federal, foreign, state, local or other tax returns of KDDJ.
Neither the Internal Revenue Service nor any foreign, state, local or other
taxing authority is now asserting or threatening to assert any deficiency or
claim for additional taxes (or interest thereon or penalties in connection
therewith) except as set forth on Schedule 3.19.
(b) KDDJ has not made any requests for rulings, and KDDJ has not
received any subpoenas or requests for information, or notices of proposed
reassessment of any property owned or leased by KDDJ. There are no Liens for
Taxes upon any property or assets of KDDJ (other than for real property taxes,
not yet due, on premises leased by KDDJ for which KDDJ will be liable under the
terms of the applicable leases).
(c) KDDJ has delivered to VCI true and complete copies of all
federal, state and foreign income tax returns (together with any Revenue Agent's
Reports) filed by KDDJ relating to its operations for taxable years ended 1995
and 1996.
(d) KDDJ has not filed a consent pursuant to Section 341(f) of the
Code, and has not filed, and would not be deemed to have filed, any election
under Section 338 of the Code.
(e) KDDJ has never been, nor is KDDJ currently, bound by or subject
to any obligation under any agreement relating to the sharing of any liability
for, or payment of, Taxes with any other Person.
(f) KDDJ has withheld or will withhold, and has paid over or will pay
over to applicable taxing authorities amounts from its employees and has filed
or will file all federal, foreign, state, and local returns and reports with
respect to employee income tax withholding and social security and
15.
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unemployment Taxes for all periods (or portions thereof) ending on or before the
Effective Time, in compliance with the provisions of the Code and other
applicable federal, foreign, state and local laws.
3.20 Environmental Compliance. KDDJ has not received any notice that it
------------------------
or any of its properties have not been or are not now in complete compliance
with all applicable environmental law.
3.21 Labor and Employment Matters.
----------------------------
(a) Except as set forth on Schedule 3.21, as of the date hereof;
(1) The employment of each employee of KDDJ may be terminated
immediately by KDDJ, except as otherwise provided by statute or decisional
authority;
(2) To KDDJ's best knowledge, no key executive employee of KDDJ
and no group of employees of KDDJ has plans to terminate his or her employment
at or prior to the Closing, whether or not as a result of the transactions
contemplated herein;
(3) KDDJ has not had any material labor relations problems; and
(4) KDDJ has complied in all material respects with all
collective bargaining agreements and all applicable laws and orders relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of Taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate governmental authorities, or is holding for payment not yet due to
such governmental authorities, all amounts required to be withheld from such
employees of KDDJ and is not liable for any arrears of wages, Taxes, penalties
or other sums for failure to comply with any of the foregoing. No present or
former employee, officer or director of KDDJ has notified KDDJ that he or she
has or will have at the Effective Time, any claim against KDDJ for any matter,
including but not limited to (i) overtime pay for work done through the
Effective Time; (ii) wages or salary for the work done through the Effective
Time; (iii) vacation time off or pay in lieu of vacation time off for the period
through the Effective Time; (iv) any violation of any statute, ordinance or
relation relating to minimum wages or maximum hours or work-place conditions; or
(v) injuries or other damages which are not fully covered by KDDJ's insurance
policies; except, in the case of clauses (i) and (ii), for amounts accrued in
the current pay period that are not yet due and payable, and in the case of
clause (iii), for vacation accrued in accordance with KDDJ's policies and set
forth in Schedule 3.21, which its employees have not yet taken.
16.
<PAGE>
(b) Except as disclosed on Schedule 3.21, as of the date hereof, KDDJ
has not received any notice of any:
(1) unfair labor practice complaint against KDDJ pending before
the National Labor Relations Board or any state or local agency;
(2) pending labor strike or other material labor trouble
affecting KDDJ;
(3) material labor grievance pending against KDDJ;
(4) pending representation question respecting the employees of
KDDJ; or
(5) pending arbitration proceedings arising out of or under any
collective bargaining agreement to which KDDJ is a party.
(c) In addition: (i) none of the matters specified in clauses (b) (1)
through (5) is threatened against KDDJ; (ii) no union organizing activities have
taken place with respect to KDDJ; and (iii) no basis exists for which a claim
may be made under any collective bargaining agreement to which KDDJ is a party.
3.22 Pension and Benefit Plans.
-------------------------
(a) All accrued obligations of KDDJ applicable to its employees,
whether arising by operation of law, by contract, by past custom or otherwise,
for payments by KDDJ to trusts or other funds or to any governmental agency,
with respect to unemployment compensation benefits, social security benefits or
any other benefits for its employees with respect to the employment of said
employees through the date hereof have been paid or adequate accruals therefor
have been made on, as applicable, the Books and Records of KDDJ and the KDDJ
Financial Statements.
(b) Except as disclosed on Schedule 3.22, as of the date hereof:
(1) Neither KDDJ nor any of its ERISA Affiliates maintains or
has any obligations to contribute to, or has in effect or has committed to
adopt, any Pension Plan or any Welfare Plan;
(2) Each ERISA Plan conforms in all material respects to all
applicable laws and orders, including ERISA and the applicable provisions of the
Code. All notices, reports, returns, applications and disclosures have been
timely made which are required to be made to the Internal Revenue Service, the
U.S. Department of Labor, the Pension Benefit Guaranty Corporation,
17.
<PAGE>
any participants in the ERISA Plans, any trustee, or any insurer with respect to
the ERISA Plans;
(3) KDDJ and its ERISA Affiliates have made or provided for
(with fully-funded reserves) all contributions heretofore required to have been
made under all of the ERISA Plans, and will, by the Closing, have made or
provided for (with fully-funded reserves) all contributions required to be made
on or before the Closing under all such plans;
(4) No ERISA Plan nor any trust created thereunder, nor any
trustee or administrator thereof has engaged in a transaction which may subject
any of such ERISA Plans, any such trust, or any party dealing with such ERISA
Plans or any such trust, to the Tax or penalty on prohibited transactions
imposed by Section 4975 of the Code or to a civil penalty imposed by Section 502
of ERISA;
(5) There are no material actions, claims or lawsuits which have
been asserted or instituted against the assets of any of the trusts under the
ERISA Plans, and no basis for such action, claim or lawsuit exists, and no such
action, claim or lawsuit has been threatened;
(6) KDDJ has not agreed to indemnify any other party for any
liabilities or expenses which have been or may in the future be incurred by or
asserted against such other party in respect of any ERISA Plan;
(7) Each Pension Plan constituting one of the ERISA Plans is
qualified under Section 401 of the Code, each of the trusts maintained with
respect thereto is exempt from federal income taxation under Section 501 of the
Code, and nothing has occurred which would cause the loss of such qualification
or exemption or the imposition of any penalty under Section 4971 of the Code;
(8) The assets of each Pension Plan constituting one of the
ERISA Plans (including Pension Plans maintained by an ERISA Affiliate) are
sufficient to pay all liabilities of the plan, including, without limitation,
all liabilities to pay benefits to any past or present participant or
beneficiary in such plan, any expense incurred in administering the plan, and
any liabilities for Taxes which may be imposed on the plan or on any trust
maintained in connection with the plan;
(9) The value of all accrued benefits under each Pension Plan
constituting one of the ERISA Plans (including Pension Plans maintained by an
ERISA Affiliate) which is a "defined benefit plan" within the meaning of Section
3(35) of ERISA, including each "multi-employer plan" within the meaning of
Section 3(37) of ERISA, does not exceed, on an accrual basis, the aggregate
value of the assets of each such plan;
18.
<PAGE>
(10) There has been no "reportable event," within the meaning of
Section 4043(b) of ERISA, with respect to any Pension Plan which constitutes one
of the ERISA Plans since the effective date of Section 4043(b) of ERISA;
(11) The transaction contemplated by this Agreement will not
result in a reportable event, within the meaning of ERISA Section 4043, other
than a reportable event with respect to which (i) the ERISA Section 4043
reportable event notice requirement has been waived or (ii) the Pension Benefit
Guaranty Corporation will not apply a penalty for failure to satisfy the
reportable event notice requirement;
(12) Neither KDDJ nor any of its ERISA Affiliates has any
liability to the Pension Benefit Guaranty Corporation pursuant to Title IV of
ERISA in respect of any Pension Plan constituting one of the ERISA Plans
(including Pension Plans maintained, or formerly maintained, by an ERISA
Affiliate);
(13) Neither KDDJ nor any of its ERISA Affiliates maintains or
has any obligation to contribute to any multi-employer plan;
(14) Neither KDDJ nor any of its ERISA Affiliates has terminated
a defined benefit plan or multi-employer plan or suffered or otherwise caused a
"complete withdrawal" or "partial withdrawal" as such terms are respectively
defined in Sections 4203 and 4205 of ERISA from any multi-employer plan. Since
April 1, 1979, neither KDDJ nor any of its ERISA Affiliates has complied with
Section 4204 of ERISA in order to avoid any such "complete withdrawal" or
"partial withdrawal";
(15) The transaction contemplated by this Agreement will not
result in a KDDJ liability for severance or termination pay or result in
increased employee benefits becoming payable to any employees of KDDJ;
(16) Neither KDDJ nor any of its ERISA Affiliates has any unpaid
liability in respect of any employee for any contributions and/or premiums due
under any Welfare Plan constituting one of the ERISA Plans;
(17) Neither KDDJ nor its ERISA Affiliates has any liability as
to any benefits to which any employee may be entitled under any Welfare Plan
constituting one of the ERISA Plans, whether for benefits due or claims filed;
and
(18) KDDJ does not maintain any health or life insurance plan
that provides for continuing benefits or coverage for any participant or any
spouse, dependent or beneficiary under such plan after termination of
employment, other than as may be
19.
<PAGE>
required under Section 4980B of the Code and regulations thereunder ("COBRA").
KDDJ is in compliance with the COBRA notice and continuation coverage
requirements with respect to Plans maintained by KDDJ.
(c) True, correct and complete copies of the following documents,
with respect to each of the ERISA Plans, have been delivered to VCI:
(1) Each ERISA Plan document, employment contract, policy,
procedure or other governing instrument relating to an ERISA Plan, including all
amendments, supplements, collective bargaining agreements, letters, memoranda,
understandings and any other document reasonably necessary to reflect the terms
and conditions of each ERISA Plan.
(2) The most recent summary plan description of each ERISA Plan
for which a summary plan description is required under ERISA, and summaries of
material modification thereto.
(3) All instruments under which the assets of any ERISA Plan are
held or managed and benefits provided, including, but not limited to, insurance
contracts, trust agreements, custodial contracts and investment management
agreements.
(4) The two most recent Forms 5500, 5500-C or 5500-R for each
ERISA Plan for which such filing is required, with all attachments and schedules
thereto.
(5) The two most recent annual financial statements for each
ERISA Plan, if not included with such Form 5500 (5500-C or 5500-R).
(6) The most recent actuarial valuation report for each ERISA
Plan (as applicable).
(7) With respect to each ERISA Plan that has received a
determination letter under Section 401(a) of the Code, and any voluntary
employee benefit association trust that has received a determination letter
under Section 501(c) of the Code, the most recent Internal Revenue Service
determination letter (including any letter concerning the tax-exempt status of
any trust under Section 501(a) of the Code), the application submitted when
requesting such determination letter, and any subsequently filed determination
letter request.
(d) All Pension Plans shall be terminated by KDDJ prior to the
Effective Time.
3.23 Insurance. Schedule 3.23 sets forth a true and correct list of all
---------
policies or binders of fire, liability, workers' compensation, vehicular or
other insurance held by or on
20.
<PAGE>
behalf of KDDJ specifying the insurer, the policy number or covering note number
with respect to binders, and describing each pending claim thereunder of more
than $5,000. Such policies and binders are in full force and effect. No such
policy is terminable or cancelable by the insurer by virtue of the consummation
of the transactions contemplated herein.
3.24 Books and Records. KDDJ has heretofore furnished or made available
-----------------
to VCI for its examination the following, each of which is, and will be
maintained so as to remain until the Closing, accurate and complete in all
material respects:
(a) copies of the Certificate of Incorporation and Bylaws, as in
effect on the date of this Agreement;
(b) the minute books of KDDJ containing all proceedings, consents,
actions and meetings of its shareholders and Boards of Directors;
(c) copies of all KDDJ Permits, orders and consents with respect to
KDDJ's securities issued by any administrative agency or governmental body
regulating the issuance or transfer of such securities and all applications for
such permits, orders and consents;
(d) the stock transfer books of KDDJ setting forth all transfers of
its securities;
(e) copies of all agreements and documents referred to in any KDDJ
Disclosure Schedule;
(f) all other Books and Records of KDDJ; and
(g) an accurate list of all of the incumbent officers and directors
of KDDJ.
3.25 Inventory. The inventory of KDDJ reflected on the KDDJ Balance
---------
Sheet, as well as other inventory items acquired since the date of the KDDJ
Balance Sheet that are now the property of KDDJ, are of such quality and held in
such quantities as are being used and will be usable and salable or rentable in
the ordinary course of the business of KDDJ. The inventory excludes obsolete
items, and is recorded at cost and amortized over the estimated life of the
inventory items, with no provision for salvage value. Videocassettes which 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
nine months on a straight line basis, the first through ninth copies of each
title per store are amortized as base stock. Since the date of the KDDJ Balance
Sheet, KDDJ has continued to replenish its inventories in a
21.
<PAGE>
normal and customary manner consistent with practice prevailing in the retail
video sales and rental industry.
3.26 Accuracy and Provision of Information. None of the documents or
-------------------------------------
other information made available to VCI or its Affiliates, attorneys,
accountants, agents or representatives in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained therein not misleading. KDDJ has provided VCI all material
information regarding its business and operations.
3.27 Shareholder Approval. The Selling Shareholders holding 100% of the
--------------------
shares of KDDJ Common Stock have approved this Agreement and the transactions
contemplated hereby.
3.28 Investor Representations. Each Selling Shareholder who receives VCI
------------------------
Common Stock in connection with the transactions contemplated by this Agreement
represents that (i) he is an accredited investor as defined in Regulation D
under the Securities Act, or (ii) by reason of his business and financial
experience, and the business and financial experience of those persons
unaffiliated with VCI retained by him, if any, to advise him with respect to his
investment in the shares of VCI Common Stock, such Selling Shareholder together
with such advisers have such knowledge, sophistication and experience in
business and financial matters as to be capable of evaluating the merits and
risk of the prospective investment, and that he is acquiring the shares of VCI
Common Stock for his own account or for one or more separate accounts maintained
by him, if any, for investment and not with a view to the distribution thereof
except in compliance with the Securities Act or an exemption available
thereunder. Each Selling Shareholder who receives VCI Common Stock in
connection with the transactions contemplated by this Agreement understands and
agrees that the shares of VCI Common Stock have not been registered under the
Securities Act and may be resold only if registered pursuant to the applicable
provisions of the Securities Act or if an exemption from registration is
available.
3.29 No Brokers. Except for the possible claim by Robert Stahl referred
----------
to in Schedule 3.12 hereto (which claim would be fully disputed by ADV, KDDJ and
Ballstadt, and as to which Ballstadt shall indemnify ADV, KDDJ and VCI as stated
in said Schedule 3.12), neither KDDJ or the Selling Shareholders nor any of
their respective Representatives or Affiliates has employed or made any
agreement with any broker, finder or similar agent, person or firm or incurred
any liability for any finder's fee, brokerage fees or commission or similar
payment in connection with the transactions contemplated hereby which would
result in any liability of KDDJ, VCI or Video Sub.
22.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VCI
-------------------------------------
Except as set forth in a Disclosure Schedule delivered by VCI hereunder,
and except for the transactions contemplated by this Agreement, VCI hereby
represents and warrants to KDDJ as follows:
4.1 Organization of VCI and Video Sub. Each of VCI and VCI Sub is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and California, respectively, has full corporate power
and authority to conduct its business as it is presently being conducted and to
own, lease and operate its properties and assets, and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not result in a Material Adverse Change to VCI or its business.
4.2 VCI and Video Sub Capital Stock. The authorized capital stock of VCI
-------------------------------
consists solely of 20,000,000 shares of common stock, $.01 par value per share,
9,773,927 shares of which were issued and outstanding as of the date of this
Agreement. No shares of any other class or series of capital stock are
authorized, issued or outstanding.
The authorized capital stock of Video Sub consists of 1,000 shares of
common stock, 100 shares of which were issued and out standing as of the date of
this Agreement. All of the issued and outstanding shares of common stock of
Video Sub are owned by VCI free and clear of all Encumbrances. All of the
outstanding shares of common stock of Video Sub have been duly and validly
authorized and issued and are fully paid and nonassessable.
4.3 Authorization Relative to this Agreement. The execution, delivery
----------------------------------------
and performance by VCI and Video Sub of this Agreement and all of the other VCI
Documents and the consummation by VCI and Video Sub of the transactions
contemplated hereby and thereby are within the corporate powers of VCI and Video
Sub and have been duly authorized by all necessary corporate action on the part
of VCI and Video Sub. This Agreement is, and as of the Closing the other VCI
Documents shall be, the legal, valid and binding obligations of VCI and Video
Sub, enforceable against VCI and Video Sub, as the case may be, in accordance
with their respective terms.
4.4 No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement, the Agreement of Merger or the Certificate of Merger nor the
consummation of the transactions contemplated hereby or thereby will result in
(a) a violation of or a conflict with any provision of the Certificate of
23.
<PAGE>
Incorporation, Bylaws or other organizational document of VCI, (b) a breach of,
or a default under, any Material term or provision of any Material Contract,
indebtedness, Encumbrance, Permit or concession to which VCI is a party or is
subject or by which any assets of VCI are bound, including, without limitation,
any such breach or default which would interfere in any way with its ability to
consummate the transactions contemplated by this Agreement, the Agreement of
Merger or the Certificate of Merger, (c) a Material violation by VCI of any
statute, rule, regulation, ordinance, code, order, judgment, writ, injunction,
decree or award, including any violation which would interfere with its ability
to consummate the transactions contemplated by this Agreement, the Agreement of
Merger or the Certificate of Merger, (d) the imposition of any Material
Encumbrance, restriction or charge on the business or assets of VCI, or (e) give
rise to any right of termination, cancellation or acceleration under any
Material Contract or other agreement to which VCI is a party or by or to which
they or any of their Material assets or properties may be bound or subject.
4.5 Litigation. There are no Actions pending, or to the best of VCI's
----------
knowledge, threatened (a) against, related to or affecting VCI, which Actions,
if determined adversely to VCI, would be reasonably likely to have a Material
adverse effect on VCI, or (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement, including any derivative suits brought by or on
behalf of VCI. VCI is not in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against VCI involving amounts in excess
of $100,000. For purposes of this Section 4.5, an Action will be deemed to have
an "adverse effect" on VCI if in connection with such Action, VCI or Video Sub
is reasonably likely to pay $100,000 or more in the aggregate with respect to
the defense, settlement, dismissal or other disposition or satisfaction of such
Action.
4.6 Board Approval. The Boards of Directors of VCI and Video Sub have
--------------
approved and adopted this Agreement.
4.7 Validity of Shares Issued to Selling Shareholders. The shares of VCI
-------------------------------------------------
Common Stock to be issued to the Selling Shareholders hereunder will, when
issued and paid for in accordance with this Agreement, be duly and validly
issued, nonassessable shares free and clear of any and all Encumbrances (other
than Encumbrances which may exist prior to the Closing on the KDDJ Common
Stock), and will be issued in compliance with all applicable federal and state
securities laws.
4.8 VCI Shareholder Approval. No approval of the shareholders of VCI is
------------------------
required for the consummation of the transactions under this Agreement.
24.
<PAGE>
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
KDDJ and VCI each covenant with the other for the period from the date
hereof through the Effective Time as follows:
5.1 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Time, KDDJ and VCI shall each give prompt notice to the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
KDDJ of its business that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.12 or that relate to
the consummation of the transactions contemplated by this Agreement.
5.2 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the performance of obligations hereunder,
each of the parties hereto acknowledges that it will have access to confidential
information relating to the other parties. Each party shall treat such
information as confidential, preserve the confidentiality thereof and not
disclose such information, except to its respective Representatives and
Affiliates in connection with the transactions contemplated hereby. Each party
agrees to maintain in confidence, and not to disclose to any third party, any
ideas, methods, developments, inventions, improvements and business plans and
information which are the confidential information of the other parties. If,
however, confidential information is disclosed, the disclosing party shall
immediately notify the other parties in writing and take all reasonable steps
required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Time or the Termination Date, all confidential information shall remain the
property of the party who originally possessed such information. In the event
of the termination of this Agreement for any reason whatsoever, KDDJ shall
return to VCI, and VCI shall return to KDDJ, all documents, work papers and
other material (including all copies thereof)
25.
<PAGE>
obtained from the other party in connection with the transactions contemplated
hereby and will use all reasonable efforts, including, without limitation,
instructing its employees and others who have had access to such information, to
keep confidential and not to use any such information, unless such information
is now, or is hereafter disclosed, through no act or omission of such party, in
any manner making it available to the general public. If VCI or any of its
Affiliates is required by legal process or by operation of law to disclose any
confidential information in anticipation of a possible acquisition of KDDJ by
VCI or any such Affiliate, VCI shall provide KDDJ with written notice of such
request at least 48 hours prior to making such disclosure (or, if it is not
practicable to give at least 48 hours' prior notice, written notice shall be
given as promptly as practicable) and, without any need to obtain the consent of
such other parties, shall be entitled to make such disclosure. If any party is
compelled by legal process to disclose any confidential information, such party
shall provide the other parties with prompt written notice of such request and,
without any need to obtain the consent of such other parties, shall be entitled
to make such disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such information to, deliver to such other party all documents, work
papers and other material (including copies of extracts and summaries thereof)
obtained by or on behalf of any of them directly or indirectly as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof.
5.3 Employment Agreements. At or prior to the Effective Time, VCI shall
---------------------
execute employment agreements (the "Employment Agreements") substantially in the
form of Exhibits C and D hereto with David A. Ballstadt, Keith D. Ballstadt and
Donald Ballstadt. VCI also agrees to retain Jeffrey Ballstadt as an employee
for 30 days following the Effective Time at his regular rate of pay and
benefits.
ARTICLE VI
ADDITIONAL COVENANTS OF KDDJ
----------------------------
6.1 Conduct of Business. From the date hereof through the Effective Time
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination
26.
<PAGE>
Date"), except as contemplated or as may be required by this Agreement, or as
set forth on Schedule 6.1, or as consented to by VCI in writing, KDDJ shall
diligently carry on its business and in the ordinary course only, and will use
its best efforts to preserve its present business organization intact and to
keep available the services of its present officers, agents or employees
(nothing herein implying an obligation of KDDJ to maintain or retain any
specific officer, agent or employee), and preserve its present relationships
with customers and other Persons having business dealings with it, and will not
take any action inconsistent with this Agreement or with the consummation of the
transactions contemplated hereby. Without limiting the generality of the
foregoing, KDDJ shall not, except as specifically contemplated by this
Agreement:
(a) change or amend its Certificate of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) Material
Contract, except in the ordinary course of business, or (ii) any Contract
involving $10,000 or more;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any Material assets, or any interests therein,
and, without limiting the generality of the foregoing, KDDJ will maintain and
sell or rent inventory consistent with its past practices and in accordance with
any other provision in this Agreement;
(d) incur any obligations or liability for long-term indebtedness, or
incur any other obligation or liability of $10,000 or more except in the
ordinary course of business;
(e) (i) grant any bonus, severance or termination pay or increase
in any manner the compensation or fringe benefits of any employee or pay any
benefit not required by any existing KDDJ Employee Plan or policy;
(ii) make any change in the key management structure of KDDJ,
including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any KDDJ Employee Plan,
agreement (including, without limitation, any collective bargaining or
employment agreement), trust, fund or other arrangement for the benefit or
welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
Material assets or business of any corporation, partnership, association or
other business organization or division thereof;
27.
<PAGE>
(g) declare, set aside, make or pay any dividend or other
distribution in respect of KDDJ's capital stock;
(h) fail to expend funds for budgeted capital expenditures or
commitments that have been disclosed to VCI;
(i) willingly allow or permit any of KDDJ's insurance policies to be
suspended, impaired or canceled;
(j) fail to pay its accounts payable and any debts owed or
obligations due to it, or pay or discharge when due any liabilities, in the
ordinary course of business;
(k) enter into, renew, modify or revise any agreement or transaction
with any of its Affiliates;
(l) fail to maintain any assets in substantially their current state
of repair, excepting normal wear and tear or fail to replace consistent with
KDDJ's past practice inoperable, worn-out or obsolete or destroyed assets;
(m) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
(n) make any Material income tax election or settlement or compromise
with tax authorities;
(o) fail to comply in any Material respect with all laws applicable
to it;
(p) intentionally do any other act which would cause any
representation or warranty of KDDJ in this Agreement to be or become untrue in
any Material respect;
(q) issue any shares of KDDJ Common Stock or any options, warrants,
rights or other securities convertible into, or exercisable or exchangeable for,
KDDJ Common Stock; or
(r) enter into any agreement, arrangement or under standing or
otherwise become obligated, to do any action prohibited hereunder.
6.2 Public Statements and Press Releases. Except as provided for
------------------------------------
hereinbelow, KDDJ and the Selling Shareholders shall not from and after the date
hereof make, issue or release any public announcement, press release, statement
or acknowledgment of the existence of, or reveal publicly the terms, conditions
and status of, the transactions provided for herein, without the prior written
consent of VCI as to the content and time of release of such statement or
announcement.
28.
<PAGE>
6.3 No Solicitation. Prior to the Effective Time (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither KDDJ nor
any of its Affiliates or Representatives shall directly or indirectly solicit or
initiate any discussions, offers or negotiations with, or participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise encourage any effort or attempt by, any
Person other than VCI, concerning any Alternative Transaction with respect to
KDDJ. KDDJ shall promptly notify VCI if any proposal, offer, inquiry or other
contact is received by KDDJ in respect of an Alternative Transaction, and shall
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep VCI informed on a current basis of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations.
6.4 Delivery of KDDJ Common Stock. The Selling Shareholders shall
-----------------------------
deliver stock certificates representing all issued and outstanding capital stock
of KDDJ at or prior to the Effective Time.
6.5 Noncompetition Agreements. At or prior to the Effective Time, each
-------------------------
of David A. Ballstadt, Keith D. Ballstadt and Donald E. Ballstadt shall have
executed noncompetition agreements in favor of VCI substantially in the form of
Exhibit E hereto (the "Noncompetition Agreements").
6.6 Piggyback Registration. Each time that VCI proposes to file a
----------------------
registration statement under the Securities Act of 1933 with respect to an
offering of VCI Common Stock either by VCI or by shareholders of VCI on a form
that would also permit the registration of shares held by the Selling
Shareholders, VCI will give written notice of such proposal to each Selling
Shareholder. Each Selling Shareholder may, by written request given within ten
business days after receipt of any such notice, require VCI to use its best
efforts to cause all or part of such person's shares to be included in such
registration statement. Notwithstanding the foregoing, if the managing
underwriter or underwriters, if any, of such offering advise VCI in writing that
inclusion of such shares would (a) make it impracticable to conduct an
underwritten offering of the VCI Common Stock being registered at the price at
which such VCI Common Stock could be sold without such inclusion, or (b)
materially and adversely interfere with the offering, then the number of shares
requested to be included in such registration by the Selling Shareholders may be
reduced or eliminated. In connection with any registration pursuant to this
Section 6.6 covering an underwritten public offering, VCI and each Selling
Shareholder whose shares are included therein shall enter into a written
agreement with a managing underwriter containing such provisions as are
customary in the securities business for such an arrangement. In connection
with any such registration, each such Selling Shareholder shall (a) provide
29.
<PAGE>
such information and execute such documents as may be reasonably required in
connection with such registration, (b) agree to sell such shares on the basis
provided in any underwriting arrangements, and (c) complete and execute all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
Notwithstanding the foregoing, the registration rights set forth in this Section
6.6 shall terminate at such time as the Selling Shareholders are eligible,
pursuant to Rule 144(k) under the Securities Act, to resell their shares without
restriction under the federal securities laws.
6.7 Insurance. From the date hereof through the Effective Time, KDDJ
---------
shall maintain in force (including necessary renewals thereof) the insurance
policies listed on Schedule 3.23.
6.8 Reporting and Compliance With Law. From the date hereof through the
---------------------------------
Effective Time, KDDJ shall duly and timely file all tax returns required to be
filed with governmental authorities and duly observe and conform in all material
respects to all applicable laws and orders.
6.9 Approval of Shareholders of KDDJ. KDDJ shall take all action
--------------------------------
necessary, in accordance with the Minnesota Law and its Certificate of
Incorporation and Bylaws, to obtain the approval of 100% of the KDDJ Common
Stock for this Agreement, the Agreement of Merger and the Certificate of Merger
and the transactions contemplated hereby and thereby, and KDDJ shall provide the
Selling Shareholders with full disclosure of all terms of this transaction.
6.10 Termination of Employee Benefit Plans Prior to Effective Time. KDDJ
-------------------------------------------------------------
agrees that its employee benefit plans, programs and arrangements (in addition
to those for non-employee directors) (and if required by such plans, programs or
arrange ments, any agreements entered thereunder and awards and options granted
thereunder) shall be terminated or amended as of the Effective Time, to the
extent necessary or appropriate, to reflect the transactions contemplated by
this Agreement. From and after the Closing, VCI shall cause KDDJ to provide
employees who were employed by KDDJ immediately prior to the Closing, and who
will be eligible for coverage under VCI's programs, with substantially the same
level of employee medical and dental insurance coverage as is provided by VCI to
its employees of comparable status and seniority; provided that, to the extent
there is any period of delayed eligibility for coverage of such persons under
VCI's medical and dental insurance programs, VCI shall notify such persons that
they may continue their previous coverage during such transition period pursuant
to the Consolidated Omnibus Reconciliation Act of 1985 (COBRA), with premiums
for such coverage to be paid by the employee and/or KDDJ in accordance with
VCI's company-wide policies and practices.
<PAGE>
6.11 Access to Information. KDDJ shall afford VCI and its Representatives
---------------------
reasonable access during normal business hours, throughout the period prior to
the earlier of the Effective Time or the Termination Date (as hereinafter
defined), to its personnel, facilities, contracts, commitments, books, computer
software application systems, files and records and to furnish such financial
and operating data and other information with respect to its business, assets
and properties, and shall use its best efforts to cause its Representatives to
furnish promptly to VCI and its Representatives such additional financial and
operating data and other information as to its business and properties as the
other or its duly authorized Representatives may from time to time reasonably
request.
ARTICLE VII
[Intentionally omitted]
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF KDDJ
-------------------------------------
AND THE SELLING SHAREHOLDERS
----------------------------
The obligations of KDDJ and the Selling Shareholders to con summate the
transactions provided for hereby are subject, in the discretion of KDDJ, to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any of which may be waived by KDDJ:
8.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of VCI contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Effective Time as if such
representations and warranties were made at and as of the Effective Time, and
VCI shall have performed all agreements and covenants required hereby to be
performed by it prior to or at the Effective Time.
8.2 Permits. All Material Permits, waivers and approvals from
-------
governmental authorities and other parties necessary to permit VCI to consummate
the transactions contemplated hereby shall have been obtained.
8.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
31.
<PAGE>
8.4 No Material Adverse Change. Since January 31, 1997, there shall not
--------------------------
have occurred any change in the business, financial condition or prospects of
VCI taken as a whole, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, resulted in a Material Adverse
Change to the business, financial condition or prospects of VCI.
8.5 Seat on VCI Board. Ballstadt shall have been elected to the VCI
-----------------
Board of Directors, effective upon the Closing.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF VCI
------------------------------------
The obligations of VCI to consummate the transactions provided for hereby
are subject, in the discretion of VCI, to the satisfaction, at or prior to the
Effective Time, of each of the following conditions, any of which may be waived
by VCI:
9.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of KDDJ contained in this Agreement shall be true and correct at and
as of the date of this Agreement, all representations and warranties of
Ballstadt con tained in this Agreement shall be true and correct at and as of
the Effective Time as if such representations and warranties were made at and as
of the Effective Time, and KDDJ and the Selling Shareholders shall have
performed all agreements and covenants required hereby to be performed by them
prior to or at the Effective Time, and KDDJ shall have delivered a certificate
signed by Ballstadt to such effect.
9.2 Permits. All Permits, waivers and approvals from governmental
-------
authorities and other parties, necessary to permit KDDJ and the Selling
Shareholders to consummate the transactions contemplated hereby shall have been
obtained.
9.3 Opinion of Counsel. KDDJ shall have delivered to VCI an opinion of
------------------
Huffman, Usem, Saboe, Crawford & Greenberg, P.A., counsel to KDDJ and the
Selling Shareholders, in substantially the form attached hereto as Exhibit G,
which opinion shall set forth, among other things, that all KDDJ Documents and
the consummation by KDDJ of the transactions contemplated hereby are within the
corporate powers of KDDJ and have been duly authorized by all necessary
corporate and shareholder action on the part of KDDJ and that all transactions
contemplated by the Merger are being consummated in accordance with Minnesota
Law.
9.4 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
32.
<PAGE>
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.5 No Material Adverse Change. Since September 30, 1997, there shall
--------------------------
not have occurred any change in the business, financial condition or prospects
of KDDJ, except for changes contemplated hereby or changes which have not had a
material adverse effect on the business, financial condition or prospects of
KDDJ.
9.6 Corporate Resolutions. VCI shall have received from KDDJ certified
---------------------
resolutions adopted by the Board of Directors of KDDJ approving this Agreement
and the transactions contemplated hereby.
9.7 Selling Shareholder Approval. This Agreement, the Agreement of
----------------------------
Merger, the Certificate of Merger and the transactions contemplated hereby and
thereby shall have been approved and adopted by the vote or consent of 100% of
the outstanding shares of KDDJ Common Stock and an officer's certifi cate as to
such approval shall be delivered by KDDJ to VCI.
9.8 Employment Agreements. The Employment Agreements shall be in effect.
---------------------
9.9 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of KDDJ shall have been delivered to
VCI.
9.10 Inventory. Notwithstanding any other provision in this Agreement,
---------
KDDJ's rental and sale inventory at the Closing will be not less than the amount
set forth on the KDDJ Balance Sheet as of December 31, 1997, which shall be not
less than the amount set forth on the KDDJ balance sheet as of September 30,
1997.
9.11 Store Lease Assignments. VCI shall have received from KDDJ copies of
-----------------------
all necessary third party consents to the assignment to VCI pursuant to the
Merger of any store leases held by KDDJ. Other than such consents, there are no
other change of control or similar provisions in any Contracts of KDDJ which
would prevent the assignment to VCI of any store leases held by KDDJ.
9.12 Due Diligence. VCI and its counsel shall have found satisfaction
-------------
with the results of their due diligence investigation of the financial
condition, assets and operations of KDDJ.
9.13 Financing. VCI shall have obtained or arranged for new financing in
---------
an amount of at least $8,000,000 on terms acceptable to VCI.
33.
<PAGE>
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
shareholders of KDDJ, this Agreement and the Merger and other transactions
contemplated hereby may be terminated at any time prior to the Effective Time:
(1) By mutual written consent of the Boards of Directors of KDDJ
and VCI;
(2) By either KDDJ or VCI, if the Closing shall not have
occurred on or before March 31, 1998 unless such date is extended by the mutual
agreement of the parties; provided however, that this provision shall not be
available to KDDJ if there is then a breach of this Agreement under clause (4)
of this Section 10.1(a), and this provision shall not be available to VCI if
there is then a breach of this Agreement under clause (3) of this Section
10.1(a);
(3) By KDDJ, if there is a breach of any representation or
warranty set forth in Article IV hereof or any covenant or agreement to be
complied with or performed by VCI pursuant to the terms of this Agreement or an
occurrence of any event which results or would result in the failure of a
condition set forth in Article VIII to be satisfied at or prior to the Effective
Time; or
(4) By VCI, if there is a breach of any representation or
warranty set forth in Article III hereof or of any covenant or agreement to be
complied with or performed by KDDJ or the Selling Shareholders pursuant to the
terms of this Agreement or the occurrence of any event which results or would
result in the failure of a condition set forth in Article IX to be satisfied at
or prior to the Effective Time.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any willful breach of this Agreement occurring
prior to or as a result of termination of this Agreement, and except that:
(1) Each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same; and
34.
<PAGE>
(2) The provisions of Sections 5.2 and 12.5 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the avail ability of
specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Time, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
10.4 Releases and Indemnification Regarding Personal Guarantees. Within
----------------------------------------------------------
60 days following the Closing, VCI will use its best efforts to obtain releases
from lessors, lenders, vendors and any other third parties, of any personal
guarantees or personal liabilities of Ballstadt or any other Selling Shareholder
with respect to any obligations of KDDJ, insofar as such personal guarantees or
liabilities are described in the KDDJ Disclosure Schedule; and VCI shall in any
event, as set forth in Article 11.3 below, indemnify and hold harmless Ballstadt
and/or such other Selling Shareholders from any personal liability with respect
to such described guarantees and liabilities, unless and to the extent that VCI
and KDDJ are entitled to be indemnified under Article XI of this Agreement.
Notwithstanding the foregoing, VCI's indemnification in this Section 10.4 shall
not be limited to two years, and the same shall continue for the term of any
remaining personal guarantee.
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of KDDJ, Ballstadt and VCI contained herein and the
indemnification by
35.
<PAGE>
Ballstadt under Section 11.2 with respect thereto, and the indemnification by
VCI under Section 11.3 with respect thereto, shall survive the Effective Time
for two years; provided, however, that the representations and warranties of
KDDJ and Ballstadt in Section 3.19 and the indemnification by Ballstadt with
respect thereto shall survive until the applicable statutes of limitations have
expired, and those contained in Section 3.5 and the indemnification by Ballstadt
with respect thereto shall survive without any limitation in time. For purposes
of this Article XI, "representations" and "warranties" of KDDJ and Ballstadt
shall mean collectively those representations and warranties of KDDJ and
Ballstadt set forth in Article III, the Disclosure Schedules referenced therein,
and "representations" and "warranties" of VCI shall mean collectively those
representa tions and warranties of VCI set forth in Article IV, the Disclosure
Schedules referenced therein.
11.2 Indemnification by Ballstadt. Subject to, and in the manner
----------------------------
described in, this Article XI, for a period of two years from the Effective Time
except as otherwise provided in Section 11.1, Ballstadt shall indemnify and hold
harmless VCI and its Representatives and Affiliates (the "VCI Indemnified
Parties") to the fullest extent lawful, from and against any and all losses,
damages, diminution in value, claims, liabilities, actions and expenses
(including, without limitation, costs of investigating, preparing or defending
any such claim or action, costs of settlement, judgments, and reasonable legal
fees and expenses), net of any amounts actually received under any insurance
policy as a result of such loss, damage, diminution in value, claim, liability,
action, or expense (collectively "Losses") arising out of or in connection with
the breach of any representation, warranty, covenant or agreement of KDDJ or
Ballstadt contained in this Agreement. The term "Losses" as used in this
Section 11.2 is not limited to matters asserted by third parties against a VCI
Indemnified Party, but includes Losses incurred or sustained by a VCI
Indemnified Party in the absence of third party claims.
11.3 Indemnification by VCI. Subject to, and in the manner described in,
----------------------
this Article XI, for a period of two years from the Effective Time, VCI shall
indemnify and hold harmless the Selling Shareholders and their respective
Representatives and Affiliates (the "KDDJ Indemnified Parties") to the fullest
extent lawful, from and against any and all Losses (as defined in Section 11.2)
arising out of or in connection with the breach of any representation, warranty,
covenant or agreement of VCI. The term "Losses" as used in this Section 11.3 is
not limited to matters asserted by third parties against a KDDJ Indemnified
Party, but includes Losses incurred or sustained by a KDDJ Indemnified Party in
the absence of third party claims.
11.4 Basket and Cap. VCI shall be indemnified by Ballstadt and the
--------------
Selling Shareholders shall be indemnified by VCI, in each case to the extent
that the aggregate of all Losses, determined
36.
<PAGE>
without regard to whether any Loss was Material or not, exceeds $10,000 (the
"Basket Amount"), provided that in no circumstance shall the aggregate liability
of Ballstadt or VCI exceed $1,500,000. Notwithstanding the foregoing, there
shall be no Basket Amount applicable to any Loss resulting from a breach of
representations and warranties in Sections 3.5 or 3.19 or from a failure to make
any adjustment required under Section 2.2(e).
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party
for which indemnification would be available under this Article XI (a "Claim"),
the indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be represented by the indemnifying
party, such indemnified party shall have the right to assume control of the
defense of such Claim and to have its expenses reimbursed promptly with respect
to such Claim to the extent entitled thereto. In addition, in the event that
such indemnifying party, within a reasonable time after notice that any such
Claim or the total Losses incurred exceeds the Basket Amount, fails to defend
any indemnified party, such indemnified party will (upon further notice to such
indemnifying party) have the right to undertake its defense of such Claim for
the account of such indemnifying party and to have its expenses reimbursed
promptly with respect to such Claim to the extent entitled thereto. Regardless
of which party is controlling the defense of any Claim, (i) both the
indemnifying party and the indemnified party shall act in good faith; (ii) no
settlement of such Claim may be agreed to without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld; and (iii)
no part of any Claim shall be paid without such consent or unless a final
judgment from which no appeal may be taken is entered on such Claim against the
indemnified party. The controlling party shall deliver, or cause to be
delivered, to the other party copies of all correspondence, pleadings, motions,
briefs, appeals or other written statements relating to or submitted in
connection with the defense of any such Claim, and timely notices of any hearing
or other court proceeding relating to such Claim.
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within 90 days of the discovery of the Loss of the nature and
extent thereof, and the other party shall repay such Losses within 90 days
37.
<PAGE>
thereafter to the extent the Losses exceed the Basket Amount, or shall inform
the party seeking indemnification that it is denying in good faith all or a
portion of such Claim. If the party seeking indemnification disputes the denial
of such Claim, it may thereupon proceed to enforce its rights under this
Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns, and no other Person shall have any
right, benefit or obligation under this Agreement as a third party beneficiary
or otherwise.
12.2 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express); and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
If to KDDJ or the Selling Shareholders, addressed to:
David A. Ballstadt
3904 The Strand
Manhattan Beach, CA 90266
Fax:
With a copy to:
Craig D. Greenberg, Esq.
Huffman, Usem, Saboe, Crawford &
Greenberg, P.A.
1000 Water Park Place
5101 Olson Memorial Highway
Minneapolis, Minnesota 55422
FAX: (612) 545-2720
38.
<PAGE>
If to VCI, addressed to:
Robert Y. Lee
Video City, Inc.
6840 District Blvd.
Bakersfield, CA 93313
FAX: (805) 397-5982
With a copy to:
William J. Feis, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
FAX: (310) 201-4746
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.3 Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without reference to choice
of law provisions.
12.4 Multiple 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 instrument.
12.5 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement into effect.
12.6 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
12.7 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.8 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
39.
<PAGE>
12.9 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, including, without
limitation, the letter of intent dated November 17, 1997.
12.10 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.11 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
---------------------------
Robert Y. Lee,
Chairman and Chief
Executive Officer
VIDEO BALLSTADT CORP.
By: /s/ Robert Y. Lee
---------------------------
Robert Y. Lee,
President
KDDJ INVESTMENTS, INC.
By: /s/ Robert Y. Lee
---------------------------
David A. Ballstadt,
President
BALLSTADT:
/s/ David A. Ballstadt
---------------------------
David A. Ballstadt
40.
<PAGE>
EXHIBIT 10.3
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
between
VIDEO CITY, INC.,
VIDEO ACQUISITION CORP.,
LEPTIS MAGNA, INC. d/b/a VIDEO UNLIMITED
and
G. WAYNE BAILEY and ORAWAN BAILEY
Dated as of March 25, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I. DEFINITIONS..................................... 1
1.1 Defined Terms........................................ 1
1.2 Other Defined Terms.................................. 4
ARTICLE II. PLAN OF REORGANIZATION.......................... 5
2.1 Adoption of Plan..................................... 5
2.2 The Merger........................................... 5
2.3 Effective Time....................................... 6
2.4 Certificate of Incorporation and Bylaws.............. 6
2.5 Directors and Officers............................... 6
2.6 The Closing.......................................... 7
2.7 Reimbursable and Pro Rata Expenses................... 7
2.8 Inventory............................................ 7
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF
VUN AND THE SELLING SHAREHOLDERS................ 7
3.1 Corporate Existence and Power........................ 8
3.2 Corporate Authorization.............................. 8
3.3 Governmental Authorization........................... 8
3.4 Non-Contravention.................................... 8
3.5 VUN Capitalization................................... 8
3.6 Subsidiaries......................................... 9
3.7 Consents............................................. 9
3.8 Financial Statements................................. 9
3.9 Absence of Certain Changes........................... 10
3.10 Title to Assets..................................... 10
3.11 Real Property....................................... 11
3.12 Litigation.......................................... 11
3.13 Contracts........................................... 11
3.14 Licenses and Permits................................ 11
3.15 Compliance with Laws................................ 12
3.16 Intangible Property................................. 12
3.17 Employees........................................... 12
3.18 Prepaids............................................ 13
3.19 Taxes............................................... 13
3.20 Environmental Compliance............................ 14
3.21 Labor and Employment Matters........................ 14
3.22 Pension and Benefit Plans........................... 16
3.23 Insurance........................................... 19
3.24 Books and Records................................... 19
3.25 Inventory........................................... 20
3.26 Accuracy and Provision of Information............... 20
3.27 Shareholder Approval................................ 20
</TABLE>
i.
<PAGE>
<TABLE>
<C> <S> <C>
3.28 Investor Representations............................ 20
3.29 No Brokers.......................................... 21
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF
VCI............................................ 21
4.1 Organization of VCI and Video Sub................... 21
4.2 VCI and Video Sub Capital Stock..................... 21
4.3 Authorization Relative to this Agreement............ 22
4.4 No Conflict or Violation............................ 22
4.5 Litigation.......................................... 22
4.6 Board Approval...................................... 23
4.7 Validity of Shares Issued to Selling Shareholders... 23
4.8 VCI Shareholder Approval............................ 23
ARTICLE V. COVENANTS OF EACH PARTY........................ 23
5.1 Notification of Certain Matters..................... 23
5.2 Confidential Information............................ 23
ARTICLE VI. ADDITIONAL COVENANTS OF VUN.................... 25
6.1 Conduct of Business................................. 25
6.2 Public Statements and Press Releases................ 27
6.3 No Solicitation..................................... 27
6.4 Delivery of VUN Common Stock........................ 27
6.5 Noncompetition Agreement............................ 27
6.6 Lock-Up............................................. 27
6.7 Insurance........................................... 27
6.8 Reporting and Compliance With Law................... 28
6.9 Approval of Shareholders of VUN..................... 28
6.10 Termination of Employee Benefit Plans Prior
to Effective Time................................... 28
6.11 Access to Information............................... 28
ARTICLE VII. ADDITIONAL COVENANTS OF VCI.................... 28
7.1 Indebtedness........................................ 28
ARTICLE VIII. CONDITIONS TO THE OBLIGATIONS OF
VUN AND THE SELLING SHAREHOLDERS............... 29
8.1 Representations, Warranties and Covenants........... 29
8.2 Permits............................................. 29
8.3 No Governmental Actions............................. 29
8.4 No Material Adverse Change.......................... 29
ARTICLE IX. CONDITIONS TO THE OBLIGATIONS OF VCI........... 29
9.1 Representations, Warranties and Covenants........... 29
9.2 Permits............................................. 30
9.3 Opinion of Counsel.................................. 30
9.4 No Governmental Actions............................. 30
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
9.5 No Material Adverse Change.......................... 30
9.6 Corporate Resolutions............................... 30
9.7 Selling Shareholder Approval........................ 30
9.8 Delivery of Stock Certificates...................... 31
9.9 Inventory........................................... 31
9.10 Store Lease Assignments............................. 31
9.11 Due Diligence....................................... 31
9.12 Financing........................................... 31
9.13 Limit on Liabilities................................ 31
ARTICLE X. TERMINATION, AMENDMENTS, WAIVERS
AND POST-CLOSING COVENANTS...................... 31
10.1 Termination......................................... 31
10.2 Amendments.......................................... 32
10.3 Waivers............................................. 32
10.4 Store Number 7...................................... 33
ARTICLE XI. INDEMNIFICATION; SURVIVAL....................... 33
11.1 Survival of Representations, Etc.................... 33
11.2 Indemnification by the Selling Shareholders......... 33
11.3 Indemnification by VCI.............................. 34
11.4 Basket and Cap...................................... 34
11.5 Indemnification Procedure........................... 34
ARTICLE XII. GENERAL PROVISIONS.............................. 35
12.1 Assignment.......................................... 35
12.2 Notices............................................. 35
12.3 Choice of Law....................................... 36
12.4 Multiple Counterparts............................... 36
12.5 Expenses............................................ 37
12.6 Invalidity.......................................... 37
12.7 Titles.............................................. 37
12.8 Cumulative Remedies................................. 37
12.9 Entire Agreement.................................... 37
12.10 Attorneys' Fees..................................... 37
12.11 Waiver of Right to Trial by Jury.................... 37
</TABLE>
iii.
<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION, dated as of March 25,
1998 is by and among VIDEO CITY, INC., a Delaware corporation ("VCI"), VIDEO
ACQUISITION CORP., a Colorado corporation ("Video Sub"), LEPTIS MAGNA, INC., a
Colorado corporation (d/b/a Video Unlimited) ("VUN") and G. WAYNE BAILEY and
ORAWAN BAILEY (collectively, the "Selling Shareholders"), with reference to the
following facts:
A. The Selling Shareholders own 100% of the outstanding stock of VUN.
B. VCI, VUN and each of the Selling Shareholders believe that it is in
their best interests to adopt and consummate a plan of reorganization that
provides for the merger (the "Merger") of Video Sub, a newly formed subsidiary
of VCI, into VUN, with Video Sub disappearing and VUN surviving, and the
conversion of all VUN shares into the right to receive the Merger Consideration.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, and in the masculine or feminine gender,
depending upon the reference.
"Action" shall mean any action, order, writ, injunction, judgment or
------
decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation.
"Affiliate" shall mean, with respect to any Person, a Person that
---------
directly or indirectly controls, is controlled by or is under common control
with such Person.
"Agreement" shall mean this Agreement of Merger and Plan of
---------
Reorganization, together with all schedules (including the Disclosure Schedule)
and exhibits referenced herein.
"Assets" shall mean those assets and properties owned by VUN, or in
------
which VUN has any right, title or interest of any kind and description as of the
Effective Time, except as set forth in the Disclosure Schedule.
1.
<PAGE>
"Books and Records" shall mean all books and records, stock transfer
-----------------
books, minute books, copies of outstanding stock certificates, ledgers, employee
records, customer lists, files, correspondence, and other written records of
every kind.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
"Contracts" shall mean all executory agreements, contracts, leases,
---------
commitments, evidences of indebtedness, letters of credit, franchise agreements,
purchase agreements and purchase orders, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules attached
-------------------
hereto and delivered by the parties as of the date hereof which set forth the
exceptions to the representations and warranties contained in Article III hereof
(as to VUN) and Article IV hereof (as to VCI and Video Sub) and certain other
information called for by this Agreement. Unless otherwise specified, each
reference in this Agreement to any numbered schedule is a reference to that
numbered schedule which is included in the Disclosure Schedule. Any information
disclosed on a particular schedule on the Disclosure Schedule or subparts
thereof shall be deemed disclosed on any and all schedules.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
-----------
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance, restriction or other right of third parties, whether voluntarily
incurred or arising by operation of law, and includes, without limitation, any
agreement to give any of the foregoing in the future, and any contingent sale or
other title retention agreement or lease in the nature thereof, except liens for
current taxes, assessments, governmental charges or levies on property not yet
due and payable.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
the same may be amended from time to time.
"ERISA Affiliate" shall mean any entity that is a member of a group of
---------------
which VUN is a member and which is under common control with VUN, within the
meaning of the regulations promulgated under Section 414 of the Code.
"ERISA Plans" shall mean, collectively, all Pension Plans and all
-----------
Welfare Plans required to be disclosed on Schedule 3.22.
"Marks" means all registered and unregistered trademarks, service
-----
marks, trade names, and slogans, all applications therefor, and all goodwill
associated therewith.
2.
<PAGE>
"Material" shall mean, unless otherwise specifically defined herein,
--------
any amounts of $10,000 or more as to VUN, and any amounts of $100,000 or more as
to VCI, except that where the context requires, "material" shall mean an effect
resulting in loss, liability, payment, damage or expense of $10,000 or more in
the case of VUN, and $100,000 or more in the case of VCI and Video Sub.
"Material Adverse Change" means a material adverse change in the
-----------------------
business, assets, financial condition or results of operations of VUN or its
business which involves a loss or exposure of more than $10,000 or of VCI or its
business which involves a loss or exposure of more than $100,000.
"Pension Plan" shall mean any employee pension benefit plan within
------------
the meaning of Section 3(2) of ERISA.
"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings under all
federal, state, local or foreign laws with governmental or regulatory bodies, or
any other Person.
"Person" shall mean an individual, a partnership, a limited liability
------
company, a joint venture, a corporation, a trust, an unincorporated
organization, a government or any department or agency thereof or any other
entity.
"Representative" shall mean any officer, director, principal,
--------------
attorney, accountant, agent, employee or other representative.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Tax" or "Taxes" shall mean any federal, state, local, foreign or
--- -----
other tax, levy, impost, fee, assessment or other government charge, including
without limitation income, estimated income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, use, import duty,
employment, commercial rent, occupancy, franchise or withholding taxes, and any
premium, including without limitation interest, penalties and additions in
connection therewith.
"VCI Common Stock" shall mean shares of common stock, $.01 par value
----------------
per share, of VCI.
"VCI Documents" shall mean this Agreement and any other documents,
-------------
instruments or certificates to be delivered by VCI in connection with this
Agreement.
"VUN Common Stock" shall mean shares of common stock, no par value
----------------
per share, of VUN.
3.
<PAGE>
"VUN Disclosure Schedules" shall mean all Disclosure Schedules
------------------------
delivered by VUN pursuant to this Agreement.
"VUN Documents" shall mean this Agreement, the Articles of Merger and
-------------
any other documents, instruments or certificates to be delivered by VUN in
connection with this Agreement.
"VUN Intangible Property" means all intangible property owned by VUN
-----------------------
or in which VUN has any interest (including the right to use) or owned by any
Selling Shareholder and used in VUN's business (other than intangible property
owned by third parties and available generally for commercial license from
others), including without limitation, (i) VUN's name and all Marks; (ii) all
statutory, common law and registered copyrights and mask work rights, and all
applications for the registration thereof; (iii) all patents and applications
therefor; (iv) all software; (v) all other inventories, discoveries,
improvements, processes, formulae (secret or otherwise), trade secrets,
information, know-how and ideas (including those in the possession of third
parties, but that are the property of VUN); and (vi) all technical documentation
relating thereto.
"Welfare Plan" shall mean any employee welfare benefit plan within
------------
the meaning of Section 3(1) of ERISA.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Articles of Merger 2.3
Basket Amount 11.4
Claim 11.5
Closing 2.6
Colorado Law 2.3
Effective Time 2.3
Losses 11.2
Merger 2.2(a)
Merger Consideration 2.2(b)
Note 2.2(b)(ii)
Noncompetition Agreement 6.5
Surviving Corporation 2.2(a)
Termination Date 6.1
VCI Indemnified Parties 11.2
Video Sub 2.2(a)
VUN Consents 3.7
VUN Financial Statements 3.8(a)
VUN Indemnified Parties 11.3
VUN Permits 3.14
</TABLE>
4.
<PAGE>
ARTICLE II
PLAN OF REORGANIZATION
----------------------
2.1 Adoption of Plan. VCI, VUN and each of the Selling Shareholders
----------------
believe that it is in their best interests to adopt and consummate the Merger.
2.2 The Merger.
----------
(a) VCI shall form a wholly owned subsidiary called Video Acquisition
Corp. ("Video Sub") under the laws of the State of Colorado. VCI shall cause
Video Sub to be merged with and into VUN with VUN as the surviving corporation
in the Merger (the "Surviving Corporation"), and as of the Effective Time as a
result thereof, VUN shall become a wholly owned subsidiary of VCI. From and
after the Effective Time, the name of the Surviving Corporation shall be Leptis
Magna, Inc. until changed or amended in accordance with applicable law.
(b) Pursuant to the Merger, the shares of VUN Common Stock issued and
outstanding immediately prior to the Effective Time shall thereupon be converted
into and become the right to receive the following aggregate consideration (the
"Merger Consideration"):
(i) A certain number of shares of VCI Common Stock determined by
subtracting from $950,000 (x) the total amount of liabilities of VUN immediately
prior to the Effective Time and (y) the dollar reduction, if any, called for by
Section 2.8 below, and dividing the result by $2.00 (to illustrate, if the total
liabilities of VUN immediately prior to the Effective Time and other reductions
are $420,000, the number of shares issuable hereunder would be 265,000 shares of
VCI Common Stock); and
(ii) $150,000, of which $75,000 shall be paid to the Selling Shareholders
at the Closing and the remainder shall be paid, without interest, in twelve
equal monthly installments commencing on the _____ day of the first month
following the Closing, pursuant to a promissory note (the "Note") in the form
attached hereto as Exhibit C.
(iii) Of the shares of VCI Common Stock issuable under Section 2.2(b)(i),
150,000 shares shall be issued at the Effective Time. The remainder of the
shares shall be issued not later than 90 days after the Effective Time,
reflecting the adjustments described in Sections 2.2(b)(i) and 2.8; and if the
total of the liabilities and the reduction (if any) under Section 2.8 exceed
$650,000, so that no remaining shares are issuable, then the Selling
Shareholders shall return to VCI a portion of the 150,000 shares issued to them,
having a value equal to such excess over $650,000 (such shares to be valued for
this purpose at $2.00 per share).
5.
<PAGE>
(c) VUN will cause all stock certificates representing issued and
outstanding shares of VUN Common Stock to be delivered, free and clear of all
Encumbrances, to VCI at or prior to the Effective Time. Each certificate which
immediately prior to the Effective Time represents outstanding shares of VUN
Common Stock shall at and after the Effective Time be deemed to represent only
the number of shares of VCI Common Stock into which such shares of VUN Common
Stock shall have the right to be converted pursuant to Section 2.2(b) above.
From and after the Effective Time, VCI shall be entitled to treat certificates
for shares of VUN Common Stock as evidencing the ownership of the whole number
of shares of VCI Common Stock into which such shares of VUN Common Stock have
been converted. Certificates representing the VCI Common Stock will be
delivered to the Selling Shareholders upon surrender to VCI of valid stock
certificates representing their shares of VUN Common Stock. At the Closing,
certificates representing VCI Common Stock will bear a legend substantially as
follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER."
(d) At the Effective Time, each share of common stock of Video Sub
that is issued and outstanding will be converted into one newly issued share of
VUN Common Stock. From and after the Effective Time, VCI, as the sole
shareholder of VUN, shall be entitled to receive one or more certificates
representing the VUN Common Stock into which such shares have been converted.
2.3 Effective Time. The Merger shall become effective (such time and
--------------
date are referred to herein as the "Effective Time") on the business day (which
day shall be on or before March 31, 1998 unless such date is extended by mutual
agreement by the parties) on which (a) all conditions to the Closing of the
transactions contemplated by this Agreement shall have occurred, and (b) the
Articles of Merger and any other documents necessary to effect the Merger shall
be filed in accordance with the Colorado Business Corporation Act (the "Colorado
Law").
2.4 Certificate of Incorporation and Bylaws. From and after the
---------------------------------------
Effective Time, the Certificate of Incorporation of VUN set forth in Exhibit A
shall be the Certificate of Incorporation of the Surviving Corporation and the
Bylaws of VUN set forth in Exhibit B shall be the Bylaws of the Surviving
Corporation, until changed or amended as provided therein or under the Colorado
Law.
2.5 Directors and Officers. From and after the Effective Time, the
----------------------
directors and officers of VUN immediately prior to the Effective Time shall be
the directors and officers of the
6.
<PAGE>
Surviving Corporation, in each case until their successors shall have been
elected and shall qualify or until otherwise provided by law or the Certificate
of Incorporation or Bylaws of the Surviving Corporation.
2.6 The Closing. The closing of the transactions contem plated by this
-----------
Agreement (the "Closing") shall be held at 9:00 a.m. local time on the date of
the Effective Time at the offices of Troy & Gould Professional Corporation, 1801
Century Park East, Suite 1600, Los Angeles, California 90067, or at such other
date, place and time as the parties may agree.
2.7 Reimbursable and Pro Rata Expenses. Except as otherwise provided in
----------------------------------
this Agreement, all rent payments, insurance premiums and utility payments (but
not utility deposits or lease deposits) made by VUN and covering time periods in
which the Closing occurs shall be prorated as of the Closing; and VCI shall
cause VUN to pay to the Shareholders the amount, if any, by which such payments
made prior to the Closing which are applicable to periods following the Closing
exceed such payments that are made after the Closing and are allocable to
periods prior to the Closing; or, conversely, the Shareholders shall pay to VUN
the amount, if any, by which such payments made after the Closing for expenses
allocable to periods prior to the Closing exceed the amounts paid by VUN prior
to the Closing for expenses allocable to periods following the Closing.
2.8 Inventory. An itemized physical inventory of VUN's videocassettes
---------
shall be taken by VCI or its representatives. In the event such inventory as of
the Closing shows that the number of videocassettes on hand is less than the
number in VUN's inventory as of December 31, 1997 (in each case excluding all
such inventory of VUN's Store No. 7), the aggregate Merger Consideration shall
be reduced by $10.00 times the reduction in the number of videocassettes. There
shall be no increase in the Merger Consideration if the number of videocassettes
on hand is greater than the number in VUN's inventory as of December 31, 1997.
This reduction, if any, in the Merger Consideration shall be made by means of a
reduction in the number of shares of VCI Common Stock issuable pursuant to
Section 2.2(b)(i) of this Agreement, equal to the remainder of the reduction in
the Merger Consideration divided by $2.00.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VUN
-------------------------------------
AND THE SELLING SHAREHOLDERS
----------------------------
Subject to the exceptions set forth in the VUN Disclosure Schedules, VUN
and each of the Selling Shareholders, and solely with respect to Sections 3.27
and 3.28 each Selling Shareholder, hereby represent and warrant to VCI that:
7.
<PAGE>
3.1 Corporate Existence and Power. VUN is a corporation duly organized,
-----------------------------
validly existing and in good standing under the laws of the State of Colorado
and has all corporate power and authority and all governmental licenses,
authorizations, consents and approvals required to carry on its business and
operations as now conducted. Schedule 3.1 sets forth those jurisdictions in
which VUN is required to be qualified to do business as a foreign corporation
because of the character of the property owned or
leased by VUN or the nature of its activities; VUN is duly qualified to do
business in each of these jurisdictions.
3.2 Corporate Authorization. The execution, delivery and performance by
-----------------------
VUN of this Agreement and all of the other VUN Documents and the consummation by
VUN of the transactions contemplated hereby and thereby are within the corporate
powers of VUN and have been duly authorized by all necessary corporate action on
the part of VUN. This Agreement is, and as of the Closing the other VUN
Documents shall be, the legal, valid and binding obligations of VUN, enforceable
against VUN in accordance with their respective terms.
3.3 Governmental Authorization. The execution, delivery and performance
--------------------------
by VUN of this Agreement and the other VUN Documents require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than the filing of the Articles of Merger and this Agreement with the
Secretary of State of Colorado as contemplated by Section 2.3.
3.4 Non-Contravention. The execution, delivery and performance by VUN of
-----------------
this Agreement and the other VUN Documents does not and will not (i) contravene
or conflict with the Certificate of Incorporation or Bylaws of VUN, (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 VUN or any part of its business, (iii) assuming
the obtaining of all VUN Consents, constitute a default under or breach of, or
violate or give rise to any right of termination, cancellation or acceleration
of any right or obligation of VUN, or to a loss of any benefit relating to its
business or operations to which VUN is entitled under any provision of any
Contract to which VUN is a party or by which any of its assets is or may be
bound or (iv) result in the creation or imposition of any Encumbrance on any of
VUN's assets.
3.5 VUN Capitalization. The authorized capital stock of VUN consists
------------------
solely of 500 shares of VUN Common Stock, of which 100 shares are issued and
outstanding. All such outstanding shares are duly authorized, validly issued,
fully paid and non-assessable. Schedule 3.5 lists the Selling Shareholders and
the number of shares of VUN Common Stock owned by each of them as of the date of
this Agreement. All outstanding shares of VUN Common Stock have been issued in
compliance with all federal and state
8.
<PAGE>
securities laws and are not subject to any rights or obligations that require
the registration of such shares. Except as set forth on Schedule 3.5, there are
no outstanding options, warrants or other rights in or with respect to any
shares of VUN Common Stock or any securities convertible into such stock, and
VUN is not obligated to issue any additional shares of VUN Common Stock or any
options, warrants or other rights to acquire stock or any other securities
convertible into such stock.
3.6 Subsidiaries. VUN does not own, directly or indirectly, securities
------------
or other ownership interests in any other entity, nor is VUN a party to any
agreement relating to the formation of any other entity or joint venture.
3.7 Consents. Schedule 3.7 sets forth each Contract of VUN and each of
--------
the VUN Permits that requires a consent, approval, authorization, order or other
action of or filing with any Person as a result of the execution, delivery and
performance of this Agreement or any of the other VUN Documents or the
consummation of the transactions contemplated hereby or thereby (each of the
foregoing, a "VUN Consent").
3.8 Financial Statements.
--------------------
(a) VUN has delivered to VCI unaudited financial statements of VUN
consisting of statements of operations for the year ended December 31, 1996 and
the nine months ended September 30, 1997, and balance sheets as of December 31,
1996 and September 30, 1997 (collectively, the VUN Financial Statements"). The
VUN Financial Statements fairly present, in conformity with general accepted
accounting principles applied on a consistent basis, the financial position of
VUN as of the dates thereof and the results of operations of VUN for the periods
then ended.
(b) Except for (i) those liabilities specifically reflected or
reserved against on the VUN balance sheet as of September 30, 1997 (the "VUN
Balance Sheet"), (ii) those current liabilities for trade or business
obligations incurred since September 30, 1997 in connection with the purchase of
goods or services in the ordinary course of VUN's business and consistent with
past practices (none of which is, individually or in the aggregate, material and
none of which is for breach of contract, breach of warranty, tort or
infringement), (iii) those liabilities arising under any Contract (none of which
liabilities is for breach of contract, breach of warranty, tort or infringement)
or (iv) those matters otherwise disclosed on Schedule 3.8 (none of which
liabilities, except as stated in a Schedule hereto, is for breach of contract,
breach of warranty, tort or infringement), VUN does not have, as of the date
hereof, any direct or indirect indebtedness, liabilities, claims, losses,
damages, deficiencies, obligations (including, without limitation, the
obligation to indemnify any other Person for any liabilities or expenses which
have been or may in the future be
9.
<PAGE>
incurred by or asserted against such other Person, or responsibilities, known or
unknown, liquidated or unliquidated, accrued, absolute, contingent or otherwise,
and whether or not of a kind required by generally accepted accounting
principles to be set forth on a financial statement), which individually or in
the aggregate are material to the condition (financial or otherwise), assets,
liabilities, business or operations of VUN. To the best knowledge of VUN, there
are no circumstances, conditions, events or arrangements which may hereafter
give rise to any liabilities of VUN except in the ordinary course of business or
as otherwise set forth in this Section 3.8 or in a Schedule to this Agreement.
3.9 Absence of Certain Changes. Except as set forth on Schedule 3.9,
--------------------------
since September 30, 1997, VUN has conducted its business in the ordinary course
consistent with past practices, and there has not been:
(a) any Material Adverse Change or any event, occurrence, development
or state of circumstances or facts which could reasonably be expected to result
in a Material Adverse Change;
(b) any dividend or other distribution declared or paid with respect
to any of the VUN Common Stock;
(c) any loan or forgiveness of indebtedness to any holder of VUN
Common Stock or any Affiliate thereof;
(d) any bonus, salary or other compensation paid or agreed to be paid
to any employee except in accordance with Schedule 3.17 hereto;
(e) any incurrence of indebtedness for borrowed money;
(f) any creation or other incurrence of any Encumbrance on any of its
assets;
(g) any transaction, Contract entered into, or commitment made, by VUN
relating to its business, operations or any of its assets (including the
acquisition or disposition of any assets) or any relinquishment by VUN of any
contract or other right, in either case other than transactions and commitments
in the ordinary course of business consistent with past practices and those
contemplated by this Agreement (other than payments of compensation); or
(h) any transfer of any assets of VUN to any Person who is a
shareholder or other Affiliate of VUN.
3.10 Title to Assets. VUN has good and marketable title to the Assets
---------------
owned or stated to be owned by VUN, free and clear of all Encumbrances except:
(i) as set forth in the VUN Financial
10.
<PAGE>
Statements, (ii) Encumbrances for current taxes not yet due, (iii) Encumbrances
incurred in the ordinary course of business, (iv) Encumbrances that are not
substantial in character, amount or extent (individually or collectively) and
that do not (individually or collectively) materially detract from the value, or
interfere with present use, of the property subject thereto or affected thereby,
or otherwise materially impair the conduct of business of VUN, or (v) as set
forth on Schedule 3.10. All of the material properties and assets used by VUN
or held by VUN, other than any leased assets listed on Schedule 3.10, are owned
by VUN, free and clear of any Encumbrances except as set forth on Schedule 3.10.
3.11 Real Property. Schedule 3.11 sets forth a true and complete list of
-------------
all leaseholds owned by VUN. VUN has valid leasehold interest in such
leaseholds, free and clear of all Encumbrances, except: (i) for rights of
lessors and such matters that are reflected in the relevant lease, (ii) current
Taxes not yet due and payable, (iii) Encumbrances of public record, (iv)
Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property, and (v) as set forth
on Schedule 3.11.
3.12 Litigation. Other than as set forth on Schedule 3.12, there is no
----------
action, suit, investigation, hearing or proceeding pending against or, to the
best knowledge of VUN, threatened against or affecting, VUN, any of its
officers, directors, or shareholders, its business or any assets or any Contract
before any court or arbitrator or any governmental body, agency official, which
would have a Material Adverse Effect, or in any manner challenges or seeks to
prevent, enjoin, alter or delay the transactions contemplated by this Agreement.
There are no outstanding judgments against VUN.
3.13 Contracts. Each Contract of VUN is a valid and binding agreement of
---------
VUN, and is in full force and effect, and VUN is not in default (whether with or
without the passage of time or the giving of notice or both) under the terms of
any such Contract. VUN has not assigned, delegated, or otherwise transferred
any of its rights or obligations with respect to any Contracts, or granted any
power of attorney with respect thereto. Schedule 3.13 is a true and correct
list of all Contracts involving an outstanding monetary obligation greater than
$25,000 or with a remaining term greater than one year.
3.14 Licenses and Permits. Schedule 3.14 correctly lists each material
--------------------
license, franchise, permit or other similar authorization affecting, or relating
in any way to VUN's business, together with the name of the governmental agency
or entity issuing such license or permit (the "VUN Permits"). The VUN Permits
are valid and in full force and effect and, assuming the related VUN Consents
have been obtained prior to the Closing,
11.
<PAGE>
will not be terminated or impaired or become terminable as a result of the
transactions contemplated by this Agreement.
3.15 Compliance with Laws. VUN is not in material violation of, has not
--------------------
violated, and is neither under investigation with respect to nor has been
threatened to be charged with or given notice of any violation of, any law,
rule, statute, ordinance or regulation, or judgment, order or decree entered by
any court, arbitrator or governmental authority, domestic or foreign, materially
applicable to VUN's assets or the conduct of its business.
3.16 Intangible Property.
-------------------
(a) Schedule 3.16 sets forth all material VUN Intangible Property and
identifies each material contract to which VUN is a party relating to any item
of VUN Intangible Property. No Contract requires VUN to (or will require VCI
to) pay, or entitles it to receive any material royalty, license fee, or other
compensation with respect to the VUN Intangible Property. Except as set forth
on Schedule 3.16, no VUN Intangible Property development was funded by a third
Person (other than any shareholder of VUN) or was conducted by or as a joint
venture, in partnership, or otherwise in collaboration, with any other Person
(except an employee solely in his or her capacity as such). The transactions
contemplated hereby will not adversely affect in any manner any item or part of
the VUN Intangible Property or the nature or usefulness thereof in the hands of
VCI.
(b) All VUN Intangible Property and all federal, state and foreign
registrations with respect thereto, and all applications therefor are valid and
in full force and effect and are not subject to any taxes, maintenance fees or
actions.
(c) None of the VUN Intangible Property which is purportedly an asset
of VUN was developed or conceived by any VUN employee, officer or director while
employed by any other Person and no Selling Shareholder has violated any
agreement with any former employer which pertains to any of such property.
3.17 Employees.
---------
(a) Schedule 3.17 sets forth a true and complete list of the names,
titles, annual salaries or wage rates and other compensation and office location
of all employees of VUN, indicating part-time and full-time employment, and all
changes in salaries and wage rates per employee since December 31, 1996.
(b) Except as set forth on Schedule 3.17, VUN is not a party to or
subject to any employment contract, consulting agreement, collective bargaining
agreement, confidentiality agreement restricting the activities of VUN, non-
competition
12.
<PAGE>
agreement restricting the activities of VUN, or any similar agreement.
3.18 Prepaids. Except as set forth on Schedule 3.18, VUN has not received
--------
any material payments with respect to any services to be rendered or goods to be
provided after the Closing.
3.19 Taxes.
-----
(a) VUN has filed all federal and foreign income tax returns, all
state and local franchise and income tax, real and personal property tax, sales
and use tax, premium tax, excise tax, employment tax and other tax returns of
every character required to be filed by it and has paid in full all Taxes
(including, without limitation, all tax deposits), together with any interest
and penalties owing in connection therewith, shown on such returns to be due in
respect of the periods covered by such returns, other than Taxes which are being
contested in good faith and for which adequate reserves have been established.
Adequate provision has been made in the Books and Records of VUN and, to the
extent required by generally accepted accounting principles, reflected in the
VUN Financial Statements, for all Tax liabilities, including interest or
penalties, whether or not due and payable and whether or not disputed, with
respect to any and all Taxes for the periods covered by the VUN Financial
Statements and for all prior periods. Schedule 3.19 sets forth the date or
dates through which the Internal Revenue Service has examined the federal income
taxes of VUN and the date or dates through which any foreign, state, local or
other taxing authority has examined any other tax returns of VUN. Schedule 3.19
also contains a complete list of each year for which any federal, state, local
or foreign tax authority has obtained or has requested an extension of the
statute of limitations from VUN and lists each tax case of VUN currently pending
in audit, at the administrative appeals level or in litigation. Schedule 3.19
further lists the date and issuing authority of each statutory notice of
deficiency, notice or proposal assessment and revenue agent's report issued to
VUN within the last twelve months. Except as set forth on Schedule 3.19, to
VUN's best knowledge, neither the Internal Revenue Service nor any foreign,
state, local or other taxing authority has, during the past three years,
examined or is in the process of examining any federal, foreign, state, local or
other tax returns of VUN. Neither the Internal Revenue Service nor any foreign,
state, local or other taxing authority is now asserting or threatening to assert
any deficiency or claim for additional taxes (or interest thereon or penalties
in connection therewith) except as set forth on Schedule 3.19.
(b) VUN has not made any requests for rulings, and VUN has not
received any subpoenas or requests for information, or notices of proposed
reassessment of any property owned or
13.
<PAGE>
leased by VUN. There are no Liens for Taxes upon any property or assets of VUN
(other than for real property taxes, not yet due, on premises leased by VUN for
which VUN will be liable under the terms of the applicable leases).
(c) VUN has delivered to VCI true and complete copies of all federal,
state and foreign income tax returns (together with any Revenue Agent's Reports)
filed by VUN relating to its operations for taxable years ended 1995 and 1996.
(d) VUN has not filed a consent pursuant to Section 341(f) of the
Code, and has not filed, and would not be deemed to have filed, any election
under Section 338 of the Code.
(e) VUN has never been, nor is VUN currently, bound by or subject to
any obligation under any agreement relating to the sharing of any liability for,
or payment of, Taxes with any other Person.
(f) VUN has withheld or will withhold, and has paid over or will pay
over to applicable taxing authorities amounts from its employees and has filed
or will file all federal, foreign, state, and local returns and reports with
respect to employee income tax withholding and social security and unemployment
Taxes for all periods (or portions thereof) ending on or before the Effective
Time, in compliance with the provisions of the Code and other applicable
federal, foreign, state and local laws.
3.20 Environmental Compliance. VUN has not received any notice that it or
------------------------
any of its properties have not been or are not now in complete compliance with
all applicable environmental law.
3.21 Labor and Employment Matters.
----------------------------
(a) Except as set forth on Schedule 3.21, as of the date hereof;
(1) The employment of each employee of VUN may be terminated
immediately by VUN, except as otherwise provided by statute or decisional
authority;
(2) To VUN's best knowledge, no key executive employee of VUN
and no group of employees of VUN has plans to terminate his or her employment at
or prior to the Closing, whether or not as a result of the transactions
contemplated herein;
(3) VUN has not had any material labor relations problems; and
14.
<PAGE>
(4) VUN has complied in all material respects with all collective
bargaining agreements and all applicable laws and orders relating to the
employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of Taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate governmental authorities, or is holding for payment not yet due to
such governmental authorities, all amounts required to be withheld from such
employees of VUN and is not liable for any arrears of wages, Taxes, penalties or
other sums for failure to comply with any of the foregoing. No present or
former employee, officer or director of VUN has notified VUN that he or she has
or will have at the Effective Time, any claim against VUN for any matter,
including but not limited to (i) overtime pay for work done through the
Effective Time; (ii) wages or salary for the work done through the Effective
Time; (iii) vacation time off or pay in lieu of vacation time off for the period
through the Effective Time; (iv) any violation of any statute, ordinance or
relation relating to minimum wages or maximum hours or work-place conditions; or
(v) injuries or other damages which are not fully covered by VUN's insurance
policies; except, in the case of clauses (i) and (ii), for amounts accrued in
the current pay period that are not yet due and payable, and in the case of
clause (iii), for vacation accrued in accordance with VUN's policies and set
forth in Schedule 3.21, which its employees have not yet taken.
(b) Except as disclosed on Schedule 3.21, as of the date hereof, VUN
has not received any notice of any:
(1) unfair labor practice complaint against VUN pending before
theNational Labor Relations Board or any state or local agency;
(2) pending labor strike or other material labor trouble
affecting VUN;
(3) material labor grievance pending against VUN;
(4) pending representation question respecting the employees of
VUN; or
(5) pending arbitration proceedings arising out of or under any
collective bargaining agreement to which VUN is a party.
(c) In addition: (i) none of the matters specified in clauses
(b) (1)through (5) is threatened against VUN; (ii) no union organizing
activities have taken place with respect to VUN; and (iii) no basis exists for
which a claim may be made under any collective bargaining agreement to which VUN
is a party.
15.
<PAGE>
3.22 Pension and Benefit Plans.
-------------------------
(a) All accrued obligations of VUN applicable to its employees,
whether arising by operation of law, by contract, by past custom or otherwise,
for payments by VUN to trusts or other funds or to any governmental agency, with
respect to unemployment compensation benefits, social security benefits or any
other benefits for its employees with respect to the employment of said
employees through the date hereof have been paid or adequate accruals therefor
have been made on, as applicable, the Books and Records of VUN and the VUN
Financial Statements.
(b) Except as disclosed on Schedule 3.22, as of the date hereof:
(1) Neither VUN nor any of its ERISA Affiliates maintains or has
any obligations to contribute to, or has in effect or has committed to adopt,
any Pension Plan or any Welfare Plan;
(2) Each ERISA Plan conforms in all material respects to all
applicable laws and orders, including ERISA and the applicable provisions of the
Code. All notices, reports, returns, applications and disclosures have been
timely made which are required to be made to the Internal Revenue Service, the
U.S. Department of Labor, the Pension Benefit Guaranty Corporation, any
participants in the ERISA Plans, any trustee, or any insurer with respect to the
ERISA Plans;
(3) VUN and its ERISA Affiliates have made or provided for (with
fully-funded reserves) all contributions heretofore required to have been made
under all of the ERISA Plans, and will, by the Closing, have made or provided
for (with fully-funded reserves) all contributions required to be made on or
before the Closing under all such plans;
(4) No ERISA Plan nor any trust created thereunder, nor any
trustee or administrator thereof has engaged in a transaction which may subject
any of such ERISA Plans, any such trust, or any party dealing with such ERISA
Plans or any such trust, to the Tax or penalty on prohibited transactions
imposed by Section 4975 of the Code or to a civil penalty imposed by Section 502
of ERISA;
(5) There are no material actions, claims or lawsuits which have
been asserted or instituted against the assets of any of the trusts under the
ERISA Plans, and no basis for such action, claim or lawsuit exists, and no such
action, claim or lawsuit has been threatened;
(6) VUN has not agreed to indemnify any other party for any
liabilities or expenses which have been or may in
16.
<PAGE>
the future be incurred by or asserted against such other party in respect of any
ERISA Plan;
(7) Each Pension Plan constituting one of the ERISA Plans is qualified
under Section 401 of the Code, each of the trusts maintained with respect
thereto is exempt from federal income taxation under Section 501 of the Code,
and nothing has occurred which would cause the loss of such qualification or
exemption or the imposition of any penalty under Section 4971 of the Code;
(8) The assets of each Pension Plan constituting one of the ERISA
Plans (including Pension Plans maintained by an ERISA Affiliate) are sufficient
to pay all liabilities of the plan, including, without limitation, all
liabilities to pay benefits to any past or present participant or beneficiary in
such plan, any expense incurred in administering the plan, and any liabilities
for Taxes which may be imposed on the plan or on any trust maintained in
connection with the plan;
(9) The value of all accrued benefits under each Pension Plan
constituting one of the ERISA Plans (including Pension Plans maintained by an
ERISA Affiliate) which is a "defined benefit plan" within the meaning of Section
3(35) of ERISA, including each "multi-employer plan" within the meaning of
Section 3(37) of ERISA, does not exceed, on an accrual basis, the aggregate
value of the assets of each such plan;
(10) There has been no "reportable event," within the meaning of
Section 4043(b) of ERISA, with respect to any Pension Plan which constitutes one
of the ERISA Plans since the effective date of Section 4043(b) of ERISA;
(11) The transaction contemplated by this Agreement will not result in
a reportable event, within the meaning of ERISA Section 4043, other than a
reportable event with respect to which (i) the ERISA Section 4043 reportable
event notice requirement has been waived or (ii) the Pension Benefit Guaranty
Corporation will not apply a penalty for failure to satisfy the reportable event
notice requirement;
(12) Neither VUN nor any of its ERISA Affiliates has any liability to
the Pension Benefit Guaranty Corporation pursuant to Title IV of ERISA in
respect of any Pension Plan constituting one of the ERISA Plans (including
Pension Plans maintained, or formerly maintained, by an ERISA Affiliate);
(13) Neither VUN nor any of its ERISA Affiliates maintains or has any
obligation to contribute to any multi-employer plan;
(14) Neither VUN nor any of its ERISA Affiliates has terminated a
defined benefit plan or multi-employer plan or
17.
<PAGE>
suffered or otherwise caused a "complete withdrawal" or "partial withdrawal" as
such terms are respectively defined in Sections 4203 and 4205 of ERISA from any
multi-employer plan. Since April 1, 1979, neither VUN nor any of its ERISA
Affiliates has complied with Section 4204 of ERISA in order to avoid any such
"complete withdrawal" or "partial withdrawal";
(15) The transaction contemplated by this Agreement will not result in
a VUN liability for severance or termination pay or result in increased employee
benefits becoming payable to any employees of VUN;
(16) Neither VUN nor any of its ERISA Affiliates has any unpaid
liability in respect of any employee for any contributions and/or premiums due
under any Welfare Plan constituting one of the ERISA Plans;
(17) Neither VUN nor its ERISA Affiliates has any liability as to any
benefits to which any employee may be entitled under any Welfare Plan
constituting one of the ERISA Plans, whether for benefits due or claims filed;
and
(18) VUN does not maintain any health or life insurance plan that
provides for continuing benefits or coverage for any participant or any spouse,
dependent or beneficiary under such plan after termination of employment, other
than as may be required under Section 4980B of the Code and regulations
thereunder ("COBRA"). VUN is in compliance with the COBRA notice and
continuation coverage requirements with respect to Plans maintained by VUN.
(c) True, correct and complete copies of the following documents, with
respect to each of the ERISA Plans, have been delivered to VCI:
(1) Each ERISA Plan document, employment contract, policy, procedure
or other governing instrument relating to an ERISA Plan, including all
amendments, supplements, collective bargaining agreements, letters, memoranda,
understandings and any other document reasonably necessary to reflect the terms
and conditions of each ERISA Plan.
(2) The most recent summary plan description of each ERISA Plan for
which a summary plan description is required under ERISA, and summaries of
material modification thereto.
(3) All instruments under which the assets of any ERISA Plan are held
or managed and benefits provided, including, but not limited to, insurance
contracts, trust agreements, custodial contracts and investment management
agreements.
18.
<PAGE>
(4) The two most recent Forms 5500, 5500-C or 5500-R for each ERISA
Plan for which such filing is required, with all attachments and schedules
thereto.
(5) The two most recent annual financial statements for each ERISA
Plan, if not included with such Form 5500 (5500-C or 5500-R).
(6) The most recent actuarial valuation report for each ERISA
Plan (as applicable).
(7) With respect to each ERISA Plan that has received a
determination letter under Section 401(a) of the Code, and any voluntary
employee benefit association trust that has received a determination letter
under Section 501(c) of the Code, the most recent Internal Revenue Service
determination letter (including any letter concerning the tax-exempt status of
any trust under Section 501(a) of the Code), the application submitted when
requesting such determination letter, and any subsequently filed determination
letter request.
(d) All Pension Plans shall be terminated by VUN prior to the
Effective Time.
3.23 Insurance. Schedule 3.23 sets forth a true and correct list of all
---------
policies or binders of fire, liability, workers' compensation, vehicular or
other insurance held by or on behalf of VUN specifying the insurer, the policy
number or covering note number with respect to binders, and describing each
pending claim thereunder of more than $5,000. Such policies and binders are in
full force and effect. No such policy is terminable or cancelable by the
insurer by virtue of the consummation of the transactions contemplated herein.
3.24 Books and Records. VUN has heretofore furnished or made available to
-----------------
VCI for its examination the following, each of which is, and will be maintained
so as to remain until the Closing, accurate and complete in all material
respects:
(a) copies of the Certificate of Incorporation and Bylaws, as in
effect on the date of this Agreement;
(b) the minute books of VUN containing all proceedings, consents,
actions and meetings of its shareholders and Boards of Directors;
(c) copies of all VUN Permits, orders and consents with respect to
VUN's securities issued by any administrative agency or governmental body
regulating the issuance or transfer of such securities and all applications for
such permits, orders and consents;
19.
<PAGE>
(d) the stock transfer books of VUN setting forth all transfers of
its securities;
(e) copies of all agreements and documents referred to in any VUN
Disclosure Schedule;
(f) all other Books and Records of VUN; and
(g) an accurate list of all of the incumbent officers and directors
of VUN.
3.25 Inventory. The inventory of VUN reflected on the VUN Balance Sheet,
---------
as well as other inventory items acquired since the date of the VUN Balance
Sheet that are now the property of VUN, are of such quality and held in such
quantities as are being used and will be usable and salable or rentable in the
ordinary course of the business of VUN. The inventory excludes slow-moving
items and obsolete items, and are recorded at cost and amortized over their
estimated life with no provision for salvage value. Videocassettes which 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
nine months on an accelerated basis, the fourth through ninth copies of each
title per store are amortized on an accelerated basis, and copies one through
three of each title per store are amortized as base stock. Since the date of
the VUN Balance Sheet, VUN has continued to replenish its inventories in a
normal and customary manner consistent with practice prevailing in the retail
video sales and rental industry.
3.26 Accuracy and Provision of Information. None of the documents or
-------------------------------------
other information made available to VCI or its Affiliates, attorneys,
accountants, agents or representatives in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained therein not misleading. VUN has provided VCI all material information
regarding its business and operations.
3.27 Shareholder Approval. The Selling Shareholders holding 100% of the
--------------------
shares of VUN Common Stock have approved this Agreement and the transactions
contemplated hereby.
3.28 Investor Representations. Each Selling Shareholder who receives VCI
------------------------
Common Stock in connection with the transactions contemplated by this Agreement
represents that (i) he is an accredited investor as defined in Regulation D
under the Securities Act, or (ii) by reason of his business and financial
experience, and the business and financial experience of those persons
unaffiliated with VCI retained by him, if any, to advise him with respect to his
investment in the shares of VCI Common Stock, such Selling Shareholder together
with such advisers have
20.
<PAGE>
such knowledge, sophistication and experience in business and financial matters
as to be capable of evaluating the merits and risk of the prospective
investment, and that he is acquiring the shares of VCI Common Stock for his own
account or for one or more separate accounts maintained by him, if any, for
investment and not with a view to the distribution thereof except in compliance
with the Securities Act or an exemption available thereunder. Each Selling
Shareholder who receives VCI Common Stock in connection with the transactions
contemplated by this Agreement understands and agrees that the shares of VCI
Common Stock have not been registered under the Securities Act and may be resold
only if registered pursuant to the applicable provisions of the Securities Act
or if an exemption from registration is available.
3.29 No Brokers. Neither VUN or the Selling Shareholders nor any of their
----------
respective Representatives or Affiliates has employed or made any agreement with
any broker, finder or similar agent, person or firm or incurred any liability
for any finder's fee, brokerage fees or commission or similar payment in
connection with the transactions contemplated hereby which would result in any
liability of VUN, VCI or Video Sub.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VCI
-------------------------------------
Except as set forth in a Disclosure Schedule delivered by VCI hereunder,
and except for the transactions contemplated by this Agreement, VCI hereby
represents and warrants to VUN as follows:
4.1 Organization of VCI and Video Sub. Each of VCI and VCI Sub is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and Colorado, respectively, has full corporate power
and authority to conduct its business as it is presently being conducted and to
own, lease and operate its properties and assets, and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not result in a Material Adverse Change to VCI or its business.
4.2 VCI and Video Sub Capital Stock. The authorized capital stock of VCI
-------------------------------
consists solely of 20,000,000 shares of common stock, $.01 par value per share,
9,773,927 shares of which were issued and outstanding as of the date of this
Agreement. No shares of any other class or series of capital stock are
authorized, issued or outstanding.
The authorized capital stock of Video Sub consists of 1,000 shares of
common stock, 100 shares of which were issued and out-
21.
<PAGE>
standing as of the date of this Agreement. All of the issued and outstanding
shares of common stock of Video Sub are owned by VCI free and clear of all
Encumbrances. All of the outstanding shares of common stock of Video Sub have
been duly and validly authorized and issued and are fully paid and
nonassessable.
4.3 Authorization Relative to this Agreement. The execution, delivery
----------------------------------------
and performance by VCI and Video Sub of this Agreement and all of the other VCI
Documents and the consummation by VCI and Video Sub of the transactions
contemplated hereby and thereby are within the corporate powers of VCI and Video
Sub and have been duly authorized by all necessary corporate action on the part
of VCI and Video Sub. This Agreement is, and as of the Closing the other VCI
Documents shall be, the legal, valid and binding obligations of VCI and Video
Sub, enforceable against VCI and Video Sub, as the case may be, in accordance
with their respective terms.
4.4 No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement or the Articles of Merger nor the consummation of the transactions
contemplated hereby or thereby will result in (a) a violation of or a conflict
with any provision of the Certificate of Incorporation, Bylaws or other
organizational document of VCI, (b) a breach of, or a default under, any
Material term or provision of any Material Contract, indebtedness, Encumbrance,
Permit or concession to which VCI is a party or is subject or by which any
assets of VCI are bound, including, without limitation, any such breach or
default which would interfere in any way with its ability to consummate the
transactions contemplated by this Agreement or the Articles of Merger, (c) a
Material violation by VCI of any statute, rule, regulation, ordinance, code,
order, judgment, writ, injunction, decree or award, including any violation
which would interfere with its ability to consummate the transactions
contemplated by this Agreement or the Articles of Merger (d) the imposition of
any Material Encumbrance, restriction or charge on the business or assets of
VCI, or (e) give rise to any right of termination, cancellation or acceleration
under any Material Contract or other agreement to which VCI is a party or by or
to which they or any of their Material assets or properties may be bound or
subject.
4.5 Litigation. There are no Actions pending, or to the best of VCI's
----------
knowledge, threatened (a) against, related to or affecting VCI, which Actions,
if determined adversely to VCI, would be reasonably likely to have a Material
adverse effect on VCI, or (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement, including any derivative suits brought by or on
behalf of VCI. VCI is not in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against VCI involving amounts in excess
of $100,000. For purposes of this Section 4.5, an Action will be deemed to have
an "adverse effect" on VCI if in connection with
22.
<PAGE>
such Action, VCI or Video Sub is reasonably likely to pay $500,000 or more in
the aggregate with respect to the defense, settlement, dismissal or other
disposition or satisfaction of such Action.
4.6 Board Approval. The Board of Directors of VCI approved and adopted
--------------
this Agreement.
4.7 Validity of Shares Issued to Selling Shareholders. The shares of VCI
-------------------------------------------------
Common Stock to be issued to the Selling Shareholders hereunder will, when
issued and paid for in accordance with this Agreement, be duly and validly
issued, nonassessable shares free and clear of any and all Encumbrances (other
than Encumbrances which may exist prior to the Closing on the VUN Common Stock),
and will be issued in compliance with all applicable federal and state
securities laws.
4.8 VCI Shareholder Approval. No approval of the shareholders of VCI is
------------------------
required for the consummation of the transactions under this Agreement.
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
VUN and VCI each covenant with the other for the period from the date
hereof through the Effective Time as follows:
5.1 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Time, VUN and VCI shall each give prompt notice to the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
VUN of its business that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.12 or that relate to
the consummation of the transactions contemplated by this Agreement.
5.2 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the
23.
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performance of obligations hereunder, each of the parties hereto acknowledges
that it will have access to confidential information relating to the other
parties. Each party shall treat such information as confidential, preserve the
confidentiality thereof and not disclose such information, except to its
respective Representatives and Affiliates in connection with the transactions
contemplated hereby. Each party agrees to maintain in confidence, and not to
disclose to any third party, any ideas, methods, developments, inventions,
improvements and business plans and information which are the confidential
information of the other parties. If, however, confidential information is
disclosed, the disclosing party shall immediately notify the other parties in
writing and take all reasonable steps required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Time or the Termination Date, all confidential information shall remain the
property of the party who originally possessed such information. In the event
of the termination of this Agreement for any reason whatsoever, VUN shall return
to VCI, and VCI shall return to VUN, all documents, work papers and other
material (including all copies thereof) obtained from the other party in
connection with the transactions contemplated hereby and will use all reasonable
efforts, including, without limitation, instructing its employees and others who
have had access to such information, to keep confidential and not to use any
such information, unless such information is now, or is hereafter disclosed,
through no act or omission of such party, in any manner making it available to
the general public. If VCI or any of its Affiliates is required by legal
process or by operation of law to disclose any confidential information in
anticipation of a possible acquisition of VUN by VCI or any such Affiliate, VCI
shall provide VUN with written notice of such request at least 48 hours prior to
making such disclosure (or, if it is not practicable to give at least 48 hours'
prior notice, written notice shall be given as promptly as practicable) and,
without any need to obtain the consent of such other parties, shall be entitled
to make such disclosure. If any party is compelled by legal process to disclose
any confidential information, such party shall provide the other parties with
prompt written notice of such request and, without any need to obtain the
consent of such other parties, shall be entitled to make such disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such
24.
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information to, deliver to such other party all documents, work papers and other
material (including copies of extracts and summaries thereof) obtained by or on
behalf of any of them directly or indirectly as a result of this Agreement or in
connection herewith, whether so obtained before or after the execution hereof.
ARTICLE VI
ADDITIONAL COVENANTS OF VUN
---------------------------
6.1 Conduct of Business. From the date hereof through the Effective Time
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination Date"), except as contemplated or as may be
required by this Agreement, or as set forth on Schedule 6.1, or any other
Schedule made as part of this Agreement, or as consented to by VCI in writing,
VUN shall diligently carry on its business and in the ordinary course only, and
will use its best efforts to preserve its present business organization intact
and to keep available the services of its present officers, agents or employees
(nothing herein implying an obligation of VUN to maintain or retain any specific
officer, agent or employee), and preserve its present relationships with
customers and other Persons having business dealings with it, and will not take
any action inconsistent with this Agreement or with the consummation of the
transactions contemplated hereby. Without limiting the generality of the
foregoing, VUN shall not, except as specifically contemplated by this Agreement:
(a) change or amend its Certificate of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) Material
Contract, except in the ordinary course of business, or (ii) any Contract
involving $10,000 or more;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any Material assets, or any interests therein,
and, without limiting the generality of the foregoing, VUN will maintain and
sell or rent inventory consistent with its past practices and in accordance with
any other provision in this Agreement;
(d) incur any obligations or liability for long-term indebtedness, or
incur any other obligation or liability of $10,000 or more except in the
ordinary course of business;
(e) (i) grant any bonus, severance or termination pay or increase
in any manner the compensation or fringe benefits of any employee or pay any
benefit not required by any existing VUN Employee Plan or policy;
25.
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(ii) make any change in the key management structure of VUN,
including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any VUN Employee Plan,
agreement (including, without limitation, any collective bargaining or
employment agreement), trust, fund or other arrangement for the benefit or
welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
Material assets or business of any corporation, partnership, association or
other business organi zation or division thereof;
(g) declare, set aside, make or pay any dividend or other
distribution in respect of VUN's capital stock;
(h) fail to expend funds for budgeted capital expenditures or
commitments that have been disclosed to VCI;
(i) willingly allow or permit any of VUN's insurance policies to be
suspended, impaired or canceled;
(j) fail to pay its accounts payable and any debts owed or obligations
due to it, or pay or discharge when due any liabilities, in the ordinary course
of business;
(k) enter into, renew, modify or revise any agreement or transaction
with any of its Affiliates;
(l) fail to maintain any assets in substantially their current state
of repair, excepting normal wear and tear or fail to replace consistent with
VUN's past practice inoperable, worn-out or obsolete or destroyed assets;
(m) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
(n) make any Material income tax election or settlement or compromise
with tax authorities;
(o) fail to comply in any Material respect with all laws applicable
to it;
(p) intentionally do any other act which would cause any
representation or warranty of VUN in this Agreement to be or become untrue in
any Material respect;
26.
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(q) issue any shares of VUN Common Stock or any options, warrants,
rights or other securities convertible into, or exercisable or exchangeable for,
VUN Common Stock; or
(r) enter into any agreement, arrangement or under standing or
otherwise become obligated, to do any action prohibited hereunder.
6.2 Public Statements and Press Releases. Except as pro vided for
------------------------------------
hereinbelow, VUN and the Selling Shareholders shall not from and after the date
hereof make, issue or release any public announcement, press release, statement
or acknowledgment of the existence of, or reveal publicly the terms, conditions
and status of, the transactions provided for herein, without the prior written
consent of VCI as to the content and time of release of such statement or
announcement.
6.3 No Solicitation. Prior to the Effective Time (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither VUN nor any
of its Affiliates or Representatives shall directly or indirectly solicit or
initiate any discussions, offers or negotiations with, or participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise encourage any effort or attempt by, any
Person other than VCI, concerning any Alternative Transaction with respect to
VUN. VUN shall promptly notify VCI if any proposal, offer, inquiry or other
contact is received by VUN in respect of an Alternative Transaction, and shall
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep VCI informed on a current basis of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations.
6.4 Delivery of VUN Common Stock. The Selling Shareholders shall deliver
----------------------------
stock certificates representing all issued and outstanding capital stock of VUN
at or prior to the Effective Time.
6.5 Noncompetition Agreement. At or prior to the Effective Time, G.
------------------------
Wayne Bailey shall have executed a noncompetition agreement in favor of VCI
substantially in the form of Exhibit D hereto (the "Noncompetition Agreement").
6.6 Lock-Up. The Selling Shareholders will enter into an agreement with
-------
VCI restricting the resale or disposal, for a period of 180 days from the
Closing, of any VCI Common Stock issued to them pursuant to the Merger.
6.7 Insurance. From the date hereof through the Effective Time, VUN
---------
shall maintain in force (including necessary renewals thereof) the insurance
policies listed on Schedule 3.23.
27.
<PAGE>
6.8 Reporting and Compliance With Law. From the date hereof through the
---------------------------------
Effective Time, VUN shall duly and timely file all tax returns required to be
filed with governmental authorities and duly observe and conform in all material
respects to all applicable laws and orders.
6.9 Approval of Shareholders of VUN. VUN shall take all action
-------------------------------
necessary, in accordance with the Colorado Law and its Certificate of
Incorporation and Bylaws, to obtain the approval of 100% of the VUN Common Stock
for this Agreement and the Articles of Merger and the transactions contemplated
hereby and thereby, and VUN shall provide the Selling Shareholders with full
disclosure of all terms of this transaction.
6.10 Termination of Employee Benefit Plans Prior to Effective Time. VUN
-------------------------------------------------------------
agrees that its employee benefit plans, pro grams and arrangements (in addition
to those for non-employee directors) (and if required by such plans, programs or
arrange ments, any agreements entered thereunder and awards and options granted
thereunder) shall be terminated or amended, to the extent necessary or
appropriate, to reflect the transactions contemplated by this Agreement.
6.11 Access to Information. VUN shall afford VCI and its Representatives
---------------------
reasonable access during normal business hours, throughout the period prior to
the earlier of the Effective Time or the Termination Date (as hereinafter
defined), to its personnel, facilities, contracts, commitments, books, computer
software application systems, files and records and to furnish such financial
and operating data and other information with respect to its business, assets
and properties, and shall use its best efforts to cause its Representatives to
furnish promptly to VCI and its Representatives such additional financial and
operating data and other information as to its business and properties as the
other or its duly authorized Representatives may from time to time reasonably
request.
ARTICLE VII
ADDITIONAL COVENANTS OF VCI
---------------------------
7.1 Indebtedness.
------------
(a) VCI shall pay at the Closing the entire outstanding principal
balance and accrued interest due from VUN to Norwest Bank Colorado, N.A.
("Norwest"), which amount shall not exceed $130,000, or shall cause Norwest to
release G. Wayne Bailey from his personal guaranty of such indebtedness.
(b) VCI shall repay all outstanding indebtedness, including all
accrued and unpaid interest of VUN to Ingram Entertainment Corporation evidenced
by that certain promissory note dated November 21, 1996 in the original amount
of $318,960.66.
28.
<PAGE>
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF VUN
------------------------------------
AND THE SELLING SHAREHOLDERS
----------------------------
The obligations of VUN and the Selling Shareholders to con summate the
transactions provided for hereby are subject, in the discretion of VUN, to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any of which may be waived by VUN:
8.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of VCI contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Effective Time as if such
representations and warranties were made at and as of the Effective Time, and
VCI shall have performed all agreements and covenants required hereby to be
performed by it prior to or at the Effective Time.
8.2 Permits. All Material Permits, waivers and approvals from
-------
governmental authorities and other parties necessary to permit VCI to consummate
the transactions contemplated hereby shall have been obtained.
8.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
8.4 No Material Adverse Change. Since January 31, 1997, there shall not
--------------------------
have occurred any change in the business, financial condition or prospects of
VCI taken as a whole, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, resulted in a Material Adverse
Change to the business, financial condition or prospects of VCI.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF VCI
------------------------------------
The obligations of VCI to consummate the transactions provided for hereby
are subject, in the discretion of VCI, to the satisfaction, at or prior to the
Effective Time, of each of the following conditions, any of which may be waived
by VCI:
9.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of VUN contained in this Agreement shall be true and correct at and
as of the date of this Agreement, all representations and warranties of the
Selling Shareholders contained in this Agreement shall be true and
29.
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correct at and as of the Effective Time as if such representations and
warranties were made at and as of the Effective Time, and VUN and the Selling
Shareholders shall have performed all agreements and covenants required hereby
to be performed by them prior to or at the Effective Time, and VUN shall have
delivered a certificate signed by G. Wayne Bailey and the Selling Shareholders
to such effect.
9.2 Permits. All Permits, waivers and approvals from governmental
-------
authorities and other parties, necessary to permit VUN and the Selling
Shareholders to consummate the transactions contemplated hereby shall have been
obtained.
9.3 Opinion of Counsel. VUN shall have delivered to VCI an opinion of
------------------
Woodson L. Herring, counsel to VUN and the Selling Shareholders, in
substantially the form attached hereto as Exhibit E, which opinion shall set
forth, among other things, that all VUN Documents and the consummation by VUN of
the transactions contemplated hereby are within the corporate powers of VUN and
have been duly authorized by all necessary corporate and shareholder action on
the part of VUN and that all transactions contemplated by the Merger are being
consummated in accordance with Colorado Law.
9.4 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.5 No Material Adverse Change. Since September 30, 1997, there shall
--------------------------
not have occurred any change in the business, financial condition or prospects
of VUN, except for changes contemplated hereby or changes which have not had a
material adverse effect on the business, financial condition or prospects of
VUN.
9.6 Corporate Resolutions. VCI shall have received from VUN certified
---------------------
resolutions adopted by the Board of Directors of VUN approving this Agreement
and the transactions contemplated hereby.
9.7 Selling Shareholder Approval. This Agreement, the Articles of Merger
----------------------------
and the transactions contemplated hereby and thereby shall have been approved
and adopted by the vote or consent of 100% of the outstanding shares of VUN
Common Stock and an officer's certificate as to such approval shall be delivered
by VUN to VCI.
30.
<PAGE>
9.8 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of VUN shall have been delivered to
VCI.
9.9 Inventory. Notwithstanding any other provision in this Agreement,
---------
VUN's rental and sale inventory at the Closing will be not less than the amount
set forth on the VUN Balance Sheet as of December 31, 1997.
9.10 Store Lease Assignments. VCI shall have received from VUN copies of
-----------------------
all necessary third party consents to the assignment to VCI or the change of
control of VUN pursuant to the Merger of any store leases held by VUN. Other
than such consents, there are no other change of control or similar provisions
in any Contracts of VUN which would prevent the assignment to VCI of any store
leases held by VUN.
9.11 Due Diligence. VCI and its counsel shall have found satisfaction
-------------
with the results of their due diligence investigation of the financial
condition, assets and operations of VUN.
9.12 Financing. VCI shall have obtained or arranged for new financing in
---------
an amount of at least $8,000,000 on terms acceptable to VCI.
9.13 Limit on Liabilities. In no event shall the aggregate of all notes
---------------------
payable, loans payable, accounts payable and other liabilities of VUN
immediately prior to the Effective Time, including but not limited to the
matters referred to in subparagraphs (a) and (b) of Section 7.1, exceed
$600,000.
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
shareholders of VUN, this Agreement and the Merger and other transactions
contemplated hereby may be terminated at any time prior to the Effective Time:
(1) By mutual written consent of the Boards of Directors of VUN
and VCI;
(2) By either VUN or VCI, if the Closing shall not have occurred
on or before March 31, 1998 unless such date is extended by the mutual agreement
of the parties; provided however, that this provision shall not be available to
VUN if VCI has the right to terminate this Agreement under clause (4) of this
Section 10.1(a), and this provision shall not be available
31.
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to VCI if VUN has the right to terminate this Agreement under clause (3) of this
Section 10.1(a);
(3) By VUN, if there is a breach of any representation or warranty set
forth in Article IV hereof or any covenant or agreement to be complied with or
performed by VCI pursuant to the terms of this Agreement or an occurrence of any
event which results or would result in the failure of a condition set forth in
Article VIII to be satisfied at or prior to the Effective Time; or
(4) By VCI, if there is a breach of any representation or warranty set
forth in Article III hereof or of any covenant or agreement to be complied with
or performed by VUN or the Selling Shareholders pursuant to the terms of this
Agreement or the occurrence of any event which results or would result in the
failure of a condition set forth in Article IX to be satisfied at or prior to
the Effective Time.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any willful breach of this Agreement occurring
prior to or as a result of termination of this Agreement, and except that:
(1) Each party shall redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same; and
(2) The provisions of Sections 5.2 and 12.5 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the avail ability of
specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Time, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own
32.
<PAGE>
obligations. Any agreement on the part of a party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party by a duly authorized officer. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
10.4 Store Number 7. Within a reasonable time after Closing, VUN shall
--------------
complete the distribution of all assets and the elimination of all liabilities
with respect to VUN's Store Number 7 as expressly set forth in Schedule 10.4.
To the extent VCI incurs any liabilities or costs as a result of VUN's failure
to timely meet this post-Closing condition, the Selling Shareholders shall
indemnify VCI in accordance with Section 11.2. So long as Store Number 7 is
operated by the Selling Shareholders following the Closing, VCI shall, or shall
cause VUN to, continue to support Store Number 7 with Bonafide Systems software.
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of VUN, each Selling Shareholder and VCI contained
herein and the indemnification by the Selling Shareholders under Section 11.2
with respect thereto, and the indemnification by VCI under Section 11.3 with
respect thereto, shall survive the Effective Time for two years; provided,
however, that the representations and warranties of VUN and the Selling
Shareholders in Section 3.19 and the related indemnification by the Selling
Shareholders with respect thereto shall survive until the applicable statutes of
limitations have expired, and those contained in Section 3.5 and the related
indemnification by the Selling Shareholders with respect thereto shall survive
without any limitation in time. For purposes of this Article XI,
"representations" and "warranties" of VUN and each Selling Shareholder shall
mean collectively those representations and warranties of VUN and each Selling
Shareholder set forth in Article III, the Disclosure Schedules referenced
therein and "representations" and "warranties" of VCI shall mean collectively
those representations and warranties of VCI set forth in Article IV, the
Disclosure Schedules referenced therein.
11.2 Indemnification by the Selling Shareholders. Subject to, and in the
-------------------------------------------
manner described in, this Article XI, each Selling Shareholder, jointly and
severally, shall indemnify and hold harmless VCI and its Representatives and
Affiliates (the "VCI Indemnified Parties") to the fullest extent lawful, for the
respective periods of time specified in Section 11.1, from and against any and
all losses, damages, diminution in value, claims,
33.
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liabilities, actions and expenses (including, without limitation, costs of
investigating, preparing or defending any such claim or action, costs of
settlement, judgments, and reasonable legal fees and expenses), net of any
amounts actually received under any insurance policy as a result of such loss,
damage, diminution in value, claim, liability, action, or expense (collectively
"Losses") arising out of or in connection with the breach of any representation,
warranty, covenant or agreement of VUN or any Selling Shareholder contained in
this Agreement. The term "Losses" as used in this Section 11.2 is not limited
to matters asserted by third parties against a VCI Indemnified Party, but
includes Losses incurred or sustained by a VCI Indemnified Party in the absence
of third party claims.
11.3 Indemnification by VCI. Subject to, and in the manner described in,
----------------------
this Article XI, for a period of two years from the Effective Time, VCI shall
indemnify and hold harmless VUN and the Selling Shareholders and their
respective Representatives and Affiliates (the "VUN Indemnified Parties") to the
fullest extent lawful, from and against any and all Losses arising out of or in
connection with the breach of any representation, warranty, covenant or
agreement of VCI. The term "Losses" as used in this Section 11.3 is not limited
to matters asserted by third parties against a VUN Indemnified Party, but
includes Losses incurred or sustained by a VUN Indemnified Party in the absence
of third party claims.
11.4 Basket and Cap. VCI shall be indemnified by VUN and the Selling
--------------
Shareholders and the Selling Shareholders shall be indemnified by VCI, in each
case to the extent that the aggregate of all Losses, determined without regard
to whether any Loss was Material or not, exceeds $10,000 (the "Basket Amount"),
provided that in no circumstance shall the aggregate liability of the Selling
Shareholders or VCI exceed $1,500,000. Notwithstanding the foregoing, there
shall be no Basket Amount applicable to any Loss resulting from a breach of
representations and warranties in Sections 3.5 or 3.19 or from a failure to make
any adjustment or pay any amount payable under Article II.
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party for
which indemnification would be available under this Article XI (a "Claim"), the
indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be
34.
<PAGE>
represented by the indemnifying party, such indemnified party shall have the
right to assume control of the defense of such Claim and to have its expenses
reimbursed promptly with respect to such Claim to the extent entitled thereto.
In addition, in the event that such indemnifying party, within a reasonable time
after notice that any such Claim or the total Losses incurred exceeds the Basket
Amount, fails to defend any indemnified party, such indemnified party will (upon
further notice to such indemnifying party) have the right to undertake its
defense of such Claim for the account of such indemnifying party and to have its
expenses reimbursed promptly with respect to such Claim to the extent entitled
thereto. Regardless of which party is controlling the defense of any Claim, (i)
both the indemnifying party and the indemnified party shall act in good faith;
(ii) no settlement of such Claim may be agreed to without the written consent of
the indemnifying party, which consent shall not be unreasonably withheld; and
(iii) no part of any Claim shall be paid without such consent or unless a final
judgment from which no appeal may be taken is entered on such Claim against the
indemnified party. The controlling party shall deliver, or cause to be
delivered, to the other party copies of all correspondence, pleadings, motions,
briefs, appeals or other written statements relating to or submitted in
connection with the defense of any such Claim, and timely notices of any hearing
or other court proceeding relating to such Claim.
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within 90 days of the discovery of the Loss of the nature and
extent thereof, and the other party shall repay such Losses within 90 days
thereafter to the extent the Losses exceed the Basket Amount, or shall inform
the party seeking indemnification that it is denying in good faith all or a
portion of such Claim. If the party seeking indemnification disputes the denial
of such Claim, it may thereupon proceed to enforce its rights under this
Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and no other Person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise.
12.2 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when
35.
<PAGE>
transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express); and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
If to VUN or the Selling Shareholders, addressed to:
G. Wayne Bailey
Video Unlimited
15503 East Mississippi Avenue
Aurora, CO 80017
Fax: (303) 671-1801
With a copy to:
Woodson L. Herring, Esq.
Anderson & Jahde
950 South Cherry Street
Denver, CO 80246
Fax: (303) 691-9719
If to VCI, addressed to:
Robert Y. Lee
Video City, Inc.
6840 District Blvd.
Bakersfield, CA 93313
FAX: (805) 397-5982
With a copy to:
William J. Feis, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
FAX: (310) 201-4746
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.3 Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without reference to choice
of law provisions.
12.4 Multiple 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 instrument.
36.
<PAGE>
12.5 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement into effect.
12.6 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
12.7 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.8 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
12.9 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, including, without
limitation, the letter of intent dated October 7, 1997.
12.10 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.11 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
--------------------------------
Robert Y. Lee,
Chairman and Chief
Executive Officer
37.
<PAGE>
VIDEO ACQUISITION CORP.
By: /s/ Mark Wernli
--------------------------
Mark Wernli,
President
LEPTIS MAGNA, INC. d/b/a
VIDEO UNLIMITED
By: /s/ Orawan Bailey
--------------------------
Orawan Bailey,
President
By: /s/ G. Wayne Bailey
--------------------------
G. Wayne Bailey,
Secretary
SELLING SHAREHOLDERS:
/s/ G. Wayne Bailey
-----------------------------
G. Wayne Bailey
/s/ Orawan Bailey
-----------------------------
Orawan Bailey
38.
<PAGE>
EXHIBIT 10.4
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
between
VIDEO CITY, INC.,
VIDEO REPUBLIC CORP.,
OLD REPUBLIC ENTERTAINMENT, INC.
and
C. ANTHONY ANDERSON
Dated as of March 25, 1998
<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION, dated as of March 25,
1998 is by and among VIDEO CITY, INC., a Delaware corporation ("VCI"), VIDEO
REPUBLIC CORP., a California corporation ("Video Sub"), OLD REPUBLIC
ENTERTAINMENT, a California corporation doing business as "Video Tyme" ("ORE")
and C. Anthony Anderson ("Anderson"), with reference to the following facts:
A. Anderson is the chief executive officer and the sole shareholder of
ORE.
B. ORE owns and operates retail video sales and rental stores (the
"Business") in the locations listed in Schedule 3.11 hereto.
C. Prior to the incorporation of ORE in July 1997, the business of ORE
was operated by Anderson as a sole proprietorship. All references to ORE in
this Agreement shall include such predecessor proprietorship, unless the context
otherwise requires.
D. VCI, ORE and Anderson believe that it is in their best interests to
adopt and consummate a plan of reorganization that provides for the merger (the
"Merger") of Video Sub, a newly formed subsidiary of VCI, into ORE, with Video
Sub disappearing and ORE surviving, and the conversion of all ORE shares into
the right to receive the Merger Consideration.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, and in the masculine or feminine gender,
depending upon the reference.
"Action" shall mean any action, order, writ, injunction, judgment or
------
decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation.
1.
<PAGE>
"Affiliate" shall mean, with respect to any Person, a Person that
---------
directly or indirectly controls, is controlled by or is under common control
with such Person.
"Agreement" shall mean this Agreement of Merger and Plan of
---------
Reorganization, together with all schedules (including the Disclosure Schedule)
and exhibits referenced herein.
"Agreement of Merger" shall mean that certain document describing the
-------------------
Merger to be filed with the Secretary of State of the State of California.
"Books and Records" shall mean all books and records, stock transfer
-----------------
books, minute books, copies of outstanding stock certificates, ledgers, employee
records, customer lists, files, correspondence, and other written records of
every kind.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
"Contracts" shall mean all executory agreements, contracts, leases,
---------
commitments, evidences of indebtedness, letters of credit, franchise agreements,
purchase agreements and purchase orders, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules attached
-------------------
hereto and delivered by the parties as of the date hereof which set forth the
exceptions to the representations and warranties contained in Article III hereof
(as to ORE) and Article IV hereof (as to VCI and Video Sub) and certain other
information called for by this Agreement. Unless otherwise specified, each
reference in this Agreement to any numbered schedule is a reference to that
numbered schedule which is included in the Disclosure Schedule. Any information
disclosed on a particular schedule on the Disclosure Schedule or subparts
thereof shall be deemed disclosed on any and all schedules.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
-----------
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance, restriction or other right of third parties, whether voluntarily
incurred or arising by operation of law, and includes, without limitation, any
agreement to give any of the foregoing in the future, and any contingent sale or
other title retention agreement or lease in the nature thereof, except liens for
current taxes, assessments, governmental charges or levies on property not yet
due and payable.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
the same may be amended from time to time.
2.
<PAGE>
"ERISA Affiliate" shall mean any entity that is a member of a group of
---------------
which ORE is a member and which is under common control with ORE, within the
meaning of the regulations promulgated under Section 414 of the Code.
"ERISA Plans" shall mean, collectively, all Pension Plans and all
-----------
Welfare Plans required to be disclosed on Schedule 3.22.
"Marks" means all registered and unregistered trademarks, service
-----
marks, trade names, and slogans, all applications therefor, and all goodwill
associated therewith.
"Material" shall mean, unless otherwise specifically defined herein,
--------
any amounts of $10,000 or more as to ORE, and any amounts of $100,000 or more as
to VCI, except that where the context requires, "material" shall mean an effect
resulting in loss, liability, payment, damage or expense of $10,000 or more in
the case of ORE, and $100,000 or more in the case of VCI and Video Sub.
"Material Adverse Change" means a material adverse change in the
-----------------------
business, assets, financial condition or results of operations of ORE or its
business which involves a loss or exposure of more than $10,000 or of VCI or its
business which involves a loss or exposure of more than $100,000.
"ORE Balance Sheet" shall mean the balance sheet of ORE dated as of
-----------------
December 31, 1997.
"ORE Common Stock" shall mean shares of common stock of ORE.
----------------
"ORE Disclosure Schedule" shall mean all Disclosure Schedules
-----------------------
delivered by ORE pursuant to this Agreement.
"ORE Documents" shall mean this Agreement, the Agreement of Merger and
-------------
any other documents, instruments or certificates to be delivered by ORE in
connection with this Agreement.
"ORE Intangible Property" means all intangible property owned by ORE
-----------------------
or in which ORE has any interest (including the right to use) or owned by any
Selling Shareholder and used in ORE's business (other than intangible property
owned by third parties and available generally for commercial license from
others), including without limitation, (i) ORE's name and all Marks; (ii) all
statutory, common law and registered copyrights and mask work rights, and all
applications for the registration thereof; (iii) all patents and applications
therefor; (iv) all software; (v) all other inventories, discoveries,
improvements, processes, formulae (secret or otherwise), trade secrets,
information, know-how and ideas (including those in the
3.
<PAGE>
possession of third parties, but that are the property of ORE); and (vi) all
technical documentation relating thereto.
"Pension Plan" shall mean any employee pension benefit plan within
-------------
the meaning of Section 3(2) of ERISA.
"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings under all
federal, state, local or foreign laws with governmental or regulatory bodies, or
any other Person.
"Person" shall mean an individual, a partnership, a limited liability
------
company, a joint venture, a corporation, a trust, an unincorporated
organization, a government or any department or agency thereof or any other
entity.
"Representative" shall mean any officer, director, principal,
--------------
attorney, accountant, agent, employee or other representative.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Tax" or "Taxes" shall mean any federal, state, local, foreign or
--- -----
other tax, levy, impost, fee, assessment or other government charge, including
without limitation income, estimated income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, use, import duty,
employment, commercial rent, occupancy, franchise or withholding taxes, and any
premium, including without limitation interest, penalties and additions in
connection therewith.
"VCI Common Stock" shall mean shares of common stock of VCI.
----------------
"VCI Documents" shall mean this Agreement, the Agreement of Merger
-------------
and any other documents, instruments or certificates to be delivered by VCI in
connection with this Agreement.
"Welfare Plan" shall mean any employee welfare benefit plan within
------------
the meaning of Section 3(1) of ERISA.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Basket Amount 11.4
Business Recital B
California Law 2.3
Claim 11.5
</TABLE>
4.
<PAGE>
<TABLE>
<S> <C>
Closing 2.6
Effective Time 2.3
Losses 11.2
Merger Consideration 2.2(b)
Noncompetition Agreement 6.5
ORE Balance Sheet 3.8(b)
ORE Consent 3.7
ORE Financial Statements 3.8(a)
ORE Indemnified Parties 11.3
ORE Permits 3.14
Surviving Corporation 2.2(a)
Termination Date 6.1
VCI Indemnified Parties 11.2
Video Sub 2.2(a)
</TABLE>
ARTICLE II
PLAN OF REORGANIZATION
----------------------
2.1 Adoption of Plan. VCI, ORE and Anderson believe that it is in their
----------------
best interests to adopt and consummate the Merger.
2.2 The Merger.
----------
(a) VCI shall form a wholly owned subsidiary called Video Republic
Corp. ("Video Sub") under the laws of the State of California. VCI shall cause
Video Sub to be merged with and into ORE with ORE as the surviving corporation
in the Merger (the "Surviving Corporation"), and as of the Effective Time as a
result thereof, ORE shall become a wholly owned subsidiary of VCI. From and
after the Effective Time, the name of the Surviving Corporation shall be Old
Republic Entertainment, Inc. until changed or amended in accordance with
applicable law.
(b) Pursuant to the Merger, the shares of ORE Common Stock issued and
outstanding immediately prior to the Effective Time shall thereupon be converted
into and become the right to receive an aggregate of (i) 350,000 shares of VCI
Common Stock (subject to possible adjustment as provided in Section 2.2(e)
below) and (ii) $150,000 in cash, payable at the Closing (collectively, the
"Merger Consideration").
(c) ORE will cause all stock certificates representing issued and
outstanding shares of ORE Common Stock to be delivered, free and clear of all
Encumbrances, to VCI at or prior to the Effective Time. Each certificate which
immediately prior to the Effective Time represents outstanding shares of ORE
Common Stock shall at and after the Effective Time be deemed to represent only
the number of shares of VCI Common Stock into which such shares of ORE Common
Stock shall have the right to be converted pursuant to Section 2.2(b) above.
From and after the Effective Time, VCI shall be entitled to treat certificates
for
5.
<PAGE>
shares of ORE Common Stock as evidencing the ownership of the whole number of
shares of VCI Common Stock into which such shares of ORE Common Stock have been
converted. Certificates representing the VCI Common Stock will be delivered to
Anderson upon surrender to VCI of valid stock certificates representing their
shares of ORE Common Stock. At the Closing, certificates representing VCI
Common Stock will bear a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER."
(d) At the Effective Time, each share of common stock of Video Sub
that is issued and outstanding will be converted into one newly issued share of
ORE Common Stock. From and after the Effective Time, VCI, as the sole
shareholder of ORE, shall be entitled to receive one or more certificates
representing the ORE Common Stock into which such shares have been converted.
(e) The number of shares of VCI Common Stock issuable pursuant to
clause (i) of Section 2.2(b) above is subject to reduction as follows:
(i) If VCI gives notice to Anderson, within four months after the
Effective Time, that VCI has determined that ORE's total purchases (in
accordance with generally accepted accounting principles) in calendar year 1997
of videotapes, video disks, inventory, and related goods, consumables and other
items intended for sale or rental to customers (collectively, "Goods"),
excluding (w) purchases for the San Buenaventura Mall store and (x) purchases
(not in excess of $20,000) of base stock inventory (non-new release and non-
replacement inventory) for the Kimball Store only purchased not later than June
30, 1997, were greater than $614,930, then there shall be a reduction in the
number of shares of VCI Common Stock equal to the amount of purchases in excess
of $614,930, multiplied by a factor of 3.46, and then divided by the higher of
(y) $2.00 or (z) the closing sale price of the VCI Common Stock on the trading
date immediately preceding the date of such notice, as reported on Nasdaq, or if
sale prices are not so reported, then the average of the mean between the
closing bid and asked price on such trading date as reported by not more than
two market makers designated by VCI. If Anderson gives written notice to VCI,
within 14 days following the date of such notice, that he disagrees with VCI's
determination and if Anderson and VCI are unable to agree upon the amount (if
any) of such excess purchases, then the matter shall be determined by BDO
Seidman, LLP, whose determination shall be conclusive. If an adjustment under
this Section 2.2(e)(i) is required, Anderson shall deliver his certificate for
the VCI Common Stock to VCI and
6.
<PAGE>
VCI shall reissue to Anderson a new stock certificate for the adjusted number of
shares of VCI Common Stock issuable as a result of this adjustment.
(ii) ORE owns a supply of prerecorded videocassettes and other rental
inventory in good working condition, which are held in storage (referred to
herein as the "Storage Units"). Prior to the Closing, designated
representatives of VCI and ORE shall jointly inspect and count the number of
Storage Units. If they mutually determine that there are fewer than 16,920
Storage Units, Anderson shall contribute and deliver additional videocassettes
to ORE to bring the number of Storage Units to at least 16,920; and if the
parties mutually determine that there are more than 19,080 Storage Units, then
ORE shall deliver to Anderson the number of Storage Units in excess of 19,080.
Such delivery shall be made to Anderson or ORE, as the case may be, not later
than 90 days following the Closing, and the selection of such Storage Units
shall be made by the party delivering them.
2.3 Effective Time. The Merger shall become effective (such time and
--------------
date are referred to herein as the "Effective Time") on the business day (which
day shall be on or before March 31, 1998 unless such date is extended by mutual
agreement by the parties) on which (a) all conditions to the Closing of the
transactions contemplated by this Agreement shall have occurred, and (b) an
Agreement of Merger and any other documents necessary to effect the Merger shall
be filed in accordance with the California General Corporation Law (the
"California Law").
2.4 Articles of Incorporation and Bylaws. From and after the Effective
------------------------------------
Time, the Articles of Incorporation of ORE set forth in Exhibit A shall be the
Articles of Incorporation of the Surviving Corporation and the Bylaws of ORE set
forth in Exhibit B shall be the Bylaws of the Surviving Corporation, until
changed or amended as provided therein or under the California Law.
2.5 Directors and Officers. From and after the Effective Time, the
----------------------
directors and officers of ORE immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation, in each case until
their successors shall have been elected and shall qualify or until otherwise
provided by law or the Articles of Incorporation or Bylaws of the Surviving
Corporation.
2.6 The Closing. The closing of the transactions contem plated by this
-----------
Agreement (the "Closing") shall be held at 9:00 a.m. local time on the date of
the Effective Time at the offices of Troy & Gould Professional Corporation, 1801
Century Park East, Suite 1600, Los Angeles, California 90067, or at such other
date, place and time as the parties may agree.
7.
<PAGE>
2.7 Liabilities at Closing. The parties hereto agree that the aggregate
----------------------
of all notes payable, loans payable, accounts payable and other liabilities of
ORE (other than liabilities for purchases of new releases streeted during or
after the calendar week in which the Closing occurs) immediately prior to the
Effective Time, including amounts that may be owed to Anderson, shall in no
event exceed $750,000. If for any reason the total of all such notes payable,
loans payable, accounts payable and other liabilities exceeds $750,000 as of the
Effective Time, Anderson shall be responsible for the payment of all such
amounts and shall promptly pay such amounts upon request of ORE or VCI.
2.8 Cash as of Closing. Notwithstanding anything to the contrary in this
------------------
Agreement, Anderson shall have the right to withdraw cash from ORE prior to the
Effective Time so that ORE shall have as little as $100 as of the Effective
Time. In addition, within 30 days after the Effective Time VCI shall cause ORE
to pay to Anderson an amount equal to (i) the prorated portion of ORE insurance
premiums and store rental payments paid prior to the Effective Time but
applicable to periods after the Effective Time, and (ii) amounts actually paid
by ORE prior to the Effective Time for new releases streeted during or after the
calendar week in which the Closing occurs. Anderson shall not be entitled to be
reimbursed for lease deposits, utility deposits or other prepaid items, which
the parties agree are assets of ORE.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ORE
-------------------------------------
AND ANDERSON
------------
Subject to the exceptions set forth in the ORE Disclosure Schedules, ORE
and Anderson, and solely with respect to Sections 3.27 and 3.28 Anderson, hereby
represent and warrant to VCI that:
3.1 Corporate Existence and Power. ORE is a corporation duly organized,
-----------------------------
validly existing and in good standing under the laws of the State of California
and has all corporate power and authority and all governmental licenses,
authorizations, consents and approvals required to carry on its business and
operations as now conducted. Schedule 3.1 sets forth those jurisdictions in
which ORE is required to be qualified to do business as a foreign corporation
because of the character of the property owned or leased by ORE or the nature of
its activities; ORE is duly qualified to do business in each of these
jurisdictions.
3.2 Corporate Authorization. The execution, delivery and performance by
-----------------------
ORE of this Agreement and all of the other ORE Documents and the consummation by
ORE of the transactions contemplated hereby and thereby are within the corporate
powers of ORE and have been duly authorized by all necessary corporate action on
the part of ORE. This Agreement is, and as of the Closing the other ORE
Documents shall be, the legal, valid and
8.
<PAGE>
binding obligations of ORE, enforceable against ORE in accordance with their
respective terms.
3.3 Governmental Authorization. The execution, delivery and performance
--------------------------
by ORE of this Agreement and the other ORE Documents require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than the filing of the Agreement of Merger with the Secretary of State of
the State of California as contemplated by Section 2.3.
3.4 Non-Contravention. Except as set forth in Schedule 3.4, the
-----------------
execution, delivery and performance by ORE of this Agreement and the other ORE
Documents does not and will not (i) contravene or conflict with the Certificate
of Incorporation or Bylaws of ORE, (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 ORE or
any part of its business, (iii) assuming the obtaining of all ORE Consents,
constitute a default under or breach of, or violate or give rise to any right of
termination, cancellation or acceleration of any right or obligation of ORE, or
to a loss of any benefit relating to its business or operations to which ORE is
entitled under any provision of any Contract to which ORE is a party or by which
any of its assets is or may be bound or (iv) result in the creation or
imposition of any Encumbrance on any of ORE's assets.
3.5 ORE Capitalization. The authorized capital stock of ORE consists
------------------
solely of 100,000 shares of ORE Common Stock, of which 80,000 shares are issued
and outstanding and all 80,000 shares are owned beneficially and of record by
Anderson. All such outstanding shares are duly authorized, validly issued,
fully paid and non-assessable. All outstanding shares of ORE Common Stock have
been issued in compliance with all federal and state securities laws and are not
subject to any rights or obligations that require the registration of such
shares. There are no outstanding options, warrants or other rights in or with
respect to any shares of ORE Common Stock or any securities convertible into
such stock, and ORE is not obligated to issue any additional shares of ORE
Common Stock or any options, warrants or other rights to acquire stock or any
other securities convertible into such stock.
3.6 Subsidiaries. ORE does not own, directly or indirectly, securities
------------
or other ownership interests in any other entity, nor is ORE a party to any
agreement relating to the formation of any other entity or joint venture.
3.7 Consents. Schedule 3.7 sets forth each Contract of ORE and each of
--------
the ORE Permits that requires a consent, approval, authorization, order or other
action of or filing with any Person as a result of the execution, delivery and
performance of this Agreement or any of the other ORE Documents or the
9.
<PAGE>
consummation of the transactions contemplated hereby or thereby (each of the
foregoing, an "ORE Consent").
3.8 Financial Statements.
--------------------
(a) ORE has delivered to VCI financial statements of ORE and its
predecessor proprietorship consisting of unaudited balance sheets as of December
31, 1995, 1996 and 1997 and statements of operations for each of the years then
ended (collectively, the ORE Financial Statements"). The ORE Financial
Statements have been prepared on a cash basis and are not in conformity with
general accepted accounting principles.
(b) Except for (i) liabilities arising under any Contract (none of
which liabilities is for breach of contract, breach of warranty, tort or
infringement) or (ii) those matters otherwise disclosed on the ORE balance sheet
as of December 31, 1997 (the "ORE Balance Sheet") or on Schedule 3.8 (none of
which liabilities, except as stated in a Schedule hereto, is for breach of
contract, breach of warranty, tort or infringement), ORE will not have, as of
the Effective Time, any direct or indirect indebtedness, liabilities, claims,
losses, damages, deficiencies, obligations (including, without limitation, the
obligation to indemnify any other Person for any liabilities or expenses which
have been or may in the future be incurred by or asserted against such other
Person, or responsibilities, known or unknown, liquidated or unliquidated,
accrued, absolute, contingent or otherwise, and whether or not of a kind
required by generally accepted accounting principles to be set forth on a
financial statement). To the best knowledge of ORE, there are no circumstances,
conditions, events or arrangements which may after the Effective Time give rise
to any liabilities of ORE except in the ordinary course of business or as
otherwise set forth in this Section 3.8 or in a Schedule to this Agreement.
3.9 Absence of Certain Changes. Except as set forth on Schedule 3.9,
--------------------------
since December 31, 1997, ORE has conducted its business in the ordinary course
consistent with past practices, and there has not been:
(a) any Material Adverse Change or any event, occurrence, development
or state of circumstances or facts which could reasonably be expected to result
in a Material Adverse Change;
(b) any dividend or other distribution declared or paid with respect
to any of the ORE Common Stock;
(c) any loan or forgiveness of indebtedness to any holder of ORE
Common Stock or any Affiliate thereof;
10.
<PAGE>
(d) any bonus, salary or other compensation paid or agreed to be paid
to any employee except in accordance with Schedule 3.17 hereto;
(e) any incurrence of indebtedness for borrowed money;
(f) any creation or other incurrence of any Encumbrance on any of its
assets;
(g) any transaction, Contract entered into, or commitment made, by ORE
relating to its business, operations or any of its assets (including the
acquisition or disposition of any assets) or any relinquishment by ORE of any
contract or other right, in either case other than transactions and commitments
in the ordinary course of business consistent with past practices and those
contemplated by this Agreement (other than payments of compensation); or
(h) any transfer of any assets of ORE to any Person who is a
shareholder or other Affiliate of ORE.
3.10 Title to Assets. ORE has good and marketable title to its material
---------------
properties and assets owned or stated to be owned by ORE, free and clear of all
Encumbrances except: (i) as set forth in the ORE Financial Statements, (ii)
Encumbrances for current taxes not yet due, (iii) Encumbrances incurred in the
ordinary course of business, (iv) Encumbrances that are not substantial in
character, amount or extent (individually or collectively) and that do not
(individually or collectively) materially detract from the value, or interfere
with present use, of the property subject thereto or affected thereby, or
otherwise materially impair the conduct of business of ORE, or (v) as set forth
on Schedule 3.10. All of the material properties and assets used by ORE or held
by ORE, other than any leased assets listed on Schedule 3.10, are owned by ORE,
free and clear of any Encumbrances except as set forth on Schedule 3.10.
3.11 Stores and Real Property.
------------------------
(a) Schedule 3.11 lists the four existing stores owned and operated by
ORE. A fifth store listed on Schedule 3.11, located at the San Buenaventura
Mall, has been closed and the lease thereon was terminated effective January 31,
1998. An additional proposed lease for a new store at the Simi Mall was signed
but has since been cancelled by ORE, and ORE has no liability or obligation
whatsoever with respect to that proposed store or lease.
(b) Schedule 3.11 sets forth a true and complete list of all
leaseholds owned by ORE. ORE has valid leasehold interest in such leaseholds,
free and clear of all Encumbrances, except: (i) for rights of lessors and such
matters that are reflected in
11.
<PAGE>
the relevant lease, (ii) current Taxes not yet due and payable, (iii)
Encumbrances of public record, (iv) Encumbrances, if any, as do not materially
detract from the value of or materially interfere with the present use of such
property, and (v) as set forth on Schedule 3.11.
3.12 Litigation. Other than as set forth on Schedule 3.12, there is no
----------
action, suit, investigation, hearing or proceeding pending against or, to the
best knowledge of ORE, threatened against or affecting, ORE, any of its
officers, directors, or shareholders, its business or any assets or any Contract
before any court or arbitrator or any governmental body, agency official, which
would have a Material Adverse Effect, or in any manner challenges or seeks to
prevent, enjoin, alter or delay the transactions contemplated by this Agreement.
There are no outstanding judgments against ORE.
3.13 Contracts. Each Contract of ORE is a valid and binding agreement of
---------
ORE, and is in full force and effect, and ORE is not in default (whether with or
without the passage of time or the giving of notice or both) under the terms of
any such Contract. ORE has not assigned, delegated, or otherwise transferred
any of its rights or obligations with respect to any Contracts, or granted any
power of attorney with respect thereto. Schedule 3.13 is a true and correct
list of all Contracts involving an outstanding monetary obligation greater than
$25,000 or with a remaining term greater than one year.
3.14 Licenses and Permits. Schedule 3.14 correctly lists each material
--------------------
license, franchise, permit or other similar authorization affecting, or relating
in any way to ORE's business, together with the name of the governmental agency
or entity issuing such license or permit (the "ORE Permits"). The ORE Permits
are valid and in full force and effect and, assuming the related ORE Consents
have been obtained prior to the Closing, will not be terminated or impaired or
become terminable as a result of the transactions contemplated by this
Agreement.
3.15 Compliance with Laws. ORE is not in material violation of, has not
--------------------
violated, and is neither under investigation with respect to nor has been
threatened to be charged with or given notice of any violation of, any law,
rule, statute, ordinance or regulation, or judgment, order or decree entered by
any court, arbitrator or governmental authority, domestic or foreign, materially
applicable to ORE's assets or the conduct of its business.
3.16 Intangible Property.
-------------------
(a) Schedule 3.16 sets forth all material ORE Intangible Property and
identifies each material contract to which ORE is a party relating to any item
of ORE Intangible Property. No Contract requires ORE to (or will require VCI
to)
12.
<PAGE>
pay, or entitles it to receive any material royalty, license fee, or other
compensation with respect to the ORE Intangible Property. Except as set forth
on Schedule 3.16, no ORE Intangible Property development was funded by a third
Person (other than any shareholder of ORE) or was conducted by or as a joint
venture, in partnership, or otherwise in collaboration, with any other Person
(except an employee solely in his or her capacity as such). The transactions
contemplated hereby will not adversely affect in any manner any item or part of
the ORE Intangible Property or the nature or usefulness thereof in the hands of
VCI.
(b) All ORE Intangible Property and all federal, state and foreign
registrations with respect thereto, and all applications therefor are valid and
in full force and effect and are not subject to any taxes, maintenance fees or
actions.
(c) None of the ORE Intangible Property which is purportedly an asset
of ORE was developed or conceived by any ORE employee, officer or director while
employed by any other Person and no Selling Shareholder has violated any
agreement with any former employer which pertains to any of such property.
3.17 Employees.
---------
(a) Schedule 3.17 sets forth a true and complete list of the names,
titles, annual salaries or wage rates and other compensation and office location
of all employees of ORE, indicating part-time and full-time employment, and all
changes in salaries and wage rates per employee since December 31, 1997.
(b) Except as set forth on Schedule 3.17, ORE is not a party to or
subject to any employment contract, consulting agreement, collective bargaining
agreement, confidentiality agreement restricting the activities of ORE, non-
competition agreement restricting the activities of ORE, or any similar
agreement.
3.18 Prepaids. Except as set forth on Schedule 3.18, ORE has not received
--------
any material payments with respect to any services to be rendered or goods to be
provided after the Closing.
3.19 Taxes.
-----
(a) ORE has filed all federal and foreign income tax returns, all
state and local franchise and income tax, real and personal property tax, sales
and use tax, premium tax, excise tax, employment tax and other tax returns of
every character required to be filed by it and has paid in full all Taxes
(including, without limitation, all tax deposits), together with any interest
and penalties owing in connection therewith, shown on such returns to be due in
respect of the periods covered by
13.
<PAGE>
such returns, other than Taxes which are being contested in good faith and for
which adequate reserves have been established. Adequate provision has been made
in the Books and Records of ORE for all Tax liabilities, including interest or
penalties, whether or not due and payable and whether or not disputed, with
respect to any and all Taxes for the periods covered by the ORE Financial
Statements and for all prior periods. Schedule 3.19 sets forth the date or
dates through which the Internal Revenue Service has examined the federal income
taxes of ORE and the date or dates through which any foreign, state, local or
other taxing authority has examined any other tax returns of ORE. Schedule 3.19
also contains a complete list of each year for which any federal, state, local
or foreign tax authority has obtained or has requested an extension of the
statute of limitations from ORE and lists each tax case of ORE currently pending
in audit, at the administrative appeals level or in litigation. Schedule 3.19
further lists the date and issuing authority of each statutory notice of
deficiency, notice or proposal assessment and revenue agent's report issued to
ORE within the last twelve months. Except as set forth on Schedule 3.19, to
ORE's best knowledge, neither the Internal Revenue Service nor any foreign,
state, local or other taxing authority has, during the past three years,
examined or is in the process of examining any federal, foreign, state, local or
other tax returns of ORE. Neither the Internal Revenue Service nor any foreign,
state, local or other taxing authority is now asserting or threatening to assert
any deficiency or claim for additional taxes (or interest thereon or penalties
in connection therewith) except as set forth on Schedule 3.19.
(b) ORE has not made any requests for rulings, and ORE has not
received any subpoenas or requests for information, or notices of proposed
reassessment of any property owned or leased by ORE. There are no Liens for
Taxes upon any property or assets of ORE (other than for real property taxes,
not yet due, on premises leased by ORE for which ORE will be liable under the
terms of the applicable leases).
(c) ORE has delivered to VCI true and complete copies of all federal,
state and foreign income tax returns (to the extent they deal in any way with
the Business, such as Schedule C to the federal income tax returns) (together
with any Revenue Agent's Reports) filed by Anderson and ORE's predecessors
relating to the operations of the Business for the taxable years ended 1995 and
1996.
(d) ORE has not filed a consent pursuant to Section 341(f) of the
Code, and has not filed, and would not be deemed to have filed, any election
under Section 338 of the Code.
(e) ORE has never been, nor is ORE currently, bound by or subject to
any obligation under any agreement relating to
14.
<PAGE>
the sharing of any liability for, or payment of, Taxes with any other Person.
(f) ORE has withheld or will withhold, and has paid over or will pay
over to applicable taxing authorities amounts from its employees and has filed
or will file all federal, foreign, state, and local returns and reports with
respect to employee income tax withholding and social security and unemployment
Taxes for all periods (or portions thereof) ending on or before the Effective
Time, in compliance with the provisions of the Code and other applicable
federal, foreign, state and local laws.
3.20 Environmental Compliance. ORE has not received any notice that it or
------------------------
any of its properties have not been or are not now in complete compliance with
all applicable environmental law.
3.21 Labor and Employment Matters.
----------------------------
(a) Except as set forth on Schedule 3.21, as of the date hereof;
(i) The employment of each employee of ORE may be terminated
immediately by ORE, except as otherwise provided by statute or decisional
authority;
(ii) To ORE's best knowledge, no key executive employee of ORE
and no group of employees of ORE has plans to terminate his or her employment at
or prior to the Closing, whether or not as a result of the transactions
contemplated herein;
(iii) ORE has not had any material labor relations problems; and
(iv) ORE has complied in all material respects with all
collective bargaining agreements and all applicable laws and orders relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of Taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate governmental authorities, or is holding for payment not yet due to
such governmental authorities, all amounts required to be withheld from such
employees of ORE and is not liable for any arrears of wages, Taxes, penalties or
other sums for failure to comply with any of the foregoing. No present or former
employee, officer or director of ORE has notified ORE that he or she has or will
have at the Effective Time, any claim against ORE for any matter, including but
not limited to (i) overtime pay for work done through the Effective Time; (ii)
wages or salary for the work done through the Effective Time; (iii) vacation
time off or pay in lieu of vacation time off for the period through the
Effective Time; (iv) any violation of any
15.
<PAGE>
statute, ordinance or relation relating to minimum wages or maximum hours or
work-place conditions; or (v) injuries or other damages which are not fully
covered by ORE's insurance policies; except, in the case of clauses (i) and
(ii), for amounts accrued in the current pay period that are not yet due and
payable, and in the case of clause (iii), for vacation accrued in accordance
with ORE's policies and set forth in Schedule 3.21, which its employees have not
yet taken.
(b) Except as disclosed on Schedule 3.21, as of the date hereof, ORE
has not received any notice of any:
(i) unfair labor practice complaint against ORE pending before
the National Labor Relations Board or any state or local agency;
(ii) pending labor strike or other material labor trouble
affecting ORE;
(iii) material labor grievance pending against ORE;
(iv) pending representation question respecting the employees
of ORE; or
(v) pending arbitration proceedings arising out of or under
any collective bargaining agreement to which ORE is a party.
(c) In addition: (i) none of the matters specified in clauses (b) (1)
through (5) is threatened against ORE; (ii) no union organizing activities have
taken place with respect to ORE; and (iii) no basis exists for which a claim may
be made under any collective bargaining agreement to which ORE is a party.
3.22 Pension and Benefit Plans.
-------------------------
(a) All accrued obligations of ORE applicable to its employees,
whether arising by operation of law, by contract, by past custom or otherwise,
for payments by ORE to trusts or other funds or to any governmental agency, with
respect to unemployment compensation benefits, social security benefits or any
other benefits for its employees with respect to the employment of said
employees through the date hereof have been paid or adequate accruals therefor
have been made on, as applicable, the Books and Records of ORE and the ORE
Financial Statements.
(b) Neither ORE nor any of its ERISA Affiliates maintains or has ever
maintained or has any obligations to contribute to, or has in effect or has
committed to adopt, any Pension Plan, Welfare Plan or other ERISA Plan;
16.
<PAGE>
3.23 Insurance. Schedule 3.23 sets forth a true and correct list of all
---------
policies or binders of fire, liability, workers' compensation, vehicular or
other insurance held by or on behalf of ORE specifying the insurer, the policy
number or covering note number with respect to binders, and describing each
pending claim thereunder of more than $5,000. Such policies and binders are in
full force and effect. No such policy is terminable or cancelable by the
insurer by virtue of the consummation of the transactions contemplated herein.
3.24 Books and Records. ORE has heretofore furnished or made available to
-----------------
VCI for its examination the following, each of which is, and will be maintained
so as to remain until the Closing, accurate and complete in all material
respects:
(a) copies of the Articles of Incorporation and Bylaws, as in effect
on the date of this Agreement;
(b) the minute books of ORE containing all proceedings, consents,
actions and meetings of its shareholders and Boards of Directors;
(c) copies of all ORE Permits, orders and consents with respect to
ORE's securities issued by any administrative agency or governmental body
regulating the issuance or transfer of such securities and all applications for
such permits, orders and consents;
(d) the stock transfer books of ORE setting forth all transfers of
its securities;
(e) copies of all agreements and documents referred to in any ORE
Disclosure Schedule;
(f) all other Books and Records of ORE; and
(g) an accurate list of all of the incumbent officers and directors
of ORE.
3.25 Inventory. The inventory of ORE reflected on the ORE Balance Sheet,
---------
as well as other inventory items acquired since the date of the ORE Balance
Sheet that are now the property of ORE, are of such quality and held in such
quantities as are being used and will be usable and salable or rentable in the
ordinary course of the business of ORE. Since the date of the ORE Balance
Sheet, ORE has continued to replenish its inventories in a normal and customary
manner consistent with practice prevailing in the retail video sales and rental
industry.
3.26 Accuracy and Provision of Information. None of the documents or
-------------------------------------
other information made available to VCI or its Affiliates, attorneys,
accountants, agents or representatives in connection with the transactions
contemplated by this Agreement
17.
<PAGE>
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained therein not misleading.
ORE has provided VCI all material information regarding its business and
operations.
3.27 Shareholder Approval. The persons holding 100% of the shares of ORE
--------------------
Common Stock have approved this Agreement and the transactions contemplated
hereby.
3.28 Investor Representations. Each person who receives VCI Common Stock
------------------------
in connection with the transactions contemplated by this Agreement represents
that (i) he is an accredited investor as defined in Regulation D under the
Securities Act, or (ii) by reason of his business and financial experience, and
the business and financial experience of those persons unaffiliated with VCI
retained by him, if any, to advise him with respect to his investment in the
shares of VCI Common Stock, such person together with such advisers have such
knowledge, sophistication and experience in business and financial matters as to
be capable of evaluating the merits and risk of the prospective investment, and
that he is acquiring the shares of VCI Common Stock for his own account or for
one or more separate accounts maintained by him, if any, for investment and not
with a view to the distribution thereof except in compliance with the Securities
Act or an exemption available thereunder. Each person who receives VCI Common
Stock in connection with the transactions contemplated by this Agreement
understands and agrees that the shares of VCI Common Stock have not been
registered under the Securities Act and may be resold only if registered
pursuant to the applicable provisions of the Securities Act or if an exemption
from registration is available.
3.29 No Brokers. Neither ORE or Anderson nor any of their respective
----------
Representatives or Affiliates has employed or made any agreement with any
broker, finder or similar agent, person or firm or incurred any liability for
any finder's fee, brokerage fees or commission or similar payment in connection
with the transactions contemplated hereby which would result in any liability of
ORE, VCI or Video Sub.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VCI
-------------------------------------
Except as set forth in a Disclosure Schedule delivered by VCI hereunder,
and except for the transactions contemplated by this Agreement, VCI hereby
represents and warrants to ORE as follows:
4.1 Organization of VCI and Video Sub. Each of VCI and VCI Sub is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and California, respectively, has full corporate power
and authority to conduct its business as it is presently being conducted and to
18.
<PAGE>
own, lease and operate its properties and assets, and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not result in a Material Adverse Change to VCI or its business.
4.2 VCI and Video Sub Capital Stock. The authorized capital stock of VCI
-------------------------------
consists solely of 20,000,000 shares of common stock, $.01 par value per share,
9,773,927 shares of which were issued and outstanding as of the date of this
Agreement. No shares of any other class or series of capital stock are
authorized, issued or outstanding.
The authorized capital stock of Video Sub consists of 1,000 shares of
common stock, 100 shares of which were issued and out standing as of the date of
this Agreement. All of the issued and outstanding shares of common stock of
Video Sub are owned by VCI free and clear of all Encumbrances. All of the
outstanding shares of common stock of Video Sub have been duly and validly
authorized and issued and are fully paid and nonassessable.
4.3 Authorization Relative to this Agreement. The execution, delivery
----------------------------------------
and performance by VCI and Video Sub of this Agreement and all of the other VCI
Documents and the consummation by VCI and Video Sub of the transactions
contemplated hereby and thereby are within the corporate powers of VCI and Video
Sub and have been duly authorized by all necessary corporate action on the part
of VCI and Video Sub. This Agreement is, and as of the Closing the other VCI
Documents shall be, the legal, valid and binding obligations of VCI and Video
Sub, enforceable against VCI and Video Sub, as the case may be, in accordance
with their respective terms.
4.4 No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement or the Agreement of Merger nor the consummation of the transactions
contemplated hereby or thereby will result in (a) a violation of or a conflict
with any provision of the Certificate of Incorporation, Bylaws or other
organizational document of VCI, (b) a breach of, or a default under, any
Material term or provision of any Material Contract, indebtedness, Encumbrance,
Permit or concession to which VCI is a party or is subject or by which any
assets of VCI are bound, including, without limitation, any such breach or
default which would interfere in any way with its ability to consummate the
transactions contemplated by this Agreement or the Agreement of Merger, (c) a
Material violation by VCI of any statute, rule, regulation, ordinance, code,
order, judgment, writ, injunction, decree or award, including any violation
which would interfere with its ability to consummate the transactions
contemplated by this Agreement or the Agreement of Merger, (d) the imposition of
any Material Encumbrance, restriction or charge on the business
19.
<PAGE>
or assets of VCI, or (e) give rise to any right of termination, cancellation or
acceleration under any Material Contract or other agreement to which VCI is a
party or by or to which they or any of their Material assets or properties may
be bound or subject.
4.5 Litigation. There are no Actions pending, or to the best of VCI's
----------
knowledge, threatened (a) against, related to or affecting VCI, which Actions,
if determined adversely to VCI, would be reasonably likely to have a Material
adverse effect on VCI, or (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement, including any derivative suits brought by or on
behalf of VCI. VCI is not in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against VCI involving amounts in excess
of $100,000. For purposes of this Section 4.5, an Action will be deemed to have
an "adverse effect" on VCI if in connection with such Action, VCI or Video Sub
is reasonably likely to pay $500,000 or more in the aggregate with respect to
the defense, settlement, dismissal or other disposition or satisfaction of such
Action.
4.6 Board Approval. The Board of Directors of VCI has approved and
--------------
adopted this Agreement.
4.7 Validity of Shares Issued to Selling Shareholders. The shares of VCI
-------------------------------------------------
Common Stock to be issued to Anderson hereunder will, when issued and paid for
in accordance with this Agreement, be duly and validly issued, nonassessable
shares free and clear of any and all Encumbrances (other than Encumbrances which
may exist prior to the Closing on the ORE Common Stock), and will be issued in
compliance with all applicable federal and state securities laws.
4.8 VCI Shareholder Approval. No approval of the shareholders of VCI is
------------------------
required for the consummation of the transactions under this Agreement.
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
ORE and VCI each covenant with the other for the period from the date
hereof through the Effective Time as follows:
5.1 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Time, ORE and VCI shall each give prompt notice to the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
20.
<PAGE>
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
ORE of its business that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.12 or that relate to
the consummation of the transactions contemplated by this Agreement.
5.2 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the performance of obligations hereunder,
each of the parties hereto acknowledges that it will have access to confidential
information relating to the other parties. Each party shall treat such
information as confidential, preserve the confidentiality thereof and not
disclose such information, except to its respective Representatives and
Affiliates in connection with the transactions contemplated hereby. Each party
agrees to maintain in confidence, and not to disclose to any third party, any
ideas, methods, developments, inventions, improvements and business plans and
information which are the confidential information of the other parties. If,
however, confidential information is disclosed, the disclosing party shall
immediately notify the other parties in writing and take all reasonable steps
required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Time or the Termination Date, all confidential information shall remain the
property of the party who originally possessed such information. In the event
of the termination of this Agreement for any reason whatsoever, ORE shall return
to VCI, and VCI shall return to ORE, all documents, work papers and other
material (including all copies thereof) obtained from the other party in
connection with the transactions contemplated hereby and will use all reasonable
efforts, including, without limitation, instructing its employees and others who
have had access to such information, to keep confidential and not to use any
such information, unless such information is now, or is hereafter disclosed,
through no act or omission of such party, in any manner making it available to
the general public. If VCI or any of its Affiliates is required by legal
process or by operation of law to disclose any confidential information in
anticipation of a possible acquisition of ORE by VCI or any such Affiliate, VCI
shall provide ORE with written notice of such request at least 48 hours prior to
making such disclosure (or, if it is not practicable to give at least 48 hours'
prior notice, written notice shall be given as promptly as
21.
<PAGE>
practicable) and, without any need to obtain the consent of such other parties,
shall be entitled to make such disclosure. If any party is compelled by legal
process to disclose any confidential information, such party shall provide the
other parties with prompt written notice of such request and, without any need
to obtain the consent of such other parties, shall be entitled to make such
disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such information to, deliver to such other party all documents, work
papers and other material (including copies of extracts and summaries thereof)
obtained by or on behalf of any of them directly or indirectly as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof.
ARTICLE VI
ADDITIONAL COVENANTS OF ORE
---------------------------
6.1 Conduct of Business. From the date hereof through the Effective Time
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination Date"), except as contemplated or as may be
required by this Agreement, or as set forth on Schedule 6.1, or as consented to
by VCI in writing, ORE shall diligently carry on its business and in the
ordinary course only, and will use its best efforts to preserve its present
business organization intact and to keep available the services of its present
officers, agents or employees (nothing herein implying an obligation of ORE to
maintain or retain any specific officer, agent or employee), and preserve its
present relationships with customers and other Persons having business dealings
with it, and will not take any action inconsistent with this Agreement or with
the consummation of the transactions contemplated hereby. Without limiting the
generality of the foregoing, ORE shall not, except as specifically contemplated
by this Agreement:
(a) change or amend its Articles of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) Material
Contract, except in the ordinary course of business, or (ii) any Contract
involving $10,000 or more;
22.
<PAGE>
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any Material assets, or any interests therein,
and, without limiting the generality of the foregoing, ORE will maintain and
sell or rent inventory consistent with its past practices and in accordance with
any other provision in this Agreement;
(d) incur any obligations or liability for long-term indebtedness, or
incur any other obligation or liability of $10,000 or more except in the
ordinary course of business;
(e) (i) grant any bonus, severance or termination pay or increase
in any manner the compensation or fringe benefits of any employee or pay any
benefit not required by any existing ORE Employee Plan or policy;
(ii) make any change in the key management structure of ORE,
including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any ORE Employee Plan,
agreement (including, without limitation, any collective bargaining or
employment agreement), trust, fund or other arrangement for the benefit or
welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
Material assets or business of any corporation, partnership, association or
other business organi zation or division thereof;
(g) declare, set aside, make or pay any dividend or other
distribution in respect of ORE's capital stock;
(h) fail to expend funds for budgeted capital expenditures or
commitments that have been disclosed to VCI;
(i) willingly allow or permit any of ORE's insurance policies to be
suspended, impaired or canceled;
(j) fail to pay its accounts payable and any debts owed or obligations
due to it, or pay or discharge when due any liabilities, in the ordinary course
of business;
(k) enter into, renew, modify or revise any agreement or transaction
with any of its Affiliates;
(l) fail to maintain any assets in substantially their current state
of repair, excepting normal wear and tear or fail to replace consistent with
ORE's past practice inoperable, worn-out or obsolete or destroyed assets;
23.
<PAGE>
(m) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
(n) make any Material income tax election or settlement or compromise
with tax authorities;
(o) fail to comply in any Material respect with all laws applicable
to it;
(p) intentionally do any other act which would cause any
representation or warranty of ORE in this Agreement to be or become untrue in
any Material respect;
(q) issue any shares of ORE Common Stock or any options, warrants,
rights or other securities convertible into, or exercisable or exchangeable for,
ORE Common Stock; or
(r) enter into any agreement, arrangement or under standing or
otherwise become obligated, to do any action prohibited hereunder.
6.2 Public Statements and Press Releases. Except as pro vided for
------------------------------------
hereinbelow, ORE and Anderson shall not from and after the date hereof make,
issue or release any public announcement, press release, statement or
acknowledgment of the existence of, or reveal publicly the terms, conditions and
status of, the transactions provided for herein, without the prior written
consent of VCI as to the content and time of release of such statement or
announcement.
6.3 No Solicitation. Prior to the Effective Time (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither ORE nor any
of its Affiliates or Representatives shall directly or indirectly solicit or
initiate any discussions, offers or negotiations with, or participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise encourage any effort or attempt by, any
Person other than VCI, concerning any Alternative Transaction with respect to
ORE. ORE shall promptly notify VCI if any proposal, offer, inquiry or other
contact is received by ORE in respect of an Alternative Transaction, and shall
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep VCI informed on a current basis of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations.
6.4 Delivery of ORE Common Stock. Anderson shall deliver stock
----------------------------
certificates representing all issued and outstanding capital stock of ORE at or
prior to the Effective Time.
24.
<PAGE>
6.5 Noncompetition Agreement. At or prior to the Effective Time,
------------------------
Anderson shall have executed a noncompetition agreement in favor of VCI
substantially in the form of Exhibit C hereto (the "Noncompetition Agreement").
6.6 Lock-Up. Anderson will enter into an agreement with VCI restricting
-------
the resale or disposal, for a period of 180 days from the Closing, of any VCI
Common Stock issued to him pursuant to the Merger.
6.7 Insurance. From the date hereof through the Effective Time, ORE
---------
shall maintain in force (including necessary renewals thereof) the insurance
policies listed on Schedule 3.23.
6.8 Reporting and Compliance With Law. From the date hereof through the
---------------------------------
Effective Time, ORE shall duly and timely file all tax returns required to be
filed with governmental authorities and duly observe and conform in all material
respects to all applicable laws and orders.
6.9 Approval of Shareholders of ORE. ORE shall take all action
-------------------------------
necessary, in accordance with the California Law and its Articles of
Incorporation and Bylaws, to obtain the approval of 100% of the ORE Common Stock
for this Agreement and the Agreement of Merger and the transactions contemplated
hereby and thereby, and ORE shall provide Anderson with full disclosure of all
terms of this transaction.
6.10 Access to Information. ORE shall afford VCI and its Representatives
---------------------
reasonable access during normal business hours, throughout the period prior to
the earlier of the Effective Time or the Termination Date (as hereinafter
defined), to its personnel, facilities, contracts, commitments, books, computer
software application systems, files and records and to furnish such financial
and operating data and other information with respect to its business, assets
and properties, and shall use its best efforts to cause its Representatives to
furnish promptly to VCI and its Representatives such additional financial and
operating data and other information as to its business and properties as the
other or its duly authorized Representatives may from time to time reasonably
request.
ARTICLE VII
[Intentionally omitted]
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF ORE
------------------------------------
AND ANDERSON
------------
The obligations of ORE and Anderson to consummate the transactions provided
for hereby are subject, in the discretion of ORE, to the satisfaction, at or
prior to the Effective Time,
25.
<PAGE>
of each of the following conditions, any of which may be waived by ORE:
8.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of VCI contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Effective Time as if such
representations and warranties were made at and as of the Effective Time, and
VCI shall have performed all agreements and covenants required hereby to be
performed by it prior to or at the Effective Time, and VCI shall have delivered
a certificate signed by a VCI officer to such effect.
8.2 Permits. All Material Permits, waivers and approvals from
-------
governmental authorities and other parties necessary to permit VCI to consummate
the transactions contemplated hereby shall have been obtained.
8.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
8.4 No Material Adverse Change. Since January 31, 1997, there shall not
--------------------------
have occurred any change in the business, financial condition or prospects of
VCI taken as a whole, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, resulted in a Material Adverse
Change to the business, financial condition or prospects of VCI.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF VCI
------------------------------------
The obligations of VCI to consummate the transactions provided for hereby
are subject, in the discretion of VCI, to the satisfaction, at or prior to the
Effective Time, of each of the following conditions, any of which may be waived
by VCI:
9.1 Representations, Warranties and Covenants. All repre sentations and
-----------------------------------------
warranties of ORE contained in this Agreement shall be true and correct at and
as of the date of this Agreement, all representations and warranties of Anderson
con tained in this Agreement shall be true and correct at and as of the
Effective Time as if such representations and warranties were made at and as of
the Effective Time, and ORE and Anderson shall have performed all agreements and
covenants required hereby to be performed by them prior to or at the Effective
Time, and ORE
26.
<PAGE>
shall have delivered a certificate signed by Anderson to such effect.
9.2 Permits. All Permits, waivers and approvals from governmental
-------
authorities and other parties, necessary to permit ORE and Anderson to
consummate the transactions contemplated hereby shall have been obtained.
9.3 Opinion of Counsel. ORE shall have delivered to VCI an opinion of
------------------
England, Whitfield, Schroeder & Tredway, LLC, counsel to ORE and Anderson, in
substantially the form attached hereto as Exhibit D, which opinion shall set
forth, among other things, that all ORE Documents and the consummation by ORE of
the transactions contemplated hereby are within the corporate powers of ORE and
have been duly authorized by all necessary corporate and shareholder action on
the part of ORE.
9.4 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.5 No Material Adverse Change. Since September 30, 1997, except as set
--------------------------
forth in the ORE Disclosure Schedules, there shall not have occurred any change
in the business, financial condition or prospects of ORE, except for changes
contemplated hereby or changes which have not had a material adverse effect on
the business, financial condition or prospects of ORE.
9.6 Corporate Resolutions. VCI shall have received from ORE certified
---------------------
resolutions adopted by the Board of Directors of ORE approving this Agreement
and the transactions contemplated hereby.
9.7 Shareholder Approval. This Agreement and the Agreement of Merger,
--------------------
and the transactions contemplated hereby and thereby shall have been approved
and adopted by the vote or consent of 100% of the outstanding shares of ORE
Common Stock and an officer's certificate as to such approval shall be delivered
by ORE to VCI.
9.8 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of ORE shall have been delivered to
VCI.
9.9 Inventory. Notwithstanding any other provision in this Agreement,
---------
ORE's rental and sale inventory at the Closing will be not less than the amount
set forth on the ORE Balance
27.
<PAGE>
Sheet as of December 31, 1997, which shall be not less than the amount set forth
on the ORE balance sheet as of September 30, 1997.
9.10 Store Lease Assignments. VCI shall have received from ORE copies of
-----------------------
all necessary third party consents to the assignment to VCI pursuant to the
Merger of any store leases held by ORE. Other than such consents, there are no
other change of control or similar provisions in any Contracts of ORE which
would prevent the assignment to VCI of any store leases held by ORE.
9.11 Due Diligence. VCI and its counsel shall have found satisfaction
-------------
with the results of their due diligence investigation of the financial
condition, assets and operations of ORE.
9.12 Financing. VCI shall have obtained or arranged for new financing in
---------
an amount of at least $8,000,000 on terms acceptable to VCI.
9.13 Resignation. Anderson shall resign as a Director and officer of ORE
-----------
effective at the Closing.
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
shareholders of ORE, this Agreement and the Merger and other transactions
contemplated hereby may be terminated at any time prior to the Effective Time:
(i) By mutual written consent of the Boards of Directors of ORE
and VCI;
(ii) By either ORE or VCI, if the Closing shall not have occurred
on or before March 31, 1998 unless such date is extended by the mutual agreement
of the parties; provided however, that this provision shall not be available to
ORE if there is then a breach of this Agreement under clause (4) of this Section
10.1(a), and this provision shall not be available to VCI if there is then a
breach of this Agreement under clause (3) of this Section 10.1(a);
(iii) By ORE, if there is a breach of any representation or
warranty set forth in Article IV hereof or any covenant or agreement to be
complied with or performed by VCI pursuant to the terms of this Agreement or an
occurrence of any event which results or would result in the failure of a
condition set forth in Article VIII to be satisfied at or prior to the Effective
Time; or
28.
<PAGE>
(iv) By VCI, if there is a breach of any representation or warranty
set forth in Article III hereof or of any covenant or agreement to be complied
with or performed by ORE or Anderson pursuant to the terms of this Agreement or
the occurrence of any event which results or would result in the failure of a
condition set forth in Article IX to be satisfied at or prior to the Effective
Time.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any willful breach of this Agreement occurring
prior to or as a result of termination of this Agreement, and except that:
(i) Each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same; and
(ii) The provisions of Sections 5.2 and 12.5 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the avail ability of
specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Time, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
10.4 Releases and Indemnification Regarding Personal
-----------------------------------------------
29.
<PAGE>
Obligations and Guarantees. Following the Closing, VCI will use its best
- --------------------------
efforts to obtain releases from lessors, lenders, vendors and any other third
parties, of any personal obligations and guarantees or personal liabilities of
Anderson with respect to any obligations of ORE, insofar as such personal
guarantees or liabilities are described in the ORE Disclosure Schedule; and VCI
shall in any event indemnify and hold harmless Anderson from any personal
liability with respect to such described obligations, guarantees and
liabilities, including by not limited to the leases identified on Schedule 3.11,
unless and to the extent that VCI and ORE are entitled to be indemnified under
Article XI of this Agreement.
10.5 Payment of Liabilities. At the Closing, VCI shall pay or shall cause
----------------------
ORE to pay all amounts owing by ORE to the Anderson Family Living Trust,
American Commercial Bank on an SBA-guaranteed loan, Zola Lefcourt and Andrew
Baruffi (in the aggregate not to exceed $750,000).
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of ORE, Anderson and VCI contained herein and the
indemnification by Anderson under Section 11.2 with respect thereto, and the
indemnification by VCI under Section 11.3 with respect thereto, shall survive
the Effective Time for two years; provided, however, that the representations
and warranties of ORE and Anderson in Section 3.19 and the indemnification by
Anderson with respect thereto shall survive until the applicable statutes of
limitations have expired, and those contained in Section 3.5 and the
indemnification by Anderson with respect thereto shall survive without any
limitation in time. For purposes of this Article XI, "representations" and
"warranties" of ORE and Anderson shall mean collectively those representations
and warranties of ORE and Anderson set forth in Article III, the Disclosure
Schedules referenced therein, and "representations" and "warranties" of VCI
shall mean collectively those representa tions and warranties of VCI set forth
in Article IV, the Disclosure Schedules referenced therein.
11.2 Indemnification by Anderson. Subject to, and in the manner described
---------------------------
in, this Article XI, Anderson shall indemnify and hold harmless VCI and its
Representatives and Affiliates (the "VCI Indemnified Parties") for the periods
specified in Section 11.1 to the fullest extent lawful, from and against any and
all losses, damages, diminution in value, claims, liabilities, actions and
expenses (including, without limitation, costs of investigating, preparing or
defending any such claim or action, costs of settlement, judgments, and
reasonable legal fees and expenses), net of any amounts actually received under
any insurance policy as a result of such loss, damage, diminution in
30.
<PAGE>
value, claim, liability, action, or expense (collectively "Losses") arising out
of or in connection with the breach of any representation, warranty, covenant or
agreement of ORE or Anderson contained in this Agreement. The term "Losses" as
used in this Section 11.2 is not limited to matters asserted by third parties
against a VCI Indemnified Party, but includes Losses incurred or sustained by a
VCI Indemnified Party in the absence of third party claims.
11.3 Indemnification by VCI. Subject to, and in the manner described in,
----------------------
this Article XI, for a period of two years from the Effective Time, VCI shall
indemnify and hold harmless Anderson and his Representatives and Affiliates (the
"ORE Indemnified Parties") to the fullest extent lawful, from and against any
and all Losses arising out of or in connection with the breach of any
representation, warranty, covenant or agreement of VCI. The term "Losses" as
used in this Section 11.3 is not limited to matters asserted by third parties
against a ORE Indemnified Party, but includes Losses incurred or sustained by a
ORE Indemnified Party in the absence of third party claims.
11.4 Basket and Cap. VCI shall be indemnified by Anderson and Anderson
--------------
shall be indemnified by VCI, in each case to the extent that the aggregate of
all Losses, determined without regard to whether any Loss was Material or not,
exceeds $10,000 (the "Basket Amount"), provided that in no circumstance shall
the aggregate liability of Anderson or VCI exceed $1,500,000. Notwithstanding
the foregoing, there shall be no Basket Amount applicable to any Loss resulting
from a breach of representations and warranties in Sections 3.5 or 3.19 or from
a failure to pay any amount payable under Article II.
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party for
which indemnification would be available under this Article XI (a "Claim"), the
indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be represented by the indemnifying
party, such indemnified party shall have the right to assume control of the
defense of such Claim and to have its expenses reimbursed promptly with respect
to such Claim to the extent entitled thereto. In addition, in the event that
such indemnifying party, within a reasonable time after notice that any such
Claim or the total Losses incurred exceeds the Basket Amount, fails to defend
any indemnified party,
31.
<PAGE>
such indemnified party will (upon further notice to such indemnifying party)
have the right to undertake its defense of such Claim for the account of such
indemnifying party and to have its expenses reimbursed promptly with respect to
such Claim to the extent entitled thereto. Regardless of which party is
controlling the defense of any Claim, (i) both the indemnifying party and the
indemnified party shall act in good faith; (ii) no settlement of such Claim may
be agreed to without the written consent of the indemnifying party, which
consent shall not be unreasonably withheld; and (iii) no part of any Claim shall
be paid without such consent or unless a final judgment from which no appeal may
be taken is entered on such Claim against the indemnified party. The
controlling party shall deliver, or cause to be delivered, to the other party
copies of all correspondence, pleadings, motions, briefs, appeals or other
written statements relating to or submitted in connection with the defense of
any such Claim, and timely notices of any hearing or other court proceeding
relating to such Claim.
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within 90 days of the discovery of the Loss of the nature and
extent thereof, and the other party shall repay such Losses within 90 days
thereafter to the extent the Losses exceed the Basket Amount, or shall inform
the party seeking indemnification that it is denying in good faith all or a
portion of such Claim. If the party seeking indemnification disputes the denial
of such Claim, it may thereupon proceed to enforce its rights under this
Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns, and no other Person shall have any
right, benefit or obligation under this Agreement as a third party beneficiary
or otherwise.
12.2 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express); and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
32.
<PAGE>
If to ORE or Anderson, addressed to:
C. Anthony Anderson
2723 East Main Street
Ventura, California 93003
Fax:
With a copy to:
Stuart A. Comis, Esq.
England, Whitfield, Schroeder & Tredway, LLC
300 Esplanade Drive
Sixth Floor
Oxnard, CA 93030
If to VCI, addressed to:
Robert Y. Lee
Video City, Inc.
6840 District Blvd.
Bakersfield, CA 93313
FAX: (805) 397-5982
With a copy to:
William J. Feis, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
FAX: (310) 201-4746
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.3 Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without reference to choice
of law provisions.
12.4 Multiple 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 instrument.
12.5 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement into effect.
12.6 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum
33.
<PAGE>
extent permitted by law, such invalidity, illegality or unenforceability shall
not affect any other provision of this Agreement or any other such instrument.
12.7 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.8 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
12.9 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, including, without
limitation, the letter of intent dated November 13, 1997.
12.10 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.11 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
-----------------------------
Robert Y. Lee,
Chairman and Chief
Executive Officer
VIDEO REPUBLIC CORP.
By: /s/ Robert Y. Lee
-----------------------------
Robert Y. Lee,
President
34.
<PAGE>
OLD REPUBLIC ENTERTAINMENT, INC.
By: /s/ C. Anthony Anderson
-----------------------------
C. Anthony Anderson,
President
ANDERSON:
/s/ C. Anthony Anderson
--------------------------------
C. Anthony Anderson
35.
<PAGE>
EXHIBIT 10.5
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
between
VIDEO CITY, INC.,
VIDEO SULPIZIO CORP.,
SULPIZIO ONE, INC.,
DENNIS RHOTON and EDWARD RHEINHARDT
Dated as of March 25, 1998
<PAGE>
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION, dated as of March 25,
1998 is by and among VIDEO CITY, INC., a Delaware corporation ("VCI"), VIDEO
SULPIZIO CORP., a California corporation ("Video Sub"), SULPIZIO ONE, INC., a
California corporation ("SOI"), and DENNIS RHOTON and EDWARD RHEINHARDT
(collectively, the "Shareholders"), with reference to the following facts:
A. SOI owns and operates four retail video sales and rental stores (the
"Stores") in the locations listed in Schedule 3.11 hereto.
B. Each of the Shareholders owns 45% of the outstanding capital stock of
SOI.
C. VCI has been managing the Stores and business of SOI pursuant to a
management agreement and is familiar with many aspects of the business and
assets of SOI.
D. VCI, SOI and the Shareholders believe that it is in their best
interests to adopt and consummate a plan of reorganization that provides for the
merger (the "Merger") of Video Sub, a newly formed subsidiary of VCI, into SOI,
with Video Sub disappearing and SOI surviving, and the conversion of all SOI
shares into the right to receive the Merger Consideration.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, and in the masculine or feminine gender,
depending upon the reference.
"Action" shall mean any action, order, writ, injunction, judgment or
------
decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation.
"Affiliate" shall mean, with respect to any Person, a Person that
---------
directly or indirectly controls, is controlled by or is under common control
with such Person.
1.
<PAGE>
"Agreement" shall mean this Agreement of Merger and Plan of
---------
Reorganization, together with all schedules (including the Disclosure Schedule)
and exhibits referenced herein.
"Contracts" shall mean all executory agreements, contracts, leases,
---------
commitments, evidences of indebtedness, letters of credit, franchise agreements,
purchase agreements and purchase orders, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules attached
-------------------
hereto and delivered by the parties as of the date hereof which set forth the
exceptions to the representations and warranties contained in Article III hereof
(as to SOI) and Article IV hereof (as to VCI and Video Sub) and certain other
information called for by this Agreement. Unless otherwise specified, each
reference in this Agreement to any numbered schedule is a reference to that
numbered schedule which is included in the Disclosure Schedule. Any information
disclosed on a particular schedule on the Disclosure Schedule or subparts
thereof shall be deemed disclosed on any and all schedules.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
-----------
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance, restriction or other right of third parties, whether voluntarily
incurred or arising by operation of law, and includes, without limitation, any
agreement to give any of the foregoing in the future, and any contingent sale or
other title retention agreement or lease in the nature thereof, except liens for
current taxes, assessments, governmental charges or levies on property not yet
due and payable.
"Material" shall mean, unless otherwise specifically defined herein,
--------
any amounts of $10,000 or more as to SOI, and any amounts of $100,000 or more as
to VCI, except that where the context requires, "material" shall mean an effect
resulting in loss, liability, payment, damage or expense of $10,000 or more in
the case of SOI, and $100,000 or more in the case of VCI and Video Sub.
"Material Adverse Change" means a material adverse change in the
-----------------------
business, assets, financial condition or results of operations of SOI or its
business which involves a loss or exposure of more than $10,000 or of VCI or its
business which involves a loss or exposure of more than $100,000.
"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings under all
federal, state, local or foreign laws with governmental or regulatory bodies, or
any other Person.
2.
<PAGE>
"Person" shall mean an individual, a partnership, a limited liability
------
company, a joint venture, a corporation, a trust, an unincorporated
organization, a government or any department or agency thereof or any other
entity.
"Representative" shall mean any officer, director, principal,
--------------
attorney, agent, employee or other representative.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"VCI Common Stock" shall mean shares of common stock of VCI.
----------------
"VCI Documents" shall mean this Agreement, the Certificate of Merger,
-------------
the Agreement of Merger and any other documents, instruments or certificates to
be delivered by VCI in connection with this Agreement.
"SOI Common Stock" shall mean shares of common stock of SOI.
----------------
"SOI Disclosure Schedule" shall mean all Disclosure Schedules
-----------------------
delivered by SOI pursuant to this Agreement.
ARTICLE II
PLAN OF REORGANIZATION
----------------------
2.1 Adoption of Plan. VCI, SOI and the Shareholders believe that it is
----------------
in their best interests to adopt and consummate the Merger.
2.2 The Merger.
----------
(a) VCI shall form a wholly owned subsidiary called Video Sulpizio
Corp. ("Video Sub") under the laws of the State of California. VCI shall cause
Video Sub to be merged with and into SOI with SOI as the surviving corporation
in the Merger (the "Surviving Corporation"), and as of the Effective Time as a
result thereof, SOI shall become a wholly owned subsidiary of VCI. From and
after the Effective Time, the name of the Surviving Corporation shall be
Sulpizio One, Inc. until changed or amended in accordance with applicable law.
(b) Pursuant to the Merger, the shares of SOI Common Stock issued and
outstanding immediately prior to the Effective Time shall thereupon be converted
into and become the right to receive an aggregate of 100,000 shares of VCI
Common Stock (the "Merger Consideration").
(c) SOI will cause all stock certificates representing issued and
outstanding shares of SOI Common Stock to
3.
<PAGE>
be delivered, free and clear of all Encumbrances, to VCI at or prior to the
Effective Time. Each certificate which immediately prior to the Effective Time
represents outstanding shares of SOI Common Stock shall at and after the
Effective Time be deemed to represent only the number of shares of VCI Common
Stock into which such shares of SOI Common Stock shall have the right to be
converted pursuant to Section 2.2(b) above. From and after the Effective Time,
VCI shall be entitled to treat certificates for shares of SOI Common Stock as
evidencing the ownership of the whole number of shares of VCI Common Stock into
which such shares of SOI Common Stock have been converted. Certificates
representing the VCI Common Stock will be delivered to the Shareholders upon
surrender to VCI of valid stock certificates representing their shares of SOI
Common Stock. At the Closing, certificates representing VCI Common Stock will
bear a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED
UNDER SAID ACT OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION
IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER."
(d) At the Effective Time, each share of common stock of Video Sub
that is issued and outstanding will be converted into one newly issued share of
SOI Common Stock. From and after the Effective Time, VCI, as the sole
shareholder of SOI, shall be entitled to receive one or more certificates
representing the SOI Common Stock into which such shares have been converted.
2.3 Effective Time. The Merger shall become effective (such time and
--------------
date are referred to herein as the "Effective Time") on the business day (which
day shall be on or before March 31, 1998 unless such date is extended by mutual
agreement by the parties) on which (a) all conditions to the Closing of the
transactions contemplated by this Agreement shall have occurred, and (b) an
Agreement of Merger and any other documents necessary to effect the Merger shall
be filed in accordance with the California General Corporation Law (the
"California Law").
2.4 Articles of Incorporation and Bylaws. From and after the Effective
------------------------------------
Time, the Articles of Incorporation of SOI set forth in Exhibit A shall be the
Articles of Incorporation of the Surviving Corporation and the Bylaws of SOI set
forth in Exhibit B shall be the Bylaws of the Surviving Corporation, until
changed or amended as provided therein or under the California Law.
2.5 Directors and Officers. From and after the Effective Time, the
----------------------
directors and officers of SOI immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation, in each case until
their successors shall have been elected and shall qualify or until otherwise
provided
4.
<PAGE>
by law or the Articles of Incorporation or Bylaws of the Surviving Corporation.
2.6 The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall be held at 9:00 a.m. local time on the date of
the Effective Time at the offices of Troy & Gould Professional Corporation, 1801
Century Park East, Suite 1600, Los Angeles, California 90067, or at such other
date, place and time as the parties may agree.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOI
-------------------------------------
AND THE SHAREHOLDERS
--------------------
Subject to the exceptions set forth in the SOI Disclosure Schedule, SOI and
the Shareholders, and solely with respect to Sections 3.11 and 3.12 the
Shareholders, hereby represent and warrant to VCI that:
3.1 Due Organization, etc. SOI is duly organized, validly existing and
---------------------
in good standing under the laws of the State of California, has full corporate
power to own its properties and conduct the business presently being conducted
by it.
3.2 Authority Relative to this Agreement; Consents. The execution,
----------------------------------------------
delivery and performance of this Agreement by SOI have been duly authorized and
approved by all requisite corporate action, and neither the execution nor the
delivery of this Agreement nor the consummation of the transactions contemplated
hereby by SOI, nor compliance with nor fulfillment of the terms and provisions
hereof, will (a) conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under the Articles of Incorporation or By-
laws of SOI, or any material instrument, mortgage or deed of trust evidencing or
securing indebtedness for borrowed money, any financing lease, judgment, order,
award, decree or other restriction of any kind to which SOI is a party or by
which it is bound, (b) require the approval, consent, authorization or other
order or action of, or filing with, any court, governmental authority or
regulatory body, (c) require the consent, approval, order or authorization of
any person under any permit, license, agreement, indenture or other instrument
to which SOI is a party or by which any of its properties are subject, except
for the consent of the landlords under leases of the Stores (the "Leases") and
except for the consent of Rentrak Corporation ("Rentrak"), or (d) require any
declaration, filing or registration with any governmental or regulatory
authority by SOI. SOI has full power and authority to do and perform all acts
and things required to be done under this Agreement. This Agreement and each
other agreement and instrument required to be delivered hereunder by SOI, when
duly executed and delivered by SOI, will constitute valid and binding
5.
<PAGE>
obligations of SOI and will be enforceable in accordance with their respective
terms.
3.3 Assets. Except as set out in the Disclosure Schedule, SOI is the
------
sole owner of and has good title to all of its assets free and clear of all
liens, encumbrances, claims and security interests of any type or nature
whatsoever, other than any security interests in favor of Rentrak. With respect
to the Leases, there is no notice of cancellation or termination under any
option or right reserved to the lessor under any Lease or any notice of default
under any Lease, and no event has occurred which, with notice or lapse of time
or both, would constitute a default under any Lease. SOI has not assigned its
interest under any Lease or subleased the premises demised thereby. The present
use of any leased premises pursuant to the Leases does not depend on any
variance, special exceptions or other special municipal approval of limited
duration for continuing legality.
3.4 Compliance with Laws. SOI is in material compliance, and there
--------------------
exists no alleged noncompliance, with all applicable statutes, orders, rules and
regulations promulgated by governmental authorities relating in any material
respect to SOI or the operation or conduct of the business of Stores, including,
without limitation, any applicable statute, order, rule or regulation relating
to (i) wages, hours, hiring, non-discrimination, promotion, retirement,
benefits, pensions and working conditions, (ii) air, water, toxic substances or
noise, (iii) health and safety or (iv) zoning and building codes, and SOI has
not received any notice of alleged violation of any such statute, order, rule or
regulation.
3.5 Employees. SOI is not a party to any employment, noncompetition,
---------
collective bargaining or other agreements of any nature whatsoever with SOI's
current or past employees at any of the Stores. SOI does not now have, and has
never maintained, any pension, profit sharing, fringe benefit or deferred
compensation plans covering any of its employees at any of the Stores.
3.6 Litigation. There is no litigation, arbitration proceeding or
----------
governmental investigation pending, or so far as known to SOI threatened, or any
judgment, lien, award, order or decree outstanding against, or relating to the
Stores or the transactions contemplated by this Agreement, nor is there any
basis known to SOI for any such litigation, proceeding or investigation. SOI is
not in default with respect to any order of any court, governmental authority,
or arbitration board or tribunal, with respect to the Stores.
3.7 Tax Returns and Audit. SOI has filed all federal, state and local
---------------------
tax returns which are required to be filed with respect to the operations of the
Stores and has paid, or made provision for the payment of, all taxes which have
or may have been due pursuant to such returns or to assessments received
6.
<PAGE>
relative to operations of the Stores other than taxes on or measured by income.
All federal, state and local franchise, sales, use, occupation, property,
excise, or other taxes attributable to the Stores have been timely and fully
paid or adequately reserved. No deficiencies on any of SOI's tax returns or
reports attributable to or otherwise allocable to the Stores have been
threatened as of the date hereof.
3.8 Powers of Attorney. No person has any power of attorney to act on
------------------
behalf of the Stores in connection with its properties or business affairs.
3.9 Transactions with Management. The SOI Disclosure Schedule includes a
----------------------------
complete and correct list and description of the amounts and other essential
terms of all indebtedness and other fixed or contingent obligations, liabilities
or commitments existing on the date hereof of the Stores to or from any past or
current officer, director, employee or controlling stockholder of SOI or any
person related to, controlling, controlled by or under common control with SOI.
All transactions between such persons and the Stores have been on terms
equivalent to those available from unrelated third parties.
3.10 Accuracy of Supplemental Information. The SOI Disclosure Schedule is
------------------------------------
true, accurate and complete in all material respects. All financial information
that SOI has provided or will provide to VCI in connection with VCI's evaluation
of this asset purchase is or will be true, accurate, and complete in all
material respects.
3.11 Shareholder Approval. The Shareholders, who hold 90% of the shares
--------------------
of SOI Common Stock, have approved this Agreement and the transactions
contemplated hereby.
3.12 Investor Representations. Each person who receives VCI Common Stock
------------------------
in connection with the transactions contemplated by this Agreement represents or
shall represent that (i) he is an accredited investor as defined in Regulation D
under the Securities Act, or (ii) by reason of his business and financial
experience, and the business and financial experience of those persons
unaffiliated with VCI retained by him, if any, to advise him with respect to his
investment in the shares of VCI Common Stock, such person together with such
advisers have such knowledge, sophistication and experience in business and
financial matters as to be capable of evaluating the merits and risk of the
prospective investment, and that he is acquiring the shares of VCI Common Stock
for his own account or for one or more separate accounts maintained by him, if
any, for investment and not with a view to the distribution thereof except in
compliance with the Securities Act or an exemption available thereunder. Each
person who receives VCI Common Stock in connection with the transactions
contemplated by this Agreement understands and agrees that the shares of VCI
Common Stock have not been
7.
<PAGE>
registered under the Securities Act and may be resold only if registered
pursuant to the applicable provisions of the Securities Act or if an exemption
from registration is available.
3.13 SOI Capitalization. The authorized capital stock of SOI consists
------------------
solely of __________ shares of SOI Common Stock, of which 221,976 shares are
issued and outstanding. All such outstanding shares are duly authorized,
validly issued, fully paid and non-assessable. The SOI Disclosure Schedule
lists the shareholders of SOI and the number of shares of SOI Common Stock owned
by each of them as of the date of this Agreement. All outstanding shares of SOI
Common Stock have been issued in compliance with all federal and state
securities laws and are not subject to any rights or obligations that require
the registration of such shares. Except as set forth on Schedule 3.5, there are
no outstanding options, warrants or other rights in or with respect to any
shares of SOI Common Stock or any securities convertible into such stock, and
SOI is not obligated to issue any additional shares of SOI Common Stock or any
options, warrants or other rights to acquire stock or any other securities
convertible into such stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VCI
-------------------------------------
Except as set forth in a Disclosure Schedule delivered by VCI hereunder,
and except for the transactions contemplated by this Agreement, VCI hereby
represents and warrants to SOI as follows:
4.1 Organization of VCI and Video Sub. Each of VCI and VCI Sub is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and California, respectively, has full corporate power
and authority to conduct its business as it is presently being conducted and to
own, lease and operate its properties and assets, and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not result in a Material Adverse Change to VCI or its business.
4.2 VCI and Video Sub Capital Stock. The authorized capital stock of VCI
-------------------------------
consists solely of 20,000,000 shares of common stock, $.01 par value per share,
9,773,927 shares of which were issued and outstanding as of the date of this
Agreement. No shares of any other class or series of capital stock are
authorized, issued or outstanding.
The authorized capital stock of Video Sub consists of 1,000 shares of
common stock, 100 shares of which were issued and out-
8.
<PAGE>
standing as of the date of this Agreement. All of the issued and outstanding
shares of common stock of Video Sub are owned by VCI free and clear of all
Encumbrances. All of the outstanding shares of common stock of Video Sub have
been duly and validly authorized and issued and are fully paid and
nonassessable.
4.3 Authorization Relative to this Agreement. The execution, delivery
----------------------------------------
and performance by VCI and Video Sub of this Agreement and all of the other VCI
Documents and the consummation by VCI and Video Sub of the transactions
contemplated hereby and thereby are within the corporate powers of VCI and Video
Sub and have been duly authorized by all necessary corporate action on the part
of VCI and Video Sub. This Agreement is, and as of the Closing the other VCI
Documents shall be, the legal, valid and binding obligations of VCI and Video
Sub, enforceable against VCI and Video Sub, as the case may be, in accordance
with their respective terms.
4.4 No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement or the Agreement of Merger nor the consummation of the transactions
contemplated hereby or thereby will result in (a) a violation of or a conflict
with any provision of the Articles of Incorporation, Bylaws or other
organizational document of VCI, (b) a breach of, or a default under, any
Material term or provision of any Material Contract, indebtedness, Encumbrance,
Permit or concession to which VCI is a party or is subject or by which any
assets of VCI are bound, including, without limitation, any such breach or
default which would interfere in any way with its ability to consummate the
transactions contemplated by this Agreement or the Agreement of Merger, (c) a
Material violation by VCI of any statute, rule, regulation, ordinance, code,
order, judgment, writ, injunction, decree or award, including any violation
which would interfere with its ability to consummate the transactions
contemplated by this Agreement or the Agreement of Merger, (d) the imposition of
any Material Encumbrance, restriction or charge on the business or assets of
VCI, or (e) give rise to any right of termination, cancellation or acceleration
under any Material Contract or other agreement to which VCI is a party or by or
to which they or any of their Material assets or properties may be bound or
subject.
4.5 Litigation. There are no Actions pending, or to the best of VCI's
----------
knowledge, threatened (a) against, related to or affecting VCI, which Actions,
if determined adversely to VCI, would be reasonably likely to have a Material
adverse effect on VCI, or (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement, including any derivative suits brought by or on
behalf of VCI. VCI is not in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against VCI involving amounts in excess
of $100,000. For purposes of this Section 4.5, an Action will be deemed to have
an "adverse effect" on VCI if in connection with
9.
<PAGE>
such Action, VCI or Video Sub is reasonably likely to pay $500,000 or more in
the aggregate with respect to the defense, settlement, dismissal or other
disposition or satisfaction of such Action.
4.6 Board Approval. The Board of Directors of VCI approved and adopted
--------------
this Agreement.
4.7 Validity of Shares Issued to Shareholders. The shares of VCI Common
-----------------------------------------
Stock to be issued to the shareholders of SOI hereunder will, when issued and
paid for in accordance with this Agreement, be duly and validly issued,
nonassessable shares free and clear of any and all Encumbrances (other than
Encumbrances which may exist prior to the Closing on the SOI Common Stock), and
will be issued in compliance with all applicable federal and state securities
laws.
4.8 VCI Shareholder Approval. No approval of the shareholders of VCI is
------------------------
required for the consummation of the transactions under this Agreement.
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
SOI and VCI each covenant with the other for the period from the date
hereof through the Effective Time as follows:
5.1 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Time, SOI and VCI shall each give prompt notice to the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
SOI of its business that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Section 3.6 or that relate to
the consummation of the transactions contemplated by this Agreement.
5.2 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the
10.
<PAGE>
performance of obligations hereunder, each of the parties hereto acknowledges
that it will have access to confidential information relating to the other
parties. Each party shall treat such information as confidential, preserve the
confidentiality thereof and not disclose such information, except to its
respective Representatives and Affiliates in connection with the transactions
contemplated hereby. Each party agrees to maintain in confidence, and not to
disclose to any third party, any ideas, methods, developments, inventions,
improvements and business plans and information which are the confidential
information of the other parties. If, however, confidential information is
disclosed, the disclosing party shall immediately notify the other parties in
writing and take all reasonable steps required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Time or the Termination Date, all confidential information shall remain the
property of the party who originally possessed such information. In the event
of the termination of this Agreement for any reason whatsoever, SOI shall return
to VCI, and VCI shall return to SOI, all documents, work papers and other
material (including all copies thereof) obtained from the other party in
connection with the transactions contemplated hereby and will use all reasonable
efforts, including, without limitation, instructing its employees and others who
have had access to such information, to keep confidential and not to use any
such information, unless such information is now, or is hereafter disclosed,
through no act or omission of such party, in any manner making it available to
the general public. If VCI or any of its Affiliates is required by legal
process or by operation of law to disclose any confidential information in
anticipation of a possible acquisition of SOI by VCI or any such Affiliate, VCI
shall provide SOI with written notice of such request at least 48 hours prior to
making such disclosure (or, if it is not practicable to give at least 48 hours'
prior notice, written notice shall be given as promptly as practicable) and,
without any need to obtain the consent of such other parties, shall be entitled
to make such disclosure. If any party is compelled by legal process to disclose
any confidential information, such party shall provide the other parties with
prompt written notice of such request and, without any need to obtain the
consent of such other parties, shall be entitled to make such disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such
11.
<PAGE>
information to, deliver to such other party all documents, work papers and other
material (including copies of extracts and summaries thereof) obtained by or on
behalf of any of them directly or indirectly as a result of this Agreement or in
connection herewith, whether so obtained before or after the execution hereof.
ARTICLE VI
ADDITIONAL COVENANTS OF SOI
---------------------------
6.1 Conduct of Business. From the date hereof through the Effective Time
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination Date"), except as contemplated or as may be
required by this Agreement, or as set forth on Schedule 6.1, or as consented to
by VCI in writing, SOI shall diligently carry on its business and in the
ordinary course only, and will use its best efforts to preserve its present
business organization intact and to keep available the services of its present
officers, agents or employees (nothing herein implying an obligation of SOI to
maintain or retain any specific officer, agent or employee), and preserve its
present relationships with customers and other Persons having business dealings
with it, and will not take any action inconsistent with this Agreement or with
the consummation of the transactions contemplated hereby. Without limiting the
generality of the foregoing, SOI shall not, except as specifically contemplated
by this Agreement:
(a) change or amend its Articles of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) Material
Contract, except in the ordinary course of business, or (ii) any Contract
involving $10,000 or more;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any Material assets, or any interests therein,
and, without limiting the generality of the foregoing, SOI will maintain and
sell or rent inventory consistent with its past practices and in accordance with
any other provision in this Agreement;
(d) incur any obligations or liability for long-term indebtedness, or
incur any other obligation or liability of $10,000 or more except in the
ordinary course of business;
(e) (i) grant any bonus, severance or termination pay or increase
in any manner the compensation or fringe benefits of any employee or pay any
benefit not required by any existing SOI employee plan or policy;
12.
<PAGE>
(ii) make any change in the key management structure of SOI,
including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any agreement (including, without
limitation, any collective bargaining or employment agreement), trust, fund or
other arrangement for the benefit or welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate with,
or purchase substantially all of the assets of, or otherwise acquire any
Material assets or business of any corporation, partnership, association or
other business organization or division thereof;
(g) declare, set aside, make or pay any dividend or other distribution in
respect of SOI's capital stock;
(h) enter into, renew, modify or revise any agreement or transaction with
any of its Affiliates;
(i) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
(j) make any Material income tax election or settlement or compromise with
tax authorities;
(k) fail to comply in any Material respect with all laws applicable to it;
(l) intentionally do any other act which would cause any representation or
warranty of SOI in this Agreement to be or become untrue in any Material
respect;
(m) issue any shares of SOI Common Stock or any options, warrants, rights
or other securities convertible into, or exercisable or exchangeable for, SOI
Common Stock; or
(n) enter into any agreement, arrangement or understanding or otherwise
become obligated, to do any action prohibited hereunder.
6.2 Public Statements and Press Releases. Except as provided for
------------------------------------
hereinbelow, SOI and the Shareholders shall not from and after the date hereof
make, issue or release any public announcement, press release, statement or
acknowledgment of the existence of, or reveal publicly the terms, conditions and
status of, the transactions provided for herein, without the prior written
consent of VCI as to the content and time of release of such statement or
announcement.
13.
<PAGE>
6.3 No Solicitation. Prior to the Effective Time (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither SOI nor any
of its Affiliates or Representatives shall directly or indirectly solicit or
initiate any discussions, offers or negotiations with, or participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise encourage any effort or attempt by, any
Person other than VCI, concerning any alternative transaction with respect to
SOI.
6.4 Delivery of SOI Common Stock. The Shareholders shall deliver stock
----------------------------
certificates representing all issued and outstanding capital stock of SOI at or
prior to the Effective Time.
6.5 Noncompetition Agreements. At or prior to the Effective Time, Dennis
-------------------------
Rhoton and Edward Rheinhardt shall have executed noncompetition agreements in
favor of VCI substantially in the form of Exhibit C hereto (the "Noncompetition
Agreements"). Dennis Rhoton shall receive $70,000 in consideration for his
noncompetition agreement.
6.6 Lock-Up. Each of the Shareholders will enter into an agreement with
-------
VCI restricting the resale or disposal, for a period of 180 days from the
Closing, of any VCI Common Stock issued to him pursuant to the Merger.
6.7 Reporting and Compliance With Law. From the date hereof through the
---------------------------------
Effective Time, SOI shall duly and timely file all tax returns required to be
filed with governmental authorities and duly observe and conform in all material
respects to all applicable laws and orders.
6.8 Approval of Shareholders of SOI. SOI shall take all action
-------------------------------
necessary, in accordance with the California Law and its Articles of
Incorporation and Bylaws, to obtain the approval of 100% of the SOI Common Stock
for this Agreement and the Agreement of Merger and the transactions contemplated
hereby and thereby, and SOI shall provide the Shareholders with full disclosure
of all terms of this transaction.
6.9 Access to Information. SOI shall afford VCI and its Representatives
---------------------
reasonable access during normal business hours, throughout the period prior to
the earlier of the Effective Time or the Termination Date (as hereinafter
defined), to its personnel, facilities, contracts, commitments, books, computer
software application systems, files and records and to furnish such financial
and operating data and other information with respect to its business, assets
and properties, and shall use its best efforts to cause its Representatives to
furnish promptly to VCI and its Representatives such additional financial and
operating data and other information as to its business and
14.
<PAGE>
properties as the other or its duly authorized Representatives may from time to
time reasonably request.
ARTICLE VII
[Intentionally omitted]
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF SOI
------------------------------------
AND THE SHAREHOLDERS
--------------------
The obligations of SOI and the Shareholders to consummate the transactions
provided for hereby are subject, in the discretion of SOI, to the satisfaction,
at or prior to the Effective Time, of each of the following conditions, any of
which may be waived by SOI:
8.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of VCI contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Effective Time as if such
representations and warranties were made at and as of the Effective Time, and
VCI shall have performed all agreements and covenants required hereby to be
performed by it prior to or at the Effective Time.
8.2 Permits. All Material Permits, waivers and approvals from
-------
governmental authorities and other parties necessary to permit VCI to consummate
the transactions contemplated hereby shall have been obtained.
8.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
8.4 No Material Adverse Change. Since January 31, 1997, there shall not
--------------------------
have occurred any change in the business, financial condition or prospects of
VCI taken as a whole, except for changes contemplated hereby or changes which
have not, individually or in the aggregate, resulted in a Material Adverse
Change to the business, financial condition or prospects of VCI.
15.
<PAGE>
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF VCI
------------------------------------
The obligations of VCI to consummate the transactions provided for hereby
are subject, in the discretion of VCI, to the satisfaction, at or prior to the
Effective Time, of each of the following conditions, any of which may be waived
by VCI:
9.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of SOI contained in this Agreement shall be true and correct at and
as of the date of this Agreement, all representations and warranties of the
Shareholders contained in this Agreement shall be true and correct at and as of
the Effective Time as if such representations and warranties were made at and as
of the Effective Time, and SOI and the Shareholders shall have performed all
agreements and covenants required hereby to be performed by them prior to or at
the Effective Time, and SOI shall have delivered a certificate signed by the
Shareholders to such effect.
9.2 Permits. All Permits, waivers and approvals from governmental
-------
authorities and other parties, necessary to permit SOI and the Shareholders to
consummate the transactions contemplated hereby shall have been obtained.
9.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.4 No Material Adverse Change. Since September 30, 1997, there shall
--------------------------
not have occurred any change in the business, financial condition or prospects
of SOI, except for changes contemplated hereby or changes which have not had a
material adverse effect on the business, financial condition or prospects of
SOI.
9.5 Corporate Resolutions. VCI shall have received from SOI certified
---------------------
resolutions adopted by the Board of Directors of SOI approving this Agreement
and the transactions contemplated hereby.
9.6 Shareholder Approval. This Agreement, the Agreement of Merger, the
--------------------
Certificate of Merger and the transactions contemplated hereby and thereby shall
have been approved and adopted by the vote or consent of 100% of the outstanding
shares of SOI Common Stock and an officer's certificate as to such approval
shall be delivered by SOI to VCI.
16.
<PAGE>
9.7 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of SOI shall have been delivered to
VCI.
9.8 Store Lease Assignments. VCI shall have received from SOI copies of
-----------------------
all necessary third party consents to the assignment to VCI pursuant to the
Merger of any store leases held by SOI. Other than such consents, there are no
other change of control or similar provisions in any Contracts of SOI which
would prevent the assignment to VCI of any store leases held by SOI.
9.9 Due Diligence. VCI and its counsel shall have found satisfaction
-------------
with the results of their due diligence investigation of the financial
condition, assets and operations of SOI.
9.10 Financing. VCI shall have obtained or arranged for new financing in
---------
an amount of at least $8,000,000 on terms acceptable to VCI.
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
shareholders of SOI, this Agreement and the Merger and other transactions
contemplated hereby may be terminated at any time prior to the Effective Time:
(1) By mutual written consent of the Boards of Directors of SOI
and VCI;
(2) By either SOI or VCI, if the Closing shall not have occurred
on or before March 31, 1998 unless such date is extended by the mutual agreement
of the parties; provided however, that this provision shall not be available to
SOI if there is then a breach of this Agreement under clause (4) of this Section
10.1(a), and this provision shall not be available to VCI if there is then a
breach of this Agreement under clause (3) of this Section 10.1(a);
(3) By SOI, if there is a breach of any representation or warranty
set forth in Article IV hereof or any covenant or agreement to be complied with
or performed by VCI pursuant to the terms of this Agreement or an occurrence of
any event which results or would result in the failure of a condition set forth
in Article VIII to be satisfied at or prior to the Effective Time; or
(4) By VCI, if there is a breach of any representation or warranty
set forth in Article III hereof or of
17.
<PAGE>
any covenant or agreement to be complied with or performed by SOI or the
Shareholders pursuant to the terms of this Agreement or the occurrence of any
event which results or would result in the failure of a condition set forth in
Article IX to be satisfied at or prior to the Effective Time.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any willful breach of this Agreement occurring
prior to or as a result of termination of this Agreement, and except that:
(1) Each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same; and
(2) The provisions of Sections 5.2 and 12.5 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the availability of
specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Time, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
18.
<PAGE>
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of SOI, the Shareholders and VCI contained herein and
the indemnification by SOI and the Shareholders under Section 11.2 with respect
thereto, and the indemnification by VCI under Section 11.3 with respect thereto,
shall survive the Effective Time for two years; provided, however, that the
representations and warranties of SOI and the Shareholders in Section 3.7 and
the indemnification by the Shareholders with respect thereto shall survive until
the applicable statutes of limitations have expired, and those contained in
Section 3.13 and the indemnification by the Shareholders with respect thereto
shall survive without any limitation in time. For purposes of this Article XI,
"representations" and "warranties" of SOI and the Shareholders shall mean
collectively those representations and warranties of SOI and the Shareholders
set forth in Article III, the Disclosure Schedules referenced therein, and
"representations" and "warranties" of VCI shall mean collectively those
representations and warranties of VCI set forth in Article IV, the Disclosure
Schedules referenced therein.
11.2 Indemnification by the Shareholders. Subject to, and in the manner
-----------------------------------
described in, this Article XI, the Shareholders, jointly and severally, shall
indemnify and hold harmless VCI and its Representatives and Affiliates (the "VCI
Indemnified Parties") to the fullest extent lawful, from and against any and all
losses, damages, diminution in value, claims, liabilities, actions and expenses
(including, without limitation, costs of investigating, preparing or defending
any such claim or action, costs of settlement, judgments, and reasonable legal
fees and expenses), net of any amounts actually received under any insurance
policy as a result of such loss, damage, diminution in value, claim, liability,
action, or expense (collectively "Losses") arising out of or in connection with
the breach of any representation, warranty, covenant or agreement of SOI or the
Shareholders contained in this Agreement. The term "Losses" as used in this
Section 11.2 is not limited to matters asserted by third parties against a VCI
Indemnified Party, but includes Losses incurred or sustained by a VCI
Indemnified Party in the absence of third party claims.
11.3 Indemnification by VCI. Subject to, and in the manner described in,
----------------------
this Article XI, for a period of two years from the Effective Time, VCI shall
indemnify and hold harmless the Shareholders and their respective
Representatives and Affiliates (the "SOI Indemnified Parties") to the fullest
extent lawful, from and against any and all Losses arising out of or in
connection with the breach of any representation, warranty, covenant or
agreement of VCI. The term "Losses" as used in this Section 11.3 is not limited
to matters asserted by third parties
19.
<PAGE>
against a SOI Indemnified Party, but includes Losses incurred or sustained by a
SOI Indemnified Party in the absence of third party claims.
11.4 Basket and Cap. VCI shall be indemnified by the Shareholders and the
--------------
Shareholders shall be indemnified by VCI, in each case to the extent that the
aggregate of all Losses, determined without regard to whether any Loss was
Material or not, exceeds $10,000 (the "Basket Amount"), provided that in no
circumstance shall the aggregate liability of the Shareholders or VCI exceed
$600,000. Notwithstanding the foregoing, there shall be no Basket Amount
applicable to any Loss resulting from a breach of representation or warranty in
Sections 3.7 or 3.13.
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party
for which indemnification would be available under this Article XI (a "Claim"),
the indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be represented by the indemnifying
party, such indemnified party shall have the right to assume control of the
defense of such Claim and to have its expenses reimbursed promptly with respect
to such Claim to the extent entitled thereto. In addition, in the event that
such indemnifying party, within a reasonable time after notice that any such
Claim or the total Losses incurred exceeds the Basket Amount, fails to defend
any indemnified party, such indemnified party will (upon further notice to such
indemnifying party) have the right to undertake its defense of such Claim for
the account of such indemnifying party and to have its expenses reimbursed
promptly with respect to such Claim to the extent entitled thereto. Regardless
of which party is controlling the defense of any Claim, (i) both the
indemnifying party and the indemnified party shall act in good faith; (ii) no
settlement of such Claim may be agreed to without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld; and (iii)
no part of any Claim shall be paid without such consent or unless a final
judgment from which no appeal may be taken is entered on such Claim against the
indemnified party. The controlling party shall deliver, or cause to be
delivered, to the other party copies of all correspondence, pleadings, motions,
briefs, appeals or other written statements relating to or submitted in
connection with the defense of any such Claim, and timely notices of any hearing
or other court proceeding relating to such Claim.
20.
<PAGE>
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within 90 days of the discovery of the Loss of the nature and
extent thereof, and the other party shall repay such Losses within 90 days
thereafter to the extent the Losses exceed the Basket Amount, or shall inform
the party seeking indemnification that it is denying in good faith all or a
portion of such Claim. If the party seeking indemnification disputes the denial
of such Claim, it may thereupon proceed to enforce its rights under this
Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns, and no other Person shall have any
right, benefit or obligation under this Agreement as a third party beneficiary
or otherwise.
12.2 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express); and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
If to SOI or the Shareholders, addressed to:
With a copy to:
21.
<PAGE>
If to VCI, addressed to:
Robert Y. Lee
Video City, Inc.
6840 District Blvd.
Bakersfield, CA 93313
FAX: (805) 397-5982
With a copy to:
William J. Feis, Esq.
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
FAX: (310) 201-4746
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.3 Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without reference to choice
of law provisions.
12.4 Multiple 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 instrument.
12.5 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement into effect.
12.6 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
12.7 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.8 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
22.
<PAGE>
12.9 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, including, without
limitation, the letter of intent dated November 19, 1997.
12.10 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.11 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
23.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
------------------------------------------
Robert Y. Lee,
Chairman and Chief
Executive Officer
VIDEO SULPIZIO CORP.
By: /s/ Robert Y. Lee
------------------------------------------
Robert Y. Lee,
President
SULPIZIO ONE, INC.
By: /s/ Dennis Rhoton
------------------------------------------
Dennis Rhoton,
President
SHAREHOLDERS:
/s/ Dennis Rhoton
---------------------------------------------
Dennis Rhoton
/s/ Edward Rheinhardt
---------------------------------------------
Edward Rheinhardt
24.
<PAGE>
================================================================================
EXHIBIT 10.6
FILM RIGHTS TRANSFER AGREEMENT
Dated as of March 23, 1998
by and among
CONRAD ENTERTAINMENT, LLC ("Buyer"),
and
VIDEO CITY, INC. ("Seller"),
================================================================================
<PAGE>
FILM RIGHTS TRANSFER AGREEMENT
This FILM RIGHTS TRANSFER AGREEMENT, dated as of March 23, 1998 is by and
among CONRAD ENTERTAINMENT, LLC., A NEVADA LIMITED LIABILITY COMPANY ("Buyer")
and VIDEO CITY, INC., A DELAWARE CORPORATION ("Seller").
RECITALS
Seller is the owner of a certain film library consisting of domestic rights
to approximately 47 titles and foreign rights to approximately 9 titles.
Buyer desires to purchase and Seller desires to sell the aforementioned
rights, all upon the terms and subject to the conditions set forth in this
Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
SECTION 1. DEFINITIONS. In addition to those terms defined elsewhere in this
Agreement, the following terms have the meanings specified or referred to in
this Section 1:
"Acquired Rights" shall mean collectively all of Seller's right, title
and interest in and to the Library, including, without limitation, each and
every Picture therein and all Receivables, Intellectual Property Rights and
all Contracts related thereto.
"Agreement" means this Asset Purchase Agreement, and all exhibits and
schedules hereto and all amendments, modifications and supplements hereto
and hereof.
"Assumed Liabilities" means those certain liabilities arising under or
pursuant to (a) that certain License Agreement dated as of November 8, 1994
by and between Prism Entertainment Corporation (Seller's predecessor-in-
interest) and Turner Home Entertainment, Inc., (b) that certain Deal
Memorandum dated January 14, 1994 between C/FP Distribution and Prism
Entertainment Corporation, and (c) the Screen Actors Guild Theatrical Basic
Agreement, as the same relate to the Acquired Rights, and then only to the
extent that such liabilities accrue and arise on and after the Closing
Date.
"Consent" means any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
-2-
<PAGE>
"Contemplated Transactions" means all of the transactions contemplated
by this Agreement.
"Contract" means any agreement, contract, lease, obligation, promise
or undertaking (whether written or oral and whether express or implied)
that is legally binding.
"Encumbrance" means any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, mortgage,
hypothecation, attachment, conditional sale, title retention, security
interest or similar arrangement, device, right of first refusal, or
restriction of any kind, including any restriction on use, voting, receipt
of income, or exercise of any other attribute of ownership.
"Governmental Authorization" means any approval, consent, license,
permit, waiver, or other authorization issued, granted, given, or otherwise
made available by or under the authority of any Governmental Body or
pursuant to any Legal Requirement.
"Governmental Body" means any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"Intellectual Property Rights" means all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, copyrights,
service marks, trade secrets, publicity and privacy rights, celebrity
rights, applications for trademarks and for service marks, know-how and
other proprietary rights and information under any federal or state statute
or common law or the laws of any foreign jurisdictions.
"Legal Requirement" means any federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute,
or treaty.
"Library" means all of the Pictures, and all master tapes and prints
thereof and all other tangible property relating thereto.
-3-
<PAGE>
"Order" means any award, decision, injunction, judgment, order,
ruling, subpoena, verdict, or similar authoritative ruling entered, issued,
made, or rendered by any court, administrative agency, or other
Governmental Body or by any arbitrator.
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization, labor union, or
other entity or Governmental Body.
"Pictures" means all domestic and/or foreign rights, as the case may
be, to exploit in all forms of media now or hereafter known, those certain
motion pictures set forth on Exhibit "A" attached hereto and made a part
hereof, along with all other rights of ownership that Seller may now have
in such motion pictures.
"Proceeding" means any action, arbitration, audit, hearing, inquiry,
investigation, litigation, or suit (whether civil, criminal,
administrative, investigative, or informal) commenced, brought, conducted,
or heard by or before, or otherwise involving, any Governmental Body or
arbitrator.
"Receivables" means those certain receivables generated by the
ownership and exploitation of the Library as more particularly set forth on
Exhibit "B" attached hereto and made a part hereof.
"Tax" means any tax (including, without limitation, any income tax,
capital gains tax, value-added tax, sales tax, property tax, gift tax, or
estate tax), levy, assessment, tariff, duty (including customs duty),
deficiency, or other fee, and any related charge or amount (including any
fine, penalty, interest or addition to tax), imposed, assessed, or
collected by or under the authority of any Governmental Body or payable
pursuant to any tax-sharing agreement or any other Contract relating to the
sharing or payment of any such tax, levy, assessment, tariff, duty,
deficiency, or fee.
SECTION 2. SALE AND TRANSFER OF RIGHTS AND ASSUMPTION OF LIABILITIES; CLOSING.
2.1 SALE AND TRANSFER OF RIGHTS. Subject to the terms and conditions of
this Agreement, at the Closing (as defined in Section 2.6 below), Seller will
sell, convey, assign, transfer and deliver to Buyer, and Buyer will purchase
from Seller, all of the Acquired Rights. Seller represents and warrants that at
the time of Closing, each and every Acquired Right will be free and clear of any
and all Encumbrances.
2.2 ASSUMPTION OF LIABILITIES. Notwithstanding anything contained in
this Agreement to the contrary, Buyer is not assuming and shall not be
responsible for any debts, obligations, liabilities of any kind or nature,
whether known or unknown, absolute, contingent or otherwise, of Seller
(including, without limitation, those relating to the Acquired Rights) whether
occurring prior to or after the Closing except for the Assumed Liabilities.
-4-
<PAGE>
2.3 ASSIGNMENT OF CONTRACTS AND INTELLECTUAL PROPERTY RIGHTS.
(a) To the extent that the assignment hereunder of any Contracts,
Governmental Authorizations or Intellectual Property Rights require the Consent
to the assignment or transfer of any other party (or in the event that any of
the same shall be non-assignable), neither this Agreement nor any actions taken
hereunder will constitute an assignment or an agreement to assign if such
assignment or attempted assignment would constitute a breach thereof or result
in the loss or diminution thereof; provided, however, that in each such case,
Seller and Buyer will use commercially reasonable best efforts to obtain the
Consent of such other party to an assignment to Buyer.
(b) If such consent is not obtained, Seller shall cooperate with
Buyer in a reasonable arrangement designed to provide Buyer with the benefits
and burdens of any such Contracts, Governmental Authorizations and Intellectual
Property Rights, including appointing Buyer to act as its agent to perform all
of Seller' obligations under such Contracts, Governmental Authorizations and
Intellectual Property Rights and to collect and promptly remit to Buyer all
compensation received by Seller pursuant to those Contracts, Governmental
Authorizations and Intellectual Property Rights and to enforce for the account
and benefit of Buyer, any and all rights of Seller against any other Person
arising out of the breach, infringement or cancellation of such Contracts,
Governmental Authorizations or Intellectual Property Rights by such other Person
or otherwise (any and all of which arrangements will constitute, as between the
parties hereto, a deemed assignment or transfer); provided that, to the extent
that Seller is required to undertake any services or take any actions in
furtherance of the performance of such Contracts, Governmental Authorizations or
Intellectual Property Rights, any such services or actions will be the subject
of a separate agreement that the parties will, in good faith, negotiate as
promptly as possible and which will be mutually acceptable to the parties, but
no such agreement shall require Buyer to incur any liability or expense.
2.4 WAIVER OF BULK SALES PROVISIONS. Buyer hereby waives compliance
with all provisions of the Bulk Sales Laws of California, if applicable to the
Contemplated Transactions, and in consideration of such waiver, Seller agrees to
indemnify Buyer against and hold him harmless from any and all Damages (as
defined in Section 8.2 below) resulting from or arising out of such
noncompliance.
2.5 PURCHASE PRICE. The purchase price (the "Purchase Price") for the
Acquired Rights is the sum of $1,350,000.
2.6 CLOSING. The purchase and sale (the "Closing") provided for in
this agreement will take place at the offices of Heenan Blaikie, a California
Professional Corporation, 9401 Wilshire Boulevard, Beverly Hills, California, at
10:00 A.M. (local time) within three business days after the conditions set
forth in Sections 5 and 6 are either satisfied or waived by the appropriate
party, or at such other time and place as the parties may agree. The "Closing
Date" shall be the date on which the Closing occurs.
-5-
<PAGE>
2.7 CLOSING OBLIGATIONS. At the Closing:
(a) Seller will deliver to Buyer:
(i) Possession of or access to the tangible Acquired Rights;
(ii) An assignment of copyright for each Picture in the Library
and encompassing all Intellectual Property Rights thereto, in form
acceptable to Buyer (the "Copyright Assignment");
(iii) A Uniform Commercial Code financing statement with respect
to the sale of the Receivables, executed by Seller, in form and
substance satisfactory to Buyer for filings in the States of Delaware
and California;
(iv) releases of all Encumbrances of record with respect to the
Acquired Rights, in form and substance satisfactory to Buyer,
including without limitation all copyright mortgage releases and
Uniform Commercial Code termination statements; and
(v) All other documents and instruments that Buyer shall
reasonably request in order to effectuate the transfer of all
Receivables, Contracts and Intellectual Property Rights to Buyer.
(b) Buyer will deliver to Seller:
(i) The Purchase Price by wire transfer to an account specified
in writing by Seller not less than one business day prior to the
Closing Date; and
(ii) All other documents and instruments that Seller shall
reasonably request in order to effectuate the transfer of all
Receivables, Contracts and Intellectual Property Rights to Buyer.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER.
Seller represents, warrants and consents to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING.
(a) Seller is a corporation duly organized, validly existing, and in
good standing under the laws of its jurisdiction of incorporation or
organization with full corporate power and authority to conduct its business as
it is now being conducted and to own or use the properties and assets that it
purports to own or use with respect to its business. Seller is duly qualified to
do
-6-
<PAGE>
business as a foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which either the ownership or use of the
properties owned or used by it, or the nature of the activities conducted by it,
requires such qualification.
3.2 DUE AUTHORIZATION, EXECUTION AND ENFORCEABILITY WITH RESPECT TO
SELLER. This Agreement has been duly and validly authorized by all necessary
corporate action on the part of Seller and constitutes the legal, valid, and
binding obligation of Seller, enforceable against Seller in accordance with its
terms. Seller has the corporate right, power, and authority to execute and
deliver this Agreement and to perform its obligations under this Agreement.
3.3 NO CONFLICTS; CONSENTS. Neither the execution and delivery of this
Agreement nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with, or result in a violation of (A)
any provision of the organizational documents of Seller, or (B) any
resolution adopted by the board of directors or the shareholders of
Seller;
(ii) contravene, conflict with, or result in a violation of, or
give any Governmental Body or other Person the right to challenge any
of the Contemplated Transactions or to exercise any remedy or obtain
any relief under, any Legal Requirement or any Order to which Seller,
or any of the Acquired Rights, is subject;
(iii) contravene, conflict with, or result in a violation of any
of the terms or requirements of, or give any Governmental Body the
right to revoke, withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by Seller in connection with
the Acquired Rights;
(iv) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a
default or exercise any remedy under, or to accelerate the maturity
or performance of, or to cancel, terminate, or modify, any Contract;
(v) result in the imposition or creation of any Encumbrance upon
or with respect to any Acquired Asset; or
(vi) require Seller to give any notice to or obtain any Consent
from any Person.
3.4 NO UNDISCLOSED LIABILITIES. Except to the extent of the Assumed
Liabilities, Seller has no liabilities or obligations associated with the
Acquired Rights (whether known or unknown and whether absolute, accrued,
contingent, or otherwise) except for liabilities or obligations specifically
disclosed to Buyer herein. No liability or obligation of any nature, whether
accrued,
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absolute, contingent or otherwise, relating to Seller or the Acquired
Rights (other than the Assumed Liabilities) exists which could, after the
Closing result in any form of transferee liability against Buyer or subject any
of the Acquired Rights to any Encumbrance whatsoever or otherwise affect the
full, free and unencumbered use of the Acquired Rights by Buyer.
3.5 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. No
event has occurred or circumstance exists with respect to the Acquired Rights
that (with or without notice or lapse of time) (A) may constitute or result in a
material violation by Seller of, or a failure on the part of Seller to comply
with, any Legal Requirement that is or was applicable to the ownership and/or
exploitation of the Acquired Rights, or (B) may give rise to any material
obligation on the part of Seller to undertake, or to bear all or any portion of
the cost of, any remedial action of any nature; and Seller has not received with
respect to the Acquired Rights any notice or other communication (whether oral
or written) from any Governmental Body or any other Person regarding (A) any
actual, alleged, possible, or potential violation of or failure to comply with
any Legal Requirement that is or was applicable to the ownership and/or
exploitation of the Acquired Rights, or (B) any actual, alleged, possible, or
potential obligation on the part of Seller to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature.
3.6 INTELLECTUAL PROPERTY. Seller owns or possesses adequate licenses or
other valid rights to use all Intellectual Property Rights used or held for use
in connection with the Library, each and every Picture and other Acquired Rights
and there is no assertion or claim challenging the validity of any of the
foregoing. The exploitation of the Acquired Rights does not and will not
conflict with any Intellectual Property Rights of any third party. There are no
infringements of any Intellectual Property Rights used or held for use in
connection with the Acquired Rights.
3.7 FULL DISCLOSURE. No representation or warranty made by Seller
contained in this Agreement or any certificate, document or other instrument
furnished or to be furnished by Seller pursuant hereto contains or will contain
any untrue statement of a material fact, or omits or will omit to state any
material fact required to make any statement contained herein or therein not
misleading. Seller is not aware of any impending or contemplated event or
occurrence that would cause any of the foregoing representations not to be
materially true and complete on the date of such event or occurrence as if made
on that date.
3.8 PAYMENTS. To the extent that Seller receives any payment from any
third party that constitutes payment on account of any Receivable, Seller shall
be deemed to have received such amounts in trust for the benefit of Buyer, and
shall within three business days of receipt thereof, pay over such amounts to
the Buyer. In the event that Buyer receives checks payable to Seller that apply
to the Receivables, seller authorized buyer to endorse Seller's name on the
checks (or otherwise to negotiate the checks) and retain the proceeds of the
checks. Notwithstanding anything to the contrary contained herein, Seller
agrees, within 5 business days after the Closing, to execute and deliver to each
account debtor on behalf of each and every Receivable, an irrevocable letter of
direction in the form attached hereto as Exhibit "C" and made a part hereof and
deliver to Buyer confirmation that each and every such account debtor has
received such letter of direction.
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3.9 TITLE. Seller is the owner of the Acquired Rights, free and clear
of any and all Encumbrances. Upon Closing, Buyer shall be vested with a valid
perfected ownership interest in the Acquired Rights, subject to no Encumbrances
whatsoever and prior to and enforceable against all creditors of and purchasers
from the Seller and all other persons whatsoever.
3.10 UCC FILINGS. As of the date hereof, the Seller's chief executive
office (within the meaning of the California Uniform Commercial Code (the
"UCC")) is located at the address stated herein. No UCC financing statement
applicable to the Receivables or any other Acquired Right is currently on file
in the applicable UCC filing offices in California and the Seller has not
executed as debtor any UCC financing statement applicable to the Receivables.
3.11 BOARD APPROVAL. There has been fully disclosed to all members of
the Board of Directors of Seller the relationships between all of the parties to
the Contemplated Transactions, the terms and conditions of this Agreement, the
material facts as to the Contemplated Transactions and the interests of certain
shareholders and directors of Seller in and to the Contemplated Transactions and
the parties involved therewith; specifically, and without limitation, that
Stephen Lehman, the principal of Buyer, is a shareholder and director of, and
consultant to, Seller. Notwithstanding the possible financial interests of any
such shareholder, director or consultant of Seller in and to the Contemplated
Transactions, the Board of Directors, with full knowledge of the facts and
circumstances pertaining to the Contemplated Transactions and this Agreement,
has approved of this Agreement and the Contemplated Transactions and believe
them to be fair, just and reasonable.
SECTION 4. TAX MATTERS.
4.1 SALES, USE AND TRANSFER TAXES. Seller shall pay and indemnify Buyer
against any liability for, all sales, value added, use, transfer, registration,
stamp and similar Taxes ("Transfer Taxes") with respect to the Contemplated
Transactions, including the purchase and sale of the Acquired Rights
contemplated by this Agreement
4.2 NO REPRESENTATION ON TAX CONSEQUENCES. Buyer and Seller have not
made and are not making any representations to the others concerning any of the
tax effects of the Contemplated Transactions. Buyer and Seller shall not be
liable for or in any way responsible to the other because of any tax effect
resulting from the Contemplated Transactions.
SECTION 5. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE.
Buyer's obligation to purchase the Acquired Rights and to take the
other actions required to be taken by Buyer at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Buyer, in whole or in part):
5.1 ACCURACY OF REPRESENTATIONS. All of Seller's representations and
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
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5.2 SELLER'S PERFORMANCE. All of the covenants, agreements and
obligations that Seller and the Shareholder are required to perform or to comply
with in all material respects pursuant to this Agreement at or prior to the
Closing must have been duly performed and complied with in all material
respects.
5.3 CONSENTS. All material Contracts shall be in full force and
effect on the Closing Date. Seller shall have obtained and shall have delivered
to Buyer all third-party consents to the assignment of the material Contracts.
5.4 NO ADVERSE CHANGE. No material adverse change in condition or
status of the Acquired Rights or Seller shall have occurred, or be threatened or
be reasonably likely to occur.
SECTION 6. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS TO CLOSE.
Seller's obligations to sell the Acquired Rights and to take the
other actions required to be taken by Seller at the Closing are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Seller, in whole or in part):
6.1 Accuracy of Representations. All of Buyer's representations and
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
6.2 BUYER'S PERFORMANCE.
(a) All of the material covenants and obligations that Buyer are
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing must have been performed and complied with in all material respects.
(b) Buyer shall have delivered the Purchase Price to Seller.
SECTION 7. TERMINATION.
7.1 Termination Events. This Agreement may, by notice given prior to
or at the Closing, be terminated as follows:
(a) Upon the mutual written consent of Buyer and Seller, this
Agreement may be terminated on such terms and conditions as agreed; or
(b) By written notice of Buyer to Seller, if Seller breaches in any
material respect any of its representations or warranties or defaults in any
material respect in the observance or in the due and timely performance of any
of its covenants or agreements herein contained and such breach or default shall
not be cured within three days of the date of notice of breach or default served
by Buyer; or
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(c) By written notice of Seller to Buyer, if Buyer breaches in any
material respect any of its representations or warranties or defaults in any
material respect in the observance or in the due and timely performance of any
of its covenants or agreements herein contained and such breach or default shall
not be cured within three days of the date of notice of breach or default served
by the Seller; or
(d) By written notice of Buyer to Seller, or by Seller to Buyer, if
any court of competent jurisdiction shall have issued any order, decree or
ruling or taken any other action restraining, enjoining or otherwise prohibiting
the contemplated transactions; or
(e) By written notice of Buyer to Seller if any court, legislative
body or governmental or regulatory authority has taken, or is reasonably
expected to take, any action that would make the consummation of the
Contemplated Transactions inadvisable or undesirable as determined by Buyer in
its sole discretion; or
(f) By written notice of Buyer to Seller, or by the Seller
Representative to Buyer, if the Closing shall not have been consummated on or
before March 27, 1998; or
Notwithstanding the foregoing, no party hereto may effect a
termination hereof at such time such party is in material default or breach of
this Agreement.
7.2 EFFECT OF TERMINATION BY SELLER. Each party's right of termination
under Section 7.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not be
an election of remedies. If this Agreement is terminated pursuant to Section
7.1, all further obligations of the parties under this Agreement will terminate;
provided, however, that if this Agreement is terminated by a party because of
the breach of the Agreement by the other party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive such termination unimpaired.
SECTION 8. INDEMNIFICATION.
8.1 SURVIVAL. It is the express intention and agreement of the parties
to this Agreement that all covenants and agreements set forth in this Agreement
or in any agreement, certificate or instrument delivered in connection with the
Closing (together, "Agreements") and all representations and warranties
(together, "Warranties") made by Buyer and the Seller in this Agreement shall
survive the Closing (regardless of any knowledge, investigation, audit or
inspection at any time made by or on behalf of Buyer or Seller) as follows:
(a) The Agreements shall survive the Closing without limitation.
(b) All Warranties shall survive the Closing without limitation.
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8.2 INDEMNIFICATION BY SELLER. Seller shall defend, indemnify and hold
harmless Buyer and each of his Representatives and Affiliates (collectively, the
"Buyer Indemnified Parties") from and against any and all losses, costs,
damages, liabilities and expenses, including reasonable attorneys' fees and
expenses ("Damages"), incurred by such Buyer Indemnified Party arising out of
or related to: (i) any breach of the Agreements or Warranties given or made by
Seller or Shareholder in this Agreement; (iii) any failure of the parties to
comply with any "bulk sales" laws applicable to the transactions contemplated
hereby; (iv) the exploitation of the Library or any other Acquired Asset or any
portion thereof or the use or ownership of the Acquired Rights prior to the
Closing Date.
SECTION 9. PURCHASE OPTION.
9.1 If the sale of the Acquired Rights to Buyer closes, then for a time
period commencing on the Closing Date and continuing for 10 consecutive months
(each month being deemed a period of 30 consecutive days with the first such
month commencing on the day immediately following the Closing Date) thereafter
(the "Option Period"), Buyer will grant to Seller the right to repurchase all,
but not a portion of, the Library (and all Receivables, Contracts and
Intellectual Property Rights then in existence and relating thereto) on the
terms and conditions set forth herein ("Repurchase Option"). If Seller decides,
in its sole discretion, to buy the Library within the Option Period, Seller will
give written notice to Buyer of Seller's exercise of its Repurchase Option
hereunder ("Exercise Notice"). If Seller fails to deliver the Exercise Notice
prior to the expiration of the Option Period, the Repurchase Option shall
automatically lapse and Seller shall thereafter have no right to repurchase the
Library. The Repurchase Option shall be exercisable on the express conditions
that at the time of the exercise of the Repurchase Option, Seller shall not be
in default under this Agreement. The Repurchase Option is personal to Seller
and may not be assigned by Seller to any Person without Buyer's prior written
consent which may be given or denied in Buyer's sole and absolute discretion.
If Buyer assigns its interest in the Repurchase Option without such consent,
the Repurchase Option shall automatically lapse.
9.2 In the event Seller timely delivers the Exercise Notice, the date
upon which Buyer receives the Exercise Notice shall be deemed the "Exercise
Date" and the parties will enter, within five business days after the Exercise
Date, into a new agreement with respect to said purchase and sale of the
Library, upon the same terms as set forth herein changing only the purchase
price, date for closing, and other terms that may be unique to the transaction
as may then be required to account for any changes in the Library, Receivables,
Contracts, Intellectual Property Rights, etc., as a result of Buyer's
exploitation of the Library during the Option Period. Notwithstanding anything
to the contrary contained herein, each party shall be responsible for all costs
and expenses incurred by said party in connection with the new agreement,
including, without limitation, attorneys fees and costs. The date of closing for
the repurchase of the Library ("Repurchase Closing Date") shall be the date
which is 10 business days after the Exercise Date.
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9.3 The purchase price for the Library shall be determined as follows:
(a) In the event that the Exercise Date is on or before the date
which is 90 days after the Closing Date set forth in Section 2.6 above, the
purchase price shall be $1,650,000 less the "Adjustment Amount" (as defined
below);
(b) In the event that the Exercise Date is after the 90/th/ day
after the Closing Date but on or before the date which is 180 days after the
Closing Date set forth in Section 2.6 above, the purchase price shall be
$1,750,000 less the "Adjustment Amount" (as defined below);
(c) In the event that the Exercise Date is after the 180/th/ day
after the Closing Date set forth in Section 2.6 above, but on or before the date
which is 10 business days after the expiration of the Option Period, the
purchase price shall be $1,850,000 less the "Adjustment Amount" (as defined
below).
(d) For the purposes hereof, the "Adjustment Amount" shall mean the
amount of money actually received and collected by Buyer on account of the
Receivables or other exploitation of the Library during the period commencing on
the Closing Date set forth in Section 2.6 above and ending on the day
immediately preceding the Repurchase Closing Date.
SECTION 10. GENERAL PROVISIONS.
10.1 EXPENSES. Except as otherwise expressly provided in this Agreement,
each party to this Agreement will bear its respective expenses incurred in
connection with the preparation, execution, and performance of this Agreement
and the Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel, and accountants; provided, however, that Seller has
agreed to pay Buyer's counsel fees in connection with the negotiation and
execution of this Agreement. In the event of termination of this Agreement, the
obligation of each party to pay its own expenses will be subject to any rights
of such party arising from a breach of this Agreement by another party. In any
arbitration or litigation between some or all of the parties hereto involving
the Contemplated Transactions, the prevailing party shall be entitled to receive
reasonable attorneys' fees, court costs and other related expenses.
10.2 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
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SELLER:
Video City, Inc.
6840 District Boulevard
Bakersfield, California 93313
Attention: Robert Lee, Chairman
Fax: (805) 397-5982
with a copy to:
Troy & Gould
1801 Century Park East, 15th Floor
Los Angeles, CA 90067
Attention: William J. Feis, Esq.
Fax: (310) 201-4746
BUYER:
Conrad Entertainment, LLC
15260 Ventura Boulevard, 5th Floor
Sherman Oaks, CA 91403-5339
Attention: Stephen Lehman
Fax: (818) 377-5330
with a copy to:
Heenan Blaikie
A California Professional Corporation
9401 Wilshire Boulevard, Suite 1100
Beverly Hills, CA 90212
Attention: Scott B. Zolke, Esq.
Fax: (310) 724-8340
10.3 SERVICE OF PROCESS. Process in any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be served on any party anywhere in the world.
10.4 FURTHER ASSURANCES. After the Closing, Seller shall from time to
time, at the request of and without further cost or expense to Buyer, execute
and deliver such other instruments of conveyance and transfer and take such
other actions as may reasonably be requested in order more effectively to
consummate the transactions contemplated hereby to vest in Buyer good and
marketable title to the Acquired Rights being transferred hereunder, free, clear
and unencumbered, and Buyer shall from time to time, at the request of and
without further cost or expense to the Seller or the Shareholder, execute and
deliver such other instruments and take such other actions as may
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reasonably be requested in order more effectively to relieve Seller of any
obligations being assumed by Buyer hereunder.
10.5 WAIVER. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
10.6 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
10.7 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. This Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Seller may not voluntarily
or involuntarily assign their interests under this Agreement without the prior
written consent of Buyer. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns. Nothing herein expressed or implied
is intended or shall be construed to confer upon or give to any person or entity
other than the parties hereto and their successors or permitted assigns, any
rights or remedies under or by reason of this Agreement.
10.8 SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
10.9 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms. The word "or" includes the conjunctive
sense.
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10.10 TIME OF ESSENCE. With regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
10.11 GOVERNING LAW. This Agreement will be governed by the laws of the
State of California without regard to the conflicts of law principles thereof.
Any action, suit or proceeding brought by any party to this Agreement relating
to or arising out of this Agreement or any other agreement, instrument,
certificate or other document delivered pursuant hereto (or the enforcement
hereof or thereof) must be brought and prosecuted as to all parties in, and each
of the parties hereby consents to service of process, personal jurisdiction and
venue in, the state and federal courts of general jurisdiction located in Los
Angeles County, California.
10.12 WAIVER OF JURY TRIAL. Each of Seller and Buyer hereby irrevocably
waives any and all right to trial by jury in any legal proceeding arising out of
or relating to the Contemplated Transactions. The scope of this waiver is
intended to be all encompassing of any and all disputes that may be filed in any
court and that relate to the Contemplated Transactions, including without
limitation, contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Each of Seller and Buyer acknowledges that
this waiver is a material inducement for the other to consummate the
Contemplated Transactions, that the other has already relied on this waiver in
entering into this Agreement and that each will continue to rely on this waiver
in their related future dealings. Seller and Buyer further warrant and represent
that it has reviewed this waiver with its legal counsel, and that each knowingly
and voluntarily waives its jury trial rights following consultation with legal
counsel. This waiver is irrevocable, meaning that it may not be modified either
orally or in writing, and this waiver shall apply to any subsequent amendments,
renewals, supplements or modifications to this Agreement. In the event of
litigation, this Agreement may be filed as a written consent to a trial by
court.
10.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
10.14 MONETARY DAMAGES, SPECIFIC PERFORMANCE AND OTHER REMEDIES. The
parties recognize that if any party refuses to perform under the provisions of
this Agreement, monetary damages alone will not be adequate to compensate the
other parties for their injury. Such other parties shall therefore be entitled
to obtain specific performance of the terms of this Agreement and other
equitable relief (without being required to post bond or other security) in
addition to any other remedies, including but not limited to monetary damages,
that may be available to them. If any action is brought by any party to enforce
this Agreement, the other parties shall waive the defense that there is an
adequate remedy at law.
10.15 NEGATION OF AGENCY, PARTNERSHIP. No provision of this Agreement
or subsequent conduct of the parties shall be construed as making either party
an agent, principal, partner or joint venturer with the other party, or as
making either party responsible for the payment or reimbursement of any costs
incurred by the other party in pursuing this transaction if this Agreement
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is terminated for any reason (other than as otherwise expressly set forth in
this Agreement concerning responsibility for costs).
10.16 EXECUTION. This Agreement shall not bind Seller or Buyer as an
offer or an agreement unless signed by the party sought to be bound. The
transmittal of an unexecuted draft of this document for purposes of review shall
not be considered an offer to enter into an agreement.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
BUYER: CONRAD ENTERTAINMENT, LLC,
A Nevada limited liability company,
By: /s/ Stephen Lehman
---------------------------
STEPHEN LEHMAN, Member
SELLER: VIDEO CITY INC.
By: /s/ Robert Y. Lee
---------------------------
ROBERT LEE, Chairman
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EXHIBIT "A"
PICTURES
VIDEO CITY
DOMESTIC FILM LIBRARY TITLES
1. Backstreet Justice
2. Betrayal of the Dove
3. Bitter Harvest
4. A Brilliant Disguise
5. Dominion
6. Double Exposure
7. The Double-O-Kid
8. Fleshtone
9. Galaxis
10. Hidden Fears
11. Illicit Behavior
12. Illusions
13. Invasion of Privacy
14. Last Call
15. Lone Wolf
16. Mind Killer
17. Night Eyes 2
18. Night Eyes 3
19. Night Eyes - Fatal Passion
20. Night Vision
21. Prey of the Chameleon
22. Project: Metal Beast
23. Relicator
24. Round Trip to Heaven
25. Scorned
26. Sleepstalker
27. Snapdragon
28. South Beach
29. Tropical Heat
30. When the Bough Breaks
31. Black Ice
32. Virtual Assassin
33. Power of Attorney
34. Forever
35. Charles Ghost
36. Ava's Magical Adventure
37. Hail Caesar
38. Huck & King of Hearts
39. Mardi Gras for Thieves
40. Project Shadowchaser
41. A Million to Juan
42. The Unmanageable
43. Dark Universe
44. Nights in White Satin
45. House of the Rising Sun
46. Hot Child in the City
47. Millions
VIDEO CITY
FOREIGN FILM LIBRARY TITLES
1. A Brilliant Disguise
2. Backstreet Justice
3. Bitter Harvest
4. Dominion
5. Fleshtone
6. Hidden Fears
7. Sleepstalker
8. Snapdragon
9. When the Bough Breaks
<PAGE>
[Intentionally Left Blank]
<PAGE>
EXHIBIT "C"
IRREVOCABLE LETTER OF DIRECTION
VIDEO CITY, INC.
6840 District Boulevard
Bakersfield, California 93313
March 23, 1998
Ladies and Gentlemen:
Pursuant to a Distribution Agreement (the "Distribution Agreement")
relating to the film library previously owned by Prism Entertainment (the
"Library"), and us, we are entitled to receive payments from time to time from
your account no. account name:
--------------, -----------------------------------
(the "Account") with respect to the Library.
We hereby authorize and direct you to make payment of all amounts owing
and payable to us under the Distribution Agreement, and available to us from
time to time, which have been deposited in the Account, to:
Conrad Entertainment, LLC
15260 Ventura Blvd., 5th Floor
Sherman Oaks, California 91403
The instructions contained in this letter may not be altered, modified
or rescinded in any way without the express written consent of Conrad
Entertainment, LLC.
This letter shall also serve to notify you that pursuant to a Copyright
Mortgage dated as of March 23, 1998, we have granted to Conrad Entertainment,
LLC a security interest in and to the Account and all amounts on deposit therein
from time to time and all proceeds hereof.
Sincerely,
VIDEO CITY, INC.
By:
--------------------------
-------------,President
<PAGE>
EXHIBIT 10.7
[LOGO OF FINOVA]
LOAN AND SECURITY AGREEMENT
<TABLE>
<S> <C>
VIDEO CITY, INC. LEPTIS MAGNA, INC.
FED ID TAX NO. 95-3897052 FED ID TAX NO. 84-0964171
6840 DISTRICT BLVD. 15503 E. MISSISSIPPI AVE.
BAKERSFIELD, CALIFORNIA 93313 AURORA, COLORADO 80017
ADVENTURES IN VIDEO, INC. OLD REPUBLIC ENTERTAINMENT, INC.
FED ID TAX NO. 41-1429740 FED ID TAX NO. 71-0460482
10705 UNIVERSITY AVE. NE 2723 E. MAIN ST.
BLAINE, MINNESOTA 55434 VENTURA, CALIFORNIA 93003
KDDJ INVESTMENTS, INC. SULPIZIO ONE, INC.
FED ID TAX NO. 94-3057641 FED ID TAX NO. 33-0636666
10705 UNIVERSITY AVE. NE 6840 DISTRICT BLVD.
BLAINE, MINNESOTA 55434 BAKERSFIELD, CALIFORNIA 93313
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$7,500,000
Credit Limit
AS OF MARCH 24, 1998
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CORPORATE FINANCE
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<PAGE>
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to Loan
Agreement (the "SCHEDULE") attached hereto, the "AGREEMENT") dated the date set
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forth on the cover page, is entered into by and among the borrowers named on the
cover page (jointly and severally, the "Borrower"), whose address is set forth
on the cover page and FINOVA CAPITAL CORPORATION ("FINOVA"), whose address is
355 South Grand Avenue, Los Angeles, California 90071.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
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the definitions set forth below:
"Acquisition" has the meaning set forth in Section 4.1(cc) hereof.
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"Acquisition Documents" has the meaning set forth in Section 4.1(cc)
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hereof.
"ADA" has the meaning set forth in Section 4.1(x) hereof.
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"Additional Sums" has the meaning set forth in Section 2.9(a) hereof.
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"Affiliate" means any Person controlling, controlled by or under common
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control with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of any Person, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder, member or subsidiary of Borrower, and any other Person with whom or
which Borrower has common shareholders, officers or directors.
"Agreement" has the meaning set forth in the preamble.
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"Applicable Usury Law" has the meaning set forth in Section 2.9(b) hereof.
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"Business Day" means any day on which commercial banks in both Los Angeles,
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California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred
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for the acquisition of any fixed asset or improvement, replacement, substitution
or addition thereto which has a useful life of more than one year and including,
without limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by Borrower, excluding real
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property leases, that, in accordance with GAAP, should be capitalized for
financial reporting purposes and reflected as a liability on the balance sheet
of Borrower.
"Closing Fee" has the meaning set forth in the Schedule.
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"Closing Date" means the date of the initial advance made by FINOVA
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pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
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State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
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"Collateral Monitoring Fee" has the meaning set forth in the Schedule.
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"Deposit Accounts" has the meaning set forth in Section 9105 of the Code.
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"Dominion Account" has the meaning set forth in Section 2.10(c) hereof.
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"Eligible Inventory" means Inventory which FINOVA, in its Permitted
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Discretion, deems Eligible Inventory, based on such considerations as FINOVA may
from time to
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FINOVA Loan and Security Agreement
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time deem appropriate. Without limiting the generality of the foregoing, no
Inventory shall be Eligible Inventory unless, in FINOVA's Permitted Discretion,
such Inventory (i) consists of raw materials and finished goods, in good, new
and salable condition which are not obsolete or unmerchantable, and are not
comprised of work in process, packaging materials or supplies; (iii) meets all
standards imposed by any governmental agency or authority; (iv) conforms in all
respects to the warranties and representations set forth herein; (v) is at all
times subject to FINOVA's duly perfected, first priority security interest; and
(vi) is situated at a location in compliance with Section 5.16 hereof.
"Equipment" means all of Borrower's present and hereafter acquired
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machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
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amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated
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and whether or not foreign) which is or may hereafter become a member of a group
of which Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)(1) or IRC Section 414(b) or 414(c).
"Event of Default" means any of the events set forth in Section 7.1 of this
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Agreement.
"Examination Fee" has the meaning set forth in the Schedule.
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"Excess Availability" means, as of the date of determination thereof, the
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amount by which the average daily total principal balance of the Revolving
Credit Loans facility which Borrower would be permitted to have outstanding over
the prior 30 days, based on the formulas and reserves set forth in the
Schedule, exceeds the Inventory Loans then actually outstanding, such excess
then being reduced by an amount necessary to provide for the payment of all
accounts payable of Borrower which are more than 30 days past due date and all
book overdrafts.
"Excess Cash Flow" means Operating Cash Flow/Permitted less each of Total
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Contractual Debt Service.
"FINOVA Affiliate" has the meaning set forth in Section 9.22 hereof.
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"GAAP" means generally accepted accounting principles in the United States
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of America as in effect from time to time as set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
"General Intangibles" means all general intangibles of Borrower, whether
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now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks,
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FINOVA Loan and Security Agreement
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Licenses and Patents, names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against FINOVA, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation credit, liability,
property and other insurance) tax refunds and claims, computer programs, discs,
tapes and tape files, claims under guaranties, security interests or other
security held by or granted to Borrower to secure payment of any of the
Receivables by an account debtor, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Guarantors" has the meaning set forth in the Schedule.
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"Indebtedness" means all of Borrower's present and future obligations,
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liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and (v)
deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
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"Inventory" means all of Borrower's now owned and hereafter acquired goods,
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merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease, all raw materials, work in
process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of such goods, merchandise or other personal property, and all
documents of title or other documents representing them.
"Inventory Loans" has the meaning set forth in the Schedule.
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"IRC" means the Internal Revenue Code of 1986, as amended, and the
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regulations thereunder.
"Loans" has the meaning set forth in Section 2.2 hereof.
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"Loan Documents" means, collectively, this Agreement, any note or notes
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executed by Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to any
of the foregoing.
"Loan Party" means Borrower, each Guarantor, each Subordinating Creditor
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and each other party (other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, such amounts as
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FINOVA may from time to time establish and revise in good faith reducing the
amount of Revolving Credit Loans which would otherwise be available to Borrower
under the lending
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FINOVA Loan and Security Agreement
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formula(s) provided in the Schedule: (a) to reflect events, conditions,
contingencies or risks which, as determined by FINOVA in good faith, do or may
affect either (i) the Collateral or any other property which is security for the
Obligations or its value, (ii) the assets, business or prospects of Borrower or
any Guarantor or (iii) the security interests and other rights of FINOVA in the
Collateral (including the enforceability, perfection and priority thereof) or
(b) to reflect FINOVA's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or any Guarantor to
FINOVA is or may have been incomplete, inaccurate or misleading in any material
respect or (c) in respect of any state of facts which FINOVA determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default."
"Loan Year" means each twelve month period commencing on the Closing Date.
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"Maximum Interest Rate" has the meaning set forth in Section 2.9(b) hereof.
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"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
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Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Obligations" means all present and future loans, advances, debts,
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liabilities, obligations, covenants, duties and indebtedness at any time owing
by Borrower to FINOVA, whether evidenced by this Agreement, any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by FINOVA in Borrower's debts owing
to others), absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's fees, expert
witness fees, Examination Fee, Collateral Monitoring Fee, Closing Fee, Success
Fee, Termination Fee and any other sums chargeable to Borrower hereunder or
under any other agreement with FINOVA.
"Operating Cash Flow/Actual" means, for any period, Borrower's net income
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or loss (excluding the effect of any extraordinary gains or losses), determined
in accordance with GAAP, plus or minus each of the following items, to the
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extent deducted from or added to the revenues of Borrower in the calculation of
net income or loss: (i) depreciation; (ii) amortization and other non-cash
charges; (iii) interest expense paid or accrued; and (iv) total federal and
state income tax expense determined as the accrued liability of Borrower in
respect of such period, regardless of what portion of such expense has actually
been paid by Borrower during such period; and after deduction for each of (a)
federal and state income taxes, to the extent actually paid during such period;
(b) any non-cash income; and (c) all actual Capital Expenditures made during
such period and not financed; provided that any equity contribution to Borrower
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after the date hereof shall be excluded from Operating Cash Flow/Actual, and
provided further that, if no Event of Default has occurred and is continuing,
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for Borrower's 1999 fiscal year, up to $300,000 of purchases of rental tape
inventory financed by additional credit over the current credit extended to
Borrower by its suppliers, evidenced by a writing in form and substance
reasonably satisfactory to FINOVA, shall be excluded from Operating Cash
Flow/Actual to the extent utilized.
"Operating Cash Flow/Permitted" means, for any period, Borrower's net
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income or loss (excluding the effect of any extraordinary gains or losses),
determined in accordance with GAAP, plus or minus each of the following items,
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to the extent deducted from or added to the revenues of Borrower in the
calculation of net income or loss: (i) depreciation; (ii)
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FINOVA Loan and Security Agreement
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amortization and other non-cash charges; (iii) interest expense paid or accrued;
(iv) total federal and state income tax expense determined as the accrued
liability of Borrower in respect of such period, regardless of what portion of
such expense has actually been paid by Borrower during such period; and (v) fees
paid to Subordinating Creditors, to the extent permitted hereunder, and after
deduction for each of (a) federal and state income taxes, to the extent actually
paid during such period; (b) any non-cash income; and (c) all permitted Capital
Expenditures (without regard to any waiver given by FINOVA with respect to any
limitation on such Capital Expenditures) actually made during such period and
not financed.
"Overadvance" has the meaning set forth in Section 2.3.
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"Overline" has the meaning set forth in Section 2.3.
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"PBGC" means the Pension Benefit Guarantee Corporation.
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"Permitted Discretion" means FINOVA's judgment exercised in good faith
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based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could adversely affect the value of any Collateral, the
enforceability or priority of FINOVA's liens thereon or the amount which FINOVA
would be likely to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii) suggests that
any collateral report or financial information delivered to FINOVA by any Person
on behalf of the Borrower is incomplete, inaccurate or misleading in any
material respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the Borrower, any Loan
Party or any of the Collateral, or (iv) creates or reasonably could be expected
to create an Event of Default. In exercising such judgment, FINOVA may consider
such factors already included in or tested by the definition of Eligible
Inventory, as well as any of the following: (i) the financial and business
climate of the Borrower's industry and general macroeconomic conditions, (ii)
changes in collection history and dilution with respect to the Receivables,
(iii) changes in demand for, and pricing of, Inventory, (iv) changes in any
concentration of risk with respect to Receivables and/or Inventory, and (v) any
other factors that change the credit risk of lending to the Borrower on the
security of the Receivables and Inventory. The burden of establishing lack of
good faith hereunder shall be on the Borrower.
"Permitted Encumbrance" means each of the liens, mortgages and other
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security interests set forth on the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
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venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
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employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the date
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set forth in the Schedule in the section entitled `Reporting Requirements' , and
as of each subsequent date on which audited balance sheets are delivered to
FINOVA from time to time hereunder, and the related statements of operations,
changes in stockholder's equity and changes in cash flow for the periods ended
on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
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"Prohibited Transaction" means any transaction described in Section 406 of
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ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction
described in IRC
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FINOVA Loan and Security Agreement
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Section 4975(c) which is not exempt by reason of IRC Section 4975(c)(2).
"Receivables" means all of Borrower's now owned and hereafter acquired
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accounts (whether or not earned by performance), proceeds of any letters of
credit naming Borrower as beneficiary, contract rights, chattel paper,
instruments, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
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"Reportable Event" means a reportable event described in ERISA Section 4043
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or the regulations thereunder for which notice to the PBGC is not waived under
the applicable regulations, a withdrawal from a plan described in ERISA Section
4063, or a cessation of operations described in ERISA Section 4062(e).
"Revolving Credit Loans" has the meaning set forth in the Schedule.
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"Revolving Credit Limit" has the meaning set forth in the Schedule.
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"Revolving Interest Rate" has the meaning set forth in the Schedule.
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"Schedule" has the meaning set forth in the preamble.
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"Seller" has the meaning set forth in the Schedule.
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"Seller Noncompete Agreement" has the meaning set forth in the Schedule.
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"Senior Contractual Debt Service" means, for any period, the sum of
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payments made or required to be made by Borrower during such period for (i)
interest and scheduled principal payments due on the Term Loans (excluding the
amortization of the Closing Fee and voluntary prepayment and payments made from
Borrower's Excess Cash Flow, as required pursuant to the Schedule), and (ii)
interest only payments due on the Revolving Credit Loans facility plus the
Collateral Monitoring Fee, the Success Fee and the Unused Line Fee.
"Start Date" has the meaning set forth in the Schedule.
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"Stock Purchase Agreements" means those certain Agreements of Merger and
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Plan of Reorganization between Video City, Inc. and the shareholders of the
Borrowers other than Video City, Inc. pursuant to which Video City, Inc. has
acquired or will acquire all the shares of capital stock of the other Borrowers.
"Subordinated Debt" means liabilities of Borrower the repayment of which is
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subordinated, to the payment and performance of the Obligations, pursuant to a
subordination agreement acceptable to FINOVA in its sole discretion.
"Subordinating Creditor" has the meaning set forth in the Schedule.
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"Subsidiary Merger" means the merger of Adventures in Video, Inc., KDDJ
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Investments, Inc., Leptis Magna, Inc., and Sulpizio One, Inc. into Old Republic
Entertainment, Inc. with Old Republic Entertainment, Inc. being the surviving
corporation, all within 120 days of the Closing Date.
"Success Fee" has the meaning set forth in the Schedule.
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"Term Loans" has the meaning set forth in the Schedule.
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"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
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"Tranche A Term Loan" has the meaning set forth in the Schedule.
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FINOVA Loan and Security Agreement
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"Tranche B Term Loan" has the meaning set forth in the Schedule.
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"Tranche C Term Loan" has the meaning set forth in the Schedule.
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"Total Contractual Debt Service" means, for any period, the sum of payments
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made (or, as to clause (i) of this sentence, required to be made) by Borrower
during such period for (i) Senior Contractual Debt Service, (ii) pursuant to the
Seller Note and/or Noncompete Agreement, (iii) interest and scheduled principal
payments due on any and all other Indebtedness of Borrower, including without
limitation the Subordinated Indebtedness, and (iv) cash dividends paid on
Borrower's preferred stock.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
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"Trademarks, Copyrights, Licenses and Patents" means all of Borrower's
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right, title and interest in and to, whether now owned or hereafter acquired:
(i) trademarks, trademark registrations, trade names, trade name registrations,
and trademark or trade name applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, and (e) the goodwill of the business operated by Borrower connected with
and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto throughout the
world; (iii) license agreements, including without limitation such as are listed
on the Schedule attached hereto and made a part hereof, and the right to prepare
for sale, sell and advertise for sale any Inventory now or hereafter owned by
Borrower and now or hereafter covered by such licenses; and (iv) patents and
patent applications, registered or pending, including without limitation such as
are listed on the Schedule attached hereto, together with all income, royalties,
shop rights, damages and payments thereto, the right to sue for infringements
thereof, and all rights thereto throughout the world and all reissues,
divisions, continuations, renewals, extensions and continuations-in-part
thereof.
"Unused Line Fee" has the meaning set forth in the Schedule.
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"Warrant" has the meaning set forth in the Schedule.
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1.2 Other Terms. All accounting terms used in this Agreement, unless
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otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and
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provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, FINOVA shall, upon Borrower's request, make advances
to Borrower from time to time in an aggregate
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outstanding principal amount not to exceed the Total Facility amount (the "Total
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Facility") set forth on the Schedule hereto, subject to deduction of reserves
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for accrued interest and such other reserves as FINOVA deems proper from time to
time, and less amounts FINOVA may be obligated to pay in the future on behalf of
Borrower. The Schedule is an integral part of this Agreement and all references
to "herein", "herewith" and words of similar import shall for all purposes be
deemed to include the Schedule.
2.2 Loans. Advances under the Total Facility ("Loans" and individually,
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a "Loan") shall be comprised of the amounts shown on the Schedule.
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2.3 Overlines; Overadvances. If at any time or for any reason the
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outstanding amount of advances extended or issued pursuant hereto exceeds any of
the dollar limitations ("Overline") or percentage limitations ("Overadvance") in
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the Schedule, then Borrower shall, upon FINOVA's demand, immediately pay to
FINOVA, in cash, the full amount of such Overline or Overadvance which, at
FINOVA's option, may be applied to reduce the outstanding principal balance of
the Loans. Without limiting Borrower's obligation to repay to FINOVA on demand
the amount of any Overline or Overadvance, Borrower agrees to pay FINOVA
interest on the outstanding principal amount of any Overline or Overadvance, on
demand, at the rate set forth on the Schedule and applicable to the Revolving
Credit Loans.
2.4 Intentionally Deleted.
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2.5 Loan Account. All advances made hereunder shall be added to and
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deemed part of the Obligations when made. FINOVA may from time to time charge
all Obligations of Borrower to Borrower's loan account with FINOVA.
2.6 Interest; Fees; Warrants. Borrower shall pay FINOVA interest on the
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daily outstanding balance of the Obligations at the per annum rate set forth on
the Schedule. Borrower shall also pay FINOVA the fees set forth on the
Schedule. Video City, Inc. shall issue FINOVA Warrants to acquire the capital
stock of Video City, Inc., as summarized in the Schedule and as more fully set
forth in a separate warrant agreement executed by Video City, Inc.
contemporaneously with this Agreement.
2.7 Default Interest Rate. Upon the occurrence and during the
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continuation of an Event of Default, Borrower shall pay FINOVA interest on the
daily outstanding balance of the Obligations at a rate per annum which is two
percent (2%) in excess of the rate which would otherwise be applicable thereto
pursuant to the Schedule.
2.8 Examination Fee. Borrower agrees to pay to FINOVA the Examination
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Fee in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial Examination Fee in an amount equal to the amount set forth on the
Schedule. Such initial Examination Fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction, and shall
be deducted from any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
2.9 Excess Interest. (a) The contracted for rate of interest of the loan
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contemplated hereby, without limitation, shall consist of the following: (i)
the interest rate set forth on the Schedule, calculated and applied to the
principal balance of the Obligations in accordance with the provisions of this
Agreement; (ii) interest after an Event of
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FINOVA Loan and Security Agreement
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Default, calculated and applied to the amount of the Obligations in accordance
with the provisions hereof; and (iii) all Additional Sums (as herein defined),
if any. Borrower agrees to pay an effective contracted for rate of interest
which is the sum of the above-referenced elements. The Examination Fee,
attorneys fees, expert witness fees, collateral monitoring fees, closing fees,
success fees, Termination Fees, other charges, goods, things in action or any
other sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Agreement or any other documents
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or instruments in any way pertaining to this lending transaction, or otherwise
with respect to this lending transaction, that under any applicable law may be
deemed to be interest with respect to this lending transaction, for the purpose
of any applicable law that may limit the maximum amount of interest to be
charged with respect to this lending transaction, shall be payable by Borrower
as, and shall be deemed to be, additional interest and for such purposes only,
the agreed upon and "contracted for rate of interest" of this lending
transaction shall be deemed to be increased by the rate of interest resulting
from the inclusion of the Additional Sums.
(b) It is the intent of the parties to comply with the usury
laws of the State of Arizona (the "Applicable Usury Law"). Accordingly, it is
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agreed that notwithstanding any provisions to the contrary in this Agreement, or
in any of the documents securing payment hereof or otherwise relating hereto, in
no event shall this Agreement or such documents require the payment or permit
the collection of interest in excess of the maximum contract rate permitted by
the Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any
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such excess of interest otherwise would be contracted for, charged or received
from Borrower or otherwise in connection with the loan evidenced hereby, or (b)
the maturity of the Obligations is accelerated in whole or in part, or (c) all
or part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other Person now or hereafter liable
for the payment of the Obligations shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Maximum Interest Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount of the Obligations or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law: (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, to the extent that interest paid to the date of
calculation does not exceed the Maximum Interest Rate, until the entire amount
of interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable
9
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
Usury Law, then to the extent not prohibited by the Applicable Usury Law, such
increases shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the Maximum Interest Rate be decreased because of a change in the
Applicable Usury Law, such decreases shall not apply to the indebtedness
evidenced hereby regardless of when incurred.
2.10 Principal Payments; Proceeds of Collateral.
-------------------------------------------
(a) Principal Payments. Except where evidenced by notes or
------------------
other instruments issued or made by Borrower to FINOVA specifically containing
payment provisions which are in conflict with this Section 2.10 (in which event
the conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Loans shall be payable by Borrower to FINOVA immediately upon the
earliest of (i) the receipt by FINOVA or Borrower of any proceeds of any of the
Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of
Default in consequence of which FINOVA elects to accelerate the maturity and
payment of such loans, or (iii) any termination of this Agreement pursuant to
Section 9.2 hereof; provided, however, that any Overadvance or Overline shall
-------- -------
be payable on demand pursuant to the provisions of Section 2.3 hereof.
(b) Collections. Until FINOVA notifies Borrower to the
-----------
contrary, Borrower may make collection of all Receivables for FINOVA and shall
receive all such payments or sums as trustee of FINOVA and cause the immediate
delivery of all such payments or sums to FINOVA's bank account as directed by
FINOVA. FINOVA or its designee may, at any time, notify account debtors that the
Receivables have been assigned to FINOVA and of FINOVA's security interest
therein, and may collect the Receivables directly and charge the collection
costs and expenses to Borrower's loan account. Borrower agrees that, in
computing the charges under this Agreement, all items of payment shall be deemed
applied by FINOVA on account of the Obligations two (2) Business Days after
receipt by FINOVA of good funds which have been finally credited to FINOVA's
account, whether such funds are received directly from Borrower or from the
Dominion Account bank, pursuant to Section 2.10(c) hereof, and this provision
shall apply regardless of the amount of the Obligations outstanding or whether
any Obligations are outstanding; provided, that if any such good funds are
--------
received after 12:00 p.m. noon (Los Angeles time) on any Business Day or at any
time on any day not constituting a Business Day, such funds shall be deemed
received on the immediately following Business Day. FINOVA is not, however,
required to credit Borrower's account for the amount of any item of payment
which is unsatisfactory to FINOVA in its Permitted Discretion and FINOVA may
charge Borrower's loan account for the amount of any item of payment which is
returned to FINOVA unpaid.
(c) Establishment of a Dominion Account. FINOVA may
-----------------------------------
establish depository accounts in the name of FINOVA at a bank or banks for the
deposit of such funds (each, a "Dominion Account") and, unless Borrower shall
----------------
be otherwise directed by FINOVA in writing, Borrower shall deposit all proceeds
of Receivables and all cash proceeds of any sale of Inventory or, to the extent
permitted herein, Equipment or cause same to be deposited, in kind, in such
Dominion Accounts of FINOVA, and, unless otherwise provided herein, all such
funds shall be applied by FINOVA to the Obligations in such order as FINOVA
determines in its sole discretion.
10
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
(d) Payments Without Deductions. Borrower shall pay
---------------------------
principal, interest, and all other amounts payable hereunder, or under any other
Loan Document, without any deduction whatsoever, including, but not limited to,
any deduction for any setoff or counterclaim.
(e) Collection Days Upon Repayment. In the event Borrower
------------------------------
repays the Obligations in full at any time hereafter, such payment in full shall
be credited (conditioned upon final collection) to Borrower's loan account three
(3) Business Days after FINOVA's receipt thereof.
(f) Monthly Accountings. FINOVA shall provide Borrower
-------------------
monthly with an account of advances, charges, expenses and payments made
pursuant to this Agreement. Such account shall be deemed correct, accurate and
binding on Borrower and an account stated (except for reverses and
reapplications of payments made and corrections of errors discovered by FINOVA),
unless Borrower notifies FINOVA in writing to the contrary within thirty (30)
days after each account is rendered, describing the nature of any alleged errors
or admissions.
2.11 Application of Collateral. Except as otherwise provided herein,
-------------------------
FINOVA shall have the continuing and exclusive right to apply or reverse and re-
apply any and all payments to any portion of the Obligations in such order and
manner as FINOVA shall determine in its sole discretion. To the extent that
Borrower makes a payment or FINOVA receives any payment or proceeds of the
Collateral for Borrower's benefit which is subsequently invalidated, declared to
be fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver or any other party under any bankruptcy law,
common law or equitable cause, or otherwise, then, to such extent, the
Obligations or part thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by FINOVA.
2.12 Application of Payments. The amount of all payments or amounts
-----------------------
received by FINOVA with respect to the Loan shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Default Interest; (ii) then, to any late fees,
overdue risk assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loan; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure contingent obligations arising under the Loan
Documents and/or (y) applied to amounts owed to FINOVA by Borrower as FINOVA in
its sole discretion may determine. In calculating interest and applying
payments as set forth above: (a) interest shall be calculated and collected
through the date a payment is actually applied by FINOVA under the terms of this
Agreement; (b) interest on the outstanding balance shall be charged during any
grace period permitted hereunder; (c) at the end of each month, all accrued and
unpaid interest and other charges provided for hereunder shall be added to the
principal balance of the Loan; and (d) to the extent that Borrower makes a
payment or FINOVA receives any payment or proceeds of the Collateral for
Borrower's benefit that is subsequently invalidated, set aside or required to be
repaid to any other Person, then, to such extent, the Obligations intended to be
satisfied shall be revived and continue as if such payment or proceeds had not
been received by FINOVA and FINOVA may adjust the Loan balances as FINOVA, in
its sole discretion, deems appropriate under the circumstances.
11
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
2.13 Notification of Closing. Borrower shall provide FINOVA with at
-----------------------
least forty-eight (48) hours prior written notice of the Closing Date, to enable
FINOVA to arrange for the availability of funds. In the event the closing does
not take place on the date specified in Borrower's notice to FINOVA, other than
through the fault of FINOVA, Borrower agrees to reimburse FINOVA for FINOVA's
costs to maintain the necessary funds available for the closing, at the Term
Interest Rate with respect to the amount specified in the Schedule, and at the
Revolving Interest Rate with respect to an amount equal to the initial advance
under the Revolving Credit Loans facility which is to be made on the Closing
Date, for the number of days which elapse between the date specified in
Borrower's notice and the date upon which the closing actually occurs (which
number of days shall not include the date specified in Borrower's notice, but
shall include the Closing Date).
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
-----------------------------------
performance of the Obligations when due, Borrower hereby grants to FINOVA a
first priority security interest (subject only to Permitted Encumbrances) in all
of Borrower's now owned or hereafter acquired or arising Inventory, Equipment,
Receivables, life insurance policies and the proceeds thereof, Trademarks,
Copyrights, Licenses and Patents, Borrower's rights, but not its obligations,
under the Acquisition Documents, Investment Property (as defined in Section 9-
115 of the Code) and General Intangibles; including, without limitation, all of
Borrower's Deposit Accounts, money, any and all property now or at any time
hereafter in FINOVA's possession (including claims and credit balances), and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products and all books and records and
computer data related to any of the foregoing (all of the foregoing, together
with all other property in which FINOVA may be granted a lien or security
interest, is referred to herein, collectively, as the "Collateral"); provided
---------- --------
that on the date hereof, Borrower is selling to a third party its library of
approximately 47 films previously owned by Prism Entertainment Corporation,
together with related accounts receivable, and FINOVA shall not have a security
interest in such library and such related accounts receivable.
3.2 Perfection and Protection of Security Interest. Borrower shall, at
----------------------------------------------
its expense, take all actions requested by FINOVA at any time to perfect,
maintain, protect and enforce FINOVA's first priority security interest and
other rights in the Collateral and the priority thereof from time to time,
including, without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and delivering such
documents and titles in connection with motor vehicles as FINOVA shall require,
all in form and substance satisfactory to FINOVA, (ii) maintaining a perpetual
inventory and complete and accurate stock records, (iii) delivering to FINOVA
warehouse receipts covering any portion of the Collateral located in warehouses
and for which warehouse receipts are issued, and transferring Inventory to
warehouses designated by FINOVA, (iv) placing notations on Borrower's books of
account to disclose FINOVA's security interest therein and (v) delivering to
FINOVA all letters of credit on which Borrower is named beneficiary. FINOVA may
file, without Borrower's signature, one or more financing statements disclosing
FINOVA's security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
12
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FINOVA Loan and Security Agreement
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Borrower's agents or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request, instruct them
to hold all such Collateral for FINOVA's account subject to FINOVA's
instructions. From time to time, Borrower shall, upon FINOVA's request, execute
and deliver confirmatory written instruments pledging the Collateral to FINOVA,
but Borrower's failure to do so shall not affect or limit FINOVA's security
interest or other rights in and to the Collateral. Until the Obligations have
been fully satisfied and FINOVA's obligation to make further advances hereunder
has terminated, FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted Discretion,
--------------------------
at any time discharge any lien or encumbrance on the Collateral or bond the
same, pay any insurance, maintain guards, pay any service bureau, obtain any
record or take any other action to preserve the Collateral and charge the cost
thereof to Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
---------
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee, additional insured, and other endorsements,
satisfactory to FINOVA. All premiums with respect to such insurance shall be
paid by Borrower as and when due. Accurate and certified copies of the policies
shall be delivered by Borrower to FINOVA. If Borrower fails to comply with this
Section, FINOVA may (but shall not be required to) procure such insurance and
endorsements at Borrower's expense and charge the cost thereof to Borrower's
loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
-------------------------------
(a) Invoices. Borrower shall not re-date any invoice or sale
--------
from the original date thereof or make sales on extended terms beyond those
customary in Borrower's industry, or otherwise extend or modify the term of any
Receivable. If Borrower becomes aware of any matter affecting any Receivable,
including information affecting the credit of the account debtor thereon,
Borrower shall promptly notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes
-----------
evidenced by a of money, Borrower shall immediately deliver such instrument to
FINOVA appropriately endorsed to FINOVA and, regardless of the form of any
presentment, demand, notice of dishonor, protest and notice of protest with
respect thereto, Borrower shall remain liable thereon until such instrument is
paid in full.
(c) Physical Inventory. Borrower shall conduct a physical
------------------
count of the Inventory at such intervals as FINOVA requests and promptly supply
FINOVA with a copy of such accounts accompanied by a report of the value
(calculated at the lower of cost or market value on a first in, first out basis)
of the Inventory and such additional information with respect to the Inventory
as FINOVA may request from time to time.
(d) Returns. For so long as no Event of Default has occurred
-------
and is continuing and subject to the provisions of Section 3.6(b), if any
account debtor returns any Inventory to Borrower in the ordinary course of its
business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the account debtor (sending a copy to
FINOVA) in the appropriate amount. In the event any attempted return
13
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
occurs after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for FINOVA, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as FINOVA's property, and (iv) immediately notify FINOVA of the return
of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on FINOVA's request deliver such
returned Inventory to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Eligibility. FINOVA at any time shall be entitled to (a) establish
-----------
and increase or decrease reserves against Eligible Inventory, (b) reduce the
advance rates in the Schedule or restore such advance rates to any level equal
to or below the advance rates set forth in the Schedule or (c) impose additional
restrictions (or eliminate the same) to the standards of eligibility set forth
in the definition of "Eligible Inventory," in the exercise of its Permitted
Discretion. FINOVA may but shall not be required to rely on the schedules
and/or reports delivered to FINOVA in connection herewith in determining the
eligibility of Inventory. Reliance thereon by FINOVA from time to time shall
not be deemed to limit the right of FINOVA to revise advance rates or standards
of eligibility as provided above.
3.7 Equipment. Borrower shall keep and maintain the Equipment in good
---------
operating condition and repair and make all necessary replacements thereto to
maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrower's past practice, ordinary wear and tear excepted.
Borrower shall not permit any item of Equipment to become a fixture (other than
a trade fixture) to real estate or an accession to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower represents,
-----------------------------------------
warrants and covenants that except for FINOVA's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by FINOVA in its sole discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever and (b) Borrower shall not, without FINOVA's
prior written approval, sell, encumber or dispose of or permit the sale,
encumbrance or disposal of any Collateral or all or any substantial part of any
of its other assets (or any interest of Borrower therein), except for the sale
of Inventory in the ordinary course of Borrower's business. In the event FINOVA
gives any such prior written approval with respect to any such sale of
Collateral, the same may be conditioned on the sale price being equal to, or
greater than, an amount acceptable to FINOVA. The proceeds of any such sales of
Collateral shall be remitted to FINOVA pursuant to this Agreement for
application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan
-------------------
secured by the Collateral. FINOVA may, in its sole discretion, (i) exchange,
enforce, waive or release any of the Collateral, (ii) apply Collateral and
direct the order or manner of sale thereof as it may determine, and (iii)
settle, compromise, collect or otherwise liquidate any Collateral in any manner
without affecting its right to take any other action with respect to any other
Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial
---------------
advance hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule:
14
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FINOVA Loan and Security Agreement
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(a) Loan Documents. FINOVA shall have received each of the
--------------
following Loan Documents: (i) the Agreement fully and properly executed by
Borrower; (ii) promissory notes in such amounts and on such terms and conditions
as FINOVA shall specify, executed by Borrower; (iii) Guaranties executed by each
of the Guarantors and/or Support Agreements executed by the applicable parties;
(iv) such security agreements, intellectual property assignments, pledge
agreements, mortgages and deeds of trust as FINOVA may require with respect to
this Agreement and any Guaranties, executed by each of the parties thereto and,
if applicable, duly acknowledged for recording or filing in the appropriate
governmental offices; (v) Subordination Agreements in form and substance
acceptable to FINOVA, executed by each of the Subordinating Creditors, together
with copies of all instruments subject thereto showing a legend indicating such
subordination; (vi) such Dominion Account agreements as it shall determine; and
(vii) such other documents, instruments and agreements in connection herewith as
FINOVA shall require, executed, certified and/or acknowledged by such parties as
FINOVA shall designate;
(b) Minimum Excess Availability. Borrower shall have Excess
---------------------------
Availability under the Revolving Credit Loans facility of not less than the
amount specified in the Schedule, after giving effect to the initial advance
hereunder and after giving effect to any applicable Loan Reserves against
borrowing availability under the Revolving Credit Loans.
(c) Terminations by Existing Lender. Borrower's existing
-------------------------------
lender(s) shall have executed and delivered UCC termination statements and other
documentation evidencing the termination of its liens and security interests in
the assets of Borrower or a subordination agreement in form and substance
satisfactory to FINOVA in its sole discretion;
(d) Charter Documents. FINOVA shall have received copies of
-----------------
Borrower's By-laws and Articles or Certificate of Incorporation, as amended,
modified, or supplemented to the Closing Date, certified by the Secretary of
Borrower;
(e) Good Standing. FINOVA shall have received a certificate
--------------
of corporate status with respect to Borrower, dated within ten (10) days of the
Closing Date, by the Secretary of State of the state of incorporation of
Borrower, which certificate shall indicate that Borrower is in good standing in
such state;
(f) Foreign Qualification. FINOVA shall have received
---------------------
certificates of corporate status with respect to Borrower and each other Loan
Party, each dated within ten (10) days of the Closing Date, issued by the
Secretary of State of each state in which such party's failure to be duly
qualified or licensed would have a material adverse effect on its financial
condition or assets, indicating that such party is in good standing;
(g) Authorizing Resolutions and Incumbency. FINOVA shall
--------------------------------------
have received a certificate from the Secretary of Borrower attesting to (i) the
adoption of resolutions of Borrower's Board of Directors, and shareholders or
members if necessary, authorizing the borrowing of money from FINOVA and
execution and delivery of this Agreement and the other Loan Documents to which
Borrower is a party, and authorizing specific officers of Borrower to execute
same, and (ii) the authenticity of original specimen signatures of such
officers;
(h) Insurance. FINOVA shall have received the insurance
---------
certificates and certified copies of policies required by Section 3.4 hereof, in
form and substance satisfactory to FINOVA and its counsel, together with an
additional insured
15
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
endorsement in favor of FINOVA with respect to all liability policies and a
lender's loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel;
(i) Intentionally Deleted.
---------------------
(j) Searches; Certificates of Title. FINOVA shall have
-------------------------------
received searches reflecting the filing of its financing statements and fixture
filings in such jurisdictions as it shall determine, and shall have received
certificates of title with respect to the Collateral which shall have been duly
executed in a manner sufficient to perfect all of the security interests granted
to FINOVA;
(k) Landlord, Bailee and Mortgagee Waivers. FINOVA shall
---------------------------------------
have received landlord, bailee and/or mortgagee waivers from the lessors,
bailees and/or mortgagees of the property located at 6840 District Blvd.,
Bakersfield, California and, on a best efforts basis, all other locations where
any Collateral is located, provided that FINOVA shall create a Loan Reserve in
--------
the amount of two (2) months' rent, respectively, for each store for which such
waiver is not obtained prior to the Closing Date (the "Initial Landlord
Reserve"), which amount shall be increased sixty (60) days after the Closing
Date to three (3) months' rent for each location for which a landlord waiver has
not been obtained at such time. If any landlord waiver is received by FINOVA, in
form and substance satisfactory to FINOVA, prior to sixty (60) days after the
Closing Date, such landlord waiver will reduce the amount of the Initial
Landlord Reserve only if amount of the Initial Landlord Reserve is greater than
or equal to the sum of three (3) months' rent for all remaining locations for
which a landlord waiver has not been obtained;
(l) Fees. Borrower shall have paid all fees payable by it on
----
the Closing Date pursuant to this Agreement;
(m) Opinion of Counsel. FINOVA shall have received an opinion
------------------
of Borrower's counsel covering such matters as FINOVA shall determine in its
sole discretion;
(n) Officer Certificate. FINOVA shall have received a
-------------------
certificate of the President and the Chief Financial Officer or similar official
of Borrower, attesting to the accuracy of each of the representations and
warranties of Borrower set forth in this Agreement and the fulfillment of all
conditions precedent to the initial advance hereunder;
(o) Solvency Certificate. If requested, FINOVA shall have
--------------------
received a signed certificate of the Borrower's duly elected Chief Financial
Officer concerning the solvency and financial condition of Borrower, on FINOVA's
standard form;
(p) Dominion Account. The Dominion Account referred to in
----------------
Section 2.10(c) hereof shall have been established to the satisfaction of FINOVA
in its sole discretion;
(q) Intentionally Deleted.
---------------------
(r) Intentionally Deleted.
---------------------
(s) Search and References. FINOVA shall have received and
---------------------
approved the results of UCC, tax lien, litigation, judgment, and bankruptcy
searches regarding Borrower, Investors and such members of the senior management
of Borrower as FINOVA shall require, and shall have received satisfactory
customer, vendor and credit
16
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
reference checks on Borrower. Without limiting the foregoing, FINOVA shall have
received Bishop's Reports, with findings satisfactory to FINOVA, for Robert
Young Lee.
(t) Intentionally Deleted.
---------------------
(u) Intentionally Deleted.
---------------------
(v) No Material Adverse Changes. Prior to the Closing Date,
---------------------------
there shall have occurred no material adverse change in the financial condition
of Borrower since the date set forth in the Schedule. At the closing, Borrower
shall deliver to FINOVA an officer's certification confirming that Borrower is
unaware of the existence of any such material adverse change in Borrower's
financial condition.
(w) Material Agreements. FINOVA shall have received, reviewed
-------------------
and approved all material agreements to which Borrower shall be a party.
(x) Projections. Borrower shall submit cash flow projections
-----------
and pro forma balance sheet with adjusting entries (i) showing that the proposed
financing will provide sufficient funds for the Borrower's projected working
capital needs, and (ii) showing: (1) that the Borrower will have reasonably
sufficient capital for the conduct of its business following the initial
funding, and (2) that the Borrower will not incur debts beyond its ability to
pay such debts as they mature.
(y) Opinions. To the extent any Person other than Borrower
--------
shall be parties to the Loan Documents, FINOVA reserves the right to require
satisfactory opinions of counsel for each such Person concerning the proper
organization of such Person and the due authorization, execution, delivery,
enforceability, validity and binding effect of the Loan Documents to which such
Person is a party. Each such opinion of counsel shall confirm, to the
satisfaction of FINOVA, that the opinion is being delivered to FINOVA at the
instruction of the party represented by such counsel, that FINOVA is entitled to
rely on such opinion and that for purposes of such reliance, FINOVA is deemed to
be in privity with the opining counsel.
(z) ADA Compliance. If necessary, as of the Closing Date,
--------------
Borrower shall be in compliance with the Americans with Disabilities Act of 1990
("ADA"), or, if any renovations of Borrower's facilities or modifications of
---
Borrower's employment practices shall be required to bring them into compliance
with the ADA, review and approval by FINOVA of Borrower's proposed plan to come
into such compliance. Borrower shall deliver representations and warranties to
FINOVA concerning Borrower's compliance with the ADA, and no evidence shall have
come to the attention of FINOVA indicating that Borrower is not in compliance
with the ADA (except to the extent that FINOVA has reviewed and approved
Borrower's plan to come into compliance).
(aa) Subordination and Intercreditor Agreements. FINOVA and
------------------------------------------
each Subordinating Creditor shall have entered into a Subordination Agreement,
in form and substance satisfactory to FINOVA. Without limiting the generality of
the foregoing, Seller shall enter into one or more Subordination Agreements with
FINOVA, in form and substance satisfactory to FINOVA, providing that Seller's
right to payments in respect of the Seller Subordinated Indebtedness shall be
subordinated in right of payment to the Loan.
(bb) Intentionally Deleted.
---------------------
17
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FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
(cc) Acquisition Documents. FINOVA must review and find
---------------------
satisfactory the Stock Purchase Agreements, including copies of all exhibits and
schedules thereto, the Seller Noncompete Agreement (which Seller Noncompete
Agreement shall provide for payments in an amount as previously represented to
FINOVA), and all other documents referred to therein, and all other instruments
to be executed between Borrower and Seller in connection with the acquisition
(the "Acquisition"; all such documents and instruments being referred to herein
-----------
collectively as the "Acquisition Documents"). The Acquisition Documents must
---------------------
contain specific representations and warranties, in form and substance
satisfactory to FINOVA, with respect to the accuracy of the financial
information submitted by Seller, and shall further contain indemnity provisions
acceptable to FINOVA which shall address, among other items, liability for
environmental contamination and clean up, if any. In addition, FINOVA must
review and find satisfactory all terms and conditions applicable to any
promissory notes delivered to evidence the Seller Subordinated Indebtedness.
(dd) Employment and Non-compete Agreements. FINOVA shall have
-------------------------------------
reviewed and approved all employment and non-compete agreements to be in effect
as of the Closing Date between Borrower and any Seller.
(ee) Asset Appraisal. Borrower shall have provided to FINOVA,
---------------
at Borrower's sole cost and expense, an asset appraisal of all Borrower's fixed
assets upon which FINOVA shall be granted a first priority lien and security
interest, which appraisal must be acceptable to FINOVA in all respects.
(ff) Transaction Costs. Borrower shall provide to FINOVA a
-----------------
complete, itemized summary of all transaction costs paid or incurred by any
Person in connection with the making of the Loan and the consummation of the
Acquisition, as well as appropriate documentation evidencing such costs and the
payment thereof. All such information must be acceptable to FINOVA, in FINOVA's
sole discretion, exercised in good faith.
(gg) Schedule Conditions. Borrower shall have complied with
-------------------
all additional conditions precedent as set forth in the Schedule attached
hereto.
(hh) Warrant and Warrant Agreement. FINOVA shall have received
-----------------------------
a warrant agreement duly executed by Borrower, in form and substance
satisfactory to FINOVA in its discretion, together with the Warrant;
(ii) Other Matters. All other documents and legal matters in
-------------
connection with the transactions contemplated by this Agreement shall have been
delivered, executed and recorded and shall be in form and substance satisfactory
to FINOVA and its counsel including, without limitation, each of the items
listed on the Closing Checklist attached as Exhibit 4.1 hereto.
-----------
4.2 Subsequent Advances. The obligation of FINOVA to make any advance
--------------------
shall be subject to the further conditions precedent that, on and as of the date
of such advance: (a) the representations and warranties of Borrower set forth
in this Agreement shall be accurate, before and after giving effect to such
advance or issuance and to the application of any proceeds thereof; (b) no
Event of Default and no event which, with notice or passage of time or both,
would constitute an Event of Default has occurred and is continuing, or would
result from such advance or issuance or from the application of any proceeds
thereof; (c) no material adverse change has occurred in the Borrower's business,
operations, financial condition, in the condition of the Collateral or
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FINOVA Loan and Security Agreement
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other assets of Borrower or in the prospect of repayment of the Obligations; and
(d) FINOVA shall have received such other approvals, opinions or documents as
FINOVA shall reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly
----------------
existing and in good standing under the laws of the State set forth on the
Schedule, is qualified and authorized to do business and is in good standing in
all states in which such qualification and good standing are necessary in order
for it to conduct its business and own its property, and has all requisite power
and authority to conduct its business as presently conducted, to own its
property and to execute and deliver each of the Loan Documents to which it is a
party and perform all of its Obligations thereunder, and has not taken any steps
to wind-up, dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years,
-----------
been known by or used any other corporate or fictitious name except as set forth
on the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person
during such time;
5.3 Due Authorization. The execution, delivery and performance by
-----------------
Borrower of the Loan Documents to which it is a party have been authorized by
all necessary corporate action and do not and shall not constitute a violation
of any applicable law or of Borrower's Articles or Certificate of Incorporation
or By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is
------------------
a party is the legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses,
-------------------
patents, patent applications, copyrights, trademarks, trademark applications and
trade names for the present and planned future conduct of its business without
any known conflict with the rights of others, and each is valid and has been
duly registered or filed with the appropriate governmental authorities; each of
Borrower's patents, patent applications, copyrights, trademarks and trademark
applications which have been registered or filed with any governmental authority
(including the U.S. Patent and Trademark Office and the Library of Congress) are
listed by name, date and filing number on the Schedule;
5.6 Capital. Borrower has capital sufficient to conduct its business, is
-------
able to pay its debts as they mature, and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
5.7 Material Litigation. Borrower has no pending or overtly threatened
-------------------
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. Borrower has good, indefeasible
-----------------------------------
and merchantable title to the Collateral and, upon the execution and delivery of
the Loan Documents, the filing of UCC-1 Financing
19
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FINOVA Loan and Security Agreement
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Statements, delivery of the certificate(s) evidencing any pledged securities,
the filing of any collateral assignments or security agreements regarding
Borrower, Trademarks, Copyrights, Licenses and/or Patents, if any, with the
appropriate governmental offices and the recording of any mortgages or deeds of
trust with respect to real property, in each case in the appropriate offices,
this Agreement and such documents shall create valid and perfected first
priority liens in the Collateral, subject only to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is not a party or
---------------------------------------
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to any
labor dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA in writing prior
to the date hereof;
5.10 Laws. Borrower is not in violation of any applicable statute,
----
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be obtained or issued
--------
any required consent of a governmental agency or other Person in connection with
the financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note,
--------
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly present
-------------------
Borrower's financial condition and results of operations and those of such other
Persons described therein as of the date thereof in accordance with GAAP; there
are no material omissions from the Prepared Financials or other facts or
circumstances not reflected in the Prepared Financials; and there has been no
material and adverse change in such financial condition or operations since the
date of the initial Prepared Financials delivered to FINOVA hereunder;
5.14 ERISA. The Borrower and any Plans are in compliance in all material
-----
respects with the provisions of ERISA and the qualification requirements of IRC
Section 401(a) and Borrower has received no notice indicating that it or any
Plan does not so comply. No notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA, nor has any Plan been terminated under ERISA. The
PBGC has not instituted proceedings to terminate, or appointed a trustee to
administer, a Plan. No lien upon the assets of Borrower has arisen with respect
to a Plan. No Prohibited Transaction or Reportable Event has occurred with
respect to a Plan. Neither Borrower nor any ERISA Affiliate has incurred any
withdrawal liability with respect to any Multiemployer Plan. Borrower and each
ERISA Affiliate have made all contributions required to be made by them to any
Plan or Multiemployer Plan when due. There is no accumulated funding deficiency
in any Plan, whether or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports as
-----
it is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
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FINOVA Loan and Security Agreement
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5.16 Locations; Federal Tax ID No. Borrower's chief executive office and
----------------------------
the offices and locations where it keeps the Collateral (except for Inventory in
transit) are at the locations set forth on the Schedule, except to the extent
that such locations may have been changed after notice to FINOVA in accordance
with Section 6.4 hereof; Borrower's federal tax identification number is as
shown on the Schedule;
5.17 Business Relationships. There exists no actual or threatened
----------------------
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no present
condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by Borrower pursuant to
--------------
this Agreement shall constitute (i) an automatic representation and warranty by
Borrower to FINOVA that there does not then exist any Event of Default and (ii)
a reaffirmation as of the date of said request of all of the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents.
5.19 Subsidiary Merger. The Subsidiary Merger shall be consummated within
-----------------
120 days after the Closing Date.
6. COVENANTS.
6.1 Affirmative Covenants. Borrower covenants that, so long as any
---------------------
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate
-----
provision for the payment of all taxes, assessments and other charges on or
prior to the date when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of
--------------------
any litigation, suit or administrative proceeding which may materially and
adversely affect the Collateral or Borrower's business, assets, operations,
prospects or condition, financial or otherwise, whether or not the claim is
covered by insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the
-----
occurrence of any Reportable Event with respect to a Plan, other than a
termination, partial termination or merger of a Plan or a transfer of a Plan's
assets and (ii) prior to any termination, partial termination or merger of a
Plan or a transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45)
------------------
days prior to any change in the location of Borrower's chief executive office or
the location of any Collateral, or Borrower's opening or closing of any other
place of business;
6.1.5 Corporate Existence. Maintain its corporate existence and its
-------------------
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any
--------------
labor dispute to which Borrower is or may
21
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FINOVA Loan and Security Agreement
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become subject and the expiration of any labor contract to which Borrower is a
party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
-----------------
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency thereof, applicable to Borrower which may materially
and adversely affect the Collateral or Borrower's business, assets, prospects,
operations or condition, financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business
--------
Days of Borrower's default under any note, indenture, loan agreement, mortgage,
lease or other agreement to which Borrower is a party or by which Borrower is
bound, or of any other default under any Indebtedness of Borrower;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of the
--------------------
making of any Capital Expenditure materially affecting Borrower's business,
assets, prospects, operations or condition, financial or otherwise, except to
the extent permitted in the Schedule;
6.1.10 Books and Records. Keep adequate records and books of
-----------------
account with respect to its business activities in which proper entries are made
in accordance with GAAP, reflecting all of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide FINOVA with (i) copies
----------------------------
of all agreements between Borrower and any landlord, warehouseman or bailee
which owns any premises at which any Collateral may, from time to time, be
located (whether for processing, storage or otherwise), and (ii) without
limiting the landlord, bailee and/or mortgagee waivers to be provided pursuant
to Section 4.1(j) hereof, additional landlord, bailee and/or mortgagee waivers
in form acceptable to FINOVA with respect to all locations where any Collateral
is hereafter located;
6.1.12 Additional Documents. At FINOVA's request, promptly execute
--------------------
or cause to be executed and delivered to FINOVA any and all documents,
instruments or agreements deemed necessary by FINOVA to facilitate the
collection of the Obligations or the Collateral or otherwise to give effect to
or carry out the terms or intent of this Agreement or any of the other Loan
Documents. Without limiting the generality of the foregoing, if any of the
Receivables with a face value in excess of $1,000 arises out of a contract with
the United States of America or any department, agency, subdivision or
instrumentality thereof, Borrower shall promptly notify FINOVA of such fact in
writing and shall execute any instruments and take any other action required or
requested by FINOVA to comply with the provisions of the Federal Assignment of
Claims Act; and
6.1.13 Financial Covenants. Comply with the financial covenants set
-------------------
forth on the Schedule.
6.1.14 Support Agreements. In the event that Craig Kelly or Tim
------------------
Denari resigns or is terminated as an officer of Borrower, cause the successor
to such Person's office to enter into and deliver to FINOVA a support agreement
in the form of the support agreements delivered by Craig Kelly and Tim Denari
pursuant to Section 4.1(a) (iii) of this Agreement.
6.2 Negative Covenants. Without FINOVA's prior written consent, which
------------------
consent FINOVA may withhold in its sole discretion, so long as any Obligation
remains outstanding and this Agreement is in effect, Borrower shall not:
6.2.1 Mergers. Except for the Subsidiary Merger, merge or
-------
consolidate with or
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FINOVA Loan and Security Agreement
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acquire any other Person, or make any other material change in its capital
structure or in its business or operations which might adversely affect the
repayment of the Obligations, provided that Borrower may increase the amount of
--------
its authorized common stock and issue preferred stock.
FINOVA acknowledges it has been informed about the possible merger of
Borrower with Game City and Far West; however, Borrower shall not merge or
consolidate with or acquire Game City or Far West without FINOVA's prior written
approval in a writing separate from this Agreement;
6.2.2 Loans. Make advances, loans or extensions of credit to, or
-----
invest in, any Person, except for (i) loans or cash advances to employees which
are permitted in the Schedule and (ii) provided that no Event of Default has
occurred and is continuing, funds advanced among the Borrowers.
6.2.3 Dividends. Declare or pay cash dividends upon any of its
---------
stock or distribute any of its property or redeem, retire, purchase or acquire
directly or indirectly any of its stock, provided that Borrower may increase the
--------
amount of its authorized common stock and issue preferred stock, which may be
dividend-paying so long as such payment does not otherwise violate this
Agreement;
6.2.4 Adverse Transactions. Enter into any transaction which
--------------------
materially and adversely affects the Collateral or its ability to repay the
Obligations in full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
----------------------
contingently liable for the Indebtedness of any Person, except by endorsement of
instruments for deposit and except for the existing guarantees made by Borrower
prior to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
----------
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis;
6.2.7 Name. Use any corporate or fictitious name other than its
----
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade
----------
payables and other than the Obligations;
6.2.9 Capital Expenditure. Make or incur any Capital Expenditure
-------------------
if, after giving effect thereto, the aggregate amount of all Capital
Expenditures by Borrower in any fiscal year would exceed the amount set forth on
the Schedule;
6.2.10 Compensation. Pay total compensation, including salaries,
------------
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year to
all of Borrower's executives, officers and directors (or any relative thereof)
in an amount in excess of the amount set forth on the Schedule;
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
------------
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers and customers
incurred in the ordinary course of business, (iii) other Indebtedness existing
on the date of this Agreement and reflected in the Prepared Financials (except
Indebtedness paid on the date of this Agreement from proceeds of
23
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FINOVA Loan and Security Agreement
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the initial advances hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth below, sell,
----------------------
transfer, distribute or pay any money or property to any Affiliate, or invest in
(by capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may pay compensation permitted by
Section 6.2.10 to employees who are Affiliates and, if no Event of Default has
occurred, Borrower may (i) engage in transactions with Affiliates in the normal
course of business, in amounts and upon terms which are fully disclosed to
FINOVA and which are no less favorable to Borrower than would be obtainable in a
comparable arm's length transaction with a Person who is not an Affiliate, and
(ii) make payments to a Subordinating Creditor that is an Affiliate, subject to
and only to the extent expressly permitted in the Subordination Agreement
between such Subordinating Creditor and FINOVA;
6.2.13 Nature of Business. Enter into any new business or make any
------------------
material change in any of Borrower's business objectives, purposes or
operations; provided that on the date hereof, Borrower is selling its library of
--------
approximately 47 films previously owned by Prism Entertainment Corporation;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with
-------------
any of Borrower's business or activities, except in connection with internal
business matters or as required in dealings with governmental agencies and
financial institutions or with trade creditors of Borrower, solely for credit
reference purposes; or
6.2.15 Margin Security. Borrower will not (and has not in the past)
---------------
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation G or Regulation U issued by the Board of Governors of
the Federal Reserve System), and no proceeds of any Loan or other advance will
be used to purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock, or in any manner which
might cause such Loan or other advance or the application of such proceeds to
violate (or require any regulatory filing under) Regulation G, Regulation T,
Regulation U, Regulation X or any other regulation of the Board of Governors of
the Federal Reserve System, in each case as in effect on the date or dates of
such Loan or other advance and such use of proceeds. Further, no proceeds of any
Loan or other advance will be used to acquire any security of a class which is
registered pursuant to Section 12 of the Securities Exchange Act of 1934.
6.2.16 Real Property. Purchase or acquire any real property without
-------------
FINOVA's prior written consent, a condition of which consent shall include
delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel.
7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
-----------------
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of
the Obligations at stated maturity, upon acceleration or otherwise;
24
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FINOVA Loan and Security Agreement
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(b) Borrower or any other Loan Party fails or neglects to
perform, keep, or observe any Obligation including, but not limited to, any
term, provision, condition, covenant or agreement contained in any Loan Document
to which Borrower or such other Loan Party is a party;
(c) Any material adverse change occurs in Borrower's business,
assets, operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations
or the value or priority of FINOVA's security interest in the Collateral is
materially impaired;
(e) Any portion of Borrower's assets is seized, attached,
subjected to a writ or distress warrant, is levied upon or comes into the
possession of any judicial officer;
(f) Borrower shall generally not pay its debts as they become
due or shall enter into any agreement (whether written or oral), or offer to
enter into any agreement, with all or a significant number of its creditors
regarding any moratorium or other indulgence with respect to its debts or the
participation of such creditors or their representatives in the supervision,
management or control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced
by Borrower, or any such proceeding is commenced against Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record
with respect to any of Borrower's assets;
(i) Any judgments are entered against Borrower in an aggregate
amount exceeding $50,000 in any fiscal year;
(j) Any default shall occur under (i) any material agreement
between Borrower and any third party including, without limitation, any default
which would result in a right by such third party to accelerate the maturity of
any Indebtedness of Borrower to such third party, or (ii) any Subordinated Debt;
(k) Any representation or warranty made or deemed to be made by
Borrower, any Affiliate or any other Loan Party in any Loan Document or any
other statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Robert Young Lee dies, or any Guarantor terminates or
attempts to terminate its Guaranty or any security therefor or becomes subject
to any bankruptcy or other insolvency proceeding;
(m) Any of the following which could have a material adverse
effect on the financial condition of Borrower: any Prohibited Transaction or any
Reportable Event shall occur with respect to a Plan; any lien upon the assets of
Borrower in connection with any Plan shall arise; Borrower or any of its ERISA
Affiliates shall fail to make full payment when due of all amounts which
Borrower or any of its ERISA Affiliates may be required to pay to any Plan or
any Multiemployer Plan as one or more contributions thereto; Borrower or any of
its ERISA Affiliates creates or permits the creation of any accumulated funding
deficiency in any Plan, whether or not waived; or
(n) The Subsidiary Merger shall not have been consummated within
120 days after the Closing Date.
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FINOVA Loan and Security Agreement
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NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE
RIGHT TO CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND
THEREAFTER IF AN EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at
--------
its option and in its sole discretion and in addition to all of its other rights
under the Loan Documents, cease making Loans, terminate this Agreement and/or
declare all of the Obligations to be immediately payable in full. Borrower
agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default Borrower hereby consents to the appointment of a receiver by FINOVA
after acceleration in any action initiated by FINOVA pursuant to this Agreement
and to the jurisdiction and venue set forth in Section 9.26 hereof, and Borrower
waives notice and posting of a bond in connection therewith. Further, FINOVA
may, at any time, take possession of the Collateral and keep it on Borrower's
premises, at no cost to FINOVA, or remove any part of it to such other place(s)
as FINOVA may desire, or Borrower shall, upon FINOVA's demand, at Borrower's
sole cost, assemble the Collateral and make it available to FINOVA at a place
reasonably convenient to FINOVA. FINOVA may sell and deliver any Collateral at
public or private sales, for cash, upon credit or otherwise, at such prices and
upon such terms as FINOVA deems advisable, at FINOVA's discretion, and may, if
FINOVA deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Borrower agrees that FINOVA has no
obligation to preserve rights to the Collateral or marshall any Collateral for
the benefit of any Person. FINOVA is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, name, trade
secrets, trade names, trademarks and advertising matter, or any similar
property, in completing production, advertising or selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
FINOVA's benefit. Any requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys
fees and other expenses of sale, and second, to the Obligations in such order as
FINOVA shall elect, in its sole discretion. FINOVA shall return any excess to
Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
---------------------------------------------------
FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition: (i) as to which on no later than the fifth
calendar day prior thereto written notice thereof is mailed or personally
delivered to Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof describing in general
non-specific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be conducted
(provided that no notice of any public or private disposition need be given to
the Borrower or published if the Collateral is
26
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FINOVA Loan and Security Agreement
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perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market); (ii) which is conducted at any place designated by
FINOVA, with or without the Collateral being present; and (iii) which commences
at any time between 8:00 a.m. and 5:00 p.m. Without limiting the generality of
the foregoing, Borrower expressly agrees that, with respect to any disposition
of accounts, instruments and general intangibles, it shall be commercially
reasonable for FINOVA to direct any prospective purchaser thereof to ascertain
directly from Borrower any and all information concerning the same, including,
but not limited to, the terms of payment, aging and delinquency, if any, the
financial condition of any obligor or account debtor thereon or guarantor
thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any Obligation remains
--------
outstanding and this Agreement remains in effect, it shall promptly reimburse
FINOVA for all costs, reasonable fees and expenses incurred by FINOVA in
connection with the negotiation, preparation, execution, delivery,
administration and enforcement of each of the Loan Documents, including, but not
limited to, the attorneys' and paralegals' fees of in-house and outside counsel,
expert witness fees, lien, title search and insurance fees, appraisal fees, all
charges and expenses incurred in connection with any and all environmental
reports and environmental remediation activities, and all other costs, expenses,
taxes and filing or recording fees payable in connection with the transactions
contemplated by this Agreement, including without limitation all such costs,
fees and expenses as FINOVA shall incur or for which FINOVA shall become
obligated in connection with (i) any inspection or verification of the
Collateral, (ii) any proceeding relating to the Loan Documents or the
Collateral, (iii) actions taken with respect to the Collateral and FINOVA's
security interest therein, including, without limitation, the defense or
prosecution of any action involving FINOVA and Borrower or any third party, (iv)
enforcement of any of FINOVA's rights and remedies with respect to the
Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed or the
issues are peculiar to federal bankruptcy or state insolvency laws. Borrower
shall also pay all FINOVA charges in connection with bank wire transfers,
forwarding of loan proceeds, deposits of checks and other items of payment,
returned checks, establishment and maintenance of lockboxes and other Dominion
Accounts, and all other bank and administrative matters, in accordance with
FINOVA's schedule of bank and administrative fees and charges in effect from
time to time.
8.2 Intentionally Deleted.
---------------------
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
-------------------------------------------
(a) Examinations. FINOVA shall at all reasonable times have
------------
full access to and the right to examine, audit, make abstracts and copies from
and inspect Borrower's records, files, books of account and all other documents,
instruments and agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Borrower shall deliver to FINOVA any
instrument necessary for FINOVA to obtain records from any service bureau
maintaining records for Borrower. All instruments and certificates prepared by
Borrower showing the value of any of the Collateral shall be accompanied, upon
FINOVA's request, by
27
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
copies of related purchase orders and invoices. FINOVA may, at any time after
the occurrence of an Event of Default, remove from Borrower's premises
Borrower's books and records (or copies thereof) or require Borrower to deliver
such books and records or copies to FINOVA. FINOVA may, without expense to
FINOVA, use such of Borrower's personnel, supplies and premises as may be
reasonably necessary for maintaining or enforcing FINOVA's security interest.
(b) Reporting Requirements. Borrower shall furnish FINOVA,
----------------------
upon request, such information and statements as FINOVA shall request from time
to time regarding Borrower's business affairs, financial condition and the
results of its operations. Without limiting the generality of the foregoing,
Borrower shall provide FINOVA with: (i) FINOVA's standard form collateral and
loan report, daily, and upon FINOVA's request, copies of sales journals, cash
receipt journals, and deposit slips; (ii) upon FINOVA's request, copies of sales
invoices, customer statements and credit memoranda issued, remittance advices
and reports; (iii) copies of shipping and delivery documents, upon request; (iv)
on or prior to the date set forth on the Schedule, monthly agings (aged from
invoice date) and reconciliations of Receivables (with listings of concentrated
accounts), payables reports, inventory reports, compliance certificates and
unaudited financial statements with respect to the prior month prepared on a
basis consistent with such statements prepared in prior months and otherwise in
accordance with GAAP; (v) audited annual consolidated and consolidating
financial statements, prepared in accordance with GAAP applied on a basis
consistent with the most recent Prepared Financials provided to FINOVA by
Borrower, including balance sheets, income and cash flow statements, accompanied
by the unqualified report thereon of independent certified public accountants
acceptable to FINOVA, as soon as available, and in any event, within ninety (90)
days after the end of each of Borrower's fiscal years; and (vi) such
certificates relating to the foregoing as FINOVA may request, including, without
limitation, a monthly certificate from the president and the chief financial
officer of Borrower showing Borrower's compliance with each of the financial
covenants set forth in this Agreement, and stating whether any Event of Default
has occurred or event which, with giving of notice or the passage of time, or
both, would constitute an Event of Default, and if so, the steps being taken to
prevent or cure such Event of Default. All reports or financial statements
submitted by Borrower shall be in reasonable detail and shall be certified by
the principal financial officer of Borrower as being complete and correct.
(c) Guarantor's Financial Statements and Tax Returns.
------------------------------------------------
Borrower shall cause each of the Guarantors to deliver to FINOVA such
Guarantor's annual financial statement (in form acceptable to FINOVA) and a copy
of such Guarantor's federal income tax return with respect to the corresponding
year, in each case on the date when such tax return is due or, if earlier, on
the date when available.
9.2 Term; Termination.
-----------------
(a) Term. The Initial Term of the Revolving Credit Loans facility
----
and the obligation of FINOVA to made advances with respect thereto in accordance
with this Agreement shall be as set forth on the Schedule, and the Revolving
Credit Loans facility and this Agreement shall be automatically renewed for one
or more Renewal Term(s) as set forth in the Schedule, unless earlier terminated
as provided herein.
(b) Prior Notice. Each party shall have the right to terminate
------------
this Agreement effective at the end of the Initial
28
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
Term or at the end of any Renewal Term by giving the other party written notice
not less than sixty (60) days prior to the effective date of such termination,
by registered or certified mail.
(c) Payment in Full. Upon the effective date of termination, the
---------------
Obligations shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the
----------------------------------
procedure set forth in Section 9.2(b), Borrower may terminate this Agreement at
any time but only upon sixty (60) days' prior written notice and prepayment of
the Obligations. Upon any such early termination by Borrower or any termination
of this Agreement by FINOVA upon the occurrence of an Event of Default, then,
and in any such event, Borrower shall pay to FINOVA upon the effective date of
such termination a fee (the "Termination Fee") in an amount equal to the
---------------
amount shown on the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be
-------------------------------------
payable by Borrower as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time. Borrower
waives presentment and protest of any instrument and notice thereof, notice of
default and, to the extent permitted by applicable law, all other notices to
which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right,
-------------------
remedy or option under this Agreement, any supplement, the Loan Documents or
other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
--------------------------------
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be
------------
prohibited or invalid under applicable law, it shall be ineffective only to such
extent, without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified,
-----------------------
altered or amended, except by an agreement in writing signed by Borrower and
FINOVA. Borrower may not sell, assign or transfer any interest in this Agreement
or any other Loan Document, or any portion thereof, including, without
limitation, any of Borrower's rights, title, interests, remedies, powers and
duties hereunder or thereunder. Borrower hereby consents to FINOVA's
participation, sale, assignment, transfer or other disposition, at any time or
times hereafter, of this Agreement and any of the other Loan Documents, or of
any portion hereof or thereof, including, without limitation, FINOVA's rights,
title, interests, remedies, powers and duties hereunder or thereunder. In
connection therewith, FINOVA may disclose all documents and information which
FINOVA now or hereafter may have relating to Borrower or Borrower's business. To
the extent that FINOVA assigns its rights and obligations hereunder to a third
party, FINOVA shall thereafter be released from such assigned obligations to
Borrower and such assignment shall effect a novation between Borrower and such
third party.
29
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
9.8 Integration. This Agreement, together with the Schedule (which is
-----------
a part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower
--------
contained in this Agreement shall survive the execution, delivery and acceptance
of this Agreement by the parties. No termination of this Agreement or of any
guaranty of the Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the parties hereto
and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's
-----------------------
discretion, be evidenced by notes or other instruments issued or made by
Borrower to FINOVA. If not so evidenced, such Obligation shall be evidenced
solely by entries upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan by any Person
-------------
who purports to be any employee, officer or authorized agent of Borrower shall
be made to FINOVA on or prior to 11:00 a.m., Pacific time, on the Business Day
on which the proceeds thereof are requested to be paid to Borrower and shall be
conclusively presumed to be made by a Person authorized by Borrower to do so and
the crediting of a loan to Borrower's operating account shall conclusively
establish Borrower's obligation to repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to Borrower's
operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and
-------
addressed to the Borrower and FINOVA at their addresses set forth at the
beginning of this Agreement. Notices hereunder shall be deemed received on the
earlier of receipt, whether by mail, personal delivery, facsimile, or otherwise,
or upon deposit in the United States mail, postage prepaid.
9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that,
--------------
with respect to the financing transaction herein contemplated, no Person, except
for The Value Group, LLC, which will be paid a broker's fee of 0.5% by Borrower,
is entitled to any brokerage fee or other commission and Borrower agrees to
indemnify and hold FINOVA harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by Borrower in this
----------
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
or which reasonably should be known to Borrower which Borrower has not disclosed
to FINOVA in writing with respect to the transactions contemplated by this
Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
---------
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are without
--------
substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower
-----------------
fails to perform, observe or discharge any of its
30
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
Obligations under this Agreement, any remedy at law may prove to be inadequate
relief to FINOVA. Therefore, FINOVA, if it so requests, shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed in
---------------------------------
one or more counterparts, each of which taken together shall constitute one and
the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall also
deliver a manually executed counterpart of this Agreement, but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party and its counsel
------------
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
---------------
Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of
---------------------
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by
FINOVA's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by Borrower by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing of a complaint within one year after the
first act, occurrence or omission upon which such claim or cause of action, or
any part thereof, is based and service of a summons and complaint on an officer
of FINOVA or any other Person authorized to accept service of process on behalf
of FINOVA, within 30 days thereafter. Borrower agrees that such one-year period
of time is a reasonable and sufficient time for Borrower to investigate and act
upon any such claim or cause of action. The one-year period provided herein
shall not be waived, tolled, or extended except by a specific written agreement
of FINOVA. This provision shall survive any termination of this Loan Agreement
or any other agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
---------
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong, except for gross negligence or
willful misconduct, relating to this Agreement or the Obligations or the
establishment, administration or collection thereof (including without
limitation damages for loss of profits, business interruption, or the like),
whether such damages are foreseeable or unforeseeable, even if Finova has been
advised of the possibility of such damages. neither Finova, nor any Finova
affiliate shall be liable for any claims, demands, losses or damages, of any
kind whatsoever, made, claimed, incurred or suffered by the borrower through the
ordinary negligence of Finova, or any Finova affiliate. "FINOVA Affiliate"
----------------
shall mean finova's directors, officers,
31
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
employees, agents, attorneys or any other person or entity affiliated with or
representing Finova.
9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written
--------------------------
notice of (i) any action or inaction by FINOVA or any attorney of FINOVA in
connection with any Loan Documents that may be actionable against FINOVA or any
attorney of FINOVA or (ii) any defense to the payment of the Obligations for any
reason, including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. Borrower agrees that unless such notice
is fully given as promptly as possible (and in any event within thirty (30)
days) after Borrower has knowledge, or with the exercise of reasonable diligence
should have had knowledge, of any such action, inaction or defense, Borrower
shall not assert, and Borrower shall be deemed to have waived, any claim or
defense arising therefrom.
9.24 Application of Insurance Proceeds. So long as no Event of Default
---------------------------------
has occurred and is continuing, FINOVA agrees to return to Borrower up to
$50,000 of the proceeds of any casualty insurance insuring the Collateral, to be
used solely to replace the applicable loss. The net proceeds in excess of
$50,000 of any casualty insurance insuring the Collateral, after deducting all
costs and expenses (including attorneys' fees) of collection, shall be applied,
at FINOVA's option in its discretion, either toward replacing or restoring the
Collateral, in a manner and on terms satisfactory to FINOVA, or toward payment
of the Obligations. Any proceeds applied to the payment of Obligations shall be
applied in such manner as FINOVA may elect. In no event shall such application
relieve Borrower from payment in full of all installments of principal and
interest which thereafter become due in the order of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as
-----------------
Borrower's attorney, with the power to endorse Borrower's name on any checks,
notes, acceptances, money orders or other forms of payment or security that come
into FINOVA's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on assignments
of Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers or account
debtors; to send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to notify the
post office authorities to change the address for delivery of Borrower's mail to
an address designated by FINOVA and to open and dispose of all mail addressed to
Borrower; and to do all other things FINOVA deems necessary or desirable to
carry out the terms of this Agreement. Borrower hereby ratifies and approves
all acts of such attorney. Neither FINOVA nor any of its designees shall be
liable for any acts or omissions nor for any error of judgment or mistake of
fact or law while acting as Borrower's attorney. This power, being coupled with
an interest, is irrevocable until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder shall have terminated
9.26 Governing Law; Waivers. THIS AGREEMENT, INCLUDING WITHOUT LIMITATION
----------------------
ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA
GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT TO
THE EXTENT THE UNIFORM COMMERCIAL CODE AS ADOPTED IN A PARTICULAR STATE HAS
PROVISIONS GOVERNING THE
32
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
ATTACHMENT AND PERFECTION OF A SECURITY INTEREST IN DEPOSIT ACCOUNTS (e.g.
CALIFORNIA HAWAII, IDAHO, ILLINOIS AND OREGON) THE LAW OF THAT JURISDICTION
SHALL APPLY BUT ONLY WITH RESPECT TO SUCH DEPOSIT ACCOUNTS AND WITHOUT OTHERWISE
AFFECTING THE ARIZONA CHOICE OF LAW HEREUNDER. BORROWER HEREBY CONSENTS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY
OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE SOLE OPTION OF FINOVA, IN ANY
OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND
WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER
WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE. BORROWER FURTHER WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN SECTION 9.12 HEREOF FOR
THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY RIGHT IT MAY OTHERWISE HAVE TO
COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT.
9.27 Mutual Waiver of Right to Jury Trial. FINOVA and Borrower each
-------------------------------------
hereby waives the right to trial by jury in any action or proceeding based upon,
arising out of, or in any way relating to: (i) this Agreement; (ii) any other
present or future instrument or agreement between FINOVA and Borrower; or (iii)
any conduct, acts or omissions of FINOVA or Borrower or any of their directors,
officers, employees, agents, attorneys or any other persons affiliated with
FINOVA or Borrower; in each of the foregoing cases, whether sounding in contract
or tort or otherwise.
Borrower:
VIDEO CITY, INC.
FED. TAX ID #95-3897052
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
ADVENTURES IN VIDEO, INC.
FED. TAX ID #41-1429740
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
KDDJ INVESTMENTS, INC.
FED. TAX ID #94-3057641
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
OLD REPUBLIC ENTERTAINMENT, INC.
FED. TAX ID #71-0460482
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
LEPTIS MAGNA, INC.
FED. TAX ID #84-0964171
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
33
<PAGE>
FINOVA Loan and Security Agreement
- --------------------------------------------------------------------------------
SULPIZIO ONE, INC.
FED. TAX ID #33-0636666
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
FINOVA:
FINOVA CAPITAL CORPORATION
BY /s/ [Illegible]
--------------------------------
TITLE Vice President
----------------------------
34
<PAGE>
SCHEDULE TO
Loan and Security Agreement
<TABLE>
<S> <C> <C>
Borrower: VIDEO CITY, INC. ADVENTURES IN VIDEO, INC.
ADDRESS: 6840 DISTRICT BLVD. 10705 UNIVERSITY AVE. NE
BAKERSFIELD, CALIFORNIA 93313 BLAINE, MINNESOTA 55434
KDDJ INVESTMENTS, INC. Old Republic Entertainment, Inc.
10705 UNIVERSITY AVE. NE 2723 E. MAIN ST.
BLAINE, MINNESOTA 55434 VENTURA, CALIFORNIA 93003
LEPTIS MAGNA, INC. SULPIZIO ONE, INC.
15503 E. MISSISSIPPI AVE. 6840 DISTRICT BLVD.
AURORA, COLORADO 80017 BAKERSFIELD, CALIFORNIA 93313
</TABLE>
DATE: AS OF MARCH 24, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
================================================================================
DEFINITIONS (SECTION 1):
"Guarantors" means, collectively, Video City, Inc., Adventures in Video,
----------
Inc., KDDJ Investments, Inc., Leptis Magna, Inc., Old Republic Entertainment,
Inc., and Sulpizio One, Inc.
"Seller" means the selling shareholders under the Stock Purchase
------
Agreements.
"Seller Noncompete Agreement" means, collectively, those certain
---------------------------
noncompetition agreements in favor of Video City, Inc. required under Section
6.5 of the Stock Purchase Agreements, substantially in the form of Exhibit D to
the Stock Purchase Agreements.
"Subordinating Creditor" means Ingram Entertainment, Inc., Rentrak
----------------------
Corporation, and Video Products Distributors.
================================================================================
TOTAL FACILITY (SECTION 2.1):
$7,500,000
================================================================================
1
<PAGE>
LOANS (SECTION 2.2):
Revolving Credit Loans: A revolving line of credit consisting
----------------------
of loans against Borrower's Eligible Inventory ("INVENTORY
---------
LOANS") (the Inventory Loans also shall be referred to as the
-----
"REVOLVING CREDIT LOANS") in an aggregate outstanding principal
-----------------------
amount not to exceed the lesser of (a) or (b) below:
(a) Five Hundred Thousand Dollars ($500,000) (the
"REVOLVING CREDIT LIMIT"), less any Loan Reserves, or
----------------------- ----
(b) an amount equal to 65% of the value of Borrower's
Eligible Inventory consisting of all formats of
entertainment items and related accessories for sale in
Borrower's retail stores, calculated at the lower of cost or
market value and determined on a first-in, first-out basis,
less any Loan Reserves.
----
TERM LOANS: one or more term loans against the value of
----------
Borrower's Eligible Inventory consisting of rental video tape
and game inventory ("TERM LOANS") in an aggregate outstanding
----------
principal amount not to exceed $7,000,000; provided, that the
--------
Terms Loans, if any, shall be in such amounts set forth below
and on such terms as are set forth on separate promissory notes
of Borrower from time to time, each in form and substance
satisfactory to FINOVA in its sole discretion:
TRANCHE A: one or more term loans against the value of
---------
Borrower's Eligible Inventory consisting of rental video
tape and game inventory in an aggregate outstanding
principal amount not to exceed the lesser of $3,465,000 or
50% of the net appraised orderly liquidation value of such
Eligible Inventory consisting of rental video tape and game
inventory ("TRANCHE A TERM LOANS"). Borrower's rental video
--------------------
tape and game inventory shall be appraised annually at the
expense of Borrower by an appraiser chosen by FINOVA, and
Borrower shall pay to FINOVA the amount that the Tranche A
Term Loans exceed 50% of the orderly liquidation value of
such inventory.
TRANCHE B: one or more term loans against the value of
---------
Borrower's Eligible Inventory consisting of rental video
tape and game inventory in an aggregate outstanding
principal amount not to exceed the lesser of $1,735,000 or
25% of the net appraised orderly liquidation value of such
Eligible Inventory consisting of rental video tape and game
inventory ("TRANCHE B TERM LOANS"). Borrower's rental video
--------------------
tape and game inventory shall be appraised annually at the
expense of Borrower by an appraiser chosen by FINOVA, and
Borrower shall pay to FINOVA the amount that the Tranche B
Term Loans exceed 25% of the orderly liquidation value of
such inventory.
TRANCHE C: one or more term loans against the value of
---------
Borrower's Eligible Inventory consisting of rental video
tape and game inventory acquired by Borrower in retail store
acquisitions after the Closing Date
<PAGE>
and approved by FINOVA in its discretion in an aggregate
outstanding principal amount not to exceed the lesser of (a)
or (b) below:
(a) $7,000,000 less the aggregate outstanding
----
principal amount of the Tranche A Term Loans and the
Tranche B Term Loans; or
(b) 75% of the net appraised orderly liquidation value of
such Eligible Inventory consisting of rental video tape
and game inventory acquired by Borrower in retail store
acquisitions after the Closing Date and approved by
FINOVA ("TRANCHE C TERM LOANS"). Such acquired rental
--------------------
video tape and game inventory shall be appraised annually
at the expense of Borrower by an appraiser chosen by
FINOVA, and Borrower shall pay to FINOVA the amount that
the Tranche C Term Loans exceed 75% of the orderly
liquidation value of such inventory.
Notwithstanding anything in this Loan Agreement to the
contrary, FINOVA reserves the right to (a) make separate
Loans to each Borrower based upon each Borrower's respective
Collateral and (b) upon the consummation of the Subsidiary
Merger, readjust the Loans to reflect the respective
Collateral owned by each of Video City, Inc. and Old
Republic Entertainment, Inc.
================================================================================
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay FINOVA interest on
-----------------------
the daily outstanding balance of Borrower's Revolving Credit
Loans at a per annum rate of 2.75% in excess of the rate of
interest announced publicly by Citibank, N.A., (or any
successor thereto), from time to time as its "prime rate" (the
"PRIME RATE") which may not be such institution's lowest rate.
----------
The interest rate chargeable hereunder in respect of the
Revolving Credit Loans (herein, the "REVOLVING INTEREST RATE")
-----------------------
shall be increased or decreased, as the case may be, without
notice or demand of any kind, upon the announcement of any
change in the Prime Rate. Each change in the Prime Rate shall
be effective hereunder on the first day following the
announcement of such change. Interest charges and all other
fees and charges herein shall be computed on the basis of a
year of 360 days and actual days elapsed and shall be payable
to FINOVA in arrears on the first day of each month.
Term Interest Rate: Borrower shall pay FINOVA interest on the
------------------
daily outstanding balance of the Term Loans at a per annum rate
of 2.75% in excess of the Prime Rate. The interest rate
chargeable hereunder in respect of the Term Loans (herein, the
"TERM INTEREST RATE") shall be increased or decreased, as the
------------------
case may be, without notice or demand of any kind, upon the
announcement of any change in the Prime Rate. Each change in
the Prime Rate shall be effective hereunder on the first day
following the announcement of such change. Interest charges and
all other fees and charges herein shall be
<PAGE>
computed on the basis of a year of 360 days and actual days
elapsed and shall be payable to FINOVA in arrears on the first
day of each month.
Collateral Monitoring Fee. At the closing of this transaction
-------------------------
and on the first day of each calendar month thereafter,
Borrower shall pay FINOVA a collateral monitoring fee of $1,000
("COLLATERAL MONITORING FEE"); provided however, that Borrower
-------------------------
agrees and acknowledges that each Loan Year a full year's fee
shall be deemed earned at the beginning of the respective Loan
Year.
Closing Fee. Borrower shall pay to FINOVA a closing fee in an
-----------
amount equal to 1.25% of the Total Facility ("CLOSING FEE"),
-----------
which shall be deemed fully earned on the Closing Date. Such
Closing Fee shall be amortized over twelve (12) equal monthly
payments of $7,812.50, with the first payment payable on the
Closing Date and each subsequent payment payable on the first
day of each month thereafter beginning April 1, 1998.
Success Fee. On the first anniversary of the date of this
-----------
Agreement, and on each subsequent anniversary of said date, if
this Agreement is in effect, Borrower shall pay FINOVA a
success fee in the amount of $10,000, ("SUCCESS FEE"), which
-----------
shall be deemed fully earned on the date due and shall be non-
refundable.
Unused Line Fee. With respect to each fiscal quarter, or
---------------
portion thereof during the term of this Agreement, Borrower
shall unconditionally pay to FINOVA a fee equal to one-half of
one percent (0.50%) per annum of the difference between the
Revolving Credit Limit and the average daily outstanding
balance of the Revolving Credit Loans during such quarter, or
portion thereof ("UNUSED LINE FEE"), which fee shall be
---------------
calculated and payable quarterly, in arrears, and shall be due
and payable, commencing on the first Business Day of the
Borrower's first fiscal quarter following the Closing Date and
continuing on the first Business Day of each fiscal quarter
thereafter.
Examination Fee. Borrower agrees to pay to FINOVA an
---------------
examination fee in the amount of $600 per person per day in
connection with each audit or examination of Borrower performed
by FINOVA prior to or after the date hereof, plus all costs and
expenses incurred in connection therewith (the "EXAMINATION
-----------
FEE"); provided, that so long as no Event of Default has
--------
occurred and is continuing, the Examination Fees shall not
exceed, in the aggregate, $18,000 per annum, plus all costs and
expenses incurred in connection with the audits or examinations
conducted. Without limiting the generality of the foregoing,
Borrower shall pay to FINOVA an initial
<PAGE>
Examination Fee in an amount equal to $600 per person per day,
plus all costs and expenses incurred in connection therewith.
Such initial Examination Fee shall be deemed fully earned at
the time of payment and due and payable upon the closing of
this transaction, and shall be deducted from any good faith
deposit paid by Borrower to FINOVA prior to the date of this
Agreement.
Warrants. 520,720 shares of common stock of Video City, Inc.,
--------
exercisable within 3 years after the Closing Date and subject
to the terms and conditions set forth in that certain warrant
agreement dated as of even date between Video City, Inc. and
FINOVA.
===============================================================================
NOTIFICATION OF CLOSING (SECTION 2.13):
The amount for purposes of Section 2.13 shall be $7,500,000.
===============================================================================
CONDITIONS OF CLOSING (SECTION 4.1):
The obligation of FINOVA to make the initial advance hereunder
is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions, in
addition to the conditions set forth in Sections 4.1 and 4.2
above:
(a) Minimum Excess Availability (Section 4.1(b)). Not less
--------------------------------------------
than $400,000. Accounts payable outstanding not more than 30
days past due.
(b) Lease and Landlord's Consent (Section 4.1(k)).
----------------------------------------------
Location(s): See Schedule 4.1(k).
(c) No Material Adverse Change (Section 4.1(v )). No material
---------------------------------------------
adverse change has occurred in the Borrower's business,
operations, financial condition, or assets or in the prospect
of repayment of the Obligations since December 31, 1997.
(d) Support Agreements. Each of Robert Young Lee, Craig Kelly,
------------------
and Tim Denari, shall have delivered a Support Agreement in
favor of FINOVA, and in form and substance satisfactory to
FINOVA.
Borrower shall cause the conditions precedent set forth in
Section 4.1 of this Agreement and set forth above in this
Schedule to be satisfied, and shall provide evidence to FINOVA
that all such conditions precedent have been satisfied, on or
before March 31, 1998.
================================================================================
BORROWER INFORMATION:
<PAGE>
Borrower's State of Incorporation (Section 5.1):
Video City, Inc.--Delaware
Adventures in Video, Inc.--Minnesota
KDDJ Investments, Inc.--Minnesota
Old Republic Entertainment, Inc.--California
Leptis Magna, Inc.--Colorado
Sulpizio One, Inc.--California
Borrower's copyrights, patents trademarks, and licenses (Section 5.5): None.
Fictitious Names/Prior Corporate Names (Section 5.2):
Prior Corporate Names: Prism Entertainment Corporation
Lee Video City, Inc.
32nd Street III
Fictitious Names: Speedy Video (Adventures in Video, Inc.)
Movie Magic (KDDJ Investments, Inc.)
Video Unlimited (Leptis Magna, Inc.)
Video Tyme (Old Republic Entertainment,
Inc.)
Video Tyme Studio Sales (Old Republic
Entertainment, Inc.)
Video City
Borrower Locations (Section 5.16) See Schedule 5.16
Borrower's Federal Tax Identification Number (Section 5.16):
Video City, Inc. 95-3897052
Adventures in Video, Inc. 41-1429740
KDDJ Investments, Inc. 94-3057641
Leptis Magna, Inc. 84-0964171
Old Republic Entertainment, Inc. 71-0460482
Sulpizio One, Inc. 33-0636666
Permitted Encumbrances (Section 1.1): None.
================================================================================
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the following covenants.
Compliance shall be determined as of the end of each month
or quarter (as determined by FINOVA in its sole discretion),
except as otherwise specifically provided below:
Total Debt Service Coverage Ratio As of the last day of each calendar
--------------------------------------
month, Borrower's Operating Cash Flow/Actual for the
consecutive 12-month period ending as of such last day must
be at least 1.10 times the amount
<PAGE>
necessary to meet Borrower's Total Contractual Debt Service
for such 12-month period; provided however, that, with
----------------
respect to the calculations set forth herein for the period
from the Closing Date through March 31, 1999, Borrower's
Operating Cash Flow/Actual and Total Contractual Debt
Service shall be determined beginning as of April 1, 1998
(the "START DATE") and be measured for such amounts for the
respective periods as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Period Minimum Total Debt
------ ------------------
Service Coverage
----------------
Ratio
-----
- -----------------------------------------------------------------------------------
<S> <C>
Start Date through May 31, 1998 0.30
- -----------------------------------------------------------------------------------
Start Date through June 30, 1998 0.50
- -----------------------------------------------------------------------------------
Start Date through July 31, 1998 0.75
- -----------------------------------------------------------------------------------
Start Date through August 31, 1998 0.90
- -----------------------------------------------------------------------------------
Start Date through September 30, 1998 0.65
- -----------------------------------------------------------------------------------
Start Date through October 31, 1998 0.65
- -----------------------------------------------------------------------------------
Start Date through November 30, 1998 0.80
- -----------------------------------------------------------------------------------
Start Date through December 31, 1998 1.00
- -----------------------------------------------------------------------------------
Start Date through January 31, 1999 1.10
- -----------------------------------------------------------------------------------
Start Date through February 28, 1999 1.10
- -----------------------------------------------------------------------------------
Start Date through March 31, 1999 1.10
- -----------------------------------------------------------------------------------
</TABLE>
Provided further, that all such determinations
----------------
shall be made on a consolidated basis.
================================================================================
NEGATIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or advances to
------------------ Employees except in the ordinary course of business
and consistent with past practices of Borrower in an
aggregate amount not exceeding at any time $30,000.
Existing Guaranties: None.
--------------------
Capital Expenditures: Borrower shall not make or incur any Capital
--------------------- Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by
Borrower in any fiscal year (beginning with the 2000
fiscal year) would exceed $200,000; provided that for
--------
the 1999 fiscal year, Borrower shall not make or incur
any Capital Expenditure unless (a) such Capital
Expenditure is financed through a Capital Lease and (b)
after giving effect thereto, the aggregate amount of
all Capital Expenditures by Borrower in the 1999 fiscal
year will not exceed $310,000.
Compensation: Borrower shall not pay total compensation, including
------------ salaries, withdrawals, fees, bonuses, commissions,
drawing accounts and other
<PAGE>
payments, whether directly or indirectly, in money or
otherwise, during any fiscal year to Robert Young Lee, Craig
Kelly, or Tim Denari (or any relative thereof) in an amount
in excess of the greater of (a) 115% of such total
compensation paid in the immediately preceding fiscal year
or (b) 24% of the Operating Cash Flow/Actual, calculated
after taking into account the amount of such compensation.
Notwithstanding the foregoing, Borrower shall be entitled to
issue stock options to its senior management.
Indebtedness: Borrower shall not create, incur, assume or permit to exist
------------
any Indebtedness (including Indebtedness in connection with
Capital Leases) in excess of the amounts set forth above in
the Capital Expenditure covenant other than (i) the
Obligations, (ii) trade payables and other contractual
obligations to suppliers and customers incurred in the
ordinary course of business, (iii) other Indebtedness
existing on the date of this Agreement and reflected in the
Prepared Financials (other than Indebtedness paid on the
date of this Agreement from proceeds of the initial advances
hereunder), and (iv) Subordinated Debt.
================================================================================
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly accounts payable
agings aged by invoice date, outstanding or held check
registers and inventory certificates within ten (10) days
after the end of each month.
2. Borrower shall provide FINOVA with monthly perpetual inventory
reports for the Inventory valued on a first-in, first-out
basis at the lower of cost or market (in accordance with GAAP)
or such other inventory reports as are reasonably requested by
FINOVA, all within ten (10) days after the end of each month.
3. Borrower shall provide FINOVA with monthly unaudited financial
statements, income statements, and balance sheets within
thirty (30) days after the end of each month.
4. Borrower shall provide FINOVA with audited consolidated and
consolidating fiscal financial statements within one hundred
twenty (120) days after the end of each fiscal year, as more
specifically described in Section 9.1(b) hereof, and with an
opinion issued by a Certified Public Accountant which is
acceptable to FINOVA.
5. Borrower shall provide FINOVA with annual operating budgets
(including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower
within thirty (30) days prior to the end of each fiscal year
of Borrower.
6. Borrower's balance sheets for purposes of the definition of
Prepared Financials shall be as of December 31, 1997.
================================================================================
<PAGE>
================================================================================
TERM (SECTION 9.2):
The initial term of this Agreement shall be FIVE (5) years from
the date hereof (the "INITIAL TERM") and shall be automatically
------------
renewed for successive periods of one (1) year each (each, a
"RENEWAL TERM"), unless earlier terminated as provided in
-------------
Section 7 or 9.2 above or elsewhere in this Agreement; provided
that the term of the Tranche C Terms Loans shall be three (3)
years from date of the initial advances of the Tranche A Terms
Loans and the Tranche B Term Loans.
================================================================================
TERMINATION FEE (SECTION 9.2):
(A) Revolving Credit Loans Facility. The Termination Fee
-------------------------------
applicable to the Revolving Credit Loans facility provided for
in Section 9.2(d) shall be an amount equal to the following
percentage of the average daily outstanding balance of the
Obligations for the 180-day period (or lesser period if
applicable) preceding the date of termination:
(i) five percent (5.0%), if such early termination occurs on or
prior to the first anniversary of the date of this Agreement;
(ii) three percent (3.0%), if such early termination occurs
between the first anniversary of the date of this Agreement and
the second anniversary of the date of this Agreement.
(iii) one percent (1.0%), if such early termination occurs
after the second anniversary of the date of this Agreement.
(B) Term Loans. The Termination Fee applicable to the Term
----------
Loans provided for in Section 9.2(d) shall be equal to:
(i) five percent (5.0%) of the amount prepaid if such
prepayment is made during the Loan Year beginning on the
Closing Date;
(ii) three percent (3.0%) of the amount prepaid if such
prepayment is made during the Loan Year beginning on the first
anniversary of the Closing Date; and
(iii) one percent (1.0%) of the amount prepaid if such
prepayment is made after the second anniversary of the Closing
Date.
================================================================================
DISBURSEMENT (SECTION 9.11):
Unless and until Borrower otherwise directs FINOVA in writing,
all loans shall be wired to Borrower's following operating
account:
<PAGE>
Bank: Bank of America
ABA: 1210-0035-8
Account Name: Video City, Inc.
Account #: 14764-01372
===============================================================================
ADDITIONAL PROVISIONS:
1. Excess Cash Flow Prepayments. Within sixty (60) days
----------------------------
following receipt by FINOVA of Borrower's annual audited
financial statements, commencing with such financial statements
for Borrower's fiscal year ending December 31, 1998, FINOVA may
deliver a notice to Borrower requiring Borrower to prepay the
Term Loans in an amount up to fifty percent (50%) of Borrower's
Excess Cash Flow for such year. Any prepayments required under
this section are strictly at the sole option of FINOVA, and are
payable within thirty (30) days following the date of demand by
FINOVA. All amounts paid pursuant to this section shall be
applied toward the repayment of Tranche A Term Loans. No
Termination Fee or other form of prepayment premium shall be
applied to any payments made under this section.
================================================================================
BORROWER:
- --------
VIDEO CITY, INC. OLD REPUBLIC ENTERTAINMENT, INC.
BY /s/ Robert Y. Lee BY /s/ Robert Y. Lee
-------------------------------- ---------------------------------
President or Vice President President or Vice President
ADVENTURES IN VIDEO, INC. SULPIZIO ONE, INC.
BY /s/ Robert Y. Lee BY /s/ Robert Y. Lee
-------------------------------- ---------------------------------
President or Vice President President or Vice President
KDDJ INVESTMENTS, INC.
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President
<PAGE>
LEPTIS MAGNA, INC. FINOVA:
------
FINOVA CAPITAL
CORPORATION
BY /s/ Robert Y. Lee
--------------------------------
President or Vice President BY /s/ [Illegible]
-------------------------------
TITLE Vice President
----------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS................................................. 1
1.1 Defined Terms........................................ 1
1.2 Other Terms.......................................... 7
2. LOANS; INTEREST RATE AND OTHER CHARGES...................... 7
2.1 Total Facility....................................... 7
2.2 Loans................................................ 7
2.3 Overlines; Overadvances.............................. 7
2.4 Intentionally Deleted................................ 8
2.5 Loan Account......................................... 8
2.6 Interest; Fees; Warrants............................. 8
2.7 Default Interest Rate................................ 8
2.8 Examination Fee...................................... 8
2.9 Excess Interest...................................... 8
2.10 Principal Payments; Proceeds of Collateral.......... 9
2.11 Application of Collateral............................ 11
2.12 Application of Payments.............................. 11
2.13 Notification of Closing.............................. 11
3. SECURITY.................................................... 11
3.1 Security Interest in the Collateral................... 11
3.2 Perfection and Protection of Security Interest........ 12
3.3 Preservation of Collateral............................ 12
3.4 Insurance............................................. 12
3.5 Collateral Reporting; Inventory....................... 13
3.6 Eligibility........................................... 13
3.7 Equipment............................................. 13
3.8 Other Liens; No Disposition of Collateral............. 14
3.9 Collateral Security................................... 14
4. CONDITIONS OF CLOSING....................................... 14
4.1 Initial Advance....................................... 14
4.2 Subsequent Advances................................... 18
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
5. REPRESENTATIONS AND WARRANTIES.............................. 18
5.1 Due Organization..................................... 18
5.2 Other Names.......................................... 18
5.3 Due Authorization.................................... 18
5.4 Binding Obligation................................... 18
5.5 Intangible Property.................................. 19
5.6 Capital.............................................. 19
5.7 Material Litigation.................................. 19
5.8 Title; Security Interests of FINOVA.................. 19
5.9 Restrictive Agreements; Labor Contracts.............. 19
5.10 Laws................................................. 19
5.11 Consents............................................. 19
5.12 Defaults............................................. 19
5.13 Financial Condition.................................. 19
5.14 ERISA................................................ 20
5.15 Taxes................................................ 20
5.16 Locations; Federal Tax ID No......................... 20
5.17 Business Relationships............................... 20
5.18 Reaffirmations....................................... 20
5.19 Subsidiary Merger.................................... 20
6. COVENANTS................................................... 20
6.1 Affirmative Covenants................................ 20
6.2 Negative Covenants................................... 22
7. DEFAULT AND REMEDIES........................................ 24
7.1 Events of Default.................................... 24
7.2 Remedies............................................. 25
7.3 Standards for Determining Commercial Reasonableness.. 26
8. EXPENSES AND INDEMNITIES.................................... 26
8.1 Expenses............................................. 26
9. MISCELLANEOUS............................................... 27
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
9.1 Examination of Records; Financial Reporting.......... 27
9.2 Term; Termination.................................... 28
9.3 Recourse to Security; Certain Waivers................ 28
9.4 No Waiver by FINOVA.................................. 28
9.5 Binding on Successor and Assigns..................... 28
9.6 Severability......................................... 28
9.7 Amendments; Assignments.............................. 28
9.8 Integration.......................................... 29
9.9 Survival............................................. 29
9.10 Evidence of Obligations.............................. 29
9.11 Loan Requests........................................ 29
9.12 Notices.............................................. 29
9.13 Brokerage Fees....................................... 29
9.14 Disclosure........................................... 29
9.15 Publicity............................................ 30
9.16 Captions............................................. 30
9.17 Injunctive Relief.................................... 30
9.18 Counterparts; Facsimile Execution.................... 30
9.19 Construction......................................... 30
9.20 Time of Essence...................................... 30
9.21 Limitation of Actions................................ 30
9.22 Liability............................................ 30
9.23 Notice of Breach by FINOVA........................... 31
9.24 Application of Insurance Proceeds.................... 31
9.25 Power of Attorney.................................... 31
9.26 Governing Law; Waivers............................... 31
9.27 Mutual Waiver of Right to Jury Trial................. 32
</TABLE>
-iii-
<PAGE>
An extra section break has been inserted above this paragraph. Do not delete
this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
<PAGE>
SCHEDULE 4.1(K)
LEASE AND LANDLORD'S CONSENT
<TABLE>
<C> <S>
1. 6615 Ming Avenue, Bakersfield, CA 93309
2. 5330 Olive Dr., Ste. D & E, Bakersfield, CA 93308
3. 3450 New Stine Road, Bakersfield, CA 93309
4. 2333 Brundage Lane, Bakersfield, CA 93304
5. 2697 Mt. Vernon, Ste. A&B, Bakersfield, CA 93306
6. 1557 White Lane, Bakersfield, CA 93307
7. 7890 White Lane, Bakersfield, CA 93309
8. 2665 Calloway Dr., Ste. 2A, Bakersfield, CA 93312
9. 3318 Niles, Bakersfield, CA 93306
10. 1032 West Kern Street, Taft, CA 93268
11. 1101 Cecil Ave., Delano, CA 93215
12. 1493 S. Broadway, Santa Maria, CA 93454
13. 2409 East Avenue "S", Ste. B2-B3, Palmdale, CA 93550
14. 1121 W. Valley Blvd., Ste. B&C, Tehachapi, CA 93561
15. 730 E. Alisal, Salinas, CA 93905
16. 4785 Kings Canyon, Fresno, CA 93702
17. 3285 E. Shields Avenue, Fresno, CA 93726
18. 3110 N. West Street, Fresno, CA 93705
19. 201 N. Milpas Street, Santa Barbara, CA 93103
20. 2002 West Avenue "J", Lancaster, CA 93536
21. 4069 West Avenue "L", Lancaster, CA 93536
22. 1341-A Pacheco Blvd., Los Banos, CA 93635
23. 2723 E. Main St., Ventura, CA 93003
24. 6000 Telegraph Rd. , Ventura, CA 93003
25. 7838 Telegraph Rd. , Ventura, CA 93004
26. 305 W. L.A. Ave., Moorpark, CA 93021
27. 15503 E. Mississippi Ave., Aurora, CO 80017
28. 7148 E. County Line Rd., Highlands Ranch, CO 80126
29. 10903 US Hwy 285 E103&103, Conifer, CO 80433
30. 166 Main St. (PO Box 814), Elizabeth, CO 80107
31. 911 Mountain Ave, Berthoud, CO 80513
</TABLE>
-1-
<PAGE>
<TABLE>
<C> <S>
32. 6220 Bass Lake Road, Crystal, MN 55429
33. 14001 St. Francis Blvd. N.W. Ramsey, MN 55303
34. 6976 33rd Street N. Oakdale, MN 55119
35. 6533 Nicollet Avenue S. Richfield, MN 55423
36. 7916 Brooklyn Blvd. Brooklyn Park, MN 55445
37. 1115 Shakopee Town Square, Shakopee, MN 55379
38. 11656 Winnetka Avenue, Champlin, MN 55316
39. 1435 N. Highway 101, Plymouth, MN 55447
40. 10705 University Avenue, Blaine, MN 55434
41. 8521 Zane Avenue N., Brooklyn Park, MN 55443
42. 6220 109th Avenue N. Champlin, MN 55316
43. 13733 Crosstown Blvd., Andover, MN 55304
44. 3701 Old Shakopee Road, Bloomington, MN 55431
45. 2325 Polk Street, San Francisco, CA 94109
46. 1590 Pacific Avenue, San Francisco, CA 94109
47. 1900 Lombard Street, San Francisco, CA 94123
</TABLE>
-2-
<PAGE>
SCHEDULE 5.16
BORROWER LOCATIONS
<TABLE>
<C> <S>
1. 6615 Ming Avenue, Bakersfield, CA 93309
2. 5330 Olive Dr., Ste. D & E, Bakersfield, CA 93308
3. 3450 New Stine Road, Bakersfield, CA 93309
4. 2333 Brundage Lane, Bakersfield, CA 93304
5. 2697 Mt. Vernon, Ste. A&B, Bakersfield, CA 93306
6. 1557 White Lane, Bakersfield, CA 93307
7. 7890 White Lane, Bakersfield, CA 93309
8. 2665 Calloway Dr., Ste. 2A, Bakersfield, CA 93312
9. 3318 Niles, Bakersfield, CA 93306
10. 1032 West Kern Street, Taft, CA 93268
11. 1101 Cecil Ave., Delano, CA 93215
12. 1493 S. Broadway, Santa Maria, CA 93454
13. 2409 East Avenue "S", Ste. B2-B3, Palmdale, CA 93550
14. 1121 W. Valley Blvd., Ste. B&C, Tehachapi, CA 93561
15. 730 E. Alisal, Salinas, CA 93905
16. 4785 Kings Canyon, Fresno, CA 93702
17. 3285 E. Shields Avenue, Fresno, CA 93726
18. 3110 N. West Street, Fresno, CA 93705
19. 201 N. Milpas Street, Santa Barbara, CA 93103
20. 2002 West Avenue "J", Lancaster, CA 93536
21. 4069 West Avenue "L", Lancaster, CA 93536
22. 1341-A Pacheco Blvd., Los Banos, CA 93635
23. 2723 E. Main St., Ventura, CA 93003
24. 6000 Telegraph Rd., Ventura, CA 93003
25. 7838 Telegraph Rd., Ventura, CA 93004
26. 305 W. L.A. Ave., Moorpark, CA 93021
27. 15503 E. Mississippi Ave., Aurora, CO 80017
28. 7148 E. County Line Rd., Highlands Ranch, CO 80126
29. 10903 US Hwy 285 E103&103, Conifer, CO 80433
30. 166 Main St. (PO Box 814), Elizabeth, CO 80107
31. 911 Mountain Ave, Berthoud, CO 80513
32. 6220 Bass Lake Road, Crystal, MN 55429
</TABLE>
-1-
<PAGE>
<TABLE>
<C> <S>
33. 14001 St. Francis Blvd. N.W. Ramsey, MN 55303
34. 6976 33rd Street N. Oakdale, MN 55119
35. 6533 Nicollet Avenue S. Richfield, MN 55423
36. 7916 Brooklyn Blvd. Brooklyn Park, MN 55445
37. 1115 Shakopee Town Square, Shakopee, MN 55379
38. 11656 Winnetka Avenue, Champlin, MN 55316
39. 1435 N. Highway 101, Plymouth, MN 55447
40. 10705 University Avenue, Blaine, MN 55434
41. 8521 Zane Avenue N., Brooklyn Park, MN 55443
42. 6220 109th Avenue N. Champlin, MN 55316
43. 13733 Crosstown Blvd., Andover, MN 55304
44. 3701 Old Shakopee Road, Bloomington, MN 55431
45. 2325 Polk Street, San Francisco, CA 94109
46. 1590 Pacific Avenue, San Francisco, CA 94109
47. 1900 Lombard Street, San Francisco, CA 94123
</TABLE>
-2-
<PAGE>
SECURED PROMISSORY NOTE
-----------------------
(Tranche A)
-----------
$3,465,000 Phoenix, Arizona
March 24, 1998
FOR VALUE RECEIVED, each of VIDEO CITY, INC., a Delaware corporation,
ADVENTURES IN VIDEO, INC., a Minnesota corporation, KDDJ INVESTMENTS, INC., a
Minnesota corporation, OLD REPUBLIC ENTERTAINMENT, INC., a California
corporation, LEPTIS MAGNA, INC., a Colorado corporation, and SULPIZIO ONE, INC.,
a California corporation (jointly and severally, "Borrower"), promises to pay to
--------
the order of FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), at
------
its offices at 355 South Grand Avenue, Suite 2400, Los Angeles, California
90071, or at such other place or places as FINOVA may from time to time
designate in writing, the principal sum of Three Million Four Hundred Sixty Five
Thousand Dollars ($3,465,000) or so much as shall have been drawn by the
undersigned pursuant to the terms of the Loan Agreement (as defined below), plus
interest in the manner and upon the terms and conditions set forth below. This
Secured Promissory Note (Tranche A) ("Note") is made pursuant to that certain
----
Loan and Security Agreement of even date between the FINOVA and Borrower (the
"Loan Agreement"), the provisions of which are incorporated herein by this
- ---------------
reference. Capitalized terms herein, unless otherwise noted, shall have the
meaning set forth in the Loan Agreement.
1.0 SCHEDULE OF PAYMENTS; RATE AND PAYMENT OF INTEREST; PREPAYMENT.
--------------------------------------------------------------
1.1 This Note shall be payable as follows:
a. Subject to Section 1.1(b) below, payments of interest only
beginning on the first day of the first month after the
respective advance and continuing on the first day of each month
thereafter; and
b. A final installment of all unpaid principal plus accrued and
unpaid interest and charges on the earlier of (i) March 23,
2003, or (ii) the date the Agreement is terminated by either
party for any reason whatsoever.
1.2 Prepayment may be made under this Note in whole but not in part,
subject to the Termination set forth in the Loan Agreement, provided that such
prepayment is preceded by not less than five (5) business days prior written
notice to FINOVA and accompanied by all accrued by unpaid interest and the full
amount of the applicable Termination Fee. Notwithstanding anything herein to
the contrary, in the event the Loan Agreement is terminated by Borrower, by
FINOVA as permitted under the Loan Agreement or by any other person at any time,
then the entire unpaid principal balance of this Note, together with all accrued
and unpaid interest hereon and the full amount of the applicable Termination
Fee, shall become immediately due and payable in full on the effective date of
such termination, without presentment, notice or demand of any kind.
<PAGE>
1.3 Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed, and shall be at the rate of two and three-
quarters (2.75) percentage points above the Prime Rate (as hereinafter defined);
provided, however, upon the occurrence and during the continuance of an event of
- -------- -------
default (as hereinafter defined), interest shall accrue on the outstanding
principal balance of this Note at a default rate (the "Default Rate") of two (2)
------------
percentage points above the Prime Rate, and shall be payable on demand. "Prime
-----
Rate" means, for any day, the rate of interest per annum (over a year of 360
- ----
days) announced by Citibank, N.A. (the "Bank"), from time to time, as its "base
----
rate" (or any successor thereto) in effect on such day. The Prime Rate is not
necessarily the lowest rate charged by the Bank. The applicable rate of
interest assessed hereunder will be increased or decreased from time to time
hereafter in an amount equal to any increase or decrease hereafter made by the
Bank in the Prime Rate. A change in the Prime Rate shall be effective on the
first day following such change.
2.0 EVENTS OF DEFAULTS; REMEDIES.
----------------------------
2.1 The occurrence of any one of the following events shall
constitute a default by Borrower under this Note (hereinafter an "Event of
--------
Default"): (a) if Borrower fails to pay to FINOVA an installment of principal
- -------
or interest hereunder when due; (b) if Borrower fails to pay any of its
Obligations (as defined in the Loan Agreement) to FINOVA when due and payable or
declared due and payable; (c) if Borrower fails or neglects to perform, keep or
observe any term, provision, covenant, warranty or representation contained in
this Note or the Loan Agreement (other than as referred to in (a) or (b) of this
paragraph), which is required to be performed, kept or observed by Borrower or
if a default occurs under the Loan Agreement; or (d) the occurrence of a default
or an event of default under any agreement, instrument or document heretofore,
now or at any time or times hereafter delivered to FINOVA by Borrower or by any
guarantor of part or all of Borrower's Obligations to FINOVA.
2.2 Upon the occurrence of any Event of Default hereunder, in
addition to FINOVA's right to charge interest on the Obligations at the Default
Rate: (a) at the option of FINOVA, the entire unpaid amount of all of the
Obligations, including without limitation the Termination Fee, shall become
immediately due and payable without demand, notice or legal process of any kind;
(b) FINOVA may, at its option, without demand, notice or legal process of any
kind, exercise any and all rights and remedies granted to it by the Loan
Agreement or by any other agreement now or hereafter existing between FINOVA and
Borrower or between FINOVA and any guarantor of part or all of Borrower's
liabilities to FINOVA; and (c) FINOVA may at its option exercise from time to
time any other rights and remedies available to it under the Uniform Commercial
Code or other law of the State of Arizona.
2.3 The remedies of FINOVA as provided herein and in the Loan
Agreement shall be cumulative and concurrent, and may be pursued singularly,
successively, or together, at the sole discretion of FINOVA. No act of omission
or commission of FINOVA, including specifically any failure to exercise any
right, remedy or recourse, shall be deemed to be a waiver or release of the
same, such waiver or release to be effected only through a written document
executed by FINOVA and then only to the extent specifically recited therein. A
waiver or release with reference to any one event shall not be construed as
continuing, as a bar to, or as a waiver or release of, any subsequent right,
remedy or recourse as to a subsequent event.
- 2 -
<PAGE>
3.0 GENERAL PROVISIONS.
------------------
3.1 Borrower warrants and represents to FINOVA that Borrower has used
and will continue to use the loans and advances represented by this Note solely
for proper business purposes, and consistent with all applicable laws and
statutes.
3.2 This Note is secured by the Collateral described in the Loan
Agreement.
3.3 Borrower waives presentment, demand and protest, notice of
protest, notice of presentment and all other notices and demands in connection
with the enforcement of FINOVA's rights hereunder, except as specifically
provided and called for by this Note, and hereby consents to, and waives notice
of, the release, addition, or substitution, with or without consideration, of
any collateral or of any person liable for payment of this Note. Any failure of
FINOVA to exercise any right available hereunder or otherwise shall not be
construed as a waiver of the right to exercise the same or as a waiver of any
other right at any other time.
3.4 If this Note is not paid when due or upon the occurrence of an
Event of Default, Borrower further promises to pay all costs of collection,
foreclosure fees, attorneys fees and expert witness fees incurred by FINOVA,
whether or not suit is filed hereon, and the fees, costs and expenses as
provided in the Loan Agreement.
3.5 The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rate set forth on the Schedule, calculated and applied to the principal balance
of this Note in accordance with the provisions of this Note: (ii) interest after
an Event of Default, calculated and applied to the amounts due under this Note
in accordance with the provisions hereof; and (iii) all Additional Sums (as
herein defined), if any. Borrower agrees to pay an effective contracted for
rate of interest which is the sum of the above-referenced elements. All
examination fees, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, Termination Fees,
Minimum Interest Charges, other charges, goods, things in action or any other
sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Note, the Loan Agreement or any
- ----------------
other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction, shall
be payable by Borrower as, and shall be deemed to be, additional interest and
for such purposes only, the agreed upon and "contracted for rate of interest" of
this lending transaction shall be deemed to be increased by the rate of interest
resulting from the inclusion of the Additional Sums.
3.6 It is the intent of the parties to comply with the usury law of
the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed
--------------------
that notwithstanding any provisions to the contrary in this Note, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Note or such documents require the payment or permit the collection
of interest in excess of the maximum Interest Rate, then in any such event (1)
the provisions of the paragraph shall govern and control, (2) neither Borrower
nor any other person or entity now or hereafter liable for the payment hereof
shall be obligated to pay the
- 3 -
<PAGE>
amount of such interest to the extent that it is in excess of the Maximum
Interest Rate, (3) any such excess which may have been collected shall be either
applied as a credit against the then unpaid principal amount hereof or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, until the entire amount of interest which would
otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law has been paid in full. Borrower further agrees that should
the Maximum Interest Rate be increased at any time hereafter because of a change
in the Applicable Usury Law, then to the extent not prohibited by the Applicable
Usury Law, such increases shall apply to all indebtedness evidenced hereby
regardless of when incurred; but, again to the extent not prohibited by the
Applicable Usury Law, should the Maximum Interest Rate be decreased because of a
change in the Applicable Usury Law, such decreases shall not apply to the
indebtedness evidenced hereby regardless of when incurred.
3.7 FINOVA may at any time transfer this Note and FINOVA's rights in
any or all collateral securing this Note, and FINOVA thereafter shall be
relieved from all liability with respect to such collateral arising after the
date of such transfer.
3.8 This Note shall be binding upon Borrower and its legal
representatives, successors and assigns. Wherever possible, each provision of
this Note shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Note shall be prohibited by or
invalid under such law, such provision shall be severable, and be ineffective to
the extent of such prohibition or invalidity, without invalidating the remaining
provisions of this Note.
THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY FINOVA IN PHOENIX,
ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ARIZONA, AS
THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE
UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. BORROWER HEREBY (i) IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN MARICOPA
COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER
ARISING FROM OR RELATED TO THIS NOTE; (ii) WAIVES PERSONAL SERVICE OF ANY AND
ALL PROCESS UPON BORROWER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE
BY MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO BORROWER AT THE
ADDRESS SET FORTH BELOW AND SERVICE SO
- 4 -
<PAGE>
MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE
(3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED TO BORROWER'S ADDRESS; (iii)
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR
PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING
SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; (v) AGREES NOT TO INSTITUTE ANY
LEGAL ACTION OR PROCEEDING AGAINST FINOVA OR ANY OF FINOVA'S DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR
RELATING TO THIS NOTE IN ANY COURT OTHER THAN ONE LOCATED IN MARICOPA COUNTY,
ARIZONA; AND (vi) IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION
ARISING UNDER OR IN CONNECTION WITH THIS NOTE. NOTHING IN THIS PARAGRAPH SHALL
AFFECT OR IMPAIR FINOVA'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED
BY LAW OR FINOVA'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR
BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
"BORROWER"
<TABLE>
<CAPTION>
<S> <C>
VIDEO CITY, INC., a Delaware corporation LEPTIS MAGNA, INC., a Colorado corporation
Fed ID Tax No. 95-3897052 Fed ID Tax No. 84-0964171
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
---------------------------------- ----------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
-------------------------------- --------------------------------
Title: CEO Title: President
------------------------------- -------------------------------
Address: Address:
6840 District Blvd. 15503 E. Mississippi Ave.
Bakersfield, California 93313 Aurora, Colorado 80017
ADVENTURES IN VIDEO, INC., a Minnesota OLD REPUBLIC ENTERTAINMENT, INC., a California
corporation corporation
Fed ID Tax No. 41-1429740 Fed ID Tax No. 71-0460482
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
---------------------------------- ----------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
-------------------------------- --------------------------------
Title: President Title: President
------------------------------- -------------------------------
Address: Address:
</TABLE>
- 5 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10705 University Ave. NE 2723 E. Main St.
Blaine, Minnesota 55434 Ventura, California 93003
KDDJ INVESTMENTS, INC., a Minnesota SULPIZIO ONE, INC., a California corporation
corporation Fed ID Tax No. 33-0636666
Fed ID Tax No. 94-3057641
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
---------------------------------- ----------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
-------------------------------- --------------------------------
Title: President Title: President
------------------------------- -------------------------------
Address: Address:
10705 University Ave. NE 6840 District Blvd.
Blaine, Minnesota 55434 Bakersfield, California 93313
</TABLE>
- 6 -
<PAGE>
SECURED PROMISSORY NOTE
-----------------------
(Tranche B)
-----------
$1,735,000 Phoenix, Arizona
March 24, 1998
FOR VALUE RECEIVED, each of VIDEO CITY, INC., a Delaware corporation,
ADVENTURES IN VIDEO, INC., a Minnesota corporation, KDDJ INVESTMENTS, INC., a
Minnesota corporation, OLD REPUBLIC ENTERTAINMENT, INC., a California
corporation, LEPTIS MAGNA, INC., a Colorado corporation, and SULPIZIO ONE, INC.,
a California corporation (jointly and severally, "Borrower"), promises to pay to
--------
the order of FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), at
------
its offices at 355 South Grand Avenue, Suite 2400, Los Angeles, California
90071, or at such other place or places as FINOVA may from time to time
designate in writing, the principal sum of One Million Seven Hundred Thirty Five
Thousand Dollars ($1,735,000) or so much as shall have been drawn by the
undersigned pursuant to the terms of the Loan Agreement (as defined below), plus
interest in the manner and upon the terms and conditions set forth below. This
Secured Promissory Note (Tranche B) ("Note") is made pursuant to that certain
----
Loan and Security Agreement of even date between the FINOVA and Borrower (the
"Loan Agreement"), the provisions of which are incorporated herein by this
- ---------------
reference. Capitalized terms herein, unless otherwise noted, shall have the
meaning set forth in the Loan Agreement.
1.0 SCHEDULE OF PAYMENTS; RATE AND PAYMENT OF INTEREST; PREPAYMENT.
--------------------------------------------------------------
1.1 This Note shall be payable as follows:
a. Subject to Section 1.1(b) below, equal successive monthly
installments of principal based on a sixty month amortization,
plus interest, beginning on the first day of the first month after
the respective advance and continuing on the first day of each
month thereafter; and
b. A final installment of all unpaid principal plus accrued and
unpaid interest and charges on the earlier of (i) March 23, 2003,
or (ii) the date the Agreement is terminated by either party for
any reason whatsoever.
1.2 Prepayment may be made under this Note in whole but not in part,
subject to the Termination set forth in the Loan Agreement, provided that such
prepayment is preceded by not less than five (5) business days prior written
notice to FINOVA and accompanied by all accrued by unpaid interest and the full
amount of the applicable Termination Fee. Notwithstanding anything herein to
the contrary, in the event the Loan Agreement is terminated by Borrower, by
FINOVA as permitted under the Loan Agreement or by any other person at any time,
then the entire unpaid principal balance of this Note, together with all accrued
and unpaid interest hereon and the full amount of the applicable Termination
Fee, shall become immediately due and payable in full on the effective date of
such termination, without presentment, notice or demand of any kind.
<PAGE>
1.3 Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed, and shall be at the rate of two and three-
quarters (2.75) percentage points above the Prime Rate (as hereinafter defined);
provided, however, upon the occurrence and during the continuance of an event of
- -------- -------
default (as hereinafter defined), interest shall accrue on the outstanding
principal balance of this Note at a default rate (the "Default Rate") of two (2)
------------
percentage points above the Prime Rate, and shall be payable on demand. "Prime
-----
Rate" means, for any day, the rate of interest per annum (over a year of 360
- ----
days) announced by Citibank, N.A. (the "Bank"), from time to time, as its "base
----
rate" (or any successor thereto) in effect on such day. The Prime Rate is not
necessarily the lowest rate charged by the Bank. The applicable rate of interest
assessed hereunder will be increased or decreased from time to time hereafter in
an amount equal to any increase or decrease hereafter made by the Bank in the
Prime Rate. A change in the Prime Rate shall be effective on the first day
following such change.
2.0 EVENTS OF DEFAULTS; REMEDIES.
----------------------------
2.1 The occurrence of any one of the following events shall
constitute a default by Borrower under this Note (hereinafter an "Event of
--------
Default"): (a) if Borrower fails to pay to FINOVA an installment of principal
- -------
or interest hereunder when due; (b) if Borrower fails to pay any of its
Obligations (as defined in the Loan Agreement) to FINOVA when due and payable or
declared due and payable; (c) if Borrower fails or neglects to perform, keep or
observe any term, provision, covenant, warranty or representation contained in
this Note or the Loan Agreement (other than as referred to in (a) or (b) of this
paragraph), which is required to be performed, kept or observed by Borrower or
if a default occurs under the Loan Agreement; or (d) the occurrence of a default
or an event of default under any agreement, instrument or document heretofore,
now or at any time or times hereafter delivered to FINOVA by Borrower or by any
guarantor of part or all of Borrower's Obligations to FINOVA.
2.2 Upon the occurrence of any Event of Default hereunder, in
addition to FINOVA's right to charge interest on the Obligations at the Default
Rate: (a) at the option of FINOVA, the entire unpaid amount of all of the
Obligations, including without limitation the Termination Fee, shall become
immediately due and payable without demand, notice or legal process of any kind;
(b) FINOVA may, at its option, without demand, notice or legal process of any
kind, exercise any and all rights and remedies granted to it by the Loan
Agreement or by any other agreement now or hereafter existing between FINOVA and
Borrower or between FINOVA and any guarantor of part or all of Borrower's
liabilities to FINOVA; and (c) FINOVA may at its option exercise from time to
time any other rights and remedies available to it under the Uniform Commercial
Code or other law of the State of Arizona.
2.3 The remedies of FINOVA as provided herein and in the Loan
Agreement shall be cumulative and concurrent, and may be pursued singularly,
successively, or together, at the sole discretion of FINOVA. No act of omission
or commission of FINOVA, including specifically any failure to exercise any
right, remedy or recourse, shall be deemed to be a waiver or release of the
same, such waiver or release to be effected only through a written document
executed by FINOVA and then only to the extent specifically recited therein. A
waiver or release with reference to any one event shall not be construed as
continuing, as a bar to, or as a waiver or release of, any subsequent right,
remedy or recourse as to a subsequent event.
- 2 -
<PAGE>
3.0 GENERAL PROVISIONS.
------------------
3.1 Borrower warrants and represents to FINOVA that Borrower has used
and will continue to use the loans and advances represented by this Note solely
for proper business purposes, and consistent with all applicable laws and
statutes.
3.2 This Note is secured by the Collateral described in the Loan
Agreement.
3.3 Borrower waives presentment, demand and protest, notice of
protest, notice of presentment and all other notices and demands in connection
with the enforcement of FINOVA's rights hereunder, except as specifically
provided and called for by this Note, and hereby consents to, and waives notice
of, the release, addition, or substitution, with or without consideration, of
any collateral or of any person liable for payment of this Note. Any failure of
FINOVA to exercise any right available hereunder or otherwise shall not be
construed as a waiver of the right to exercise the same or as a waiver of any
other right at any other time.
3.4 If this Note is not paid when due or upon the occurrence of an
Event of Default, Borrower further promises to pay all costs of collection,
foreclosure fees, attorneys fees and expert witness fees incurred by FINOVA,
whether or not suit is filed hereon, and the fees, costs and expenses as
provided in the Loan Agreement.
3.5 The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rate set forth on the Schedule, calculated and applied to the principal balance
of this Note in accordance with the provisions of this Note: (ii) interest after
an Event of Default, calculated and applied to the amounts due under this Note
in accordance with the provisions hereof; and (iii) all Additional Sums (as
herein defined), if any. Borrower agrees to pay an effective contracted for
rate of interest which is the sum of the above-referenced elements. All
examination fees, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, Termination Fees,
Minimum Interest Charges, other charges, goods, things in action or any other
sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Note, the Loan Agreement or any
- ----------------
other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction, shall
be payable by Borrower as, and shall be deemed to be, additional interest and
for such purposes only, the agreed upon and "contracted for rate of interest" of
this lending transaction shall be deemed to be increased by the rate of interest
resulting from the inclusion of the Additional Sums.
3.6 It is the intent of the parties to comply with the usury law of
the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed
--------------------
that notwithstanding any provisions to the contrary in this Note, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Note or such documents require the payment or permit the collection
of interest in excess of the maximum Interest Rate, then in any such event (1)
the provisions of the paragraph shall govern and control, (2) neither Borrower
nor any other person or entity now or hereafter liable for the payment hereof
shall be obligated to pay the
- 3 -
<PAGE>
amount of such interest to the extent that it is in excess of the Maximum
Interest Rate, (3) any such excess which may have been collected shall be either
applied as a credit against the then unpaid principal amount hereof or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, until the entire amount of interest which would
otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law has been paid in full. Borrower further agrees that should
the Maximum Interest Rate be increased at any time hereafter because of a change
in the Applicable Usury Law, then to the extent not prohibited by the Applicable
Usury Law, such increases shall apply to all indebtedness evidenced hereby
regardless of when incurred; but, again to the extent not prohibited by the
Applicable Usury Law, should the Maximum Interest Rate be decreased because of a
change in the Applicable Usury Law, such decreases shall not apply to the
indebtedness evidenced hereby regardless of when incurred.
3.7 FINOVA may at any time transfer this Note and FINOVA's rights in
any or all collateral securing this Note, and FINOVA thereafter shall be
relieved from all liability with respect to such collateral arising after the
date of such transfer.
3.8 This Note shall be binding upon Borrower and its legal
representatives, successors and assigns. Wherever possible, each provision of
this Note shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Note shall be prohibited by or
invalid under such law, such provision shall be severable, and be ineffective to
the extent of such prohibition or invalidity, without invalidating the remaining
provisions of this Note.
THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY FINOVA IN PHOENIX,
ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ARIZONA, AS
THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE
UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. BORROWER HEREBY (i) IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN MARICOPA
COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER
ARISING FROM OR RELATED TO THIS NOTE; (ii) WAIVES PERSONAL SERVICE OF ANY AND
ALL PROCESS UPON BORROWER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE
BY MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO BORROWER AT THE
ADDRESS SET FORTH BELOW AND SERVICE SO
- 4 -
<PAGE>
MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE
(3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED TO BORROWER'S ADDRESS; (iii)
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR
PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING
SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; (v) AGREES NOT TO INSTITUTE ANY
LEGAL ACTION OR PROCEEDING AGAINST FINOVA OR ANY OF FINOVA'S DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR
RELATING TO THIS NOTE IN ANY COURT OTHER THAN ONE LOCATED IN MARICOPA COUNTY,
ARIZONA; AND (vi) IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION
ARISING UNDER OR IN CONNECTION WITH THIS NOTE. NOTHING IN THIS PARAGRAPH SHALL
AFFECT OR IMPAIR FINOVA'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED
BY LAW OR FINOVA'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR
BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
"BORROWER"
<TABLE>
<CAPTION>
<S> <C>
VIDEO CITY, INC., a Delaware corporation LEPTIS MAGNA, INC., a Colorado corporation
Fed ID Tax No. 95-3897052 Fed ID Tax No. 84-0964171
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
----------------------------------- -----------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
--------------------------------- ---------------------------------
Title: CEO Title: President
-------------------------------- --------------------------------
Address: Address:
6840 District Blvd. 15503 E. Mississippi Ave.
Bakersfield, California 93313 Aurora, Colorado 80017
ADVENTURES IN VIDEO, INC., a OLD REPUBLIC ENTERTAINMENT, INC., a
Minnesota corporation California corporation
Fed ID Tax No. 41-1429740 Fed ID Tax No. 71-0460482
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
----------------------------------- -----------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
--------------------------------- ---------------------------------
Title: President Title: President
-------------------------------- --------------------------------
Address: Address:
</TABLE>
- 5 -
<PAGE>
<TABLE>
<S> <C>
10705 University Ave. NE 2723 E. Main St.
Blaine, Minnesota 55434 Ventura, California 93003
KDDJ INVESTMENTS, INC., a Minnesota SULPIZIO ONE, INC., a California
corporation corporation Fed ID Tax No. 33-0636666
Fed ID Tax No. 94-3057641
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
---------------------------------- ----------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
-------------------------------- --------------------------------
Title: President Title: President
------------------------------- -------------------------------
Address: Address:
10705 University Ave. NE 6840 District Blvd.
Blaine, Minnesota 55434 Bakersfield, California 93313
</TABLE>
- 6 -
<PAGE>
SECURED PROMISSORY NOTE
-----------------------
(Tranche C)
-----------
$1,800,000 Phoenix, Arizona
March 24, 1998
FOR VALUE RECEIVED, each of VIDEO CITY, INC., a Delaware corporation,
ADVENTURES IN VIDEO, INC., a Minnesota corporation, KDDJ INVESTMENTS, INC., a
Minnesota corporation, OLD REPUBLIC ENTERTAINMENT, INC., a California
corporation, LEPTIS MAGNA, INC., a Colorado corporation, and SULPIZIO ONE, INC.,
a California corporation (jointly and severally, "Borrower"), promises to pay to
--------
the order of FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), at
------
its offices at 355 South Grand Avenue, Suite 2400, Los Angeles, California
90071, or at such other place or places as FINOVA may from time to time
designate in writing, the principal sum of One Million Eight Hundred Thousand
Dollars ($1,800,000) or so much as shall have been drawn by the undersigned
pursuant to the terms of the Loan Agreement (as defined below), plus interest in
the manner and upon the terms and conditions set forth below. This Secured
Promissory Note (Tranche C) ("Note") is made pursuant to that certain Loan and
----
Security Agreement of even date between the FINOVA and Borrower (the "Loan
----
Agreement"), the provisions of which are incorporated herein by this reference.
- ---------
Capitalized terms herein, unless otherwise noted, shall have the meaning set
forth in the Loan Agreement.
1.0 SCHEDULE OF PAYMENTS; RATE AND PAYMENT OF INTEREST; PREPAYMENT.
--------------------------------------------------------------
1.1 This Note shall be payable as follows:
a. Subject to Section 1.1(b) below, equal successive monthly
installments of principal based on a sixty month amortization of
one-third of the original outstanding principal amount of the
Tranche C Term Loans, plus interest on the entire outstanding
principal amount, beginning on the first day of the first month
after the respective advance and continuing on the first day of
each month thereafter; and
b. A final installment of all unpaid principal plus accrued and
unpaid interest and charges on the earlier of (i) March 23, 2001,
or (ii) the date the Agreement is terminated by either party for
any reason whatsoever.
1.2 Prepayment may be made under this Note in whole but not in part,
subject to the Termination set forth in the Loan Agreement, provided that such
prepayment is preceded by not less than five (5) business days prior written
notice to FINOVA and accompanied by all accrued by unpaid interest and the full
amount of the applicable Termination Fee. Notwithstanding anything herein to
the contrary, in the event the Loan Agreement is terminated by Borrower, by
FINOVA as permitted under the Loan Agreement or by any other person at any time,
then the entire unpaid principal balance of this Note, together with all accrued
and unpaid interest hereon and the full amount of the applicable Termination
Fee, shall become immediately
<PAGE>
due and payable in full on the effective date of such termination, without
presentment, notice or demand of any kind.
1.3 Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed, and shall be at the rate of two and three-
quarters (2.75) percentage points above the Prime Rate (as hereinafter defined);
provided, however, upon the occurrence and during the continuance of an event of
- -------- -------
default (as hereinafter defined), interest shall accrue on the outstanding
principal balance of this Note at a default rate (the "Default Rate") of two (2)
------------
percentage points above the Prime Rate, and shall be payable on demand. "Prime
-----
Rate" means, for any day, the rate of interest per annum (over a year of 360
- ----
days) announced by Citibank, N.A. (the "Bank"), from time to time, as its "base
----
rate" (or any successor thereto) in effect on such day. The Prime Rate is not
necessarily the lowest rate charged by the Bank. The applicable rate of interest
assessed hereunder will be increased or decreased from time to time hereafter in
an amount equal to any increase or decrease hereafter made by the Bank in the
Prime Rate. A change in the Prime Rate shall be effective on the first day
following such change.
2.0 EVENTS OF DEFAULTS; REMEDIES.
----------------------------
2.1 The occurrence of any one of the following events shall
constitute a default by Borrower under this Note (hereinafter an "Event of
--------
Default"): (a) if Borrower fails to pay to FINOVA an installment of principal
- -------
or interest hereunder when due; (b) if Borrower fails to pay any of its
Obligations (as defined in the Loan Agreement) to FINOVA when due and payable or
declared due and payable; (c) if Borrower fails or neglects to perform, keep or
observe any term, provision, covenant, warranty or representation contained in
this Note or the Loan Agreement (other than as referred to in (a) or (b) of this
paragraph), which is required to be performed, kept or observed by Borrower or
if a default occurs under the Loan Agreement; or (d) the occurrence of a default
or an event of default under any agreement, instrument or document heretofore,
now or at any time or times hereafter delivered to FINOVA by Borrower or by any
guarantor of part or all of Borrower's Obligations to FINOVA.
2.2 Upon the occurrence of any Event of Default hereunder, in
addition to FINOVA's right to charge interest on the Obligations at the Default
Rate: (a) at the option of FINOVA, the entire unpaid amount of all of the
Obligations, including without limitation the Termination Fee, shall become
immediately due and payable without demand, notice or legal process of any kind;
(b) FINOVA may, at its option, without demand, notice or legal process of any
kind, exercise any and all rights and remedies granted to it by the Loan
Agreement or by any other agreement now or hereafter existing between FINOVA and
Borrower or between FINOVA and any guarantor of part or all of Borrower's
liabilities to FINOVA; and (c) FINOVA may at its option exercise from time to
time any other rights and remedies available to it under the Uniform Commercial
Code or other law of the State of Arizona.
2.3 The remedies of FINOVA as provided herein and in the Loan
Agreement shall be cumulative and concurrent, and may be pursued singularly,
successively, or together, at the sole discretion of FINOVA. No act of omission
or commission of FINOVA, including specifically any failure to exercise any
right, remedy or recourse, shall be deemed to be a waiver or release of the
same, such waiver or release to be effected only through a written document
executed by FINOVA and then only to the extent specifically recited therein. A
waiver or release
-2-
<PAGE>
with reference to any one event shall not be construed as continuing, as a bar
to, or as a waiver or release of, any subsequent right, remedy or recourse as to
a subsequent event.
3.0 GENERAL PROVISIONS.
------------------
3.1 Borrower warrants and represents to FINOVA that Borrower has used
and will continue to use the loans and advances represented by this Note solely
for proper business purposes, and consistent with all applicable laws and
statutes.
3.2 This Note is secured by the Collateral described in the Loan
Agreement.
3.3 Borrower waives presentment, demand and protest, notice of
protest, notice of presentment and all other notices and demands in connection
with the enforcement of FINOVA's rights hereunder, except as specifically
provided and called for by this Note, and hereby consents to, and waives notice
of, the release, addition, or substitution, with or without consideration, of
any collateral or of any person liable for payment of this Note. Any failure of
FINOVA to exercise any right available hereunder or otherwise shall not be
construed as a waiver of the right to exercise the same or as a waiver of any
other right at any other time.
3.4 If this Note is not paid when due or upon the occurrence of an
Event of Default, Borrower further promises to pay all costs of collection,
foreclosure fees, attorneys fees and expert witness fees incurred by FINOVA,
whether or not suit is filed hereon, and the fees, costs and expenses as
provided in the Loan Agreement.
3.5 The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rate set forth on the Schedule, calculated and applied to the principal balance
of this Note in accordance with the provisions of this Note: (ii) interest after
an Event of Default, calculated and applied to the amounts due under this Note
in accordance with the provisions hereof; and (iii) all Additional Sums (as
herein defined), if any. Borrower agrees to pay an effective contracted for
rate of interest which is the sum of the above-referenced elements. All
examination fees, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, Termination Fees,
Minimum Interest Charges, other charges, goods, things in action or any other
sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Note, the Loan Agreement or any
- ----------------
other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction, shall
be payable by Borrower as, and shall be deemed to be, additional interest and
for such purposes only, the agreed upon and "contracted for rate of interest" of
this lending transaction shall be deemed to be increased by the rate of interest
resulting from the inclusion of the Additional Sums.
3.6 It is the intent of the parties to comply with the usury law of
the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed
--------------------
that notwithstanding any provisions to the contrary in this Note, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Note or such documents require the payment or
-3-
<PAGE>
permit the collection of interest in excess of the maximum Interest Rate, then
in any such event (1) the provisions of the paragraph shall govern and control,
(2) neither Borrower nor any other person or entity now or hereafter liable for
the payment hereof shall be obligated to pay the amount of such interest to the
extent that it is in excess of the Maximum Interest Rate, (3) any such excess
which may have been collected shall be either applied as a credit against the
then unpaid principal amount hereof or refunded to Borrower, at FINOVA's option,
and (4) the effective rate of interest shall be automatically reduced to the
Maximum Interest Rate. It is further agreed, without limiting the generality of
the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all
calculations of interest which are made for the purpose of determining whether
such rate would exceed the Maximum Interest Rate shall be made by amortizing,
prorating, allocating and spreading during the period of the full stated term of
the loan evidenced hereby, all interest at any time contracted for, charged or
received from Borrower or otherwise in connection with such loan; and (y) in the
event that the effective rate of interest on the loan should at any time exceed
the Maximum Interest Rate, such excess interest that would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law shall be
paid to FINOVA from time to time, if and when the effective interest rate on the
loan otherwise falls below the Maximum Interest Rate, until the entire amount of
interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable Usury Law, then to the extent not
prohibited by the Applicable Usury Law, such increases shall apply to all
indebtedness evidenced hereby regardless of when incurred; but, again to the
extent not prohibited by the Applicable Usury Law, should the Maximum Interest
Rate be decreased because of a change in the Applicable Usury Law, such
decreases shall not apply to the indebtedness evidenced hereby regardless of
when incurred.
3.7 FINOVA may at any time transfer this Note and FINOVA's rights in
any or all collateral securing this Note, and FINOVA thereafter shall be
relieved from all liability with respect to such collateral arising after the
date of such transfer.
3.8 This Note shall be binding upon Borrower and its legal
representatives, successors and assigns. Wherever possible, each provision of
this Note shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Note shall be prohibited by or
invalid under such law, such provision shall be severable, and be ineffective to
the extent of such prohibition or invalidity, without invalidating the remaining
provisions of this Note.
THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY FINOVA IN PHOENIX,
ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ARIZONA, AS
THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE
UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. BORROWER HEREBY (i) IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN MARICOPA
COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER
ARISING FROM OR RELATED TO THIS NOTE; (ii) WAIVES PERSONAL SERVICE OF ANY AND
ALL
-4-
<PAGE>
PROCESS UPON BORROWER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY
MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS
SET FORTH BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE
EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN
POSTED TO BORROWER'S ADDRESS; (iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
BORROWER MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT
IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY
OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY
LAW; (v) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST FINOVA
OR ANY OF FINOVA'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY,
CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS NOTE IN ANY COURT OTHER
THAN ONE LOCATED IN MARICOPA COUNTY, ARIZONA; AND (vi) IRREVOCABLY WAIVES ANY
RIGHT TO A TRIAL BY JURY IN ANY ACTION ARISING UNDER OR IN CONNECTION WITH THIS
NOTE. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR FINOVA'S RIGHT TO SERVE
LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR FINOVA'S RIGHT TO BRING ANY
ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF
ANY OTHER JURISDICTION.
"BORROWER"
<TABLE>
<S> <C>
VIDEO CITY, INC., a Delaware corporation LEPTIS MAGNA, INC., a Colorado corporation
Fed ID Tax No. 95-3897052 Fed ID Tax No. 84-0964171
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
----------------------------------- ------------------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
--------------------------------- ----------------------------------------
Title: CEO Title: President
-------------------------------- ---------------------------------------
Address: Address:
6840 District Blvd. 15503 E. Mississippi Ave.
Bakersfield, California 93313 Aurora, Colorado 80017
ADVENTURES IN VIDEO, INC., a Minnesota OLD REPUBLIC ENTERTAINMENT, INC., a California
corporation corporation
Fed ID Tax No. 41-1429740 Fed ID Tax No. 71-0460482
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
----------------------------------- -------------------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
--------------------------------- ----------------------------------------
Title: President Title: President
-------------------------------- ---------------------------------------
Address: Address:
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
10705 University Ave. NE 2723 E. Main St.
Blaine, Minnesota 55434 Ventura, California 93003
KDDJ INVESTMENTS, INC., a Minnesota SULPIZIO ONE, INC., a California
corporation corporation
Fed ID Tax No. 94-3057641 Fed ID Tax No. 33-0636666
By: /s/ Robert Y. Lee By: /s/ Robert Y. Lee
----------------------------------- -------------------------------------------
Name: Robert Y. Lee Name: Robert Y. Lee
--------------------------------- -----------------------------------------
Title: President Title: President
-------------------------------- ----------------------------------------
Address: Address:
10705 University Ave. NE 6840 District Blvd.
Blaine, Minnesota 55434 Bakersfield, California 93313
</TABLE>
-6-
<PAGE>
<PAGE>
EXHIBIT 10.8
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE HEREOF AS HEREIN PROVIDED HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.
Warrant No. 0001
WARRANT
VIDEO CITY, INC.
NOT EXERCISABLE UNTIL MARCH 24, 2001
Expiring March 23, 2005
This is to certify that, for value received, FINOVA Capital Corporation
("Lender"), or registered assigns, is entitled during the Exercise Period to (i)
------
purchase, from time to time, upon the occurrence of a Liquidity Event, from
Video City, Inc., a Delaware corporation (together with its successors and
assigns, the "Company"), at the Warrant Office, 520,720 shares of the duly
-------
authorized, validly issued, fully paid and nonassessable shares of Common Stock
of the Company as of the Closing Date (defined below), at the Warrant Price or
(ii) put, at any one time, this Warrant to the Company, at the Warrant Office,
at a price equal to the Put Price. The number of shares of Common Stock
purchasable hereunder is subject to adjustment from time to time in the manner
provided in Section 4 hereof.
This Warrant was issued on the same date as the closing date (the "Closing
-------
Date") under the Loan and Security Agreement (as amended, extended or replaced
- ----
from time to time, the "Loan Agreement") dated as of March ___, 1998 among the
--------------
Company, the Lender and the other parties named therein, pursuant to which
credit is being extended to the Company on the terms and subject to the
conditions set forth therein. This Warrant is separate from the credit extended
under the Loan Agreement and may be assigned by the holder hereof without
restriction, subject to certain rights of the Company set forth in Section 3.
Certain terms used in this Warrant are defined in Section 5.
SECTION 1. EXERCISE OF WARRANTS.
1.1 (a) Method of Exercise for Common Stock. Subject to the provisions of
-----------------------------------
Section 3 of this Warrant, to exercise this Warrant for Common Stock, which such
exercise may only be in whole and not in part, the holder hereof shall deliver
to the Company at the Warrant Office designated pursuant to Section 2.1 not less
than ten (10) days prior to the date on which all or part of this Warrant shall
be exercised: (i) a written notice, in substantially the form of the
Subscription/Put Notice appearing at the end of this Warrant, of such holder's
election to exercise this Warrant, which notice shall specify the number of
shares of Common Stock to be purchased, the nature of payment, whether by check
or Warrants (pursuant to Section 1.3) or by a combination thereof, and the date
as of which such holder is exercising, in whole or in part, this Warrant (the
"Warrant Exercise Date"), (ii) a certified or official bank check payable to the
---------------------
order of the Company and/or Warrants and/or any other form of consideration
which the Company may have agreed to accept in payment of the Warrant Price in
the aggregate equal to the aggregate Warrant Price of the number of shares of
Common Stock being purchased and (iii) this Warrant. The Company shall execute
and deliver or cause to be executed and delivered, in accordance with said
notice, a certificate or certificates representing the aggregate number of
shares of Common Stock specified in said notice, dated as of the Warrant
Exercise Date. The stock certificate or certificates so delivered shall be in
the denomination of whole shares as may be specified in said notice and shall be
issued in the name of such holder or such other name as shall be designated in
said notice. No fractional shares or scrip representing fractional shares shall
be issued upon the exercise of this Warrant. In lieu of any fractional share to
which the Warrantholder would otherwise be entitled, the
<PAGE>
Company shall make a cash payment equal to the Fair Market Value of the Common
Stock multiplied by such fraction. Such certificate or certificates shall be
deemed to have been issued and such Warrantholder or any other person so
designated to be named therein shall be deemed for all purposes to have become a
holder of record of such shares as of the Warrant Exercise Date as aforesaid,
subject to the prior delivery by the holder hereof of the items described in
clauses (i) through (iii) above. The Company shall pay all expenses, taxes
(other than transfer taxes) and other charges payable in connection with the
preparation, issuance and delivery of such stock certificates, except that, in
case such stock certificates shall be registered in a name or names other than
the name of the holder of this Warrant, funds sufficient to pay all stock
transfer taxes which shall be payable upon the issuance of such stock
certificate or certificates shall be paid by the holder hereof at the time of
delivering the notice of exercise mentioned above or promptly upon receipt of a
written request of the Company for payment of the same.
(b) Method for Exercise of Put. To exercise this Warrant for cash, which
--------------------------
such exercise may only be in whole and not in part, the holder hereof shall
deliver to the Company at the Warrant Office designated pursuant to Section 2.1
not less than five (5) days prior to the date on which this Warrant shall be
exchanged for the Put Price (i) a written notice, in substantially the form of
the Subscription/Put Notice appearing at the end of this Warrant, of such
holder's election to exercise its put pursuant to the terms of his Warrant and
(ii) this Warrant. The Company shall pay to the account designated in the
Subscription/Put Notice to the holder hereof the Put Price not later than five
days after receipt of the notice specified in clause (i) above.
1.2 Warrant Shares To Be Fully Paid and Nonassessable. All shares of
-------------------------------------------------
Common Stock issued upon the exercise of this Warrant shall be validly issued,
fully paid and nonassessable and, if the Common Stock is then listed on a
securities exchange, shall be duly listed thereon.
1.3 Legend on Warrant Shares. Each certificate for Warrant Shares
------------------------
initially issued upon exercise of this Warrant, unless at the time of exercise
such Warrant Shares are registered under the Act, shall bear the following
legend (and any additional legend required by any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or the laws of any
state. The transfer of the securities represented hereby is subject to the
restrictions set forth in Section 3 of the Warrant or Warrants exchanged
for the securities represented by this certificate, copies of which Warrant
or Warrants are available for inspection at the office of Video City, Inc.,
and no transfer of such securities shall be valid or effective unless and
until the terms and conditions of such Section 3 of said Warrant or
Warrants shall have been complied with."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of (i) a public distribution pursuant to an effective registration statement or
(ii) an exempt sale pursuant to Rule 144 under the Act of the securities
represented thereby) shall also bear such legend unless, in the written opinion
of Orrick, Herrington & Sutcliffe LLP or such other counsel for the holder
thereof as shall be reasonably acceptable to the Company, delivered to the
Company to the effect that the securities represented thereby need no longer be
subject to the restrictions contained in said Section 3. The Company agrees to
pay the fees and expenses of any such counsel representing the Initial
Warrantholder rendering such opinion but in all other cases such fees and
expenses shall be borne by the Warrantholder. The provisions of said Section 3
shall be binding upon all subsequent holders of this Warrant.
1.4 Acknowledgment of Continuing Obligation. The Company will, at the
---------------------------------------
time of any exercise of this Warrant in whole or in part, upon request of the
holder hereof, acknowledge in writing their continuing obligation to such holder
in respect of any rights (including, without limitation, any right to
registration of this Warrant and the shares of Common Stock issued upon such
exercise) to which such holder shall continue to be entitled after such exercise
in accordance with this Warrant; provided, however, that the failure of such
-------- -------
holder to make any such request shall not affect the continuing obligations of
the Company to such holder in respect of such rights.
-2-
<PAGE>
SECTION 2. WARRANT OFFICE; TRANSFER, DIVISION OR COMBINATION OF WARRANTS.
2.1 Warrant Office. The Company shall maintain an office for certain
--------------
purposes specified herein (the "Warrant Office"), which office shall initially
--------------
be the Company's office at 6840 District Blvd., Bakersfield, California 93313,
and may subsequently be such other office of the Company or of any transfer
agent of the Common Stock in the continental United States as to which written
notice has previously been given to the Warrantholder.
2.2 Ownership of Warrant. The Company may deem and treat the person in
--------------------
whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Section 2.
2.3 Transfer of Warrants. The Company agrees to maintain at the Warrant
--------------------
Office books for the registration and registration of transfer of the Warrants,
and, subject to the provisions of Section 3 hereof, this Warrant and all rights
hereunder (except as provided herein) are transferable, in whole or in part, on
said books at said office, upon surrender of this Warrant at said office,
together with a written assignment of this Warrant duly executed by the holder
hereof or its duly authorized agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and payment the Company shall execute and deliver a new Warrant or Warrants in
the name of the assignee or assignees and in the denominations specified in such
instrument of assignment, and this Warrant shall promptly be canceled. A
Warrant may be exercised by a new holder for the purchase of shares of Common
Stock without having a new Warrant issued.
2.4 Division of Warrants. This Warrant may not be divided.
--------------------
2.5 Expenses of Delivery of Warrants. The Company agrees to pay all
--------------------------------
expenses, taxes (other than transfer taxes) and other charges payable in
connection with the preparation, issuance and delivery of any Warrant hereunder.
SECTION 3. RESTRICTIONS ON EXERCISE AND TRANSFER; REGISTRATION RIGHTS.
3.1 Restrictions on Exercise and Transfer. Notwithstanding any provisions
-------------------------------------
contained in this Warrant to the contrary, this Warrant and the related Warrant
Shares shall not be transferable except pursuant to (and subject to compliance
by the holder hereof with) the provisions of Section 3.2 hereof and then only
in compliance with the provision contained in the following sentence or the
other conditions specified in this Section 3, intended, among other things, to
insure compliance with the provisions of the Act and applicable state law in
respect of the transfer of this Warrant or such Warrant Shares. The holder of
this Warrant, by its acceptance hereof, agrees that it will not transfer this
Warrant or the related Warrant Shares until registration of such Warrant or
Warrant Shares under the Act has become effective or a sale of such Warrant
Shares has been consummated pursuant to Rule 144 or other exemption under the
Act. Any transfer of this Warrant may only be in whole and not in part.
3.2 Notice of Intention to Transfer; Opinion of Counsel. The holder of
---------------------------------------------------
this Warrant, by its acceptance hereof, agrees that prior to or concurrently
with any transfer of this Warrant or of the related Warrant Shares (other than
to an affiliate of such holder or pursuant to a registration under the Act),
such holder will give written notice to the Company of its intention to effect
such transfer and, if requested by the Company, a written opinion of Orrick,
Herrington & Sutcliffe LLP or other counsel for such holder, to the effect that
such Warrant Shares may be effected without registration under the Act of this
Warrant and/or such Warrant Shares. Additionally, such notice may indicate that
the proposed transfer requires that the Company take any action and/or execute
and file with the Commission and/or any state securities authority with
jurisdiction and/or deliver to the holder of this Warrant and/or such Warrant
Shares or any other person any form or document (other than a registration
statement under the Act) in order to establish the entitlement of the holder
hereof to take advantage of such method of disposition without registration
under the Act, and if such notice so indicates, the Company agrees promptly to
take any such action and/or execute and file and/or deliver any such form or
document. The Company agrees to pay the expense
-3-
<PAGE>
associated with any action taken by the Company pursuant to the preceding
sentence except any fees related to any "Blue Sky" filings requested by the
holder, and the Company agrees to pay the fees and expenses of such counsel
referred to above if such counsel represents the Initial Warrantholder.
3.3 Registrations Required by Warrantholder. Upon the receipt of the
---------------------------------------
written request of the Warrantholder, the Company shall be obligated to use its
best efforts to effect the registration under the Act of Warrant Shares (and if
so requested, the Warrants) in accordance with the provisions of this Section
3.3. The Company shall only be obligated to use its best efforts to effect one
(1) such registration pursuant to this Section 3.3, provided that an additional
--------
written request to effect registration may be made if after making such a
request (i) less than all of Warrant Shares and Warrants requested to be
registered are in fact included in such registration or (ii) the operation of
Section 4 hereof shall result in the issuance of additional Warrant Shares to
one or more Warrant holders. The Company shall not be obligated to register any
Warrant Shares pursuant to this Section 3.3 if, within 90 days prior to the
receipt of such request, a registration statement of the Company was declared
effective. Whenever the Company shall be requested by the Warrantholder,
pursuant to this Section 3.3, to effect the registration of any Warrant Shares
under the Act, the Company shall promptly give written notice of such proposed
registration to the Warrantholder and thereupon shall, as expeditiously as
possible, use its best efforts to effect the registration under the Act of
(A) the Warrant Shares and Warrants which the Company has been
requested to register pursuant to the preceding sentence, and
(B) all other Warrant Shares and Warrants which Warrantholder
have, within thirty (30) days after the Company has given such written
notice, requested the Company to register,
all to the extent required to permit the disposition by the Warrantholder of the
Warrant Shares and Warrants so registered. Such registration shall be
underwritten, if requested by the Warrantholder, by an underwriter or
underwriters named by them and reasonably approved by the Company. Securities
not held by Warrantholder may only be included in such registration if, in the
opinion of the underwriter or underwriters managing the offering, the total
amount of the securities to be so registered, when added to the total amount of
Warrant Shares to be registered, will not exceed the maximum amount of
securities of the Company which can then be successfully marketed (1) at a price
reasonably related to their then Current Market Price, and (2) without otherwise
materially and adversely affecting the entire offering. To the extent that the
amount of securities to be registered must be reduced in order to obtain the
opinion referred to in the preceding sentence, such reduction shall be achieved
by first eliminating from the registration some or all of the securities to be
offered by persons other than the Warrantholder.
3.4 "Piggyback" Registrations. If the Company at any time proposes to
-------------------------
register any of its equity securities (as defined in the Act), other than
securities which are convertible into shares of Common Stock, under the Act on
Forms S-1, S-2 or S-3 (but not Form S-4 or S-8) or on any other form upon which
may be registered securities similar to the Warrant Shares (or the Warrants, if
requested, or to the extent necessary to be registered in connection with the
registration of the underlying Warrant Shares) and other than pursuant to
Section 3.3 above, it will at each such time give written notice at least
fifteen (15) days prior to the filing of the registration statement to the
Warrantholder of its intention so to do. Such notice shall specify the proposed
date of the filing of the registration statement and advise each Warrantholder
of its right to participate therein. Upon the written request of any
Warrantholder given not less than seven (7) days prior to the proposed date of
filing set forth in such notice, the Company will use its best efforts to cause
each Warrant Share which the Company has been requested to register by such
Warrantholder to be registered under the Act, all to the extent requisite to
permit the sale or other disposition by such Warrantholder of the Warrant Shares
so registered.
3.5 Company's Obligations in Registration. The obligation of the Company
-------------------------------------
to use its best efforts to register any Warrant Shares pursuant to Section 3.3
or Section 3.4 hereof includes the obligation to use its best efforts to
register under the same registration statement the related Warrants if such
registration is necessary to effect the offer and sale of underlying Warrant
Shares to the public; provided, however, that the foregoing proviso shall not
-------- -------
restrict any Warrantholder from selling any Warrant to the underwriter or
underwriters of any offering registered pursuant to Section 3.3 or Section 3.4
hereof so long as only Warrant Shares are offered and sold to the
-4-
<PAGE>
public. If and whenever the Company is obligated by the provisions of this
Section 3 to use its best efforts to effect the registration of any Warrant
Shares or Warrants under the Act, as expeditiously as possible the Company will:
(a) expeditiously prepare and file with the Commission a
registration statement with respect to such Warrant Shares and/or
Warrants and use its best efforts to cause such registration statement
to become and remain effective during the period required for the
distribution of the securities covered by the registration statement;
provided, however, the Company shall not be required to keep such
-------- -------
registration statement in effect, or to prepare and file any
amendments or supplements thereto, after all securities subject
thereto have been disposed of;
(b) as expeditiously as reasonably possible, prepare and file
with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the
disposition of all Warrant Shares and Warrants covered by such
registration statement, whenever the Warrantholder for whom such
Warrant Shares or Warrants are registered or are to be registered
shall desire to dispose of the same;
(c) as expeditiously as reasonably possible, furnish to the
Warrantholder for whom such Warrant Shares or Warrants are registered
or are to be registered and to any underwriter or underwriters such
numbers of copies of a prospectus, including a preliminary prospectus,
in conformity with the requirements of the Act, and such other
documents as the Warrantholder may reasonably request in order to
facilitate the disposition of such Warrant Shares or Warrants;
(d) use its best efforts to register or qualify the Warrant
Shares and Warrants covered by such registration statement under such
other securities or blue sky laws of such jurisdictions as the
Warrantholder for whom such Warrant Shares and Warrants are registered
or are to be registered shall reasonably request, and do any and all
other acts and things to so register or qualify which may be necessary
or advisable to enable such Warrantholder to consummate the
disposition in such jurisdictions of such Warrant Shares and Warrants;
provided, however, that the Company shall not be required to consent
-------- -------
to the general jurisdiction of, or to qualify to do business in, any
State where it is not otherwise required to do so;
(e) if such registration is effected pursuant to a request for
registration by the Warrantholder pursuant to Section 3.3, furnish to
the Warrantholder for whom such Warrant Shares or Warrants are
registered or are to be registered at the time of the disposition of
Warrant Shares or Warrants by the Warrantholder an opinion of counsel
for the Company reasonably acceptable to the Warrantholder to the
effect that (i) a registration statement covering such Warrant Shares
has been filed with the Commission under the Act and has been made
effective by order of the Commission, (ii) such registration statement
and the prospectus contained therein (other than the financial
statements and other financial information contained therein as to
which such counsel shall not be required to express any opinion) at
the time the registration statement became effective complied as to
form in all material respects with the Act and the rules and
regulations thereunder, and nothing has come to said counsel's
attention which would cause it to believe that either such
registration statement or such prospectus (other than the financial
statements and other financial information contained therein as to
which such counsel shall not be required to express any opinion)
contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which made not
misleading, (iii) a prospectus meeting the requirements of the Act is
available for delivery, (iv) no stop order has been issued by the
Commission suspending the effectiveness of such registration statement
and, to the best of such counsel's knowledge, no proceedings for the
issuance of such a stop order are threatened or contemplated, (v) the
applicable provisions of the securities or blue sky law of each state
in which the Company shall be required, pursuant to Section 3.5(d), to
register or qualify such Warrant Shares or
-5-
<PAGE>
Warrants, have been complied with based on standard compilations, or,
in lieu of such opinion, a blue sky memorandum as would customarily be
provided in connection with an offering such as the one contemplated,
and (vi) such other matters as the Warrantholder may reasonably
request; and
(f) if such registration is effected pursuant to a request for
registration by the Warrantholder and is to be underwritten as
provided in Section 3.3, join with the Warrantholder as are registered
or are to be registered and the underwriter in the execution and
delivery of an underwriting agreement, which shall include such
representations and warranties and covenants of the Company and such
other provisions as are customary at the time in an underwriting
agreement for an underwritten secondary offering; and
(g) if an underwriter in a registration effected pursuant to a
request for registration by the Warrantholder shall so request and
provide reasonable advance notice of a time and location thereof that
is mutually convenient to the underwriter and the Company, participate
with members of senior management of the Company and pay the costs
incident to conducting "road shows" in for the purpose of informing
investment professionals and institutional investors about the
Company.
3.6 Payment of Registration Expenses. The Company agrees to pay the costs
--------------------------------
and expenses of all registrations under the Act and of all other actions which
the Company is required to take or effect pursuant to this Section 3 (including,
without limitation, all registration, qualification and filing fees, printing
expenses, expenses of distributing prospectuses and other documents, fees and
disbursements of counsel for the Company, expenses of any special audits
incident to or required in connection with any such registration and the
expenses incident to participation in any "roadshow" pursuant to Section 3.5(g))
and, if such registration is effected pursuant to a request for registration
pursuant to Section 3.3, all fees and disbursements of special counsel for the
Initial Warrantholder. In the event that any effective request pursuant to
Section 3.3 is withdrawn prior to the filing with the Commission of a
registration statement relating to the Warrant Shares or Warrants with respect
to which registration is requested, and unless the Warrantholder otherwise
request in writing at the time of the withdrawal, no request for registration
shall be subsequently deemed to have been made and no registration shall be
deemed to have been effected under Section 3.3.
3.7 Information from the Warrantholder. Notices and requests delivered by
----------------------------------
the Warrantholder to the Company pursuant to this Section 3 shall contain such
information regarding the Warrant Shares and Warrants and the intended method of
disposition thereof as shall reasonably be required in connection with the
action to be taken, and each Warrantholder for whom Warrant Shares or Warrants
are at any time being registered pursuant to Section 3.3 agrees to furnish
promptly such additional information as the Company may reasonably request.
3.8 Company's Indemnification. In the event of any registration under the
-------------------------
Act of any Warrant Shares or Warrants pursuant to this Section 3, the Company
hereby agrees to indemnify and hold harmless each Warrantholder disposing of
such Warrant Shares or Warrants and each other person, if any, who controls such
Warrantholder within the meaning of the Act against any losses, claims, damages
or liabilities, joint or several, to which such Warrantholder or controlling
person may become subject under the Act or otherwise, in so far as such losses,
claims, damages or liabilities (or proceedings in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which such Warrant Shares or Warrants were registered under the
Act, in any preliminary prospectus or final prospectus contained therein, or in
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances made not misleading, and will reimburse such Warrantholder and
each such controlling person for any legal or any other expenses incurred by
such Warrantholder or such controlling person in connection with investigating
or defending any such loss, claim, damage, liability or proceeding; provided,
--------
however, that neither the Company will not be liable in any such case to the
- -------
extent that any such loss, claim, damage or liability arises out of or is based
upon (a) an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, said preliminary or final
prospectus
-6-
<PAGE>
or said amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Warrantholder or such controlling person, as the case may be, specifically for
use in the preparation thereof or (b) an untrue statement or alleged untrue
statement, omission or alleged omission in a prospectus if such untrue statement
or alleged untrue statement, omission or alleged omission is corrected in an
amendment or supplement to the prospectus or in the final prospectus, which
amendment, supplement or final prospectus is delivered to such Warrantholder and
such Warrantholder thereafter fails to deliver such prospectus as so amended or
supplemented prior to or concurrently with the sale of Warrant Shares or
Warrants to the person asserting such loss, claim, damage, liability or expense.
3.9 Conduct of Indemnification Proceedings. If any action, suit, or
--------------------------------------
proceeding or investigation is commenced, as to which an indemnitee demands
indemnification pursuant to Section 3.8, such indemnitee shall notify the
Company with reasonable promptness. If any such action, suit, proceeding or
investigation shall be brought against such indemnitee and if such indemnitee
shall notify the Company of the commencement of any such action, suit,
proceeding or investigation, and if the Company is not in default of any of its
covenants and obligations under this Warrant or the Loan Agreement and shall
have acknowledged its obligations to indemnify such indemnitee hereunder in
respect thereof, then the Company shall be entitled to assume the defense of
such action, suit, proceeding or investigation with counsel of its choice at its
expense. Notwithstanding the election of the Company to assume the defense of
such action, suit, proceeding or investigation, such indemnitee shall have the
right to employ separate counsel and to participate in the defense of the
action, suit, proceeding or investigation, however, the Company shall bear the
reasonable fees, costs and expenses of such separate counsel only if (i) the use
of counsel chosen by the Company to represent such Indemnitee would in the
written opinion of counsel chosen by such Indemnitee present counsel chosen by
the Company with a conflict of interest; (ii) the Company did not employ
counsel to represent such Indemnitee within a reasonable time after notice of
the institution of such action, suit, proceeding or investigation; or (iii)
the Company shall authorize such Indemnitee to employ separate counsel at the
expense of the Company.
3.10 Public Information. The Company covenants and agrees that if and for
------------------
so long as the Common Stock shall be registered under Section 12 of the Exchange
Act, at any time when any Warrantholder so entitled desires to make sales of any
Warrant Shares or Warrants in reliance on Rule 144 or Rule 144A under the Act
either (i) there will be available adequate current public information with
respect to the Company as required by paragraph (c) of said Rule 144, or
information with respect to the Company satisfying the requirements of paragraph
(d)(iv) of said Rule 144A, as the case may be, or (ii) if such information is
not available the Company will use its best efforts to make such information
available without delay. Without limiting the foregoing, after the time of any
such registration the Company will timely file with the Commission all reports
required to be filed under Sections 13 and 15(d) of the Exchange Act and will
promptly furnish to any Warrantholder so requesting a written statement that the
Company has complied with all such reporting requirements.
3.11 No Conflicting Registration Rights. The Company covenants and agrees
----------------------------------
that if and so long as any Warrants or any Warrant Shares shall remain
outstanding and the holders thereof shall have any rights under this Section 3,
it will not enter into any agreement with any person creating any rights with
respect to the registration of any shares of Common Stock or any other security
in conflict with or inconsistent with any rights retained by any holder of
Warrantholder pursuant to this Section 3. Subject to the foregoing limitation,
the Company may issue registration rights to other persons.
SECTION 4. ANTI-DILUTION PROVISIONS.
4.1 Adjustment of Warrant Price and Number of Shares. The number and
------------------------------------------------
kind of securities issuable upon the exercise of this Warrant shall be subject
to adjustment from time to time upon the happening of certain events as follows:
(a) Adjustment of Dividends in Stock or Other
-----------------------------------------
Securities or Property. In case at any time or from time to time on or after
- ----------------------
the date hereof the holders of the Common Stock of the Company (or any shares of
stock or other securities at the time receivable upon the exercise of this
Warrant) shall have received, or,
-7-
<PAGE>
on or after the record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, the holder of this
Warrant shall, upon the exercise hereof, be entitled to receive, in addition to
the number of shares of Common Stock receivable thereupon, and without payment
of any additional consideration therefor, the amount of such other or additional
stock or other securities or property (other than cash) of the Company which
such holder would hold on the date of such exercise had it been the holder of
record of such Common Stock on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such period, giving effect to all adjustments called for during such
period by paragraphs (b) and (c) of this Section 4.
(b) Adjustment for Reclassification, Reorganization or
--------------------------------------------------
Merger. In case of any reclassification or change of the outstanding securities
- ------
of the Company or of any reorganization of the Company (or any other corporation
the stock and securities of which are at the time receivable upon the exercise
of this Warrant) or any similar corporate reorganization on or after the date
hereof, then and in each such case the holder of this Warrant, upon the exercise
hereof at any time after the consummation of such reclassification, change,
reorganization, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the exercise hereof
prior to such consummation, the stock or other securities or property to which
such holder would have been entitled to upon such consummation if such holder
had exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in paragraphs (a) and (c); and in each such case, the
terms of this Section 4 shall be applicable to the shares of stock or other
securities properly receivable upon the exercise of this Warrant after such
consummation.
(c) Stock Splits and Reverse Stock Splits. If at any
-------------------------------------
time on or after the date hereof the Company shall subdivide its outstanding
shares of Common Stock into a greater number of shares, the Warrant Price in
effect immediately prior to such subdivision shall thereby be proportionately
reduced and the number of shares receivable upon exercise of the Warrant shall
thereby be proportionately increased; and, conversely, if at any time on or
after the date hereof the outstanding number of shares of Common Stock shall be
combined into a smaller number of shares, the Warrant Price in effect
immediately prior to such combination shall thereby be proportionately increased
and the number of shares receivable upon exercise of this Warrant shall thereby
be proportionately decreased.
4.2 Notice of Adjustment. Upon the occurrence of any event requiring
--------------------
an adjustment pursuant to Section 4.1 or effecting a change in the rights of the
holder hereof, then and in each such case the Company shall promptly prepare a
schedule setting forth the adjustment required pursuant to Section 4.1 and the
Warrant Price of such Shares hereunder and the amount thereof receivable as a
result of such change in rights, and setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
Company shall promptly mail a copy of such schedule to the registered holder of
this Warrant.
4.3 Other Notices. In case at any time while this Warrant is
-------------
exercisable:
(a) there shall be any capital reorganization, or
reclassification of the Common Stock of the Company, or consolidation
or merger of the Company with, or sale of all or substantially all of
its assets to, another corporation or other entity; or
(b) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then, in any one or more of
such cases, the Company shall give to the holder of this Warrant (i)
at least twenty (20) days and not more than sixty (60) days prior
written notice of the date on which the books of the Company shall
close or a record shall be taken for determining rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up and (ii) in the
case of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up, at least thirty
(30) days prior written notice of the date (or, if not then known, a
reasonable approximation
-8-
<PAGE>
thereof by the Company) when the same shall take place. Any notice in
accordance with the foregoing clause (ii) shall also specify the date
on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up, as the case may be. Each such
notice shall also state whether the action in question or the record
date is subject to the effectiveness of a registration statement under
the Act or to a favorable vote of such security holders.
4.4 Prohibition of Certain Actions. The Company will not, by amendment of
------------------------------
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 4 and in the taking of all such action as may reasonably be
requested by the holder of any Warrant in order to protect the rights of the
Warrantholder to exercise their Warrants for Shares against dilution or other
impairment, consistent with the tenor and purpose of this Section 4.
SECTION 5. CERTAIN DEFINITIONS.
For all purposes of this Warrant, unless the context otherwise requires,
the following terms shall have the following respective meanings:
"Act": the Securities Act of 1933, as amended from time to time, or any
---
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Affiliate" of an entity: any person controlling, controlled by or under
---------
common control with such entity, including, but not limited to (i) any director
or officer of such entity or any of its subsidiaries and (ii) any person who
owns beneficially or of record 5% or more of the shares of the Common Stock of
such entity or any of its subsidiaries or of which such entity, directly or
indirectly, owns beneficially or of record 5% or more of the shares of Common
Stock.
"Commission": the Securities and Exchange Commission, or any other federal
----------
agency then administering the Act.
"Common Stock": the Company's authorized Common Stock, par value $.001 per
------------
share, as such class existed on the Closing Date, including stock of the Company
of any class thereafter authorized which ranks, or is entitled to a
participation, as to assets or dividends substantially on a parity with Common
Stock.
"Company": see the first paragraph of this Warrant.
-------
"Convertible Securities": any securities convertible or exchangeable for
----------------------
shares of Common Stock.
"Current Market Price" (per share of Common Stock at any date): the
--------------------
average of the daily market prices over a period of ten (10) consecutive
business days before such date. The market price for each such business day
shall be the last sale price on such day on the principal securities exchange on
which the Common Stock is then listed or admitted to trading, or, if no sale
takes place on such day on any such exchange, the average of the closing bid and
asked prices on such day as officially quoted on any such exchange, or if the
Common Stock is not then listed or admitted on any stock exchange, the market
price for each such business day shall be the last sale price on such day, or,
if no sale takes place on such day, the average of the closing bid and asked
prices on such day in the over-the-counter market, in either case as reported
through NASDAQ, or, if such prices are not at the time so reported, as furnished
by any member of the National Association of Securities Dealers, Inc. selected
by the Company. If and so long as there shall be no exchange or over-the-
counter market for the Common Stock during the 10-day period prior to the date
on which Current Market Price is to be determined, the Current Market Price
-9-
<PAGE>
shall be the Fair Market Value; provided, however, that in case the Company
-------- -------
makes an underwritten public offering of shares of Common Stock, for purposes of
the adjustment, if any, pursuant to Section 4, the Current Market Price with
respect to such shares shall be deemed to be the price to the public shown in
the final prospectus used in connection with such public offering.
"Exercise Period": the period commencing on 5:00 P.M., local time, March
---------------
__, 2001 and ending at 5:00 P.M., local time, March ___, 2005.
"Exchange Act": the Securities Exchange Act of l934, as amended from time
------------
to time, or any successor federal statute, and the rules and regulations of the
Commission thereunder.
"Fair Market Value": (a) as to securities regularly traded in the
-----------------
organized securities markets, the Current Market Price; and (b) as to all
securities not regularly traded in the securities markets and other property,
the fair market value thereof as shall be determined in good faith by the Board
of Directors of the; provided, however, that, if the Warrantholder, disagree
-------- -------
with such determination, the Fair Market Value of such securities and other
property shall be determined as set forth below in this definition. For a
period of thirty (30) days after the date of a Valuation Event (the "Negotiation
-----------
Period"), the Company and the Warrantholder agree to negotiate in good faith to
- ------
reach agreement upon the Fair Market Value of such securities or property, as of
the date of the Valuation Event. In the event that the parties are unable to
agree upon the Fair Market Value of such securities or other property by the end
of the Negotiation Period, then the Company, on the one hand, and such holders,
on the other, will each designate an independent investment bank or accounting
firm of recognized national standing (any such Person, an "Appraiser"), which
---------
shall attempt in good faith to agree on the Fair Market Value of such securities
or other property within forty-five (45) days after the end of the Negotiation
Period. If the two Appraisers fail to agree on the Fair Market Value of such
securities or other property before the end of such 45-day period, then they
shall expeditiously agree upon a third Appraiser which shall determine the Fair
Market Value of such securities within thirty (30) days of the end of such 45-
day period, taking into account the work and opinions of the two original
Appraisers. The Company and the holder of this Warrant agree to disclose to
each other all material business or personal relationships with the investment
banks or accounting firms referred to above. The agreement of the investment
banks and accounting firms or, failing such agreement, the determination of the
third investment bank or accounting firm, shall be conclusive and binding on the
Company and the holder of this Warrant. Fair Market Value of each share of
Common Stock at a time when (i) the Company is not a reporting company under the
Exchange Act, and (ii) the Common Stock is not traded in the organized
securities markets, shall, in all cases, be calculated by determining the Fair
Market Value of the equity of the Company taken as a whole after deducting the
value of all preferred stock outstanding and dividing that value by the
aggregate number of shares of Common Stock (A) outstanding on such date and
assuming the conversion on the last day of the quarter next preceding the date
of determination of all securities convertible into shares of Common Stock or
(B) issuable upon exercise of any warrants, options and other rights then
outstanding, assuming the exercise on such date of all then outstanding
warrants, options and similar rights to acquire shares of Common Stock
exercisable on such date, and the receipt by the Company of any consideration
required in correction with any such conversion or exercise without premium for
control or discount for minority interests or restrictions on transfer. The
costs of the Appraisers will be borne 2/3rds by the Company and 1/3rd by the
Warrantholder. In no event shall the Fair Market Value of the Common Stock be
less than the per share consideration received or receivable with respect to the
Common Stock in connection with a pending transaction involving a sale, merger,
or liquidation of the Company, a sale of all or substantially all of its assets,
or similar transaction. Any such valuation shall be effective for a period of
ninety (90) days, unless there has been a material development in the business
of the Company and its Subsidiaries, in which case there shall be a
redetermination in accordance with the provisions of this definition.
"Initial Warrantholder": FINOVA Capital Corporation.
---------------------
"Liquidity Event": any of the following occurrences at any time prior to
---------------
March ___, 2005: (i) if, at any time Robert Lee owns ten percent or less of the
issued and outstanding shares of common stock or other evidence of ownership of
Company, (ii) a secondary public offering for the shares of Common Stock of the
Company; (iii) the Company terminates the Loan Agreement with the Lender; or
(iv) the Company recapitalizes, refinances, reorganizes, or sells substantially
all of its assets.
-10-
<PAGE>
"outstanding": when used with reference to Common Stock at any date, all
-----------
issued shares of Common Stock (including, but without duplication, shares deemed
issued pursuant to Section 4) at such date, except shares then held in the
treasury of the Company.
"person": an individual, corporation, partnership, joint venture, trust
------
estate, unincorporated organization or government or an agency or political
subdivision thereof.
"Put Price": $600,000.00.
---------
"Shares": see definition of "Warrant Shares" below in this Section 5.
------
"Voting Stock": with respect to a corporation, shall mean the stock of such
------------
corporation the holders of which are ordinarily, in the absence of
contingencies, entitled to elect members of the board of directors (or other
governing body) of such corporation.
"Warrant Exercise Date": see Section 1.1.
---------------------
"Warrant Office": see Section 2.1.
--------------
"Warrant Price" (per share of Common Stock at any date): the price at
-------------
which one share of Common Stock may be purchased hereunder at any time, which
shall equal $0.01 per share of Common Stock.
"Warrant Shares or Shares": the shares of Common Stock purchasable or
------------------------
purchased by the Warrantholder upon the exercise of the Warrant. Unless
otherwise expressly stated herein, Warrant Shares shall not include shares of
Common Stock purchased upon exercise of a Warrant which have been sold by a
Warrantholder pursuant to (i) a registration statement under the Act or (ii)
Rule 144 under the Act, and, in either case, have come to rest in the hands of a
holder other than a Warrantholder or an Affiliate of a Warrantholder.
"Warrantholder": the registered holder of a Warrant or Warrants or any
-------------
related Warrant Shares.
"Warrants": the warrant originally issued by the Company in connection
--------
with the initial closing under the Loan Agreement evidencing the right initially
to purchase an aggregate of 4.3 shares of Common Stock outstanding at the date
of such purchase and all warrants issued in substitution, combination or
subdivision of any thereof.
SECTION 6. CERTAIN COVENANTS OF THE COMPANY
The Company covenants and agrees that
(a) it will reserve and set apart and have at all times, free
from preemptive rights, a number of shares of authorized but unissued
Common Stock or other securities or property deliverable upon the
exercise of the Warrants sufficient to enable it at any time to
fulfill all its obligations thereunder;
(b) before taking any action which would cause an adjustment
reducing the Warrant Price below the then par value of the shares of
Common Stock issuable upon exercise of the Warrants, it will take any
corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of such
Common Stock at such adjusted Warrant Price;
(c) if any shares of Common Stock required to be reserved for
the purposes of the exercise of this Warrant require registration with
or approval of any governmental authority under any federal law (other
than the Act) or under any state law before such shares may be issued
upon exercise of this Warrant, the Company will, at its expense, as
expeditiously as possible, cause such shares to be duly registered or
approved, as the case may be;
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<PAGE>
(d) if and so long as the Common Stock is listed on any national
securities exchange (as defined in the Exchange Act), it will, at its
expense, obtain and maintain the approval for listing upon official
notice of issuance of all shares of Common Stock issuable upon the
exercise of the Warrants at the time outstanding and maintain the
listing of such shares after their issuance; and the Company will so
list on such national securities exchange, will register under the
Exchange Act (or any similar statute then in effect) and will
maintain such listing of any other securities that at any time are
issuable upon exercise of the Warrants if, and at the time that, any
securities of the same class shall be listed on such national
securities exchange by the Company;
(e) except as otherwise prohibited by law, so long as any of the
Warrants or Warrant Shares are outstanding, the Company will permit
the holder thereof, by its representatives, agents or attorneys, to
consult with the management of the Company and its subsidiaries at
any time or from time to time, by telephone or in person, on such
matters relating to the operation of the Company and its subsidiaries
as such representatives shall deem appropriate (including, without
limitation, regarding their financial condition, capital
expenditures, product development and management compensation); and
(f) this Warrant shall be binding upon any corporation
succeeding to the Company by merger, consolidation or acquisition of
all or substantially all of the Company's or Store's assets, as
applicable.
SECTION 7. NOTICE.
Any notice or other document required to be given or delivered to the
Warrantholder shall be delivered at, or sent by certified or registered mail to,
each such holder at the last address shown on the books of the Company
maintained at the Warrant Office for the registration and registration of
transfer of the Warrants or at any more recent address of which any
Warrantholder shall have notified the Company in writing. Any notice or other
document required or permitted to be given or delivered to holders of record of
outstanding Warrant Shares shall be delivered at, or sent by certified or
registered mail to, each such holder at such holder's address as the same
appears on the stock records of the Company. Any notice or other document
required or permitted to be given or delivered to the Company, other than such
notice or documents required to be delivered to the Warrant Office, shall be
delivered at, or sent by certified or registered mail to, the Warrant Office or
such other address within the United States of America as shall have been
furnished by the Company to the Warrantholder and the holders of record of
Warrant Shares. Any notice or other document sent by certified or registered
mail, return receipt requested, shall be deemed to have been delivered and
received five (5) days after deposit in the mail if the receipt is appropriately
completed and returned. Notices or documents delivered in any other manner
shall be deemed to have been delivered only when and if received.
SECTION 8. LIMITATIONS OF LIABILITY; NOT STOCKHOLDERS.
No provision of this Warrant shall be construed as conferring upon the
holder hereof the right to vote, consent, receive dividends or receive notice
other than as herein expressly provided in respect of meetings of stockholders
for the election of directors of the Company or any other matter whatsoever as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the holder hereof to purchase shares of Common Stock, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall give
rise to any liability of such holder for the purchase price of any Warrant
Shares or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
SECTION 9. LOSS, DESTRUCTION, ETC. OF WARRANTS.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
mutilation or destruction of any Warrant, or in the case of any such loss, theft
or destruction upon delivery of a bond of indemnity in such form and amount as
shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of the Warrant, the Company will make
and deliver a new Warrant, of like tenor, in lieu of such lost,
-12-
<PAGE>
stolen, destroyed or mutilated Warrant; provided, however, that neither any
Initial Warrantholder nor any other financial institution having combined net
capital, capital surplus and undivided profits in excess of $50,000,000 which
shall become a Warrantholder shall be required to provide any such bond of
indemnity. Any Warrant issued under the provisions of this Section 9 in lieu of
any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated
Warrant, shall constitute an original contractual obligation on the part of the
Company.
SECTION 10. LAW GOVERNING.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE INTERNAL LAWS OF THE STATE OF ARIZONA EXCEPT THAT MATTERS WITH RESPECT
TO THE GENERAL CORPORATE LAWS OF THE STATE OF DELAWARE SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
DELAWARE.
IN WITNESS WHEREOF, each of the Company has caused this Warrant to be
signed in its name by its Chairman of the Board, President or a Vice President
and attested by its Secretary or an Assistant Secretary.
Dated: March 24, 1998
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
---------------------------
Title: President
-----------------------
Attest:
/s/ [Illegible]
- ---------------------------
Secretary/Asst Secretary
-13-
<PAGE>
SUBSCRIPTION/PUT NOTICE
Video City, Inc.
__The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented by said Warrant for, and to purchase
thereunder, ________ shares of the Common Stock covered by said Warrant and
herewith (a) makes payment in full therefor of (i) $________ by certified or
official bank check payable to the order of the Company; and/or (ii) $________
in respect of the foregoing Warrant (calculated as provided in Section 1.3 of
the foregoing Warrant) and (b) requests (1) that certificates for such shares
(and any securities or other property issuable upon such exercise) be issued in
the name of and delivered to ________ , whose address is ________ and (2) if
such shares shall not include all of the shares issuable as provided in said
Warrant, that a new Warrant of like tenor and date for the balance of the shares
issuable thereunder be delivered to the undersigned.
__The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise put rights represented by said Warrant and hereby puts this Warrant to
the Company. The Put Price to be paid by the Company shall be by wire transfer
to such Holder's account at [ ].
_________________________________
Signature Guaranteed:
Dated:
-14-
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _______________ the rights represented by the foregoing Warrant of Video
City, Inc. and appoints _______________ attorney to transfer said rights on the
books of said corporation, with full power of substitution in the premises.
______________________________
Signature Guaranteed:
Dated:
-15-
<PAGE>
EXHIBIT 10.9
RESTRUCTURED DEBT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of this 25
day of March, 1998, by and between RENTRAK CORPORATION, an Oregon corporation,
having its principal place of business at One Airport Center, 7700 N.E.
Ambassador Place, Portland, Oregon 97220 ("Rentrak"), MORTCO, INC., an Oregon
corporation and a wholly-owned subsidiary of Rentrak, having its principal place
of business at One Airport Center, 7700 N.E. Ambassador Place, Portland, Oregon
97220 ("Mortco"), VIDEO CITY, INC., a Delaware corporation, having its principal
place of business at 6840 District Avenue, Bakersfield, California 93313
("VCI"), SULPIZIO ONE, INC., a California corporation, having its principal
place of business at 6840 District Avenue, Bakersfield, California 93313
("Sulpizio"), and ADVENTURES IN VIDEO, INC., a Minnesota corporation, having its
principal place of business at 1958 127th Lane, N.W., Coon Rapids, Minnesota
55448 ("AIV").
RECITALS
A. Rentrak distributes pre-recorded videocassettes pursuant to a lease
arrangement known as Pay-Per-Transaction(SM) (the "PPT System");
B. VCI and Sulpizio are both engaged in the business of leasing, renting
and selling pre-recorded videocassettes and currently participate in the PPT
System pursuant to the following Rentrak National Account Agreements:
1. VCI participates in the PPT System pursuant to a Rentrak National
Account Agreement, which was originally entered into by Lee Video
City, Inc. on December 16, 1994, and was amended and supplemented
by a First Addendum, dated December 16, 1994, a Second Addendum,
dated August 24, 1995, and a Third Addendum, dated June 19, 1996,
which National Account Agreement was expressly assumed by VCI
pursuant to an Assumption Agreement, dated January 7, 1997, in
connection with the merger of Lee Video City, Inc. into VCI, and
was further amended and supplemented by a Fourth Addendum, dated
July 11, 1997 (collectively the "VCI PPT Agreement");
2. Sulpizio participates in the PPT System pursuant to a Rentrak
National Account Agreement entered into on December 16, 1994, as
amended and supplemented by a First Addendum, dated December 16,
1994, a Second Addendum, dated August 24, 1995, and a Third
Addendum, dated July 11, 1997 (collectively the "Sulpizio PPT
Agreement"); and
C. AIV previously participated in the PPT System pursuant to a Rentrak
National Account Agreement entered into on July 17, 1992, as amended and
supplemented by an
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<PAGE>
Agreement, dated July 21, 1992, and a Letter Agreement, dated April 2, 1993
(collectively the "AIV PPT Agreement"), which Rentrak terminated by written
notice on June 14, 1996;
D. VCI desires to acquire Sulpizio, AVI and three other corporations,
namely KDDJ Investments, Inc., a Minnesota corporation ("KDDJ"), Leptis Magna,
Inc., dba Video Unlimited, a Colorado corporation, ("Leptis"), and Old Republic
Entertainment, Inc., a California corporation ("Old Republic");
E. VCI desires to structure the acquisitions of Sulpizio, AIV, KDDJ,
Leptis, and Old Republic (individually a "Subsidiary" and collectively the
"Subsidiaries") as reverse triangular mergers, whereby each of the Subsidiaries
would become a wholly-owned subsidiary of VCI;
F. VCI acknowledges and agrees that, as of March 6, 1998, it owed Rentrak
at least $587,368.36 under the VCI PPT Agreement, which sum was comprised of (i)
$464,234.10 in past due accounts receivable, based on accounts receivable
invoiced through February 28, 1998, including interest computed through March 6,
1998; (ii) $31,570.00 in lost late fee revenues; and (iii) $91,564.26 in
accounts receivable that were not then due and payable, based on accounts
receivable invoiced through February 28, 1998. VCI further acknowledges and
agrees that, as of March 23, 1998, it owes Rentrak an additional $514,692.26
under a Promissory Note executed by VCI in favor of Rentrak on February 28, 1997
(the "1997 VCI Note"), including interest and late fees computed through March
23, 1998.
G. Sulpizio acknowledges and agrees that, as of March 6, 1998, it owed
Rentrak at least $106,928.97 under the Sulpizio PPT Agreement, which sum was
comprised of (i) $77,024.72 in past due accounts receivable, based on accounts
receivable invoiced through February 28, 1998, including interest computed
through March 6, 1998; and (ii) $29,904.25 in accounts receivable that were not
then due and payable, based on accounts receivable invoiced through February 28,
1998. Sulpizio further acknowledges and agrees that, as of March 23, 1998, it
owes Rentrak an additional $1,273,505.57, which sum is comprised of (i) a
$4,155.92 PPT Deficiency (as defined in the Sulpizio PPT Agreement) for
calendar year 1996, including interest calculated through March 23, 1998; (ii)
$1,048,385.27 under a Revolving Credit Agreement, dated December 16, 1994, and a
Senior Secured Revolving Note executed by Sulpizio in connection therewith on
December 16, 1994 (the "1994 Sulpizio Note"), including interest computed
through March 23, 1998; and (iii) $220,964.38 under a Loan Agreement, dated July
11, 1997 (the "1997 Loan Agreement"), of which $215,964.38 is owing under the
1997 Loan Agreement and a Promissory Note executed by Sulpizio in connection
therewith on July 11, 1997 (the "1997 Sulpizio Note"), including interest
computed through March 23, 1998, and $5,000.00 is owing under Article III of the
1997 Loan Agreement for reimbursement of legal expenses;
H. VCI and Sulpizio acknowledge and agree that they both owe a PPT
Deficiency (as defined in their respective PPT Agreements) for calendar year
1997, the amount of which has not yet been calculated, and that they owe other
additional amounts to Rentrak under their respective
Page 2--RESTRUCTURED DEBT AGREEMENT
<PAGE>
PPT Agreements; that the enumeration of the foregoing amounts shall not be
construed or operate as a release of VCI's and Sulpizio's obligation to pay all
additional amounts determined to be due, including interest, late fees and
related charges; and that Rentrak is not waiving any of its rights and remedies
with respect to collecting any such additional amounts when due;
I. Rentrak has filed a lawsuit against AIV in the United States District
Court for District of Oregon (Case No. CV98-04-HA) seeking to recover certain
past due accounts receivable and other amounts owing by AIV under the AIV PPT
Agreement (the "AIV Lawsuit");
J. Rentrak and AIV have compromised, settled and resolved all matters at
issue in the AIV Lawsuit, subject to consummation of the transactions
contemplated herein, and AIV acknowledges and agrees that it owes Rentrak the
sum of $389,900.00 under the terms of such settlement;
K. VCI, Sulpizio and AIV desire to work out an arrangement with Rentrak
with respect to restructuring the above-identified indebtedness that they owe to
Rentrak, excluding the current accounts receivable not yet due and payable,
whereby (i) Rentrak would consent to VCI's acquisition of the Subsidiaries, (ii)
VCI would pay Rentrak the sum of $810,496.36 in cash, and issue a promissory
note in the principal sum of $200,000.00 upon closing such acquisitions, and
(iii) Rentrak would cancel certain indebtedness owing by Sulpizio and AIV in
exchange for certain shares of VCI stock being issued to Mortco, and a
promissory note being issued to Mortco; and
L. Rentrak is willing to restructure the above-identified indebtedness
owing by VCI, Sulpizio and AIV, excluding the current accounts receivable not
yet payable, based on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
in reliance on and subject to the terms, conditions, representations,
warranties, covenants and agreements contained herein, the parties agree as
follows:
1. RESTRUCTURING SPECIFIC INDEBTEDNESS OWING TO RENTRAK BY SULPIZIO AND AIV.
1.1 Issuance of VCI Shares. At Closing VCI shall issue to Mortco and,
subject to and in reliance upon the representations, warranties, covenants,
terms and conditions of this Agreement, Mortco shall accept from VCI, a total of
665,112 shares of VCI's authorized and
Page 3--RESTRUCTURED DEBT AGREEMENT
<PAGE>
unissued voting common stock (the "VCI Shares") in consideration of Rentrak's
cancellation of the following indebtedness owing by Sulpizio and AIV:
1.1.1 CANCELLATION OF SPECIFIC INDEBTEDNESS OWING BY SULPIZIO. VCI
shall issue 470,162 shares of its authorized and unissued voting common stock to
Mortco in exchange for Rentrak's cancellation of an aggregate of $940,324.31 of
indebtedness owing by Sulpizio, which represents:
(a) $77,024.72 owed in past due accounts receivable as of
March 6, 1998, based on accounts receivable invoiced through February 28,
1998, including interest computed through March 6, 1998, and a $4,155.92
PPT Deficiency for calendar year 1996, including interest computed through
March 23, 1998;
(b) $220,964.38 owing under the 1997 Sulpizio Note, including
interest computed through March 23, 1998, and an additional $5,000.00 owing
under the 1997 Loan Agreement for reimbursement of legal expenses; and
(c) $638,179.29 of the $1,048,385.27 balance owing under the
1994 Sulpizio Note, including interest calculated through March 23, 1998.
1.1.2 CANCELLATION OF SPECIFIC INDEBTEDNESS OWING BY AIV. VCI shall
issue 194,950 shares of its authorized and unissued voting common stock to
Mortco in exchange for Rentrak's cancellation of the $389,900.00 that AIV owes
to Rentrak under the terms of the settlement of the AIV Lawsuit.
1.2 PROMISSORY NOTE FROM SULPIZIO. At Closing Rentrak and Sulpizio shall
convert the remaining $410,205.98 of the balance owing under the 1994 Sulpizio
Note into a new Promissory Note in the form attached hereto as Exhibit A (the
"Sulpizio Note"), and Sulpizio shall pay such $410,205.98 in strict compliance
with the terms of such Sulpizio Note.
1.3 CASH AND PROMISSORY NOTE FROM VCI. At Closing VCI shall pay
$810,496.36 to Rentrak in readily available funds at Closing, which represents
(i) $264,234.10 of the $464,234.10 owed by VCI in past due accounts receivable
as of March 6, 1998, based on accounts receivable invoiced through February 28,
1998, including interest and late fees computed through March 6, 1998; (ii)
$31,570.00 owing by VCI in lost late fee revenues; and (iii) $514,692.26 owing
by VCI under the 1997 VCI Note, including interest and late fees computed
through March 23, 1998. At Closing VCI shall issue a Promissory Note to Mortco
in the principal sum of $200,000.00, in the form attached hereto as Exhibit B
(the "VCI Note"), which represents the balance owed by VCI in past due accounts
receivable as of March 6, 1998, based on accounts receivable invoiced through
February 28, 1998, including interest and late fees computed through March 6,
1998.
Page 4--RESTRUCTURED DEBT AGREEMENT
<PAGE>
1.4 CLOSING. The transactions contemplated by this Agreement,
specifically including without limitation the issuance of the VCI Shares to
Rentrak as contemplated by Section 1.1 above, shall be closed (the "Closing")
simultaneously with the closing of VCI's acquisition of the five Subsidiaries on
or about March 24, 1998, at the Law Offices of Troy & Gould, 1801 Century Park
East, 16th Floor, Los Angeles, California 90067, or at such other time, date and
place as the parties hereto shall mutually agree in writing. The date on which
the Closing shall occur is herein referred to as the "Closing Date."
1.5 ACTIONS TO BE TAKEN AT CLOSING. The parties agree to take the
following actions at Closing, each of which shall be conditional on completion
of all other actions and all of which shall be deemed to take place
simultaneously:
1.5.1 CLOSING OF VCI'S ACQUISITIONS OF SUBSIDIARIES. VCI shall close
on the acquisition of each Subsidiary in strict compliance with the terms and
conditions set forth in the Merger Agreements attached hereto as Exhibits C-1
through C-5.
1.5.2 DELIVERY OF CERTIFICATES REPRESENTING THE VCI SHARES. VCI
shall issue and deliver to Mortco a stock certificate evidencing the 665,112
shares of voting common stock being issued to Mortco under Section 1.1,
registered in Mortco's name.
1.5.3 STOCK LEGEND. The stock certificate delivered to Mortco in
compliance with Section 1.5.2 shall bear a legend, prominently stamped or
printed thereon, reading substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS (THE "ACTS"), HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER THE ACTS IS IN
EFFECT WITH REGARD THERETO OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. AN OPINION OF COUNSEL SHALL, UPON REQUEST
BY VCI, BE FURNISHED OPINING AS TO THE AVAILABILITY OF AN EXEMPTION.
1.5.4 PAYMENT BY VCI TO RENTRAK. VCI shall pay the sum of
$810,496.36 to Rentrak by wire transfer to an account designated by Rentrak.
1.5.5 OTHER AGREEMENTS. The parties shall, as applicable, execute
and deliver the following agreements at Closing:
(a) LOAN AGREEMENT, SULPIZIO PROMISSORY NOTE, AND VCI
PROMISSORY NOTE. Sulpizio shall execute the Sulpizio Note and the Loan
Agreement attached hereto as Exhibits A and D, respectively, and
deliver the
Page 5--RESTRUCTURED DEBT AGREEMENT
<PAGE>
same to Mortco at Closing. VCI shall execute the VCI Note and deliver the same
to Rentrak at Closing.
(b) SUBORDINATED SECURITY AGREEMENTS AND GUARANTY. VCI shall grant to
Rentrak and Mortco a security interest in all of its properties and assets, as
security for the timely payment and performance of the Sulpizio Note, the VCI
Note, and the Loan Agreement, based on the terms and conditions set forth in the
Subordinated Security Agreement attached hereto as Exhibit E (the "VCI Security
Agreement"). Sulpizio shall grant to Rentrak and Mortco a security interest in
all of its property and assets, as security for the timely payment and
performance of the Sulpizio Note, the VCI Note, the Sulpizio Loan Agreement, the
Sulpizio PPT Agreement, the VCI/Subsidiaries PPT Agreement, and certain other
obligations owing from Sulpizio to Rentrak and Mortco, based on the terms and
conditions set forth in the Subordinated Security Agreement attached hereto as
Exhibit F (the "Sulpizio Security Agreement"). VCI and Sulpizio shall execute
their respective Security Agreements and deliver the same to Rentrak and Mortco
at Closing. VCI shall unconditionally and irrevocably guarantee payment of the
Sulpizio Note, and certain other obligations owing by the Subsidiaries to
Rentrak and Mortco, in strict compliance with the terms and conditions of the
Guaranty attached hereto as Exhibit G (the "Guaranty"), which VCI shall execute
and deliver to Mortco at Closing.
(c) VCI/SUBSIDIARIES PPT AGREEMENT. VCI and each Subsidiary shall execute
the new Rentrak Chain or Multiple Store Account Agreement and First Addendum to
Rentrak Chain or Multiple Store Account Agreement attached hereto as Exhibit H
(collectively the "VCI/Subsidiaries PPT Agreement") and deliver the same to
Rentrak at Closing.
(d) REGISTRATION RIGHTS AGREEMENT. VCI shall grant to Mortco, with respect
to the VCI Shares being issued to Mortco under Section 1.1 above and the VCI
shares being issued to Mortco in connection with VCI's acquisition of Sulpizio,
the registration rights set forth in the Registration Rights Agreement attached
hereto as Exhibit I (the "Registration Rights Agreement"). VCI shall execute the
Registration Rights Agreement and deliver the same to Mortco at Closing.
(e) RESTATED WARRANTS. Lee Video City, Inc., which merged with and into
VCI on January 7, 1997, granted two separate warrants to Rentrak to purchase
certain shares of its common stock, the terms and conditions of which are set
forth in a Warrant Certificate, dated August 24, 1995 (the "First Warrant"), and
a Warrant Certificate, dated June 19, 1996 (the "Second Warrant"). VCI assumed,
as result of the merger, all obligations of Lee Video City, Inc. under the First
Warrant and the Second Warrant. Rentrak has assigned, as of the date
Page 6-RESTRUCTURED DEBT AGREEMENT
<PAGE>
hereof, all of its right, title and interest in the First Warrant and
the Second Warrant to Mortco. The terms and conditions of the First
Warrant are restated in a new Warrant Certificate attached hereto as
Exhibit J (the "First Restated Warrant") and the terms and conditions of
the Second Warrant are restated in a new Warrant Certificate attached
hereto as Exhibit K (the "Second Restated Warrant"), which VCI shall
execute and deliver to Rentrak at Closing.
(f) Settlement Agreement. Rentrak, AIV, and David Ballstadt shall
execute the Settlement Agreement attached hereto as Exhibit L at
Closing.
1.5.6 Additional Deliveries. The parties hereto shall execute and
deliver all other documents and certificates required to be delivered at Closing
pursuant to this Agreement.
1.6 Cancellation of Notes. Rentrak and Sulpizio shall, effective on the
satisfaction of all the conditions precedent set forth in Section 4.1 and the
Closing of the transactions contemplated by this Agreement, cancel the Revolving
Credit Agreement, dated December 16, 1994, and the 1994 Sulpizio Note executed
by Sulpizio on connection therewith; the Loan Agreement, dated July 11, 1997,
and the 1997 Sulpizio Note executed by Sulpizio in connection therewith; and the
1997 VCI Note, all which instruments shall thereafter be deemed null and void
and of no further binding force and effect.
1.7 Consent to Sale of VCI Film Library. Effective on the satisfaction of
all the conditions precedent set forth in Section 4.1 and the Closing of the
transactions contemplated by this Agreement, Rentrak consents to the sale of
VCI's rights in the motion picture titles listed in Schedule 1.7, which consent
VCI must obtain pursuant to Section 6.1 of that certain Stock Purchase
Agreement, dated December 16, 1994, by and between Mortco and Lee Video City,
Inc., the terms of which VCI expressly assumed under that certain Assumption
Agreement, dated January 7, 1997, by and between Rentrak, Mortco, and Prism
Entertainment Corporation (nka VCI).
2. REPRESENTATIONS AND WARRANTIES OF VCI, SULPIZIO AND AIV. As a material
inducement to Rentrak and Mortco to enter into this Agreement, VCI, Sulpizio and
AIV, jointly and severally, make the following representations and warranties to
Rentrak and Mortco:
2.1 Organization and Standing. VCI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware;
Sulpizio is a corporation duly organized, validly existing and in good standing
under the laws of the State of California; AIV is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota;
KDDJ is a corporation duly organized, validly existing and in good standing
under the laws of the State of Minnesota; Leptis is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado; and Old Republic is a corporation duly organized, validly existing and
in good standing under the laws of the State of California. VCI and each
Subsidiary have all requisite corporate power and authority for the ownership
and
Page 7--RESTRUCTURED DEBT AGREEMENT
<PAGE>
operation of their properties and for the carrying on of their business as now
conducted or as now proposed to be conducted. VCI and each Subsidiary is duly
licensed or qualified and in good standing as a foreign corporation authorized
to do business in all jurisdictions wherein the character of the property owned
or leased, or the nature of the activities conducted by it makes such licensing
or qualification necessary.
2.2 Authorization; Corporate Action. VCI and each Subsidiary, as
applicable, have all necessary corporate power and authority, and have taken all
corporate action required, to enter into, execute and deliver this Agreement and
all other agreements and instruments contemplated herein, including all Exhibits
attached hereto (collectively the "Related Documents"), to fully perform their
obligations hereunder and thereunder, and to carry out and consummate the
transactions contemplated hereby and thereby. This Agreement and the Related
Documents have been duly executed and delivered by duly authorized officers of
VCI and each Subsidiary, as applicable, and are the legal, valid, and binding
obligations of VCI and each Subsidiary, as applicable, enforceable in accordance
with their terms. A sufficient number of authorized but unissued shares of
voting common stock of VCI have been reserved by appropriate corporate action in
connection with the prospective exercise of the Restated Warrant, and the
issuance of the VCI Shares is not, and the issuance of the shares upon exercise
of the First Restated Warrant and Second Restated Warrant will not, be subject
to preemptive rights or other preferential rights in any present or future
shareholders of VCI and will not conflict with any provision of any agreement or
instrument to which VCI is a party or by which it or its property is bound.
2.3 Capitalization; Status of Capital Stock. The authorized capital stock
of VCI consists solely of 20,000,000 shares of voting common stock, $.01 par
value, of which an aggregate of 9,773,927 shares are presently issued and
outstanding. After giving effect to the transactions described herein, an
aggregate of 11,589,039 shares of VCI common stock will be issued and
outstanding. All of the outstanding shares of capital stock of VCI have been
duly authorized, are validly issued, and are fully paid and nonassessable. The
VCI Shares, when issued and delivered in accordance with the terms of this
Agreement, and the shares to be issued to Mortco upon exercise of the First
Restated Warrant and the Second Restated Warrant, when issued in accordance with
the terms of the First Restated Warrant and the Second Restated Warrant, will be
duly authorized, validly issued, fully paid and nonassessable, and free and
clear of all claims, pledges, liens, encumbrances and restrictions of every
kind. Except as otherwise set forth in Schedule 2.3, no options, warrants,
subscriptions or purchase rights of any nature to acquire from VCI or any
Subsidiary shares of capital stock or other securities are authorized, issued or
outstanding, nor is VCI or any Subsidiary obligated in any other manner to issue
shares of its capital stock or other securities except as contemplated by this
Agreement. Except as set forth in Schedule 2.3, there are no agreements,
understandings, trusts or other collaborative arrangements or understandings
concerning the voting of the capital stock of VCI or any Subsidiary. There are
no agreements, understandings, trusts or other understandings concerning
transfers of the capital stock of VCI or any Subsidiary, except as contemplated
by this Agreement. The offer and sale of all capital stock and other securities
of VCI and each Subsidiary issued before the Closing complied with or were
exempt from all applicable federal
Page 8--RESTRUCTURED DEBT AGREEMENT
<PAGE>
<PAGE>
and state securities laws and no stockholder has a right of rescission with
respect thereto. VCI shall own, upon closing on the acquisition of each
Subsidiary in compliance with the Merger Agreements attached hereto as Exhibits
C-1 through C-5, all of the issued and outstanding capital stock of each
Subsidiary.
2.4 REGISTRATION RIGHTS. Except as set forth in Schedule 2.4, neither VCI
nor any Subsidiary has granted any registration rights of any kind or nature,
including but not limited to piggy-back registration rights, to any person or
entity and has not otherwise agreed to register any of its authorized or
outstanding securities under the Securities Act of 1933.
2.5 ARTICLES OF INCORPORATION, BYLAWS AND CORPORATE RECORDS. VCI has
delivered to Rentrak a true and complete copy of VCI's and each Subsidiary's
Articles of Incorporation, and a true and complete copy of VCI's and each
Subsidiary's Bylaws, as amended and in effect on the date hereof, certified by
the Secretary of VCI and each Subsidiary, as applicable. The corporate minute
book of VCI and each Subsidiary contains true and complete records of all
meetings of, and all corporate action taken by, their respective Board of
Directors (and any committees thereof) and shareholders since the date of their
incorporation, including all actions taken by written consents in lieu of
meetings. The stock books of VCI and each Subsidiary, including stock ledgers
and stock transfer records, are true, correct and complete.
2.6 SUBSIDIARIES. Neither VCI nor any Subsidiary own, directly or
indirectly, any capital stock or other equity, ownership or proprietary interest
in any corporation, limited liability company, partnership, association, trust,
joint venture or other entity, except as will result from the consummation of
the transactions contemplated herein.
2.7 FINANCIAL STATEMENTS. The books of account and records of VCI and
each Subsidiary are true, correct and complete in all material respects, fairly
and accurately reflect their income, expenses, assets and liabilities, and
provide a fair and accurate basis for the preparation of their financial
statements and tax returns. VCI's unaudited financial statements for the
nine-month period ending October 31, 1997, including without limitation VCI's
balance sheet, related statement of income and retained earnings for the
nine-month period then ended and statement of cash flow (collectively the "VCI
Financial Statements"); Sulpizio's unaudited balance sheet and related
statement of income for the year ending December 31, 1997 (collectively the
"Sulpizio Financial Statements"); AIV's unaudited balance sheet and related
statement of income for the year ending December 31, 1997 (collectively the "AIV
Financial Statements"); KDDJ's unaudited balance sheet and related statement of
income for the year ending December 31, 1997 (collectively the "KDDJ Financial
Statements"); Leptis' unaudited balance sheet and related statement of income
for the year ending December 31, 1997 (collectively the "Leptis Financial
Statements"); and Old Republic's unaudited balance sheet and related statement
of income for the six-month period ending December 31, 1997 (collectively the
"Old Republic Financial Statements"), are set forth in Schedule 2.7. The VCI
Financial Statements, the Sulpizio Financial Statements, the AIV Financial
Statements, the KDDJ Financial Statements, the Leptis Financial Statements, and
the Old Republic Financial
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Statements (including any related notes and schedules) are true, correct, and
complete; fairly present VCI's and each Subsidiary's financial condition at the
dates thereof and the results of its operations for the periods then ended; and
have been prepared in accordance with generally accepted accounting principles
applied on a basis consistent with prior accounting periods. Since October 31,
1997, there has been no material adverse change in the business, assets or
condition, financial or otherwise, or in the operations or prospects, of VCI.
Since December 31, 1997, there has been no material adverse change in the
business, assets or condition, financial or otherwise, or in the operations or
prospects, of Sulpizio, AIV, KDDJ, Leptis, or Old Republic.
2.8 NO UNDISCLOSED LIABILITIES. VCI has no debts, liabilities or
obligations of any nature whatsoever, liquidated or unliquidated, secured or
unsecured, accrued, absolute, contingent or otherwise, other than (i) those
liabilities fully and adequately reflected or reserved against on the VCI
Financial Statements, or in the notes thereto, and (ii) those liabilities
incurred in the ordinary course of business consistent with past practices since
October 31, 1997. Each of Sulpizio, AIV, KDDJ, Leptis and Old Republic has no
debts, liabilities or obligations of any nature whatsoever, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise,
other than (i) those liabilities fully and adequately reflected or reserved
against on the Sulpizio Financial Statements, the AIV Financial Statements, the
KDDJ Financial Statements, the Leptis Financial Statements, and the Old Republic
Financial Statements, or in the notes thereto, and (ii) those liabilities
incurred in the ordinary course of business consistent with past practices since
December 31, 1997.
2.9 ACTIVITIES SINCE BALANCE SHEET DATE. Except as set forth in Schedule
2.9, since December 31, 1997, each of Sulpizio, AIV, KDDJ, Leptis and Old
Republic has not, and since October 31, 1997, VCI has not: (i) suffered any
material adverse change in its financial condition, liabilities, assets,
business or prospects; (ii) suffered any destruction, damage to, or loss of any
asset (whether or not covered by insurance) that materially and adversely
affects its financial condition, business or prospects; (iii) incurred any
liability or obligation of any nature (whether accrued, absolute, contingent or
otherwise), except in the ordinary course of business consistent with past
practices; (iv) permitted any of its assets to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction or charge of any kind;
(v) sold, transferred or otherwise disposed of any of its assets, tangible or
intangible, or any interest therein, except in the ordinary course of business
consistent with past practices; (vi) declared, set aside or paid any dividend or
made any other distribution in respect to its capital stock, or redeemed,
purchased or otherwise acquired any shares of its capital stock; (vii) issued or
sold any shares of its capital stock of any class; (viii) increased its
indebtedness for borrowed money, or made any loan, advance or guaranty to or for
the benefit of any person or entity; (ix) otherwise conducted its business or
entered into any agreement, contract, commitment or transaction, except in the
usual and ordinary manner and in the ordinary course of business; or (x) agreed,
whether or not in writing, to do any of the foregoing.
2.10 TITLE TO ASSETS. Except as set forth in Schedule 2.10, VCI and each
Subsidiary owns outright and holds good and marketable title to all of their
assets and properties, tangible
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and intangible, of every nature and description, free and clear of restrictions
on or conditions to transfer or assignment, and free and clear of all liens,
pledges, charges, and encumbrances of any nature whatsoever.
2.11 Compliance with Other Instruments. The execution and delivery of this
Agreement and the Related Documents, the consummation of the transactions
contemplated hereby and thereby, and the performance by VCI and each Subsidiary
of its obligations hereunder and thereunder will not (i) violate any provision
of VCI's or any Subsidiary's Articles of Incorporation or Bylaws; (ii) violate,
conflict with or result in the breach of any of the terms of, result in a
modification of the effect of, give any other contracting party the right to
terminate, or constitute (or with notice or lapse of time or both constitute) a
default under, any contract or other agreement to which VCI or any Subsidiary is
a party or by or to which VCI or any Subsidiary is bound or subject; (iii)
violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon, VCI or
any Subsidiary or upon the securities, properties or business of VCI or any
Subsidiary; or (iv) violate any statute, law or regulation of any jurisdiction
as such statute, law or regulation relates to VCI or any Subsidiary or to the
securities, properties or business of VCI or any Subsidiary. VCI and each
Subsidiary is in full compliance in all respects with the terms and provisions
of its Articles of Incorporation and Bylaws, as amended and in effect as of the
date hereof, and in compliance in all material respects with the terms and
provisions of all leases, agreements and other instruments by which it is bound
or to which it or any or its respective properties or assets are subject.
2.12 Brokers and Finders. Neither VCI nor any Subsidiary has employed any
broker or finder in connection with the transactions contemplated by this
Agreement, or taken any action that would give rise to a valid claim against any
party for a brokerage commission, finder's fee, or other like payment
(collectively "Fees"), except for John Sheehy of Sphere Capital Corporation.
VCI and each Subsidiary, jointly and severally, agree to defend, indemnify and
hold Rentrak and Mortco harmless from any Fees to John Sheehy or Sphere Capital
Corporation, or any other person or entity claimed to be engaged by VCI or any
Subsidiary in connection with the transactions contemplated by this Agreement.
2.13 Employment and Labor Relations Matters. VCI and each Subsidiary have
paid or made provision for the payment of all salaries and wages accrued through
the date hereof. VCI and each Subsidiary has complied with all labor and
employment laws, including all Federal, state and local laws and regulations
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and other taxes. Neither VCI nor any Subsidiary is a
party to, nor otherwise subject to, any collective bargaining or other
agreement covering wages, hours, and terms of employment of their respective
employees.
2.14 Contracts and Commitments. Schedule 2.14 contains a true and
complete list and description of all contracts, agreements, commitments and
undertakings of any nature, written or oral, of VCI and each Subsidiary, each of
which involves future payments,
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performance of services, or delivery of goods or materials to or by VCI or any
Subsidiary of an aggregate amount of value in excess of $50,000, or which
otherwise is material to the respective operations, assets, business or
financial condition of VCI or any Subsidiary (collectively, the "Material
Contracts"). All of the Material Contracts listed on Schedule 2.14 are in full
force and effect and are binding upon VCI and each Subsidiary, as applicable,
and the other parties thereto; VCI and each Subsidiary, as applicable, have
fully performed all of their obligations thereunder; and there exists no default
or event of default or event, occurrence, condition or act which, with the
giving of notice, the lapse of time or the happening of any other event or
condition, would become a default or event of default thereunder.
2.15 Compliance with laws. VCI and each Subsidiary is now and has at all
times been in compliance in all material respects with all laws, rules,
regulations, codes, ordinances, requirements, decrees and orders applicable to
their respective businesses. Neither VCI nor any Subsidiary is under
investigation or charged with any violation or alleged violation of any federal,
state, local or other law or regulation which would have any material adverse
effect on its business, prospects, financial condition, operation, property, or
affairs.
2.16 Third-Party and Governmental Approvals. All authorizations, consents,
and approvals of, and licenses, exemptions of or filings or registrations with,
all third-parties, courts or governmental departments, commissions, boards,
bureaus, agencies or instrumentalities, domestic or foreign, that are necessary
for the execution and delivery by VCI and each Subsidiary, as applicable, of
this Agreement and the Related Documents, for the offer, issue, sale and
delivery of VCI Shares, or for the performance by VCI and each Subsidiary, as
applicable, of their respective obligations under this Agreement and the
Related Documents, have been obtained.
2.17 Litigation. Except as set forth in Schedule 2.17, there is no
litigation or governmental proceeding or investigation pending or, to the best
knowledge of VCI and each Subsidiary, after due inquiry, threatened against VCI
or any Subsidiary, affecting any of their respective properties or assets, nor,
to the best knowledge of VCI and each Subsidiary, after due inquiry, has there
occurred any event or does there exist any condition on the basis of which any
such litigation, proceeding or investigation might properly be instituted.
Neither VCI nor any Subsidiary is in default with respect to any order, writ,
injunction, decree, ruling or decision of any court commission, board, or other
government agency.
2.18 Taxes. VCI and each Subsidiary have accurately prepared and timely
filed all federal, state, and other tax returns required by law to be filed by
it, has paid or made provision for the payment of all taxes shown to be due and
all additional assessments, and adequate provisions have been made and are
reflected in their respective Financial Statements for all current taxes and
other charges to which they are subject and which are not currently due and
payable. After due inquiry, neither VCI nor any Subsidiary knows of any
additional assessments or adjustments pending or threatened against them for any
period, nor of any basis for any such assessments or adjustments.
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<PAGE>
2.19 INTELLECTUAL PROPERTY RIGHTS. The conduct of VCI's and each
Subsidiary's business does not infringe or conflict with, and has not in the
past infringed or conflicted with, and neither VCI nor any Subsidiary is in
receipt of any notice or complaint of conflict with or infringement of, or
misappropriation of the asserted rights of others in, any patents, trademarks,
copyrights, trade secrets, or other intellectual property rights.
2.20 ERISA. Neither VCI nor any Subsidiary presently maintain or
contribute to, and have never in the past maintained or contributed to, any
employee benefit plan within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder ("ERISA"), whether or not such employee benefit plan is
otherwise exempt from the provisions of ERISA.
2.21 INSURANCE COVERAGE. VCI and each Subsidiary maintains insurance
policies, including fire and casualty insurance policies, worker's compensation
insurance policies, and public liability insurance policies, that are
customarily carried by comparable businesses that insure VCI and each
Subsidiary, and their respective properties and businesses against such losses
and risks, and in such amounts as in their best judgment are customary and
acceptable for the nature and extent of its business.
2.22 BOOKS AND RECORDS. VCI's and each Subsidiary's books of account,
ledgers, order books, records and documents accurately and completely reflect
all material information relating to their respective businesses, the location
and collection of their assets, and the nature of all transactions giving rise
to their obligations and accounts receivable.
2.23 CONFLICTS OF INTEREST. No officer, director or stockholder of VCI or
any Subsidiary, or any affiliate, as such term is defined in Rule 405 under the
Securities Act of 1933 ("Affiliates"), of any such entities, has any direct or
indirect interest (i) in any entity which does business with VCI or any
Subsidiary, (ii) in any property, asset or right which is used by VCI or any
Subsidiary in the conduct of its business, or (iii) in any contractual
relationship with VCI or any Subsidiary other than as an employee.
2.24 SECURITIES LAWS. VCI has complied and will comply with all applicable
federal and state securities laws in connection with the offer, issuance and
sale of the VCI Shares and the shares to be issued upon exercise of the Restated
Warrant.
2.25 STORE LEASES. Schedule 2.25 sets forth all real property leased by
VCI and each Subsidiary, including the location of the leased property (the
"Leases"). Each of the Leases listed on Schedule 2.25 is in full force and
effect and is binding upon VCI and each Subsidiary, as applicable, and on the
other parties thereto; VCI and each Subsidiary, as applicable, have fully
performed all of their obligations thereunder, including paying all rents and
payments due to date thereunder in full; and there exists no default or event of
default or event, occurrence, condition
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<PAGE>
or act which, with the giving of notice, the lapse of time or the happening of
any other event or condition, would become a default or event of default
thereunder.
2.26 DISCLOSURE. Neither this Agreement, the Related Documents, nor any
other agreement, document, certificate or written statement furnished to
Rentrak, Mortco, or their counsel, by or on behalf of VCI or any Subsidiary in
connection with the transactions contemplated hereby or thereby contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading.
There is no fact within the knowledge of VCI or any Subsidiary which has not
been disclosed herein or in writing by them to Rentrak and Mortco and which
materially adversely affects, or in the future in their opinion may, insofar as
they can now foresee, materially adversely affect the business, properties,
assets or condition, financial or otherwise, of VCI or any Subsidiary.
3. REPRESENTATIONS AND WARRANTIES OF MORTCO. As a material inducement to VCI,
Sulpizio, and AIV to enter into this Agreement, Mortco makes the following
representations and warranties:
3.1 INVESTMENT INTENT. Mortco is acquiring the VCI Shares for its own
account and not with the view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities Act
of 1933 (the "1993 Act"). Mortco acknowledges that VCI Shares have not been
registered under the 1933 Act or any state securities laws, and that such shares
may not be resold without registration under the 1933 Act or applicable state
securities laws or an exemption therefrom. Mortco is an "Accredited Investor" as
that term is defined in Rule 501(a) of Regulation D promulgated under the 1933
Act and has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of the investment to be made by
it hereunder.
3.2 AUTHORIZATION. This Agreement and the Related Documents have been duly
authorized by all necessary corporate action on the part of Mortco and Rentrak,
as the case may be, and have been duly executed and delivered by Mortco and
Rentrak, and are valid and binding agreements, enforceable in accordance with
their terms.
3.3 NO BROKERS OF FINDERS. Neither Mortco nor Rentrak have employed any
broker or finder in connection with the transactions contemplated by this
Agreement, or taken any action that would give rise to a valid claim against any
party for a brokerage commission, finder's fee, or other like payment.
4. CONDITIONS OF CLOSING.
4.1 Conditions Precedent to Obligations of Rentrak and Mortco. The
obligations of Rentrak and Mortco to consummate the transactions contemplated by
this Agreement, are subject, in Rentrak's and Mortco's sole discretion, to the
fulfillment of each of the following
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<PAGE>
conditions precedent on or prior to the Closing Date, any of which may be waived
in whole or in part by Rentrak and Mortco:
4.1.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of VCI, Sulpizio and AIV under this Agreement shall be true and
correct in all respects at and as of the Closing Date with the same effect as
though made on and as of the Closing Date.
4.1.2 COMPLIANCE WITH AGREEMENT. VCI and each Subsidiary, as
applicable, shall have performed and complied with all agreements or conditions
required by this Agreement and the Related Documents to be performed and
complied with by them prior to or as of the Closing Date, specifically including
without limitation taking all actions required under Section 1.5 above.
4.1.3 SIMULTANEOUS CLOSING OF VCI'S ACQUISITIONS OF SUBSIDIARIES.
VCI shall have simultaneously closed on the acquisition of each Subsidiary in
strict compliance with the terms and conditions set forth in the Merger
Agreements attached hereto as Exhibits C-1 through C-5. VCI shall have issued
and delivered to Mortco, in connection with VCI's acquisition of Sulpizio, a
stock certificate evidencing 9,900 shares of VCI's authorized and unissued
voting common stock, fully paid and nonassessable.
4.1.4 NO EVENT OF DEFAULT. No condition or event which would
constitute an Event of Default (as such term is defined in Section 7.1), or
which, after notice or lapse of time or both, would constitute an Event of
Default, shall exist at the time of Closing.
4.1.5 CLOSING CERTIFICATE. VCI, Sulpizio and AIV shall have each
delivered to Rentrak and Mortco, a certificate, duly signed by their respective
Presidents or Chief Executive Officers, dated as of the Closing Date, certifying
that the conditions specified in Sections 4.1.1, 4.1.2, 4.1.3 and 4.1.4 have
been satisfied and fulfilled.
4.1.6 OPINION OF COUNSEL. VCI, Sulpizio and AIV shall have delivered
to Rentrak and Mortco an opinion of counsel for VCI, Sulpizio and AIV in form
and substance satisfactory to Rentrak and Mortco, dated as of the Closing Date.
4.1.7 EXECUTION AND DELIVERY OF DOCUMENTS. VCI, Sulpizio, AIV, KDDJ,
Leptis, Old Republic, and David Ballstadt, as applicable, shall have executed
and delivered to Rentrak and Mortco this Agreement and all other documents
required to be executed and delivered at Closing hereunder, specifically
including without limitation the Sulpizio Note, the VCI Note, the Loan
Agreement, the VCI Security Agreement, the Sulpizio Security Agreement, the
Guaranty, the VCI/Subsidiaries PPT Agreement, the Registration Rights Agreement,
the First Restated Warrant, the Second Restated Warrant, and the Settlement
Agreement, attached hereto as Exhibits A, B, D, E, F, G, H, I, J, K and L
respectively.
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<PAGE>
4.1.8 QUALIFICATION UNDER STATE SECURITIES LAWS. All registrations,
qualifications, permits and approvals required under applicable state and
federal securities laws for the lawful execution and delivery of this Agreement
and the offer, sale, issuance and delivery of VCI Shares and shall have been
obtained.
4.1.9 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
and actions taken in connection with the transactions contemplated hereby and
all certificates, opinions, agreements, instruments and documents mentioned
herein or incident to any such transactions shall be satisfactory in form and
substance to Rentrak and Mortco. VCI shall have delivered to Mortco (i) a
certificate from the Secretary of the State of Delaware to the effect that VCI
is incorporated and in good standing in Delaware; (ii) a certificate from the
Secretary of State of the State of California to the effect that Sulpizio is
incorporated and in good standing in California; and (iii) a copy of the
resolutions of the Board of Directors of VCI, Sulpizio and AIV, respectively,
approving this Agreement and the Related Documents and the transactions
contemplated hereby and thereby, certified by their respective Secretaries as
being true and correct.
4.1.10 NO LITIGATION. No suit, action, governmental proceeding or
order shall have been instituted or threatened which makes the transactions
contemplated hereby illegal or otherwise prohibited or otherwise seeks to
restrain or prohibit the consummation of the transactions contemplated by this
Agreement.
4.1.11 THIRD-PARTY CONSENTS. All consents and approvals from parties
to contracts or other agreements with VCI or any Subsidiary that may be required
in connection with the performance by VCI and each Subsidiary of their
obligations under this Agreement or the continuance of such contracts or other
agreements with VCI or any Subsidiary after the Closing shall have been
obtained.
4.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF VCI, SULPIZIO AND AIV. The
obligations of VCI, Sulpizio and AIV to consummate the transactions contemplated
by this Agreement are subject, in the discretion of VCI, Sulpizio and AIV, to
the fulfillment prior to or on the Closing Date of each of the following
conditions, any of which may be waived in whole or in part by VCI, Sulpizio and
AIV:
4.2.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Mortco under this Agreement shall be true and correct in all
respects at and as of the Closing Date with the same effect as though made on
and as of the Closing date.
4.2.2 COMPLIANCE WITH AGREEMENT. Rentrak and Mortco shall have
performed and complied with all agreements or conditions required by this
Agreement to be performed and complied with by it prior to or as of the Closing
Date.
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<PAGE>
4.2.3 Simultaneous Closing of VCI's Acquisitions of Subsidiaries. VCI
shall have simultaneously closed on the acquisition of each Subsidiary in strict
compliance with the terms and conditions set forth in the Merger Agreements
attached hereto as Exhibits C-1 through C-5.
4.2.4 Execution and Delivery of Documents. Rentrak and Mortco, as the
case may be, shall have executed this Agreement and all other documents required
to be executed and delivered by them at Closing hereunder.
4.2.5 No Litigation. No suit, action, governmental proceeding or order
shall have been instituted or threatened which makes the transactions
contemplated hereby illegal or otherwise prohibited or otherwise seeks to
restrain or prohibit the consummation of the transactions contemplated by this
Agreement.
5. AFFIRMATIVE COVENANTS OF SULPIZIO. VCI and Sulpizio hereby jointly and
severally covenant and agree that, unless Mortco shall otherwise give its prior
written consent, which consent may be withheld in its sole discretion, Sulpizio
shall perform and VCI shall cause Sulpizio to perform, all of the following
covenants, which shall be deemed continuing covenants:
5.1 Corporate Existence. Sulpizio shall maintain and preserve its
corporate existence in good standing and all rights, franchises and other
authorizations adequate for the conduct of its business.
5.2 Books of Account and Reserves. Sulpizio shall keep books of record and
account in which full, true and correct entries are made of all of its dealings,
business and affairs, in accordance with generally accepted accounting
principles, consistently applied. Sulpizio will employ a nationally recognized
accounting firm as its independent accountants. Sulpizio will have annual audits
made by such independent public accountants in the course of which such
accountants shall make such examinations, in accordance with generally accepted
auditing standards, as will enable them to give reports or opinions with respect
to the financial statements of Sulpizio.
5.3 Furnishing of Financial Statements and Information. Sulpizio shall
deliver to Mortco:
(a) Within five days of their availability, but in any event within 20
days after the close of each month starting March 1998, an unaudited
consolidated balance sheet of VCI as of the end of such month, together
with the related unaudited consolidated statement of the results of
operation (which shall also set forth by way of comparison the budgeted
figures), and statements of changes in financial position and stockholders'
equity for such month and for the period from the beginning of the fiscal
year to the end of such month and, in comparative form, figures for the
corresponding periods of the previous fiscal year, all in reasonable detail
and certified by an authorized accounting
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officer of VCI to be accurate to the best of his knowledge and belief,
subject to year-end adjustments;
(b) Within five days of their availability, but in any event within
90 days after the end of each fiscal year, an audited consolidated balance
sheet of VCI, as of the end of such fiscal year, together with the related
consolidated statements of income and retained earnings and changes in
financial position for such fiscal year, setting forth in comparative form
figures for the previous fiscal year, all in reasonable detail and duly
certified by VCI's independent public accountants, which accountants shall
have given VCI an opinion, unqualified as to the scope of the audit,
regarding such statements;
(c) Within five days after Sulpizio learns of the commencement or
threatened commencement of any material suit, legal or equitable, or of any
material administrative, arbitration or other proceeding against Sulpizio or
its business, assets or properties, written notice of the nature and extent
of such suit or proceeding;
(d) Within ten days after Sulpizio learns of any material change in
Sulpizio's management, competition, financial condition or properties,
written notice of the nature and extent of such change;
(e) Promptly after the submission thereof to Sulpizio, copies of all
reports and recommendations submitted by independent public accountants in
connection with any annual or interim audit of the accounts of Sulpizio made
by such accountants; and
(f) With reasonable promptness, such other financial data relating to
the business, affairs and financial condition of Sulpizio as is available to
Sulpizio and as from time to time Mortco may reasonably request.
5.4 INSPECTION. Sulpizio shall (upon receipt of reasonable notice) permit
Mortco and any of its officers or employees, or any outside representatives
designated by it and reasonably satisfactory to Sulpizio, to visit and inspect
at Mortco's expense, any of the properties of Sulpizio including their books and
records (and to make extracts therefrom) and to discuss its affairs, finances
and accounts with its officers, except with respect to trade secrets and similar
confidential information, all to such reasonable extent and at such reasonable
times and intervals as Mortco may reasonably request without disruption of
Sulpizio's operations.
5.5 PAYMENT OF TAXES AND MAINTENANCE OF PROPERTIES. Sulpizio shall:
(a) pay and discharge promptly, or cause to be paid and discharged
promptly when due and payable, all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or upon any or its property, real,
personal or mixed, or upon any part thereof, as well as all material claims of
any kind (including claims for labor, material and supplies) which, if
unpaid, might by law become a lien or charge upon
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<PAGE>
its property; provided, however, that Sulpizio shall not be required to pay
-----------------
any such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall currently be contested in good
faith by appropriate proceedings and if Sulpizio shall have set aside on
its books, reserves (segregated to the extent required by generally
accepted accounting principles) deemed adequate by it with respect thereto;
and
(b) maintain and keep, or cause to be maintained and kept, its
properties in good repair, working order and condition, and from time to
time make, or cause to be made, all repairs and renewals and replacements
which in the opinion of Sulpizio are necessary and proper so that the
business carried on in connection therewith may be properly and
advantageously conducted at all times.
5.6 Insurance. Sulpizio shall:
(a) keep or cause all of its insurable property or properties to be
kept insured against loss or damage against fire and other business risks
in such amounts as is customary for similar businesses of comparable size;
(b) maintain public liability insurance against claims for personal
injury, death or property damage suffered by others upon or in or about any
premises occupied by Sulpizio or occurring as a result of its maintenance
or operation of any automobiles, trucks or other vehicles or other
facilities; and
(c) maintain all such workers' compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which
Sulpizio may be engaged in business.
5.7 Filing of Reports. Sulpizio will, from and after such time as it has
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "1934 Act") or has securities registered pursuant to the
Securities Act, make timely filing of such reports as are required to be filed
by it with the SEC so that Rule 144 under the Securities Act will be available
to the security holders of Sulpizio who are otherwise able to take advantage of
the provisions of such Rule.
5.8 Payment of Indebtedness and Discharge of Obligations. Sulpizio shall
pay or cause to be paid the principal of and interest and premium, if any, on
all Indebtedness for Borrowed Money heretofore or hereafter incurred or assumed
by it when and as the same shall become due and payable. Sulpizio shall
faithfully observe, perform and discharge all of the material covenants,
conditions and obligations which are imposed on it by any and all indentures and
other agreements securing or evidencing such Indebtedness for Borrowed Money or
pursuant to which such Indebtedness for Borrowed Money is issued, and will not
permit the continuance of any act or omission which is, or under the provisions
thereof may be declared to be, a default thereunder, unless such default is
waived pursuant to the provisions thereof. As used in this
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<PAGE>
Agreement, the term "Indebtedness" means all items, except items of capital
stock and surplus and reserves which are mere segregations of surplus, which
would be included on the liability side of the consolidated balance sheet of
Sulpizio in accordance with generally accepted accounting principles as of the
date on which Indebtedness is to be determined. As used in this Agreement the
term "Indebtedness for Borrowed Money" includes only indebtedness incurred as
the result of a direct borrowing of money and shall not include Indebtedness
incurred with respect to trade accounts.
6. NEGATIVE COVENANTS. VCI and Sulpizio hereby, jointly and severally,
covenant and agree that, unless Mortco otherwise gives its prior written
consent, which consent may be withheld in its sole discretion, Sulpizio shall
not permit, and VCI shall cause Sulpizio not to permit, any of the following to
be done:
6.1 SALE OF BUSINESS, MERGER, OR CONSOLIDATION, ETC. Sulpizio shall not
liquidate, dissolve or sell, lease or otherwise dispose of more than 10% of its
assets, or consolidate with, participate in a share exchange with, or merge into
any other corporation or entity, or permit any other corporation or entity to
consolidate or merge into it or commence any proceeding therefor.
6.2 DIVIDENDS ON OR REDEMPTION OF COMMON STOCK. Sulpizio shall not
declare or pay any dividend, either in cash or property, or make any other
distribution on any shares of its stock or purchase, redeem, retire or otherwise
acquire for any consideration, any shares of stock.
6.3 COMPENSATION TO CERTAIN EMPLOYEES. Sulpizio shall not pay any
compensation, whether by way of salaries, bonuses, fees, participation in
pension or profit sharing plans or otherwise, to its officers and directors in
excess of the respective amounts being paid on the date hereof, plus 20%.
6.4 ISSUANCE OF STOCK AND RIGHTS TO ACQUIRE STOCK. Sulpizio shall not
issue any shares of stock of Sulpizio of any class and shall not authorize,
issue or grant any options, warrants, conversion rights or other rights to
purchase or acquire any shares of stock of Sulpizio of any class.
6.5 OTHER RESTRICTIONS. Sulpizio shall not:
(a) make loans or advances to any third party or Affiliate, which
individually or in the aggregate, exceed $50,000 (including without
limitation to any officer, director, employee or stockholder of Sulpizio)
or become a guarantor or surety or pledge credit with respect to any
obligation, other than pursuant to Section 6.8 of this Agreement, that
exceeds $50,000 on any undertaking of a third party or Affiliate;
(b) purchase or invest in the stock or obligations of any other
person, firm or corporation whose principal business is unrelated to the
retail video business;
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(c) purchase, acquire, lease or transfer any property to, or otherwise
deal with, in the ordinary course of business or otherwise, VCI or any
Affiliate of Sulpizio or VCI, except on an arm's length basis in
transactions which are on no less favorable terms to Sulpizio than would be
the case in a similar transaction with an unaffiliated Person; or
(d) fail to perform or breach any of Sulpizio's respective
obligations, agreements or representations and warranties under the
Sulpizio PPT Agreement, the VCI/Subsidiaries PPT Agreement, or any other
agreement with Mortco or Rentrak.
6.6 REGISTRATION RIGHTS. Sulpizio shall not give to any stockholder the
right to cause a registration with the Securities and Exchange Commission of the
sale of such stockholders' securities.
6.7 ARTICLES AND BYLAWS. Sulpizio shall not amend its Articles or Bylaws
or otherwise change or modify its capital structure.
6.8 BORROWED MONIES. Sulpizio shall not create, incur, assume, guarantee
or be or remain liable with respect to any Indebtedness for Borrowed Money,
other than Indebtedness that is subordinate pursuant to a Subordination
Agreement, in form and substance satisfactory to Mortco, to the Indebtedness
contemplated in the Related Documents, except for the Indebtedness described in
Schedule 6.9.
6.9 RESTRICTIONS ON ENCUMBRANCES. Sulpizio shall not create, make,
incur, assume or permit to exist any mortgage, pledge, lien, security interest,
encumbrance or charge of any kind upon any of its properties or assets, whether
now owned or hereafter acquired, except the following:
(a) mortgages, pledges, liens, security interests and other
encumbrances securing any Indebtedness owing to Mortco or Rentrak and the
Indebtedness described on Schedule 6.9;
(b) Personal Property Purchase Money Encumbrances;
(c) Workman's, materialmen's and similar liens imposed by operation
of law.
For purposes of this Agreement, the term "Personal Property Purchase Money
Encumbrances" means all mortgages, security interests, liens and other
encumbrances existing upon any personal property at the time of its acquisition
by Sulpizio or placed upon property being acquired by Sulpizio to secure a
portion of the purchase price thereof; provided, however, that no such
-----------------
mortgage, security interest, lien, encumbrance, agreement or arrangement shall
extend to or cover any other property of Sulpizio; and provided further that
that aggregate principal amount of the Indebtedness secured by any such
mortgage, security interest, lien, encumbrance, agreement or arrangement shall
at no time exceed (i) the cost (including the principal amount of such
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<PAGE>
Indebtedness, whether or not assumed) to Sulpizio of the property subject
thereto, or (ii) the fair market value of such property at the time of purchase.
6.10 Confidentiality. VCI, Sulpizio and AIV, and their respective
agents and representatives shall treat as strictly confidential and shall not,
without express written consent of Rentrak and Mortco, disclose to any third
party any of the specific terms and conditions concerning the transactions
contemplated by this Agreement, including, but not limited to, the identity of
Rentrak or Mortco with respect thereto, or in any other agreement or document
referred to herein, including, but not limited to, the Related Documents.
Rentrak and Mortco may, in the exercise of their sole discretion, disclose the
existence of the transactions consummated pursuant to this Agreement and the
Related Documents and upon the request of Rentrak or Mortco, VCI, Sulpizio and
AIV shall confirm the same. This restriction, however, shall not prevent VCI,
Sulpizio or AIV from disclosing the terms and conditions of this Agreement and
the Related Documents pursuant to Court order. In the event Sulpizio engages in
an initial public offering of its securities, Rentrak and Mortco agree not to
unreasonably withhold their consent with respect to disclosures that are
required under federal and state securities laws, provided that Sulpizio
exercises its best efforts to uphold and abide by its obligations with respect
to confidentiality as provided herein, including but not limited to, seeking
confidential treatment by the SEC with respect to disclosures concerning this
Agreement, the Related Documents, Rentrak or Mortco.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. For purposes of this Agreement, any one or more
of the following events shall constitute an event of default hereunder ("Event
of Default"):
7.1.1 If any representation or warranty made by or on behalf of VCI,
Sulpizio or AIV in this Agreement or the Related Documents, or in any
certificate, report or other instrument delivered under or pursuant to any term
thereof, shall prove to have been untrue or incorrect in any respect as of the
date of this Agreement or as of the Closing; or
7.1.2 Failure by VCI or any Subsidiary to strictly comply with any
term, condition or covenant of this Agreement, the Related Documents, or any
other agreement between VCI and Rentrak and/or Mortco, or between any Subsidiary
and Rentrak and/or Mortco; or
7.1.3 Dissolution, termination of existence, insolvency on a balance
sheet basis, or business failure of VCI or any Subsidiary, the commencement by
VCI or any Subsidiary of a voluntary case under the federal bankruptcy laws or
under other federal or state law relating to insolvency or debtor's relief; the
entry of a decree or order for relief against VCI or any Subsidiary in an
involuntary case under the federal bankruptcy laws or under any other applicable
federal or state law relating to debtor's relief; the appointment or the consent
by VCI or any Subsidiary to the appointment of receiver, trustee, or custodian
of VCI or any Subsidiary, or of any of VCI's or any Subsidiary's property; an
assignment for the benefit of creditors by
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<PAGE>
VCI or any Subsidiary, or VCI's or any Subsidiary's failure generally to pay its
debts as such debts become due.
7.2 REMEDIES UPON AN EVENT OF DEFAULT. Upon the occurrence of an Event of
Default as herein defined, Rentrak and Mortco shall be entitled to all remedies
available at law or equity and may protect and enforce its rights hereunder by
suit in equity or action at law. It is agreed that in the event of any such
action, the prevailing party shall be entitled to receive all reasonable fees,
costs and expenses incurred, including without limitation such reasonable fees
and expenses of attorneys at trial and on appeal.
7.3 REMEDIES CUMULATIVE. No right, power or remedy conferred upon Rentrak
and Mortco shall be exclusive, and each such right, power or remedy shall be
cumulative and in addition to every other right, power or remedy, whether
conferred hereby or now or hereafter available at law or in equity or by statute
or otherwise.
7.4 REMEDIES NOT WAIVED. No course of dealing between VCI, any
Subsidiary, and Rentrak and/or Mortco, and no delay in exercising any right,
power or remedy conferred hereby, shall operate as a waiver of or otherwise
prejudice any such right, power or remedy.
8. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.
8.1 SURVIVAL. Notwithstanding any right of Rentrak or Mortco to fully
investigate the affairs of VCI and each Subsidiary and notwithstanding any
knowledge of facts determined or determinable by Rentrak or Mortco pursuant to
such investigation or right of investigation, Rentrak and Mortco have the right
to rely fully upon the representations, warranties, covenants, indemnities and
agreements of VCI, Sulpizio, and AIV contained in or made pursuant to this
Agreement or the Related Documents (including all Exhibits and Schedules
thereto) or in any certificate, document or statement delivered pursuant
thereto (collectively the "Ancillary Documents"). All representations,
warranties, covenants, indemnities and agreements of the parties contained in or
made pursuant to this Agreement, the Related Documents or the Ancillary
Documents shall survive the Closing.
8.2 OBLIGATION TO INDEMNIFY. VCI, Sulpizio, and AIV, jointly and
severally, shall indemnify, defend and hold harmless Rentrak and Mortco, and
their respective directors, officers, employees, affiliates, successors and
assigns (collectively, the "Indemnitees") from and against any and all losses,
liabilities, damages, deficiencies, costs or expenses (including interest,
penalties and reasonable attorneys' fees and disbursements) ("Losses") that are
suffered or incurred by any of the Indemnitees or to which any of the
Indemnitees may become subject at any time (whether or not such Losses relate to
any third party claim) and which arise from or as a result of, or are directly
or indirectly connected with:
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<PAGE>
(a) any inaccuracy in or any breach of any representation or
warranty made by VCI or any Subsidiary in this Agreement, the Related
Documents or the Ancillary Documents; or
(b) any breach of any covenant or obligation of VCI or any Subsidiary
contained in this Agreement, the Related Documents or the Ancillary
Documents.
9. MISCELLANEOUS.
9.1 ENTIRE AGREEMENT. This document (including the Exhibits and Schedules
attached hereto) is the entire, final and complete Agreement and understanding
of the parties with respect to the transactions contemplated hereby, and
supersedes and replaces all written and oral agreements and understandings
heretofore made or existing by and between the parties or their representatives
with respect thereto.
9.2 WAIVER. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
9.3 BINDING EFFECT. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
9.4 NOTICES. Any notice of other communication required or permitted under
this Agreement shall be in writing and shall be deemed given on the date of
transmission when sent by telex or facsimile transmission, on the third business
day after the day of mailing when mailed by certified mail, postage prepaid,
return receipt requested, from within the United States, or on the date of
actual delivery, whichever is the earliest, and shall be sent to the parties at
the addresses shown on the first page of this Agreement, address, or at such
other address as the party may hereafter designate by written notice to the
others:
9.5 AMENDMENT. No supplement, modification or amendment of this
Agreement shall be valid, unless the same is in writing and signed by all
parties hereto.
9.6 SEVERABILITY. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court or competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
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9.7 SURVIVAL OF COVENANTS. Any covenants the full performance of which
are not required before Closing shall survive the Closing and be fully
enforceable thereafter in accordance with their terms.
9.8 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. This Agreement and all
other agreements contemplated hereunder, including the Related Documents, and
the rights of the parties hereunder and thereunder shall be governed, construed
and enforced in accordance with by the laws of the State of Oregon, without
regard to its conflict of law principles. Any suit or action arising out of or
in connection with this Agreement or the Related Documents, or any breach hereof
or thereof, shall be brought and maintained exclusively in the federal or state
courts in Portland, Oregon. The parties hereby irrevocably submit to the
exclusive jurisdiction of such courts for the purpose of such suit or action and
hereby expressly and irrevocably waive, to the fullest extent permitted by law,
any objection it may now or hereafter have to the venue of any such suit or
action in any such court and any claim that any such suit or action has been
brought in an inconvenient forum. VCI, Sulpizio and AIV hereby irrevocably waive
their right to a jury trial in any claim or cause of action based upon or
arising out of this Agreement or the Related Documents or any dealings between
VCI, Sulpizio and AIV and Rentrak and/or Mortco relating to this Agreement or
the Related Documents.
9.9 SCHEDULES. All Schedules to this Agreement shall be deemed an
integral part of this Agreement and shall be incorporated herein by this
reference as though set forth in full.
9.10 SPECIFIC PERFORMANCE. Each party's obligations under this Agreement
are unique. If any party should default in its obligations under this Agreement,
the parties each acknowledge that it would be extremely impracticable to measure
the resulting damages and, accordingly, the nondefaulting party, in addition to
any other available rights or remedies, may sue in equity for specific
performance, and the parties each expressly waive the defense that a remedy in
damages will be adequate.
9.11 RECITALS. The "Recitals" set forth at the beginning of this Agreement
are true and accurate and are incorporated herein by this reference as though
set forth in full.
9.12 CAPTIONS. The caption headings of the sections and subsections of
this Agreement are for convenience of reference only and are not intended to be,
and should not be construed as, a part of this Agreement.
9.13 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
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9.14 CROSS-REFERENCES. Unless expressly stated otherwise herein, all
references in this Agreement to sections, exhibits, and schedules refer to
sections, exhibits, and schedules of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate as of the day and year first above written.
VIDEO CITY, INC. RENTRAK CORPORATION
By: /s/ Robert Y. Lee By: /s/ Ron Berger
------------------------- -----------------------------
Title: CEO Ron Berger, President
-----------------------
SULPIZIO ONE INC. MORTCO, INC.
By: /s/ Robert Y. Lee By: /s/ Ron Berger
------------------------- -----------------------------
Title: President Ron Berger, President
-----------------------
ADVENTURES IN VIDEO, INC.
By: /s/ Robert Y. Lee
-------------------------
Title: President
-----------------------
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LIST OF SCHEDULES
Schedule 1.7 - VCI Film Library
Schedule 2.3 - Status of Capital Stock
Schedule 2.4 - Registration Rights
Schedule 2.7 - Financial Statements
Schedule 2.9 - Activities Since Date of Financial Statement
Schedule 2.10 - Title and Related Matters
Schedule 2.14 - Material Contracts
Schedule 2.17 - Litigation
Schedule 2.25 - Store Leases
Schedule 6.9 - Indebtedness
LIST OF EXHIBITS
Exhibit A - Sulpizio Note
Exhibit B - VCI Note
Exhibit C - Merger Agreements
Exhibit D - Loan Agreement
Exhibit E - VCI Security Agreement
Exhibit F - Sulpizio Security Agreement
Exhibit G - Guaranty
Exhibit H - VCI/Subsidiaries PPT Agreement
Exhibit I - Registration Rights Agreement
Exhibit J - First Restated Warrant
Exhibit K - Second Restated Warrant
Exhibit L - Settlement Agreement
