<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 0-14023
VIDEO CITY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-3897052
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Amapola Avenue, Suite 208, Torrance, California 90501
(Address of principal executive offices) (Zip Code)
</TABLE>
(310) 533-3900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
----- -----
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of May 10, 1999, was approximately $14,051,000.
The number of shares of common stock outstanding as May 10, 1999 was 13,846,936
shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________
Documents Incorporated by Reference
The registrant's definitive proxy statement for its Annual Meeting of
Stockholders which is anticipated to be filed within 120 days of January 31,
1999 is incorporated by reference in response to Part III of this Annual Report
on Form 10-K.
================================================================================
<PAGE>
Safe Harbor Statement under the Private Securities Litigation Reform Act of
---------------------------------------------------------------------------
1995.
- ----
This Annual Report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled "Special Considerations" as
well as those discussed elsewhere in this Annual Report.
PART I
ITEM 1. BUSINESS
General
Video City, Inc. ("Video City" or the "Company") owns and operates several
chains of retail video specialty stores and, measured in growth rates, was the
fastest growing publicly-held retail video specialty store company in the United
States in 1998. As part of its strategic plan of acquisition, during its fiscal
year ended January 31, 1999 ("fiscal 1999"), Video City grew from 18 stores in
California to a total of 128 video stores located in nine states. As of May 10,
1999, the Company owned and operated 137 video specialty stores in eleven
states. The Company has recently entered into an agreement to sell 50 of its
video stores located in the states of Washington and Oregon. See "--Recent
Developments."
The Company's predecessor, Lee Video City, Inc. ("Lee Video City"), was formed
as a California corporation in February 1990 for the purpose of developing a
chain of retail video specialty stores. In January 1997, Lee Video City, Inc.
merged with and into Prism Entertainment Corporation, a Delaware corporation
incorporated in January 1984 ("Prism"), and the surviving Delaware corporation
changed its name to "Video City, Inc." As a result of the Company's sale of its
library of 47 feature films and other film properties in March 1998, the
Company's sole business is the ownership and operation of video specialty
stores. The Company's principal executive offices are located at 370 Amapola
Avenue, Suite 208, Torrance, California 90501 and its telephone number is (310)
533-3900.
Developments During Fiscal 1999
During fiscal 1999, the Company acquired nine companies that owned and
operated an aggregate of 114 retail video stores. The consideration for the
acquisitions consisted of a combination of cash, capital stock of the Company,
promissory notes and the assumption by the Company of certain indebtedness and
liabilities of the companies being acquired, some of which were paid off by the
Company at the closings. Except for the acquisition of Video Tyme, Inc., Far
West Entertainment, Inc. and Game City, Inc., each of the acquisitions described
below was structured as a reverse triangular merger, with a newly formed
subsidiary of Video City merging into the acquired company. Video City acquired
all of the outstanding capital stock of Video Tyme, Inc. and substantially all
of the assets of Far West Entertainment, Inc. and Game City, Inc. The following
summarizes
2.
<PAGE>
the acquisitions completed by the Company during fiscal 1999:
<TABLE>
<CAPTION>
Acquired Companies Number of Stores States
- ------------------ ---------------- ------
<S> <C> <C>
Cianci's Videoland, Inc. 76 California, Idaho, Iowa, Oregon
South Dakota and Washington
Adventures in Video, Inc. 13 Minnesota
Video Tyme Inc. 6 Nevada
Leptis Magna, Inc. 5 Colorado
Sulpizio One, Inc. 4 California
Old Republic Entertainment, Inc. 4 California
KDDJ Investments, Inc. 3 California
Far West Entertainment, Inc. 2 California and Idaho
Game City, Inc. 1 California
</TABLE>
The Company has recently entered into an agreement to sell 50 of its video
stores located in the states of Washington and Oregon. See "--Recent
Developments."
Recent Developments
Acquisition of Video Galaxy. On March 31, 1999, the Company acquired Video
Galaxy, Inc. ("Video Galaxy") from the shareholders of Video Galaxy, in a
transaction structured as a reverse triangular merger, with a newly formed
subsidiary of Video City merging into Video Galaxy. Video Galaxy owns and
operates 15 retail video stores in Connecticut and Massachusetts and had
aggregate revenues of approximately $5,800,000 during the year ended December
31, 1998. The purchase price consisted of (i) 360,667 shares of Video City
common stock (subject to post-closing adjustments, if any) and (ii) assumption
and payment of indebtedness of Video Galaxy by Video City in the amount of
$4,833,000 (of which approximately $1,757,000 was paid off by Video City at
closing and $2,000,000 was converted into shares of Video City preferred stock
and warrants). The payoff of indebtedness at closing was provided by cash
obtained from an existing creditor of the Company.
Sale of Certain Assets. On April 22, 1999 the Company entered into an Asset
Purchase Agreement with Blockbuster Inc. pursuant to which the Company has
agreed to sell to Blockbuster Inc. substantially all of the assets of 50 of the
Company's retail video stores located in the states of Washington and Oregon for
approximately $16 million in cash. The consummation of the sale is subject to
certain conditions, including satisfactory due diligence investigations by
Blockbuster Inc. and the receipt of certain governmental and other third-party
consents. The company anticipates using the net proceeds from the sale of the
assets to pay off certain of the Company's indebtedness and to finance future
acquisitions. There can be no assurances that the contemplated asset sale will
be consummated.
Industry Overview
Video Retail Industry. According to the Video Software Dealers Association
("VSDA"), a video
3.
<PAGE>
retailing industry association, the videocassette rental industry grew
approximately 10% in 1998, reaching $8.1 billion in revenue, in sharp contrast
to recent years in which rental revenue was generally flat and industry growth
was driven by increases in product sales revenue. According to Paul Kagan
Associates, Inc. ("Paul Kagan"), a video industry analyst, the United States
video rental and sales industry grew from $9.8 billion in revenue in 1990 to
approximately $16.9 billion in 1998, and is expected to reach nearly $20.8
billion by 2002.
The video retail industry is highly fragmented and in recent years has been
characterized by increased consolidation as larger regional and national
"superstore" (video store that carries more than 7,500 units for rental or sale)
chains have continued to increase market share by opening new stores and
acquiring smaller, local operators. According to the VSDA, there were between
25,000 to 30,000 video specialty stores in operation during 1998. The Company
believes approximately 8,500 of these stores are "superstores." The Company
believes this consolidation will continue as the video retail industry evolves
from independent stores to regional and national superstore chains, fueled by
the competitive impact of superstores on smaller retailers, the need for
enhanced access to working capital and efficiencies of scale offered by such
superstore chains, the favorable revenue sharing and other copy depth
opportunities afforded to the regional and national chains, and the increased
marketing efforts of such regional and national chains.
Movie Studio Dependence on Video Retailing. According to Paul Kagan, the
video retail industry is the single largest source of domestic revenue to movie
studios and represented approximately $6.7 billion, or 48.5%, of the $13.8
billion of estimated domestic studio revenue in 1998. Of the many movies
produced and released by the major studios each year in the United States,
relatively few are profitable for the movie studios based on box office receipts
alone. The Company believes the consumer is more likely to view "non-hit"
movies on rented videocassette than in any other medium because retail video
stores provide an inviting opportunity to browse and make an impulse choice
among a very broad selection of new releases. As a result, retail video stores,
including those operated by the Company, purchase movies on videocassette
regardless of whether the movies were successful at the box office, thus
providing the major movie studios a reliable source of revenue for almost all of
the hundreds of movies produced each year. Consequently, the Company believes
movie studios are highly motivated to protect this unique and significant source
of revenue.
Rentals versus Sales. Although the video retail industry includes both
rentals and sales, the consumer market for prerecorded videocassettes has been
primarily comprised of rentals. By setting the wholesale prices, movie studios
influence the relative levels of videocassette rentals versus sales.
Videocassettes released at a relatively high price, typically $60 to $70, are
purchased by video specialty stores and are promoted primarily as rental titles.
Videocassettes released at a relatively low price, typically $5 to $24 ("sell-
through titles"), are purchased by video specialty stores and are generally
promoted as both rental and sale titles. In general, movie studios attempt to
maximize total revenue from videocassette releases by combining the release of
most titles at a high price point to encourage purchase for the rental market,
with the release of a relatively few major hits or animated children's classics
at sell-through pricing to encourage purchase directly by the consumer at
retail. Video specialty stores will purchase sell-through titles for both the
rental market and for retail sale. Titles released at a high price are re-
released at a lower price six months to one year after the initial release to
promote sales directly to consumers. According to Paul Kagan, video rental
revenue has increased from $7.4 billion in 1997 to $8.1 billion in 1998 and is
expected to increase to $9.7 billion in 2002.
Revenue Sharing. In 1998 a number of studios and video retailers adopted
revenue sharing as an alternative to the historical rental pricing structure.
Studios began offering retailers more videocassettes for an individual title at
substantially lower initial cost in exchange for a share of the rental revenue
that those copies generate over their initial release window. This has led to
higher rental revenues for the video industry as well as for the studios. In
addition, revenue sharing provides the studios an incentive to market these
titles which improve revenue generated by increased transactions for both the
video industry and the studios.
4.
<PAGE>
Business Strategy
Superstore Format. The Company focuses on acquiring, building and operating
retail video superstores. The Company believes a superstore is the most
commercially viable format for video stores at most locations. The broader
selection of titles and greater availability of popular new releases of a
superstore generate enough customer traffic to make it economically viable to
lease optimal locations that may demand higher lease rates. Because many store
operating expenses, including labor costs, are substantially fixed regardless of
the size of a store, operating expenses are proportionately lower in the larger
superstore format as compared to a smaller store.
Selection, Availability and Customer Service. The Company's goal is to offer
a more complete selection and greater availability of popular new releases in an
effort to be the customers' preferred store. The Company believes that certain
of the Company's promotional strategies such as the periodic guaranteeing of the
availability of a popular new release at its stores have been successful in
attracting and retaining its customers. The Company permits its customers to
return a videocassette to any of its other store locations and hence provides a
convenience not available in other video store chains. In addition, the
Company's goal is to place great emphasis on offering its customers excellent
service to encourage repeat visits. The Company uses demographic and historical
rental data to determine the selection and quantity of videos that will best
meet the demands of customers in particular regions or neighborhoods.
Centralized Real-Time Management. All of the stores' point-of-sale system is
directly connected to the Company's centralized management information system
through Internet technology to provide real-time communication and feedback from
them to the Company's headquarters in Torrance, California. Such system allows
real-time monitoring of sales and inventory, and allows the Company to actively
manage its new videocassette purchases and monitor customer demand. The Company
periodically redistributes its inventory of videocassettes among its stores to
fulfill customer demand without making excessive purchases of popular titles.
Store Location and Marketing. Most of the Company's superstores are located
in high traffic areas providing high visibility and easy access for its
customers. The Company believes excellent customer service, a bright, clean and
friendly shopping environment and convenient store locations are important to
it's success. The Company advertises through local television, radio, newspaper
and direct mail, and promotes its products through various special programs.
Growth Strategy
Development Program. In many regions, the Company believes there are
significant opportunities to grow through internal development and the opening
of new stores. Such internal growth will be the means of expansion in
attractive market areas where there are no strong acquisition candidates and
where good locations are still available. Before the completion of the
acquisitions in fiscal 1999, the opening of new stores had fueled most of the
Company's growth. The Company selected suitable locations, negotiated
reasonable leases with the property owners, retained contractors to remodel the
interior of the stores into the Company's superstore format, hired and trained
store employees, advertised the stores within their trade area, and opened the
stores for business.
Acquisitions. The Company believes the highly fragmented nature of its
industry presents the opportunity to acquire strategically located chains that
are market share leaders in their trade areas. As part of the Company's
acquisition strategy the Company acquired 114 video stores in fiscal 1999 and 15
video stores in March 1999. See "--Developments During Fiscal 1999," "--Recent
Developments" and "--Store Operations and Locations." The Company believes that
acquiring such clusters of stores can be the most cost-effective means of
entering an area, particularly where the acquired chain already occupies
desirable locations. The purchase of an existing chain enables the Company to
immediately utilize the assets of the acquired chain and thus to have an
immediate revenue stream. Also, existing chains have an established customer
base that tend to reduce the Company's
5.
<PAGE>
advertising expenses. Through a combination of volume purchase discounts, larger
advertising credits, more efficient inventory management and centralized
management, the Company believes it is generally able to operate these acquired
stores more profitably than their prior owners, who were typically single store
or small chain operators. The Company anticipates opening additional stores as
necessary to fill in the market areas of the acquired video chains so that
operating efficiencies can be maximized.
Future store acquisitions, if any, will be pursued as attractive opportunities
become available. Such acquisitions will be based upon location, quality of
operations and financial criteria as determined by the Company to be consistent
with its growth strategy. In future acquisitions, the Company anticipates that
some of the key employees of the acquired companies will be employed by the
Company.
Geographic Concentration. The Company's strategy is to concentrate its
expansion, whether through new store development or acquisitions, in a
particular geographic area to maximize operating efficiencies. The Company
believes that geographic concentration allows the Company to achieve operating
efficiencies in inventory management, marketing and advertising, distribution,
training and store supervision. Although the Company is not currently targeting
any particular geographic area for expansion, the Company's strategy is to move
into a new geographic area if there exists an opportunity to realize certain
levels of revenues and cash flow from that particular market.
New Products. The Company continues to offer new products to achieve
competitive results and generate additional revenue in each of its stores. In
December 1997, the Company introduced digital video discs ("DVDs") at its
stores.
The Company's growth is dependent on a number of factors, including its
ability to hire, train and assimilate management and store-level employees, the
adequacy of the Company's financial resources, the Company's ability to
successfully compete in the new markets, to locate suitable store sites, to
negotiate acceptable lease terms, to adapt its purchasing, management
information and other systems to accommodate expanded operations and to
assimilate the new operations into the existing operations of the Company.
There is no assurance that the Company will be able to achieve continued
growth or that the Company will be profitable as a result of such growth.
Continued growth will place increasing pressure on the Company's management. A
failure to manage successfully its planned growth would adversely affect the
Company's business. There is also no assurance that the Company's newly
developed or acquired stores will achieve sales and profitability comparable to
the Company's existing stores. See "--Special Considerations--Growth Strategy."
Products
Videocassette Rental. The Company's primary revenue source is from the rental
of videocassettes. Each of the Company's stores currently offers from 6,000 to
17,000 videocassettes consisting of from 4,000 to 10,000 different titles. New
release videocassettes (videos within one year from release date) are displayed
in the prominent "New Release" section and are organized alphabetically by
title. Other videocassettes are displayed alphabetically by title within
categories such as "Action," "Comedy" and "Drama." The Company is committed to
offering as many copies of new releases as necessary to be competitive within
its markets. Promotional strategies that the Company believes have been highly
successful include (i) the limited time guarantee of the availability of a
popular new release, (ii) allowing customers to reserve certain video titles up
to one week in advance, and (iii) allowing customers to rent and return
videocassettes at any of the Company's stores.
Videocassette Sales. The Company offers new and previously viewed
videocassettes for sale. Previously viewed videocassettes are pulled from the
shelves several weeks after the release date depending on customer demand and
are sold to customers at a discount price.
6.
<PAGE>
Video Games. Each of the Company's stores offers from 300 to 1,000 video game
cartridges, consisting of 250 to 600 different titles. Revenues generated from
game cartridges were on a continuous upward trend from 1992 to 1995. A decline
in video game rentals began in 1995 and continued through 1996 due to consumer
confusion on the direction of new hardware and formats. Video game rentals
improved in 1997 and 1998 based on consolidation of formats by the major
suppliers. The Company anticipates growth of its video game business and
broadening its selection of game cartridges to include successful new formats as
they become available and grow in popularity.
Digital Video Discs. DVDs are an alternative format to VHS tapes that offer
consumers digital picture and sound and additional features such as enhanced
content and interactivity. The DVD format was introduced in late 1997, and since
then more than 1.3 million DVD players have reportedly been sold. The Company
began its rollout of the DVD format in its stores in December 1997 and currently
carries the format in approximately 47 percent of its stores. The company
anticipates the format will be available chain wide by January 31, 2000. DVDs
have shown to be the fastest growing new category introduced by the Company due
to increased interest in older movie titles as a result of the substantial
improvement in picture and sound quality over VHS.
Other Products. In addition to videocassette rentals and sales, video game
rentals and DVDs, the Company's stores also rent videocassette players, video
game players, digital video discs, laser discs and audio books in selected
stores and sell a variety of video accessories and confectionery items.
Store Operations and Locations
The Company's stores range in size from 2,125 square feet to 13,690 square
feet and offer between 6,000 to 14,000 videocassettes consisting of from 4,000
to 10,000 different titles. The Company's superstores feature television
monitors showing movie previews and promotions of coming attractions and
displays posters and stand-up displays promoting movie titles. The Company's
stores are open 365 days a year from 10:00 a.m. to 11:00 p.m.
The Company's management has substantial experience in the video retail
industry, including specific expertise in the various geographical areas in
which the Company operates its stores. The Company's management actively
monitors the inventory, pricing and rental period of movie titles through its
real-time management information system. The new release inventory is actively
managed, including the redistribution of certain copies to other stores to meet
greater demand. The Company does not consider backlog meaningful to its
business.
The following table provides the number of stores in each of the states in
which the Company owned and operated retail video stores as of May 10, 1999:
<TABLE>
<CAPTION>
Number of
State Stores
------------- ---------
<S> <C>
Oregon 32
California 30
Washington 22
Connecticut 14
Idaho 9
Minnesota 9
Nevada 7
Iowa 6
Colorado 4
</TABLE>
7.
<PAGE>
<TABLE>
<S> <C>
Maine 2
South Dakota 1
Massachusetts 1
---------
Total 137
---------
</TABLE>
The Company has recently entered into an agreement to sell 50 of its video
stores located in the states of Washington and Oregon. See "--Recent
Developments."
Suppliers
The Company has supply agreements with its two major suppliers, Ingram
Entertainment, Inc. ("Ingram") and Rentrak Corporation ("Rentrak"). The
agreement with Ingram requires the Company to purchase, under certain
conditions, approximately 80% of its yearly requirements for the video rental,
video sell-through, and video game products. The Ingram supply agreement expires
on June 30, 2001 unless terminated earlier by Ingram. Pursuant to the revenue
sharing agreement with Rentrak, the Company is obligated to pay Rentrak revenue
sharing and handling fee payments that are equal to on an annual basis at least
10% of total gross rental revenues. The Rentrak revenue sharing agreement
expires on May 31, 2016.
If the relationships with Ingram and Rentrak were terminated, the Company
believes that it could readily obtain its necessary inventory of videocassette
and video games from a number of other suppliers at prices and on terms
comparable to those available from Ingram or Rentrak. However, there can be no
assurance that any replacement supplier would provide service or payment terms
as favorable as those provided by Ingram or Rentrak.
Inventory Management and Management Information Systems
Inventory Management. The Company maintains an extensive inventory control
system to assist management in decisions involving purchase, distribution and
disposition of videocassettes and game cartridges. Each videocassette and game
cartridge is placed in a clear protective case which is affixed with a magnetic
security device and an optical bar code. The Company conducts physical
inventories on a quarterly basis. The inventory of videocassettes is
redistributed among the various store locations based on demand at certain
locations.
Management Information Systems. It is critically important in video retailing
to have accurate and timely information relating to videocassette rentals and
sales, individual title performance, customer demographics, shrinkage, overdue
rentals and various other financial and operational data. Video City began
development of a sophisticated management information system in early 1992 and
fully implemented its system in all superstores by mid-1994. Each superstore
uses a point-of-sale system ("POS") where all rental and sales transactions are
recorded using scanned bar code information. The management information system
electronically communicates real-time data from the POS system of all of the
Company's stores and makes the daily sales, inventory and other data immediately
available to the Company's management. The Company then uses the data to manage
inventory and monitor customer demand and rental trends to maximize each store's
profitability. The data also provides individual customer and demographic
information which is used for direct marketing to these customers, and is also
used for audit and loss prevention purposes. This POS system is a sophisticated
and complete system that can be quickly implemented in new stores due to
standard file layouts and thorough documented procedures for training and staff
utilization.
Each of the Company's stores' POS system is linked via the Internet to a
central office computer enabling all product and customer data to be shared
real-time. This sharing allows product to be rented from one store and
8.
<PAGE>
returned to another while tracking the product through the system. The Company
believes it is the only major chain of superstores that actively uses the real-
time sharing so customers can rent and return at any location, and has
successfully promoted it to gain market share. The "linked" capability also
allows stores to locate rental and sale items which may not be available at one
location but are available at another location.
Marketing and Advertising
The Company advertises through television, radio, newspaper and direct mail.
Suppliers and movie studios provide advertising credits and market development
funds for certain movie titles that the Company uses to purchase the television,
radio, and newspaper advertising. Although there can be no assurance, the
Company believes that its suppliers and the movie studios will continue to
provide funds for the Company's advertising expenditures through advertising
credits and market development funds. In addition, the Company benefits from
the advertising and marketing by studios and theaters in connection with their
efforts to promote specific videos and films. The Company's advertising
emphasizes signature attributes such as movie reservations, rent and return at
any location, membership good at all locations, and guaranteed availability of
certain key new releases. The Company believes that these promotional marketing
strategies have helped increase market share and customer loyalty.
Competition
The video retail industry is highly competitive. The Company competes with
other local, regional and national chains, such as Blockbuster Inc. and
Hollywood Entertainment Corporation ("Hollywood Entertainment"), and with
supermarkets, mass merchants, mail order companies and other retailers. Some of
the Company's competitors have significantly greater financial and marketing
resources and name recognition, although the Company is generally the largest or
second largest video retailer in most of its geographic markets.
The Company believes the principal competitive factors in the video retail
industry are store location and visibility, title selection, the number of
copies of popular titles available, customer service, and, to a lesser extent,
pricing. Approximately 35 percent of the Company's stores compete directly with
stores operated by Blockbuster and/or Hollywood Entertainment, many in very
close proximity. As a result of direct competition with Blockbuster, Hollywood
Entertainment and others, rental pricing of videocassettes and greater
availability of new releases may become a more significant competitive factor in
the Company's business, which could have an adverse impact on the results of
operations of the Company.
The Company also competes with cable television, satellite and pay-per-view,
in which subscribers pay a fee to see a movie selected by the subscriber.
Existing pay-per-view services offer a limited number of channels and movies and
are only available to households with a direct broadcast satellite or a cable
converter to unscramble incoming signals. Recent technological developments
could permit cable companies, direct broadcast satellite companies, telephone
companies, and other telecommunications companies to transmit a much greater
number of movies to homes at more frequently scheduled intervals throughout the
day. Ultimately, these technologies could lead to the availability of movies to
consumers on demand. Certain cable and other telecommunications companies have
tested "video on demand" service in some markets. Video on demand service would
allow a viewer to pause, rewind and fast forward movies. Based upon publicly
available information, the Company believes these tests have been unsuccessful.
The Company also believes movie studios have a strong interest in maintaining a
viable movie rental business because the sale of videocassettes to video retail
stores represents the studio's largest source of revenue. As a result, the
Company believes movie studios will continue to make movie titles available to
cable television and other distribution channels only after the revenue has been
derived from the sale of videocassettes to video stores. Substantial
technological developments will be necessary in order for pay-per-view to match
the low price, viewing convenience and selection available through video rental.
9.
<PAGE>
Seasonality
The video retail industry generally experiences relative revenue declines in
April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
Service Marks
The Company owns a United States federal registration for its service mark
"Video City." The Company considers its service mark to be important to its
continued success.
Employees
As of January 31, 1999 the Company had approximately 1,096 employees of whom
approximately 1,055 were located at the retail stores and the remainder were at
the Company's corporate administrative office. Due to recent acquisitions, as
of March 31, 1999, the Company had approximately 1,560 employees of whom
approximately 1,516 were located at the retail stores and the remainder were at
the Company's corporate administrative office. The Company is not currently a
party to any collective bargaining agreements. The Company believes that its
relationships with its employees are generally good.
SPECIAL CONSIDERATIONS
In addition to the other information set forth in this Annual Report, persons
who may own or intend to own securities of the Company should carefully consider
the following special considerations:
Growth Strategy
The Company's long-term strategy is to grow primarily through acquisitions of
existing stores and secondarily through new store openings. The successful
acquisition of existing stores and opening of new stores depends on numerous
conditions, some of which are described below, and requires significant amounts
of capital and other resources. In the past, the Company's growth strategy has
been funded through proceeds from bank debt, seller financing, cash from
operations and use of the Company's common stock as acquisition consideration.
The Company currently intends to finance future acquisitions and new store
openings with funds from borrowings, including the Company's credit facility
through assumption of liabilities by the Company and net proceeds from the sale
of debt or equity financing. There can be no assurance that these and other
sources of capital will be available to the Company in the future in order for
the Company to pursue its growth strategy.
The Company's growth is dependent on a number of factors, including its
ability to hire, train and assimilate management and store-level employees, the
adequacy of the Company's financial resources, the Company's ability to
successfully compete in the new markets, to locate suitable store sites, to
negotiate acceptable lease terms, to adapt its purchasing, management
information and other systems to accommodate expanded operations and to
assimilate the new operations into the existing operations of the Company.
There can be no assurance that the Company will be able to achieve continued
growth or that the Company will be profitable as a result of such growth.
Continued growth will place increasing pressure on the Company's management.
The failure to manage successfully its planned growth would adversely affect the
Company's business. There can be no assurance that the Company's newly
developed or acquired stores will
10.
<PAGE>
achieve sales and profitability comparable to the Company's existing stores.
Acquisitions
The Company's ability to grow through acquisitions and operate the acquired
stores at the desired levels of sales and profitability depends on many factors,
including the Company's ability to identify new markets in which to successfully
compete, the availability of suitable acquisition candidates at prices that the
Company considers reasonable, the Company's ability to integrate the acquired
stores into the Company's existing operations and the Company's ability to
manage the expansion into the new markets. Certain of the Company's larger,
better-capitalized competitors may seek to acquire some of the same video
specialty stores that the Company seeks to acquire. Such competition for
acquisitions would be likely to increase acquisition prices and related costs
and result in fewer acquisition opportunities, which could have a material
adverse effect on the Company's growth. Moreover, there can be no assurance
that the Company will be able to fully integrate the acquired stores' systems
into the Company's existing systems and procedures, or that once integrated, the
Company's acquired stores will achieve levels of revenues or profitability
comparable to those achieved by the Company's existing operations, or otherwise
perform as expected. The inability of the Company's acquired stores to achieve
the level of revenues and cash flow desired by the Company will have a material
adverse effect on the Company's financial condition and results of operations.
New Store Openings
The Company's growth through new store openings depends on the Company's
ability to identify suitable store sites, its ability to compete effectively
against competitors for such sites, its ability to negotiate satisfactory leases
and implement cost-effective development plans for such new stores and its
ability to hire, train and assimilate new store managers and other personnel.
There can be no assurance that the Company can successfully pursue its growth
strategy through new store openings or that any of the Company's future new
stores will achieve levels of revenues or profitability comparable to those
achieved by the Company's existing stores.
Ability to Manage Growth
The Company is currently experiencing a period of rapid growth and expansion.
The Company acquired 114 video stores during the fiscal year ended January 31,
1999 and may consummate additional acquisitions in the future. Such growth and
expansion has placed and will continue to place a significant strain on the
Company's management, services and support operations, administrative personnel
and other resources. The Company's ability to manage such growth effectively
will require the Company to continue to improve its operational, management and
financial systems and controls and to hire, train, motivate and manage its
employees. In addition, the Company may be unable to retain or hire the
necessary personnel or acquire other resources necessary to service such growth
adequately. There can be no assurance that the Company will be able to
effectively manage this rapid growth and expansion. In the event the Company is
unable to effectively manage its growth and expansion, there may be a material
adverse effect on the Company's business and results of operations.
Competition and Technological Obsolescence
The video retail industry is highly competitive. The Company competes with
other local, regional and national chains, such as Blockbuster and Hollywood
Entertainment, and with mass merchants, mail order companies and other
retailers. Some of the Company's competitors have significantly greater
financial and marketing resources and name recognition, although the Company is
generally the largest or second largest video retailer in most of its geographic
markets.
11.
<PAGE>
The Company believes the principal competitive factors in the video retail
industry are store location and visibility, title selection, the number of
copies of popular titles available, customer service, and, to a lesser extent,
pricing. Approximately 35 percent of the Company's stores compete directly with
stores operated by Blockbuster and/or Hollywood Entertainment, many in very
close proximity. As a result of direct competition with Blockbuster, Hollywood
Entertainment and others, rental pricing of videocassettes and greater
availability of popular releases may become a more significant competitive
factor in the Company's business, which could have an adverse impact on the
results of operations of the Company.
The Company also competes with cable television, satellite and pay-per-view,
in which subscribers pay a fee to see a movie selected by the subscriber.
Existing pay-per-view services offer a limited number of channels and movies and
are only available to households with a direct broadcast satellite or a cable
converter to unscramble incoming signals. Recent technological developments
could permit cable companies, direct broadcast satellite companies, telephone
companies, and other telecommunications companies to transmit a much greater
number of movies to homes at more frequently scheduled intervals throughout the
day. Ultimately, these technologies could lead to the availability of movies to
consumers on demand. Certain cable and other telecommunications companies have
tested "video on demand" service in some markets. Video on demand service would
allow a viewer to pause, rewind and fast forward movies. Based upon publicly
available information, the Company believes these tests have been unsuccessful.
However, technological advances or changes in the manner in which movies are
marketed, including in particular the earlier release of movie titles to pay-
per-view, including direct broadcast satellite, cable television or other
distribution channels, could make these technologies more attractive and
economical, which could have a material adverse effect on the business of the
Company. See "--Competition."
Fluctuations in Operating Results
The Company has experienced in the past, and may continue to experience in the
future, fluctuations in its operating results. Future operating results may be
affected by many factors, including the performance of new or acquired stores,
the quality and number of new release titles available for rental and sale and
the expense associated with the acquisition of new release titles, one-time
charges associated with acquisitions or other events, changes in comparable
store revenue, additional and existing competition, marketing and advertising
programs, weather, special or unusual events, seasonality and other factors that
may affect retailers in general. See "--Seasonality." No assurance can be
given that the Company will have positive earnings in any quarter, or that
earnings in any particular quarter will not fall short of either a prior fiscal
quarter or investors' expectations.
Reliance on Certain Suppliers
The Company either purchases or leases approximately 80% of its supply of new
release videos, in the aggregate, from two suppliers, Ingram and Rentrak. If the
relationships with Ingram and Rentrak were terminated, the Company believes that
it could readily obtain its necessary inventory of videocassette and video games
from a number of other suppliers at prices and on terms comparable to those
available from Ingram or Rentrak. However, there can be no assurance that any
replacement supplier would provide service or payment terms as favorable as
those provided by Ingram or Rentrak. Failure to obtain comparable service,
support or payment terms from an alternative supplier could have a material
adverse effect on the Company's financial condition and results of operations.
Dependence on Key Personnel
The Company's business and operations are dependent on the continued efforts
of Robert Y. Lee, its Chairman of the Board and Chief Executive Officer, and its
other executive officers. If any of these individuals become unwilling or unable
to continue their employment or association with the Company, or if the Company
is
12.
<PAGE>
unable to attract and retain other skilled employees when needed, the Company's
business could be materially, adversely affected. The Company maintains a key
person life insurance policy on Robert Y. Lee.
Stock Price Volatility
In recent years, the stock market has experienced significant price and volume
fluctuations. These fluctuations, which are often unrelated to the operating
performances of specific companies, have had a substantial effect on the market
price of stocks, particularly for many small capitalization companies.
Accordingly, the factors described in this Special Considerations section or
market conditions in general may cause the market price of the Company's Common
Stock to fluctuate, perhaps substantially.
ITEM 2. PROPERTIES
All of the Company's stores are leased pursuant to leases with initial terms
ranging from three to ten years, with varying option renewal periods. Most of
the leases are "triple net" requiring the Company to pay all taxes, insurance,
and common area maintenance expenses associated with the properties. See
"Business -- Store Operations and Locations."
The Company leases its corporate headquarters located in Torrance, California
pursuant to a lease with an initial term expiring September 2002. This facility
consists of approximately 9,300 square feet of office space. The Company
considers its corporate offices and stores to be generally suitable and adequate
for their intended purposes.
The Company's corporate headquarters were relocated from Bakersfield,
California to Torrance, California during November 1998. The Company will
continue to lease the Bakersfield facility as a regional office primarily for
various support staff and storage until the expiration of the lease in January
2000.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted no matters to a vote of stockholders during the fourth
quarter of the fiscal year ended January 31, 1999.
13.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Lee Video City was privately held until its merger with and into Prism on
January 8, 1997. Prism's common stock did not have an established public
trading market at the time of the merger. Commencing in February 1998, the
Company's Common Stock has traded on the NASD Electronic Bulletin Board under
the symbol "VDCT." See "Business--General."
The following sets forth for the periods indicated the high and low last sale
prices of the Company's Common Stock as reported on the NASD Electronic Bulletin
Board:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal Year Ended January 31, 1999:
First Fiscal Quarter $1.500 $.250
Second Fiscal Quarter $1.500 $.656
Third Fiscal Quarter $1.000 $.200
Fourth Fiscal Quarter $1.937 $.375
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
As of May 10, 1999, there were approximately 540 record holders of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since its
inception and has no current plans to pay dividends on its Common Stock in the
foreseeable future. The Company intends to reinvest future earnings, if any, in
the development and expansion of its business. The Company's current credit
facility prohibits the payment of dividends on the Company's Common Stock. Any
future determination to pay dividends will depend upon the Company's combined
results of operations, financial condition and capital requirements and such
other factors deemed relevant by the Company's Board of Directors.
Recent Sales of Unregistered Securities
On December 1, 1998, the Company issued warrants to purchase an aggregate of
105,000 shares of the Company's Common Stock to three consultants as
consideration for certain consulting services provided to the Company. All of
the warrants were exercisable at $2.00 per share.
On December 28, 1998, the Company issued a total of 76,000 shares of the
Company's Series B Convertible Redeemable Preferred Stock ("Series B Preferred
Stock") to Victor J. Cianci and Evvy R. Cianci as part of the consideration for
the acquisition of Cianci's Videoland, Inc ("Videoland"). The shares of Series B
Preferred Stock are convertible at a conversion price of $3.1667 per share. On
December 28, 1998, the Company also issued 25,000 shares its Common Stock to the
Company's financial advisor as part of the compensation for financial advice
rendered in connection with the acquisition.
14.
<PAGE>
On January 31, 1999, the Company issued a total of 24,497 shares of its Common
Stock to two of the Company's vendors in satisfaction of approximately $49,000
owed to such vendors by the Company.
The Company believes that the issuance of securities in each of the foregoing
transactions were exempt from registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving a public
offering.
Effective as of January 31, 1999, the Company issued 7,000 shares of its
Series AA Convertible Redeemable Preferred Stock to the holders of the Series A
Convertible Redeemable Preferred Stock in exchange for an equivalent number of
previously outstanding shares of the Company's Series A Convertible Redeemable
Preferred Stock. The Company believes that the exchange was exempt pursuant to
Section 3(a)(9) of the Securities Act of 1933, as amended.
15.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the years ended January
31, 1999 and 1998 and December 31, 1996, 1995, and 1994 have been derived from
the financial statements. As a result of the reverse acquisition of Prism, the
Company changed its fiscal year from December 31 to January 31 effective
February 1, 1997. The information set forth below should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and the Company's financial statements and notes thereto.
<TABLE>
<CAPTION>
Month
ended
Year ended January 31, January 31, Year ended December 31,
1999 1998 1997 1996 1995 1994
----------- ----------- ----------- ------- ------- -------
STATEMENT OF OPERATIONS DATA: (In thousands of dollars, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $24,436 $10,212 $ 940 $11,441 $14,151 $13,164
Operating income (loss)................ (1,263) (2,423) (105) (418) 285 (379)
Net income (loss)...................... 11 (2,976) (133) (43) (586) (1,310)
Net income (loss) per share............ 0.00 (0.30) (0.03) (0.01) (0.14) (0.32)
Weighted average shares used
in computation........................ 12,091 9,771 4,569 4,234 4,127 4,080
OPERATING DATA:
Number of stores at end of period...... 128 18 18 18 29 20
Increase (decrease) in same store
revenues(1)........................... 1.6% 4.4% (1.2)% (1.9)% 5.2%
<CAPTION>
January
January 31, 31, December 31,
1999 1998 1997 1996 1995 1994
----------- ----------- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (In thousands of dollars, except per share and operating data)
Cash and cash equivalents.............. $ 172 $ 28 $ 1,247 $ 59 $ 418 $ 93
Videocassette rental inventory......... 21,120 2,795 2,127 2,189 3,354 3,529
Total assets........................... 38,253 6,599 11,080 4,010 7,335 7,705
Credit facility........................ 16,045 - - - - -
Long-term debt, less current portion... 1,637 2,043 3,341 5,804 7,954 9,028
Total liabilities...................... 32,985 7,298 8,844 8,167 11,449 11,458
Stockholders' equity (deficit)......... 5,267 (699) 2,236 (4,157) (4,114) (3,753)
</TABLE>
_____________
(1) The increase (decrease) in same store revenues compares revenues from
stores opened and owned by the Company for twelve full months. (Including
relocations)
16.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion should be read in conjunction with the Company's
financial statements and the related notes thereto and the other financial
information included elsewhere in this Annual Report. When used in the
following discussions, the words "believes", "anticipates", "intends", "expects"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, which could
cause actual results to differ materially from those projected, including, but
not limited to, those set forth in "Business--SpecialConsiderations." Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date hereof.
Overview
Corporate History. Lee Video City opened its first video superstore in
1990. The Company owned and operated 29 superstores from the end of 1994 until
June 1996 when it sold its eleven stores outside of California. The eleven
stores were sold to reduce debt and restructure Lee Video City's operations by
focusing its attention on the "core stores" in California. On January 8, 1997,
Lee Video City merged with and into Prism. Prism had been engaged in the in-
house production of theatrical and television films and other programming for
distribution to the home video, pay and basic cable, network television and
syndication, and theatrical markets worldwide. Prism also acquired from third
parties rights to such programming, primarily for distribution to the home video
market. Upon consummation of the merger, the surviving Delaware corporation
changed its name to "Video City, Inc." See "Business--General." Prior to the
merger, Lee Video City's fiscal year ended on December 31. After the merger,
the Company retained Prism's year-end of January 31.
General Business. The Company's revenue consists primarily of rental
revenue and product sales revenue. Rental revenue includes revenue from rentals
of videos, video games, video players and video game machines and extended
viewing fees. Product sales revenue are derived from sales of new and used
videocassettes, including excess rental inventory, concessions and accessory
items.
Operating costs and expenses include operating expenses, cost of product
sales, and general and administrative expenses. Operating expenses consist of
amortization of videos purchased for rental, fees and lease expenses for leased
videos and all store expenses, including occupancy, payroll, store opening
expenses and direct store advertising and promotion expenses.
Videocassette rental inventory, which includes video games, is recorded at
cost and amortized over its estimated economic life. Effective February 1,
1998, the Company adopted a new method for amortizing its base stock (copies one
through three of each title per store) of rental videocassettes. Base stock is
now amortized over a 60 month period on a straight-line basis to a salvage value
of $6 per tape, whereas prior to the change, base stock was amortized over a 36
month period on a straight-line basis to a salvage value of $6 per tape. The
new method of amortization was adopted because the Company believes that
decelerating expense recognition for its base stock more accurately matches its
revenue stream and useful economic life. The fourth through ninth copies of
each title per store are amortized over a 36 month period on an accelerated
basis to a salvage value of $6 per tape. The tenth and any succeeding copies of
each title per store are amortized over 9 months on a straight-line basis to a
salvage value of $6 per tape. The method for amortizing copies four and any
succeeding copies of each title per store has remained the same. The effect of
the change on base stock amortization for the year ended January 31, 1999 was a
reduction of amortization of videocassette rental inventory of approximately
$570,000.
Certain videocassettes in the rental inventory are leased under a Revenue
Sharing Agreement with Rentrak Corporation. Under its agreement with Rentrak,
pursuant to which the Company leases videos for rental to its customers, the
Company pays a handling fee of $8.30 for each videocassette. During the revenue
sharing
17.
<PAGE>
period, which is one year, the movie studio that supplies the video to Rentrak
owns the video, and Rentrak and the Company on a predetermined basis share the
rental revenues. The Company may also sell excess copies of a video title and
share the sale proceeds with Rentrak on a predetermined basis. At the end of the
revenue sharing period for a video title, the Company may purchase remaining
copies of that title generally for less than $5 per copy. The handling fee per
video is amortized on a straight-line basis over the revenue sharing period, and
revenue sharing payments are expensed when incurred.
Cost of sales and leased product is comprised of the cost of videos sold to
customers and the cost of concessions and other products sold in the Company's
stores. The cost of a video is measured at its amortized basis when sold, if
previously used as a rental video, or at the Company's cost if purchased for
sell-through, or at a varying basis if a leased product, depending upon when in
the revenue sharing period it is sold.
General and administrative expenses are comprised of corporate office
expenses, including office equipment and facilities costs, management salaries
and benefits, professional fees and all other items of corporate expense.
Results of Operations
The following table sets forth for the periods indicated (i) statement of
operations data expressed as a percentage of total revenues and (ii) the number
of stores open at the end of each period.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, January 31, December 31,
1999 1998 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Operating costs and expenses:
Store operating expenses 56.0% 43.7% 55.9%
Amortization of videocassette rental
Inventory 10.4% 18.9% 17.4%
Cost of product sales 13.5% 7.5% 13.6%
Cost of leased product 5.7% 4.1% 4.9%
General and administrative 19.6% 19.9% 12.0%
Nonrecurring writedown of Film Library 29.7%
Total Operating costs and expenses: 105.2% 123.7% 103.7%
Operating income (loss) (5.2)% (23.7)% (3.7)%
Non-operating expenses 5.5% 5.4% 3.3%
Loss before income taxes (10.7)% (29.1)% (0.4)%
Number of stores open at end of period 128 18 18
Weighted average number of stores 51 18 22
</TABLE>
18.
<PAGE>
Year Ended January 31, 1999 Compared to Year Ended January 31, 1998
Revenues. Revenues for the fiscal year ended January 31, 1999 increased
$14,224,000 or 139%, to $24,436,000 compared to $10,212,000 for the fiscal year
ended January 31, 1998 ("fiscal 1998"). The increased revenues were primarily
attributable to the acquisition of 114 stores during fiscal 1999. Same store
revenues for fiscal 1999 increased by approximately 1.6% compared to fiscal
1998. The Company ended fiscal 1999 with 128 stores operating in 9 states
compared to 18 stores operating in California at the end of fiscal 1998.
Management fee income for fiscal 1999 totaled $607,733 compared to $205,000 for
fiscal 1998. The increase was mainly due to the management fees earned from
managing Videoland's stores for the 10 weeks prior to its acquisition.
Store Operating Expenses. Store operating expenses for fiscal 1999
increased $9,215,000, or 207%, to $13,675,000 compared to $4,460,000 for fiscal
1998. The increase was primarily attributable to acquisition of 114 stores
during fiscal 1999. Store operating expenses as a percentage of total revenues
were 56.0% for fiscal 1999 compared to 43.7% for fiscal 1998. The increase in
store expenses as a percentage of total revenue for fiscal 1999 was primarily
due to assimilation, payroll, training, and inventory expenses related to the
acquired stores.
Amortization of Videocassette Rental Inventory. Amortization of
videocassette rental inventory for fiscal 1999 increased $614,000 or 31.8%, to
$2,542,000 compared to $1,928,000 for fiscal 1998. The primary reason for the
increase was the addition of 114 stores acquired during fiscal 1999, partially
offset by the effect of a change in the amortization period for base inventory
(copies 1-3) from 36 months to 60 months. Amortization of videocassette rental
inventory as a percentage of total revenue was 10.4% in fiscal 1999 compared to
18.9% in fiscal 1998. The decrease was primarily due to the Company purchasing a
lower proportion of purchased videocassettes versus leased videocassettes in
fiscal 1999 compared to fiscal 1998.
Cost of Product Sales. The cost of product sales for fiscal 1999 increased
$2,539,000 or 333%, to $3,301,000 compared to $762,000 for fiscal 1998. This
increase was directly attributable to aggregate growth in product sales of 262%
in fiscal 1999 compared to fiscal 1998.
Cost of Leased Product. Cost of leased product for fiscal 1999 increased
$975,000 or 233%, to $1,394,000 compared to $419,000 for fiscal 1998. The
increase was primarily attributable to the Company acquiring 114 stores during
fiscal 1999. Cost of leased product as a percentage of total revenue was 5.7%
in fiscal 1999 compared to 4.1% in fiscal 1998. The increase as a percentage of
total revenue was due to the higher proportion of leased videocassettes versus
purchased videocassettes in fiscal 1999 compared to fiscal 1998, in part due to
the company's increased leasing of additional titles to periodically provide
"guaranteed" rentals of popular films in all stores.
General and Administrative. General and administrative expenses for fiscal
1999 increased $2,750,000, or 135%, to $4,786,000 compared to $2,035,000 for
fiscal 1998. The increase was primarily attributable to incurring additional
costs for payroll, professional services, and travel to support the addition of
114 new stores during fiscal 1999. General and administrative expenses as a
percentage of total revenues decreased to 19.6% in fiscal 1999 compared to 19.9%
in fiscal 1998. The decrease was mainly the result of spreading the corporate
expenses over significantly higher revenues for that period.
Write-down of Film Library. During the fourth quarter of fiscal 1998,
management decided to dispose of the film library in order to concentrate the
Company's business on the ownership and operation of video specialty
superstores. The film library was written down by $3,030,000 to reflect it's net
realizable value at January 31, 1998. On March 25, 1998, the Company sold the
rights to its library of 47 feature films and other properties and related
accounts receivable to an entity owned and controlled by Stephen C. Lehman, a
member of the Company's board of
19.
<PAGE>
directors, for $1,350,000 in cash. The film library was stated at the net
realizable value at January 31, 1998. The library was the principal asset of
Prism prior to the merger in January 1997 of Lee Video City with and into Prism.
Under the agreement by which the Company sold its film rights, the Company had 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. The Company did not exercise this right.
Interest Expense. Net interest expense increased $1,011,000, or 183.2%, to
$1,563,000 for fiscal 1999 compared to $552,000 for fiscal 1998. The increase
in interest expense was primarily due to the increase in borrowings related to
the addition of the credit facility entered into with FINOVA Capital Corporation
("FINOVA") in March of 1998. The facility was used primarily to fund the cash
portion of the March 25, 1998 and September 30, 1998 acquisitions and to pay off
other short term debt. In addition, the Company incurred a write off of the
unamortized loan fees related to the FINOVA credit facility when it was paid off
on December 28, 1998 with proceeds from the new $30 million revolving credit
facility with BankBoston Retail Finance Inc. ("BankBoston").
Other. Other (income) expense was $(221,000) for fiscal 1999 compared to
$0 for fiscal 1998 mainly due to the receipt by the Company of a break-up fee in
June 1998 in connection with the acquisition agreement entered into with Planet
Video, Inc.
Income Taxes. Statement of Financial Accounting Standards No. 109
requires a valuation allowance to be recorded when it is more likely than not
that some or all of the deferred tax assets of a Company will not be realized.
At January 31, 1998, a valuation allowance for the full amount of the net
deferred tax asset in the amount of $2,195,397 was recorded because of pre-
fiscal 1998 losses and uncertainties as to the amount of taxable income that
would be generated in future years. Due to significant acquisitions consummated
during the year, the Company has determined from its projections that it is more
likely than not that future taxable income would be sufficient to enable the
Company to realize its deferred tax assets and has accordingly, reversed the
full amount of the valuation allowance as of January 31, 1999.
Year Ended January 31, 1998 Compared to Year Ended December 31, 1996
Revenues. Revenues for the fiscal year ended January 31, 1998 ("fiscal
1998") decreased $1,229,000 or 10.7%, to $10,212,000 compared to $11,441,000 for
the fiscal year ended December 31, 1996 ("fiscal 1996"). The decreased revenues
were primarily attributable to the inclusion in fiscal 1996 of the eleven stores
sold by the Company in June 1996. Same store revenues increased 4.4% in fiscal
1998, which was attributable to the addition of new sell-through products and
the strategic relocation of three stores.
Amortization of Videocassette Rental Inventory. Amortization of
videocassette rental inventory for fiscal 1998 decreased $59,000 or 3.0%, to
$1,928,000, compared to $1,987,000 for fiscal 1996. Amortization of
videocassette rental inventory as a percentage of total revenue was 18.9% in
fiscal 1998 compared to 17.4% in fiscal 1996. The increase as a percentage of
total revenue was due to a higher proportion of purchased videocassettes versus
leased videocassettes in fiscal 1998 compared to fiscal 1996, and an increased
number of "hit" videocassettes purchased for each location, offset partially by
the change in amortization method to allow for a $6 salvage value.
Cost of Product Sales. The cost of product sales as a percentage of total
revenue decreased to 7.5% for fiscal 1998 compared to 13.6% for fiscal 1996.
This decrease was primarily due to the Company increasing its sales of new
videocassettes and accessories for fiscal 1998 as compared to fiscal 1996, which
provided an improvement in the margins, and a return to normal holding periods
for previously viewed tapes resulting in a
20.
<PAGE>
lower net book value at time of sale.
Cost of Leased Product. Cost of leased product for fiscal 1998 decreased
$137,000, or 24.6%, to $419,000 compared to $556,000 for fiscal 1996. The
decrease was primarily attributable to the inclusion in fiscal 1996 of the
eleven stores sold by the Company in June 1996. Cost of leased product as a
percentage of total revenue was 4.1% in fiscal 1998 compared to 4.9% in fiscal
1996. The decrease as a percentage of total revenue was due to the lower
proportion of leased videocassettes versus purchased videocassettes in fiscal
1998 compared to fiscal 1996.
Store Operating Expenses. Store operating expenses for fiscal 1998
decreased $1,931,000, or 30.2%, to $4,460,000 compared to $6,391,000 for fiscal
1996. The decrease was primarily attributable to the inclusion in fiscal 1996
of the 11 stores sold by the Company in June 1996. Store operating expenses as
a percentage of total revenues were 43.7% for fiscal 1998 compared to 55.9% for
fiscal 1996 due primarily to higher personnel costs and the payment of
settlement fees of $380,000 to landlords for the termination of two occupancy
leases related to the relocation of stores in fiscal 1996.
General and Administrative. General and administrative expenses for fiscal
1998 increased $667,000, or 48.8%, to $2,035,000 compared to $1,368,000 for
fiscal 1996. General and administrative expenses as a percentage of total
revenue were 19.9% in fiscal 1998 compared to 12.0% in fiscal 1996. The
increase was attributable to the professional services associated with the
merger with Prism Entertainment Corporation and the incremental cost of hiring
two management employees of Prism Entertainment Corporation following the
merger.
Nonrecurring Writedown of Film Library. During the fourth quarter of
fiscal 1998, management decided to dispose of the film library in order to
concentrate the company's business on the ownership and operation of video
specialty stores. The film library was written down by $3,030,000 to reflect
its net realizable value at January 31, 1998.
Gain on Disposition of Assets. The gain on disposition of assets in fiscal
1996 is primarily related to the sale of eleven stores outside of California in
June 1996.
Interest Expense. Net interest expense decreased $140,000, or 20.2%, to
$552,000 for fiscal 1998 compared to $692,000 for fiscal 1996. The decrease in
interest expenses was due to the conversion of debt to equity in January 1997 of
approximately $3,850,000 and paydown of approximately $2,000,000 primarily
through collection of accounts receivable, partially offset by the assumption by
the Company of the note payable to Imperial Bank in the amount of $3,066,000 in
January 1997.
Other. Other (income) expense of $(17,000) in fiscal 1996 was attributable
to miscellaneous non-operating royalties.
Income Taxes. The Company's effective income tax rate varied from the
statutory federal tax rate as a result of operating losses for which no benefit
is recognized due to the valuation allowance on the net deferred tax asset. A
full valuation allowance has been established as the Company cannot determine
that it is more likely than not that the deferred tax asset will be realized.
One Month Ended January 31, 1997 Compared to One Month Ended January 31, 1996
Revenues. Revenue for the one month ended January 31, 1997 decreased
$145,000, or 13.4%, to $940,000 compared to $1,085,000 for the one month ended
January 31, 1996. The reason for the decrease was the sale of the eleven stores
by the Company in June 1996. Same store revenue, however, for the one month
ended January 31, 1997 was up $131,000, or 19.2%, compared to the one month
ended January 31, 1996.
21.
<PAGE>
Amortization of Videocassette Rental Inventory. Amortization of
videocassette rental inventory for the one month ended January 31, 1997
decreased $18,000, or 14.0%, to $111,000 compared to $129,000 for the one month
ended January 31, 1996. The primary reason for the decrease was the sale of
eleven stores by the Company in June 1996.
Cost of Product Sales. Cost of product sales for the one month ended
January 31, 1997 increased $71,000 to $136,000 compared to $65,000 for the one
month ended January 31, 1996. The increase was primarily due to the Company's
expansion of its sell-through product lines in its stores.
Cost of Leased Product. Cost of leased product for the one month ended
January 31, 1997 decreased $64,000, or 63.6%, to 36,000 compared to $99,000 for
the one month ended January 31, 1996. The decrease was due to the Company
leasing a lower proportion of videocassettes versus purchasing videocassettes in
January 1997 compared to January 1996.
Store Operating Expenses. Store operating expenses for the one month ended
January 31, 1997 decreased $138,000, or 23.8%, to $439,000 compared to $577,000
for the one month ended January 31, 1996. Store operating expenses as a
percentage of total revenues was 46.7% in January 1997 compared to 53.1% in
January 1996. The decrease was primarily due to lower personnel costs and other
controllable expenses.
General and Administrative. General and Administrative expenses for the
one month ended January 31, 1997 increased $196,000 to $323,000 compared to
$127,000 for the one month ended January 31, 1996. The increase was primarily
due to costs related to the merger of Lee Video City with and into Prism.
Interest Expense. Interest expense for the one month ended January 31,
1997 decreased $31,000, or 40.2%, to $46,000 compared to $77,000 for the one
month ended January 31, 1996. The decrease in interest expense was due to the
Company having approximately $3,750,000 less in debt in January 1997 compared to
January 1996.
Net Loss. The net loss for the one month ended January 31, 1997 of
$133,000 compared to net income for the one month ended January 31, 1996 of
$28,000 was attributable to the increased general and administrative expenses
related to the merger of Lee Video City with and into Prism.
Results of Operation of Prism. Prism's operations for the period from
January 9, 1997 through January 31, 1997 includes $1,933 of sales, operating
losses of $47,822, interest expense of $23,744, which resulted in a net loss of
$71,566.
Liquidity and Capital Resources
The Company funds its short-term working capital needs, including the
purchase of videocassettes and other inventory, primarily through cash from
operations. The Company expects that cash from operations and extended vendor
terms will be sufficient to fund future videocassette and other inventory
purchases and other working capital needs for its existing stores. As part of
its aggressive growth strategy, the Company requires greater working capital to
sustain its current level of growth. There can be no assurance, however, that
cash from operations and extended vendor terms will be sufficient to fund future
videocassette and inventory purchases and other working capital to sustain the
continued aggressive growth of the Company. In the event the Company is unable
to obtain the equity financing, debt financing or the contemplated strategic
divestiture, the Company may not have the liquidity to sustain its current rate
of growth.
Videocassette rental inventories are accounted for as noncurrent assets
under generally accepted
22.
<PAGE>
accounting principles because they are not assets which are reasonably expected
to be completely realized in cash or sold in the normal business cycle. Although
the rental of this inventory generates a substantial portion of the Company's
revenue, the classification of these assets as noncurrent excludes them from the
computation of working capital. The acquisition cost of videocassette rental
inventories, however, is reported as a current liability until paid and,
accordingly, included in the computation of working capital. Consequently, the
Company believes working capital is not as significant a measure of financial
condition for companies in the video retail industry as it is for companies in
other industries. Because of the accounting treatment of videocassette rental
inventory as a noncurrent asset, the Company anticipates that it will operate
with a working capital deficit during fiscal 2000.
The Company's primary long-term capital needs are for opening and acquiring
new stores. The Company expects to fund such needs through cash flows from
operations, the net proceeds from the possible sale of debt or equity
securities, bank credit facilities, trade credit, and equipment leases. On
December 28, 1998, the Company and its subsidiaries entered into a Loan and
Security agreement with BankBoston providing for a $30 million revolving credit
facility secured by all of the assets of Video City and its subsidiaries. The
BankBoston credit facility replaced the Company's previous $7.5 million loan
facility with FINOVA Capital Corporation. The new loan agreement provides for a
maturity date of December 29, 2001 and a per annum interest rate equal to either
(a) the base rate announced from time to time by BankBoston, N.A. plus 0.5
percent or (b) LIBOR plus 3.0 percent, at Video City's election. In addition,
Video City is obligated to pay various fees in connection with the credit
facility. The amount available for borrowing under the Line of Credit is
determined by deducting the Company's principal balance of the Line of Credit
from its borrowing base. The borrowing base is determined by multiplying the
applicable inventory advance rate and the number of units of the acceptable
inventory, net of reserves. As of December 30, 1998, Video City borrowed
$13,400,000 of which (a) $6,400,000 was used to pay off all amounts due to
FINOVA Capital Corporation, (b) $1,900,000 was used as the cash component of the
purchase price of Videoland, and (c) $3,700,000 was used to pay off certain
indebtedness and trade payables of Videoland, and (d) $800,000 was used to pay
off certain amounts owed by Video City. As of January 31, 1999, the outstanding
amount under the BankBoston credit facility was $16,045,000. As of May 14,
1999, the outstanding amount under the BankBoston credit facility was
$23,692,000, the unused portion was $6,308,000 and the availability was $70,000.
On April 22, 1999 the Company entered into an Asset Purchase Agreement with
Blockbuster Inc. pursuant to which the Company has agreed to sell to Blockbuster
Inc. substantially all of the assets of 50 of the Company's retail video stores
located in the states of Washington and Oregon for approximately $16 million in
cash. The consummation of the sale is subject to certain conditions, including
satisfactory due diligence investigations by Blockbuster Inc. and the receipt of
certain governmental and other third-party consents. The company anticipates
using the net proceeds from the sale of the assets to pay off certain of the
Company's indebtedness and to finance future acquisitions. There can be no
assurances that the contemplated asset sale will be consummated.
In conjunction with the sale of its film library on March 25, 1998, the
Company paid off in full the promissory note to Imperial Bank, which had a
balance at January 31, 1998 of $1,411,306.
Net cash provided by operating activities for fiscal 1999 decreased by
approximately $5,002,000 or 168% from fiscal 1998, primarily due to an increase
in accounts payable and accrued expenses, partially offset by an increase in
goodwill and accounts receivable. Net cash used in investing activities during
fiscal 1999 increased by $23,914,000 or 872% compared to fiscal 1998, mainly due
the inventory and fixed assets purchased through acquisitions and increased
inventory purchases to operate a larger number of stores. Net cash provided by
financing activities during fiscal 1999 was $21,866,000 compared to net cash
used of $1,447,243 during fiscal 1998. The change was mainly due to proceeds
received from the BankBoston credit facility, issuance of debt, and issuance of
preferred and common stock, partially offset by repayment of the FINOVA credit
facility loan balance.
23.
<PAGE>
Net cash provided by operating activities in the year ended January 31,
1998 increased by approximately $1,241,000 or 71.7% from the year ended December
31, 1996, primarily due to a decrease in accounts receivable, partially offset
by an increase in merchandise inventories and other assets. Net cash used in
investing activities during fiscal 1998 increased by $914,000, or 50.0% compared
to 1996, mainly due to the inclusion in 1996 of proceeds received from the sale
of certain fixed assets and increased net purchases of videocassette rental
inventory made in fiscal 1998 versus 1996. Net cash used in financing activities
during fiscal 1998 increased $1,187,000, or 331.3% compared to 1996, mainly due
to increased principal payments made on obligations secured by accounts
receivables.
General Economic Trends, Quarterly Results and Seasonality
The Company anticipates that its business will be affected by general
economic and other consumer trends. To date, the Company has not operated
during a period of high inflation. However, the Company believes that it would
generally be able to pass on increased costs relating to inflation to its
customers. Future operating results may be affected by various factors,
including variations in the number and timing of new store openings, the
performance of new or acquired stores, the expenses associated with any
acquisition of stores, the quality and number of new release titles available
for rental and sale, the expense associated with the acquisition of new release
titles, additional and existing competition, marketing programs, weather,
special or unusual events and other factors that may affect retailers in
general. Any concentration of acquisitions or new store openings and the
related costs and other expenses associated with the acquisition of stores or
opening of new stores near the end of a fiscal quarter could have an adverse
effect on the financial results for that quarter and could, in certain
circumstances, lead to fluctuations in quarterly financial results.
The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
Year 2000
The year 2000 problem is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer systems that uses time-sensitive software programming may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculation or system failures.
The Company has completed its assessment of all its information technology
systems, related computer applications, and any embedded systems contained in
the Company's buildings, equipment, and other infrastructure and has determined
that it is ready for the year 2000. Substantially all of the Company's hardware
and software systems have been verified as being Year 2000 compliant.
The Company has important and material relationships with a number of its
vendors and suppliers and has obtained written verification from these third
parties that they expect to be Year 2000 compliant in time. However, if the
Company's vendors and suppliers are unable to resolve such processing issues in
a timely manner, it could result in material financial risk to the Company.
Management has determined that the costs of addressing potential problems
are not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in the future periods. The
estimated total costs to address the Company's Year 2000 issues is approximately
$25,000 which includes the cost of upgrading software and hardware systems.
24.
<PAGE>
The reasonably most likely worst case scenario for the Company would be
the failure of its video stores' point of sale system. The Company is in the
process of developing back-up systems that do not rely on computers in response
to this unlikely event.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133") which
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. The
provisions of this statement are effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Historically, the Company has not entered
into derivatives contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of the new standard
on January 31, 2001 to affect its financial statements.
Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk sensitive instruments do not subject it to
material market risk exposures, except for such risks related to interest rate
fluctuations. The carrying value of the Company's bank debt approximates fair
value at January 31, 1999 and 1998 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Form 10-K for the
information required by Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
26.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules:
The following financial statements of Video City, Inc. (and its predecessor
Lee Video City, Inc.) are included in this Report as pages F-1 through F-30
following the signature pages:
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(b) Form 8-K
A Current Report on Form 8-K, dated December 28, 1998, was filed by the
Company on January 12, 1999 to report under Item 2 and Item 5 the acquisition of
Cianci's Videoland, Inc. and obtaining of a credit facility. An amendment to
the Form 8-K was filed by the Company on March 15, 1999 to report under Item 7
the financial statements and pro forma financial information relating to the
acquisition of Cianci's Videoland, Inc.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description
- -------- ----------------------------------------------------------------------------------------
<C> <S>
2.1 Amended Plan of Reorganization of Prism Entertainment Corporation, date October 25,
1996.(1)
2.2 Agreement and Plan of Reorganization and Merger, dated as of October 25, 1996, between
Prism Entertainment Corporation and Lee Video City, Inc., as amended.(1)
3.1 Certificate of Incorporation of the Company, as amended.(2)(5)
3.2 Bylaws of the Company, as amended.(2)
3.3 Certificate of Designations for the Company's Series A Convertible Redeemable Preferred
Stock.(5)
3.4 Certificate of Designations for the Company's Series AA Convertible Redeemable
Preferred Stock
3.5 Certificate of Designations for the Company's Series B Convertible Redeemable Preferred
Stock.(9)
4.1 Certificate of Merger of Lee Video City, Inc. into the Company.(1)
</TABLE>
27.
<PAGE>
<TABLE>
<C> <S>
10.1 Override Agreement, dated as of November 19, 1996, by and among Lee Video City, Inc.,
Robert Y. Lee, Prism Entertainment Corporation and Ingram Entertainment, Inc.(1)
10.2 Stockholders Agreement, dated as of January 8, 1997, by and among the Company, Robert
Y. Lee, Barry Collier and Ingram Entertainment, Inc.(3)
10.3 Supply Agreement, dated January 8, 1997, between the Company and Ingram Entertainment,
Inc.(3)
10.4 Escrow and Warrant Agreement, dated as of January 8, 1997, granted by Robert Y. Lee to
Ingram Entertainment, Inc. to purchase 404,403 shares of Common Stock of the Company.(3)
10.5 Warrant, dated as of January 8, 1997, to purchase 852,750 shares of Common Stock of the
Company issued to Ingram Entertainment, Inc.(3)
10.6 Stock Purchase Warrant, dated August 24, 1995, issued by Lee Video City, Inc. to
Rentrak Corporation.(3)
10.7 Stock Purchase Warrant, dated June 19, 1996, issued by Lee Video City, Inc. to Rentrak
Corporation.(3)
10.8 Employment Agreement, dated January 8, 1997, between the Company and Robert Y. Lee.(3)
10.9 Employment Agreement, dated January 8, 1997, between the Company and James Craig
Kelly.(3)
10.10 Employment Agreement, entered into in August 1998, between the Company and Timothy J.
Denari.(6)
10.11 1996 Stock Option Plan of Lee Video City, Inc.(3)
10.12 1998 Stock Option Plan.(11)
10.13 Stock Option Agreement, dated January 8, 1997, between the Company and Barry L.
Collier.(3)
10.14 Irrevocable Proxy, dated January 8, 1997, given by Barry Collier to Robert Y. Lee.(3)
10.15 Agreement of Merger and Plan of Reorganization, dated as of March 25, 1998, by and
among Video City, Inc., Video Adventures Corp., Adventures in Video, Inc. and David A.
Ballstadt.(4)
10.16 Agreement of Merger and Plan of Reorganization, dated as of March 25, 1998, by and
among Video City, Inc., Video Ballstadt Corp., KDDJ Investments, Inc. and David A.
Ballstadt.(4)
10.17 Agreement of Merger and Plan of Reorganization, dated as of March 25, 1998, by and
among Video City, Inc., Video Acquisition Corp., Leptis Magna, Inc. d/b/a Video
Unlimited and G. Wayne Bailey and Orawan Bailey.(4)
10.18 Agreement of Merger and Plan of Reorganization, dated as of March 25, 1998, by and
among Video City, Inc., Video Republic Corp., Old Republic Entertainment, Inc. and C.
Anthony Anderson.(4)
10.19 Agreement of Merger and Plan of Reorganization, dated as of March 25, 1998, by and
among Video City, Inc., Video Sulpizio Corp., Sulpizio One, Inc., Dennis Rhoton and
Edward Rheinhardt.(4)
10.20 Film Rights Transfer Agreement, dated as of March 23, 1998, by and among Conrad
Entertainment, LLC and Video City, Inc.(4)
</TABLE>
28.
<PAGE>
<TABLE>
<C> <S>
10.21 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 Republic Entertainment, Inc. and Sulpizio One, Inc.(4)
10.22 Warrant issued to FINOVA Capital Corporation.(4)
10.23 Restructured Debt Agreement, dated March 25, 1998, by and among Rentrak Corporation,
Mortco, Inc., Video City, Inc., Sulpizio One, Inc. and Adventures in Video, Inc.(4)
10.24 Stock Purchase Agreement, dated as of July 3, 1998, by and among the Company, Andrew T.
Baruffi, The Baruffi Family Trust, and The Baruffi Family Partnership, as amended by
that certain Addendum, dated as of September 30, 1998.(8)
10.25 Asset Purchase Agreement, dated as of September 30, 1998, by and among the Company, Far
West Entertainment, Inc. and Bradley K. Maples.(8)
10.26 Asset Purchase Agreement, dated as of September 30, 1998, by and among the Company,
Game City, Inc., Young C. Lee and Kay L. Lee.(8)
10.27 Management Agreement, dated as of October 16, 1998, by and between the Company and
Cianci's Videoland, Inc.(7)
10.28 Agreement of Merger and Plan of Reorganization, dated as of October 9, 1998, by and
among the Company, Cianci's Videoland, Inc., Victor J. Cianci and Evvy Cianci.(7)
10.29 Agreement of Merger and Plan of Reorganization, dated as of March 30, 1999, by and
among the Company, Video Galaxy, Inc. James G. Howard, George M. Peloso and Kurt
Peterson.(10)
10.30 Loan and Security Agreement, dated as of December 29, 1998, by and among the Company
and its subsidiaries and BankBoston Retail Finance Inc.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule
</TABLE>
_____________________
(1) Previously filed as exhibits to the Company's Current Report on Form 8-K,
dated January 8, 1997, and incorporated herein by reference.
(2) Previously filed as exhibits to Prism Entertainment Corporation's Annual
Report on Form 10-K for the fiscal year ended January 31, 1988, and
incorporated herein by reference.
(3) Previously filed as exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997, and incorporated herein by
reference.
(4) Previously filed as exhibits to the Company's Current Report on Form 8-K,
dated March 25, 1998, and incorporated herein by reference.
(5) Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1998, and incorporated herein by
reference.
(6) Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 1998, and incorporated herein by
reference.
(7) Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended
29.
<PAGE>
October 31, 1998, and incorporated herein by reference.
(8) Previously filed as exhibits to the Company's Current Report on Form 8-K,
dated September 30, 1998, and incorporated herein by reference.
(9) Previously filed as exhibits to the Company's Current Report on Form 8-K,
dated December 28, 1998, and incorporated herein by reference.
(10) Previously filed as exhibits to the Company's Current Report on Form 8-K,
dated March 31, 1999, and incorporated herein by reference.
(11) Previously filed as exhibits to the Company's Definitive Proxy Statement
for its 1998 Annual Meeting of Stockholders, and incorporated herein by
reference.
(d) Financial Statement Schedule
Schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted
30.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIDEO CITY, INC.
By /s/ Robert Y. Lee
-------------------------------
Robert Y. Lee
Chairman of the Board
and Chief Executive Officer
Date: May 14, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert Y. Lee Chairman of the Board and May 14, 1999
- --------------------------------------- Chief Executive Officer (Principal
Robert Y. Lee Executive Officer)
/s/ Timothy J. Denari Chief Financial Officer (Principal May 14, 1999
- --------------------------------------- Financial and Accounting Officer)
Timothy J. Denari
/s/ James Craig Kelly Director May 14, 1999
- ---------------------------------------
James Craig Kelly
/s/ David A. Ballstadt Director May 14, 1999
- ---------------------------------------
David A. Ballstadt
/s/ Michael T. Anderson Director May 14, 1999
- ---------------------------------------
Michael T. Anderson
/s/ Barry L. Collier
- --------------------------------------- Director May 14, 1999
Barry L. Collier
/s/ Charles E. Cooke Director May 14, 1999
- ---------------------------------------
Charles E. Cooke
Director May 14, 1999
/s/ Stephen C. Lehman
- ---------------------------------------
Stephen C. Lehman
/s/ John T. Sheehy Director May 14, 1999
- ---------------------------------------
John T. Sheehy
/s/ Gerald W.B. Weber Director May 14, 1999
- ---------------------------------------
Gerald W.B. Weber
</TABLE>
<PAGE>
Video City, Inc.
Consolidated Financial Statements
For the Years Ended January 31, 1999 and 1998,
the Year Ended December 31, 1996,
and
the Months Ended January 31, 1997 and 1996 (unaudited)
<PAGE>
ITEM 8. Consolidated Financial Statements and Supplementary Data
The following consolidated financial statements are filed with this report:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-11
</TABLE>
F-2
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Video City, Inc.
We have audited the accompanying consolidated balance sheets of Video City, Inc.
(formerly "Lee Video City") as of January 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years ended January 31, 1999 and 1998 and December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Video City, Inc. as
of January 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the years ended January 31, 1999 and 1998 and December 31,
1996 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
May 14, 1999
F-3
<PAGE>
Video City, Inc
(Formerly Lee Video City, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31, January 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Assets (Notes 1, 6, and 7)
Current assets
Cash $ 172,043 $ 28,127
Customer receivables (Note 1) 2,932,807 758,101
Notes receivable (Note 4) 86,703 355,430
Merchandise inventories (Note 1) 2,026,628 339,759
Other 52,870 411,536
--------------- ---------------
Total current assets 5,271,051 1,892,953
Videocassette rental inventory, net (Note 1) 21,119,897 2,795,258
Property and equipment, net (Note 5) 4,525,986 859,708
Goodwill, net (Note 1) 5,176,850 -
Deferred taxes, net (Note 8) 883,249 -
Film Library (Note 14) - 818,171
Other assets (Note 6) 1,275,847 233,226
--------------- ---------------
Total assets $ 38,252,880 $ 6,599,316
=============== ===============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 9,328,556 $ 2,166,027
Accrued expenses 3,422,724 702,293
Current portion of long-term debt (Note 7) 2,125,187 1,674,457
--------------- ---------------
Total current liabilities 14,876,467 4,542,777
Senior secured revolving credit facility (Note 6) 16,044,502 -
Long-term debt, less current portion (Note 7) 1,636,646 2,043,431
Other liabilities 427,791 711,931
--------------- ---------------
Total liabilities 32,985,406 7,298,139
Commitments and contingencies (Note 9)
Stockholders' equity (deficit) (Note 10)
Preferred stock 3,763,963 -
Common stock, $.01 par value per share, authorized 30,000,000
shares at 1999 and 20,000,000 shares at 1998; issued and
outstanding 13,498,715 shares at 1999 and 9,773,927 shares
at 1998 134,987 97,739
Additional paid-in capital 9,229,687 7,075,735
Accumulated deficit (7,861,163) (7,872,297)
--------------- ---------------
Total stockholders' equity (deficit) 5,267,474 (698,823)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 38,252,880 $ 6,599,316
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, January 31, December 31,
1999 1998 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue
Rental revenues and product sales $ 23,828,501 $ 10,007,358 $ 11,271,229
Management fee income 607,733 205,000 170,000
----------------- ----------------- -----------------
Total revenue 24,436,234 10,212,358 11,441,229
----------------- ----------------- -----------------
Operating costs and expenses
Store operating expenses 13,675,372 4,460,200 6,390,574
Amortization of videocassette rental inventory 2,541,934 1,928,343 1,987,407
Cost of product sales 3,301,185 762,153 1,557,062
Cost of leased product 1,394,409 419,361 556,248
General and administrative 4,785,890 2,035,428 1,367,650
Non-recurring write-down of Film Library
(Note 14) - 3,029,829 -
----------------- ----------------- -----------------
Total operating costs and expenses 25,698,790 12,635,314 11,858,941
Loss from operations (1,262,556) (2,422,956) (417,712)
Other (income) expense
Gain on disposition of assets, net (Note 12) - - (1,049,295)
Interest expense, net 1,563,348 552,359 691,782
Other (221,081) - (17,275)
----------------- ----------------- -----------------
Loss before income taxes (2,604,823) (2,975,315) (42,924)
Income tax benefit (Note 8) 2,615,957 - -
----------------- ----------------- -----------------
Net income (loss) $ 11,134 $ (2,975,315) $ (42,924)
----------------- ----------------- -----------------
Earnings (loss) per share (Note 11):
Basic earnings (loss) per share $ 0.00 $ (0.30) $ (0.01)
Diluted earnings (loss) per share $ 0.00 $ (0.30) $ (0.01)
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Consolidated Statements of Operations
(continued)
<TABLE>
<CAPTION>
One One
Month Ended Month Ended
January 31, January 31,
1997 1996
(Unaudited) (Unaudited)
----------------- -----------------
<S> <C> <C>
Revenue
Rental revenues and product sales $ 940,141 $ 1,085,250
Operating costs and expenses
Store operating expenses 438,766 576,543
Amortization of videocassette rental inventory 111,034 129,145
Cost of product sales 135,894 65,301
Cost of leased product 35,864 99,425
General and administrative 323,206 126,828
----------------- -----------------
Total operating costs and expenses 1,044,764 997,242
Income (loss) from operations (104,623) 88,008
Other (income) expense
Interest expense, net 46,351 76,793
Other (18,132) (17,192)
----------------- -----------------
Income (loss) before income taxes (132,842) 28,407
Income tax benefit - -
----------------- -----------------
Net income (loss) $ (132,842) $ 28,407
================= =================
Earnings (loss) per share:
Basic earnings (loss) per share $ (0.02) $ 0.01
Diluted earnings (loss) per share $ (0.02) $ 0.01
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------
Series AA (Note 10) Series B (Note 10) Common Stock Additional
------------------- -------------------- ---------------------- Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
-------- -------- ------ ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - $ - - $ - 4,234,024 $ 42,340 $ 564,660 $(4,721,216)
Net loss (42,924)
----- -------- ------ ---------- ---------- -------- ---------- -----------
Balance, at December 31, 1996 - - - - 4,234,024 42,340 564,660 (4,764,140)
Stock issued in satisfaction
of debt - - - - 1,500,000 15,000 2,985,000 -
Stock issued in conversion of
debt - - - - 773,653 7,737 811,263 -
Effect of the Merger - - - - 3,246,250 32,462 2,675,012 -
Net loss (one month ended) - - - - - - - (132,842)
----- -------- ------ ---------- ---------- -------- ---------- -----------
Balance, at January 31, 1997 - - - - 9,753,927 97,539 7,035,935 (4,896,982)
Stock issued in satisfaction - - - - 20,000 200 39,800
of debt
Net loss - - - - - - - (2,975,315)
----- -------- ------ ---------- ---------- -------- ---------- -----------
Balance, at January 31, 1998 - - - - 9,773,927 97,739 7,075,735 (7,872,297)
Stock issued in satisfaction
of services 750 75,000 - - 243,288 2,433 192,803 -
Stock issued for acquisition
of stores - - 76,000 3,065,190 3,481,500 34,815 1,961,149 -
Stock issued for private
placement 7,000 623,773 - - - - - -
Net income - - - - - - - 11,134
----- -------- ------ ---------- ---------- -------- ---------- -----------
Balance at January 31, 1999 7,750 $698,773 76,000 $3,065,190 13,498,715 $134,987 $9,229,687 $(7,861,163)
----- -------- ------ ---------- ---------- -------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended Year ended Year ended
January 31, January 31, December 31,
1999 1998 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 11,134 $ (2,975,315) $ (42,924)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,692,329 2,127,443 2,518,068
(Gain) loss on disposal of assets - - (1,049,294)
Note issued for legal settlement - - 379,632
Stock issued for professional services 195,236 40,000 -
Non-recurring writedown of film library - 3,029,829 -
Changes in assets and liabilities net of effects from acquisitions:
Decrease (increase) in accounts receivable (1,378,087) 1,409,951 -
Decrease (increase) in notes receivable 268,727 (280,783) 29,954
Decrease (increase) in merchandise inventories (853,142) 21,464
Decrease (increase) in other assets (925,751) (280,703) 175,792
Increase in deferred tax asset (883,249) - -
Decrease in accounts payable (134,616) (30,302) (214,125)
Decrease in accrued expenses (1,738,833) (5,192) (58,817)
Decrease in other liabilities (284,140) (62,944) (28,814)
-------------- -------------- ---------------
Net cash provided by (used in) operating activities (2,030,392) 2,971,984 1,730,906
Cash flows from investing activities
Purchases of videocassette rental inventory, net (4,213,040) (2,596,812) (2,260,680)
Purchases of fixed assets (756,398) (189,719) (169,512)
Payment for acquisitions, net of cash acquired (2,626,185) - -
Proceeds from sale of fixed assets - - 601,301
Proceeds from sale of film library 818,171 - -
Repayment on notes receivable - 43,400 -
-------------- -------------- ---------------
Net cash used in investing activities (6,777,452) (2,743,131) (1,828,891)
Cash flows from financing activities
Issuance of preferred stock 623,773 - -
Principal payments on obligations under capital leases (18,136) - (299,751)
Repayment of long-term debt (13,221,880) (1,447,243) (1,034,939)
Proceeds from issuance of long-term debt 5,523,501 - 1,074,431
Proceeds from borrowing under lines of credit 16,044,502 - -
-------------- -------------- ---------------
Net cash used in financing activities 8,951,760 (1,447,243) (260,259)
Net increase (decrease) in cash 143,916 (1,218,390) (358,244)
Cash at beginning of year 28,127 1,246,517 417,517
-------------- -------------- ---------------
Cash at end of year $ 172,043 $ 28,127 $ 59,273
============== ============== ===============
</TABLE>
F-8
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
January 31, January 31, December 31,
1999 1998 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Supplementary disclosures of cash flow information
Cash paid during the year:
Interest $ 1,071,506 $ 557,551 $ 757,259
Income taxes 800 800 800
Noncash investing and financing activities:
Professional services financed through issuance of common stock 195,236 40,000 -
Videocassette rental inventory acquired through issuance
of common stock - - 379,632
Long-term debt issued for settlement of lawsuit - - -
Sale of stores in exchange for assignment of debt - - 3,100,000
Accounts payable converted to long term debt 494,935 435,032 -
Professional services financed through issuance
of preferred stock 75,000 - -
</TABLE>
For acquisitions consummated during the year, the Company paid
$2,626,185, net of cash acquired. In conjunction with the acquisitions,
liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $22,018,218
Cash paid (2,626,185)
Common stock issued (1,995,964)
Preferred stock issued (3,065,190)
Goodwill 5,260,990
-----------
Liabilities assumed $19,591,869
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
One
Month Ended
January 31,
1997
(Unaudited)
-------------------
<S> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (132,842)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 142,065
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (5,913)
Decrease in merchandise inventories (9,379)
Decrease (increase) in other assets 68,037
Increase (decrease) in accounts payable (119,740)
Increase in accrued expenses (45,540)
-------------------
Net cash used in operating activities (103,312)
Cash flows from investing activities
Purchases of videocassette rental inventory, net (1,094,536)
Disposal of videocassette rental inventory 1,072,084
Purchases of fixed assets (13,641)
Proceeds from sale of fixed assets 1,454,293
-------------------
Net cash provided by investing activities 1,418,200
Cash flows from financing activities
Principal payments on obligations under capital leases (21,159)
Repayment of long-term debt (43,985)
Payment of dissenter's shares (62,500)
-------------------
Net cash used in financing activities (127,644)
Net increase in cash 1,187,244
Cash at beginning of period 59,273
-------------------
Cash at end of period $ 1,246,517
-------------------
Supplementary disclosures of cash flow information
Cash paid during the year: $ 25,333
Interest
Noncash investing and financing activities:
Long-term debt converted to common stock 819,000
In conjunction with the merger of Lee Video City, Inc.
into Prism Entertainment Corporation, common stock
was issued and the following fair value of non-cash net
assets were acquired 1,440,535
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
1. Business Operations and Significant Accounting Policies
Video City, Inc. (the "Company"), a Delaware Corporation, was formed on January
27, 1984. The Company owns and operates retail video specialty stores. As of
January 31, 1999, the Company owned and operated 128 stores and managed one
"licensed" store. The stores are located in California, Oregon, Washington,
Nevada, Idaho, Iowa, South Dakota, Colorado and Minnesota.
The Company's predecessor, Lee Video City, Inc. ("Lee Video City"), was formed
as a California corporation in February 1990 for the purpose of developing a
chain of retail video specialty stores. In January 1997, Lee Video City, Inc.
merged with and into Prism Entertainment Corporation ("Prism") pursuant to an
Agreement and Plan of Reorganization and Merger, dated as of October 25, 1996
(the "Plan"), and the surviving corporation changed its name to "Video City,
Inc." (Note 2). Prism had operated as a debtor in possession under Chapter 11 of
the United States Bankruptcy Code and engaged in only limited business
activities consisting of the sale of its existing film products to domestic
markets as well as foreign rights to its existing film library.
The existing shareholders of Lee Video City, Inc. received 5,007,677 of the
common stock of Prism Entertainment Corporation or approximately 51% of the
Company's common stock. The transaction was accounted for as a reverse
acquisition. In a reverse acquisition, the stock issued goes to the accounting
acquirer. Accordingly, since the reverse purchase accounting is the reverse of
normal, it is the fair market value (FMV) of the issuer's stock at date of
acquisition that is valued with a write up (write down) of the issuer's net
assets depending on whether the stock is trading in excess (less than) book
value. If a FMV cannot be determined for the stock and cost is determined based
on the FMV of the issuer's net assets, then goodwill is not recognized and the
transaction is valued at the issuer's net tangible assets. Due to the trading of
Prism Entertainment Corporation's common stock being suspended during the
bankruptcy proceedings, the FMV of the stock could not be determined.
Accordingly, goodwill was not recognized and the transaction was recorded at the
fair value of the issuer's net tangible assets. As a result of the reverse
acquisition of Prism, the Company changed its fiscal year from December 31 to
January 31 effective February 1, 1997.
The accompanying consolidated financial statements include the accounts of Video
City, Inc. and its wholly owned subsidiaries. These subsidiaries include Old
Republic Entertainment, Inc., Sulpizio One, Inc., Video Tyme, Inc., and
Videoland, Inc. All material intercompany transactions have been eliminated.
The financial statements include the operations of companies acquired from the
dates of acquisition (Note 2).
The financial statements also include the accounts of Prism for the period
January 9, 1997 through January 31, 1997. Prism's operations for the period
January 9, 1997 through January 31, 1997 includes $1,933 of sales, operating
losses of $47,822, interest expense of $23,744, which resulted in a net loss of
$71,566.
Customer Receivables
Customer receivables primarily consist of late fees on rental videocassettes and
games and fees for unreturned items.
F-11
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
Merchandise Inventories
Merchandise inventories, consisting primarily of videocassettes, video games,
concessions, and accessories held for resale, are stated at the lower of cost or
market. Cost of sales are determined on a first-in, first-out basis.
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games, is recorded at cost
and amortized over its estimated economic life. Base stock is amortized over a
60 month period on a straight-line basis with a salvage value of $6 per tape.
The fourth through ninth copies of each title per store are amortized over a 36
month period on an accelerated basis with a salvage value of $6 per tape. The
tenth and any succeeding copies of each title per store are amortized over 9
months on a straight-line basis with a salvage value of $6 per tape.
During the fourth quarter of fiscal 1999, the Company adopted a new method for
amortizing its base stock (copies one through three of each title per store) of
rental videocassettes. The new method of amortization was adopted because the
Company believes that decelerating expense recognition for its base stock more
accurately matches its revenue stream and useful economic life as demonstrated
in the industry. Prior to the change, base stock was amortized over a 36 month
period on a straight-line basis with a salvage value of $6 per tape. The effect
of the change on base stock amortization for the year ended January 31, 1999 was
approximately $570,000.
During fiscal 1998, the Company revised the estimate of salvage value relating
to the amortization of videocassette inventory to provide for a $6 salvage value
per tape in order to reflect a more accurate salvage value as demonstrated in
the industry.
Certain videocassettes are leased under a revenue sharing agreement with a
vendor, as broker for various studios (Revenue Sharing Agreement). During the
revenue sharing period, which is generally one year, the studios retain
ownership of the videocassettes and the Company shares the rental revenue with a
vendor rather than purchasing the videocassettes for a fixed cost per copy
(average cost per tape approximately $70). Such revenue sharing amounts are
included as cost of leased product in the accompanying statements of operations.
The associated handling fee per leased videocassette is amortized on a straight-
line basis over the term of the lease and is included in amortization of
videocassette rental inventory in the accompanying statements of operations.
Amortization expense related to videocassette rental inventory totaled
approximately $2,541,934, $1,928,343 and $1,987,407 for the years ended January
31, 1999 and 1998 and December 31, 1996. As videocassettes are sold or retired,
the applicable cost and accumulated amortization are eliminated from the
accounts, and any gain or loss is recorded.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives, ranging from five to ten
years. Leasehold improvements are recorded at cost and amortized using the
straight-line method over the estimated economic life of the lease term.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an asset may
be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the asset would be compared to the carrying amount to determine
if a writedown to market value is required.
F-12
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
Goodwill
Goodwill represents the excess of the cost of the companies acquired over the
fair value of their net assets at the dates of acquisition and is amortized on
the straight-line method over 20 years. Periodically, the Company reviews the
recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill from the
expected future operating cash flows on an undiscounted basis. In management's
opinion, no material impairment exists at January 31, 1999. Amortization
expense charged to operations for the year ended January 31, 1999 was $84,139.
Film Library
Film costs are paid to obtain film license rights and are amortized in the same
proportion that current revenues bear to estimated remaining lifetime revenues.
Estimates of total lifetime revenues and expenses are periodically reviewed by
management and revised if warranted by changing conditions. Where all or a
portion of the film costs appear not be recoverable through estimated remaining
lifetime revenues, the non-recoverable portion is charge to expense.
Revenue Recognition
Revenue is recognized at the time of rental or sale, or as late charges accrue.
Store Opening Costs
Store opening costs, which consist primarily of payroll, advertising and
supplies, are expensed as incurred.
Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the Company
adopted for footnote disclosure purposes only, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
SFAS No. 123 requires that companies recognize the fair value of all stock-based
awards on the date of grant as compensation expense over the vesting period.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro froma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provision of SFAS 123.
Income Taxes
The Company records income taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the
asset and liability method of SFAS No. 109, deferred income taxes are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under
F-13
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings (Loss) per Share
The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
No. 128), "Earnings Per Share," which simplifies the standards for computing and
presenting earnings per share as previously prescribed by APB Opinion No. 15,
"Earnings per Share." SFAS No. 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted from
issuance of common stock that then share in earnings. SFAS No. 128 also
requires dual presentation of basic and diluted EPS on the face of the income
statement and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
All prior earnings per share amounts have been restated to reflect the adoption
of SFAS No. 128.
Comprehensive Income
The Company adopted SFAS 130 in January 1998. Comprehensive income (loss) is
the change in equity of a business enterprise during a period from transactions
and all other events and circumstances from non-owner sources. Other
comprehensive income (loss) includes foreign currency items and minimum pension
liability adjustments. The Company did not have components of other
comprehensive income (loss) during the periods presented. As a result,
comprehensive income (loss) is the same as the net income (loss) for the periods
presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the prior year financial statements
to conform with the 1999 presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. The
provisions of this statement are effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Historically, the Company has not entered
into derivatives contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of the new standard
on January 31, 2001 to affect its financial statements.
F-14
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
2. Acquisitions
On March 25, 1998, Video City acquired five corporations owning and operating an
aggregate of 29 retail video stores. The following sets forth a description of
the transactions:
(a) Adventures in Video, Inc. ("Adventures") and KDDJ Investments, Inc.
("KDDJ") - Adventures owned and operated thirteen stores in Minnesota in
the greater Minneapolis metropolitan area. The purchase price for
Adventures was 866,000 shares of the Company's common stock. KDDJ owned and
operated three stores in San Francisco, California. The purchase price for
KDDJ was 216,500 shares of the Company's common stock. Pursuant to the
merger agreement, the Company paid off existing indebtedness of
approximately $449,000 that Adventures owed to Marquette Bank, N.A. As part
of the restructuring (see Note 3), Rentrak accepted 194,950 shares of Video
City common stock in settlement of $389,900 owed by Adventures. The Company
also entered into a two-year employment agreement with the prior owner 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 owned and operated five stores under the
name "Video Unlimited" in Colorado. The purchase price in this merger
consisted of $75,000 in cash, a one-year promissory note for $75,000
payable in twelve equal monthly installments, and 150,000 shares of the
Company's common stock. Pursuant to the Merger Agreement, the Company also
paid off existing indebtedness including $131,000 owed to Norwest Bank
Colorado, N.A. and $372,000 of indebtedness owed to a major vendor.
(c) Old Republic Entertainment, Inc. - This company owned and operated four
stores in and around Ventura, California, under the name "Video Tyme." The
purchase price consisted of 350,000 shares of the Company's common stock,
$150,000 in cash, and the assumption of certain debt. Pursuant to the
Merger Agreement, the Company paid off approximately $741,000 of existing
indebtedness owed to three creditors of the acquired company.
(d) Sulpizio One, Inc. - This company owned and operated four stores in
Lancaster, Santa Barbara, and Los Banos, California. The purchase price
consisted of 100,000 shares of the Company's common stock plus the
assumption of all liabilities including the amounts owing to Rentrak
Corporation (see Note 3). For more than three years prior to this
acquisition, these stores were managed by the Company under a management
agreement and operated under the name "Video City."
On September 30, 1998, the Company acquired an aggregate of nine retail video
stores through the acquisition of all of the outstanding shares of capital stock
of Video Tyme, Inc. ("Video Tyme") and substantially all of the assets of Far
West Entertainment, Inc. ("Far West") and Game City, Inc. ("Game City). The
following sets forth a description of the transactions:
(a) Video Tyme, Inc. - Video Tyme owned and operated seven retail video stores
in Las Vegas, Nevada, of which six were acquired. The purchase price of
Video Tyme consisted of 1,050,000 shares of the Company's common stock and
cash in the amount of $1,000,000. The Company also entered into a
management agreement with the selling shareholders to manage an additional
store in Las Vegas currently owned by the selling shareholders. Pursuant to
the management agreement, the Company has the option to acquire such store
from the selling shareholders at a cash purchase price of (a) $400,000 if
such option to purchase is exercised on or before March 31, 1999 or (b)
$440,000 if such option to purchase
F-15
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
is exercised between April 1, 1999 and September 30, 1999. The Company has
not exercised any of the above options as of May 14, 1999.
(b) Far West Entertainment, Inc. - Far West owned and operated two retail video
stores located in Clovis, California and Pocatello, Idaho. The purchase
price of the assets of Far West consisted of 32,000 shares of the Company's
common stock, cash in the amount of $20,000, the assumption of certain
indebtedness to third parties and to the Company in the total amount of
$495,000 and a promissory note in the principal amount of $100,000. For
more than 21 months prior to this acquisition, the store located in Clovis,
California was managed by the Company pursuant to a management agreement,
and operated under the name "Video City."
(c) Game City, Inc. -Game City owned and operated a retail video store in
Bakersfield, California. The purchase price of the assets consisted of cash
in the amount of $7,500, the assumption of certain indebtedness to third
parties and to the Company in the total amount of $117,500, and a
promissory note in the principal amount of $150,000. For more than 26
months prior to this acquisition, this acquired store was managed by the
Company pursuant to a management agreement, and operated under the name
"Video City." The prior owners of Game City are related to Robert Y. Lee,
the Company's Chief Executive Officer and Chairman of the Board.
On December 28, 1998, the Company acquired Cianci's Videoland, Inc.
("Videoland). Videoland owned and operated 76 stores in Oregon, Washington,
Iowa, Idaho, South Dakota and California. The consideration consisted of 76,000
shares of the Company's Series B voting Convertible Redeemable Preferred Stock
with a stated value of $100 per share, $1,900,000 in cash and the assumption of
approximately $11,500,000 of liabilities.
Pro Forma Condensed Consolidated Statements of Operations (unaudited)
The following unaudited pro forma condensed consolidated statements of
operations are based on the historical income statements of Video City, Inc.,
Far West Entertainment, Inc., Game City, Inc., Video Tyme, Inc., and Videoland,
Inc. and assumes all acquisitions had occurred at the beginning of each period
presented. The unaudited pro forma condensed consolidated statements of
operations may not be indicative of the actual results of the merger and there
can be no assurance that the foregoing results will be obtained.
<TABLE>
<CAPTION>
Year ended Year ended
January 31, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenue and product sales 58,785,961 53,470,065
Income (loss) before income taxes 73,881 4,716,421
Net income (loss) 44,328 2,829,853
Basic earnings (loss) per share $ 0.00 $ 0.17
Basic weighted average number of shares outstanding 13,179,316 13,200,206
</TABLE>
3. Related Party Transactions
In connection with the purchase of Game City, Inc. on September 30, 1998, the
Company had a note payable balance due to the former owners at January 31, 1999
of $113,797, which is included as part of the long term debt balance. For more
than 26 months prior to this acquisition, this acquired store was managed by the
Company pursuant to a management agreement, and operated under the name "Video
F-16
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
City." Young C. and Kay L. Lee are relatives of Robert Y. Lee, the Company's
Chief Executive Officer and Chairman of the Board.
On September 30, 1998, in connection with the purchase of Far West
Entertainment, Inc., the Company issued 32,000 shares of the Company's common
stock and a note payable in the amount of $100,000 to the seller, Brad Maples.
The note requires monthly principal and interest payments of $1,028 beginning in
October 1998 for a period of twelve years and bears an annual interest rate of
7%. The balance of the note at January 31, 1999 was $98,204 and is included as
part of the long term debt balance.
In May 1998, the Company commenced a $700,000 private placement financing of the
Company's securities in which Ridgewood Capital Funding, Inc. ("Ridgewood")
agreed to serve as the placement agent. John T. Sheehy, a member of the Board
of Directors of the Company, assisted Ridgewood in conducting the offering,
acting as a registered broker under Ridgewood's broker-dealership. In addition,
certain directors of the Company and The Value Group, LLC participated in the
private placement financing by investing in the Company's securities.
Ingram Entertainment Inc. has been the principal supplier of videocassettes and
related equipment to the Company, and has been a secured creditor of the Company
since August 1991. As of December 31, 1995, the Company owed Ingram $7.3
million. This amount was paid down to $4.5 million in June 1996 with proceeds
derived from the Company's sale of eleven stores. On January 8, 1997,
concurrent with the merger of Lee Video City, Inc. into Prism Entertainment
Corporation, Ingram accepted 1,500,000 shares of common stock of the Company in
consideration of $3,000,000 of the Company's indebtedness to Ingram, reducing
the Company's remaining long-term indebtedness to Ingram to $1,500,000. At the
same time, Ingram also received warrants to purchase 852,750 shares of common
stock from the Company and 404,403 shares of common stock from Robert Y. Lee.
In March 1998, the Company used funds in the amount of $1,500,000 from a credit
facility to pay off the term loan owing to Ingram.
In addition, the Company entered into a new long-term supply agreement with
Ingram for videocassettes and related products (Note 9); Ingram released Mr. Lee
from his personal guarantee of the Company's indebtedness; and the parties
entered into the Stockholders Agreement and the Override Agreement, which among
other things prohibit certain corporate actions without the approval of Ingram
or Ingram's designees on the Board of Directors. All of these transactions and
arrangements were entered into either simultaneously with or prior to Ingram's
receipt of common stock of the Company.
On March 25, 1998, the Company entered into a restructured debt agreement with
Rentrak Corporation ("Rentrak"), a major lessor of videocassettes under a
revenue sharing arrangement (Note 9). Prior to the acquisition of the five
companies on March 25, 1998, the Company and Sulpizio One, Inc. (one of the
acquired companies) were parties to such arrangements with Rentrak. As part of
the restructuring, Rentrak agreed to accept 194,950 shares of the Company's
Common Stock in settlement of a lawsuit Rentrak had previously filed against
Adventures in Video, Inc. (one of the acquired companies), and 470,162 shares of
the Company's Common Stock in satisfaction of indebtedness owed to Rentrak by
Sulpizio One, Inc. As part of the restructured debt agreement, Rentrak also
agreed to a deferral of certain amounts owed to it by Sulpizio One, Inc. and the
Company, and obtained a security interest in the assets of the Company to secure
such amounts. Rentrak also released Robert Y. Lee, the Company's Chairman of the
Board and Chief Executive Officer, from personal guaranties of the Company's
indebtedness that Mr. Lee had previously given. Rentrak's wholly-owned
subsidiary, Mortco, Inc., is a principal stockholder of the Company.
The Company either purchases or leases approximately 80% of its supply of new
release videos, in the aggregate, from two suppliers, Ingram and Rentrak. During
fiscal 1999, the Company purchased approximately $4,660,000 of product from
Ingram Entertainment and approximately $1,035,000 of product from Rentrak. If
the relationships with Ingram and Rentrak were terminated, the Company believes
that it could readily obtain its necessary inventory of videocassette and video
games from a number of other suppliers at prices and on terms comparable to
those available from Ingram or Rentrak. However, there can be no assurance that
any replacement supplier would provide service or payment terms as favorable as
those provided by Ingram or Rentrak. Failure to obtain comparable service,
support or payment terms from an alternative supplier could have a material
adverse effect on the Company's financial condition and results of operations.
F-17
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
On March 25, 1998, the Company sold the rights to its library of 47 feature
films and other properties and related accounts receivable to an entity owned
and controlled by Stephen C. Lehman, a member of the Company's board of
directors, for $1,350,000 in cash. During the fourth quarter of fiscal 1998,
the film library was written down by $3,030,000 to reflect its net realizable
value at January 31, 1998. The library was the principal asset of Prism prior
to the merger in January 1997 of Lee Video City with and into Prism. Under the
agreement by which the Company sold its film rights, the Company 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. The Company did not exercise this right.
In January 1997, the Company entered into a seven year Non-Competition Agreement
with Barry Collier, former president of Prism. Pursuant to the agreement, the
Company is obligated to pay Mr. Collier $147,500 over a period of 15 months
commencing on November 15, 1997.
The Company has entered into employment and consulting agreements with certain
shareholders (Note 9).
4. Notes Receivable
At January 31, 1999 and 1998, the Company had unsecured employee and director
loans aggregating approximately $86,703 and $86,700, respectively, bearing
interest at 7%, and due on demand. Included in notes receivable was a secured
note amounting to approximately $144,200 as of January 31, 1998, bearing
interest at 8%. The balance of the note was satisfied on September 30, 1998 as
part of the consideration received by the former owner of Far West
Entertainment, Inc. for the purchase of the assets of its two video stores.
Notes receivable also includes other miscellaneous unsecured notes receivable of
approximately $124,500 as of January 31, 1998.
5. Property and Equipment
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
January 31, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 2,188,217 $ 1,192,192
Equipment 2,457,431 811,911
Leasehold Improvements 2,058,056 435,917
----------- -----------
Total Property and Equipment 6,703,704 2,440,020
Accumulated depreciation and amortization (2,177,718) (1,580,312)
----------- -----------
Total Property and Equipment, net $ 4,525,986 $ 859,708
=========== ===========
</TABLE>
Depreciation and amortization expense was $601,000, $347,000 and $531,000 for
the years ended January 31, 1999 and 1998 and December 31, 1996.
6. Senior Secured Revolving Credit Facility
On March 25, 1998, the Company 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 subsidiaries.
F-18
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
The interest rate on this loan was at a per annum rate of 2.75% plus the prime
rate of Citibank, N.A. This credit facility was paid off on December 29, 1998 at
the time of the Videoland purchase.
On December 29, 1998, the Company entered into a Senior Secured Revolving Credit
Facility agreement (the "Credit Facility") with BankBoston to be used for
working capital purposes and capital expenditures. The Credit Facility bears
interest at the bank's prime rate plus 1/2 percent (8.25% at January 31, 1999)
and is secured by substantially all assets of the Company. The amount available
for borrowing under the Credit Facility is determined by deducting the Company's
principal balance of the Credit Facility from its borrowing base. The borrowing
base is determined by multiplying the applicable inventory advance rate and the
number of units of the acceptable inventory, net of reserves. The maximum amount
available to borrow is the lesser of the borrowing base or $30,000,000. The
Credit Facility matures on December 29, 2001. The Credit Facility contains
various financial covenants of which the Company is in compliance at January 31,
1999. The loan fees related to the loan are capitalized and amortized over the
three-year term of the loan. The balance of deferred loan charges, net of
related amortization, at January 31, 1999 is $675,695 and is included in other
assets.
F-19
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
7. Long-Term Debt
Long-term debt is summarized in the following table:
<TABLE>
<CAPTION>
January 31, January 31,
1999 1998
---------- -----------
<S> <C> <C>
Promissory note, secured by all assets, bearing interest at 10% per
annum, interest only payments monthly beginning January 31, 1997
through the year 2000. Principal and interest paid in March 1998. $ - $ 1,500,000
Promissory note, secured by the film library, accounts receivable and
the store inventory. All proceeds from current and future accounts
receivable collections as well as from the sale of the film library are
to be applied to the outstanding principal until paid in full. Any
principal balance outstanding as of July 1, 1998 will be paid in twelve
equal monthly installments. The note bears interest at the bank's prime - 1,411,306
rate plus 3%.
Other loan payable to individual for $50,000 (unsecured), bearing
interest at 11%, with personal guarantee by primary stockholder of the - 50,000
Company.
Other unsecured loan to fulfill settlement obligation for $259,847,
payable in monthly installments of $8,000, including interest at 8.5%
per annum until February 20, 2000. 92,033 203,414
Promissory note - Rentrak Fourth Addendum which was executed in July
1997 called for the conversion of balances in accounts payable to a
note with an interest rate of 10% due and payable in January 1998. - 435,032
Promissory notes, secured by certain assets subordinate to the credit
facility (note 6), payable in monthly installments of $34,403 and
$5,952, interest imputed at 9% per annum, due June 2003. 1,782,484 -
Promissory notes, secured by certain assets subordinate to the credit
facility (note 6), at interest rates varying from 9% to 10% per annum, 1,405,141 -
due from April 1999 to July 1999
Other unsecured obligations, including interest from 7% to 15% per
annum, due from March 1999 to September 2010. 482,175 118,136
----------- -----------
Total debt 3,761,833 3,717,888
Less current portion (2,125,187) (1,674,457)
----------- -----------
Total long-term debt $ 1,636,646 $ 2,043,431
----------- -----------
</TABLE>
Total maturities of remaining long-term debt for five years subsequent to
January 31, 1999 are presented in the following table:
<TABLE>
<CAPTION>
Year ending Amount
January 31,
----------- ------
<S> <C>
2000 $ 2,271,913
2001 589,450
2002 490,751
2003 491,120
2004 209,238
Thereafter 65,592
--------------
$ 4,118,064
Less: imputed interest 356,231
--------------
Total $ 3,761,833
==============
</TABLE>
8. Income Taxes
As of January 31, 1999, net operating loss carryforwards generated by the
Company of approximately $6,037,000 and $2,999,000 for Federal and California
income tax purposes are available to offset future taxable income through 2019.
The Company's ability to utilize net operating loss carryforwards is
F-20
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
dependent upon its ability to generate taxable income in future periods.
Approximately $650,000 of Federal and $305,000 of State net operating losses may
be limited due to ownership changes (as defined under Section 382 of the
Internal Revenue Code of 1986) which occurred on January 8, 1997 and resulted in
an annual limitation per year. Unused annual limitations may be carried over to
future years until the net operating losses expire. Utilization of net operating
losses may also be limited in any one year by alternative minimum tax rules.
The income tax provision (benefit) is comprised of the following current and
deferred amounts:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, January 31, December 31,
1999 1998 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current
- -------
Federal $ - $ - $ -
State 5,000 - -
----------- ----------- -----------
5,000 - -
----------- ----------- -----------
Deferred
- --------
Federal (2,384,229) - -
State (236,728) - -
----------- ----------- -----------
(2,620,957) - -
----------- ----------- -----------
$(2,615,957) $ - $ -
=========== =========== ===========
</TABLE>
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and liabilities
which will result in future deductible amounts and operating loss and tax credit
carryforwards. A valuation allowance is then established to reduce that
deferred tax asset to the level at which it is "more likely than not" that the
tax benefits will be realized. Realization of tax benefits of deductible
temporary differences and operating loss or credit carryforwards depends on
having sufficient taxable income of an appropriate character within the
carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
difference, and (iii) future taxable income generated by future operations.
Based on an evaluation of the realizability of the deferred tax asset,
management has determined that it is more likely than not that the Company will
realize this tax benefit. Therefore, the valuation allowance that had been
established for a portion of the deferred tax asset has been reversed for the
year ended January 31, 1999.
The assets acquired from the Videoland merger were recorded at fair market value
for financial statement purposes. The difference between that value and the tax
basis of the assets result in a deferred tax liability of approximately
$1,732,708 as of January 31, 1999. The following table presents the primary
components of the Company's net long-term deferred tax asset:
<TABLE>
<CAPTION>
January 31, January 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Components of long-term deferred tax assets:
Rental inventory principally due to difference in
amortization $ - $ (48,315)
Federal and State NOL carryforward 2,227,462 817,887
Videoland fixed asset basis difference 1,043,903 -
Fixed assets due to difference in depreciation and
amortization 202,219 87,067
Section 481 adjustment - 39,707
Deferred rent 170,389 73,441
Non-recurring writedown of Film Library - 1,211,932
</TABLE>
F-21
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C>
Other 15,887 13,678
--------------- ---------------
Total gross deferred tax asset 3,659,860 2,195,397
Valuation allowance - (2,195,397)
--------------- ---------------
Total deferred tax asset, net of valuation allowance 3,659,860 -
--------------- ---------------
Components of long-term deferred tax liability:
Videoland inventory basis difference (2,776,611) -
--------------- ---------------
Net long-term deferred tax asset $ 883,249 $ -
=============== ===============
</TABLE>
The total income tax provision differs from the amount computed by applying the
statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, 1999 January 31, 1998 December 31, 1996
---------------- ---------------- -----------------
% of % of % of
Pretax Pretax Pretax
income income income
------ ------ ------
<S> <C> <C> <C>
Income tax at Federal statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of Federal tax benefit 2.4 % (5.8)% (5.8)%
Valuation allowance (84.3)% 39.5 % 39.8 %
Expiration of net operating losses 14.9 % - % - %
Other 0.6 % 0.3 % - %
------ ------ ------
Total (100.4)% 0.0 % 0.0 %
====== ====== ======
</TABLE>
9. Commitments and Contingencies
Operating Leases - The Company leases its facilities under noncancelable
operating leases expiring at various dates through 2013. Rent expense under
operating leases was approximately $3,601,986, $1,502,000 and $1,444,000 for the
years ended January 31, 1999, 1998 and the year ended December 31, 1996.
The future minimum lease payments under noncancelable operating leases with
initial lease terms in excess of one year as of January 31, 1999 are as follows:
<TABLE>
<CAPTION>
Years ending Operating
January 31, Leases
------------ -----------
<S> <C>
2000 $ 7,682,374
2001 6,117,381
2002 4,852,814
2003 3,751,184
2004 2,546,154
Thereafter 6,762,362
-----------
Total $31,712,269
-----------
</TABLE>
Revenue Sharing Agreement - Pursuant to the Revenue Sharing Agreement (Note 3),
the Company is obligated to pay a major vendor revenue sharing and handling fee
payments that are equal on an annual basis to at least 10% of the Company's
gross revenues. During fiscal 1999, the Company purchased approximately
$1,035,000 of product from this vendor.
Vendor Supply Agreement - On November 6, 1996, the Company amended the March 13,
1996 agreement with its major supplier to purchase, under certain conditions,
80% of its yearly requirements
F-22
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
for the video rental, video sell-through and video game products. The agreement
expires on June 30, 2001. During fiscal 1999, the Company purchased
approximately $4,660,000 of product from this supplier. The Company's CEO and
the same supplier entered into an Override Agreement dated November 19, 1996
which provides, subject to certain exceptions, that without the written consent
of the supplier, the Company shall not enter into a merger or a sale or transfer
of all or substantially all of its assets, or make any material change in the
nature of its business as now conducted, or change the form of organization of
its business; and that without unanimous approval of the Board of Directors, the
Company shall not enter into any line of business other than the sale and rental
of video product and related goods, the completion of one film that Prism had
under way, and the exploitation of Prism's film library; these provisions will
remain in force until the later of the payment in full of the Company's
$1,500,000 debt to the supplier, or such time as the supplier's beneficial
ownership interest in the Company's common stock, on a fully diluted basis, is
4% or less. The $1,500,000 debt was paid in March 1998, however, the supplier's
beneficial ownership interest in the Company's common stock, on a fully diluted
basis remains greater than 4%.
Employment Agreements - The Company has entered into employment agreements with
various of its key officers. In general, these agreements cover a period of
three years or less. The annual salary amounts for these agreements range from
$117,500 to $178,000. In the event that the employment of any of the these
officers is terminated for any reason other than "material breach" or "cause" as
defined in his Employment Agreement, the Company will pay the remainder of the
base salary to such individual for the remaining term of his employment
agreement.
Other Agreements - On March 25, 1998, the Company acquired Adventures in Video,
Inc. ("Adventures in Video") and KDDJ Investments, Inc. ("KDDJ") from David A.
Ballstadt and members of his immediate family pursuant to two Agreements of
Merger and Plan of Reorganization (each a "Merger Agreement"). Adventures in
Video owns and operates 13 stores in the greater Minneapolis metropolitan area
and KDDJ owns and operates three stores in San Francisco, California. The
purchase price for Adventures in Video was 866,000 shares of the Company's
Common Stock. The purchase price for KDDJ was 216,500 shares of the Company's
Common. Pursuant to the Adventures in Video Merger Agreement, the Company 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 the Company was expanded from eight to nine members and
David A. Ballstadt was elected to fill this vacancy. Mr. Ballstadt has served
as a director of the Company since the consummation of the two acquisitions.
The Company 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.
On April 16, 1997, the Company entered into three year consulting agreements
with Gerald W. B. Weber and Stephen C. Lehman pursuant to which Messrs. Weber
and Lehman shall provide finance, acquisitions and corporate development
consulting services to the Company. The consulting agreements of Messrs. Weber
and Lehman provide for compensation in the form of options to purchase an
aggregate of 75,000 and 90,000 shares, respectively, of the Company's Common
Stock at $2.00 per share. Options to purchase one-third of such shares of
Common Stock vest each year commencing on April 16, 1997 and any unexercise
portions terminate on April 15, 2002. Each consulting agreement also provides
that the Company shall reimburse the consultant for reasonable out-of-pocket
expenses incurred in performing his consulting services, that the Company shall
indemnify the consultant with respect to any claims made against the consultant
arising in connection with the consulting service, and that either party may
terminate the consulting agreement by providing 30 days notice to the other
party. On March 24, 1998, Mr. Lehman's consulting agreement was amended to
provide Mr. Lehman additional compensation in the form of warrants to purchase
100,000 shares of the Company's Common Stock at $2.00 per share. Messrs. Weber
and Lehman are directors of the Company.
F-23
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
In April 1997, the Company entered into an engagement agreement with Sphere
Capital Partners ("Sphere Capital") pursuant to which Sphere Capital shall act
as the exclusive financial advisor to the Company providing financial
management, acquisition and financing advisory services for a period of one year
commencing April 1997 and for such additional one year terms as may be mutually
agreed to by Sphere Capital and the Company. The agreement provided that during
the term of the engagement, Sphere Capital shall limit its financial advisory
services within the video retail industry solely to the Company. The engagement
agreement provided for a base fee of $5,000 per month which shall be credited
against any transaction fees to which Sphere Capital may be entitled upon
consummation of any acquisition or financing transaction. The engagement
agreement also provided that the Company would reimburse Sphere Capital for
reasonable out-of-pocket expenses incurred in performing its financial advisory
services and that either party may terminate the engagement by providing 45 days
notice to the other party. In May 1997, Sphere Capital assigned the agreement
to The Value Group, LLC. During the fiscal year ended January 31, 1998, the
Company paid Sphere Capital fees in the amount of approximately $28,000.
Effective April 1998, a new engagement agreement was entered into by the Company
and The Value Group, LLC, the successor entity to Sphere Capital, which provides
for a base fee of $2,500 per month which shall be credited against any
transaction fees to which The Value Group, LLC, may be entitled upon
consummation of any acquisition or financing transaction, John T. Sheehy serves
as a director of the Company and is a Managing Director of The Value Group, LLC
and its predecessor, Sphere Capital.
Litigation
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
10. Stockholders' Equity
Redeemable Preferred Stock - In June 1998, the Company sold an aggregate of
7,000 shares of its Series A Convertible Redeemable Preferred Stock ("Series A
Preferred Stock") with a stated value of $100 per share and detachable warrants
to purchase an aggregate of 350,000 shares of the Company's Common Stock at an
exercise price of $2.00 per share to eight investors, including certain
directors of the Company and their affiliates, for a total consideration of
$700,000, less related expenses of $76,227. Each share of Series A Preferred
Stock is convertible into 50 shares of the Company's Common Stock, subject to
adjustment. The Company authorized 20,000 shares and the terms of the Series A
Preferred Stock require the Company to redeem the Series A Preferred Stock in
May 2003. In the fourth quarter, these shares were exchanged for an equivalent
number of shares of Series AA Convertible Redeemable Preferred Stock ("Series AA
Preferred Stock"). The terms of the Series AA Preferred Stock are identical to
those of the Series A Preferred Stock except that the Series AA Preferred Stock
does not provide for mandatory redemption and provides for the issuance of
common stock dividends. In December 1998, the Company granted 750 shares of
Series AA Preferred Stock to a supplier for satisfaction of accounts payable.
On December 28, 1998, in connection with the Videoland acquisition, the Company
issued 76,000 shares of the Company's Series B Voting Convertible Redeemable
Preferred Stock with a stated value of $100 per share (200,000 shares
authorized). A portion of the 76,000 shares of the Company's Series B Preferred
Stock issued to the former owners as part of the consideration for the
acquisition has been pledged to the Company in order to secure Videoland's
existing shareholder receivable in the amount of $1,370,673. In the event the
trading price of the Company's Common Stock for any period of 20 consecutive
trading days during the five year period commencing December 28, 1998 is equal
to or exceeds $3.1667, then the Company may, at its option, receive the number
of outstanding shares of the Series B Preferred Stock then held by the former
owners
F-24
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
determined by dividing (i) the total amount of the outstanding receivable by
(ii) $100, or any lesser number of outstanding shares of Series B Preferred
Stock then held by the former owners, in exchange for full or partial
satisfaction of the applicable amount then owed. Not withstanding the foregoing,
in the event such trading price for any period of 20 consecutive trading days
during the five year period commencing December 28, 1998 does not equal or
exceed $3.1667, then at the end of such five year period, the Company shall
forgive the $1,370,673 receivable balance oustanding. This receivable has been
recorded as a reduction against the carrying value of the Company's Series B
Convertible Redeemable Preferred Stock.
The holders of these shares shall have the right to convert all or any shares
into duly authorized, validly issued, fully paid and nonassessable shares of
Common Stock of the Company. Each share of Series B Preferred Stock shall be
converted into a number of shares of common stock determined by dividing (i)
$100 by (ii) the conversion price initially set at $3.1667. The outstanding
shares of Series B Preferred Stock may be redeemed, in whole or in part, at any
time at the option of the Company for cash at $100 per share, plus, in each
case, all declared and unpaid dividends thereon, if any, to the redemption date.
The holders of the outstanding shares shall be entitled to receive when, as and
if declared by the Board of Directors, cumulative dividends at an annual rate of
8.0% of the stated value per share. In the event the Company is unable to pay
such dividends in cash, the Company may pay such dividends in shares of common
stock of the Company. The holders of these shares have agreed to waive and
discharge the Company of its obligation to pay such dividends during the period
January 1999 to June 1999 in exchange for a monthly consultant fee of $50,667
per month.
Common Stock - In September 1998, the Company issued 1,050,000 shares of its
common stock as part of the purchase price for all of the outstanding shares of
capital stock of Video Tyme Inc. Video Tyme owned and operated seven retail
video stores in Las Vegas, Nevada, of which six were acquired. In September
1998, the Company issued 32,000 shares of its common stock as part of the
purchase price for the two video stores acquired from Far West Entertainment,
Inc. Also in September 1998, the Company issued 38,500 shares of common stock
for the asset purchase of one video store. In December 1998, the Company issued
49,497 shares of common stock to various vendors for satisfaction of accounts
payable.
In June 1998, the Company issued 9,375 shares of its common stock to a
consultant for professional services rendered to the Company. Also in June
1998, the Company issued 127,305 shares of its common stock to a vendor for
services and equipment rendered to the Company and 57,111 shares of its common
stock to a supplier for satisfaction of accounts payable.
In March 1998, the Company issued 1,682,500 shares of its common stock to
acquire five corporations owning and operating an aggregate of 29 retail video
stores (Note 2).
Common Stock Warrants - During 1995, in conjunction with an addendum to the
Revenue Sharing Agreement (Note 3), the Company granted to the distributor a
warrant to purchase shares of common stock of the Company, representing 2% of
the fully diluted issued and outstanding shares of common stock at an exercise
price of $400,000. The number of shares issuable under this warrant was fixed
at 132,279 shares at an exercise price of $3.02 per share. The warrant is
exercisable during the period commencing August 24, 1995 and ending on August
23, 2005.
In 1996, in conjunction with a second addendum to the Revenue Sharing Agreement
(Note 3), the Company granted to the distributor a warrant to purchase shares of
common stock at an exercise price of $30,795 for each 1% of the fully diluted
number of common shares outstanding, not to exceed 5% of the fully diluted
number of common shares outstanding. The number of shares issuable under this
warrant was fixed at a maximum of 341,141 shares at a weighted average exercise
price of $0.45 per share. The
F-25
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
warrant was exercisable during the period commencing June 19, 1997 and ending on
September 30, 2005.
In 1997, the Company cancelled the above described warrants granted to the
distributor and reissued 131,483 and 65,077 warrants effective June 1, 1995 and
June 1, 1996, respectively. These warrants vested immediately, are exercisable
at $3.04 and $0.47, respectively, and expire five years from the date of grant.
During 1995, the Company issued a warrant to its major supplier (Note 9) to
purchase common stock at an exercise price of $30,795 for each 1% of the fully
diluted number of common shares outstanding, not to exceed 5% of the fully
diluted number of common shares outstanding. The warrant is exercisable during
the period commencing January 1, 1996 and ending on December 31, 2004. In 1996,
the Company amended this warrant under basically the same terms, except the
warrant shall not exceed 8.5% of the fully diluted common shares outstanding and
the warrant is fully vested as of December 31, 1996. As a result of the merger,
this warrant was then exchanged for a new warrant to purchase 404,403 shares of
the Company's common stock from a principal stockholder of the Company at
$0.6085 per share. The grant date of this warrant is January 8, 1997 and expires
five years from that date.
As a result of the Prism Entertainment merger and effective on the merger date,
the major supplier also received warrants to purchase up to an aggregate of
852,750 shares of the Company's common stock. A summary of these warrants is
presented below:
<TABLE>
<CAPTION>
Number Life Exercise
of Shares (Years) Price
--------- ------- -----
<S> <C> <C>
200,000 5.0 $2.00
200,000 6.0 2.25
200,000 7.0 2.50
114,240 5.0 0.51
54,360 5.0 1.03
15,000 5.0 1.00
69,150 5.0 2.00
-------
852,750
</TABLE>
In June 1998, the Company, in conjunction with the sale of an aggregate of 7,000
shares of its Series A Convertible Redeemable Preferred Stock ("Series A
Preferred Stock"), issued detachable warrants to purchase an aggregate of
350,000 shares of the Company's common stock at an exercise price of $2.00 per
share to eight investors, including certain directors of the Company and their
affiliates, for a total consideration of $700,000. In the fourth quarter of
1998, the Company issued warrants to purchase an aggregate of 105,000 shares of
the Company's common stock at an exercise price of $2.00 per share to various
consultants as payment for services provided to the Company by such consultants.
F-26
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
Stock Option Plan - The stock option plans adopted by the Company allow the
Company to grant up to 5,364,000 stock options to qualified employees,
directors, and affiliates. A summary of the Company's warrant and stock option
activity and related information is presented in the following table:
<TABLE>
<CAPTION>
Year Ended January 31, Year Ended January 31, Year Ended December 31,
1999 1998 1996
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,947,435 $1.47 3,549,997 $1.45 1,355,483 $0.93
Granted 1,756,936 1.41 397,438 1.65 2,194,514 1.76
Exercised - - - - - -
Cancelled (520,720) 0.01 - - - -
--------- ----- --------- ----- --------- -----
Outstanding at end of year 5,183,651 $1.59 3,947,435 $1.47 3,549,997 $1.45
========= ===== ========= ===== ========= =====
Options exercisable at year end 4,142,265 $1.49 3,320,881 $1.36 2,827,310 $1.30
========= ===== ========= ===== ========= =====
</TABLE>
Information relating to warrants and stock options at January 31, 1999
summarized by exercise price is presented in the following table:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Price Contractual Exercise Exercise
Per Share Shares Life Price Shares Price
-------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.10 to $0.51 1,195,917 1.8 years $0.43 1,195,917 $0.43
1.00 to 1.03 531,760 1.4 years 1.02 531,760 1.02
2.00 to 2.00 2,924,491 6.0 years 2.00 1,883,105 2.00
2.25 to 3.04 531,483 2.5 years 2.54 531,483 2.54
-------------- --------- ----------- -------- --------- --------
5,183,651 4.2 years $1.59 4,142,265 $1.49
========= =========== ======== ========= ========
</TABLE>
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value at the grant dates consistent with the methods of SFAS
123, the Company's net income (loss) and earnings (loss) per share would be as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, January 31, December 31,
1999 1998 1996
--------- ----------- -------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 11,134 $(2,975,315) (42,924)
Proforma (184,277) (2,988,270) (42,924)
Diluted earnings (loss) per share As reported $ 0.00 $ (0.30) (0.01)
Proforma (0.01) (0.30) (0.01)
</TABLE>
The fair value of options granted during the year ended January 31, 1999 is
estimated on the date of grant utilizing a Black-Scholes pricing model over the
expected life of the options ranging from 3 to 5 years, expected volatility of
70%, risk-free interest rates ranging from 4.45% to 5.61%, and a 0% dividend
yield. The weighted average fair value of options granted was $0.54.
F-27
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
The fair value of options granted during the years ended January 31, 1998 and
December 31, 1996 are estimated on the date of grant utilizing a Black-Scholes
pricing model over the expected life of the options ranging from 3 to 5 years,
expected volatility of 0%, risk-free interest rates ranging from 5.38% to 5.69%,
and a 0% dividend yield. The weighted average fair value of options granted
ranged from $0 to $0.42.
11. Earnings Per Share
The following table summarizes the calculation of the Company's basic and
diluted earnings per share for the periods presented:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 Year Ended January 31, 1998 Year Ended December 31, 1996
--------------------------- -------------------------------- ----------------------------
Per- Per- Per-
Income share share Income share
(loss) Shares amount Income (loss) Shares amount (loss) Shares amount
------ ------ ------ ------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available
to common stockholders:
Net income (loss) $11,134 12,091,467 $0.00 $(2,975,315) 9,770,594 $(0.30) $(42,924) 4,234,024 $(0.01)
Effect of Dilutive Securities:
Incremental shares from
outstanding common stock
options, warrants, and
preferred stock 1,336,911 - -
------- ---------- ----- ----------- --------- ------ --------- --------- ------
Diluted EPS
Income (loss) available to
common stockholders
Net income (loss) $11,134 13,428,378 $0.00 $(2,975,315) 9,770,594 $(0.30) $(42,924) 4,234,024 $(0.01)
------- ---------- ----- ----------- --------- ------ --------- --------- ------
</TABLE>
Warrants to purchase 15,000 shares at $1.00, 54,360 shares at $1.03, 724,150
shares at $2.00, 200,000 shares at $2.25, 200,000 shares at $2.50, and 131,483
shares at $3.04 were outstanding for the year ended January 31, 1999, but were
not included in the computations of diluted earnings per share because the
effect of exercise would have an antidilutive effect on earnings per share.
Warrants to purchase 114,240 at $0.51, 65,077 at $0.47, 15,000 shares at $1.00,
54,360 shares at $1.03, 269,150 shares at $2.00, 200,000 shares at $2.25,
200,000 shares at $2.50, and 131,483 shares at $3.04 were outstanding for the
year ended January 31, 1998, but were not included in the computations of
diluted earnings per share because the effect of exercise would have an
antidilutive effect on earnings per share.
Warrants to purchase 65,077 at $0.47 and 131,483 shares at $3.04 were
outstanding for the year ended December 31, 1996, but were not included in the
computations of diluted earnings per share because the effect of exercise would
have an antidilutive effect on earnings per share.
12. Gain on Disposition of Assets
During 1996, the Company sold 11 stores and the resulting gain on sale of assets
is included in the statement of operations.
13. Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
F-28
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
Notes receivable: Estimated discounting of future cash flow using the current
rate at which similar loans would be made with similar credit risks and for the
same remaining maturities. The fair market value of employee notes cannot be
estimated due to their related party nature and terms.
Long-term debt: Estimated based upon current market borrowing rates for loans
with similar terms and maturities.
Senior Secured Revolving Credit Facility: Estimated based upon variable
interest rates for facilities with similar terms and maturities.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
January 31, 1999 January 31, 1998
---------------------------- --------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Notes Receivable $ - $ - $ 355,430 $ 355,830
Financial Liabilities:
Long-Term Debt $ 5,143,004 $ 5,143,004 $3,717,888 $3,717,888
Senior Secured Revolving
Credit Facility $16,044,502 $16,044,502 $ - $ -
</TABLE>
14. Writedown of Film Library
During the fourth quarter of fiscal 1998, management decided to dispose of the
film library in order to concentrate the Company's business on the ownership and
operation of video specialty superstores. The film library was written down by
$3,030,000 to reflect it's net realizable value at January 31, 1998. On March
25, 1998, the Company sold the rights to its library of 47 feature films and
other properties and related accounts receivable to an entity owned and
controlled by Stephen C. Lehman, a member of the Company's board of directors,
for $1,350,000 in cash. The film library was stated at the net realizable value
at January 31, 1998. The library was the principal asset of Prism prior to the
merger in January 1997 of Lee Video City with and into Prism. Under the
agreement by which the Company sold its film rights, the Company had 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. The Company did not exercise this right.
15. Employee Benefit Plans
The Company maintains a 401(k) profit sharing plan, which allows eligible
employees to defer part of their income on a pre-tax basis through contributions
to the plan. The Company also provides a 15% matching contribution of up to 20%
of an employee's salary.
16. Subsequent Events
Acquisition of Video Galaxy, Inc. - On March 31, 1999, the Company acquired
Video Galaxy, Inc. (Video Galaxy") from the shareholders of Video Galaxy, in a
transaction structured as a reverse triangular merger, with a newly formed
subsidiary of Video City merging into Video Galaxy. Video Galaxy owns and
operates 15 retail video stores, fourteen of which are located in Connecticut
and one in Massachusetts and had aggregate revenues of approximately $5,800,000
during the year ended December 31, 1998. The acquisition increased Video City's
chain of retail video stores from 128 to 143.
F-29
<PAGE>
Video City, Inc.
(Formerly Lee Video City, Inc.)
Notes to Consolidated Financial Statements
The purchase price consisted of (i) 360,667 shares of the Company's common stock
(subject to post-closing adjustments, if any) and (ii) assumption and payment of
indebtedness of Video Galaxy by the Company in the amount of $4,833,000 (of
which approximately $1,757,000 was paid off by the Company at closing and
$2,000,000 was converted into shares of the Company's preferred stock and
warrants). The payoff of indebtedness at closing was provided by cash obtained
from an existing creditor of the Company.
Pending Sale of Assets - On April 22, 1999, the Company entered into a
definitive asset purchase agreement with a third party for the purpose of
selling substantially all of the assets of 50 of the Company's video retail
stores located in the states of Washington and Oregon.
The consideration received by the Company for the sale is expected to be
$16,200,000, subject to the following post-closing adjustment, if any: if the
actual number of videocassettes held for rental and for sale and the actual
number of new retail videocassettes which are included as part of the purchased
inventory is less than the minimum number of tapes as defined in the agreement,
the purchase price shall be reduced by an amount equal to the result of
multiplying the difference between the minimum inventory and the actual
inventory by the predetermined value defined in the agreement for each item.
There is no assurance that the sale will ultimately be consummated.
F-30
<PAGE>
EXHIBIT 3.4
VIDEO CITY, INC.
CERTIFICATE OF DESIGNATIONS
_________________
Pursuant to Section 151
of the General Corporation Law of the State of Delaware
__________________
Video City, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
that pursuant to Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors adopted the following resolution on December
18, 1998, which resolution remains in full force and effect as of the date
hereof:
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized, within the limitations and restrictions stated in the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to fix by resolution or resolutions the designation, powers,
preferences, voting rights and other rights of each series of preferred stock,
and the qualifications, limitations or restrictions thereof, and such other
subjects or matters as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series
of preferred stock on the terms and with the provisions herein set forth:
1. DESIGNATION OF SERIES. The designation of such series of preferred stock is
Series AA Convertible Redeemable Preferred Stock ("Series AA Preferred Stock").
The number of shares constituting such series is 20,000, with a value of $100
per share for the purpose of calculating dividends and amounts payable upon
liquidation, dissolution or winding up ("stated value"). Shares of Series AA
Preferred Stock redeemed, converted or purchased by the Corporation shall be
canceled and shall revert to authorized but unissued shares of preferred stock
undesignated as to series. Shares of the Series AA Preferred Stock shall rank
pari passu and share in dividends and other distributions on a pro rata basis
with the shares of Series B Voting Convertible Redeemable Preferred Stock and
with shares of any other series of preferred stock hereafter issued by the
Corporation that may be designated by the Corporation to rank pari passu with
the Series AA Preferred Stock.
2. DIVIDENDS. The holders of the outstanding Series AA Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors, out
of funds
1.
<PAGE>
legally available therefor, cumulative dividends at the annual rate of 9.0% of
the stated value per share of Series AA Preferred Stock. Such dividends shall be
payable semi-annually, on November 30 and May 31 of each year (each of such
dates being a "Dividend Payment Date"), commencing May 31, 1999. In the event
the Corporation does not pay such dividends in cash on the Dividend Payment
Date, the Corporation may elect to pay such dividends in shares of Common Stock
of the Corporation ("Common Stock"). If such dividends are paid in shares of
Common Stock, the Common Stock shall be valued at the average of the Trading
Price (as hereinafter defined in Paragraph 13) for the twenty consecutive
trading days immediately preceding the Dividend Payment Date. Such dividends
shall be cumulative so that if such dividends shall not have been paid or set
aside for all shares of Series AA Preferred Stock at the time outstanding, the
deficiency shall be paid or set aside for such shares before the Corporation
makes any distribution to the holders of Common Stock or preferred stock of any
series that ranks junior to the Series AA Preferred Stock in rights to
dividends. Declared but unpaid dividends shall not bear interest.
3. VOTING. The holders of Series AA Preferred Stock shall not be entitled to
vote upon any matter except as otherwise required by law.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series AA Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share of Series AA Preferred Stock equal to the stated
value of such share of Series AA Preferred Stock and a further amount equal to
any dividends declared and unpaid thereon, if any, as provided in Paragraph 2
hereof, to the date that payment is made available to the holders of Series AA
Preferred Stock, and no more, before any payment shall be made or any assets
distributed to the holders of shares of Common Stock or shares of any other
stock of the Corporation that rank junior to the Series AA Preferred Stock in
rights upon liquidation.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series AA Preferred Stock, and other series
of preferred stock that rank pari passu with the Series AA Preferred Stock upon
liquidation, dissolution, or winding up, shall be insufficient to permit the
payment to such stockholders of the full preferential amounts aforesaid, then
the entire assets of the Corporation to be distributed shall be distributed
ratably among the holders of Series AA Preferred Stock and such other series of
preferred stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, subject to the provisions of the Corporation's
Certificate of Incorporation, and to all of the preferential rights of the
holders of Series AA Preferred Stock and other series of preferred stock that
rank senior to the Common Stock on distribution or otherwise, the holders of
Common Stock shall be entitled to receive, ratably, all remaining assets of the
Corporation.
2.
<PAGE>
A consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Corporation, shall not be deemed to be a liquidation, dissolution or
winding up within the meaning of this Paragraph 4.
5. CONVERSION RIGHTS. The holder of any shares of Series AA Preferred Stock
shall have the right at any time commencing from the date of issuance to convert
any of his or her shares of Series AA Preferred Stock into duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Corporation at the Conversion Price, as defined herein, and upon the terms set
forth herein.
6. CONVERSION PRICE. Each share of Series AA Preferred Stock shall be
converted into a number of shares of Common Stock determined by dividing (i)
$100 by (ii) the Conversion Price in effect on the conversion date. The
Conversion Price at which shares of Common Stock shall initially be issuable
upon conversion of the shares of Series AA Preferred Stock shall be $2.00. The
Conversion Price shall be subject to adjustment as set forth in Paragraph 8
hereof. No payment or adjustment shall be made for any dividend or other
distribution that is payable on the Common Stock issued upon such conversion.
7. CONVERSION PROCEDURE. The holder of any shares of the Series AA Preferred
Stock may exercise his or her right to convert such shares into shares of Common
Stock by surrendering for such purpose to the Corporation, at its principal
office or at such other office or agency maintained by the Corporation for that
purpose, a certificate or certificates representing the shares of Series AA
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Paragraph 7 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. As promptly as practicable, and in any event within ten business
days after the surrender of such certificates and the receipt of such notice
relating thereto and, if applicable, payment of all transfer taxes, the
Corporation shall deliver or cause to be delivered (i) certificates representing
the number of validly issued, fully paid and nonassessable shares of Common
Stock to which the holder of the Series AA Preferred Stock so converted shall be
entitled and (ii) if less than the full number of shares of the Series AA
Preferred Stock evidenced by the surrendered certificate or certificates are
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares converted. Such conversions shall be deemed to have been
made at the close of business on the date of giving of such notice and of such
surrender of the certificate or certificates representing the shares of the
Series AA Preferred Stock to be converted so that the rights of the holder
thereof shall cease except for the right to receive Common Stock in accordance
herewith, and the converting holder shall be treated for all purposes as having
become the record holder of such Common Stock at
3.
<PAGE>
such time.
Shares of the Series AA Preferred Stock may not be converted after the
close of business of the fifth business day preceding the date fixed for
redemption of such shares pursuant to Paragraph 13 hereof.
Upon conversion of any shares of the Series AA Preferred Stock, the holder
thereof shall not be entitled to receive any accumulated, accrued or unpaid
dividends in respect of the shares so converted, provided that such holder shall
be entitled to receive any dividends on such shares of the Series AA Preferred
Stock declared prior to such conversion if such holder held such shares on the
record date fixed for the determination of holders of the Series AA Preferred
Stock entitled to receive payment of such dividend.
8. CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to
adjustment from time to time upon the occurrence of certain events as follows:
a. Stock Dividends, Subdivisions, Reclassifications or Combinations. If
the Corporation shall (i) declare a dividend or make a distribution in shares of
Common Stock, (ii) subdivide or reclassify the outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect at the time of the record date of such dividend or distribution or on
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of Series AA Preferred
Stock surrendered for conversion after such date shall be entitled to receive
the number of shares of Common Stock which he or she would have owned or been
entitled to receive had such Series AA Preferred Stock been converted
immediately prior to such date. Successive adjustments in the Conversion Price
shall be made whenever any event specified above shall occur.
b. Other Distributions. In case the Corporation shall fix a record date
for the making of a distribution to all holders of shares of Common Stock, (i)
of shares of any class of capital stock of the Corporation other than shares of
Common Stock, or (ii) of evidences of indebtedness of the Corporation, or (iii)
of assets (excluding cash dividends or distributions, and dividends or
distributions referred to in subparagraph 8(a) hereof), or (iv) of rights or
warrants entitling the holders of Common Stock to subscribe for or purchase
shares of Common Stock at less than the Trading Price, as defined in Paragraph
13 hereof, on the record date fixed to determine stockholders entitled to
subscribe or purchase; in each such case, the Conversion Price in effect
immediately prior thereto shall be reduced immediately thereafter to the price
determined by dividing (1) an amount equal to the difference resulting from (A)
the number of shares of Common Stock outstanding on such record date multiplied
by the Conversion Price per share on such record date, less (B) the fair market
----
value (as determined by the Board of Directors in their reasonable discretion)
of said shares or evidences of indebtedness or assets or rights or warrants to
be so distributed by (2) the
4.
<PAGE>
number of shares of Common Stock outstanding on such record date. Such
adjustment shall be made successively whenever such a record date is fixed. In
the event that such distribution is not so made, the Conversion Price then in
effect shall be readjusted, effective as of the date when the Board of Directors
determines not to distribute such shares, evidences of indebtedness, assets,
rights or warrants, as the case may be, to the Conversion Price which was in
effect prior to the fixing of the record date (subject to any adjustments made
pursuant to this Paragraph 8 since such record date).
c. Rounding of Calculations; Minimum Adjustment. All calculations under
this Paragraph 8 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment in the Conversion Price
shall be made if the amount of such adjustment would be less than $0.01, but any
such amount shall be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate $0.01 or more.
d. Adjustments for Consolidation, Merger, etc. In case the Corporation,
(i) shall consolidate with or merge into any other person and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) shall
permit any other person to consolidate with or merge into the Corporation and
the Corporation shall be the continuing or surviving person, but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, (iii) shall transfer all or substantially all of its properties or its
assets to any other person, or (iv) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common stock for
which adjustment is provided in this Paragraph 8); then, and in each such case,
proper provision shall be made so that each share of Series AA Preferred Stock
then outstanding shall be converted into, or exchanged for, one share of
preferred stock of the acquiring corporation entitling the holder thereof to all
of the rights (including voting rights), powers, privileges and preferences with
respect to the acquiring corporation to which the holder of a share of Series AA
Preferred Stock is entitled with respect to the Corporation, and being subject
with respect to the acquiring corporation to the qualifications, limitations and
restrictions to which a share of Series AA Preferred Stock is subject with
respect to the Corporation.
9. VOLUNTARY ADJUSTMENT. The Corporation may make, but shall not be obligated
to make, such decreases in the Conversion Price so as to increase the number of
shares of Common Stock into which the Series AA Preferred Stock may be
converted, in addition to those required by Paragraph 8 hereof, as it considers
to be advisable in order to avoid federal income tax treatment as a dividend of
stock or stock rights.
10. RESERVATION OF SHARES OF COMMON STOCK FOR CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of
5.
<PAGE>
Series AA Preferred Stock that are then outstanding.
11. NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever the Conversion Price is
adjusted as herein provided, the Corporation shall forthwith file with any
transfer agent or agents for the Series AA Preferred Stock, if any, and at the
principal office of the Corporation, a statement signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary of the
Corporation setting forth the adjusted Conversion Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series AA
Preferred Stock. The Corporation shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series AA
Preferred Stock at their addresses appearing on the books of the Corporation or
supplied by such holder to the Corporation for the purpose of notice.
12. FRACTIONAL SHARES IN CONVERSION. The Corporation shall not be required to
issue fractions of shares of Common Stock on the conversion of Series AA
Preferred Stock. If any fraction of a share of Common Stock would be issuable
upon the conversion of a share, except for the provisions hereof, the
Corporation shall purchase such fraction for an amount in cash equal to the
Trading Price (as defined in Paragraph 13 hereof) multiplied by such fraction.
If more than one certificate for shares of Series AA Preferred Stock shall be
presented for conversion at any one time by the same registered holder, the
number of shares of Common Stock which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Common Stock
issuable upon conversion of the shares so presented. All calculations under
this Paragraph 12 shall be made to the nearest one-hundredth of a share.
13. REDEMPTION. Commencing on June 1, 2000, the outstanding shares of Series
AA Preferred Stock may be redeemed, in whole or in part, at any time at the
option of the Corporation by resolution of its Board of Directors, for cash at
$100 per share; plus, in each case, all declared and unpaid dividends thereon,
----
if any, to the redemption date. However, the Corporation may not redeem the
shares of Series AA Preferred Stock pursuant to this Paragraph 13 unless the
Common Stock has had a Trading Price (as hereinafter defined in this Paragraph
13) of not less than 175% of the Conversion Price for 20 consecutive trading
days ending not more than two trading days prior to the Corporation giving
notice to the holders thereof. In case of the redemption of a part only of the
outstanding shares of Series AA Preferred Stock, the shares so to be redeemed
shall be selected pro rata.
At least 30 days' previous notice by mail, postage prepaid, shall be given
to the holders of record of the shares of Series AA Preferred Stock to be
redeemed, such notice to be addressed to each such stockholder at the address of
such holder appearing on the books of the Corporation or given by such holder to
the Corporation for the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the Corporation is located.
Such notice shall state the date fixed for redemption and the redemption price
and shall call upon such holder to surrender to the
6.
<PAGE>
Corporation on said date at the place designated in the notice such holder's
certificate or certificates representing the shares to be redeemed. On or after
the date fixed for redemption and stated in such notice, each holder of shares
of Series AA Preferred Stock called for redemption shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such notice and shall thereupon be entitled to receive payment of the redemption
price, together with declared and unpaid dividends, if any, to the date fixed
for redemption. If less than all the shares represented by any such surrendered
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. If such notice of redemption shall have been duly given, and
if on the date fixed for redemption funds necessary for the redemption shall be
available therefor, then, notwithstanding that the certificate evidencing any
shares of Series AA Preferred Stock so called for redemption shall not have been
surrendered, all rights pertaining to such shares shall terminate, except only
the right of the holders to receive the redemption price, together with declared
and unpaid dividends thereon, if any, to the date fixed for redemption, without
interest, upon surrender of their certificates therefor.
If, after notice of redemption has been given, the Corporation deposits, on
or prior to any date fixed for redemption of shares of Series AA Preferred
Stock, with any bank or trust company in the State of California that has a
combined capital and surplus of not less than $100 million, as a trust fund, a
sum sufficient to redeem, on the date fixed for redemption thereof, the shares
called for redemption, with irrevocable instructions and authority to the bank
or trust company to give the notice of redemption thereof (or to complete the
giving of such notice if theretofore commenced) and to pay, on or after the date
fixed for redemption or prior thereto, the redemption price of the shares to
their respective holders upon the surrender of their share certificates, then
from and after the date of the deposit (although prior to the date fixed for
redemption), the shares shall no longer be outstanding, and the holders thereof
shall cease to be stockholders with respect to such shares, and shall have no
rights with respect thereto except the right to receive from the bank or trust
company payment of the redemption price of the shares without interest, upon the
surrender of their certificates therefor, and the right to convert said shares
as provided herein at any time up to but not after the close of business on the
fifth day prior to the date fixed for redemption of such shares. The deposit
shall constitute full payment of the shares to the holders thereof. Any moneys
so deposited on account of the redemption price of Series AA Preferred Stock
converted subsequent to the making of such deposit shall be repaid to the
Corporation forthwith upon the conversion of such shares of Series AA Preferred
Stock. Any interest accrued on any funds so deposited shall be the property of,
and paid to, the Corporation. If the holders of Series AA Preferred Stock so
called for redemption shall not, at the end of two years from the date fixed for
redemption thereof, have claimed any funds so deposited, such bank or trust
company shall thereupon pay over to the Corporation such unclaimed funds, and
such bank or trust company shall thereafter be relieved of all responsibility in
respect thereof to such holders and such holders shall look only to the
Corporation for payment of the redemption price.
The term "Trading Price" shall be the average for the 20 consecutive
trading
7.
<PAGE>
days immediately prior to the date requiring a determination of the prices
determined as follows: (i) If the Common Stock is listed or admitted to trade on
a national securities exchange, on the Nasdaq National Market System ("NMS"), or
on the Nasdaq SmallCap Market ("SmallCap"), the closing price of the Common
Stock on the composite tape of the principal national securities exchange on
which the Common Stock is so listed or admitted to trade or on the NMS or
SmallCap systems, as the case may be; (ii) If the Common Stock is not listed or
admitted to trade on an exchange or a system that publishes daily closing
prices, the average of the last bid and asked prices of the Common Stock quoted
on such other trading system.
14. MUTILATED OR MISSING PREFERRED STOCK CERTIFICATES. If any of the Series AA
Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the
Corporation shall issue, in exchange and substitution for and upon cancellation
of the mutilated Series AA Preferred Stock certificate, or in lieu of and in
substitution for the Series AA Preferred Stock certificate lost, stolen or
destroyed, a new Series AA Preferred Stock certificate of like tenor and
representing an equivalent number of shares of Series AA Preferred Stock, but
only upon receipt of evidence of such loss, theft or destruction of such Series
AA Preferred Stock certificate and indemnity, if requested.
15. REISSUANCE OF PREFERRED STOCK. Shares of Series AA Preferred Stock that
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of preferred stock undesignated as to series and may be redesignated and
reissued as part of any series of preferred stock other than the Series AA
Preferred Stock.
16. BUSINESS DAY. If any payment, redemption or exchange shall be required by
the terms hereof to be made on a day that banks are not open in the State of
California, such payment, redemption or exchange shall be made on the
immediately succeeding day on which such banks are open.
17. HEADINGS OF SUBDIVISIONS. The headings of various subdivisions hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
18. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the
Series AA Preferred Stock set forth in these resolutions and the Certificate of
Designations filed pursuant hereto (as such resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other rights, preferences and limitations set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
8.
<PAGE>
19. NOTICE TO THE CORPORATION. All notices and other communications required
or permitted to be given to the Corporation hereunder shall be made to the
Corporation at its principal executive offices located at 370 Amapola Avenue,
Suite 208, Torrance, California 90501, Attention: Chairman. Minor
imperfections in any such notice shall not affect the validity thereof.
20. LIMITATIONS. Except as may otherwise be required by law, the shares of
Series AA Preferred Stock shall not have any powers, preferences or relative,
participating, optional or other special rights other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, Video City, Inc. has caused this certificate to be
executed by the undersigned on this 27th day of January, 1999.
VIDEO CITY, INC.
By /s/ Young J. Kim
----------------
Young J. Kim,
Senior Vice President
9.
<PAGE>
EXHIBIT 10.30
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
==============================================
LOAN AND SECURITY AGREEMENT
==============================================
BANKBOSTON RETAIL FINANCE INC.
The Lender
==============================================
$30,000,000
Senior Secured Revolving Credit Facility
==============================================
Video City, Inc. and Subsidiaries
The Borrowers
==============================================
Dated as of December 29, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS:......................................................7
ARTICLE 2 - THE REVOLVING CREDIT:............................................29
2.1. Establishment of Revolving Credit......................................29
---------------------------------
2.2. Advances in Excess of Borrowing Base...................................30
------------------------------------
2.3. Risks of Value of Collateral...........................................30
----------------------------
2.4. Loan Requests..........................................................31
-------------
2.5. Making of Loans Under Revolving Credit.................................33
--------------------------------------
2.6. The Loan Account.......................................................33
----------------
2.7. The Revolving Credit Note..............................................34
-------------------------
2.8. Payment of The Loan Account............................................35
---------------------------
2.9. Interest Rates.........................................................36
--------------
2.10. Commitment Fee........................................................37
--------------
2.11. Facility Fee..........................................................37
------------
2.12. Line (Unused) Fee.....................................................37
-----------------
2.13. Early Termination Fee.................................................37
---------------------
2.14. Concerning Fees.......................................................38
---------- ----
2.15. Lender's Discretion...................................................39
-------------------
2.16. Procedures For Issuance of L/C's......................................40
--------------------------------
2.17. Fees For L/C's........................................................41
--------------
2.18. Concerning L/C's......................................................41
----------------
2.19. Changed Circumstances.................................................43
---------------------
2.20. Increased Costs.......................................................44
---------------
2.21. Concerning Joint and Several Liability of the Borrowers...............45
-------------------------------------------------------
2.22. Video City, Inc. as Agent Borrower....................................47
2.23. Intercompany Loans....................................................47
ARTICLE 3 - CONDITIONS PRECEDENT:............................................47
3.1. Corporate Due Diligence................................................48
-----------------------
3.2. Opinion................................................................48
-------
3.3. Landlord Waivers.......................................................48
----------------
3.4. Additional Documents...................................................48
--------------------
3.5. Officers' Certificates.................................................48
----------------------
3.6. Representations and Warranties.........................................49
------------------------------
3.7. Minimum Excess Availability............................................49
---------------------------
3.8. All Fees and Expenses Paid.............................................49
--------------------------
3.9. No Suspension Event....................................................49
-------------------
3.10. No Adverse Change.....................................................49
-----------------
3.11. Purchase Agreement....................................................49
------------------
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:...............50
4.1. Payment and Performance of Liabilities.................................50
--------------------------------------
4.2. Due Organization - Corporate Authorization - No Conflicts..............50
-----------------------------------------------------
4.3. Trade Names............................................................51
-----------
4.4. Infrastructure.........................................................51
--------------
4.5. Locations..............................................................52
---------
- --------------------------------------------------------------------------------
Page 2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
4.6. Title to Assets........................................................53
---------------
4.7. Indebtedness...........................................................54
------------
4.8. Insurance Policies.....................................................54
------------------
4.9. Licenses...............................................................55
--------
4.10. Leases................................................................55
------
4.11. Requirements of Law...................................................55
-------------------
4.12. Maintain Properties...................................................55
-------------------
4.13. Pay Taxes.............................................................56
---------
4.14. No Margin Stock.......................................................57
---------------
4.15. ERISA.................................................................57
-----
4.16. Hazardous Materials...................................................58
-------------------
4.17. Litigation............................................................59
----------
4.18. Dividends or Investments..............................................59
------------------------
4.19. Loans.................................................................59
-----
4.20. Protection of Assets..................................................60
--------------------
4.21. Line of Business......................................................60
----------------
4.22. Affiliate Transactions................................................60
----------------------
4.23. Executive Pay.........................................................60
-------------
4.24. Additional Assurances.................................................61
---------------------
4.25. Adequacy of Disclosure................................................62
----------------------
4.26. Other Covenants.......................................................63
---------------
4.27. Ownership.............................................................63
---------
4.28. Acquisition...........................................................63
-----------
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:...................63
5.1. Maintain Records.......................................................63
----------------
5.2. Access to Records......................................................64
-----------------
5.3. Immediate Notice to Lender.............................................65
--------------------------
5.4. Borrowing Base Certificate.............................................66
--------------------------
5.5. Weekly Reports.........................................................66
--------------
5.6. Monthly Reports........................................................66
---------------
5.7. Quarterly Reports......................................................67
-----------------
5.8. Annual Reports.........................................................67
--------------
5.9. Officers' Certificates.................................................68
----------------------
5.10. Inventories, Appraisals, and Audits...................................69
-----------------------------------
5.11. Additional Financial Information......................................70
--------------------------------
5.12. Financial Performance Covenants.......................................71
-------------------------------
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:................................71
6.1. Use of Inventory Collateral............................................71
---------------------------
6.2. Inventory Quality......................................................72
-----------------
6.3. Adjustments and Allowances.............................................72
--------------------------
6.4. Validity of Accounts...................................................72
--------------------
6.5. Notification to Account Debtors........................................72
-------------------------------
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:........................73
7.1. Depository Accounts....................................................73
-------------------
7.2. Credit Card Receipts...................................................73
--------------------
7.3. The Concentration, Blocked, and Operating Accounts.....................74
----------------------------------------------
7.4. Proceeds and Collection of Accounts....................................74
-----------------------------------
7.5. Payment of Liabilities.................................................75
----------------------
- --------------------------------------------------------------------------------
Page 3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
7.6. The Operating Account..................................................76
---------------------
ARTICLE 8 - GRANT OF SECURITY INTEREST:......................................76
8.1. Grant of Security Interest.............................................76
--------------------------
8.2. Extent and Duration of Security Interest...............................77
----------------------------------------
8.3. Purchase Money Financing...............................................77
------------------------
ARTICLE 9 - LENDER AS BORROWERS' ATTORNEY-IN-FACT:...........................78
9.1. Appointment as Attorney-in-Fact........................................78
-------------------------------
9.2. No Obligation to Act...................................................79
--------------------
ARTICLE 10 - EVENTS OF DEFAULT:..............................................79
10.1. Failure to Pay Revolving Credit.......................................79
-------------------------------
10.2. Failure To Make Other Payments........................................79
------------------------------
10.3. Failure to Perform Covenant or Liability (No Grace Period)............79
----------------------------------------------------------
10.4. Failure to Perform Covenant or Liability (Grace Period)...............80
-------------------------------------------------------
10.5. Misrepresentation.....................................................80
-----------------
10.6. Acceleration of Other Debt. Breach of Lease...........................80
-------------------------------------------
10.7. Default Under Other Agreements........................................80
------------------------------
10.8. Uninsured Casualty Loss...............................................80
-----------------------
10.9. Judgment. Restraint of Business......................................81
--------------------------------
10.10. Business Failure.....................................................81
----------------
10.11. Bankruptcy...........................................................81
----------
10.12. Default by Guarantor or Related Entity...............................82
--------------------------------------
10.13. Indictment - Forfeiture..............................................82
-----------------------
10.14. Termination of Guaranty..............................................82
-----------------------
10.15. Challenge to Loan Documents..........................................82
---------------------------
10.16. Executive Management.................................................82
--------------------
10.17. Change in Control....................................................83
-----------------
10.18. Change in Supplier Agreements........................................83
-----------------------------
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT:...............................83
11.1. Rights of Enforcement.................................................83
---------------------
11.2. Sale of Collateral....................................................84
------------------
11.3. Occupation of Business Location.......................................84
-------------------------------
11.4. Grant of Nonexclusive License.........................................85
-----------------------------
11.5. Assembly of Collateral................................................85
----------------------
11.6. Rights and Remedies...................................................85
-------------------
ARTICLE 12 - NOTICES:........................................................86
12.1. Notice Addresses......................................................86
----------------
12.2. Notice Given..........................................................87
------------
ARTICLE 13 - TERM:...........................................................87
13.1. Termination of Revolving Credit.......................................87
-------------------------------
13.2. Effect of Termination.................................................87
---------------------
ARTICLE 14 - GENERAL:........................................................88
14.1. Protection of Collateral..............................................88
------------------------
14.2. Successors and Assigns................................................88
----------------------
14.3. Severability..........................................................89
------------
- --------------------------------------------------------------------------------
Page 4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
14.4. Amendments. Course of Dealing........................................89
------------------------------
14.5. Power of Attorney.....................................................89
-----------------
14.6. Application of Proceeds...............................................90
-----------------------
14.7. Lender's Costs and Expenses...........................................90
---------------------------
14.8. Copies and Facsimiles.................................................90
---------------------
14.9. Massachusetts Law.....................................................91
-----------------
14.10. Consent to Jurisdiction..............................................91
-----------------------
14.11. Indemnification......................................................91
---------------
14.12. Rules of Construction................................................92
---------------------
14.13. Intent...............................................................93
------
14.14. Right of Set-Off.....................................................94
----------------
14.15. Maximum Interest Rate................................................94
---------------------
14.16. Waivers..............................................................94
-------
14.17. Federal Reserve Bank.................................................95
--------------------
- --------------------------------------------------------------------------------
Page 5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
SCHEDULES
1 : List of Subsidiaries
EXHIBITS
2-7 : Revolving Credit Note
4-2 : Related Entities
4-3 : Trade Names
4-5 : Locations, Leases, and Landlords
4-6 : Encumbrances
4-7 : Indebtedness
4-8 : Insurance Policies
4-10 : Capital Leases
4-13 : Taxes
4-17 : Litigation
4-18(a) : Permitted Dividends
4-18(b) : Description of Merger
5-4 : Borrowing Base Certificate
5-12(a) : Financial Performance Covenants
5-12(b) : Business Plan
7-1 : DDA'S.
7-2 : Credit Card Arrangements
- --------------------------------------------------------------------------------
Page 6
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
================================================================================
LOAN AND SECURITY AGREEMENT BankBoston Retail Finance Inc.
================================================================================
December 29, 1998
THIS AGREEMENT is made between
BankBoston Retail Finance Inc., a Delaware corporation with offices at
40 Broad Street, Boston, Massachusetts 02109 (the "Lender"),
and
Video City, Inc., a Delaware corporation with its principal executive
offices at 370 Amapola Avenue, Suite 208, Torrance, California, 90501,
("Agent Borrower") and its wholly owned subsidiaries listed on Schedule 1
attached hereto and incorporated herein by reference ("Subsidiaries"), each
Subsidiary having a principal executive office at the addresses listed on
Schedule 1, (collectively, Agent Borrower and the Subsidiaries are
hereinafter referred to as the "Borrowers")
in consideration of the mutual covenants contained herein and benefits to be
derived herefrom,
WITNESSETH:
ARTICLE I - DEFINITIONS:
As herein used, the following terms have the following meanings or are
defined in the section of the within Agreement so indicated.
- --------------------------------------------------------------------------------
Page 7
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Acceptable Inventory": Such of the Borrowers' Active Video Units and
Active Game Units, as the case may be, at such locations, and of such
types, character, qualities and quantities, as the Lender in its sole
discretion from time to time determines to be acceptable for
borrowing, as to which Active Video Units and Active Game Units, as
the case may be, the Lender has a perfected security interest which is
prior and superior to all security interests, claims, and all
Encumbrances other than Permitted Encumbrances. Notwithstanding
anything contained herein to the contrary, at any date as to which the
calculation thereof shall be determined, Stock Video Units and Sell
Through Active Video Units shall not be acceptable for borrowing to
---
the extent that the sum of Active Stock Video Units and Sell Through
Active Video Units exceeds sixty percent (60%) of the aggregate of the
Borrower's Active Video Unit and Active Game Unit Inventory.
"Accounts" and "Accounts Receivable" include, without limitation,
"accounts" as defined in the UCC, and also all: accounts, accounts
receivable, credit card receivables, notes, drafts, acceptances, and
other forms of obligations and receivables and rights to payment for
credit extended and for goods sold or leased, or services rendered,
whether or not yet earned by performance, all "contract rights" as
formerly defined in the UCC-1 all Inventory which gave rise thereto,
and all rights associated with such Inventory, including the right of
stoppage in transit, all reclaimed, returned, rejected or repossessed
Inventory (if any) the sale of which gave rise to any Account.
"ACH": Automated clearing house.
"Account Debtor": Has the meaning given that term in the UCC.
"Active Game Units": Such of the Borrowers' Inventory which consists of
prerecorded interactive format, including without limitation videos,
tapes, and discs.
"Active Video Units": Such of the Borrowers' Inventory which consists of
prerecorded entertainment product, including without limitation video
games, discs and tapes.
- --------------------------------------------------------------------------------
Page 8
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Affiliate": With respect to any two Persons, a relationship in which (a)
one holds, directly or indirectly, not less than Thirty Five Percent
(35%) of the capital stock, beneficial interests, partnership
interests, or other equity interests of the other, or (b) one has,
directly or indirectly, the right, under ordinary circumstances, to
vote for the election of a majority of the directors (or other body or
Person who has those powers customarily vested in a board of directors
of a corporation); or (c) not less than Thirty Five Percent (35%) of
their respective ownership is directly or indirectly held by the same
third Person.
"Agent Borrower": As defined in Preamble.
"Availability": Is defined in Section 2-1 (b)(i).
"Availability Reserves": Such reserves as the Lender from time to time
reasonably determines in the Lender's discretion as being appropriate
to reflect the impediments to the Lender's ability to realize upon the
Collateral. Without limiting the generality of the foregoing,
Availability Reserves may include (but are not limited to) reserves
based on the following:
(i) Rent (based upon past due rent and/or whether or not
Landlord's Waiver, acceptable to the Lender, has been
received by the Lender).
(ii) In store customer credits.
(iii) Gift Certificates.
(iv) Frequent Shopper Programs.
(v) Layaways and Customer Deposits
(vi) Taxes and other governmental charges, including, ad
valorem, personal property, and other taxes which might
have priority over the security interests of the Lender in
the Collateral.
(vii) L/C Landing Costs.
"Bankruptcy Code": Title 11, U.S.C., as amended from time to time.
- --------------------------------------------------------------------------------
Page 9
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Base": The Base Rate announced from time to time by BankBoston, N.A. (or
any successor in interest to BankBoston, N.A.). In the event that said
bank (or any such successor) ceases to announce such a rate, "Base"
shall refer to that rate or index announced or published from time to
time as the Lender, in good faith, designates as the functional
equivalent to said Base Rate. Any change in "Base" shall be effective,
for purposes of the calculation of interest due hereunder, when such
change is made effective generally by the bank on whose rate or index
"Base" is being set. In all events, interest which is determined by
reference to Base (or any successor to Base) shall be calculated on a
360 day year and actual days elapsed.
"Base Margin Loan": Each Revolving Credit Loan while bearing interest at
the Base Margin Rate.
"Base Margin Rate": the aggregate of Base plus One Half of One Percent
(0.5%) per annum.
"Blocked Account": Defined in Section 7-3.
"Borrowers": Is defined in the Preamble.
"Borrowing Base": Is defined in Section 2-1(b)(ii).
"Business Day": Any day other than (a) a Saturday or Sunday; (b) any day
on which banks in Boston, Massachusetts generally are not open to the
general public for the purpose of conducting commercial banking
business; or (c) a day on which the Lender is not open to the general
public to conduct business.
"Business Plan": The Borrowers' business plan annexed hereto as EXHIBIT 5-
12(b) and any revision, amendment, or update of such business plan to
which the Lender has provided its written sign-off.
- --------------------------------------------------------------------------------
Page 10
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Capital Expenditures": The expenditure of funds or the incurrence of
liabilities which may be capitalized in accordance with GAAP.
"Capital Lease": Any lease which may be capitalized in accordance with
GAAP.
"Change in Control": The occurrence of any of the following:
(a) The acquisition, by any group of persons (within the meaning
of the Securities Exchange Act of 1934, as amended) or by any Person,
of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission) of 35% or more of the issued and
outstanding capital stock of the Agent Borrower, having the right,
under ordinary circumstances, to vote for the election of directors of
the Agent Borrower.
(b) More than half of the persons who were directors of the
Borrowers, or any one of them, on the first day of any period
consisting of Twelve (12) consecutive calendar months (the first of
which Twelve (12) month periods commencing with the first day of the
month during which the within Agreement was executed), cease, for any
reason other than death or disability, to be directors of the
Borrowers, or any one of them.
(c) Robert Y. Lee ceasing to be Chairman of the board of
directors of the Borrowers, or any one of them.
(d) The acquisition , by any group of persons (within the meaning
of the Securities Exchange Act of 1934, as amended) or by any Person
of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission) of any of the issued and
outstanding capital stock of any of the Subsidiaries.
- --------------------------------------------------------------------------------
Page 11
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Chattel Paper": Has the meaning given that term in the UCC.
"Collateral": Is defined in Section 8-1
"Commitment Fee": Is defined in Section 2-10.
"Concentration Account": Is defined in Section 7-3.
"Consolidated" and "Consolidating": Aggregating the relevant financial
statements or accounts of the Borrowers (or other Persons which, in
accordance with GAAP, are to be included in such computation) on a
line-by-line basis (i.e.: adding together corresponding items of
assets, liabilities, revenues and expenses) with relevant financial
statements or accounts of such Person, eliminating inter-company
balances and transactions and providing for any minority interest, all
as determined in accordance with GAAP.
"Costs of Collection": Includes, without limitation, all reasonable
attorneys' fees and reasonable out-of-pocket expenses incurred by the
Lender's attorneys, and all reasonable costs incurred by the Lender in
the administration of the Liabilities and/or the Loan Documents,
including, without limitation, reasonable costs and expenses
associated with travel on behalf of the Lender, which costs and
expenses are directly or indirectly related to or in respect of the
Lender's: administration and management of the Liabilities,
negotiation, documentation, and amendment of any Loan Document, or
efforts to preserve, protect, collect, or enforce the Collateral, the
Liabilities, and/or the Lender's Rights and Remedies and/or any of the
Lender's rights and remedies against or in respect of any guarantor or
other person liable in respect of the Liabilities (whether or not suit
is instituted in connection with such efforts). The Costs of
Collection are Liabilities, and at the Lender's option may bear
interest at the highest post-default rate which the Lender may charge
the Borrowers hereunder as if such had been lent, advanced, and
credited by the Lender to, or for the benefit of, the Borrowers.
- --------------------------------------------------------------------------------
Page 12
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"DDA": Any checking or other demand daily depository account maintained by
the Borrower.
"Deposit Account": Has the meaning given that term in the UCC.
"Documents": Has the meaning given that term in the UCC.
"Documents of Title": Has the meaning given that term in the UCC.
"Early Termination Fee": Is defined in Section 2-13.
"EBITDA": The Borrowers' earnings before interest, taxes, depreciation,
and amortization, each as determined in accordance with GAAP.
"Employee Benefit Plan": As defined in ERISA.
"Encumbrance": Each of the following:
(a) Any security interest, mortgage, pledge, hypothecation, lien,
attachment, or charge of any kind (including any agreement to give any
of the foregoing); the interest of a lessor under a Capital Lease;
conditional sale or other title retention agreement; sale of accounts
receivable or chattel paper; or other arrangement pursuant to which
any Person is entitled to any preference or priority with respect to
the property or assets of another Person or the income or profits of
such other Person or which constitutes an interest in property to
secure an obligation; each of the foregoing whether consensual or non-
consensual and whether arising by way of agreement, operation of law,
legal process or otherwise.
(b) The filing of any financing statement under the UCC or
comparable law of any jurisdiction.
"End Date": The date upon which both (a) all Liabilities have been paid in
full and (b) all obligations of the Lender to make loans and advances
and to provide other financial accommodations to the Borrowers
hereunder shall have been irrevocably terminated.
- --------------------------------------------------------------------------------
Page 13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Environmental Laws": All of the following:
(a) Any and all federal, state, local or municipal laws, rules,
orders, regulations, statutes, ordinances, codes, decrees or
requirements which regulate or relate to, or impose any standard of
conduct or liability on account of or in respect to environmental
protection matters, including, without limitation, Hazardous
Materials, as are now or hereafter in effect.
(b) The common law relating to damage to Persons or property from
Hazardous Materials.
"Equipment": Includes, without limitation, "equipment" as defined in the
UCC, and also all motor vehicles, rolling stock, machinery, office
equipment, plant equipment, tools, dies, molds, store fixtures,
furniture, and other goods, property, and assets which are used and/or
were purchased for use in the operation or furtherance of the
Borrowers' business, and any and all accessions or additions thereto,
and substitutions therefor.
"ERISA": The Employee Retirement Security Act of 1974, as amended.
"ERISA Affiliate": Any Person which is under common control with the
Borrowers within the meaning of Section 4001 of ERISA or is part of a
group which includes the Borrowers and which would be treated as a
single employer under Section 414 of the Internal Revenue Code of
1986, as amended.
"Events of Default": Is defined in Article 10.
"Executive Agreement": Any agreement or understanding (whether or not
written) to which the Borrowers, or any one of them, is a party or by
which the Borrowers may be bound, which agreement or understanding
relates to Executive Pay.
- --------------------------------------------------------------------------------
Page 14
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Executive Officer": Each of Robert Y. Lee, Timothy J. Denari and any
other Person who (without regard to title) is the successor to any of
the foregoing or who exercises a substantial portion of the authority
being exercised, at the execution of the within Agreement, by any of
the foregoing or a combination of such authority of more than one of
the foregoing or who otherwise has Control of the Borrowers, or any
one of them.
"Executive Pay": All salary, bonuses, and other value directly or
indirectly provided by or on behalf of the Borrowers, or any one of
them, to or for the benefit of any Executive Officer or any Affiliate,
spouse, parent, or child of any Executive Officer.
"Facility Fee": Is defined in Section 2-11.
"Federal Funds Effective Rate": For any day, a fluctuating per annum
interest rate equal to the weighted average of the rates on overnight
federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published on that date (or on
the then next succeeding Business Day, if not one) by the Federal
Reserve Bank of New York, provided that if such a rate is not so
published for a day which is a Business Day, Federal Funds Effective
Rate shall be the average of quotations for such day on such
transactions received by the Lender from three federal funds brokers
of recognized standing selected by the Lender.
"Fixed Charge Ratio": At any date as of which the amount thereof shall be
determined and for the period specified, the quotient obtained by
dividing Operating Cash Flow by Total Debt Service.
"Fixtures": Has the meaning given that term in the UCC.
"GAAP": Principles which are consistent with those promulgated or adopted
by the Financial Accounting Standards Board and its predecessors (or
successors) in effect and applicable to that accounting period in
respect of which reference to GAAP is being made, provided, however,
in the event of a Material Accounting Change, then unless otherwise
- --------------------------------------------------------------------------------
Page 15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
specifically agreed to by the Lender, (a) the Borrowers' compliance
with the financial performance covenants imposed pursuant to Section
5-12 shall be determined as if such Material Accounting Change had not
taken place and (b) the Borrowers shall include, with its monthly,
quarterly, and annual financial statements a schedule, certified by
the Borrowers' chief financial officer, on which the effect of such
Material Accounting Change to the statement with which provided shall
be described.
"General Intangibles": Includes, without limitation, "general intangibles"
as defined in the UCC; and also all: rights to payment for credit
extended; deposits; amounts due to the Borrowers; credit memoranda in
favor of the Borrowers, warranty claims, tax refunds and abatements,
insurance refunds and premium rebates, all means and vehicles of
investment or hedging, including, without limitation, options,
warrants, and futures contracts; records; customer lists; telephone
numbers; goodwill; causes of action; judgments; payments under any
settlement or other agreement; literary rights; rights to performance;
royalties; license and/or franchise fees, rights of admission;
licenses; franchises; license agreements, including all rights of the
Borrowers to enforce same, permits, certificates of convenience and
necessity, and similar rights granted by any governmental authority,
patents, patent applications, patents pending, and other intellectual
property, internet addresses and domain names, developmental ideas and
concepts, proprietary processes, blueprints, drawings, designs,
diagrams, plans, reports, and charts, catalogs, manuals; technical
data, computer software programs (including the source and object
codes therefor), computer records, computer software, rights of access
to computer record service bureaus, service bureau computer contracts,
and computer data; tapes, disks, semi-conductors chips and printouts,
trade secrets rights, copyrights, mask work rights and interests, and
derivative works and interests, user, technical reference, and other
manuals and materials; trade names, trademarks, service marks, and all
goodwill relating thereto; applications for registration of the
foregoing; and all other general intangible property of the Borrowers
in the nature of intellectual property, proposals; cost estimates, and
reproductions on paper, or otherwise, of any and all concepts or
ideas, and any matter related to, or connected with, the design,
development, manufacture, sale, marketing, leasing, or use of any or
all property produced, sold or
- --------------------------------------------------------------------------------
Page 16
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
leased, by the Borrowers or credit extended or services performed, by
the Borrowers, whether intended for an individual customer or the
general business of the Borrowers, or used or useful in connection
with research by the Borrowers.
"Goods": Has the meaning given that term in the UCC.
"Gross Margin": With respect to the subject accounting period for which
being calculated, the decimal equivalent of the following (determined
in accordance with the retail method of accounting):
Sales (Minus) Cost of Goods Sold
--------------------------------
Sales
"Hazardous Materials": Any (a) hazardous materials, hazardous waste,
hazardous or toxic substances, petroleum products, which (as to any of
the foregoing) are defined or regulated as a hazardous material in or
under any Environmental Law and (b) oil in any physical state.
"Indebtedness": All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any indebtedness
which is non-recourse to the credit of such Person but which is
secured by an Encumbrance on any asset of such Person) whether or not
evidenced by a promissory note, bond, debenture or other written
obligation to pay money.
(b) In connection with any letter of credit or acceptance
transaction (including, without limitation, the face amount of all
letters of credit and acceptances issued for the account of such
Person or reimbursement on account of which such Person would be
obligated).
(c) In connection with the sale or discount of accounts
receivable or chattel paper of such Person.
(d) On account of deposits or advances.
- --------------------------------------------------------------------------------
Page 17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(e) As lessee under Capital Leases.
"Indebtedness" also includes:
(x) Indebtedness of others secured by an Encumbrance on any
asset of such Person, whether or not such Indebtedness is assumed
by such Person.
(y) Any guaranty, endorsement, suretyship or other
undertaking pursuant to which that Person may be liable on
account of any obligation of any third party.
(z) The Indebtedness of a partnership or joint venture in
which such Person is a general partner or joint venturer.
"Indemnified Person": Is defined in Section 14-1 1.
"Instruments": Has the meaning given that term in the UCC.
"Interest Payment Date": With reference to:
Each Libor Loan: The last day of each month; the last day of the
Interest Period relating thereto; the Termination Date, and the End Date.
Each Base Margin Loan: the first day of each month; the Termination
Date; and the End Date.
"Interest Period":
(a) With respect to each Libor Loan: Subject to Subsection (c),
below, the period commencing on the date of the making or continuation
of, or conversion to, the subject Libor Loan and ending one, two, or
three months thereafter, as the Borrowers may elect by notice
(pursuant to Section 2-4(a)) to the Lender.
(b) With respect to each Base Margin Loan: Subject to Subsection
(c), below, the period commencing on the date of the making or
continuation of or conversion to such Base Margin Loan and ending on
that date (i) as of which the subject Base Margin Loan is converted to
a Libor Loan, as the Borrowers may elect by notice (pursuant to
Section 2-4(a)) to the Lender, or (ii) on which the subject Base
Margin Loan is paid by the Borrowers.
- --------------------------------------------------------------------------------
Page 18
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(c) The setting of Interest Periods is in all instances subject
to the following:
(i) Any Interest Period for a Base Margin Loan which
would otherwise end on a day which is not a Business Day shall be
extended to the next succeeding Business Day.
(ii) Any Interest Period for a Libor Loan which would
otherwise end on a day that is not a Business Day shall be
extended to the next succeeding Business Day, unless that
succeeding Business Day is in the next calendar month, in which
event such Interest Period shall end on the last Business Day of
the month during which the Interest Period ends.
(iii) Subject to Subsection (iv), below, any Interest
Period applicable to a Libor Loan, which Interest Period begins
on a day for which there is no numerically corresponding day in
the calendar month during which such Interest Period ends, shall
end on the last Business Day of the month during which that
Interest Period ends.
(iv) Any Interest Period which would otherwise end after
the Termination Date shall end on the Termination Date.
(v) The number of Interest Periods in effect at any one
time is subject to Section 2-9(d) hereof.
"Inventory": Includes, without limitation, "inventory" as defined in the
UCC and also all: packaging, advertising, and shipping materials
related to any of the foregoing, and all names or marks affixed or to
be affixed thereto for identifying or selling the same; Goods held for
sale or lease or furnished or to be furnished under a contract or
contracts of sale or service by the Borrowers, or used or consumed or
to be used or consumed in the Borrowers' business; Goods of said
description in transit: returned, repossessed and rejected Goods of
said description; and all documents (whether or not negotiable) which
represent any of the foregoing.
"Inventory Advance Rate": The following Dollar advance rates per Active
Video Units or Active Game Units, as the case may be:
- --------------------------------------------------------------------------------
Page 19
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Unit Description Dollar Advance Rate/Unit
---------------- ------------------------
- --------------------------------------------------------------------------------
<S> <C>
New Release Video Units $10.91
- --------------------------------------------------------------------------------
Stock Video Units $ 6.98
- --------------------------------------------------------------------------------
Sell Through Video Units $ 7.45
- --------------------------------------------------------------------------------
New Release Game Units $26.26
- --------------------------------------------------------------------------------
Stock Game Units $11.20
- --------------------------------------------------------------------------------
Sell Through Game Units $24.41
- --------------------------------------------------------------------------------
</TABLE>
The Inventory Advance Rate will be subject to change based upon
periodic appraisals conducted by Lender, at Borrowers' expense
pursuant to Section 5.10(d), so that the Inventory Advance Rate does
not exceed 80% of the appraised Liquidation Value of Acceptable
Inventory.
"Inventory Reserves": Such Reserves, either on a Dollar or Unit basis, as
may be established from time to time by the Lender in the Lender's
reasonable discretion with respect to the determination of the
saleability, at retail, of the Acceptable Inventory or which reflect
such other factors as affect the market value of the Acceptable
Inventory. Without limiting the generality of the foregoing,
Inventory Reserves may include (but are not limited to) reserves based
on the following:
(i) Obsolescence (determined based upon Inventory on hand
beyond a given number of days).
(ii) Seasonality.
(iii) Shrinkage.
(iv) Return to Vendor/Damage.
(v) Change in Inventory character.
(vi) Change in Inventory composition.
(vii) Change in Inventory mix.
(viii) Packaways.
(ix) Used Movies.
(x) Rentrak Inventory
(xi) Revenue Sharing Inventory
- --------------------------------------------------------------------------------
Page 20
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Investment Property": Has the meaning given that term in the UCC.
"Issuer": The issuer of any L/C.
"L/C": Any letter of credit, the issuance of which is procured by the
Lender for the account of the Borrowers and any acceptance made on
account of such letter of credit.
"L/C Landing Costs": To the extent not included in the Stated Amount of an
L/C, customs, duty, freight, and other out-of-pocket costs and
expenses which will be expended to "land" the Inventory, the purchase
of which is supported by such L/C.
"Lease": Any lease or other agreement, no matter how styled or structured,
pursuant to which the Borrowers are entitled to the use or occupancy
of any space.
"Leasehold Interest": Any interest of the Borrowers as lessee under any
Lease.
"Lender": Is defined in the Preamble to the within Agreement.
"Lender's Rights and Remedies": Is defined in Section 11-6.
"Leverage Ratio": At any date as of which the amount thereof shall be
determined and for the period specified, the quotient obtained by
dividing (i) Total Liabilities minus Subordinated Debt by (ii)
Tangible Net Worth plus Subordinated Debt.
"Liabilities" (in the singular, "Liability"): Includes, without
limitation, all and each of the following, whether now existing or
hereafter arising:
(a) Any and all direct and indirect liabilities, debts, and
obligations of the Borrower to the Lender, each of every kind, nature,
and description.
- --------------------------------------------------------------------------------
Page 21
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) Each obligation to repay any loan, advance, indebtedness,
note, obligation, overdraft, or amount now or hereafter owing by the
Borrowers to the Lender (including all future advances whether or not
made pursuant to a commitment by the Lender), whether or not any of
such are liquidated, unliquidated, primary, secondary, secured,
unsecured, direct, indirect, absolute, contingent, or of any other
type, nature, or description, or by reason of any cause of action
which the Lender may hold against the Borrower.
(c) All notes and other obligations of the Borrowers now or
hereafter assigned to or held by the Lender, each of every kind,
nature, and description.
(d) All interest, fees, and charges and other amounts which may
be charged by the Lender to the Borrowers and/or which may be due from
the Borrowers to the Lender from time to time.
(e) All costs and expenses incurred or paid by the Lender in
respect of any agreement between the Borrowers and the Lender or
instrument furnished by the Borrowers to the Lender (including,
without limitation, Costs of Collection, attorneys' reasonable fees,
and all court and litigation costs and expenses).
(f) Any and all covenants of the Borrowers to or with the Lender
and any and all obligations of the Borrowers to act or to refrain from
acting in accordance with any agreement between the Borrowers and the
Lender or instrument furnished by the Borrowers to the Lender.
(g) Each of the foregoing as if each reference to the " Lender "
therein were to each Affiliate of the Lender.
"Libor Business Day": Any day which is both a Business Day and a day on
which the principal interbank market for Libor deposits in London in
which BankBoston, N.A. participates is open for dealings in United
States Dollar deposits.
"Libor Loan": Any Revolving Credit Loan which bears interest at a Libor
Rate.
"Libor Margin": Three Hundred (300) basis points.
- --------------------------------------------------------------------------------
Page 22
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Libor Offer Rate": That rate of interest (rounded upwards, if necessary,
to the next 1/100 of 1 %) determined by the Lender to be the highest
prevailing rate per annum at which deposits on U.S. Dollars are
offered to BankBoston, N.A., by first-class banks in the London
interbank market in which BankBoston, N.A. participates at or about
10.00AM (Boston Time) Two (2) Libor Business Days before the first day
of the Interest Period for the subject Libor Loan, for a deposit
approximately in the amount of the subject loan for a period of time
approximately equal to such Interest Period.
"Libor Rate": That per annum rate determined as the aggregate of the Libor
Offer Rate plus the Libor Margin except that, in the event that it is
determined by the Lender that the Lender may be subject to the Reserve
Percentage, the "Libor Rate" shall mean, with respect to any Libor
Loans then outstanding (from the date on which that Reserve Percentage
first became applicable to such loans), and with respect to all Libor
Loans thereafter made, an interest rate per annum equal the sum of (a)
plus (b), where
(a) is the decimal equivalent of the following fraction:
Libor Offer Rate
__________________________
1 minus Reserve Percentage
(b) the applicable Libor Margin.
"Line (Unused) Fee": Is defined in Section 2-12.
"Liquidation Value": The liquidation value, as determined by appraisers
acceptable to Lender from time to time.
"Loan Account": Is defined in Section 2-6.
"Loan Ceiling": Thirty Million Dollars ($30,000,000), or such lesser amount
as the Lender, in its discretion, may establish following the
occurrence of an Event of Default.
- --------------------------------------------------------------------------------
Page 23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Loan Documents": The within Agreement, each instrument and document
executed and/or delivered as contemplated by Article 3, below, and
each other instrument or document from time to time executed and/or
delivered in connection with the arrangements contemplated hereby or
in connection with any transaction with the Lender or any Affiliate of
the Lender, including, without limitation, any transaction which
arises out of any cash management, depository, investment, letter of
credit, interest rate protection, or equipment leasing services
provided by the Lender or any Affiliate of the Lender, as each may be
amended from time to time.
"Local DDA": A depository account maintained by the Borrowers, the only
contents of which may be transfers from the Operating Account and
actually used solely (i) for petty cash purposes; or (ii) for payroll.
"Material Accounting Change": Any change in GAAP applicable to accounting
periods subsequent to the Borrowers' fiscal year most recently
completed prior to the execution of the within Agreement, which change
has a material effect on the Borrowers' financial condition or
operating results, as reflected on financial statements and reports
prepared by or for the Borrowers, when compared with such condition or
results as if such change had not taken place or where preparation of
the Borrowers' statements and reports in compliance with such change
results in the breach of a financial performance covenant imposed
pursuant to Section 5-12 where such a breach would not have occurred
if such change had not taken place or visa versa.
"Maturity Date": December 29, 2001.
"New Release": Such Acceptable Inventory consisting of Active Video Units
or Active Game Units, as the case may be, which are no more than nine
(9) months old measured from the date such Unit generally became
available to video retailers for rent (i.e., the "street date").
- --------------------------------------------------------------------------------
Page 24
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"New Release Game Units": Such Acceptable Inventory consisting of New
Release Game Units rented to retail customers by the Borrowers.
"New Release Video Unit": Such Acceptable Inventory consisting of New
Release Video Units rented to retail customers by the Borrowers.
"Operating Account": Is defined in Section 7-3.
"Operating Cash Flow": Borrowers' EBITDA minus funded Capital
Expenditures, cash taxes and any prepayment penalties relating to
current obligations of the Borrowers, each determined on a
Consolidated basis in accordance with GAAP.
"Participant": Is defined in Section 14-14, hereof.
"Permitted Encumbrances": Those Encumbrances permitted as provided in
Section 4-6(a) hereof.
"Person": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other enterprise or
entity.
"Proceeds": Includes, without limitation, "Proceeds" as defined in the UCC
(defined below), and each type of property described in Section 8-1
hereof.
"Purchase Agreement": That certain Agreement of Merger and Plan of
Reorganization by and among Video City and Sellers dated as of October
9, 1998.
"Receipts": All cash, cash equivalents, checks, and credit card slips and
receipts as arise out of the sale of the Collateral.
"Receivables Collateral": That portion of the Collateral which consists of
the Borrowers' Accounts, Accounts Receivable, General Intangibles,
Chattel Paper, Instruments,
- --------------------------------------------------------------------------------
Page 25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
Documents of Title, Documents, Investment Property, letters of credit
for the benefit of the Borrowers, and bankers' acceptances held by the
Borrowers, and any rights to payment.
"Related Entity": (a) Any corporation, limited liability company, trust,
partnership, joint venture, or other enterprise which. is a parent,
brother-sister, subsidiary, or affiliate, of the Borrowers, could have
such enterprise's tax returns or financial statements consolidated
with the Borrowers'; could be a member of the same controlled group of
corporations (within the meaning of Section 1563(a)(1), (2) and (3) of
the Internal Revenue Code of 1986, as amended from time to time) of
which the Borrowers are a member, controls or is controlled by the
Borrowers or by any Affiliate of the Borrowers.
(b) Any Affiliate.
"Requirement of Law": As to any Person:
(a)(i) All statutes, rules, regulations, orders, or other
requirements having the force of law and (ii) all court orders and
injunctions, arbitrator's decisions, and/or similar rulings, in each
instance ((i) and (ii)) of or by any federal, state, municipal, and
other governmental authority, or court, tribunal, panel, or other body
which has or claims jurisdiction over such Person, or any property of
such Person, or of any other Person for whose conduct such Person
would be responsible.
(b) That Person's charter, certificate of incorporation,
articles of organization, and/or other organizational documents, as
applicable; and (c) that Person's by-laws and/or other instruments
which deal with corporate or similar governance, as applicable.
"Reserve Percentage": The decimal equivalent of that rate applicable to
the Lender under regulations issued from time to time by the Board of
Governors of the Federal Reserve System for determining the maximum
reserve requirement of that Lender with respect to "Eurocurrency
liabilities" as defined in such regulations. The Reserve Percentage
applicable to a particular Eurodollar Loan shall be based upon that in
effect during the subject Interest Period, with changes in the Reserve
Percentage which take effect during
- --------------------------------------------------------------------------------
Page 26
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
such Interest Period to take effect (and to consequently change any
interest rate determined with reference to the Reserve Percentage) if
and when such change is applicable to such loans.
"Reserves": All (if any) Availability Reserves and Inventory Reserves.
"Revolving Credit": Is defined in Section 2-1.
"Revolving Credit Note": Is defined in Section 2-7.
"Revolving Credit Loan": A term of convenience which refers to so much of
the unpaid principal balance of the Loan Account as bears the same
rate of interest for the same Interest Period. (See Section 2-9(c)).
"Sell Through Game Units": Such Acceptable Inventory consisting of Active
Game Units for sale to retail customers by the Borrowers.
"Sell Through Video Units": Such Acceptable Inventory consisting of Active
Video Units for sale to retail customers by the Borrowers.
"Sellers": Videoland and Victor J. Cianci and Evvy Cianci.
"Stated Amount": The maximum amount for which an L/C may be honored.
"Stock": Such Acceptable Inventory consisting of Active Video Units or
Active Game Units, as the case may be, that are more than nine (9)
months old measured from the date such Unit generally became available
to video retailers for rent (i.e., the "street date").
"Stock Game Units": Such Acceptable Inventory consisting of Stock Game
Units rented to retail customers by the Borrowers.
- --------------------------------------------------------------------------------
Page 27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"Stock Video Units": Such Acceptable Inventory consisting of Stock Video
Units rented to retail customers by the Borrowers.
"Subordinated Debt": Indebtedness which is expressly stated, on terms
satisfactory to Lender in its sole discretion, to be subordinated or
junior in right of payment to Borrowers' Liabilities to Lender.
"Subsidiaries": As defined in the Preamble.
"Suspension Event": Any occurrence, circumstance, or state of facts which
(a) is an Event of Default; or (b) would become an Event of Default if
any requisite notice were given and/or any requisite period of time
were to run and such occurrence, circumstance, or state of facts were
not absolutely cured within any applicable grace period.
"Tangible Net Worth": At any date as of which the amount thereof shall be
determined, the total assets of the Borrowers minus (i) the sum of any
amounts attributable to (a) goodwill, (b) deferred tax asset, (c) all
reserves not already deducted from assets, (d) any write-up in book
value of assets resulting from any revaluation thereof subsequent to
the date of the financial statements referred to in Section 3.10 and
(ii) Total Liabilities minus Subordinated Debt, each determined on a
Consolidated basis in accordance with GAAP.
"Termination Date": The earliest of (a) the Maturity Date, or (b) the
occurrence of any event described in Section 10-11 hereof, or (c) date
set by notice by the Lender to the Borrowers, which notice sets the
Termination Date on account of the occurrence of any Event of Default
other than as described in Section 10-11 hereof.
"Total Debt Service": Total interest expense plus principal payments of
long term debt, payment of cash dividends and capital lease payments,
each determined on a consolidated basis in accordance with GAAP.
- --------------------------------------------------------------------------------
Page 28
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
"UCC": The Uniform Commercial Code as presently in effect in Massachusetts
(Mass. Gen. Laws, Ch. 106).
"Unit": Any single Video Unit or Game Unit.
"Videoland": Cianci's Videoland Inc., an Oregon corporation.
"Year 2000 Problem": The risk that a computer application may not be able
to recognize certain dates or properly perform date sensitive
functions involving dates prior to and after December 31, 1999.
ARTICLE 2 - THE REVOLVING CREDIT:
2.1. Establishment of Revolving Credit.
---------------------------------
(a) The Lender hereby establishes a revolving line of credit (the
"Revolving Credit") in the Borrowers' favor pursuant to which the Lender,
subject to, and in accordance with, the within Agreement, shall make loans and
advances and otherwise provide financial accommodations to and for the account
of the Borrowers as provided herein. The amount available for borrowing under
the Revolving Credit shall be determined by the Lender by reference to
Availability, as determined by the Lender from time to time.
(b) As used herein, the following terms have the following
meanings:
(i) "Availability" refers at any time to the result of the
following:
(A) Borrowing Base.
Minus
(B) The then unpaid principal balance of the Loan
Account.
Minus
(C) The then Stated Amount of all L/C's.
(ii) "Borrowing Base" refers at any time to the lesser of 2-
1(b)(ii)(A) or 2-1 (b)(ii)(B), where:
(A) is the Loan Ceiling.
(B) is the result of the following:
- --------------------------------------------------------------------------------
Page 29
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(I) The result of multiplying the then applicable
Inventory Advance Rate and the number of Units
of the applicable Acceptable Inventory (in
each case net of Inventory Reserves).
Minus
(II) The then aggregate of the Availability
Reserves which initially shall include a
Reserve for sixty (60) days rent for those
locations in the State of Washington for which
the Lender has not received landlord lien
waivers, in form and substance acceptable to
Lender.
(c) Availability shall be based upon Borrowing Base Certificates
furnished as provided in Section 5-4 hereof.
(d) The proceeds of borrowings under the Revolving Credit shall be
used solely in accordance with the Business Plan for working
capital purposes of the Borrowers and for their Capital
Expenditures, all solely to the extent permitted by the within
Agreement.
2.2. Advances in Excess of Borrowing Base. The Lender does not have any
------------------------------------
obligation to make any loan or advance, or otherwise to provide any credit for
the benefit of the Borrowers such that the balance of the Loan Account exceeds
the Borrowing Base. The making of loans, advances, and credits and the
providing of financial accommodations in excess of the Borrowing Base is for the
benefit of the Borrowers and does not affect the obligations of the Borrowers
hereunder; such loans, advances, credits, and financial accommodations
constitute Liabilities. The making of any such loans, advances, and credits and
the providing of financial accommodations, on any one occasion such that the
Borrowing Base is exceeded shall not obligate the Lender to make any such loans,
credits, or advances or to provide any financial accommodation on any other
occasion nor to permit such loans, credits, or advances to remain outstanding.
2.3. Risks of Value of Collateral. The Lender's reference to a given
----------------------------
asset in connection with the making of loans, credits, and advances and the
providing of financial accommodations under the Revolving Credit and/or the
monitoring of compliance with the provisions hereof shall not be deemed a
determination by the Lender relative to the actual value of the asset in
question. All risks concerning the saleability of the Borrowers' Inventory are
and remain upon the Borrowers. All Collateral secures the
- --------------------------------------------------------------------------------
Page 30
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
prompt, punctual, and faithful performance of the Liabilities whether or not
relied upon by the Lender in connection with the making of loans, credits, and
advances and the providing of financial accommodations under the Revolving
Credit.
2.4. Loan Requests.
-------------
(a) Subject to the provisions of the within Agreement, a loan or
advance under the Revolving Credit duly and timely requested by the Borrowers
shall be made pursuant hereto, provided that:
(i) Borrowing Base will not be exceeded; and
(ii) The Revolving Credit has not been suspended as provided
in Section 2-4(i).
(b) Requests for loans and advances under the Revolving Credit may
be requested by the Borrowers in such manner as may from time to time be
acceptable to the Lender.
(c) Subject to the provisions of the within Agreement, the
Borrowers may request a Revolving Credit Loan and elect an interest rate and
Interest Period to be applicable to that Revolving Credit Loan by giving the
Lender notice no later than the following:
(i) If such Revolving Credit Loan is or is to be converted
to a Base Margin Loan: By 11:30AM on the Business Day on which the subject
Revolving Credit Loan is to be made or is to be so converted. Base Margin
Loans requested by the Borrowers, other than those resulting from the
conversion of a Libor Loan, shall not be less than $10,000.00.
(ii) If such Revolving Credit Loan is, or is to be continued
as, or converted to, a Libor Loan: By 1:OOPM Three (3) Libor Business Days
before the end of the then applicable Interest Period. Libor Loans and
conversions to Libor Loans shall each be not less than One Million Dollars
($1,000,000) and in increments of Five Hundred Thousand Dollars ($500,000)
in excess of such minimum. Any Libor Loan which matures while a Suspension
Event is extant shall be converted, at the option of the Lender to a Base
Margin Loan notwithstanding any notice from the Borrowers that such Loan is
to be continued as a Libor Loan.
(d) Any request for a Revolving Credit Loan or for the conversion
of a Revolving Credit Loan which is made after the applicable deadline therefor,
as set forth above, shall be deemed to have been made at the opening of business
on the then next Business Day or Libor Business Day, as
- --------------------------------------------------------------------------------
Page 31
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
applicable. Each request for a Revolving Credit Loan or for the conversion of a
Revolving Credit Loan shall be made in such manner as may from time to time be
acceptable to the Lender.
(e) If, during the Fifteen (15) days immediately preceding the day
on which a loan request is made there has been no unpaid principal balance in
the Loan Account on account of loans and advances under the Revolving Credit,
the loan so requested shall be made (subject to all other provisions of the
within Agreement) no later than the Fifth Business Day after (and not counting)
the day on which the loan otherwise would have been made as provided above.
(f) The Borrowers may request that the Lender cause the issuance of
L/C's for the account of the Borrowers as provided in Section 2-16.
(g) The Lender may rely on any request for a loan or advance, or
other financial accommodation under the Revolving Credit which the Lender, in
good faith, believes to have been made by a person duly authorized to act on
behalf of the Borrowers and may decline to make any such requested loan or
advance, or issuance, or to provide any such financial accommodation pending the
Lender's being furnished with such documentation concerning that person's
authority to act as may be satisfactory to the Lender.
(h) A request by the Borrowers for loan or advance, or other
financial accommodation under the Revolving Credit shall be irrevocable and
shall constitute certification by the Borrowers that as of the date of such
request, each of the following is true and correct:
(i) There has been no material adverse change in the
Borrowers' financial condition from the most recent financial information
furnished Lender pursuant to this Agreement.
(ii) The Borrowers are in compliance with, and has not
breached any of, its covenants contained in this Agreement.
(iii) All or a portion of any loan or advance so requested
will be set aside by the Borrowers to cover all of the Borrowers'
obligations for sales tax on account of sales since the then most recent
borrowing pursuant to the Revolving Credit.
(iv) Each representation which is made herein or in any of
the Loan Documents is then true and complete as of and as if made on the
date of such request.
(v) No Suspension Event is then extant.
(i) Upon the occurrence from time to time of any Suspension Event:
(i) The Lender may suspend the Revolving Credit immediately.
- --------------------------------------------------------------------------------
Page 32
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(ii) The Lender shall not be obligated, during such
suspension, to make any loans or advance, or to provide any financial
accommodation hereunder or to seek the issuance of any L/C.
(iii) The Lender may suspend the right of the Borrowers to
request any Libor Loan or to convert any Base Margin Loan to a Libor Loan.
2.5. Making of Loans Under Revolving Credit.
--------------------------------------
(a) A loan or advance under the Revolving Credit shall be made by
the transfer of the proceeds of such loan or advance to the Funding Account or
as otherwise instructed by the Borrowers.
(b) A loan or advance shall be deemed to have been made under the
Revolving Credit (and the Borrowers shall be indebted to the Lender for the
amount thereof immediately) at the following:
(i) The Lender's initiation of the transfer of the proceeds
of such loan or advance in accordance with the Borrowers'
instructions (if such loan or advance is of funds requested by the
Borrowers).
(ii) The charging of the amount of such loan to the Loan
Account (in all other circumstances).
(c) There shall not be any recourse to or liability of the Lender,
on account of:
(i) Any delay in the making of any loan or advance requested
under the Revolving Credit.
(ii) Any delay in the proceeds of any such loan or advance
constituting collected funds.
(iii) Any delay in the receipt, and/or any loss, of funds
which constitute a loan or advance under the Revolving Credit, the wire
transfer of which was properly initiated by the Lender in accordance with
wire instructions provided to the Lender by the Borrowers.
2.6. The Loan Account.
-----------------
(a) An account ("Loan Account") shall be opened on the books of the
Lender. A record may be kept in the Loan Account of all loans made under or
pursuant to this Agreement and of all payments thereon.
- --------------------------------------------------------------------------------
Page 33
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) The Lender may also keep a record (either in the Loan Account
or elsewhere, as the Lender may from time to time elect) of all interest, fees,
service charges, costs, expenses, and other debits owed the Lender on account of
the Liabilities and of all credits against such amounts so owed.
(c) All credits against the Liabilities shall be conditional upon
final payment to the Lender of the items giving rise to such credits. The
amount of any item credited against the Liabilities which is charged back
against the Lender for any reason or is not so paid shall be a Liability and
shall be added to the Loan Account, whether or not the item so charged back or
not so paid is returned.
(d) Except as otherwise provided herein, all fees, service charges,
costs, and expenses for which the Borrowers are obligated hereunder are payable
on demand. In the determination of Availability, the Lender may deem fees,
service charges, accrued interest, and other payments as having been advanced
under the Revolving Credit whether or not such amounts are then due and payable.
(e) The Lender, without the request of the Borrowers, may advance
under the Revolving Credit any interest, fee, service charge, or other payment
to which the Lender is entitled from the Borrowers pursuant hereto and may
charge the same to the Loan Account notwithstanding that such amount so advanced
may result in Borrowing Base's being exceeded. Such action on the part of the
Lender shall not constitute a waiver of the Lender's rights and Borrowers'
obligations under Section 2-8(b). Any amount which is added to the principal
balance of the Loan Account as provided in this Section 2-6(e) shall bear
interest, subject to Section 2-9(f), at the Base Margin Rate.
(f) Any statement rendered by the Lender to the Borrowers
concerning the Liabilities shall be considered correct and accepted by the
Borrowers and shall be conclusively binding upon the Borrowers unless the
Borrowers provide the Lender with written objection thereto within twenty (20)
days from the mailing of such statement, which written objection shall indicate,
with particularity, the reason for such objection. The Loan Account and the
Lender's books and records concerning the loan arrangement contemplated herein
and the Liabilities shall be prima facie evidence and proof of the items
described therein.
2.7. The Revolving Credit Note. The obligation to repay loans and
-------------------------
advances under the Revolving Credit, with interest as provided herein, shall be
evidenced by a note (the "Revolving Credit Note") in the form of EXHIBIT 2-7,
annexed hereto, executed by the Borrowers. Neither the original nor a copy of
the Revolving Credit Note shall be required, however, to establish or prove any
Liability.
- --------------------------------------------------------------------------------
Page 34
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
In the event that the Revolving Credit Note is ever lost, mutilated, or
destroyed, the Borrowers shall execute a replacement thereof and deliver such
replacement to the Lender.
2.8. Payment of The Loan Account.
---------------------------
(a) The Borrowers may repay all or any portion of the principal
balance of the Loan Account from time to time until the Termination Date. Such
payments shall be applied first to Base Margin Loans and only then to Libor
Loans.
(b) The Borrowers, without notice or demand from the Lender, shall
pay the Lender that amount, from time to time, which is necessary so that the
unpaid balance of the Loan Account does not exceed the Borrowing Base. Such
payments shall be applied first to Base Margin Loans and only then to Libor
Loans.
(c) The Lender shall endeavor to cause those application of
payments (if any), pursuant to Sections 2-8(a) and 2-8(b) against Libor Loans
then outstanding in such manner as results in the least cost to the Borrowers,
but shall not have any affirmative obligation to do so nor liability on account
of the Lender's failure to have done so. In no event shall action or inaction
taken by the Lender excuse the Borrowers from any indemnification obligation
under Section 2-8(e).
(d) The Borrowers shall repay the then entire unpaid balance of the
Loan Account and all other Liabilities on the Termination Date.
(e) The Borrowers shall indemnify the Lender and hold the Lender
harmless from and against any loss, cost or expense (including loss of
anticipated profits) which the Lender may sustain or incur (including, without
limitation, by virtue of acceleration after the occurrence of any Event of
Default) as a consequence of the following:
(i) Default by the Borrowers in payment of the principal
amount of or any interest on any Libor Loan as and when due and payable,
including any such loss or expense arising from interest or fees payable by
the Lender to lenders of funds obtained by it in order to maintain its
Libor Loans
(ii) Default by the Borrowers in making a borrowing or
conversion after the Borrowers have given (or is deemed to have given) a
request for a Revolving Credit Loan or a request to convert a Revolving
Credit Loan from one applicable interest rate to another.
(iii) The making of any payment on a Libor Loan or the making
of any conversion of any such Loan to a Base Margin Loan on a day that is
not the last day of the applicable Interest Period with respect thereto,
including interest or fees payable by the Lender to
- --------------------------------------------------------------------------------
Page 35
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
lenders of funds obtained by it in order to maintain any such Loans as
"breakage fees" (so-called).
2.9. Interest Rates.
--------------
(a) Each Revolving Credit Loan shall bear interest at the Base
Margin Rate unless timely notice is given (as provided in Section 2-4(c)) that
the subject Revolving Credit Loan (or a portion thereof) is, or is to be
converted to, a Libor Loan.
(b) Each Revolving Credit Loan which consists of a Libor Loan shall
bear interest at the applicable Libor Rate.
(c) Subject to the provisions hereof, the Borrowers, by notice to
the Lender, may cause all or a part of the unpaid principal balance of the Loan
Account to bear interest at the Base Margin Rate or the Libor Rate as specified
from time to time by the Borrowers. For ease of reference and administration,
each part of the Loan Account which bears interest at the same interest and for
the same Interest Period is referred to herein as if it were a separate
"Revolving Credit Loan".
(d) The Borrowers shall not select, renew, or convert any interest
rate for a Revolving Credit Loan such that there are more than three interest
rates applicable to the Revolving Credit Loans at any one time.
(e) The Borrowers shall pay accrued and unpaid interest on each
Revolving Credit Loan in arrears as follows:
(i) On the applicable Interest Payment Date for that
Revolving Credit Loan.
(ii) On the Termination Date and on the End Date.
(iii) Following the occurrence of any Event of Default, with
such frequency as may be determined by the Lender.
(f) Following the occurrence of any Event of Default (and whether
or not the Lender exercises the Lender's rights on account thereof), all
Revolving Credit Loans shall bear interest, at the option of the Lender at rate
which is the aggregate of the Base Margin Rate plus Three Percent (3%) per
annum.
(g) The actual annual rate of interest to which the rates
determined in accordance with this Section 2.9 is equivalent to the specified
rate multiplied by the actual number of days during the year, divided by 360:
Interest Rate x 365* = % per year
---
360
- --------------------------------------------------------------------------------
Page 36
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
* (in a leap year, 365 is replaced by 366)
2.10. Commitment Fee.
--------------
(a) As compensation for the Lender's commitment included herein to
make loans and advances to the Borrowers and as compensation for the Lender's
maintenance of sufficient funds available for such purpose, the Lender has
earned a Commitment Fee (so referred to herein) of Six Hundred Thousand Dollars
($600,000.00).
(b) The Commitment Fee shall be paid in full at closing.
2.11. Facility Fee.
------------
(a) In addition to any other fee or expense paid by the Borrowers
on account of the Revolving Credit, the Borrowers shall pay the Lender a
Facility Fee (so referred to herein) of One Hundred and Twenty-Six Thousand
Dollars ($126,000), which has been fully earned by the Lender's execution of the
within Agreement. Subject to this Section 2-11, the Facility Fee shall be paid
to the Lender in monthly installments of Three Thousand Five Hundred Dollars
($3,500.00) each.
(i) A proration of such monthly installment shall be paid
out of the first advance under the Revolving Credit for the period
beginning with the date on which the within Agreement is executed and
ending on the last day of the month of such execution.
(ii) A monthly installment shall be paid on the first day of
the month next following that during which the within Agreement is executed
and on the first day of each month thereafter, until the entire Facility
Fee has been paid.
(b) Upon the termination of the Revolving Credit and, at the
Lender's option, upon the occurrence of any Event of Default described in
Section 10-11, any remaining installments of the Facility Fee shall be
immediately due and payable.
2.12. Line (Unused) Fee. In addition to any other fee by the Borrowers
-----------------
on account of the Revolving Credit, the Borrowers shall pay the Lender a Line
(Unused) Fee (so referred to herein) in arrears, on the first day of each month
(and on the Termination Date). The Line Fee shall be equal to One Half of One
Percent (0.5%) per annum of the average difference, during the month just ended
(or relevant period with respect to the payment being made on the Termination
Date) between the Loan Ceiling and the unpaid principal balance of the Loan
Account.
2.13. Early Termination Fee.
---------------------
- --------------------------------------------------------------------------------
Page 37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(a) In the event that (i) the Termination Date occurs, for any
reason, prior to the Maturity Date, or (ii) the Borrowers elect to prepay all
Liabilities in full and terminate this Agreement, or (iii) the Liabilities are
not paid in full on the Maturity Date (any such event being a "Termination
Event"), the Borrowers shall pay the Lender the Early Termination Fee (so
referred to herein) equal to One Percent (1%) of the Loan Ceiling in effect on
the date of this Agreement.
2.14. Concerning Fees.
---------------
(a) In addition to any other right to which the Lender is then
entitled on account thereof, the Lender may assess an additional reasonable fee
payable by the Borrowers on account of the accommodation, from time to time, by
the Lender to the Borrowers' request that the Lender depart or dispense with one
or more of the administrative provisions of the within Agreement and/or the
Borrowers' failure to comply with any of such provisions.
(i) By way of non-exclusive example, the Lender may assess a
reasonable fee on account of any of the following:
(A) The Borrowers' failure to pay that amount which is
necessary so that the principal balance of the Loan Account does not
exceed Borrowing Base (as required under Section 2-8(b) hereof),
(B) The providing of a loan or advance under the
Revolving Credit or charging of the Loan Account such that the
Borrowing Base would be exceeded.
(C) The foreshortening of any of the time frames with
respect to the making of Revolving Credit Loans as set forth in
Section 2-4(a).
(D) The Borrowers' failure to provide a financial
statement or report within the applicable timeframe provided for
such report under Article 5 hereof.
(ii) The inclusion of the foregoing right on the part of the
Lender to assess a reasonable fee does not constitute an obligation, on the
part of the Lender, to waive any provision of the within Agreement under
any circumstances. The assessment of any such reasonable fee in any
particular circumstance shall not constitute the Lender's waiver of any
breach of the within Agreement on account of which such fee was assessed
nor a course of action on which the Borrowers may rely.
(b) The Borrowers shall not be entitled to any credit, rebate or
repayment of the Commitment Fee, Facility Fee, Line (Unused) Fee, Early
Termination Fee, or other fee previously earned by the Lender pursuant to this
Agreement notwithstanding any termination of the within
- --------------------------------------------------------------------------------
Page 38
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
Agreement or suspension or termination of the Lender's obligation to make loans
and advances hereunder.
2.15. Lender's Discretion.
-------------------
(a) Each reference in the Loan Documents to the exercise of
discretion or the like by the Lender shall be to that Person's exercise of its
judgment, in good faith (which shall be presumed), based upon that Person's
consideration of any such factor as the Lender, taking into account information
of which that Person then has actual knowledge, believes:
(i) Will or reasonably could be expected to affect the value
of the Collateral, the enforceability of the Lender's security and
collateral interests therein, or the amount which the Lender would likely
realize therefrom (taking into account delays which may possibly be
encountered in the Lender's realizing upon the Collateral and likely Costs
of Collection).
(ii) Indicates that any report or financial information
delivered to the Lender by or on behalf of the Borrowers are incomplete,
inaccurate, or misleading in any material manner or was not prepared in
accordance with the requirements of the within Agreement.
(iii) Suggests an increase in the likelihood that the
Borrowers will become the subject of a bankruptcy or insolvency proceeding.
(iv) Constitutes a Suspension Event.
(b) In the exercise of such judgment, the Lender also may take into
account any of the following factors:
(i) Those included in, or tested by, the definitions of
"Acceptable Inventory," "retail," and "cost".
(ii) The current financial and business climate of the
industry in which the Borrowers compete (having regard for the Borrowers'
position in that industry).
(iii) General macroeconomic conditions which have a material
effect on the Borrowers' cost structure.
(iv) Material changes in or to the mix of the Borrowers'
Inventory.
(v) Seasonality with respect to the Borrowers' Inventory and
patterns of retail sales.
- --------------------------------------------------------------------------------
Page 39
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(vi) Such other factors as the Lender determines as having a
material bearing on credit risks associated with the providing of loans and
financial accommodations to the Borrowers.
(c) The burden of establishing the failure of the Lender to have
acted in a reasonable manner in such Person's exercise of discretion shall be
the Borrowers.
2.16. Procedures For Issuance of L/C's.
--------------------------------
(a) The Borrowers may request that the Lender cause the issuance of
L/C's for the account of the Borrowers. Each such request shall be in such
manner as may from time to time be acceptable to the Lender.
(b) The Lender will endeavor to cause the issuance of any L/C so
requested by the Borrowers, provided that , at the time that the request is
made, the Revolving Credit has not been suspended as provided in Section 2-4(i)
and if so issued:
(i) The aggregate Stated Amount of all L/C's then
outstanding, does not exceed Five Hundred Thousand Dollars ($500,000).
(ii) The expiry of the L/C is not later than the earlier of
Thirty (30) days prior to the Maturity Date or the following:
(A) Standby's: One (1) year from initial issuance.
(B) Documentary's: Sixty (60) days from issuance.
(iii) Borrowing Base would not be exceeded.
(c) The Borrowers shall execute such documentation to apply for and
support the issuance of an L/C as may be required by the Issuer.
(d) There shall not be any recourse to, nor liability of, the
Lender on account of
(i) Any delay or refusal by an Issuer to issue an L/C;
(ii) Any action or inaction of an Issuer on account of or in
respect to, any L/C.
(e) The Lender, without the request of the Borrowers, may advance
under the Revolving Credit (and charge to the Loan Account) the amount of any
honoring of any L/C and other amount for which the Borrowers, the Issuer, or the
Lender becomes obligated on account of, or in respect to, any L/C. Such advance
shall be made whether or not a Suspension Event is then extant or such advance
would result in Borrowing Base's being exceeded. Such action shall not
constitute a waiver of the Lender's rights under Section 2-8(b) hereof.
- --------------------------------------------------------------------------------
Page 40
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
2.17. Fees For L/C's.
--------------
(a) The Borrowers shall pay to the Lender a fee, on account of
L/C's, the issuance of which had been procured by the Lender, monthly in
arrears, and on the Termination Date and on the End Date, equal to 2.50% per
annum of the weighted average Stated Amount of all L/C's outstanding during the
period in respect of which such fee is being paid.
(b) In addition to the fee to be paid as provided in Subsection 2-
17(a), above, the Borrowers shall pay to the Lender (or to the Issuer, if so
requested by Lender), on demand, all issuance, processing, negotiation,
amendment, and administrative fees and other amounts charged by the Issuer on
account of, or in respect to, any L/C.
2.18. Concerning L/C's.
----------------
(a) None of the Issuer, the Issuer's correspondents, or any
advising, negotiating, or paying bank with respect to any L/C shall be
responsible in any way for:
(i) The performance by any beneficiary under any L/C of that
beneficiary's obligations to the Borrowers.
(ii) The form, sufficiency, correctness, genuineness,
authority of any person signing; falsification; or the legal effect of, any
documents called for under any L/C if (with respect to the foregoing) such
documents on their face appear to be in order.
(b) The Issuer may honor, as complying with the terms of any L/C
and of any drawing thereunder, any drafts or other documents otherwise in order,
but signed or issued by an administrator, executor, conservator, trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
liquidator, receiver, or other legal representative of the party authorized
under such L/C to draw or issue such drafts or other documents.
(c) Unless otherwise agreed to, in the particular instance, the
Borrowers hereby authorize any Issuer to:
(i) Select an advising bank, if any.
(ii) Select a paying bank, if any.
(iii) Select a negotiating bank.
(d) All directions, correspondence, and funds transfers relating to
any L/C are at the risk of the Borrowers. The Issuer shall have discharged the
Issuer's obligations under any L/C which, or the drawing under which, includes
payment instructions, by the initiation of the method of payment called for in,
and in accordance with, such instructions (or by any other commercially
reasonable and
- --------------------------------------------------------------------------------
Page 41
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
comparable method). Neither the Lender nor the Issuer shall have any
responsibility for any inaccuracy, interruption, error, or delay in transmission
or delivery by post, telegraph or cable, or for any inaccuracy of translation.
(e) The Lender's and the Issuer's rights, powers, privileges and
immunities specified in or arising under this Agreement are in addition to any
heretofore or at any time hereafter otherwise created or arising, whether by
statute or rule of law or contract.
(f) Except to the extent otherwise expressly provided hereunder or
agreed to in writing by the Issuer and the Borrowers, the L/C will be governed
by the Uniform Customs and Practice for Documentary Credits, International
Chamber of Commerce, Publication No. 500, and any subsequent revisions thereof.
(g) If any change in any law, executive order or regulation, or any
directive of any administrative or governmental authority (whether or not having
the force of law), or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof, shall either:
(i) impose, modify or deem applicable any reserve, special
deposit or similar requirements against letters of credit heretofore or
hereafter issued by any Issuer or with respect to which the Lender or any
Issuer has an obligation to lend to fund drawings under any L/C; or
(ii) impose on any Issuer any other condition or requirements
relating to any and the result of any event referred to in Section 2-
18(g)(i) or 2-18(g)(ii), above, shall be to increase the cost to any Issuer
of issuing or maintaining any L/C (which increase in cost shall be the
result of such Issuer's reasonable allocation among that Issuer's letter of
credit customers of the aggregate of such cost increases resulting from
such events), then, upon demand by the Lender and delivery by the Lender to
the Borrowers of a certificate of an officer of the subject Issuer
describing such change in law, executive order, regulation, directive, or
interpretation thereof, its effect on such Issuer, and the basis for
determining such increased costs and their allocation, the Borrowers shall
immediately pay to the Lender, from time to time as specified by the
Lender, such amounts as shall be sufficient to compensate such Issuer for
such increased cost. Any Issuer's determination of costs incurred under
Section 2-18(g)(i) or 2-18(g)(ii), above, and the allocation, if any, of
such costs among the Borrowers and other letter of credit customers
- --------------------------------------------------------------------------------
Page 42
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
of such Issuer, if done in good faith and made on an equitable basis and in
accordance with such officer's certificate, shall be conclusive and binding
on the Borrowers.
(h) The obligations of the Borrowers under the within Agreement
with respect to L/C's are absolute, unconditional, and irrevocable and shall be
performed strictly in accordance with the terms hereof under all circumstances,
whatsoever including, without limitation, the following:
(i) Any lack of validity or enforceability or restriction,
restraint, or stay in the enforcement of the within Agreement, any L/C, or
any other agreement or instrument relating thereto.
(ii) Any amendment or waiver of, or consent to the departure
from, any L/C.
(iii) The existence of any claim, set-off, defense, or other
right which the Borrowers may have at any time against the beneficiary of
any L/C.
(iv) Any good faith honoring of a drawing under any L/C,
which drawing possibly could have been dishonored based upon a strict
construction of the terms of the L/C.
2.19. Changed Circumstances.
---------------------
(a) The Lender may give the Borrowers notice of the occurrence of
the following:
(i) The Lender shall have determined in good faith (which
determination shall be final and conclusive) on any day on which the rate
for a Libor Loan would otherwise be set, that adequate and fair means do
not exist for ascertaining such rate.
(ii) The Lender shall have determined in good faith (which
determination shall be final and conclusive) that:
(A) The continuation of or conversion of any Revolving
Credit Loan to a Libor Loan has been made impracticable or unlawful
by the occurrence of a contingency that materially and adversely
affects the applicable market or compliance by the Lender in good
faith with any applicable law or governmental regulation, guideline
or order or interpretation or change thereof by any governmental
authority charged with the interpretation or administration thereof
or with any request or directive of any such governmental authority
(whether or not having the force of law).
(B) The indices on which the interest rates for Libor
Loans are based shall no longer represent the effective cost to the
Lender for U.S. dollar deposits in the interbank market for deposits
in which it regularly participates.
- --------------------------------------------------------------------------------
Page 43
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) In the event that the Lender gives the Borrowers notice of an
occurrence described in Section 2-19(a), then, until the Lender notifies the
Borrowers that the circumstances giving rise to such notice no longer apply:
(i) The obligation of the Lender to make Libor Loans of the
type affected by such changed circumstances or to permit the Borrowers to
select the affected interest rate as otherwise applicable to any Revolving
Credit Loans shall be suspended.
(ii) Any notice which the Borrowers had given the Lender with
respect to any Libor Loan, the time for action with respect to which has
not occurred prior to the Lender's having given notice pursuant to Section
2-19(a), shall be deemed at the option of the Lender to not having been
given.
2.20. Increased Costs. If, as a result of any requirement of law, or of
---------------
the interpretation or application thereof by any court or by any governmental or
other authority or entity charged with the administration thereof, whether or
not having the force of law, which:
(a) subjects the Lender to any taxes or changes the basis of
taxation, or increases any existing taxes, on payments of principal,
interest or other amounts payable by the Borrowers to the Lender under this
Agreement (except for taxes on the Lender's overall net income or capital
imposed by the jurisdiction in which the Lender's principal or lending
offices are located);
(b) imposes, modifies or deems applicable any reserve, cash margin,
special deposit or similar requirements against assets held by, or deposits
in or for the account of or loans by or any other acquisition of funds by
the relevant funding office of the Lender;
(c) imposes on the Lender any other condition with respect to any
Loan Document; or
(d) imposes on the Lender a requirement to maintain or allocate
capital in relation to the Liabilities;
and the result of any of the foregoing, in the Lender's reasonable opinion, is
to increase the cost to the Lender of making or maintaining any loan, advance or
financial accommodation or to reduce the income receivable by the Lender in
respect of any loan, advance or financial accommodation by an amount which the
Lender deems to be material, then upon the Lender's giving prior written notice
thereof, from time to time, to the Borrowers (such notice to set out in
reasonable detail the facts giving rise to and a summary calculation of such
increased cost or reduced income), the Borrowers shall forthwith pay to the
- --------------------------------------------------------------------------------
Page 44
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
Lender, upon receipt of such notice, that amount which shall compensate the
Lender for such additional cost or reduction in income.
2.21. Concerning Joint and Several Liability of the Borrowers.
-------------------------------------------------------
(a) Each Borrower is accepting joint and several liability
hereunder and under the other Loan Documents in consideration of the
financial accommodations to be provided by the Lender under this Agreement,
for the mutual benefit, directly and indirectly, of such Borrower and in
consideration of the undertakings of each other Borrower to accept joint
and several liability for the Liabilities.
(b) Each Borrower, jointly and severally, hereby irrevocably and
unconditionally accepts, not merely as a surety but also as a co-debtor,
joint and several liability with the other Borrowers, with respect to the
payment and performance of all Liabilities, it being the intention of the
parties that all the Liabilities shall be the joint and several Liabilities
of each of the Borrowers without preferences or distinction.
(c) If and to the extent that any of the Borrowers fail to make any
payment with respect to any of the Liabilities as and when due or to
perform any of the Liabilities in accordance with the terms thereof, then
in each such event the other Borrowers will make such payment with respect
to, or perform, such Liability.
(d) The Liabilities of each Borrower under this Agreement
constitute full recourse Liabilities of Borrowers enforceable against each
Borrower to the full extent of its properties and assets, irrespective of
the validity, regularity, or enforceability of this Agreement or any other
circumstance whatsoever.
(e) Except as otherwise expressly provided in this Agreement, each
Borrower hereby waives notice of acceptance of its joint and several
liability, notice of any Loans made under this Agreement, notice of any
action at any time taken or omitted by the Lender under or in respect of
any of the Liabilities, and generally, to the extent permitted by
applicable law, all demands, notices and other formalities of every kind in
connection with this Agreement.
(f) Each Borrower hereby assents to, and waives notice of, any
extension or postponement of the time for the payment of any of the
Liabilities, the acceptance of any payment of any of the Liabilities, the
acceptance of any partial payment thereon, any waiver, consent or other
action or acquiescence by the Lender at any time or times in respect of any
default by any other Borrower in the performance or satisfaction of any
term, covenant,
- --------------------------------------------------------------------------------
Page 45
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
condition or provision of this Agreement, any and all other indulgences
whatsoever by the Lender in respect of any of the Liabilities, and the
taking, addition, substitution or release, in whole or in part, at any time
or times, of any security for any of the Liabilities or the addition,
substitution or release, in whole or in part, of any other Borrower.
Without limiting the generality of the foregoing, each Borrower assents to
any other action or delay in acting or failure to act on the part of the
Lender with respect to the failure by the other Borrowers to comply with
any of its respective Liabilities, including, without limitation, any
failure strictly or diligently to assert any right or to pursue any remedy
or to comply fully with applicable laws or regulations thereunder, which
might afford grounds for terminating, discharging or relieving any
Borrower, in whole or in part, from any of its Liabilities under this
Section, its being the intention of each Borrower that, so long as any of
the Liabilities hereunder remain unsatisfied, the Liabilities of the
Borrowers shall not be discharged except by performance and then only to
the extent of such performance. The Liabilities of the Borrowers under this
Agreement shall not be diminished or rendered unenforceable by any winding
up, reorganization, arrangement, liquidation, re-construction or similar
proceeding with respect to any of the Borrowers or the Lender. The joint
and several liability of the Borrowers hereunder shall continue in full
force and effect notwithstanding any absorption, merger, amalgamation or
any other change whatsoever in the name, membership, constitution or place
of formation of any of the Borrowers or the Lender.
(g) The provisions of this Section are made for the benefit of the
Lender and its successors and assigns, and may be enforced in good faith by
it from time to time against any or all of the Borrowers as often as
occasion therefor may arise and without requirement on the part of the
Lender first to marshal any of its claims or to exercise any of its rights
against any other Borrower or to exhaust any remedies available to it
against any other Borrower or to resort to any other source or means of
obtaining payment of any of the Liabilities hereunder or to elect any other
remedy. The provisions of this Section shall remain in effect until all of
the Liabilities shall have been paid in full or otherwise fully satisfied.
If at any time, any payment, or any part thereof, made in respect of any of
the Liabilities, is rescinded or must otherwise be restored or returned by
the Lender upon the insolvency, bankruptcy or reorganization, of any of the
Borrowers, or otherwise, the provisions of this Section will forthwith be
reinstated in effect, as though such payment had not been made.
- --------------------------------------------------------------------------------
Page 46
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
2.22 Video City, Inc. as Agent Borrower. The Borrowers for their
----------------------------------
convenience have appointed the Agent Borrower as their agent for the purposes of
entering into the loan arrangements contemplated hereby, requesting advances,
making representations and warranties, and distributing proceeds of Loans and
generally taking such other action as is reasonably necessary to administer the
Loans on behalf of the Borrowers. The Agent Borrower shall execute and deliver
to Lender an Agented Borrowing Agreement by and among the Borrowers and Agent
Borrower, which shall contain terms and conditions satisfactory to Lender in its
sole discretion further evidencing the Agent Borrowers' appointment as agent for
the Borrowers hereunder.
2.23 Intercompany Loans. Each Borrower has agreed that, in the event of
------------------
a request from another Borrower, it will lend, upon prior notice to Lender, to
such other Borrower the lesser of (a) an amount equal to the additional funds
which the Borrower making such loan would then be permitted to borrow under this
Agreement (in excess of the aggregate amount of such borrowings then
outstanding) or (b) an amount equal to such available funds which such lending
Borrower then estimates to be in excess of funds required for the then and
immediate future needs of its business. All such intercompany loans will be on
an open account basis and will bear interest at the same rates then being paid
under the Loan Agreement. Such intercompany loans are not intended to be
represented by promissory notes or other instruments, but if at any time any
such advance is represented by a promissory note or other instrument, the
Borrower which is the holder of such promissory note or other instrument shall
immediately deliver such promissory note or other instrument, together with any
necessary endorsements, to Lender. Notwithstanding anything contained herein to
the contrary, the Borrowers shall be prohibited from making any such
intercompany loans if an Event of Default has occurred and is continuing under
this Agreement or an Event of Default would exist after giving effect to the
intercompany loan.
ARTICLE 3 - CONDITIONS PRECEDENT:
As a condition to the effectiveness of this Agreement, the establishment of
the Revolving Credit, and the making of the first loan under the Revolving
Credit, each of the documents respectively described in Sections 3-1 through and
including 3-5, (each in form and substance satisfactory to the Lender) shall
have been delivered to the Lender, and the conditions respectively described in
Sections 3-6 through and including 3-10, shall have been satisfied:
3.1. Corporate Due Diligence.
-----------------------
- --------------------------------------------------------------------------------
Page 47
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(a) A Certificate of corporate good standing issued by the
Secretary of State for the State of incorporation for each Borrower.
(b) Certificates of due qualification, in good standing, issued by
the Secretary(ies) of State of each State in which the nature of the Borrowers'
business conducted or assets owned could require such qualification.
(c) A Certificate of each of the Borrowers' Assistant Secretaries
of the due adoption, continued effectiveness, and setting forth the texts of,
each corporate resolution adopted in connection with the establishment of the
loan arrangement contemplated by the Loan Documents and attesting to the true
signatures of each Person authorized as a signatory to any of the Loan
Documents.
3.2. Opinion. An opinion of counsel to the Borrowers in form and
-------
substance satisfactory to the Lender.
3.3. Landlord Waivers. The delivery to the Lender of waivers or
----------------
subordinations (each in form satisfactory to the Lender) executed by each of the
Borrowers' landlords.
3.4. Additional Documents. Such additional instruments and documents as
--------------------
the Lender or its counsel reasonably may require or request, including but not
limited to the following documents:
(a) Subordination Agreement executed by the Borrowers and Ingram
Entertainment, Inc. in favor of the Lender.
(b) Subordination Agreement executed by the Borrowers and Rentrak
Corporation in favor of the Lender.
(c) Assignment by the Seller of warranties under the Purchase Agreement
3.5. Officers' Certificates. Certificates executed by the President or
----------------------
Chief Executive Officer and the Chief Financial Officer of the Borrowers and
stating that the representations and warranties made by the Borrowers to the
Lender in the Loan Documents are true and complete as of the date of such
Certificate, and that no event has occurred which is or which, solely with the
giving of notice or passage of time (or both) would be an Event of Default.
3.6. Representations and Warranties. Each of the representations made by
------------------------------
or on behalf of the Borrowers in this Agreement or in any of the other Loan
Documents or in any other report, statement, document, or paper provided by or
on behalf of the Borrowers shall be true and complete as of the date as of which
such representation or warranty was made.
- --------------------------------------------------------------------------------
Page 48
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
3.7. Minimum Excess Availability. The Borrowing Base, after giving
---------------------------
effect to the first funding under the Revolving Credit; all then held checks (if
any); accounts payable which are 30 days beyond credit terms then accorded the
Borrowers; overdrafts, any charges to the Loan Account made in connection with
the establishment of the credit facility contemplated hereby; and L/C's to be
issued at, or immediately subsequent to, such establishment, is not less than
Two Million Dollars ($2,000,000.00).
3.8. All Fees and Expenses Paid. All fees due at or immediately after
--------------------------
the first funding under the Revolving Credit and all costs and expenses incurred
by the Lender in connection with the establishment of the credit facility
contemplated hereby (including the fees and expenses of counsel to the Lender)
shall have been paid.
3.9. No Suspension Event. No Suspension Event shall then exist.
-------------------
3.10. No Adverse Change. No event shall have occurred or failed to occur,
-----------------
which occurrence or failure is or could have a materially adverse effect upon
the Borrowers' financial condition when compared with such financial condition
at October 31, 1998.
3.11. Purchase Agreement The transactions contemplated by the Purchase
------------------
Agreement have closed and been fully consummated.
No document shall be deemed delivered to the Lender until received and accepted
by the Lender at its head offices in Boston, Massachusetts. Under no
circumstances will the within Agreement take effect until executed and accepted
by the Lender at said head office.
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
To induce the Lender to establish the loan arrangement contemplated herein
and to make loans and advances and to provide financial accommodations under the
Revolving Credit (each of which loans shall be deemed to have been made in
reliance thereupon) the Borrowers, in addition to all other representations,
warranties, and covenants made by the Borrowers in any other Loan Document,
makes those representations, warranties, and covenants included in the within
Agreement.
4.1. Payment and Performance of Liabilities. The Borrowers shall pay
--------------------------------------
each Liability when due (or when demanded if payable on demand) and shall
promptly, punctually, and faithfully perform each other Liability.
4.2. Due Organization - Corporate Authorization - No Conflicts.
---------------------------------------------------------
(a) Each Borrower presently is and shall hereafter remain in good
standing as corporation and is and shall hereafter remain duly qualified and in
good standing in every other State in
- --------------------------------------------------------------------------------
Page 49
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
which, by reason of the nature or location of such Borrowers assets or operation
of such Borrowers' business, such qualification may be necessary.
(b) Each Related Entity is listed on EXHIBIT 4-2, annexed hereto.
Each Related Entity is and shall hereafter remain in good standing in the State
in which incorporated and is and shall hereafter remain duly qualified in which
other State in which, by reason of that entity's assets or the operation of such
entity's business, such qualification may be necessary. The Borrowers shall
provide the Lender with prior written notice of any entity's becoming or ceasing
to be a Related Entity.
(c) The Borrowers shall not change their respective States of
incorporation nor their respective taxpayer identification numbers.
(d) Each Borrower has all requisite corporate power and authority to
execute and deliver all Loan Documents to which such Borrower is a party and has
and will hereafter retain all requisite corporate power to perform all
Liabilities.
(e) The execution and delivery by each Borrower of each Loan Document
to which it is a party; each Borrowers' consummation of the transactions
contemplated by such Loan Documents (including, without limitation, the creation
of security interests by such Borrower as contemplated hereby); such Borrowers'
performance under those of the Loan Documents to which it is a party, the
borrowings hereunder; and the use of the proceeds thereof:
(i) Have been duly authorized by all necessary corporate
action.
(ii) Do not, and will not, contravene in any material respect
any provision of any Requirement of Law or obligation of such Borrower.
(iii) Will not result in the creation or imposition of, or the
obligation to create or impose, any Encumbrance upon any assets of such
Borrower pursuant to any Requirement of Law or obligation, except pursuant
to the Loan Documents.
(f) The Loan Documents have been duly executed and delivered by each
Borrower and are the legal, valid and binding obligations of each Borrower,
enforceable against each Borrower in accordance with their respective terms.
4.3. Trade Names.
-----------
(a) EXHIBIT 4-3, annexed hereto, is a listing of:
(i) All names under which the Borrowers have conducted their
business six (6) months prior to the date hereunder and under which they
are conducting their business.
- --------------------------------------------------------------------------------
Page 50
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(ii) All entities and/or persons with whom the Borrowers ever
consolidated or merged, or from whom the Borrowers ever acquired in a
single transaction or in a series of related transactions substantially all
of such entity's or person's assets.
(b) The Borrowers will not change their respective names or conduct
their businesses under any name not listed on EXHIBIT 4-3 except (i) upon not
less than twenty-one (21) days prior written notice (with reasonable
particularity) to the Lender and (ii) in compliance with all other provisions of
this Agreement.
4.4. Infrastructure.
--------------
(a) The Borrowers, and each of them, have and will maintain a
sufficient infrastructure to conduct their business as presently conducted and
as contemplated to be conducted as described in the Business Plan.
(b) Based upon a diligent inquiry undertaken by the Borrowers, it
appears that the computer applications which the Borrowers presently employ do
not have a Year 2000 Problem. The Borrowers, and each of them, will not employ
any computer application hereafter unless the Borrowers shall have first made a
diligent inquiry to assure that no Year 2000 Problem will arise on account of
the use of such application.
(c) The Borrowers, and each of them, own and possess, or have the
right to use (and will hereafter own, possess, or have such right to use) all
patents, industrial designs, trademarks, trade names, trade styles, brand names,
service marks, logos, copyrights, trade secret, know-how, confidential
information, and other intellectual or proprietary property of any third Person
necessary for the conduct their businesses.
(d) The conduct by the Borrowers, and each of them, of their
businesses does not presently infringe (nor will conduct by the Borrowers, or
any of them, of their business in the future so as to infringe) the patents,
industrial designs, trademarks, trade names, trade styles, brand names, service
marks, logos, copyrights, trade secrets, know-how, confidential information, or
other intellectual or proprietary property of any third Person.
4.5. Locations.
---------
(a) The Collateral, and the books, records, and papers of Borrowers,
and each of them, pertaining thereto, are kept and maintained solely at the
Borrowers' chief executive offices at
(i) 370 Amapola Avenue, Suite 208, Torrance, California 90501
and
- --------------------------------------------------------------------------------
Page 51
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(ii) those locations which are listed on EXHIBIT 4-5, annexed
hereto, which EXHIBIT includes, with respect to each such location, the
name and address of the landlord on the Lease which covers such location
(or an indication that the Borrowers, or one of them, owns the subject
location) and of all service bureaus with which any such records are
maintained and the names and addresses of each of the Borrowers' landlords.
(b) Except to the extent permitted under Section 4.5(d), neither the
Borrowers' nor any of them, shall, without Lender's prior consent, remove any of
the Collateral from said chief executive office or those locations listed on
EXHIBIT 4-5 except to:
(i) accomplish sales of Inventory in the ordinary course of
business; or
(ii) move Inventory from one such location to another such
location; or
(iii) utilize such of the Collateral as is removed from such
locations in the ordinary course of business (such as motor vehicles).
(c) Except to the extent permitted under Section 4.5(d), neither the
Borrowers, nor any of them, will:
(i) Execute, alter, modify, or amend any Lease.
(ii) Commit to, or open or close any location at which the
Borrowers, or any of them, maintains, offers for sales, or stores any of
the Collateral.
(d) The Borrowers may, in the absence of any continuing Event of
Default,
(i) Relocate up to ten percent (10%) of its stores in any
twelve month period upon forty-five (45) days prior notice to Lender.
(ii) Open up to five (5) new locations during any 12 month
period upon forty-five (45) days prior notice to Lender.
(iii) Alter, modify or amend any Lease, provided such
modifications are on terms no less favorable to the Borrowers.
(e) Except as otherwise disclosed pursuant to, or permitted by, this
Section 4-5, no tangible personal property of the Borrowers, or any of one of
them, is in the care or custody of any third party or stored or entrusted with a
bailee or other third party and none shall hereafter be placed under such care,
custody, storage, or entrustment.
4.6. Title to Assets.
---------------
- --------------------------------------------------------------------------------
Page 52
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(a) The Borrowers, and each of them is, and shall hereafter remain,
the owner of the Collateral free and clear of all Encumbrances with the
exceptions of the following (the "Permitted Encumbrances"):
(i) Encumbrances in favor of the Lender.
(ii) Those Encumbrances (if any) listed on EXHIBIT 4-6, annexed
hereto.
(b) The Borrowers, and each of them, do not and shall not have
possession of any property on consignment to the Borrowers in excess of One
Hundred Thousand Dollars ($100,000.00) nor any leased Inventory, other than
leased Inventory supplied by Rentrak Corporation or like supplier, which leased
Inventory shall not exceed fifteen percent (15%) of total Active Video Units and
Active Game Units at any one time.
(c) The Borrowers, and each of them, shall not acquire or obtain the
right to use any Equipment, the acquisition or right to use of which Equipment
is otherwise permitted by the within Agreement, in which Equipment any third
party has an interest, except for:
(i) Equipment which is merely incidental to the conduct of the
business of the Borrowers, or any of them.
(ii) Equipment, the acquisition or right to use of which has been
consented to by the Lender, which consent may be conditioned upon the
Lender's receipt of such agreement with the third party which has an
interest in such Equipment as is satisfactory to the Lender.
4.7. Indebtedness. The Borrowers, and each of them, do not and shall not
------------
hereafter have any Indebtedness with the exceptions of:
(a) Any Indebtedness to the Lender.
(b) The Indebtedness (if any) listed on EXHIBIT 4-7, annexed hereto.
(c) Up to One Million Dollars ($1,000,000) of Indebtedness for
purchase money financing for Equipment and Fixtures.
4.8. Insurance Policies.
------------------
(a) EXHIBIT 4-8, annexed hereto, is a schedule of all insurance
policies owned by the Borrowers, or any one of them, or under which the
Borrowers, or any one of them, is the named insured. Each of such policies is
in full force and effect. Neither the issuer of any such policy nor the
Borrowers, or any one of them, is in material default or violation of any such
policy.
(b) The Borrowers, and each of them, shall have and maintain at all
times insurance covering such risks, in such amounts, containing such terms, in
such form, for such periods, and written
- --------------------------------------------------------------------------------
Page 53
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
by such companies as may be satisfactory to the Lender. The coverage reflected
on EXHIBIT 4-8 presently satisfies the foregoing requirements, it being
recognized by the Borrowers, however, that such requirements may change
hereafter to reflect changing circumstances. All insurance carried by each of
the Borrowers shall provide for a minimum of Sixty (60) days' written notice of
cancellation to the Lender and all such insurance which covers the Collateral
shall include an endorsement in favor of the Lender, which endorsement shall
provide that the insurance, to the extent of the Lender's interest therein,
shall not be impaired or invalidated, in whole or in part, by reason of any act
or neglect of the Borrowers or by the failure of the Borrowers to comply with
any warranty or condition of the policy. In the event of the failure by the
Borrowers to maintain insurance as required herein, the Lender, at its option,
may obtain such insurance, provided, however, the Lender's obtaining of such
insurance shall not constitute a cure or waiver of any Event of Default
occasioned by the Borrowers' failure to have maintained such insurance. The
Borrowers shall furnish to the Lender certificates or other evidence
satisfactory to the Lender regarding compliance by the Borrowers with the
foregoing insurance provisions.
(c) The Borrowers shall advise the Lender of each claim in excess of
$50,000.00 made by the Borrowers, under any policy of insurance which covers the
Collateral and will permit the Lender , at the Lender's option in each instance,
to the exclusion of the Borrowers, to conduct the adjustment of each such claim
(and of all claims following the occurrence of any Suspension Event). The
Borrowers hereby appoints the Lender as the Borrowers' attorney in fact to
obtain, adjust, settle, and cancel any insurance described in this section and
to endorse in favor of the Lender any and all drafts and other instruments with
respect to such insurance. The within appointment, being coupled with an
interest, is irrevocable until this Agreement is terminated by a written
instrument executed by a duly authorized officer of the Lender. The Lender
shall not be liable on account of any exercise pursuant to said power except for
any exercise in actual willful misconduct and bad faith. The Lender may apply
any proceeds of such insurance against the Liabilities, whether or not such have
matured, in such order of application as the Lender may determine.
4.9. Licenses. Each license, distributorship, franchise, and similar
--------
agreement issued to, or to which the Borrowers, or any one of them, is a party
is in full force and effect. No party to any such license or agreement is in
material default or violation thereof. None of the Borrowers has received any
notice or threat of cancellation of any such license or agreement.
4.10. Leases. EXHIBIT 4-10, annexed hereto, is a schedule of all presently
------
effective Capital Leases. Exhibit 4-5 includes a list of all other presently
effective Leases. Each of such Leases and
- --------------------------------------------------------------------------------
Page 54
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
Capital Leases is in full force and effect. No party to any such Lease or
Capital Lease is in material default or violation of any such Lease or Capital
Lease and none of the Borrowers has received any notice or threat of
cancellation of any such Lease or Capital Lease. The Borrowers hereby authorize
the Lender at any time and from time to time to contact any of the Borrowers'
landlords in order to confirm the Borrowers' continued compliance with the terms
and conditions of the Lease(s) between the Borrowers and that landlord and to
discuss such issues, concerning the Borrowers' occupancy under such Lease(s), as
the Lender may determine.
4.11. Requirements of Law. The Borrowers, and each of them, is in
-------------------
compliance with, and shall hereafter comply with and use its assets in
compliance with, all Requirements of Law. None of the Borrowers has received any
notice of any violation of any Requirement of Law (whether or not such violation
is material), which violation has not been cured or otherwise remedied.
4.12. Maintain Properties. The Borrowers, and each of them, shall:
-------------------
(a) Keep the Collateral in good order and repair (ordinary
reasonable wear and tear and insured casualty excepted).
(b) Not suffer or cause the waste or destruction of any material
part of the Collateral.
(c) Not use any of the Collateral in violation of any policy of
insurance thereon.
(d) Not sell, lease, or otherwise dispose of any of the Collateral,
other than the following:
(i) The sale of Inventory in compliance with the within
Agreement.
(ii) The disposal of Equipment which is obsolete, worn out, or
damaged beyond repair, which Equipment is replaced to the extent necessary
to preserve or improve the operating efficiency of the Borrowers.
(iii) The turning over to the Lender of all Receipts as
provided herein.
4.13. Pay Taxes.
---------
(a) The Borrowers have received written notice from the Internal
Revenue Service that the Internal Revenue Service has completed its examination
of the Borrowers' federal income tax returns for all examined tax years through
and including the Borrowers' taxable year referenced on EXHIBIT 4-13, annexed
hereto, and that all deficiencies, assessments, and other amounts asserted as a
result of such examinations have been fully paid or settled. No agreement is
extant which waives or extends any statute of limitations applicable to the
right of the Internal Revenue Service to assert a
- --------------------------------------------------------------------------------
Page 55
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
deficiency or make any other claim for or in respect to federal income taxes,
except as disclosed in EXHIBIT 4-13. No issue has been raised in any such
examination which, by application of similar principles, reasonably could be
expected to result in the assertion of a deficiency for any fiscal year open for
examination, assessment, or claim by the Internal Revenue Service, except as
disclosed in EXHIBIT 4-13.
(b) The Borrowers have received written notice from the respective
state and local taxing authorities to which the Borrowers are subject that such
authorities have completed their respective examination of the Borrowers'
return(s) for all state and local income, excise, sales, and other taxes for
which the Borrowers are liable for the respective examined tax years referenced
on EXHIBIT 4-13, annexed hereto, and that all deficiencies, assessments, and
other amounts asserted as a result of such examinations have been fully paid or
settled. No agreement is extant which waives or extends any statute of
limitations applicable to the right of any state taxing authority to assert a
deficiency or make any other claim for or in respect to any such state taxes.
No issue has been raised in any such examination which, by application of
similar principles, reasonably could be expected to result in the assertion of a
deficiency for any fiscal year open for examination, assessment, or claim by any
state or local taxing authority.
(c) Except as disclosed on said EXHIBIT 4-13, there are no
examinations of or with respect to the Borrowers presently being conducted by
the Internal Revenue Service or any other taxing authority.
(d) The Borrowers have, and hereafter shall: pay, as they become due
and payable, all taxes and unemployment contributions and other charges of any
kind or nature levied, assessed or claimed against the Borrowers, or any one of
them, or the Collateral by any person or entity whose claim could result in an
Encumbrance upon any asset of the Borrowers or by any governmental authority;
properly exercise any trust responsibilities imposed upon the Borrowers by
reason of withholding from employees' pay or by reason of the Borrowers' receipt
of sales tax or other funds for the account of any third party; timely make all
contributions and other payments as may be required pursuant to any Employee
Benefit Plan now or hereafter established by the Borrowers; and timely file all
tax and other returns and other reports with each governmental authority to whom
the Borrowers is obligated to so file.
(e) At its option, the Lender may, but shall not be obligated to, pay
any taxes, unemployment contributions, and any and all other charges levied or
assessed upon the Borrowers, or any one of them, or the Collateral by any person
or entity or governmental authority, and make any
- --------------------------------------------------------------------------------
Page 56
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
contributions or other payments on account of the Borrowers' Employee Benefit
Plan as the Lender , in the Lender's discretion, may deem necessary or
desirable, to protect, maintain, preserve, collect, or realize upon any or all
of the Collateral or the value thereof or any right or remedy pertaining
thereto, provided, however, the Lender's making of any such payment shall not
constitute a cure or waiver of any Event of Default occasioned by the Borrowers'
failure to have made such payment.
4.14. No Margin Stock. None of the Borrowers are engaged in the business
---------------
of extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations G,U,T, and X of the Board of Governors of the
Federal Reserve System of the United States). No part of the proceeds of any
borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.
4.15. ERISA. The Borrowers nor any ERISA Affiliate ever has or hereafter
-----
shall:
(a) Violate or fail to be in full compliance with the Borrowers'
Employee Benefit Plan.
(b) Fail timely to file all reports and filings required by ERISA
to be filed by the Borrowers.
(c) Engage in any "prohibited transactions" or "reportable events"
(respectively as described in ERISA).
(d) Engage in, or commit, any act such that a tax or penalty could
be imposed upon the Borrowers on account thereof pursuant to ERISA.
(e) Accumulate any material funding deficiency within the meaning
of ERISA.
(f) Terminate any Employee Benefit Plan such that a lien could be
asserted against any assets of the Borrowers on account thereof pursuant to
ERISA.
(g) Be a member of, contribute to, or have any obligation under
any Employee Benefit Plan which is a multiemployer plan within the meaning of
Section 4001 (a) of ERISA.
4.16. Hazardous Materials.
-------------------
(a) Neither the Borrowers, nor any of them, has ever:
(i) Been legally responsible for any release or threat of
release of any Hazardous Material.
(ii) Received notification of any release or threat of release
of any Hazardous Material from any site or vessel occupied or operated by
the Borrowers, or any of them, and/or of the incurrence of any expense or
loss in connection with the assessment,
- --------------------------------------------------------------------------------
Page 57
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
containment, or removal of any release or threat of release of any
Hazardous Material from any such site or vessel.
(b) The Borrowers, and each of them, shall:
(i) Dispose of any Hazardous Material only in compliance with
all Environmental Laws.
(ii) Not store on any site or vessel occupied or operated by
the Borrowers, or any of them, and not transport or arrange for the
transport of any Hazardous Material, except if such storage or transport is
in the ordinary course of the Borrowers' business and is in compliance with
all Environmental Laws.
(c) The Borrowers shall provide the Lender with written notice upon
the Borrowers' obtaining knowledge of any incurrence of any expense or loss by
any governmental authority or other Person in connection with the assessment,
containment, or removal of any Hazardous Material, for which expense or loss the
Borrowers, or any one of them, may be liable.
4.17. Litigation. Except as described in EXHIBIT 4-17, annexed hereto,
----------
there is not presently pending or threatened by or against the Borrowers, or any
of them, any suit, action, proceeding, or investigation which, if determined
adversely to the Borrowers, or any of them, would have a material adverse effect
upon the Borrowers' financial condition or ability to conduct their business as
such business is presently conducted or is contemplated to be conducted in the
foreseeable future.
4.18. Dividends or Investments. Neither the Borrowers, nor any of them,
------------------------
shall without the consent of Lender.
(a) Pay any cash dividend or make any other distribution in respect
of any class of the Borrowers' capital stock, except the Borrowers may, without
the consent of Lender, pay such cash dividends as provided on EXHIBIT 4.18(a)
hereto provided there has not occurred a continuing Event of Default and there
--------
would not be an Event of Default after giving effect to such cash dividends.
(b) Own, redeem, retire, purchase, or acquire any of the Borrowers'
capital stock, except for Agent Borrower's ownership of the Subsidiaries stock.
(c) Invest in or purchase any stock or securities or rights to
purchase any such stock or securities, of any corporation or other entity,
except as contemplated by the Purchase Agreement.
(d) Merge or consolidate or be merged or consolidated with or into
any other corporation or other entity, except as provided on EXHIBIT 4.18(d)
hereto.
- --------------------------------------------------------------------------------
Page 58
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(e) Consolidate any of the Borrowers' operations with those of any
other corporation or other entity.
(f) Organize or create any Related Entity, except as contemplated
by the Purchase Agreement.
(g) Subordinate any debts or obligations owed to the Borrowers by
any third party to any other debts owed by such third party to any other Person.
(h) Acquire any assets other than in the ordinary course and
conduct of the Borrowers' business as conducted at the execution of this
Agreement.
4.19. Loans. Neither the Borrowers, nor any of them, shall make any loans
-----
or advances to, nor acquire the Indebtedness of, any Person, provided, however,
the foregoing does not prohibit any of the following:
(a) Advance payments made to the Borrowers' suppliers in the
ordinary course.
(b) Advances to the Borrowers' officers, employees, and
salespersons with respect to reasonable expenses to be incurred by such
officers, employees, and salespersons for the benefit of the Borrowers, which
expenses are properly substantiated by the person seeking such advance and
properly reimbursable by the Borrowers.
(c) Assumption of Indebtedness in connection with future
acquisitions with Lender's prior consent.
4.20. Protection of Assets. The Lender, in the Lender's discretion, and
--------------------
from time to time, may discharge any tax or Encumbrance on any of the
Collateral, or take any other action that the Lender may deem necessary or
desirable to repair, insure, maintain, preserve, collect, or realize upon any of
the Collateral. The Lender shall not have any obligation to undertake any of
the foregoing and shall have no liability on account of any action so undertaken
except where there is a specific finding in a judicial proceeding (in which the
Lender has had an opportunity to be heard), from which finding no further appeal
is available, that the Lender had acted in actual bad faith or in a grossly
negligent manner. The Borrowers shall pay to the Lender, on demand, or the
Lender, in its discretion, may add to the Loan Account, all amounts paid or
incurred by the Lender pursuant to this section. The obligation of the
Borrowers to pay such amounts is a Liability.
4.21. Line of Business. Neither the Borrowers, nor any one of them,
----------------
shall engage in any business other than the business in which they are currently
engaged or a business reasonably related thereto (the conduct of which
reasonably related business is reflected in the Business Plan).
- --------------------------------------------------------------------------------
Page 59
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
4.22. Affiliate Transactions. Neither the Borrowers, nor any one of them,
----------------------
shall make any payment, nor give any value to any Related Entity except for
goods and services actually purchased by the Borrowers from, or sold by the
Borrowers to, such Related Entity for a price and on terms which shall
(a) be competitive and fully deductible as an "ordinary and
necessary business expense" and/or fully depreciable under the Internal Revenue
Code of 1986 and the Treasury Regulations, each as amended, and
(b) not be less favorable from those which would have been charged
in an arms length transaction.
4.23. Executive Pay.
-------------
(a) The only Executive Officers of the Borrowers, at the execution
of the within Agreement, are those individuals referenced in the definition of
"Executive Officers", above.
(b) Prior to the execution of the within Agreement, the Borrowers
furnished the Lender with copies of all written Executive Agreements and
outlines of the salient features of all unwritten Executive Agreements (as
amended to date) then extant. There are no unwritten agreements or
understandings between the Borrowers and any Executive Officer which relate to
Executive Pay, written disclosure of which has not been made to the Lender.
(c) Neither the Borrowers, nor any of them, will
(i) Enter into any Executive Agreement not extant at the
execution of the within Agreement except as permitted by Section
4.23(c)(ii) hereof.
(ii) Alter, amend, supplement, renew, extend, change or
supplant any Executive Agreement, except Borrowers may, in the absence of
any continuing Event of Default or the occurrence of any Event of Default
after giving effect to such changes, increase Executive Pay by up to
fifteen percent (15%) per year in the case of Robert Y. Lee and fifty
percent (50%) per year in the case of the Chief Financial Officer and may
issue such stock in such classes and amounts as the Borrowers consider
prudent in their reasonable business judgment.
(iii) Pay, provide, or facilitate any Executive Pay other than
as provided in an Executive Agreement or, if not covered by an Executive
Agreement, as permitted pursuant to Section 4-22 hereof.
4.24. Additional Assurances.
---------------------
- --------------------------------------------------------------------------------
Page 60
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(a) Neither the Borrowers, nor any of them, is the owner of, nor
have they any interest in, any property or asset which, immediately upon the
satisfaction of the conditions precedent to the effectiveness of the credit
facility contemplated hereby (Article 3) will be not be subject to a perfected
security or other collateral interest in favor of the Lender (subject only to
Permitted Encumbrances) to secure the Liabilities.
(b) Neither the Borrowers, nor any of them, will hereafter acquire
any asset or any interest in property which is not, immediately upon such
acquisition, subject to such a perfected security or other collateral interest
in favor of the Lender to secure the Liabilities (subject only to Permitted
Encumbrances).
(c) The Borrowers shall execute and deliver to the Lender such
instruments, documents, and papers, and shall do all such things from time to
time hereafter as the Lender may reasonably request to carry into effect the
provisions and intent of this Agreement, to protect and perfect the Lender's
security interests in the Collateral; and to comply with all applicable statutes
and laws, and facilitate the collection of the Receivables Collateral. The
Borrowers shall execute all such instruments as may be required by the Lender
with respect to the recordation and/or perfection of the security interests
created herein.
(d) The Borrowers, and each of them, hereby designates the Lender
as and for the true and lawful attorney for the Borrowers, and each of them,
with full power of substitution, to sign and file any financing statements in
order to perfect or protect the Lender's security and other collateral interests
in the Collateral.
(e) A carbon, photographic, or other reproduction of this Agreement
or of any financing statement or other instrument executed pursuant to this
Section 4-24 shall be sufficient for filing to perfect the security interests
granted herein.
4.25. Adequacy of Disclosure.
----------------------
(a) All financial statements furnished to the Lender by the
Borrowers have been prepared in accordance with GAAP consistently applied and
present fairly the condition of the Borrowers at the date(s) thereof and the
results of operations and cash flows for the period(s) covered. There has been
no change in the financial condition, results of operations, or cash flows of
the Borrowers since the date(s) of such financial statements, other than changes
in the ordinary course of business, which changes have not been materially
adverse, either singularly or in the aggregate.
- --------------------------------------------------------------------------------
Page 61
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(b) The Borrowers do not have any contingent obligations or
obligation under any Lease or Capital Lease which is not noted in the Borrowers'
financial statements furnished to the Lender prior to the execution of the
within Agreement.
(c) No document, instrument, agreement, or paper now or hereafter
given the Lender by or on behalf of the Borrowers or any guarantor of the
Liabilities in connection with the execution of the within Agreement by the
Lender contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary in order to make the statements
therein not misleading. There is no fact known to the Borrowers which has, or
which, in the foreseeable future could have, a material adverse effect on the
financial condition of the Borrowers or any such guarantor which has not been
disclosed in writing to the Lender.
4.26. Other Covenants. Neither the Borrowers, nor any of them, shall
---------------
indirectly do or cause to be done any act which, if done directly by the
Borrowers, or any one of them, would breach any covenant contained in this
Agreement.
4.27. Ownership. One Hundred Percent (100%) of the capital stock of each
---------
of the Subsidiaries is and, in the absence of the consent of Lender, shall
remain wholly owned by Video City.
4.28. Acquisition.
------------
(a) The Purchase Agreement has been duly authorized, executed and
delivered by each of the parties thereto and constitute the complete legal,
valid and binding obligations of each such party, enforceable in accordance with
its terms.
(b) All necessary governmental and third party consents, approvals,
releases and filings required to be obtained to effect the transactions
contemplated by the Purchase Agreement have been obtained and are in full force
and effect.
(c) The closing pursuant to the Purchase Agreement has occurred, or
will occur simultaneously with the execution of this Agreement and Video City
has acquired all of the right, title and interest in and to all of the capital
stock of Videoland in accordance with the Purchase Agreement.
(d) All representations and warranties of the parties to the
Purchase Agreement are, to the best of the Borrowers' knowledge, including the
schedules and exhibits thereto, were, at the time of the closing, true and
correct in all material respects.
(e) The Borrowers have delivered to the Lender a true, correct and
complete copy of the Purchase Agreement, including all exhibits and schedules
thereto.
- --------------------------------------------------------------------------------
Page 62
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
4.29. Management. Robert Y. Lee presently devotes, and shall hereafter
----------
devote One Hundred Percent (100%) of his working time to the management of the
Borrowers and shall not enter in any agreements to manage any other business
venture, including without limitation other businesses in the same or
substantially same business as the Borrowers.
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:
5.1. Maintain Records. The Borrowers shall:
----------------
(a) At all times, keep proper books of account, in which full,
true, and accurate entries shall be made of all of the Borrowers' transactions,
all in accordance with GAAP applied consistently with prior periods to fairly
reflect the financial condition of the Borrowers at the close of, and its
results of operations for, the periods in question.
(b) Timely provide the Lender with those financial reports,
statements, and schedules required by this Article 5 or otherwise, each of which
reports, statements and schedules shall be prepared, to the extent applicable,
in accordance with GAAP applied consistently with prior periods to fairly
reflect the financial condition of the Borrowers at the close of, and its
results of operations for, the period(s) covered therein.
(c) At all times, keep accurate current records of the Collateral
including, without limitation, accurate current stock, cost, and sales records
of its Inventory, accurately and sufficiently itemizing and describing the
kinds, types, and quantities of Inventory and the cost and selling prices
thereof.
(d) At all times, retain independent certified public accountants
who are reasonably satisfactory to the Lender and instruct such accountants to
fully cooperate with, and be available to, the Lender to discuss the Borrowers'
financial performance, financial condition, operating results, controls, and
such other matters, within the scope of the retention of such accountants, as
may be raised by the Lender.
(e) Not change the Borrowers' fiscal year.
5.2. Access to Records.
-----------------
(a) The Borrowers shall accord the Lender and the Lender's
representatives with access from time to time as the Lender and such
representatives may require to all properties owned by or over which the
Borrowers has control. The Lender and the Lender's representatives shall have
the right, and the Borrowers will permit the Lender and such representatives
from time to time as the Lender
- --------------------------------------------------------------------------------
Page 63
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
and such representatives may request, to examine, inspect, copy, and make
extracts from any and all of the Borrowers' books, records, electronically
stored data, papers, and files. The Borrowers shall make all of the Borrowers'
copying facilities available to the Lender.
(b) The Borrowers hereby authorize the Lender and the Lender's
representatives to:
(i) Inspect, copy, duplicate, review, cause to be reduced to
hard copy, run off, draw off, and otherwise use any and all computer or
electronically stored information or data which relates to the Borrowers,
or any service bureau, contractor, accountant, or other person, and directs
any such service bureau, contractor, accountant, or other person fully to
cooperate with the Lender and the Lender's representatives with respect
thereto.
(ii) Verify at any time the Collateral or any portion thereof,
including verification with Account Debtors, and/or with the Borrowers'
computer billing companies, collection agencies, and accountants and to
sign the name of the Borrowers on any notice to the Borrowers' Account
Debtors or verification of the Collateral.
5.3. Immediate Notice to Lender.
--------------------------
(a) The Borrowers shall provide the Lender with written notice
immediately upon the occurrence of any of the following events, which written
notice shall be with reasonable particularity as to the facts and circumstances
in respect of which such notice is being given:
(i) Any change in the Borrowers' Executive Officers.
(ii) The completion of any physical count of the Borrowers'
Inventory (together with a copy of the certified results thereof).
(iii) Any ceasing of the Borrowers' making of payment exceeding
$25,000.00, in the ordinary course, to any of its creditors (including the
ceasing of the making of such payments on account of a dispute with the
subject creditor).
(iv) Any failure by the Borrowers to pay rent at any of the
Borrowers' locations, which failure continues for more than Ten (10) days
following the day on which such rent first came due.
(v) Any material change in the business, operations, or
financial affairs of the Borrowers.
(vi) The occurrence of any Suspension Event.
- --------------------------------------------------------------------------------
Page 64
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(vii) Any intention on the part of the Borrowers to discharge
the Borrowers' present independent accountants or any withdrawal or
resignation by such independent accountants from their acting in such
capacity (as to which, see Subsection 5-1 (d)).
(viii) Any litigation which, if determined adversely to the
Borrowers, might have a material adverse effect on the financial condition
of the Borrowers.
(b) The Borrowers shall:
(i) Provide the Lender, when so distributed, with copies of
any materials distributed to the shareholders of the Borrowers (qua such
shareholders).
(ii) Add the Lender as an addressee on all mailing lists
maintained by or for the Borrowers.
(iii) At the request of the Lender, from time to time, provide
the Lender with copies of all advertising (including copies of all print
advertising and duplicate tapes of all video and radio advertising).
(iv) Provide the Lender, when received by the Borrowers, with a
copy of any management letter or similar communications from any accountant
of the Borrowers.
5.4. Borrowing Base Certificate. The Borrowers shall provide the Lender by
--------------------------
2:00PM, daily, with a Borrowing Base Certificate (in the form of EXHIBIT 5-4
annexed hereto, as such form may be revised from time to time by the Lender).
Such Certificate may be sent to the Lender by facsimile transmission, provided
that the original thereof is forwarded to the Lender on the date of such
transmission.
5.5. Weekly Reports. Weekly, on Tuesday of each week (as of the then
--------------
immediately preceding Sunday) the Borrowers shall provide the Lender with a
sales audit report and a flash collateral report (each in such form as may be
specified from time to time by the Lender ). Such report may be sent to the
Lender by facsimile transmission, provided that the original thereof is
forwarded to the Lender on the date of such transmission.
5.6. Monthly Reports.
---------------
(a) Monthly, the Borrowers shall provide the Lender with original
counterparts of the following (each in such form as the Lender from time to time
may specify and certified by the President or Chief Financial Officer of the
Borrowers as to the accuracy thereof):
(i) Within fifteen (15) days of the end of the previous month:
- --------------------------------------------------------------------------------
Page 65
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(A) An Inventory Certificate concerning the Borrowers'
Inventory.
(B) An Active Inventory (Depreciation) Report concerning the
Borrowers' Inventory.
(ii) Within thirty (30) days of the end of the previous month:
(A) Officers' Compliance Certificate.
(B) Reconciliations of the Active Inventory (Depreciation)
Report and Inventory Certificate to Availability and to the general
ledger as of the end of the month.
(C) A schedule of purchases from the Borrowers' ten biggest
vendors (in terms of year to date producers), which schedule shall be
in such form as may be satisfactory to Lender and shall include year
to date cumulative purchases and an aging of payables to each such
vendor.
(D) An aging of Borrowers' accounts payable.
(E) An internally prepared financial statement of the
Borrowers' financial condition the results of its operations (a) for
the period ending with the end of the subject month, which such
financial statement shall include, at a minimum, a balance sheet,
invoice statement (on a store specific and on a "consolidated" basis),
cash flow and comparison of some sales for the corresponding month of
the then immediately previous year, as well as to the Business Plan.
(b) For the purposes of Sections 5-6(a)(i) and (ii), above, the first
"previous month" in respect of which the items required by that Section shall be
December 1998.
5.7. Quarterly Reports. Quarterly, within Forty Five (45) days following
-----------------
the end of each of the Borrowers' fiscal quarters, the Borrowers shall provide
the Lender with an original counterpart of a management prepared Consolidated
financial statement of the Borrowers for the period from the beginning of the
Borrowers' then current fiscal year through the end of the subject quarter, with
comparative information for the same period of the previous fiscal year, which
statement shall include, at a minimum, a Consolidated balance sheet,
Consolidated income statement (on a store specific and on a "consolidated"
basis), Consolidated statement of changes in shareholders' equity, and
Consolidated cash flows and comparisons for the corresponding quarter of the
then immediately previous year, as well as to the Business Plan.
- --------------------------------------------------------------------------------
Page 66
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
5.8. Annual Reports.
--------------
(a) Annually, within ninety (90) days following the end of the
Borrowers' fiscal year, the Borrowers shall furnish the Lender with an original
signed counterpart of the Borrowers' Consolidated annual financial statement,
which statement shall have been prepared by, and bear the unqualified opinion
of, the Borrowers' independent certified public accountants (i.e. said statement
shall be "certified" by such accountants). Such annual statement shall include,
at a minimum (with comparative information for the then prior fiscal year) a
balance sheet, income statement, statement of changes in shareholders' equity,
and cash flows.
(b) No later than the earlier of Fifteen (1 5) days prior to the end
of each of the Borrowers' fiscal years or the date on which such accountants
commence their work on the preparation of the Borrowers' Consolidated annual
financial statement, the Borrowers shall give written notice to such accountants
(with a copy of such notice, when sent, to the Lender) that:
(i) Such annual Consolidated financial statement will be
delivered by the Borrowers to the Lender.
(ii) It is the primary intention of the Borrowers, in its
engagement of such accountants, to satisfy the financial reporting
requirements set forth in this Article 5.
(iii) The Borrowers has been advised that the Lender will rely
thereon with respect to the administration of, and transactions under, the
credit facility contemplated by the within Agreement.
(c) Each annual statement shall be accompanied by such accountant's
Certificate indicating that, in the preparation of such annual statement, such
accountants did not conclude that any Suspension Event had occurred during the
subject fiscal year (or if one or more had occurred, the facts and circumstances
thereof).
5.9. Officers' Certificates. The Borrowers shall cause the Borrowers'
----------------------
President or Chief Executive Officer and Chief Financial Officer respectively to
provide such Person's Certificate with those monthly, quarterly, and annual
statements to be furnished pursuant to this Agreement, which Certificate shall:
(a) Indicate that the subject statement was prepared in accordance
with GAAP consistently applied and presents fairly the financial condition of
the Borrowers at the close of, and the results of the Borrowers' operations and
cash flows for, the period(s) covered, subject, however to the following:
- --------------------------------------------------------------------------------
Page 67
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(i) usual year end adjustments (this exception shall not be
included in the Certificate which accompanies such annual statement).
(ii) Material Accounting Changes (in which event, such
Certificate shall include a schedule (in reasonable detail) of the effect
of each such Material Accounting Change) not previously specifically taken
into account in the determination of the financial performance covenant
imposed pursuant to Section 5-12.
(b) Indicate either that (i) no Suspension Event has occurred or
(ii) if such an event has occurred, its nature (in reasonable detail) and the
steps (if any) being taken or contemplated by the Borrowers to be taken on
account thereof.
(c) Include calculations concerning the Borrowers' compliance (or
failure to comply) at the date of the subject statement with each of the
financial performance covenants included in Section 5-12 hereof.
5.10. Inventories, Appraisals, and Audits.
-----------------------------------
(a) The Lender, at the expense of the Borrowers, may participate in
and/or observe each physical count and/or inventory of so much of the Collateral
as consists of Inventory which is undertaken on behalf of the Borrowers.
(b) The Borrowers, at their own expense, shall cause not less than
four (4) physical inventories to be undertaken in each twelve (1 2) month period
during which this Agreement is in effect (the spacing of the scheduling of
which inventories shall be subject to the Lender's discretion) conducted by such
inventory takers as are satisfactory to the Lender and following such
methodology as may be satisfactory to the Lender.
(i) The Borrowers shall provide the Lender with a copy of the
preliminary results of each such inventory (as well as of any other
physical inventory undertaken by the Borrowers) within ten (10) days
following the completion of such inventory.
(ii) The Borrowers shall provide the Lender with a
reconciliation of the results of each such inventory (as well as of any
other physical inventory undertaken by the Borrowers) to the Borrowers'
books and records within thirty (30) days following the completion of such
inventory.
(iii) The Lender, in its discretion, following the occurrence of
a Suspension Event, may cause such additional inventories to be taken as
the Lender determines (each, at the expense of the Borrowers).
- --------------------------------------------------------------------------------
Page 68
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(c) The Borrowers shall provide the Lender, within 7 days following
the completion of any inventory conducted by or for the Borrowers, with a
reconciliation of the results of that inventory to the inventory as reflect on
the books of the Borrowers immediately prior to such completion.
(d) Upon the Lender's request from time to time, the Borrowers shall
permit the Lender to obtain up to four (4) appraisals (in all events, at the
Borrowers' expense) conducted by such appraisers as are satisfactory to the
Lender, provided however, following the occurrence and during the continuance of
an Event of Default, Borrowers shall permit the Lender to obtain as many
appraisals (at Borrower's expense) as the Lender determines necessary.
(e) The Lender contemplates conducting Four (4) commercial finance
audits (in each event, at the Borrowers' expense not to exceed $45,000.00 plus
out of pocket expenses during any Twelve (12) month period) of the Borrowers'
books and records during any Twelve (1 2) month period during which the within
Agreement is in effect, but in its discretion, may undertake additional such
audits at such additional cost following the occurrence of an Event of Default.
(f) The Lender from time to time (in all events, at the Borrowers'
expense not to exceed $2,500.00 per year plus out of pocket expenses during any
Twelve (12) month period) may undertake "mystery shopping" (so-called) visits to
all or any of the Borrowers' business premises, but in its discretion, Lender
may undertake additional "mystery shopping" at such additional cost following
the occurrence of an Event of Default. The Lender shall provide the Borrowers
with a copy of any non-company confidential results of such mystery shopping.
5.11. Additional Financial Information.
--------------------------------
(a) In addition to all other information required to be provided
pursuant to this Article 5, the Borrowers promptly shall provide the Lender (and
any guarantor of the Liabilities), with such other and additional information
concerning the Borrowers, the Collateral, the operation of the Borrowers'
business, and the Borrowers' financial condition, including original
counterparts of financial reports and statements, as the Lender may from time to
time reasonably request from the Borrowers.
(b) The Borrowers may provide the Lender, from time to time
hereafter, with updated projections of the Borrowers' anticipated performance
and operating results.
(c) In all events, the Borrowers, no sooner than Ninety (90) nor
later than Sixty (60) days prior to the end of each of the Borrowers' fiscal
years, shall furnish the Lender with an updated and extended projection which
shall go out at least through the end of the then next fiscal year.
- --------------------------------------------------------------------------------
Page 69
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE, INC.
- --------------------------------------------------------------------------------
(d) Such updated and extended projections shall be prepared pursuant
to a methodology and shall include such assumptions as are satisfactory to the
Lender,
(e) The Lender, following the receipt of any of such projections,
may, but shall not be under any obligation to, provide its written sign-off on
such projections (in which event, such Projections shall become the Business
Plan) and if it provides such written sign-off, may by written notice to the
Borrowers, extend or revise the financial performance covenants included on
EXHIBIT 5-12, annexed hereto.
(f) In the event that the Lender does not provide its sign-off with
respect to the updated and extended projections to be provided at year-end
pursuant to Section 5-11 (c), above, then the Lender, by written notice to the
Borrowers, may revise, roll-over, or extend, for the then coming fiscal year,
the financial performance covenants applicable to the Borrowers pursuant to
Section 5-12 hereof by extrapolation from the Business Plan.
(g) The Borrowers recognize that all appraisals, inventories,
analysis, financial information, and other materials which the Lender may
obtain, develop, or receive with respect to the Borrowers is confidential to the
Lender and that, except as otherwise provided herein, the Borrowers are not
entitled to receipt of any of such appraisals, inventories, analysis, financial
information, and other materials, nor copies or extracts thereof or therefrom.
5.12. Financial Performance Covenants. The Borrowers shall observe and
-------------------------------
comply with those financial performance covenants set forth on EXHIBIT 5-12(a),
annexed hereto, certain of which covenants are based on the Business Plan set
forth on EXHIBIT 5-12(b), annexed hereto. Such financial performance covenants
are subject to change, revision, roll over, and extension as provided in Section
5-11(e) hereof. Compliance with such financial performance covenants shall be
made as if no Material Accounting Changes had been made (other than any Material
Accounting Changes specifically taken into account in the setting of such
covenants). The Lender may determine the Borrowers' compliance with such
covenants based upon financial reports and statements provided by the Borrowers
to the Lender (whether or not such financial reports and statements are required
to be furnished pursuant to the within Agreement) as well as by reference to
interim financial information provided to, or developed by, the Lender.
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:
- --------------------------------------------------------------------------------
Page 70
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
6.1. Use of Inventory Collateral.
---------------------------
(a) The Borrowers shall not engage in any sale of the Inventory
other than for fair consideration in the conduct of the Borrowers' business in
the ordinary course and shall not engage in sales or other dispositions to
creditors; sales or other dispositions in bulk; and any use of any of the
Inventory in brea ch of any provision of this Agreement.
(b) No sale of Inventory shall be on consignment, approval, or
under any other circumstances such that, with the exception of the Borrowers'
customary return policy applicable to the return of inventory purchased by the
Borrowers' retail customers in the ordinary course, such Inventory may be
returned to the Borrowers without the consent of the Lender .
6.2. Inventory Quality. All Inventory now owned or hereafter acquired by
-----------------
the Borrowers is and will be of good and merchantable quality and free from
defects (other than defects within customary
trade tolerances).
6.3. Adjustments and Allowances. The Borrowers may grant such allowances
--------------------------
or other adjustments to the Borrowers' Account Debtors (exclusive of extending
the time for payment of any Account or Account Receivable, which shall not be
done without first obtaining the Lender's prior written consent in each
instance) as the Borrowers may reasonably deem to accord with sound business
practice, provided, however, the authority granted the Borrowers pursuant to
this Section 6-3 may be limited or terminated by the Lender at any time in the
Lender's discretion.
6.4. Validity of Accounts.
--------------------
(a) The amount of each Account shown on the books, records, and
invoices of the Borrowers represented as owing by each Account Debtor is and
will be the correct amount actually owing by such Account Debtor and shall have
been fully earned by performance by the Borrowers.
(b) The Borrowers have no knowledge of any impairment of the
validity or collectibility of any of the Accounts and shall notify the Lender of
any such fact immediately after Borrowers becomes aware of any such impairment.
(c) The Borrowers shall not post any bond to secure the Borrowers'
performance under any agreement to which the Borrowers are a party nor cause any
surety, guarantor, or other third party obligee to become liable to perform any
obligation of the Borrowers (other than to the Lender ) in the event of the
Borrowers' failure so to perform.
- --------------------------------------------------------------------------------
Page 71
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
6.5. Notification to Account Debtors. The Lender shall have the right at
-------------------------------
any time (whether or not an Event of Default has occurred) to notify any of the
Borrowers' Account Debtors to make payment directly to the Lender and to collect
all amounts due on account of the Collateral.
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:
7.1. Depository Accounts.
-------------------
(a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all present
DDA'S, which Schedule includes, with respect to each depository (i) the name and
address of that depository, (ii) the account number(s) of the account(s)
maintained with such depository; and (iii) a contact person at such depository.
(b) The Borrowers shall deliver to the Lender, as a condition to
the effectiveness of the within Agreement:
(i) Notification, executed on behalf of the Borrowers, to
each depository institution with which any DDA is maintained (other than
the Operating Account or any Local DDA), in form satisfactory to the
Lender, of the Lender's interest in such DDA.
(ii) An agreement (generally referred to as a "Blocked Account
Agreement"), in form satisfactory to the Lender with any depository
institution at which both any DDA (other than the Operating Account) and
the Operating Account is maintained.
(c) The Borrowers will not establish any DDA hereafter (other than
a Local DDA) unless, contemporaneous with such establishment, the Borrowers
deliver to the Lender an agreement (in form satisfactory to the Lender) executed
on behalf of the depository with which such DDA is being established.
7.2. Credit Card Receipts.
--------------------
(a) Annexed hereto as EXHIBIT 7-2, is a Schedule which describes
all arrangements to which the Borrowers are a party with respect to the payment
to the Borrowers of the proceeds of all credit card charges for sales by the
Borrowers.
(b) The Borrowers shall deliver to the Lender, as a condition to
the effectiveness of the within Agreement, notification, executed on behalf of
the Borrowers, to each of the Borrowers' credit card clearinghouses and
processors of notice (in form satisfactory to the Lender ), which notice
provides that payment of all credit card charges submitted by the Borrowers to
that clearinghouse or other
- --------------------------------------------------------------------------------
Page 72
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
processor and any other amount payable to the Borrowers by such clearinghouse or
other processor shall be directed to the Concentration Account or as otherwise
designated from time to time by the Lender. The Borrowers shall not change such
direction or designation except upon and with the prior written consent of the
Lender.
7.3. The Concentration, Blocked, and Operating Accounts.
--------------------------------------------------
(a) The following checking accounts have been or will be
established (and are so referred to herein):
(i) The Concentration Account: Established by the Lender with
BankBoston, N.A.
(ii) The Blocked Account: Established by the Borrowers with
Bank of America.
(iii) The Operating Account: Established by the Borrowers with
Bank of America.
(b) The contents of each DDA (other than the Operating Account) and
of the Blocked Account constitutes Collateral and Proceeds of Collateral. The
contents of the Concentration Account constitutes the Lender's property.
(c) The Borrowers:
(i) Contemporaneous with the execution of the within
Agreement, shall provide the Lender with such agreement (generally referred
to as a "Blocked Account Agreement") of the depository with which the
Blocked Account is maintained as may be satisfactory to the Lender; and
(ii) Shall not establish any Blocked Account prior written
notice to the Lender and the hereafter except upon not less than Thirty
(30) delivery to the Lender of a similar such days agreement.
(d) The Borrowers shall pay all fees and charges of, and maintain
such impressed balances as may be required by the Lender or by any bank in which
any account is opened as required hereby (even if such account is opened by
and/or is the property of the Lender).
7.4. Proceeds and Collection of Accounts.
-----------------------------------
(a) All Receipts constitute Collateral and proceeds of Collateral
and shall be held in trust by the Borrowers for the Lender, shall not be
commingled with any of the Borrowers' other funds; and shall be deposited and/or
transferred only to the Blocked Account.
- --------------------------------------------------------------------------------
Page 73
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) The Borrowers shall cause the ACH or wire transfer to the
Blocked Account, no less frequently than daily (and whether or not there is then
an outstanding balance in the Loan Account) of
(i) the then contents of each DDA (other than (A) any Local
DDA and (B) the Funding Account), each such transfer to be net of any
minimum balance, not to exceed $750.00, as may be required to be maintained
in the subject DDA by the bank at which such DDA is maintained); and
(ii) the proceeds of all credit card charges not otherwise
provided for maintained); and pursuant hereto.
Telephone advice (confirmed by written notice) shall be provided to the Lender
on each Business Day on which any such transfer is made.
(c) Whether or not any Liabilities are then outstanding, the
Borrowers shall cause the ACH or wire transfer to the Concentration Account, no
less frequently than daily, of then entire ledger balance of the Blocked
Account, net of such minimum balance, not to exceed $750.00, as may be required
to be maintained in the Blocked Account by the bank at which the Blocked Account
is maintained.
(d) In the event that, notwithstanding the provisions of this
Section 7-4, the Borrowers receive or otherwise has dominion and control of any
Receipts, or any proceeds or collections of any Collateral, such Receipts,
proceeds, and collections shall be held in trust by the Borrowers for the Lender
and shall not be commingled with any of the Borrowers' other funds or deposited
in any account of the Borrowers other than as instructed by the Lender.
7.5. Payment of Liabilities.
----------------------
(a) On each Business Day, the Lender shall apply, towards the
Liabilities, the then collected balance of the Concentration Account (net of
fees charged, and of such impressed balances as may be required by the bank at
which the Concentration Account is maintained), provided, however, for purposes
of the calculation of interest on the unpaid principal balance of the Loan
Account, such payment shall be deemed to have been made One (1) Business Day
after such transfer.
(b) The following rules shall apply to deposits and payments under
and pursuant to this Agreement:
- --------------------------------------------------------------------------------
Page 74
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(i) Funds shall be deemed to have been deposited to the
Concentration Account on the Business Day on which deposited, provided that
notice of such deposit is available to the Lender by 2:00PM on that
Business Day.
(ii) Funds paid to the Lender, other than by deposit to the
Concentration Account, shall be deemed to have been received on the
Business Day when they are good and collected funds, provided that notice
of such payment is available to the Lender by 2:00PM on that Business Day.
(iii) If notice of a deposit to the Concentration Account
(Section 7-5(b)(i)) or payment (Section 7-5(b)(ii)) is not available to the
Lender until after 2:00PM on a Business Day, such deposit or payment shall
be deemed to have been made at 9:00AM on the then next Business Day.
(iv) All deposits to the Concentration Account and other
payments to the Lender are subject to clearance and collection.
(c) The Lender shall transfer to the Operating Account any surplus
in the Concentration Account remaining after the application towards the
Liabilities referred to in Section 7-5(a), above (less those amount which are to
be netted out, as provided therein) provided, however, in the event that both
(i) a Suspension Event has occurred and (ii) one or more L/C's are then
outstanding, the Lender may establish a funded reserve of up to 110% of the
aggregate Stated Amounts of such L/C's.
7.6. The Operating Account. Except as otherwise specifically provided
---------------------
in, or permitted by, the within Agreement, all checks shall be drawn by the
Borrowers upon, and other disbursements shall be made by the Borrowers solely
from, the Operating Account.
ARTICLE 8 - GRANT OF SECURITY INTEREST:
8.1. Grant of Security Interest. To secure the Borrowers' prompt,
--------------------------
punctual, and faithful performance of all and each of the Liabilities, the
Borrowers hereby grant to the Lender a continuing security interest in and to,
and assign to the Lender, the following, and each item thereof, whether now
owned or now due, or in which the Borrowers have an interest, or hereafter
acquired, arising, or to become due, or in which the Borrowers obtain an
interest, and all products, Proceeds, substitutions, and accessions of or to any
of the following (all of which, together with any other property in which the
Lender may in the future be granted a security interest, is referred to herein
as the "Collateral"):
- --------------------------------------------------------------------------------
Page 75
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(a) All Accounts and accounts receivable.
(b) All Inventory.
(c) All General Intangibles.
(d) All Equipment.
(e) All Goods.
(f) All Fixtures.
(g) All Chattel Paper.
(h) All books, records, and information relating to the Collateral
and/or to the operation of the Borrowers' business, and all rights of access to
such books, records, and information, and all property in which such books,
records, and information are stored, recorded, and maintained.
(i) All Investment Property, Instruments, Documents, Deposit
Accounts, policies and certificates of insurance, deposits, impressed accounts,
compensating balances, money, cash, or other property.
(j) All insurance proceeds, refunds, and premium rebates,
including, without limitation, proceeds of fire and credit insurance, whether
any of such proceeds, refunds, and premium rebates arise out of any of the
foregoing.(8-1 (a) through 8-1 (i)) or otherwise.
(k) All liens, guaranties, rights, remedies, and privileges
pertaining to any of the foregoing (8-1 (a) through 8-1 (i)), including the
right of stoppage in transit.
(l) All Leasehold Interests.
8.2. Extent and Duration of Security Interest. The within grant of a
----------------------------------------
security interest is in addition to, and supplemental of, any security interest
previously granted by the Borrowers to the Lender and shall continue in full
force and effect applicable to all Liabilities until all Liabilities have been
paid and/or satisfied in full and the security interest granted herein is
specifically terminated in writing by a duly authorized officer of the Lender.
8.3. Purchase Money Financing. Lender agrees to subordinate its security
------------------------
interest granted herein on Equipment and Fixtures which is subject to
Indebtedness for purchase money financing permitted by Section 4.7(c).
ARTICLE 9 - LENDER AS BORROWERS' ATTORNEY-IN-FACT:
9.1. Appointment as Attorney-in-Fact. The Borrowers hereby irrevocably
-------------------------------
constitute and appoint the Lender as the Borrowers' true and lawful attorney,
with full power of substitution, to convert
- --------------------------------------------------------------------------------
Page 76
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
the Collateral into cash at the sole risk, cost, and expense of the Borrowers,
but for the sole benefit of the Lender. The rights and powers granted the Lender
by the within appointment include but are not limited to the right and power to:
(a) Prosecute, defend, compromise, or release any action relating
to the Collateral.
(b) Sign change of address forms to change the address to which the
Borrowers' mail is to be sent to such address as the Lender shall designate;
receive and open the Borrowers' mail; remove any Receivables Collateral and
Proceeds of Collateral therefrom and turn over the balance of such mail either
to the Borrowers or to any trustee in bankruptcy, receiver, assignee for the
benefit of creditors of the Borrowers, or other legal representative of the
Borrowers whom the Lender determines to be the appropriate person to whom to so
turn over such mail.
(c) Endorse the name of the Borrowers in favor of the Lender upon
any and all checks, drafts, notes, acceptances, or other items or instruments,
sign and endorse the name of the Borrowers on, and receive as secured party, any
of the Collateral, any invoices, schedules of Collateral, freight or express
receipts, or bills of lading, storage receipts, warehouse receipts, or other
documents of title respectively relating to the Collateral.
(d) Sign the name of the Borrowers on any notice to the Borrowers'
Account Debtors or verification of the Receivables Collateral, sign the
Borrowers' name on any Proof of Claim in Bankruptcy against Account Debtors, and
on notices of lien, claims of mechanic's liens, or assignments or releases of
mechanic's liens securing the Accounts.
(e) Take all such action as may be necessary to obtain the payment
of any letter of credit and/or banker's acceptance of which the Borrowers are a
beneficiary.
(f) Repair, manufacture, assemble, complete, package, deliver,
alter or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of the Borrowers.
(g) Use, license or transfer any or all General Intangibles of the
Borrowers.
9.2. No Obligation to Act. The Lender shall not be obligated to do any of
--------------------
the acts or to exercise any of the powers authorized by Section 9-1 herein, but
if the Lender elects to do any such act or to exercise any of such powers, it
shall not be accountable for more than it actually receives as a result of such
exercise of power, and shall not be responsible to the Borrowers for any act or
omission to act except for any act or omission to act as to which there is a
final determination made in a judicial proceeding (in which proceeding the
Lender has had an opportunity to be heard) which determination
- --------------------------------------------------------------------------------
Page 77
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
includes a specific finding that the subject act or omission to act had been
grossly negligent or in actual bad faith.
ARTICLE 10 - EVENTS OF DEFAULT:
The occurrence of any event described in this Article 10 respectively shall
constitute an "Event of Default" herein. Upon the occurrence of any Event of
Default described in Section 10-1 1, any and all Liabilities shall become due
and payable without any further act on the part of the Lender. Upon the
occurrence of any other Event of Default, any and all Liabilities shall become
immediately due and payable, at the option of the Lender and without notice or
demand. The occurrence of any Event of Default shall also constitute, without
notice or demand, a default under all other agreements between the Lender and
the Borrowers and instruments and papers given the Lender by the Borrowers,
whether such agreements, instruments, or papers now exist or hereafter arise.
10.1. Failure to Pay Revolving Credit. The failure by the Borrowers to pay
-------------------------------
any amount when due under the Revolving Credit.
10.2. Failure To Make Other Payments. The failure by the Borrowers to pay
------------------------------
when due (or upon demand, if payable on demand) any payment Liability other than
under the Revolving Credit.
10.3. Failure to Perform Covenant or Liability (No Grace Period). The
----------------------------------------------------------
failure by the Borrowers to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant or Liability not otherwise described in
Section 10-1 or Section 10-2 hereof, and included in any of the following
provisions hereof:
<TABLE>
<CAPTION>
Section Relates to:
------- ----------
<C> <S>
4-5 Location of Collateral
4-6 Title to Assets
4-7 Indebtedness
4-8 Insurance Policies
4-13 Pay taxes
4-22 Affiliate Transactions
4-24 Additional Assurances
6-1 Use of Collateral
Article 5 Reporting Requirements and Financial Covenants
</TABLE>
- --------------------------------------------------------------------------------
Page 78
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Article 7 Cash Management
</TABLE>
10.4. Failure to Perform Covenant or Liability (Grace Period). The
-------------------------------------------------------
failure by the Borrowers, upon Ten (10) days written notice by the Lender, to
cure the Borrowers' failure to promptly, punctually and faithfully perform,
discharge, or comply with any covenant or Liability not described in any of
Sections 10-1, 10-2, or 10-3 hereof.
10.5. Misrepresentation. The determination by the Lender that any
-----------------
representation or warranty at any time made by the Borrowers to the Lender, was
not true or complete in all material respects when given.
10.6. Acceleration of Other Debt. Breach of Lease. The occurrence of any
-------------------------------------------
event such that any Indebtedness of the Borrowers to any creditor other than the
Lender could be accelerated or, without the consent of the Borrowers, any Lease
could be terminated (whether or not the subject creditor or lessor takes any
action on account of such occurrence), other than termination as a result of the
expiration of the term of the Lease.
10.7. Default Under Other Agreements. The occurrence of any breach or
------------------------------
default under any agreement between the Lender and the Borrowers or instrument
or paper given the Lender by the Borrowers, whether suc agreement, instrument,
or paper now exists or hereafter arises (notwithstanding that the Lender may not
have exercised its rights upon default under any such other agreement,
instrument or paper).
10.8. Uninsured Casualty Loss. The occurrence of any uninsured loss,
-----------------------
theft, damage, or destruction of or to any material portion of the Collateral.
10.9. Judgment. Restraint of Business.
--------------------------------
(a) The service of process upon the Lender or any Participant
seeking to attach, by trustee, mesne, or other process, any of the Borrowers'
funds on deposit with, or assets of the Borrowers in the possession of, the
Lender or such Participant.
(b) The entry of any judgment in an amount exceeding $50,000.00 or
in such lesser amount as may otherwise result in the occurrence of an Event of
Default hereunder, against the Borrowers, which judgment is not satisfied (if a
money judgment) or appealed from (with execution or similar process stayed)
within fifteen (15) days of its entry.
(c) The entry of any order or the imposition of any other process
having the force of law, the effect of which is to restrain in any material way
the conduct by the Borrowers of their business in the ordinary course.
- --------------------------------------------------------------------------------
Page 79
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
10.10. Business Failure. Any act by, against, or relating to the Borrowers,
----------------
or their property or assets, which act constitutes the application for, consent
to, or sufferance of the appointment of a receiver, trustee, or other person,
pursuant to court action or otherwise, over all, or any part of the Borrowers'
property; the granting of any trust mortgage or execution of an assignment for
the benefit of the creditors of the Borrowers, or the occurrence of any other
voluntary or involuntary liquidation or extension of debt agreement for the
Borrowers; the offering by or entering into by the Borrowers of any composition,
extension, or any other arrangement seeking relief from or extension of the
debts of the Borrowers without the Lender's prior consent, or the initiation of
any judicial or non-judicial proceeding or agreement by, against, or including
the Borrowers which seeks or intends to accomplish a reorganization or
arrangement with creditors, and/or the initiation by or on behalf of the
Borrowers of the liquidation or winding up of all or any part of the Borrowers'
business or operations, other than the closing or relocation of stores as
permitted by Section 4.5 hereof.
10.11. Bankruptcy. The failure by the Borrowers to generally pay the debts
----------
of the Borrowers as they mature; adjudication of bankruptcy or insolvency
relative to the Borrowers; the entry of an order for relief or similar order
with respect to the Borrowers in any proceeding pursuant to the Bankruptcy Code
or any other federal bankruptcy law; the filing of any complaint, application,
or petition by the Borrowers initiating any matter in which the Borrowers are or
may be granted any relief from the debts of the Borrowers pursuant to the
Bankruptcy Code or any other insolvency statute or procedure; the filing of any
complaint, application, or petition against the Borrowers initiating any matter
in which the Borrowers are or may be granted any relief from the debts of the
Borrowers pursuant to the Bankruptcy Code or any other insolvency statute or
procedure, which complaint, application, or petition is not timely contested in
good faith by the Borrowers by appropriate proceedings or, if so contested, is
not dismissed within thirty (30) days of when filed.
10.12. Default by Guarantor or Related Entity. The occurrence of any of the
--------------------------------------
foregoing Events of Default with respect to any guarantor of the Liabilities, or
the occurrence of any of the foregoing Events of Default with respect to any
parent (if the Borrowers are corporations), subsidiary, or Related Entity, as if
such guarantor, parent, or Related Entity were the "Borrowers" described
therein.
10.13. Indictment - Forfeiture. The indictment of, or institution of any
-----------------------
legal process or proceeding against, the Borrowers, under any federal, state,
municipal, and other civil or criminal statute, rule, regulation, order, or
other requirement having the force of law where the relief, penalties, or
remedies sought or available include the forfeiture of any property of the
Borrowers and/or the
- --------------------------------------------------------------------------------
Page 80
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
imposition of any stay or other order, the effect of which could be to restrain
in any material way the conduct by the Borrowers of their business in the
ordinary course.
10.14. Termination of Guaranty. The termination or attempted termination
-----------------------
of any guaranty by any guarantor of the Liabilities.
10.15. Challenge to Loan Documents.
---------------------------
(a) Any challenge by or on behalf of the Borrowers or any
guarantor of the Liabilities to the validity of any Loan Document or the
applicability or enforceability of any Loan Document strictly in accordance with
the subject Loan Document's terms or which seeks to void, avoid, limit, or
otherwise adversely affect any security interest created by or in any Loan
Document or any payment made pursuant thereto.
(b) Any determination by any court or any other judicial or
government authority that any Loan Document is not enforceable strictly in
accordance with the subject Loan Document's terms or which voids, avoids,
limits, or otherwise adversely affects any security interest created by any Loan
Document or any payment made pursuant thereto.
10.16. Executive Management. The death, disability, or failure of any of
--------------------
Robert Y. Lee and Timothy J. Denari at any time to exercise that authority and
discharge those management responsibilities with respect to the Borrowers as are
exercised and discharged by such Person at the execution of the within
Agreement.
10.17. Change in Control. Any Change in Control.
-----------------
10.18. Change in Supplier Agreements. Any material change made, without
-----------------------------
Lender's prior consent to any agreement existing as of the date of this
Agreement with Rentrak Corporation, Mortco, Inc., or Ingram Entertainment Inc.
for the supply of prerecorded video cassettes, DVDs, video games, tapes, discs,
and other products.
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT:
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Lender is provided prior to the occurrence of an Event of
Default, the Lender shall have the following rights and remedies upon the
occurrence of any Event of Default and at any time thereafter. No stay which
otherwise might be imposed pursuant to Section 362 of the Bankruptcy Code or
otherwise shall stay,
- --------------------------------------------------------------------------------
Page 81
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
limit, prevent, hinder, delay, restrict, or otherwise prevent the Lender's
exercise of any of such rights and remedies.
11.1. Rights of Enforcement. The Lender shall have all of the rights and
---------------------
remedies of a secured party upon default under the UCC, in addition to which the
Lender shall have all and each of the following rights and remedies:
(a) To collect the Receivables Collateral with or without the
taking of possession of any of the Collateral.
(b) To take possession of all or any portion of the Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or processing
as the Lender deems advisable and with or without the taking of possession of
any of the Collateral.
(d) To conduct one or more going out of business sales which
include the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the Proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
(f) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
11.2. Sale of Collateral.
------------------
(a) Any sale or other disposition of the Collateral may be at
public or private sale upon such terms and in such manner as the Lender deems
advisable, having due regard to compliance with any statute or regulation which
might affect, limit, or apply to the Lender's disposition of the Collateral.
(b) The Lender, in the exercise of the Lender's rights and
remedies upon default, may conduct one or more going out of business sales, in
the Lender's own right or by one or more agents and contractors. Such sale(s)
may be conducted upon any premises owned, leased, or occupied by the Borrowers.
The Lender and any such agent or contractor, in conjunction with any such sale,
may augment the Inventory with other goods (all of which other goods shall
remain the sole property of the Lender or such agent or contractor). Any amounts
realized from the sale of such goods which constitute augmentations to the
Inventory (net of an allocable share of the costs and expenses incurred in their
disposition) shall be the sole property of the Lender or such agent or
contractor and neither the Borrowers nor any Person claiming under or in right
of the Borrowers shall have any interest therein.
- --------------------------------------------------------------------------------
Page 82
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(c) Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized market (in
which event the Lender shall provide the Borrowers with such notice as may be
practicable under the circumstances), the Lender shall give the Borrowers at
least seven (7) days prior written notice of the date, time, and place of any
proposed public sale, and of the date after which any private sale or other
disposition of the Collateral may be made. The Borrowers agree that such
written notice shall satisfy all requirements for notice to the Borrowers which
are imposed under the UCC or other applicable law with respect to the exercise
of the Lender's rights and remedies upon default.
(d) The Lender may purchase the Collateral, or any portion of it
at any sale held under this Article.
(e) The Lender shall apply the proceeds of any exercise of the
Lender's Rights and Remedies under this Article 11 towards the Liabilities in
such manner, and with such frequency, as the Lender determines.
11.3. Occupation of Business Location. In connection with the Lender's
-------------------------------
exercise of the Lender's rights under this Article 11, the Lender may enter
upon, occupy, and use any premises owned or occupied by the Borrowers, and may
exclude the Borrowers from such premises or portion thereof as may have been so
entered upon, occupied, or used by the Lender. The Lender shall not be required
to remove any of the Collateral from any such premises upon the Lender's taking
possession thereof, and may render any Collateral unusable to the Borrowers. In
no event shall the Lender be liable to the Borrowers for use or occupancy by the
Lender of any premises pursuant to this Article 11, nor for any charge (such as
wages for the Borrowers' employees and utilities) incurred in connection with
the Lender's exercise of the Lender's Rights and Remedies.
11.4. Grant of Nonexclusive License. The Borrowers hereby grant to the
-----------------------------
Lender a royalty free nonexclusive irrevocable license to use, apply, and affix
any trademark, trade name, logo, or the like in which the Borrowers now or
hereafter have rights, such license being with respect to the Lender's exercise
of the rights hereunder including, without limitation, in connection with any
completion of the manufacture of Inventory or sale or other disposition of
Inventory.
11.5. Assembly of Collateral. The Lender may require the Borrowers to
----------------------
assemble the Collateral and make it available to the Lender at the Borrowers'
sole risk and expense at a place or places which are reasonably convenient to
both the Lender and Borrowers.
- --------------------------------------------------------------------------------
Page 83
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
11.6. Rights and Remedies. The rights, remedies, powers, privileges, and
-------------------
discretions of the Lender hereunder (herein, the " Lender's Rights and
Remedies") shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have. No delay or omission by the Lender in exercising or
enforcing any of the Lender's Rights and Remedies shall operate as, or
constitute, a waiver thereof. No waiver by the Lender of any Event of Default or
of any default under any other agreement shall operate as a waiver of any other
default hereunder or under any other agreement. No single or partial exercise of
any of the Lender's Rights or Remedies, and no express or implied agreement or
transaction of whatever nature entered into between the Lender and any person,
at any time, shall preclude the other or further exercise of the Lender's Rights
and Remedies. No waiver by the Lender of any of the Lender's Rights and Remedies
on any one occasion shall be deemed a waiver on any subsequent occasion, nor
shall it be deemed a continuing waiver. All of the Lender's Rights and Remedies
and all of the Lender's rights, remedies, powers, privileges, and discretions
under any other agreement or transaction are cumulative, and not alternative or
exclusive, and may be exercised by the Lender at such time or times and in such
order of preference as the Lender in its sole discretion may determine. The
Lender's Rights and Remedies may be exercised without resort or regard to any
other source of satisfaction of the Liabilities.
ARTICLE 12 - NOTICES:
12.1. Notice Addresses. All notices, demands, and other communications
----------------
made in respect of this Agreement (other than a request for a loan or advance or
other financial accommodation under the Revolving Credit) shall be made to the
following addresses, each of which may be changed upon seven (7) days written
notice to all others given by certified mail, return receipt requested:
If to the Lender:
BankBoston Retail Finance Inc.
40 Broad Street
Boston, Massachusetts 02109
Attention: Robert DeAngelis, Director
Tel: 617-434-4046
Fax: 617-434-4339
With a copy to:
- --------------------------------------------------------------------------------
Page 84
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
Stroock & Stroock & Lavan LLP
100 Federal Street
Boston, Massachusetts 02110
Attention: Peter J. Antoszyk, Esquire
Tel: 617-478-4490
Fax: 617-330-5111
If to the Borrowers:
Video City, Inc.
370 Amapola Avenue, Suite 208
Torrance, CA 90501
Attention: Young J. Kim, Senior Vice President and General
Counsel
Tel: 310-381-0473
Fax: 310-533-3901
With a copy to:
Troy & Gould
1801 Century Park East, 16th Floor
Los Angeles, California 90067
Attention: William Feis, Esquire
Tel: 310-553-4441
Fax: 310-201-4746
12.2. Notice Given.
------------
(a) Except as otherwise specifically provided herein, notices
shall be deemed made and correspondence received, as follows (all times being
local to the place of delivery or receipt):
(i) By mail: the sooner of when actually received or Three
(3) days following deposit in the United States mail, postage prepaid.
(ii) By recognized overnight express delivery: the Business
Day following the day when sent.
(iii) By Hand: If delivered on a Business Day after 9:00 AM
and no later than Three (3) hours prior to the close of customary business
hours of the recipient, when delivered. Otherwise, at the opening of the
then next Business Day.
(iv) By Facsimile transmission (which must include a header
on which the party sending such transmission is indicated): If sent on a
Business Day after 9:00 AM and no later than Three (3) hours prior to the
close of customary business hours of the recipient, one (1) hour after
being sent. Otherwise, at the opening of the then next Business Day.
- --------------------------------------------------------------------------------
Page 85
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) Rejection or refusal to accept delivery and inability to
deliver because of a changed address or Facsimile Number for which no due notice
was given shall each be deemed receipt of the notice sent.
ARTICLE 13 - TERM:
13.1. Termination of Revolving Credit. The Revolving Credit shall remain
-------------------------------
in effect (subject to suspension as provided in Section 2-4(i) hereof) until the
Termination Date.
13.2. Effect of Termination. On the Termination Date, the Borrowers shall
---------------------
pay the Lender (whether or not then due), in immediately available funds, all
then Liabilities including, without limitation: the entire balance of the Loan
Account; any then remaining installments of the Commitment Fee-, any then
remaining balance of the Facility Fee; any accrued and unpaid Line Fee; any
payments due on account of the indemnification obligations included in Section
2-8(e)-l and all unreimbursed costs and expenses of the Lender for which the
Borrowers are responsible; and shall make such arrangements concerning any L/C's
then outstanding are reasonably satisfactory to the Lender . Until such payment,
all provisions of this Agreement, other than those contained in Article 2 which
place an obligation on the Lender to make any loans or advances or to provide
financial accommodations under the Revolving Credit or otherwise, shall remain
in full force and effect until all Liabilities shall have been paid in full. The
release by the Lender of the security and other collateral interests granted the
Lender by the Borrowers hereunder may be upon such reasonable conditions and
indemnifications as the Lender may require.
ARTICLE 14 - GENERAL:
14.1. Protection of Collateral. The Lender has no duty as to the
------------------------
collection or protection of the Collateral beyond the safe custody of such of
the Collateral as may come into the possession of the Lender and shall have no
duty as to the preservation of rights against prior parties or any other rights
pertaining thereto. The Lender may include reference to the Borrowers (and may
utilize any logo or other distinctive symbol associated with the Borrowers) in
connection with any advertising, promotion, or marketing undertaken by the
Lender.
- --------------------------------------------------------------------------------
Page 86
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
14.2. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Borrowers and the Borrowers' representatives, successors, and assigns and shall
enure to the benefit of the Lender and the Lender's successors and assigns
provided, however, no trustee or other fiduciary appointed with respect to the
Borrowers shall have any rights hereunder. In the event that the Lender assigns
or transfers its rights under this Agreement, the assignee shall thereupon
succeed to and become vested with all rights, powers, privileges, and duties of
the Lender hereunder and the Lender shall thereupon be discharged and relieved
from its duties and obligations hereunder. Lender may, after notice to Borrower
and at Borrowers' expense, assign, or sell participations in, all or any part of
the Loan Account, the L/Cs, or any other interest herein to another financial
institution or other Person, in which event, the assignee or Participant shall
have, to the extent of such assignment or participation, the same rights and
benefits as it would have if it were the Lender hereunder, except as otherwise
provided by the terms of such assignment or participation.
14.3. Severability. Any determination that any provision of this
------------
Agreement or any application thereof is invalid, illegal, or unenforceable in
any respect in any instance shall not affect the validity, legality, or
enforceability of such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.
14.4. Amendments. Course of Dealing.
-----------------------------
(a) This Agreement and the other Loan Documents incorporate all
discussions and negotiations between the Borrowers and the Lender, either
express or implied, concerning the matters included herein and in such other
instruments, any custom, usage, or course of dealings to the contrary
notwithstanding. No such discussions, negotiations, custom, usage, or course of
dealings shall limit, modify, or otherwise affect the provisions thereof. No
failure by the Lender to give notice to the Borrowers of the Borrowers' having
failed to observe and comply with any warranty or covenant included in any Loan
Document shall constitute a waiver of such warranty or covenant or the amendment
of the subject Loan Document. No change made by the Lender in the manner by
which Availability is determined shall obligate the Lender to continue to
determine Availability in that manner.
(b) The Borrowers may undertake any action otherwise prohibited
hereby, and may omit to take any action otherwise required hereby, upon and with
the express prior written consent of the Lender. No consent, modification,
amendment, or waiver of any provision of any Loan Document shall be effective
unless executed in writing by or on behalf of the party to be charged with such
modification, amendment, or waiver (and if such party is the Lender, then by a
duly authorized officer thereof). Any
- --------------------------------------------------------------------------------
Page 87
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
modification, amendment, or waiver provided by the Lender shall be in reliance
upon all representations and warranties theretofore made to the Lender by or on
behalf of the Borrowers (and any guarantor, endorser, or surety of the
Liabilities) and consequently may be rescinded in the event that any of such
representations or warranties was not true and complete in all material respects
when given.
14.5. Power of Attorney. In connection with all powers of attorney
-----------------
included in this Agreement, the Borrowers hereby grant unto the Lender full
power to do any and all things necessary or appropriate in connection with the
exercise of such powers as fully and effectually as the Borrowers might or could
do, hereby ratifying all that said attorney shall do or cause to be done by
virtue of this Agreement. No power of attorney set forth in this Agreement shall
be affected by any disability or incapacity suffered by the Borrowers and each
shall survive the same. All powers conferred upon the Lender by this Agreement,
being coupled with an interest, shall be irrevocable until this Agreement is
terminated by a written instrument executed by a duly authorized officer of the
Lender.
14.6. Application of Proceeds. The proceeds of any collection, sale, or
-----------------------
disposition of the Collateral, or of any other payments received hereunder,
shall be applied towards the Liabilities in such order and manner as the Lender
determines in its sole discretion. The Borrowers shall remain liable for any
deficiency remaining following such application.
14.7. Lender's Costs and Expenses.
---------------------------
(a) The Borrowers shall pay on demand all Costs of Collection and
all reasonable expenses of the Lender in connection with the preparation,
execution, and delivery of this Agreement and of any other Loan Documents,
whether now existing or hereafter arising, and all other reasonable expenses
which may be incurred by the Lender in preparing or amending this Agreement and
all other agreements, instruments, and documents related thereto, or otherwise
incurred with respect to the Liabilities, and all costs and expenses of the
Lender which relate to the credit facility contemplated hereby.
(b) The Borrowers authorize the Lender to pay all such fees and
expenses and in the Lender's discretion, to add such fees and expenses to the
Loan Account.
(c) The undertaking on the part of the Borrowers in this Section
14-7 shall survive payment of the Liabilities and/or any termination, release,
or discharge executed by the Lender in favor of the Borrowers, other than a
termination, release, or discharge which makes specific reference to this
Section 14-7.
- --------------------------------------------------------------------------------
Page 88
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
14.8. Copies and Facsimiles. This Agreement and all documents which
---------------------
relate thereto, which have been or may be hereinafter furnished the Lender may
be reproduced by the Lender by any photographic, microfilm, xerographic, digital
imaging, or other process, and the Lender may destroy any document so
reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made in the
regular course of business). Any facsimile which bears proof of transmission
shall be binding on the party which or on whose behalf such transmission was
initiated and likewise shall be so admissible in evidence as if the original of
such facsimile had been delivered to the party which or on whose behalf such
transmission was received.
14.9. Massachusetts Law. This Agreement and all rights and obligations
-----------------
hereunder, including matters of construction, validity, and performance, shall
be governed by the laws of The Commonwealth of Massachusetts.
14.10. Consent to Jurisdiction.
-----------------------
(a) The Borrowers agree that any legal action, proceeding, case,
or controversy against the Borrowers with respect to any Loan Document may be
brought in the Superior Court of Suffolk County Massachusetts or in the United
States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, as the Lender may elect in the Lender's sole discretion. By
execution and delivery of this Agreement, the Borrowers, for themselves and in
respect of their property, accept, submit, and consent generally and
unconditionally, to the jurisdiction of the aforesaid courts.
(b) The Borrowers WAIVE personal service of any and all process
upon their, and irrevocably consent to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the Borrowers at the Borrowers'
address for notices as specified herein, such service to become effective five
(5) Business Days after such mailing.
(c) The Borrowers WAIVE any objection based on forum non
conveniens and any objection to venue of any action or proceeding instituted
under any of the Loan Documents and consents to the granting of such legal or
equitable remedy as is deemed appropriate by the Court.
(d) Nothing herein shall affect the right of the Lender to bring
legal actions or proceedings in any other competent jurisdiction.
(e) The Borrowers agree that any action commenced by the Borrowers
asserting any claim or counterclaim arising under or in connection with this
Agreement or any other Loan Document
- --------------------------------------------------------------------------------
Page 89
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
shall be brought solely in the Superior Court of Suffolk County Massachusetts or
in the United States District Court, District of Massachusetts, sitting in
Boston, Massachusetts, and that such Courts shall have exclusive jurisdiction
with respect to any such action.
14.11. Indemnification. The Borrowers shall indemnify, defend, and hold
---------------
the Lender and any employee, officer, or agent of the Lender (each, an
"Indemnified Person") harmless of and from any claim brought or threatened
against any Indemnified Person by the Borrowers, any guarantor or endorser of
the Liabilities, or any other Person (as well as from attorneys' reasonable fees
and expenses in connection therewith) on account of the relationship of the
Borrowers or of any other guarantor or endorser of the Liabilities Lender (each
of claims which may be defended, compromised, settled, or pursued by the
Indemnified Person with counsel of the Lender's selection, but at the expense of
the Borrowers) other than any claim as to which a final determination is made in
a judicial proceeding (in which the Lender and any other Indemnified Person has
had an opportunity to be heard), which determination includes a specific finding
that the Indemnified Person seeking indemnification had acted in a grossly
negligent manner or in actual bad faith. The within indemnification shall
survive payment of the Liabilities and/or any termination, release, or discharge
executed by the Lender in favor of the Borrowers, other than a termination,
release, or discharge which makes specific reference to this Section 14-11.
14.12. Rules of Construction. The following rules of construction shall be
---------------------
applied in the interpretation, construction, and enforcement of this Agreement
and of the other Loan Documents:
(a) Words in the singular include the plural and words in the
plural include the singular.
(b) Titles, headings (indicated by being underlined or shown in
Small Capitals) and any Table of Contents are solely for convenience of
reference; do not constitute a part of the instrument in which included; and do
not affect such instrument's meaning, construction, or effect.
(c) The words "includes" and "including" are not limiting.
(d) Text which follows the words "including, without limitation"
(or similar words) is illustrative and not limitational.
(e) Except where the context otherwise requires or where the
relevant subsections are joined by "or", compliance with any Section or
provision of any Loan Document which constitutes a warranty or covenant requires
compliance with all subsections (if any) of that Section or provision. Except
where the context otherwise requires, compliance with any warranty or covenant
of any Loan
- --------------------------------------------------------------------------------
Page 90
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
Document which includes subsections which are joined by "or" may be accomplished
by compliance with any of such subsections.
(f) Text which is shown in italics, shown in bold, shown IN ALL
CAPITAL LETTERS, or in any combination of the foregoing, shall be deemed to be
conspicuous.
(g) The words "may not" are prohibitive and not permissive.
(h) The word "or" is not exclusive.
(i) Terms which are defined in one section of any Loan Document
are used with such definition throughout the instrument in which so defined.
(j) The symbol "$" refers to United States Dollars.
(k) Unless limited by reference to a particular Section or
provision, any reference to "herein", "hereof', or "within" is to the entire
Loan Document in which such reference is made.
(l) References to "this Agreement" or to any other Loan Document
is to the subject instrument as amended to the date on which application of such
reference is being made.
(m) Except as otherwise specifically provided, all references to
time are to Boston time.
(n) In the determination of any notice, grace, or other period of
time prescribed or allowed hereunder:
(i) Unless otherwise provided (1) the day of the act, event,
or default from which the designated period of time begins to run shall not
be included and the last day of the period so computed shall be included
unless such last day is not a Business Day, in which event the last day of
the relevant period shall be the then next Business Day and (11) the period
so computed shall end at 5:00 PM on the relevant Business Day.
(ii) The word "from" means "from and including".
(iii) The words "to" and "until" each mean "to, but
excluding".
(iv) The work "through" means "to and including".
(o) The Loan Documents shall be construed and interpreted in a
harmonious manner and in keeping with the intentions set forth in Section 14-13
hereof, provided, however, in the event of any inconsistency between the
provisions of the within Agreement and any other Loan Document, the provisions
of the within Agreement shall govern and control.
14.13. Intent. It is intended that:
------
(a) This Agreement take effect as a sealed instrument.
- --------------------------------------------------------------------------------
Page 91
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) The scope of the security interests created by this Agreement
be broadly construed in favor of the Lender.
(c) The security interests created by this Agreement secure all
Liabilities, whether now existing or hereafter arising.
(d) All reasonable costs and expenses incurred by the Lender in
connection with the Lender's relationship(s) with the Borrowers shall be borne
by the Borrowers.
(e) Unless otherwise explicitly provided herein, the Lender's
consent to any action of the Borrowers which is prohibited unless such consent
is given may be given or refused by the Lender in its sole discretion and
without reference to Section 2-15 hereof.
14.14. Right of Set-Off. Any and all deposits or other sums at any time
----------------
credited by or due to the Borrowers from the Lender or any participant (a
"Participant") in the credit facility contemplated hereby or any from any
Affiliate of the Lender or any Participant and any cash, securities, instruments
or other property of the Borrowers in the possession of the Lender any
Participant or any such Affiliate, whether for safekeeping or otherwise
(regardless of the reason such Person had received the same) shall at all times
constitute security for all Liabilities and for any and all obligations of the
Borrowers to the Lender or any Participant or any such Affiliate and may be
applied or set off against the Liabilities and against such obligations at any
time, whether or not such are then due and whether or not other collateral is
then available to the Lender or any Participant or any such Affiliate.
14.15. Maximum Interest Rate. Regardless of any provision of any Loan
---------------------
Document, the Lender shall never be entitled to contract for, charge, receive,
collect, or apply as interest on any Liability, any amount in excess of the
maximum rate imposed by applicable law. Any payment which is made which, if
treated as interest on a Liability would result in such interest's exceeding
such maximum rate shall be held, to the extent of such excess, as additional
collateral for the Liabilities as if such excess were "Collateral."
14.16. Waivers.
-------
(a) The Borrowers (and all guarantors, endorsers, and sureties of
the Liabilities) make each of the waivers included in Section 14-16(b), below,
knowingly, voluntarily, and intentionally, and understands that the Lender, in
entering into the financial arrangements contemplated hereby and in providing
loans and other financial accommodations to or for the account of the Borrowers
as provided herein, whether not or in the future, is relying on such waivers.
- --------------------------------------------------------------------------------
Page 92
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
(b) THE BORROWER, AND EACH SUCH GUARANTOR, ENDORSER, AND SURETY
RESPECTIVELY WAIVES THE FOLLOWING:
(i) Except as otherwise specifically required hereby, notice
of non-payment, demand, presentment, protest and all forms of demand and
notice, both with respect to the Liabilities and the Collateral.
(ii) Except as otherwise specifically required hereby, the
right to notice and/or hearing prior to the Lender's exercising of the
Lender's rights upon default.
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR
CONTROVERSY IN WHICH THE LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE OR
CONTROVERSY IS INITIATED BY OR AGAINST THE LENDER OR IN WHICH THE LENDER IS
JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS
IN RESPECT OF, ANY RELATIONSHIP AMONGST OR BETWEEN THE BORROWER OR ANY
OTHER PERSON AND THE LENDER (AND THE LENDER LIKEWISE WAIVES THE RIGHT TO A
JURY IN ANY TRIAL OF ANY SUCH CASE OR CONTROVERSY).
(iv) The benefits or availability of any stay, limitation,
hindrance, delay, or restriction (including, without limitation, any
automatic stay which otherwise might be imposed pursuant to Section 362 of
the Bankruptcy Code) with respect to any action which the Lender may or may
become entitled to take hereunder.
(v) Any defense, counterclaim, set-off, recoupment, or other
basis on which the amount of any Liability, as stated on the books and
records of the Lender, could be reduced or claimed to be paid otherwise
than in accordance with the tenor of and written terms of such Liability.
(vi) Any claim to consequential, special, or punitive
damages.
14.17. Federal Reserve Bank. The Lender may at any time pledge or assign
--------------------
all or any portion of the Lender's rights under this Agreement and the other
Loan Documents to a Federal Reserve bank; provided however, that no such pledge
-------- -------
or Assignment shall release the Lender from its obligations hereunder or under
any other Loan Document.
- --------------------------------------------------------------------------------
Page 93
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
Video City, Inc. ("Borrower" and "Agent
Borrower")
/s/ Robert Lee
-----------------------------------
By: Robert Lee
Title: CEO
Old Republic Entertainment, Inc. ("Borrower")
/s/ Robert Lee
-----------------------------------
By: Robert Lee
Title: President
Sulpizio One, Inc. ("Borrower")
/s/ Robert Lee
-----------------------------------
By: Robert Lee
Title: President
Video Tyme, Inc. ("Borrower")
/s/ Robert Lee
-----------------------------------
By: Robert Lee
Title: President
Cianci's Videoland, Inc. ("Borrower")
/s/ Robert Lee
-----------------------------------
By: Robert Lee
Title: President
- --------------------------------------------------------------------------------
Page 94
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
("Lender")
/s/ John C. T. McNamara
------------------------------
By: John C. T. McNamara
Title: Vice President
- --------------------------------------------------------------------------------
Page 95
- --------------------------------------------------------------------------------
<PAGE>
MODIFICATION AGREEMENT
This MODIFICATION AGREEMENT entered into as of January 8, 1999, between
Video City, Inc., a Delaware corporation with its principal executive offices at
370 Amapola Avenue, Suite 208, Torrance, California, 90501, (as a "Borrower"
and "Agent Borrower") and its wholly owned subsidiaries listed as "a Borrower"
below ("Subsidiaries", and together with Video City, Inc., the "Borrowers") and
BankBoston Retail Finance Inc., a Delaware corporation with an address of 40
Broad Street, Boston 02109 (the "Lender").
WHEREAS, the Lender established a revolving line of credit pursuant to a
certain Loan and Security Agreement by and between the Lender and the Borrowers
dated as of December 29, 1998 (the "Loan Agreement") for Borrowers respecting
which Lender agreed to lend to Borrowers upon Borrowers' request, but subject to
the terms and conditions set forth in the Loan Agreement, up to Thirty Million
Dollars and Zero Cents ($30,000,000).
WHEREAS, the Borrowers have requested the Lender to modify the terms of the
Loan Agreement as set forth herein; and
WHEREAS, subject to the terms, and conditions in this Agreement, the Lender
is willing to modify the terms of the Loan Agreement as set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Lender and the Borrowers
mutually agree as follows:
1. Definitions. All capitalized terms used herein shall have the same
------------
meaning as set forth in the Loan Agreement, unless otherwise defined herein.
2. Effective Date. This Modification Agreement shall be effective upon
---------------
receipt by the Lender of an original executed copy of this Agreement signed by
the Borrowers and Lender.
3. Modifications to Loan Agreement.
-------------------------------
(a) The words "sixty percent (60%)" shall deleted from the
second to last line of the definition of Acceptable
Inventory in Article I and the words "seventy percent (70%)"
shall be substituted therefor.
(b) The definition of Inventory Advance Rate shall be deleted
and the following substituted therefor:
"Inventory Advance Rate": The following Dollar advance
rates per Active Video Units or Active Game Units, as the
case may be:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Unit Description Dollar Advance Rate/Unit
---------------- ------------------------
----------------------------------------------------------------
<S> <C>
New Release Video Units $12.29
----------------------------------------------------------------
Stock Video Units $ 7.05
----------------------------------------------------------------
Sell Through Video Units $ 7.45
----------------------------------------------------------------
New Release Game Units $26.29
----------------------------------------------------------------
Stock Game Units $12.19
----------------------------------------------------------------
Sell Through Game Units $24.41
----------------------------------------------------------------
</TABLE>
<PAGE>
The Inventory Advance Rate will be subject to change based
upon periodic appraisals conducted by Lender, at Borrowers'
expense pursuant to Section 5.10(d), so that the Inventory
Advance Rate does not exceed 80% of the appraised
Liquidation Value of Acceptable Inventory.
4. Representations and Warranties. The Borrowers hereby represent and
--------------------------------
warrant to the Lender as follows:
(a) Representations and Warranties: No Event of Default. The
---------------------------------------------------
representations and warranties herein, in the Loan Agreement
and in each other Loan Document and certificate or other
writing delivered to the Lender pursuant to the Loan
Agreement on or prior to the Effective Date of this
Modification Agreement shall be correct and accurate as to
each Borrower on and as of the Effective Date of this
Modification Agreement as though made on and as of such
date; and no Default or Event of Default shall have occurred
and be continuing as of the Effective Date of this Agreement
or would result from this Agreement becoming effective in
accordance with its terms.
(b) Organization, Good Standing, Etc. Each Borrower (i) is a
---------------------------------
corporation, duly organized, validly existing and in good
standing under the laws of its state of organization, (ii)
has all requisite power and authority to execute, deliver
and perform this Agreement, and to perform the Loan
Agreement, as amended hereby, and (iii) is duly qualified to
do business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it
or in which the transaction of its business makes such
qualification necessary.
(c) Authorization, Etc. The execution, delivery and performance
-------------------
by the Borrowers of this Agreement, and the performance by
the Borrowers of the Loan Agreement, as amended hereby, (i)
have been duly authorized by all necessary action, (ii) do
not and will not contravene the Borrowers' charter or by-
laws, any applicable law or any contractual restriction
binding on or otherwise affecting it or any of its
properties, (iii) do not and will not result in or require
the creation of any lien or other encumbrance (other than
pursuant to any Loan Documents) upon or with respect to any
of
2
<PAGE>
its properties, and (iv) do not and will not result in
any suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval
applicable to its operations or any of its properties.
(d) Governmental Approvals. No authorization or approval of
----------------------
other action by, and no notice to or filing with, any
governmental authority or agency or other regulatory body is
required in connection with the due execution, delivery and
performance by the Borrowers of this Agreement, or for the
performance of the Loan Agreement, as amended hereby.
(e) Enforceability of Loan Documents. This Agreement, the Loan
--------------------------------
Agreement, as amended hereby, and each other Loan Document
to which each Borrower is a party is a legal, valid and
binding obligation of such Borrower, enforceable against
such Borrower in accordance with its terms, except as such
enforceability may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally.
5. Miscellaneous.
-------------
(a) Continued Effectiveness of the Loan Documents. Except as
---------------------------------------------
otherwise expressly provided herein, the Loan Agreement and
the other Loan Documents are, and shall continue to be, in
full force and effect and are hereby ratified and confirmed
in all respects, except that on and after the date hereof
(i) all references in the Loan Agreement to "this
Agreement", "hereto", "hereof", "hereunder" or words of like
import referring to the Loan Agreement shall mean the Loan
Agreement as amended by this Agreement and (ii) all
references in the other Loan Documents to the "Loan
Agreement", "thereto", "thereof", "thereunder" or words of
like import referring to the Loan Agreement shall mean the
Loan Agreement as amended by this Agreement. Except as
expressly provided herein, the execution, delivery and
effectiveness of this Agreement shall not operate as an
amendment of any right, power or remedy of the Lenders under
the Loan Agreement or any other Loan Document, nor
constitute an amendment of any provision of the Loan
Agreement or any other Loan Documents.
(b) Counterparts. This Agreement may be executed in any number
------------
of counterparts and by different parties hereto in separate
counterparts (including, without limitation, by telecopy),
each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same
agreement.
(c) Headings. Section headings herein are included for
--------
convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
3
<PAGE>
(d) Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the law of the Commonwealth of
Massachusetts.
(e) Costs and Expenses. The Borrowers agree to pay on demand
------------------
all fees, costs and expenses of the Lender (including,
without limitation, the reasonable fees, costs and other
client charges of legal counsel to the Lender) in connection
with the preparation, execution and delivery of this
Agreement and the other related agreements, instruments and
documents.
(f) Modification Agreement as Loan Document. The Borrowers
---------------------------------------
hereby acknowledge and agree that this Agreement constitutes
a "Loan Document" under the Loan Agreement. Accordingly, it
shall be an Event of Default under the Loan Agreement if
(i) any representation or warranty made by the Borrowers
under or in connection with this Agreement shall have been
untrue, false or misleading in any material respect when
made, or (ii) the Borrowers shall fail to perform or observe
any term, covenant or agreement contained in this Agreement.
(g) Waiver of Jury Trial. EACH BORROWER AND THE LENDER EACH
--------------------
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON
CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF THE LENDER IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
HEREOF.
INTENTIONALLY LEFT BLANK
4
<PAGE>
Executed under seal as of the date written above.
Video City, Inc. ("Borrower" and "Agent
Borrower")
/s/ Robert Y. Lee
-----------------
By: Robert Y. Lee
Title: Chief Executive Officer
Old Republic Entertainment, Inc. ("Borrower")
/s/ Robert Y. Lee
-----------------
By: Robert Y. Lee
Title: Chief Executive Officer
Sulpizio One, Inc. ("Borrower")
/s/ Robert Y. Lee
-----------------
By: Robert Y. Lee
Title: Chief Executive Officer
Video Tyme, Inc. ("Borrower")
/s/ Robert Y. Lee
-----------------
By: Robert Y. Lee
Title: Chief Executive Officer
Videoland, Inc. ("Borrower")
/s/ Robert Y. Lee
By: Robert Y. Lee
Title: Chief Executive Officer
5
<PAGE>
BANKBOSTON RETAIL FINANCE INC.
("Lender")
/s/ Robert DeAngelis
---------------------
By: Robert DeAngelis
Title: Senior Vice President
6
<PAGE>
Exhibit 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
STATE OF NAME UNDER WHICH
SUBSIDIARY INCORPORATION BUSINESS IS DONE
- ---------- ------------- ----------------
<S> <C> <C>
Old Republic Entertainment, Inc.......California................. Video Tyme, Movie Magic,
................................................................. Adventures in Video,
................................................................. Video Unlimited
Sulpizio One, Inc. ...................California................. Video City
Video Tyme, Inc. .....................Nevada..................... Video Tyme
Videoland, Inc. ......................Oregon..................... Videoland
Video Galaxy, Inc. ...................Delaware................... Video Galaxy
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 172,043
<SECURITIES> 0
<RECEIVABLES> 3,019,510
<ALLOWANCES> 0
<INVENTORY> 23,146,525
<CURRENT-ASSETS> 5,271,051
<PP&E> 6,703,704
<DEPRECIATION> 2,177,718
<TOTAL-ASSETS> 38,252,880
<CURRENT-LIABILITIES> 14,876,467
<BONDS> 17,681,148
0
3,763,963
<COMMON> 134,987
<OTHER-SE> 1,368,524
<TOTAL-LIABILITY-AND-EQUITY> 38,252,880
<SALES> 24,436,234
<TOTAL-REVENUES> 24,436,234
<CGS> 20,912,900
<TOTAL-COSTS> 20,912,900
<OTHER-EXPENSES> 4,785,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,563,348
<INCOME-PRETAX> (2,604,823)
<INCOME-TAX> (2,615,957)
<INCOME-CONTINUING> 11,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,134
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
