<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 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)
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)
(310) 533-3900
(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at September 20, 1999
- ----- ---------------------------------
Common Stock 14,914,803
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEO CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
1999 January 31,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 127,207 $ 172,043
Customer receivables 3,347,864 2,932,807
Notes receivable (Note 3) 2,144,703 86,703
Merchandise inventories 4,114,836 2,026,628
Other 105,837 52,870
----------- -----------
Total current assets 9,840,447 5,271,051
Videocassette rental inventory, net of
accumulated amortization 16,649,841 21,119,897
Property and equipment, net 5,376,042 4,525,986
Goodwill 6,112,742 5,176,850
Deferred tax asset 1,235,139 883,249
Other assets 1,886,832 1,275,847
----------- -----------
TOTAL ASSETS $41,101,043 $38,252,880
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
1999 January 31,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable $ 15,550,775 $ 9,328,556
Accrued expenses 3,430,187 3,422,724
Current portion of long-term debt 3,807,833 2,125,187
------------ -----------
Total current liabilities 22,788,795 14,876,467
Senior secured revolving credit facility 9,949,063 16,044,502
Long-term debt, less current portion 1,368,408 1,636,646
Other liabilities 299,226 427,791
------------ -----------
TOTAL LIABILITIES 34,405,492 32,985,406
------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock (Note 4) 7,779,297 3,763,963
Common stock, $.01 par value per share, 30,000,000 shares
Authorized; 14,184,090 shares issued and outstanding at
July 31, 1999 and 13,498,715 shares issued and outstanding
at January 31, 1999 141,841 134,987
Additional paid-in capital 10,520,785 9,229,687
Accumulated deficit (11,746,372) (7,861,163)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 6,695,551 5,267,474
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,101,043 $38,252,880
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Rental revenues and product sales $14,212,961 $ 6,009,738 $27,518,031 $ 9,401,061
Management fee income - 13,500 - 56,333
----------- ----------- ----------- -----------
TOTAL REVENUES 14,212,961 6,023,238 27,518,031 9,457,394
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Store operating expenses 9,151,708 2,715,555 17,055,535 4,430,824
Amortization of videocassette rental
inventory 1,733,543 710,143 3,506,033 1,163,380
Cost of product sales 2,395,466 1,070,747 4,355,781 1,283,696
Cost of leased product 1,651,808 469,794 2,151,592 706,885
General and administrative expenses 3,371,466 771,818 5,452,017 1,450,559
----------- ----------- ----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 18,303,991 5,738,057 32,520,958 9,035,344
INCOME (LOSS) FROM OPERATIONS (4,091,030) 285,181 (5,002,927) 422,050
Other (Income) Expense:
Gain on sale of assets (Note 3) (1,913,178) - (1,913,178) -
Interest expense 694,035 199,957 1,282,762 322,101
Other (31,418) (15,097) (54,736) (15,097)
----------- ----------- ----------- -----------
Income (Loss) before taxes (2,840,469) 100,321 (4,317,775) 115,046
Income tax expense (benefit) - (1,829,869) (546,603) (1,829,869)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,840,469) $ 1,930,190 $(3,771,172) $ 1,944,915
=========== =========== =========== ===========
Preferred stock dividends 114,037 - 114,037 -
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $(2,954,506) $ 1,930,190 $(3,885,209) $ 1,944,915
=========== =========== =========== ===========
Basic Earnings (Loss) Per Share $(0.21) $0.17 $(0.28) $0.18
Diluted Earnings (Loss) Per Share $(0.21) $0.16 $(0.28) $0.17
Weighted average number of common shares
outstanding
Basic 13,978,010 11,605,716 13,811,603 11,053,757
Diluted 13,978,010 12,220,067 13,811,603 11,626,322
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 31, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $(3,771,172) $ 1,944,915
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,602,772 1,308,495
Issuance of stock for services and inventory 2,681,682 145,343
Decrease (increase) in deferred tax asset (546,603) (1,610,781)
Gain on sale of asset (1,913,178) -
Changes in assets and liabilities, net of effects of
acquisitions and disposition:
Increase in customer receivable (1,333,347) (561,472)
Decrease in notes receivable - 124,253
Increase in merchandise inventories (2,552,530) (558,030)
Increase in other assets (420,777) (946,154)
Increase (decrease) in accounts payable 3,321,290 (664,812)
Decrease in accrued expenses (1,961,342) (133,080)
Decrease in other liabilities (128,565) (283,126)
----------- -----------
Net cash provided by (used in) operating activities (2,021,771) (1,234,449)
----------- -----------
Cash flows from investing activities:
Purchases of videocassette rental inventory (5,591,490) (1,626,505)
Purchases of fixed assets (2,071,508) (455,096)
Proceeds from sale of film library - 818,171
Proceeds from the sale of fixed assets 13,863,000 -
Store acquisitions (167,036) (177,632)
----------- -----------
Net cash provided by (used in) investing activities 6,032,966 (1,441,062)
----------- -----------
Cash flows from financing activities:
Principal payments on obligations under capital leases - (18,136)
Repayment of long-term debt (285,592) (3,759,367)
Proceeds from issuance of long-term debt 1,700,000 -
Proceeds from the issuance of preferred stock 625,000 700,000
Proceeds from borrowings (repayments) under credit
facility (6,095,439) 5,745,655
----------- -----------
Net cash provided by (used in) financing activities (4,056,031) 2,668,152
----------- -----------
Net decrease in cash (44,836) (7,359)
Cash at beginning of the period 172,043 28,127
----------- -----------
Cash at end of the period $ 127,207 $ 20,768
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Six Months Ended
July 31, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Supplementary disclosures of cash flow information
Cash paid during the year:
Interest $ 890,304 $ 255,903
Income taxes 17,924 800
Noncash investing and financing activities:
Professional services and the purchase of inventory financed
Through issuance of common stock 278,682 145,343
Liabilities converted to preferred stock 4,000,000 -
Note receivable from sale of assets 2,058,000 -
Preferred stock dividends 114,037 -
</TABLE>
For acquisitions consummated during the six months ended July 31, 1999 and July
31, 1998, the Company paid $167,036 and $177,632, respectively, net of cash
acquired. In conjunction with the acquisitions, liabilities were assumed as
follows:
<TABLE>
<S> <C> <C>
Fair value of assets acquired $ 2,156,998 $ 3,826,781
Cash paid (167,036) (177,632)
Note payable issued - (2,155,370)
Common stock issued (641,394) (1,458,679)
Preferred stock issued (1,251,230) -
Goodwill 3,630,456 2,052,419
----------- -----------
Liabilities assumed $ 3,727,794 $ 2,087,519
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The accompanying condensed consolidated financial statements include the
accounts of Video City, Inc. ("the Company") and all of its wholly owned
subsidiaries. These subsidiaries include Old Republic Entertainment, Inc.,
Sulpizio One, Inc., Video Tyme, Inc., Videoland, Inc., and Video Galaxy, Inc.
All material intercompany transactions have been eliminated. The financial
statements include the operations of companies acquired from the dates of
acquisition.
The condensed consolidated balance sheet as of July 31, 1999, the condensed
consolidated statement of operations for the three and six months ended July 31,
1999 and 1998, and the condensed consolidated statement of cash flows for the
six months ended July 31, 1999 and 1998 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
January 31, 1999.
The accompanying condensed consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial position as of July 31, 1999, the results of operations for the
three and six months ended July 31, 1999 and 1998, and cash flows for the six
months ended July 31, 1999 and 1998. All such adjustments are of a normal and
recurring nature. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the prior year financial statements
to conform with the current year presentation.
2. Acquisitions
On March 26, 1999, the Company issued 112 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box
Office, LLC as part of the consideration for the purchase of the assets of a
video store acquired from Box Office, LLC. The Series C Convertible Redeemable
Preferred Stock is convertible into shares of the Company's Common Stock at a
conversion price of $2.00 per share.
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. The purchase price consisted of (i) 344,000
shares of Video City 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 2,000 shares of the
Company's Series D Convertible Redeemable Preferred Stock and 500,000 warrants
with an exercise price of $3.00 per share). The payoff of indebtedness at
closing was provided by proceeds obtained from a note payable to an existing
creditor of the Company.
3. Disposition of Assets
On July 26, 1999, the Company sold the assets of 45 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc
("Blockbuster"). The Company sold the assets of four additional
<PAGE>
Videoland stores to Blockbuster on August 30, 1999. The aggregate purchase price
for the sale of the 49 stores was approximately $14 million in cash, and
approximately $2 million in notes receivable which are subject to the sale of
assets of the four additional Videoland stores and to certain post closing
adjustments. The Company recognized the gain on the sale of approximately $1.9
million on July 26, 1999, which includes the four additional Videoland stores
which were sold on August 30, 1999.
4. Preferred Stock
On March 26, 1999, the Company issued 112 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box
Office, LLC, as part of the consideration for the purchase of the assets of a
video store acquired from Box Office, LLC. Each share of Series C Convertible
Redeemable Preferred Stock is convertible into 500 shares of the Company's
Common Stock at a conversion price of $2.00 per share. The Series C Preferred
Stock was converted based on the market value of the Company's common stock on
the date of issuance. On June 30, 1999, Box Office LLC converted 112 shares of
the Company's Series C Convertible Redeemable Preferred Stock to 56,000 of the
Company's common stock.
On March 31, 1999, the Company issued 2,000 shares of the Company's Series D
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Mortco, Inc. (a subsidiary of Rentrak Corporation) in consideration for the
cancellation of indebtedness from Video Galaxy, Inc., to such parties in the
amount of $2,000,000. Each share of Series D Convertible Redeemable Preferred
Stock is convertible into 333.3 shares of the Company's common stock at a
conversion price of $3.00 per share.
On May 12, 1999, the Company sold 750 shares of the Company's Series AA
Convertible Redeemable Preferred Stock, $100 stated value per share, to Mortco,
Inc. in consideration for cancellation of trade payables owed by the Company to
Rentrak Corporation in the amount of $75,000. The shares of Series AA Preferred
Stock are convertible into the Company's Common Stock at a conversion price of
$2.00 per share.
On June 2, 1999, the Company issued 303 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to The
Value Group, LLC in consideration for cancellation of trade payables owed by the
Company to The Value Group, LLC in the amount of $303,000. On July 13, 1999,
the Company issued 100 shares of the Company's Series C Convertible Redeemable
Preferred Stock, $1,000 stated value per share, to DAZ Systems, Inc. in
consideration for cancellation of trade payables owed by the Company to DAZ
Systems, Inc. in the amount of $100,000. The shares of Series C Preferred Stock
are convertible into the Company's Common Stock at a conversion price of $2.00
per share.
On June 11, 1999, the Company issued 2,000 shares of the Company's Series E
Convertible Preferred Stock, $1,000 stated value per share, to International
Video Distributors, LLC ("IVD") and Common Stock Purchase Warrants to purchase
50,000 shares of the Company's Common Stock at an exercise price of $2.00 per
share. IVD cancelled outstanding trade payables in the amount of $2,000,000
owed by the Company to IVD. Each share of Series E Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
$1,000 by the conversion price in effect on the conversion date. During certain
periods, the conversion price is equal to the market price of the Company's
Common Stock and ranges between $1.60 and $3.00; after such period, the
conversion price is equal to $3.00.
On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share,
to eight accredited investors including an executive officer of the Company, for
cash in the amount of $625,000 in a private placement transaction. The shares
of Series C Preferred Stock are convertible into the Company's Common Stock at a
conversion price of $2.00 per share.
5. Preferred Stock Dividends
On July 6, 1999, the Company issued 20,294 shares of the Company's Common Stock
to two holders of the Company's Series B Convertible Redeemable Preferred Stock
as stock dividends with respect to the Series B Preferred Stock. In addition,
the Company issued 27,950 shares of the Company's Common Stock to various
shareholders as stock dividends with respect to the Company's Series AA
Convertible Redeemable Preferred Stock.
6. Earnings Per Share
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 will
consequently share in earnings. The following table summarizes the calculation
of the Company's basic and diluted earnings per share for the periods presented:
<PAGE>
<TABLE>
<CAPTION>
For the three months ended July 31,
------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ----------------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
------------ ------------ --------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss) available to common
shareholders $(2,954,506) 13,978,010 $(0.21) $1,930,190 11,605,716 $0.17
Effect of Dilutive Securities:
Incremental shares from outstanding
Common stock options, warrants, and
Preferred stock - - - - 614,351 (.01)
------------ ------------ --------- ------------ ------------ -------
Diluted EPS
Net income (loss) available to common
shareholders $(2,954,506) 13,978,010 $(0.21) $1,930,190 12,220,067 $0.16
============ ============ ========= ============ ============ =======
</TABLE>
<TABLE>
<CAPTION>
For the six months ended July 31,
------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ----------------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
------------ ------------ --------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss) available to common
shareholders $(3,885,209) 13,811,603 $(0.28) $1,944,915 11,053,757 $0.18
Effect of Dilutive Securities:
Incremental shares from outstanding
Common stock options, warrants, and
Preferred stock - - - - 527,566 (.01)
------------ ------------ --------- ------------ ------------ -------
Diluted EPS
Net income (loss) available to common
shareholders $(3,885,209) 13,811,603 $(0.28) $1,944,915 11,626,566 $0.17
============ ============ ========= ============ ============ =======
</TABLE>
All outstanding common stock options, warrants, and preferred stock for the
three months and six months ended July 31, 1999, were not included in the
computations of diluted earnings per share because the effect of exercise and/or
conversion would have an antidilutive effect on earnings per share.
7. Deferred Tax Assets
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, 1999, no
valuation allowance was recorded against the deferred tax asset because the
Company determined from its projections that it is more likely than not that
future taxable income will be sufficient to realize the deferred tax asset. Due
to the pending acquisitions, management cannot determine if it is more likely
than not that future taxable income will be sufficient to realize all of the
deferred tax asset generated in the current quarter. Accordingly, a valuation
allowance has been established against the current quarter's losses.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, particularly under
this Item 2, may constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements, expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed herein and in the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1999.
Results of Operations
<PAGE>
Three months and six months ended July 31, 1999 compared to the three months and
six months ended July 31, 1998.
Revenues
Rental revenue and product sales for the three months and the six months ended
July 31, 1999 totaled $14,212,887 and $27,518,031, compared to $6,009,738 and
$9,401,061 for the three months and six months ended July 31, 1998. The
increases in revenue for the three months and six months ended July 31, 1999
were $8,203,223 or 136% and $18,116,970 or 193%. The increase in revenue was
primarily attributable to the acquisition of 101 stores since July 31, 1998. Of
the 101 stores, 9 stores were acquired on September 30, 1998, 76 stores were
acquired on December 28, 1998, one store was acquired on March 26, 1999, and 15
stores were acquired on March 31, 1999. Although 49 stores were sold to
Blockbuster on July 26, 1999, the effect on revenue was minimal for the three
months and six months ended July 31, 1999. Same store revenues for the three
months and six months ended July 31, 1999 increased by approximately 1.65% and
.60%, compared to the same periods of the previous year. At July 31, 1999 the
Company operated 95 stores in twelve states compared to 47 stores in 3 states at
July 31, 1998. The Company had no management fee income for the quarter ended
July 31, 1999, compared to $56,333 for the quarter ended July 31, 1998. The
decrease resulted from the reduction in the number of managed stores from two to
none.
Store Operating Expenses
Store operating expenses for the three months and the six months ended July 31,
1999 totaled $9,151,708 and $17,055,535, as compared to $2,715,555 and
$4,430,824 for the three months and six months ended July 31, 1998. Store
operating expenses increased by $6,436,153 or 237% and $12,624,711 or 285% for
the three months and six months ended July 31, 1999 as compared to the
corresponding periods of the previous year. The increase in store operating
expenses was primarily due to the acquisition of 101 stores since July 31, 1998.
Store operating expenses as a percentage of total revenue for the three months
and six months ended July 31, 1999 were 64% and 62% compared to 45% and 47% for
the corresponding period of 1998. The increase in store expenses as a percentage
of total revenue for the three months and six months ended July 31, 1999
compared to the corresponding periods of 1998 was primarily due to assimilation,
payroll, training, and occupancy costs for the 76 stores acquired on December
28, 1998 and the 15 stores acquired on March 31, 1999. In addition, store
operating expenses increased by approximately $290,000 due to one time store
closure expenses for 7 stores, which included rent, utilities, field management
and payroll expenses.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory for the three months and six
months ended July 31, 1999 totaled $1,733,543 and $3,506,033, compared to
$710,143 and $1,163,380 for the three months and six months ended July 31, 1998.
Amortization of videocassette rental inventory increased by $1,023,400 or 144%
and $2,342,653 or 201% for the three months and six months ended July 31, 1999
as compared to the corresponding periods of the previous year. The primary
reason for the increase in the amortization of videocassette rental inventory
was the acquisition of 101 stores since July 31, 1998. Amortization of
videocassette rental inventory as a percentage of revenue for the three months
and six months ended July 31, 1999 were 12.1% and 12.7%, compared to 11.8% and
12.3% for the corresponding periods in 1998.
Cost of Product Sales
Cost of product sales for the three months and six months ended July 31, 1999
was $2,395,466 and $4,355,781, compared to $1,070,747 and $1,283,696 for the
three months and six months ended July 31, 1998. Cost of product sales increased
by $1,324,719 or 124% and $3,072,085 or 239% for the three and months and six
months ended July 31, 1999 as compared to the corresponding periods of the
previous year. The increase in the cost of product sales for the three months
and six months ended July 31, 1999 was primarily due to aggregate growth in
videocassette, concession, and accessory sales of 47% and 148% as compared to
the corresponding periods of the previous year, resulting from the acquisition
of 101 stores since July 31, 1998.
<PAGE>
Cost of Leased Product
Cost of leased product for the three months and six months ended July 31, 1999
totaled $1,651,808 and $2,151,592, compared to $469,794 and $706,885 for the
three months and six months ended July 31, 1998. Cost of leased product
increased by $1,182,014 or 252% and $1,444,707 or 204% for the three months and
six months ended July 31, 1999 as compared to the corresponding periods of the
previous year. The increase to cost of leased product was primarily attributable
to the acquisition of 101 stores since July, 31 1998. Cost of leased product as
a percentage of total revenue was 11.6% and 7.8% for the three months and six
months ended July 31, 1999 compared to 7.8% and 7.5% for the corresponding
period in 1998. The cost of leased products as a percentage of total revenue for
the three months ended July 31, 1999 increased due to a greater number of stores
participating in the revenue sharing (the Company and its suppliers share in the
revenue generated from the leased products) arrangement. Cost of leased product
as a percentage of revenue remained fairly constant for the six months ending
July 31, 1999 as compared to the corresponding period of July 31, 1998.
General and Administrative Expenses
General and administrative expenses for the three months and six months ended
July 31, 1999 totaled $3,371,466 and $5,452,017, compared to $771,818 and
$1,450,559 for the three months and six months ended July 31, 1998. General and
administrative expenses increased by $2,599,648 or 337% and $4,001,458 or 276%
for the three months and six months ended July 31, 1999 as compared to the
corresponding periods of the previous year. The increase for the three months
and six months ended July 31, 1999 was primarily due to additional costs
incurred to support the 76 stores purchased on December 28, 1998, the 15 stores
purchased on March 31, 1999 and the additional 10 stores that were either
acquired or newly opened since August 1, 1998. General and administrative
expenses as a percentage of revenues were 23.7% and 19.8% for the three months
and six months ended July 31, 1999 compared to 12.8% and 15.3% for the
corresponding period of 1998. The increase in general and administrative
expenses is attributable to the Company's anticipation of the up-coming merger
with West Coast Entertainment Corporation, and the additional resources that
will be required to complete the acquisition.
Gain on Sale of Assets
Gain on sale of assets of $1,913,178 was realized, for the three months and six
months ended July 31, 1999, resulted from the sale of 49 stores to Blockbuster,
Inc. on July 26, 1999. The Company recognized the gain on the sale on July 26,
1999, which included the sale of assets of the four additional Videoland stores
on August 30, 1999.
Interest Expense
Interest expense for the three months and six months ended July 31, 1999 totaled
$694,035 and $1,282,762, compared to $199,957 and $322,101 for the three months
and six months ended July 31, 1998. Interest expense increased by $494,078 or
247% and $960,661 or 298%, for the three months and six months ended July 31,
1999 as compared to the corresponding periods of the previous year. The increase
in interest expense was primarily due to the increased level of borrowings under
the Company's credit facility.
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, 1999, no
valuation allowance was recorded against the deferred tax asset because the
Company determined from its projections that it is more likely than not that
future taxable income will be sufficient to realize the deferred tax asset. Due
to the pending acquisitions, management cannot determine if it is more likely
than not that future taxable income will be sufficient to realize all of the
deferred tax asset generated in the current quarter. Accordingly, a valuation
allowance has been established against the current quarter's losses.
<PAGE>
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
equity financing and/or debt financing, the Company may not have the liquidity
to sustain its current rate of growth.
Videocassette rental inventory is accounted for as a non-current asset under
generally accepted accounting principles because it is not an asset that is
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 this asset as non-
current excludes it from the computation of working capital. The acquisition
cost of videocassette rental inventory, 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 the
fiscal year ending January 31, 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 loan facility. The
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, the Company 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 by the number of units of the
acceptable inventory, net of reserves. The agreement provides for various
financial reporting and financial performance covenants that require the Company
to meet or exceed certain financial ratios on a monthly basis. Due to the
Company not meeting some of the financial covenants as required, the Company has
requested and been granted a waiver by BankBoston.
As of July 31, 1999 the total outstanding balance under the BankBoston credit
facility was $9,949,065 and the availability on the credit facility was
approximately $779,406. As of September 18, 1999, the total outstanding balance
under the BankBoston credit facility was $9,479,458 and the availability on the
credit facility was approximately $21,915. The Company currently intends to
finance future acquisitions with funds from borrowings, through assumption of
liabilities by the Company and net proceeds from possible debt or equity
financing. There is no assurance that such financing will be available to the
Company.
The Company has outstanding indebtedness in the aggregate amount of $3,105,141
with certain of the Company's key suppliers that reached maturity in July 1999
and are now overdue. The debt agreements with the key suppliers provide for
increased interest rates and penalty payment of 8% during the periods of
default. Although there can be no assurances, the Company anticipates that it
will be able to extend the maturity dates of such indebtedness. The Company has
outstanding indebtedness in the aggregate amount of $1,660,142 with one of the
Company's key suppliers and several other affiliates that reach maturity in
January and February 2000. The Company has defaulted on the monthly payments and
will be subject to increased interest rates. Although there can be no
assurances, the Company anticipates that it will be able renew the agreement
with the key supplier on favorable terms before the maturity and repay the
outstanding balance to the affiliates before the maturity date.
<PAGE>
On June 14, 1999, the Company issued an aggregate of 2,000 shares of the
Company's Series E Convertible Preferred Stock, $1,000 stated value per share,
to International Video Distributors, and common stock purchase warrants to
purchase 50,000 shares of the Company's common stock at an exercise price of
$2.00 per share. International Video Distributors agreed to cancel
outstanding trade payables in the amount of $2,000,000 owed by the Company to
International Video Distributors.
On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share
to various shareholders for $625,000 cash in the form of a private placement.
Each share of Series C Convertible Redeemable Preferred Stock is convertible
into 500 shares of the Company's common stock at a conversion price of $2.00 per
share.
On July 26, 1999, the Company sold the assets of 45 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc.
The Company sold the assets of four additional Videoland stores to Blockbuster
on August 30, 1999. The aggregate purchase price for the sale of the 49 stores
is approximately $16 million in cash, of which $15.3 million was received as of
August 30, 1999. The net proceeds from the sale of assets were utilized to pay
down the Company's Senior Credit Facility.
On August 1, 1999, the Company and West Coast Entertainment Corporation ("West
Coast") entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which a wholly-owned subsidiary of the Company will merge with and
into West Coast such that West Coast will become a wholly-owned subsidiary of
the Company (the "Merger"). Pursuant to the Merger Agreement, upon the
effectiveness of the Merger, each outstanding share of common stock of West
Coast will be converted into the right to receive (i) a number of shares of
Common Stock of the Company, as is calculated pursuant to the Common Stock
Exchange Ratio (as defined in the Merger Agreement), subject to a maximum of
.333 shares and a minimum of .250 shares, and (ii) 0.05 shares of the Company's
Series F Convertible Redeemable Preferred Stock, having a liquidation preference
of $25.00 per share.
The consummation of the Merger is subject to certain terms and conditions set
forth in the Merger Agreement, including the obtaining or arranging of
financing, the approval by the stockholders of the Company and West Coast,
certain regulatory approvals and the approval by creditors and other third
parties. There can be no assurance that the Merger with West Coast will be
consummated.
The Company has retained the services of R.W. Pressprich & Co. to provide
general advisory services and to act as the Company's private placement agent in
connection with the financing of the West Coast Merger. The Company intends to
used the net proceeds of the debt financing to refinance certain of the
creditors and vendors of the Company and West Coast, and to pay the costs and
expenses of the Merger. There can be no assurances that the Company will be
successful in obtaining such financing.
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 July 31, 1999 and 1998 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate. The
carrying value of the notes receivable approximate fair market value.
Cash Flows
Six Months Ended July 31, 1999 Compared to the Six Months Ended July 31, 1998
<PAGE>
The increase in net cash used in operating activities of $787,322 for the six
months ended July 31, 1999 compared to the six months ended July 31, 1998 was
primarily due to the decrease in accrued expenses and an increase in merchandise
inventories and accounts payable, partially offset by an increase in other
assets. Net cash provided by investing activities increased by $7,474,028 for
the six months ended July 31, 1999 compared to the six months ended July 31,
1998, primarily due to the increase in the proceeds from the sale of fixed
assets, partially offset by the increase in the purchases of videocassette
rental inventory and fixed assets. Net cash used in financing activities
increased $6,724,183 for the six months ended July 31, 1999 compared to the six
months ended July 31, 1998 primarily due to the increase in the repayment of the
revolving credit facility, partially offset by the decrease in repayments of
long-term debt.
Year 2000
The year 2000 problem is the result of computer programs being 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 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.
The 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.
PART II.
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 12, 1999, the Company sold 750 shares of the Company's Series AA
Convertible Redeemable Preferred Stock, $100 stated value per share and warrants
to purchase 37,500 shares of the Company's Common Stock at an exercise price of
$2.00 per share, to Mortco, Inc. in consideration for cancellation of trade
payables owed by the Company to Rentrak Corporation in the amount of $75,000.
The shares of Series AA Preferred Stock are convertible into the Company's
Common Stock at a conversion price of $2.00 per share.
On June 11, 1999, the Company issued 2,000 shares of the Company's Series E
Convertible Preferred Stock, $1,000 stated value per share, to International
Video Distributors, LLC ("IVD") and Common Stock Purchase Warrants to purchase
50,000 shares of the Company's Common Stock at an exercise price of $2.00 per
share. IVD cancelled outstanding trade payables in the amount of $2,000,000
owed by the Company to IVD. Each share of Series E Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
$1,000 by the conversion price in effect on the conversion date. During certain
periods, the conversion price is equal to the market price of the Company's
Common Stock and ranges between $1.60 and $3.00; after such period, the
conversion price is equal to $3.00.
<PAGE>
On June 1, 1999 the Company issued 78,750 shares of the Company's Common Stock
to Nordic Information Systems Inc. in consideration for certain software
services provided to the Company by Nordic Information Systems Inc. In June
1999, the Company also issued 25,000 shares of the Company's Common Stock to an
employee of the Company as compensation pursuant to an employment agreement.
On June 2, 1999, the Company issued 303 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share and
warrants to purchase 57,312 shares of the Company's Common Stock at an exercise
price of $2.00 per share, to The Value Group, LLC in consideration for
cancellation of trade payables owed by the Company to The Value Group, LLC in
the amount of $303,000. On July 13, 1999, the Company issued 100 shares of the
Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value
per share, to DAZ Systems, Inc. in consideration for cancellation of trade
payables owed by the Company to DAZ Systems, Inc. in the amount of $100,000. The
shares of Series C Preferred Stock are convertible into the Company's Common
Stock at a conversion price of $2.00 per share.
On July 1, 1999, the Company issued warrants to purchase 1,048,451 shares of the
Company's Common Stock at an exercise price of $2.00 per share to Ingram
Entertainment Inc. These warrants include the warrants to purchase 404,225
shares of Common Stock previously issued by the Company in connection with the
acquisition of Videoland, Inc. in December 1998, and were payable in the event
the Company was unable to pay in full by June 30, 1999, approximately $3,600,000
owed to Ingram Entertainment Inc. by the Company.
On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share,
to eight accredited investors including an executive officer of the Company, for
cash in the amount of $625,000 in a private placement transaction. The shares
of Series C Preferred Stock are convertible into the Company's Common Stock at a
conversion price of $2.00 per share.
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.
On August 11, 1999, the Company filed a Current Report on Form 8-K, dated August
6, 1999, to report under Item 5 the description of the Company's Common Stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
--------
Numbers Description
- ------- -----------
10.1 Stock Purchase Agreement, dated June 2, 1999, by and between the Company
and The Value Group, LLC.
10.2 Common Stock Purchase Warrant, dated May 11, 1999, by and between the
Company and The Value Group, LLC.
10.3 Stock Purchase Agreement, dated June 11, 1999, by and between the Company
and International Video Distributors, LLC.
10.4 Common Stock Purchase Warrant, dated June 11, 1999, by and between the
Company and International Video Distributors, LLC.
10.5 Agreement and Plan of Merger, dated August 1, 1999, by and among the
Company, Key Stone Merger Corp. and West Coast Entertainment Corporation
(previously filed).
10.6 Employment Agreement, dated June 16, 1999, between the Company and Richard
T. Gibson
10.7 Amendment to Loan Documents, dated as of December 31, 1998, by and among
the Company, Ingram Entertainment Inc. and the debtors named therein.
10.8 Warrant to Purchase Common Stock, dated December 31, 1998, executed by the
Company for Ingram Entertainment Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
<PAGE>
On April 15, 1999, the Company filed a Current Report on Form 8-K, dated March
31, 1999, to report under Item 2 the acquisition of Video Galaxy, Inc. On June
14, 1999, the Company filed an amendment to such Current Report to report under
Item 7 that the transaction was not considered significant to file financial
statements and exhibits.
On August 10, 1999, the Company filed a Current Report on Form 8-K, dated July
26, 1999, to report under Item 2 the disposition of 49 of the Company's stores
to Blockbuster, Inc., to report under Item 5 the merger agreement entered into
with West Coast Entertainment Corporation, and to report under Item 7 the pro
forma financial information of the disposition of the 49 stores sold to
Blockbuster, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO CITY, INC.
Date: September 20, 1999 /s/ Robert Y. Lee
-----------------
Robert Y. Lee
Chief Executive Officer
(Principal Executive Officer)
Date: September 20, 1999 /s/ Timothy J. Denari
---------------------
Timothy J. Denari
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
1. Purchase and Payment. The Value Group, LLC ("Value Group") hereby
--------------------
agrees to purchase from Video City, Inc., a Delaware corporation (the
"Company"), 303 shares (the "Shares") of the Company's Series C Convertible
Redeemable Preferred Stock, with a stated Value of $1,000 per share (the "Series
C Preferred Stock"), having terms and conditions in accordance with the form of
the Certificate of Designations attached hereto as Exhibit A (the "Certificate
of Designations"), at an aggregate purchase price of $303,000 (the "Purchase
Price") and the Company hereby agrees to issue the Shares subject to the terms
and conditions of this Stock Purchase Agreement. Value Group and the Company
agree that the Purchase Price of the Shares to be purchased hereby consists of
the cancellation by Value Group of outstanding fees in the amount of $303,000
owed by the Company to Value Group as of the date hereof.
2. Closing; Conveyances at Closing The closing of the transactions
-------------------------------
contemplated by this Stock Purchase Agreement shall take place as soon as
practicable from the date hereof (the "Closing Date"). On the Closing Date, the
Company shall deliver to Value Group the stock certificate representing the
Shares, and Value Group shall have deemed to have delivered to the Company the
Purchase Price (consisting of the cancellation by Value Group of outstanding
fees as set forth in Section 1). The Shares shall not be deemed issued to, or
owned by, Value Group until the stock certificate representing the Shares is
delivered to Value Group.
3. Value Group Representations and Warranties. Value Group hereby
------------------------------------------
represents and warrants to the Company as follows:
(a) Value Group is an "accredited investor" within the meaning of
Regulation D under the Securities Act of 1933, as amended (the "Act").
(b) Value Group is acquiring the Shares for Value Group's own account,
for investment purposes only, and not with a view to or for sale in connection
with any distribution of such securities.
(c) Value Group acknowledges its understanding that the offer and sale
of the Shares are intended to be exempt from registration under the Act, and
exempt from qualification under the securities laws of certain states of United
States by virtue of exemptions from such registration and qualification for
transactions not involving any public offering. In furtherance thereof, Value
Group represents and warrants to and agrees with the Company as follows:
(i) Value Group has the financial ability to bear the economic
risk of its investment in the Company (including its possible loss), has
adequate means of providing for its current needs and contingencies and has no
need for liquidity with respect to its investment in the Company; and
(ii) Value Group has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in the Shares and has obtained, in its judgment, sufficient
information from the Company to evaluate the merits and risks of an investment
in the Shares.
(d) Value Group:
(i) has received copies of the Company's Annual Report on Form 10-
1.
<PAGE>
K for the fiscal year ended January 31, 1999, as amended, filed with the
Securities and Exchange Commission (the "SEC"), and all other reports of the
Company filed with the SEC since May 17, 1999 that has been requested from the
Company (collectively, the "SEC Filings"), and has been furnished any other
documents requested from the Company by Value Group, and understands and has
evaluated the risks of a purchase of the Shares;
(ii) has been given the opportunity to ask questions of the
Company concerning the Company, the terms and conditions of this offering and
other matters pertaining to this investment, has received complete and
satisfactory answers to any such inquiries and has been given the opportunity to
obtain such additional information necessary to verify the accuracy of the
information which was provided in order for it to evaluate the merits and risks
of an investment in the Company to the extent the Company possesses such
information or can acquire it without unreasonable effort or expense; and
(iii) has read and is familiar with the SEC Filings and other
information provided to Value Group and has determined that the Shares are a
suitable investment for Value Group.
(e) Value Group acknowledges its understanding that although the
Company's strategy contemplates additional future mergers, acquisitions,
strategic divestitures and financing, there can be no assurances that any such
future transactions will be consummated.
(f) In making its decision to purchase the Shares, Value Group is not
relying on the Company with respect to tax or other economic considerations
involved in this investment.
(g) Value Group represents, warrants, and agrees that it will not sell,
transfer or otherwise dispose of the Shares or the shares of Common Stock
issuable upon conversion of the Shares (i) without registration under the Act
and any applicable state securities laws or (ii) without providing to the
Company a written opinion of counsel to Value Group reasonably satisfactory to
the Company opining that an exemption from registration or qualification is
available. Value Group fully understands and agrees that Value Group must bear
the economic risk of its investment for an indefinite period of time because,
among other reasons, the Shares and the shares of Common Stock issuable upon
conversion of the Shares have not been registered under the Act or under the
securities laws of certain states and, therefore, cannot be resold, pledged,
assigned or otherwise disposed of unless they are subsequently registered under
the Act and under applicable securities laws of such states, or an exemption
from such registration is available. Value Group acknowledges that the Company's
Common Stock is currently traded on the OTC Bulletin Board, that there is no
established public trading market for the Series C Preferred Stock, and that
there can be no assurance that such an established public trading market will
develop in the future.
2.
<PAGE>
(h) Value Group acknowledges and agrees that the certificate
representing the Shares shall bear the following (or substantially equivalent)
legends on the face or reverse side thereof:
"THE SECURITES REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
CONVERSION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR
UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF
COUNSEL FOR THE ISSUER"
Any certificate or other document issued at any time in exchange or substitution
for, or upon conversion or exercise of, any security bearing such legends shall
also bear such (or substantially equivalent) legend unless, in the sole opinion
of counsel for the Company, the securities represented thereby need no longer be
subject to such restrictions.
(i) Value Group is duly organized and validly existing and has all
power and authority to enter into this Stock Purchase Agreement and to invest in
the Shares as contemplated herein. The execution, delivery and performance by
Value Group of this Stock Purchase Agreement has been duly authorized by all
necessary action on the part of Value Group.
(j) No agency of the United States or any state thereof has passed
upon the Shares or made any findings or determination as to the fairness of this
investment.
(k) The representations, warranties, agreements, undertakings and
acknowledgements made by Value Group in this Stock Purchase Agreement are made
with the intent that they be relied upon by the Company and its agent
(including, without limitation, the Company's counsel) in determining Value
Group's suitability as a purchaser of the Shares.
(l) Value Group's place of residence is located in California.
4. Registration. The Company shall, at its sole cost and expenses,
------------
file a registration statement with the Securities and Exchange Commission
covering the resale of the shares of Common Stock issuable upon conversion of
the Shares under the Act on or before June 30, 1999 and shall use its best
efforts to cause such registration statement to become effective as soon as
practicable thereafter. The Company shall take all actions reasonably necessary
to keep such registration statement continuously effective until that date upon
which Value Group no longer owns any of the Shares or the shares of Common Stock
issuable upon conversion of the Shares. The Company shall (i) prepare and file
with the SEC such amendments and supplements to such registration statement and
the prospectus used in connection therewith; and (ii) furnish to Value Group
copies of the registration statement and the prospectus included therein as
Value Group may reasonably request in order to facilitate the public sale or
other disposition of the shares of Common Stock covered by such registration
statement. In connection with any registration hereunder, Value Group shall
provide such information and execute such documents as may reasonably be
requested by the Company in connection with such registration.
5. Indemnity by Value Group. Value Group agrees to indemnify and
------------------------
hold harmless the Company and its directors, officers, employees and counsel
against any and all loss, liability,
3.
<PAGE>
claim, damage, and expense whatsoever (including, but not limited to, any and
all expenses whatsoever reasonably incurred in investigating, preparing or
defending against any litigation commenced or threatened or any claim
whatsoever) related to (i) any false representation or warranty made by Value
Group herein or (ii) any transfer by Value Group of the Shares or the shares of
Common Stock of the Company issuable upon conversion of the Shares in violation
of any securities laws; or (iii) any claims arising out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement filed pursuant to Section 4 herein, or the omission or
alleged omission therein to state a material fact required to be stated in such
registration statement or necessary to make the statements therein not
misleading, to the extent such claim arises out of or are based upon any untrue
statement or alleged untrue statement or omission or alleged omission based upon
information furnished to the Company in writing by Value Group expressly for use
therein.
6. Indemnity by the Company. The Company agrees to indemnify and hold
------------------------
harmless Value Group and its directors, officers, employees and counsel against
any and all loss, liability, claim, damage, and expense whatsoever (including,
but not limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation commenced or
threatened or any claim whatsoever) related to (i) any false representation or
warranty made by the Company herein or the failure by the Company to perform any
covenant or agreement contained herein or in the Certificate of Designations or
(ii) any issuance of the Shares or the shares of Common Stock of the Company
issuable upon conversion of the Shares in violation of any securities laws; or
(iii) any claims arising out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement filed pursuant to Section 4 herein, or the omission or alleged
omission therein to state a material fact required to be stated in such
registration statement or necessary to make the statements therein not
misleading, except to the extent such claim arises out of or are based upon any
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished to the Company in writing by Value Group
expressly for use therein.
7. Assignment. Neither this Stock Purchase Agreement nor any of the
----------
rights or obligations hereunder may be assigned by any party without the prior
written consent of the other party. Subject to the foregoing, this Stock
Purchase Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, and no other
person shall have any right, benefit or obligation under this Stock Purchase
Agreement as a third party beneficiary or otherwise.
8. Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Stock Purchase Agreement shall be
in writing and shall be deemed to have been duly given when received if
personally delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method (with proof of transmission); the day after it is
sent, if sent for next day delivery to a domestic address by recognized
overnight delivery service (e.g., FED EX); and upon receipt, if sent by
----
certified or registered mail, return receipt requested.
9. Governing Law. This Stock Purchase Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of California without
reference to choice of law provisions.
10. Waiver of Right to Trial by Jury. Each party to this Stock Purchase
--------------------------------
Agreement hereby waives its rights to a trial by jury.
4.
<PAGE>
11. Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Stock Purchase Agreement and
to any action taken by such party in preparation for carrying this Stock
Purchase Agreement into effect.
12. Invalidity. In the event that any one or more of the provisions
----------
contained in this Stock Purchase Agreement or in any other instrument referred
to herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Stock Purchase Agreement or any other such instrument.
13. Entire Agreement. This Stock Purchase Agreement, together with all
----------------
exhibits hereto, constitutes the entire agreement among the parties pertaining
to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties.
14. Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
15. Multiple Counterparts. This Stock Purchase Agreement may be executed in
---------------------
one or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of June 2, 1999.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
------------------------------
Robert Y. Lee
Chief Executive Officer
THE VALUE GROUP, LLC
/s/ John T. Sheehy
------------------------------
John T. Sheehy
Managing Director
5.
<PAGE>
EXHIBIT 10.2
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS
EXEMPT FROM SUCH REGISTRATION.
VIDEO CITY, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance. For value received, the receipt of which is hereby
--------
acknowledged, The Value Group, LLC (the "Holder") is hereby granted the right,
subject to the terms and conditions of this Warrant, to purchase at any time
commencing May 11, 1999 and continuing until 5:00 P.M., Pacific Daylight Time,
on May 10, 2002, FIFTY SEVEN THOUSAND THREE HUNDRED AND TWELVE (57,312) fully
paid and nonassessable shares of Common Stock, $0.01 par value per share (the
"Common Stock"), of VIDEO CITY, INC. (the "Company"), at an exercise price of
$2.00 per share (the "Exercise Price"), subject to adjustment as set forth in
Section 6 hereof.
2. Exercise of Warrants. This Warrant is exercisable in whole or in part
--------------------
(but not less than 1,000 shares of Common Stock covered by this Warrant) at the
Exercise Price per share of Common Stock payable hereunder, payable in cash or
by check. Upon surrender of this Warrant with the annexed Notice of Exercise of
Warrant form duly executed, together with payment of the Exercise Price for the
shares of Common Stock purchased, the Holder shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased.
3. Reservation of Shares. The Company hereby agrees that at all times
---------------------
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence
-----------------------------
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) receipt of reasonably
satisfactory indemnification, and (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will execute and deliver a new Warrant
of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant
shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein. Nothing contained herein shall confer upon the Holder any right to
consult for, or be employed with, the Company or any of its affiliates.
1.
<PAGE>
6. Certain Adjustments.
-------------------
6.1 Adjustments for Stock Dividends, Stock Splits, Subdivisions etc.
---------------------------------------------------------------
If the Company shall (i) declare a dividend or make a distribution in shares of
Common Stock, (ii) effect a stock split or subdivide or reclassify the
outstanding shares of Common Stock into a greater number of shares, (iii)
combine or reclassify the outstanding shares of Common Stock into a smaller
number of shares, or (iv) effect a capital reorganization or reclassification of
the outstanding shares of Common Stock, the Exercise Price and the number of
shares purchasable pursuant to this Warrant shall be appropriately adjusted
proportionately so that the ratio of (i) the aggregate number of shares
purchasable by exercise of this Warrant to (ii) the total number of shares
outstanding immediately prior to such stock dividend, stock split, subdivision,
combination, reorganization, reclassification or the like shall remain
unchanged, and the aggregate purchase price of shares issuable pursuant to this
Warrant shall remain unchanged. Successive adjustments shall be made whenever
any event specified above shall occur.
6.2 Termination for Consolidation, Merger, etc. In case the Company
------------------------------------------
(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 Company and the
Company 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, or (iii) shall transfer all or substantially all of its properties or
its assets to any other person (each a "Corporate Transaction"); then, and in
each such case, this Warrant shall, to the extent not exercised, terminate
effective upon the consummation of such Corporate Transaction.
6.3 Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this Section 6 shall be made to the nearest cent or to the nearest share,
as the case may be. No adjustment 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.
7. Tax Withholding. As a condition to exercise of this Warrant, the
---------------
Company may require the Holder to pay over to the Company all applicable
federal, state and local taxes which the Company is required to withhold with
respect to the exercise of this Warrant.
8. Transfer to Comply with the Securities Act. This Warrant has not been
------------------------------------------
registered under the Securities Act of 1933, as amended, (the "Securities Act")
and has been issued to the Holder for investment and not with a view to the
distribution of either the Warrant or the Warrant Shares. Neither this Warrant
nor any of the Warrant Shares or any other security issued or upon exercise of
this Warrant may be sold, transferred, pledged or hypothecated in the absence of
an effective registration statement under the
2.
<PAGE>
Securities Act relating to such security or an opinion of counsel satisfactory
to the Company that registration is not required under the Securities Act. Each
certificate for the Warrant, the Warrant Shares and any other security issued or
issuable upon exercise of this Warrant shall contain a legend in form and
substance satisfactory to counsel for the Company, setting forth the
restrictions on transfer contained in this Section.
9. Notices. All notices or other communications given or made
-------
hereunder shall be in writing and shall be delivered by hand, against written
receipt, or mailed by registered or certified mail, return receipt requested,
postage prepaid, to the Holder at such Holder's address as shown on the books of
the Company and to the Company at its principal executive offices. Notices shall
be deemed given on the date of receipt or, if mailed, three business days after
mailing, except notices of change of address, which shall be deemed given when
received. Any party may designate another address or person for receipt of
notices hereunder by notice given to the other parties in accordance with this
Section.
10. Supplements and Amendments; Whole Agreement. This Warrant may be
-------------------------------------------
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant contains the full understanding of the parties hereto with
respect to the subject matter hereof, and there are no representations,
warranties, agreements or understandings other than expressly contained herein.
11. Governing Law. This Warrant shall be deemed to be a contract
-------------
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State.
12. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this Warrant as of
11th day of May 1999.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
----------------------------
Robert Y. Lee
Chief Executive Officer
3.
<PAGE>
THE VALUE GROUP, LLC
By: /s/ John T. Sheehy
------------------------------
John T. Sheehy
Managing Director
4.
<PAGE>
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant dated as of May 11, 1999 to purchase _______________
shares of the Common Stock, $0.01 par value per share, of VIDEO CITY, INC., and
tenders herewith payment in accordance with Section 2 of said Common Stock
Purchase Warrant.
Please deliver the stock certificate to:
Dated:
-----------------------
By:
--------------------------
CASH: $
-------------
5.
<PAGE>
EXHIBIT 10.3
STOCK PURCHASE AGREEMENT
1. Purchase and Payment. International Video Distributors, LLC
--------------------
("IVD") hereby agrees to purchase from Video City, Inc., a Delaware corporation
(the "Company"), (i) 2,000 shares (the "Shares") of the Company's Series E
Convertible Preferred Stock, with a stated value of $1,000 per share (the
"Series E Preferred Stock"), having terms and conditions in accordance with the
form of the Certificate of Designations attached hereto as Exhibit A (the
"Certificate of Designations") and (ii) Common Stock Purchase Warrants (the
"Warrants") to purchase 50,000 shares of the Company's Common Stock ("Common
Stock") at an exercise price of $2.00 per share, having terms and conditions in
accordance with the form of warrant attached hereto as Exhibit B, at an
aggregate purchase price of $2,000,000 (the "Purchase Price") and the Company
hereby agrees to issue the Shares and the Warrants subject to the terms and
conditions of this Stock Purchase Agreement (the Shares and the Warrants are
referred to herein, collectively, as the "Securities"). IVD and the Company
agree that the Purchase Price of the Securities to be purchased hereby consists
of the cancellation by IVD of outstanding trade payables in the amount of
$2,000,000 owed by the Company to IVD as of the date hereof as set forth in the
invoices attached hereto as Exhibit C.
2. Trading Price of Common Stock; Conversion Restriction. In the event
-----------------------------------------------------
IVD provides notice to the Company of its election to convert all or any part of
the Shares of Series E Preferred Stock during the 90 Day Period (as defined in
the Certificate of Designations) in accordance with the provisions of the
Certificate of Designations and the average of the Trading Price (as defined in
the Certificate of Designations) of the Company's Common Stock for the five
consecutive trading days immediately preceding the date in which IVD delivers
such notice to the Company of IVD's election to convert (the "Applicable Average
Trading Price") is less than $1.60, then in addition to issuing the number
shares of Common Stock issuable to IVD upon such conversion pursuant to the
Certificate of Designations, the Company shall pay to IVD, within five days of
receipt of the applicable conversion notice, an amount equal to the difference
between (i) $1,000, and (ii) 625 multiplied by the Applicable Average Trading
Price, for each share of Series E Preferred Stock then converted by IVD. IVD
agrees that of the 2,000 shares of Series E Preferred Stock to be issued to IVD
pursuant to this Stock Purchase Agreement, IVD may only convert (i) up to 1,000
shares of such 2,000 Shares during the period from the date of issuance until
the 30th day of the 90 Day Period (as defined in the Certificate of
Designations), (ii) up to 1,500 shares of such 2,000 Shares during the period
after the 30th day of the 90 Day Period until the 60th day of the 90 Day Period,
and (iii) all or any of the 2,000 Shares at any time after the 60th day of the
90 Day Period, so that IVD may convert all or any of the 2,000 Shares after the
60th day of the 90 Day Period.
3. Closing; Conveyances at Closing. The closing of the transactions
-------------------------------
contemplated by this Stock Purchase Agreement (the "Closing") shall take place
on or before June 15, 1999 (the "Closing Date"). On the Closing Date, the
Company shall deliver to IVD the stock certificate representing the Shares and
the Warrants, and IVD shall have deemed to have delivered to the Company the
Purchase Price (consisting of the cancellation by IVD of outstanding trade
payables as set forth in Section 1). The Shares
1.
<PAGE>
shall not be deemed issued to, or owned by, IVD until the stock certificate
representing the Shares is delivered to IVD.
4. Conditions to Closing by IVD. The obligations of IVD to consummate
----------------------------
the transactions contemplated hereby are subject to the satisfaction, at or
prior to the Closing Date, of each of the following conditions, any of which may
be waived by IVD:
(a) All representations and warranties of the Company contained in
this Stock Purchase Agreement shall be true and correct at and as of the date of
this Stock Purchase Agreement and at and as of the Closing Date as if such
representations and warranties were made at and as of the Closing Date.
(b) All permits, waivers, consents, approvals and authorizations from
governmental authorities and other parties necessary to consummate the
transactions contemplated hereby shall have been obtained.
(c) The Company shall have executed and filed the Certificate of
Designations for the Series E Preferred Stock with the Secretary of State of the
State of Delaware, and shall have delivered a copy thereof to IVD.
(d) The Company shall have delivered to IVD stock certificates
representing the Shares and the Warrants.
5. Conditions to Closing by the Company. The obligations of the
------------------------------------
Company to consummate the transactions contemplated hereby are subject to the
satisfaction, at or prior to the Closing Date, of each of the following
conditions, any of which may be waived by the Company:
(a) All representations and warranties of IVD contained in this Stock
Purchase Agreement shall be true and correct at and as of the date of this Stock
Purchase Agreement and at and as of the Closing Date as if such representations
and warranties were made at and as of the Closing Date.
(b) All permits, waivers, consents, approvals and authorizations from
governmental authorities and other parties necessary to consummate the
transactions contemplated hereby shall have been obtained.
(c) IVD shall have delivered to the Company the Purchase Price by
acknowledging the cancellation by IVD of outstanding trade payables in the
amount of $2,000,000 owed by the Company to IVD.
6. IVD Representations and Warranties. IVD hereby represents and warrants
----------------------------------
to the Company as follows:
(a) IVD is an "accredited investor" within the meaning of Regulation D
under the Securities Act of 1933, as amended (the "Act").
2.
<PAGE>
(b) IVD is acquiring the Securities for IVD's own account, for
investment purposes only, and not with a view to or for sale in connection with
any distribution of such securities.
(c) IVD acknowledges its understanding that the offer and sale of the
Securities is intended to be exempt from registration under the Act, and exempt
from qualification under the securities laws of certain states of United States
by virtue of exemptions from such registration and qualification for
transactions not involving any public offering. In furtherance thereof, IVD
represents and warrants to and agrees with the Company as follows:
(i) IVD has the financial ability to bear the economic risk of
its investment in the Company (including its possible loss), has adequate means
of providing for its current needs and contingencies and has no need for
liquidity with respect to its investment in the Company; and
(ii) IVD has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in the Securities and has obtained, in its judgment, sufficient
information from the Company to evaluate the merits and risks of an investment
in the Securities.
(d) IVD:
(i) has received copies of the Company's Annual Report on From
10-K for the fiscal year ended January 31, 1999, as amended, filed with the
Securities and Exchange Commission (the "SEC"), and all other reports of the
Company filed with the SEC since May 17, 1999 that has been requested from the
Company (collectively, the "SEC Filings"), and has been furnished any other
documents requested from the Company by IVD, and understands and has evaluated
the risks of a purchase of the Securities;
(ii) has been given the opportunity to ask questions of the
Company concerning the Company, the terms and conditions of this offering and
other matters pertaining to this investment, has received complete and
satisfactory answers to any such inquiries and has been given the opportunity to
obtain such additional information necessary to verify the accuracy of the
information which was provided in order for it to evaluate the merits and risks
of an investment in the Company to the extent the Company possesses such
information or can acquire it without unreasonable effort or expense; and
(iii) has read and is familiar with the SEC Filings and other
information provided to IVD and has determined that the Securities are a
suitable investment for IVD.
(e) IVD acknowledges its understanding that although the Company's
strategy contemplates additional future mergers, acquisitions, strategic
dispositions and financing, there can be no assurances that any such future
transactions will be
3.
<PAGE>
consummated.
(f) In making its decision to purchase the Securities, IVD has relied
solely upon independent evaluations or investigations made by IVD. IVD is not
relying on the Company with respect to tax or other economic considerations
involved in this investment.
(g) IVD represents, warrants, and agrees that it will not sell,
transfer or otherwise dispose of the Securities or the shares of Common Stock
issuable upon conversion or exercise of the Securities (i) without registration
under the Act and any applicable state securities laws or (ii) without providing
to the Company a written opinion of counsel to IVD reasonably satisfactory to
the Company opining that an exemption from registration or qualification is
available. IVD fully understands and agrees that IVD must bear the economic
risk of its investment for an indefinite period of time because, among other
reasons, the Securities and the shares of Common Stock issuable upon conversion
or exercise of the Securities have not been registered under the Act or under
the securities laws of certain states and, therefore, cannot be resold, pledged,
assigned or otherwise disposed of unless they are subsequently registered under
the Act and under applicable securities laws of such states, or an exemption
from such registration is available. IVD acknowledges that the Company's Common
Stock is currently traded on the OTC Bulletin Board, that there is no
established public trading market for the Series E Preferred Stock or the
Warrants, and that there can be no assurance that such an established public
trading market will develop in the future.
(h) IVD acknowledges and agrees that the certificate representing the
Securities shall bear the following (or substantially equivalent) legends on the
face or reverse side thereof:
"THE SECURITES REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
CONVERSION OR EXERCISE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SAID ACT
OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE IN THE OPINION
OF COUNSEL FOR THE ISSUER"
Any certificate or other document issued at any time in exchange or substitution
for, or upon conversion or exercise of, any security bearing such legends shall
also bear such (or substantially equivalent) legend unless, in the sole opinion
of counsel for the Company, the securities represented thereby need no longer be
subject to such restrictions.
(i) IVD is a limited liability company duly organized and validly
existing and has all power and authority to enter into this Stock Purchase
Agreement and to invest in the Securities as contemplated herein. IVD is
authorized and qualified to become an investor in the Company. The execution,
delivery and performance by IVD of
4.
<PAGE>
this Stock Purchase Agreement has been duly authorized by all necessary action
on the part of IVD.
(j) No agency of the United States or any state thereof has passed
upon the Securities or made any findings or determination as to the fairness of
this investment.
(k) The representations, warranties, agreements, undertakings and
acknowledgements made by IVD in this Stock Purchase Agreement are made with the
intent that they be relied upon by the Company and its agent (including, without
limitation, the Company's counsel) in determining IVD's suitability as a
purchaser of the Securities.
(l) The principal executive offices of IVD are
located at 59 Lake Drive, Hightstown, New Jersey 08520.
7. Company Representations and Warranties. The Company hereby represents
--------------------------------------
and warrants to IVD as follows:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and has full corporate
power and authority to conduct its business as it is presently being conducted.
(b) The execution, delivery and performance by the Company of this
Stock Purchase Agreement and the consummation by the Company of the transactions
contemplated hereby are within the corporate powers of the Company and have been
duly authorized by all necessary corporate action on the part of the Company.
This Stock Purchase Agreement is the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with its terms.
(c) The execution, delivery and performance by the Company of this
Stock Purchase Agreement do not and will not (i) contravene or conflict with the
Certificate of Incorporation, as amended, or Bylaws, as amended, of the Company,
(ii) contravene or conflict with or constitute a violation of any provision of
any law, statute, rule, regulation, judgment, injunction, order, writ or decree
binding upon or applicable to the Company or any part of its business, (iii)
constitute a default under or breach of, or violate or give rise to any right of
termination, cancellation or acceleration of any right or obligation of the
Company, or to a loss of any benefit relating to its business or operations to
which the Company is entitled under any provision of any contract to which the
Company is a party or by which any of its assets is or may be bound or (iv)
result in the creation or imposition of any encumbrance on any of the Company's
assets.
(d) The Securities to be issued hereunder will, when issued and paid
for in accordance with this Stock Purchase Agreement, be duly and validly
issued, nonassessable shares free and clear of any and all encumbrances.
8. Registration. The Company shall, at its sole cost and expenses,
------------
file a registration statement with the Securities and Exchange Commission
covering the resale of
5.
<PAGE>
the shares of Common Stock issuable upon conversion of the Shares and upon
exercise of the Warrants under the Act on or before June 18, 1999 and shall use
its best efforts to cause such registration statement to become effective as
soon as practicable thereafter. The Company shall take all actions reasonably
necessary to keep such registration statement continuously effective until that
date upon which IVD no longer owns any of the Shares, the Warrants or the shares
of Common Stock issuable upon conversion of the Shares or upon exercise of the
Warrants. The Company shall (i) prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection therewith; and (ii) furnish to IVD copies of the registration
statement and the prospectus included therein as IVD may reasonably request in
order to facilitate the public sale or other disposition of the shares of Common
Stock covered by such registration statement. In connection with any
registration hereunder, IVD shall provide such information and execute such
documents as may reasonably be requested by the Company in connection with such
registration.
9. Indemnity by IVD. IVD agrees to indemnify and hold harmless the
----------------
Company and its directors, officers, employees and counsel against any and all
loss, liability, claim, damage, and expense whatsoever (including, but not
limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation commenced or
threatened or any claim whatsoever) related to (i) any false representation or
warranty made by IVD herein or (ii) any transfer by IVD of the Securities or the
shares of Common Stock of the Company issuable upon conversion or exercise of
the Securities in violation of any securities laws; or (iii) any claims arising
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any registration statement filed pursuant to Section
8 herein, or the omission or alleged omission therein to state a material fact
required to be stated in such registration statement or necessary to make the
statements therein not misleading, to the extent such claim arises out of or are
based upon any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished to the Company in writing by
IVD expressly for use therein.
10. Indemnity by the Company. The Company agrees to indemnify and
------------------------
hold harmless IVD and its member, officers, employees and counsel against any
and all loss, liability, claim, damage, and expense whatsoever (including, but
not limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation commenced or
threatened or any claim whatsoever) related to (i) any false representation or
warranty made by the Company herein or the failure by the Company to perform any
covenant or agreement contained herein or in the Warrants or Certificate of
Designations or (ii) any issuance of the Securities or the shares of Common
Stock of the Company issuable upon conversion or exercise of the Securities in
violation of any securities laws; or (iii) any claims arising out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in any registration statement filed pursuant to Section 8 herein, or
the omission or alleged omission therein to state a material fact required to be
stated in such registration statement or necessary to make the statements
therein not misleading, except to the extent such claim arises out of or are
based upon any untrue statement or alleged untrue statement or omission or
alleged omission based upon
6.
<PAGE>
information furnished to the Company in writing by IVD expressly for use
therein.
11. Assignment. Neither this Stock Purchase Agreement nor any of
----------
the rights or obligations hereunder may be assigned by any party without the
prior written consent of the other party. Subject to the foregoing, this Stock
Purchase Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, and no other
person shall have any right, benefit or obligation under this Stock Purchase
Agreement as a third party beneficiary or otherwise.
12. Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Stock Purchase Agreement shall be
in writing and shall be deemed to have been duly given when received if
personally delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method (with proof of transmission); the day after it is
sent, if sent for next day delivery to a domestic address by recognized
overnight delivery service (e.g., FED EX); and upon receipt, if sent by
----
certified or registered mail, return receipt requested.
13. Governing Law. This Stock Purchase Agreement shall be governed
-------------
by and construed in accordance with the laws of the State of California without
reference to choice of law provisions.
14. Waiver of Right to Trial by Jury. Each party to this Stock Purchase
--------------------------------
Agreement hereby waives its rights to a trial by jury.
15. Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Stock Purchase Agreement and
to any action taken by such party in preparation for carrying this Stock
Purchase Agreement into effect.
16. Invalidity. In the event that any one or more of the provisions
----------
contained in this Stock Purchase Agreement or in any other instrument referred
to herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Stock Purchase Agreement or any other such instrument.
17. Entire Agreement. This Stock Purchase Agreement, together with all
----------------
exhibits hereto, constitutes the entire agreement among the parties pertaining
to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties.
18. Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
19. Multiple Counterparts. This Stock Purchase Agreement may be executed
---------------------
in one or more counterparts, each of which shall be deemed an original but all
of which
7.
<PAGE>
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of June 11, 1999.
VIDEO CITY, INC.
By: /s/ Timothy J. Denari
------------------------------
Timothy J. Denari
Chief Financial Officer
INTERNATIONAL VIDEO
DISTRIBUTORS, LLC
By: /s/ Michael Koretsky
-----------------------------
Michael Koretsky
Managing Member
8.
<PAGE>
EXHIBIT 10.4
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS
EXEMPT FROM SUCH REGISTRATION.
VIDEO CITY, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance. For value received, the receipt of which is hereby
--------
acknowledged, International Video Distributors, LLC (the "Holder") is hereby
granted the right, subject to the terms and conditions of this Warrant, to
purchase at any time commencing June 11, 1999 and continuing until 5:00 P.M.,
Pacific Daylight Time, on June 10, 2004, FIFTY THOUSAND (50,000) fully paid and
nonassessable shares of Common Stock, $0.01 par value per share (the "Common
Stock"), of VIDEO CITY, INC. (the "Company"), at an exercise price of $2.00 per
share (the "Exercise Price"), subject to adjustment as set forth in Section 6
hereof.
2. Exercise of Warrants. This Warrant is exercisable in whole or in part
--------------------
(but not less than 1,000 shares of Common Stock covered by this Warrant) at the
Exercise Price per share of Common Stock payable hereunder, payable in cash or
by check. Upon surrender of this Warrant with the annexed Notice of Exercise of
Warrant form duly executed, together with payment of the Exercise Price for the
shares of Common Stock purchased, the Holder shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased no later
than two business days after receipt of notice of exercise.
3. Reservation of Shares. The Company hereby agrees that at all times
---------------------
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence
-----------------------------
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) receipt of reasonably
satisfactory indemnification, and (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will execute and deliver a new Warrant
of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant
shall thereupon become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein. Nothing contained herein shall confer upon the Holder any right
to consult for, or be employed with, the Company or any of its affiliates.
1.
<PAGE>
6. Certain Adjustments.
-------------------
6.1 Adjustments for Stock Dividends, Stock Splits, Subdivisions etc.
---------------------------------------------------------------
If the Company shall (i) declare a dividend or make a distribution in shares of
Common Stock, (ii) effect a stock split or subdivide or reclassify the
outstanding shares of Common Stock into a greater number of shares, (iii)
combine or reclassify the outstanding shares of Common Stock into a smaller
number of shares, or (iv) effect a capital reorganization or reclassification of
the outstanding shares of Common Stock, the Exercise Price and the number of
shares purchasable pursuant to this Warrant shall be appropriately adjusted
proportionately so that the ratio of (i) the aggregate number of shares
purchasable by exercise of this Warrant to (ii) the total number of shares
outstanding immediately prior to such stock dividend, stock split, subdivision,
combination, reorganization, reclassification or the like shall remain
unchanged, and the aggregate purchase price of shares issuable pursuant to this
Warrant shall remain unchanged. Successive adjustments shall be made whenever
any event specified above shall occur.
6.2 Termination for Consolidation, Merger, etc. In case the
------------------------------------------
Company (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 Company and
the Company 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, or (iii) shall transfer all or substantially all of its properties or
its assets to any other person (each a "Corporate Transaction"); then, and in
each such case, this Warrant shall, to the extent not exercised, terminate
effective upon the consummation of such Corporate Transaction. The Company shall
provide written notice of any Corporate Transaction to the Holder not less than
20 days prior to the effective date of such Corporate Transaction.
6.3 Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this Section 6 shall be made to the nearest cent or to the nearest share,
as the case may be. No adjustment 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.
7. Tax Withholding. As a condition to exercise of this Warrant, the
---------------
Company may require the Holder to pay over to the Company all applicable
federal, state and local taxes which the Company is required to withhold with
respect to the exercise of this Warrant.
8. Transfer to Comply with the Securities Act. This Warrant has not been
------------------------------------------
registered under the Securities Act of 1933, as amended, (the "Securities Act")
and has
2.
<PAGE>
been issued to the Holder for investment and not with a view to the distribution
of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the
Warrant Shares or any other security issued or upon exercise of this Warrant may
be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement under the Securities Act relating to such security or an
opinion of counsel satisfactory to the Company that registration is not required
under the Securities Act. Each certificate for the Warrant, the Warrant Shares
and any other security issued or issuable upon exercise of this Warrant shall
contain a legend in form and substance satisfactory to counsel for the Company,
setting forth the restrictions on transfer contained in this Section.
9. Notices. All notices, requests, demands and other communications which
-------
are required or may be given under this Warrant shall be in writing and shall be
deemed to have been duly given when received if personally delivered; when
transmitted if transmitted by telecopy, electronic or digital transmission
method (with proof of transmission); the day after it is sent, if sent for next
day delivery to a domestic address by recognized overnight delivery service
(e.g., FED EX); and upon receipt, if sent by certified or registered mail,
- -----
return receipt requested.
10. Supplements and Amendments; Whole Agreement. This Warrant may be
-------------------------------------------
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant contains the full understanding of the parties hereto with
respect to the subject matter hereof, and there are no representations,
warranties, agreements or understandings other than expressly contained herein.
11. Governing Law. This Warrant shall be deemed to be a contract made
-------------
under the laws of the State of California and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State.
12. Descriptive Headings. Descriptive headings of the several Sections of
--------------------
this Warrant are inserted for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
13. Multiple Counterparts. This Warrant may be executed in one or more
---------------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
3.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Warrant as of the
11th day of June 1999.
VIDEO CITY, INC.
By: /s/ Timothy J. Denari
-----------------------
Timothy J. Denari
Chief Financial Officer
INTERNATIONAL VIDEO DISTRIBUTORS, LLC
By: /s/ Michael Koretsky
-----------------------
Michael Koretsky
Chief Executive Officer
4.
<PAGE>
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant dated as of June 11, 1999 to purchase _______________
shares of the Common Stock, $0.01 par value per share, of VIDEO CITY, INC., and
tenders herewith payment in accordance with Section 2 of said Common Stock
Purchase Warrant.
Please deliver the stock certificate to:
Dated:___________________________
By:______________________________
CASH: $________________________
5.
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
16/th/ day of June 1999, by and between Video City, Inc., a Delaware corporation
(the "Company"), and Richard Gibson ("Employee").
1. Term of Employment. The Company hereby employs Employee, and Employee
------------------
hereby agrees to serve the Company, under and subject to all of the terms,
conditions and provisions of this Agreement from the date hereof through June
15, 2001, in the capacity of President and Chief Operating Officer of the
Company, or to serve in such other executive capacity with the Company as the
Company's board of directors (the "Board of Directors") may from time to time
designate, provided such assignment is consistent with Employee's level of
experience and expertise. In the performance of his duties and the exercise of
his discretion, Employee shall be under the supervision and control of, and
shall report only to, the Chairman of the Board of the Company (the "Chairman of
the Board"). Employee's duties shall be designated by the Chairman of the Board
and shall be subject to such policies and directions as may be established or
given by the Board of Directors from time to time.
2. Devotion of Time to Company Business. Employee shall devote
------------------------------------
substantially all of his productive time, ability and attention to the business
of the Company during the term of this Agreement. Employee shall not, without
the prior written consent of the Chairman of the Board, directly or indirectly
render any services of a business, commercial or professional nature to any
other person or organization, whether for compensation or otherwise, which may
compete or conflict with the Company's business or with Employee's duties to the
Company.
3. Compensation.
------------
3.1 Base Salary. For all services rendered by Employee under this
-----------
Agreement, the Company shall pay Employee a base salary ("Base Salary"), payable
semi-monthly, at the rate of $20,833.33 per month.
3.2 Bonus. In addition to the Base Salary, the Company shall pay
-----
Employee an incentive cash bonus ("Bonus") in the amount of $250,000 in the
event that during any period of three consecutive months ending on or before
October 31, 2000: (i) the average of the annualized revenue of all retail video
stores that are owned and operated by the Company or its subsidiaries ("Video
City Stores") as measured during such three month period (but adjusted for
seasonal fluctuations) equals or exceeds $650,000 per store; and (ii) the
aggregate store operating cash flow (i.e. store earnings before general and
administrative expenses, interest, taxes, depreciation and amortization, but
after all inventory purchases) of all Video City Stores owned and operated
during such three month period equals or exceeds 17 percent of the aggregate
revenues of such Video City Stores during such three month period.
3.3 Stock Options. In addition to the Base Salary and the Bonus,
-------------
the Company shall grant to Employee options to purchase up to 400,000 shares of
the Company's
1
<PAGE>
Common Stock, at an exercise price of the greater of $2.00 per share or the last
sale price of the Company's Common Stock on the date of grant as reported on the
OTC Bulletin Board, pursuant to a stock option agreement containing terms and
conditions satisfactory to the Company and Employee and consistent with stock
options granted by the Company to other key employees. Such options shall vest
as follows:
(a) Options to purchase 100,000 shares shall vest and become
exercisable on June 16, 2000;
(b) Options to purchase an additional 100,000 shares shall vest
and become exercisable on June 16, 2001;
(c) Options to purchase an additional 100,000 shares shall vest
and become exercisable only in the event that during any period of three
consecutive months ending on or before October 31, 2000: (i) the average of the
annualized revenue of all Video City Stores owned and operated by the Company as
measured during such three month period (but adjusted for seasonal fluctuations)
equals or exceeds $550,000 per store; and (ii) the aggregate store operating
cash flow (i.e. store earnings before general and administrative expenses,
interest, taxes, depreciation and amortization, but after all inventory
purchases) of all Video City Stores owned and operated during any such three
month period equals or exceeds 16 percent of the aggregate revenues of such
Video City Stores during such three month period; and
(d) Options to purchase an additional 100,000 shares shall vest
and become exercisable only in the event that during any period of three
consecutive months ending on or before October 31, 2000: (i) the average of the
annualized revenue of all Video City Stores owned and operated by the Company as
measured during such three month period (but adjusted for seasonal fluctuations)
equals or exceeds $650,000 per store; and (ii) the aggregate store operating
cash flow (i.e. store earnings before general and administrative expenses,
interest, taxes, depreciation and amortization, but after all inventory
purchases) of all Video City Stores owned and operated during any such three
month period equals or exceeds 17 percent of the aggregate revenues of such
Video City Stores during such three month period; and (iii) the average of the
closing price of the Company's Common Stock, as reported by the national
securities exchange, the Nasdaq Stock Market or the OTC Bulletin Board (as the
case may be), during the 20 trading days preceding October 31, 2000 is greater
than $6.00.
All amounts of revenue and cash flow shall be determined under this Section
3 in accordance with the usual and customary accounting practices of the Company
and consistent with generally accepted accounting principles.
4. Benefits.
--------
(a) In addition to the compensation set forth in Section 3,
Employee will be entitled to participate in all benefits of employment available
to other members of the Company's management, on a commensurate basis as they
may be offered from time to time by
2
<PAGE>
the Company to the Company's other management employees. Such benefits include,
but are not limited to, full medical, dental and long term disability insurance
for Employee and his wife and minor children, and participation in group life
insurance and retirement plans. During the period of his employment hereunder,
Employee will be reimbursed for reasonable business, travel and entertainment
expenses incurred in accordance with Company policy on behalf of the Company in
connection with his employment, and will be required to submit appropriate
expense reports for approval by signature of the Chairman of the Board as a
condition of reimbursement of such expenses.
(b) The Company shall pay a reasonable amount for Employee to
have the use of one Company-provided automobile (or an equivalent expense
allowance for an automobile owned by Employee), including insurance and other
expenses for such automobile.
(c) Employee shall be entitled to three weeks paid vacation for
any full fiscal year of the term of this Agreement, and a prorated portion of
three weeks vacation for any fiscal year in which Employee is not employed by
the Company for the full fiscal year.
(d) The Company shall pay Employee's reasonable relocation costs
and moving expenses in an amount up to $4,000 in connection with Employee's
commencement of employment with the Company. If the Company's principal office
is moved from Torrance, California, such that Employee must move his residence
in order to continue his employment as provided herein, the Company shall pay
his reasonable relocation costs, including but not limited to moving expenses.
5. Authority. So long as Employee serves as President and Chief
---------
Operating Officer of the Company under this Agreement, he shall have the
authority and responsibilities specified in the Bylaws of the Company, except
that he shall not proceed with any matters, or permit the Company to take any
actions, which are prohibited by, or are in conflict with, resolutions or
guidelines adopted by the Board of Directors.
6. Termination. This Agreement shall terminate in advance of the time
-----------
specified in Section 1 above (and except as provided in Sections 6(c) and 6(e)
below, Employee shall have no right to receive any compensation not due and
payable to him or to his estate at the time of such termination) under any of
the following circumstances:
(a) Upon the death of Employee.
(b) In the event that Employee shall become either physically or
mentally incapacitated so as to not be capable of performing his duties as
required hereunder, and if such incapacity shall continue for a period of three
months consecutively, the Company may, at its option, terminate this Agreement
by written notice to Employee at that time or at any time thereafter while such
incapacity continues. In case of termination under this Section 6(b) or under
Section 6(a), Employee or his estate shall be entitled to receive Base Salary
and any other compensation accrued or earned as of or to the date of any
termination and for six months
3
<PAGE>
following such termination or until expiration of this Agreement, whichever is
earlier.
(c) By Employee, if the Company shall have materially breached
any of the provisions of this Agreement, and such termination shall have the
same effect on the payment of Employee's Base Salary and any other compensation
as a termination by the Company under Section 6(e).
(d) By the Company for Cause. The term "Cause" used in this
Section 6(d) means Employee (i) after repeated notices and warnings, fails to
perform his reasonably assigned duties as reasonably determined by the Company,
(ii) materially breaches any of the terms or conditions of Sections 1, 2 or 5 of
this Agreement, or (iii) commits or engages in a felony or any intentionally
dishonest or fraudulent act which materially damages the Company or the
Company's reputation. If the Company terminates Employee for Cause, no payments
or benefits under this Agreement shall become payable after the date of
Employee's termination.
(e) By the Company at any time, without Cause; provided,
however, in case of termination under this Section 6(e), Employee shall be
entitled to receive Base Salary and any other compensation accrued or earned as
of or to the date of any termination and for six months following such
termination or until expiration of this Agreement, whichever is earlier.
7. Loyalty, Non-Competition and Confidentiality.
--------------------------------------------
(a) Non-Competition. Employee agrees and covenants that,
---------------
except for the benefit of the Company (and/or any successor, parent or
subsidiary) during the Non-Competition Period (as defined in Section 7(b)) he
will not engage, directly or indirectly (whether as an officer, director,
consultant, employee, representative, agent, partner, owner, stockholder or
otherwise), in any business engaged in by the Company in the Non-Competition
Area (as defined on Section 7(c)). It is the parties' express intention that if
a court of competent jurisdiction finds or holds the provisions of this Section
7 to be excessively broad as to time, duration, geographical scope, activity or
subject, this Section 7 shall then be construed by limiting or reducing it so as
to comport with then applicable law.
(b) Non-Competition Period. As used herein, the "Non-
----------------------
Competition Period" means the period beginning on the date hereof and ending on
a date which is two years after the later to occur of (i) June 16, 2003 or (ii)
the date on which Employee's employment with the Company terminates; provided,
--------
however, that if Employee's employment is terminated by the Company without
- -------
Cause, the Non-Competition Period shall end on the date of such termination.
(c) Non-Competition Area. As used herein, the term "Non-
--------------------
Competition Area" means anywhere in any County in which the Company conducts
business during the term of this Agreement and anywhere within a ten-mile radius
of any store operated by the Company.
(d) Other Employees. Employee agrees that during the Non-
---------------
Competition Period he shall not, directly or indirectly, for his own account or
as agent, servant or employee of
4
<PAGE>
any business entity, engage, hire or offer to hire or entice away or in any
other manner persuade or attempt to persuade any officer, employee or agent of
the Company or any subsidiary to discontinue his or her relationship with the
Company or any subsidiary.
(e) Confidentiality. Employee acknowledges that he has learned
---------------
and will learn Confidential Information, as defined in Section 7(f), relating to
the business of the Company. Employee agrees that he will not, except in the
normal and proper course of his duties, disclose or use or enable anyone else to
disclose or use, either during the Non-Competition Period or subsequently
thereto, any such Confidential Information without prior written approval of the
Chairman of the Board of the Company.
(f) Confidential Information. "Confidential Information" shall
------------------------
include, but not be limited to, the following types of information regarding the
Company: corporate information, including contractual arrangements, plans,
locations, strategies, tactics, potential acquisitions or business combinations
or joint venture possibilities, policies and negotiations; marketing
information, including sales, purchasing and inventory plans, strategies,
tactics, methods, customers, advertising, promotion or market research data;
financial information, including operating results and statistics, cost and
performance data, projections, forecasts, investors, and holdings; and
operational information, including trade secrets, secret formulae, control and
inspection practices, accounting systems and controls, computer programs and
data, personnel lists, resumes, personal data, organizational structure and
performance evaluations. Confidential Information is limited to that information
which is not generally known in the industries in which the Company or any
subsidiary operates, and does not include skills, knowledge and experience
acquired by Employee during his employment with any prior employer.
(g) Corporate Documents. Employee agrees that all documents of
-------------------
any nature pertaining to activities of the Company or to any of the foregoing
matters in his possession now or at any time during the Non-Competition Period,
including, without limitation, memoranda, notebooks, notes, computer records,
disks, electronic information, data sheets, records and blueprints, are and
shall be the property of the Company and that they and all copies of them shall
be surrendered to the Company whenever requested by the Company from time to
time during the Non-Competition Period or thereafter and with or without request
upon termination of Employee's employment with the Company.
(h) Equitable Remedies. In the event of a breach by Employee
------------------
of any of the provisions of this Section 7, the Company, in addition to any
other remedies it may have, shall be entitled to an injunction restraining
Employee from doing or continuing to do any such act in violation of this
Section 7.
8. Attorney Fees. The successful party in any litigation relating to
-------------
matters covered by this Agreement shall be entitled to an award of reasonable
attorneys' fees in such action.
9. Assignment. Neither this Agreement nor any of the rights or
----------
obligations of either
5
<PAGE>
party hereunder shall be assignable by either Employee or the Company, except
that this Agreement shall be assignable by the Company to and shall inure to the
benefit of and be binding upon (i) any successor of the Company by way of
merger, consolidation or transfer of all or substantially all of the assets of
the Company to an entity other than any parent, subsidiary or affiliate of the
Company and (ii) any parent, subsidiary or affiliate of the Company to which the
Company may transfer its rights hereunder.
10. Binding Effect. The terms, conditions, covenants and agreements set
--------------
forth herein shall inure to the benefit of, and be binding upon, the heirs,
administrators, successors and assigns of each of the parties hereto, and upon
any corporation, entity or person with which the Company may become merged,
consolidated, combined or otherwise affiliated.
11. Amendment. This Agreement may not be altered or modified except by
---------
further written agreement between the parties.
12. Notices. Any notice required or permitted to be given under this
-------
Agreement by one party to the other shall be sufficient if given or confirmed in
writing and delivered personally or mailed by first class mail, registered or
certified, return receipt requested (if mailed from the United States), postage
prepaid, addressed to such party as respectively indicated below or as otherwise
designated by such party in writing.
If to the Company, to: Video City, Inc.
370 Amapola Avenue, Suite 208
Torrance, California 90501
Attention: Robert Y. Lee
Fax: (310) 533-3901
If to Employee, to: Richard Gibson
_______________________
_______________________
_______________________
13. California Law. This Agreement is being executed and delivered and is
--------------
intended to be performed and shall be governed by and construed in accordance
with the laws of the State of California.
14. Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement, shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, then to the maximum extent permitted by
law, such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement.
15. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, of the parties, and all other
6
<PAGE>
prior letters entered into by the parties.
16. Multiple Counterparts. This Agreement may be executed in one or more
---------------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Any or all signatures
required pursuant to this Agreement may be a facsimile.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
-------------------------------
Robert Y. Lee
Chairman of the Board
and Chief Executive Officer
RICHARD GIBSON
/s/ Richard Gibson
-------------------------------
Richard Gibson
7
<PAGE>
EXHIBIT 10.7
AMENDMENT TO LOAN DOCUMENTS
THIS AMENDMENT TO LOAN DOCUMENTS ("Amendment") is executed as of the 31st
day of December, 1998, by and among VIDEO CITY, INC., a Delaware corporation
(formerly known as Prism Entertainment Corporation) ("Video City"), SULPIZIO
ONE, INC., a California corporation ("Sulpizio"), OLD REPUBLIC ENTERTAINMENT,
INC., a California corporation ("OREI"), VIDEO TYME, INC., a Nevada corporation
("VTI") and VIDEOLAND, INC., an Oregon corporation ("Videoland"; Sulpizio, OREI,
VTI and Videoland are sometimes individually and collectively referred to herein
as the "Subsidiaries"; the Subsidiaries and Video City are sometimes
individually and collectively referred to herein as the "Debtors"), and INGRAM
ENTERTAINMENT INC., a Tennessee corporation ("Secured Party");
WITNESSETH:
WHEREAS, Video City has granted certain liens and security interests to
Secured Party pursuant to (1) an Override Agreement, dated November 19, 1996, by
and between Video City and Secured Party, and (2) a Security Agreement dated
January 8, 1997, by and between Video City and Secured Party, both as amended
from time to time (all of the foregoing documents are sometimes hereinafter
referred to as the "VCI Documents"), all in order to secure certain indebtedness
and obligations of Video City to Secured Party; and
WHEREAS, Cianci's Videoland, Inc. (an entity to which Videoland is the
successor by merger) ("Cianci's Videoland") has granted certain liens and
security interests to Secured Party pursuant to a Security Agreement dated June
19, 1996, by and between Cianci's Videoland and Secured Party (the "Cianci's
Videoland Security Agreement"), all in order to secure certain indebtedness and
obligations of Cianci's Videoland to Secured Party.
WHEREAS, Sulpizio, OREI and certain others have granted certain liens and
security interests to Secured Party pursuant to a Security Agreement dated March
24, 1998, executed by Sulpizio, OREI and certain others in favor of Secured
Party (the "Original Subsidiary Security Agreement"), all in order to secure
certain indebtedness and obligations of such parties to Secured Party.
WHEREAS, Videoland and VTI have granted certain liens and security
interests to Secured Party pursuant to a Security Agreement of even date
herewith, executed by Videoland and VTI in favor of Secured Party (the
"Subsequent Subsidiary Security Agreement"; the VCI Documents, the Cianci's
Videoland Security Agreement, the Original Subsidiary Security Agreement and the
Subsequent Subsidiary Security Agreement are sometimes individually and
collectively referred to herein as the "Loan Documents"), all in order to secure
certain indebtedness and obligations of such parties to Secured Party.
WHEREAS, certain indebtednesses of the Debtors have been consolidated
pursuant to that certain Demand Secured Promissory Note of even date herewith,
in the original principal
<PAGE>
amount of $3,623,903, made and executed by Debtors payable to the order of
Secured Party (together with any and all extensions, renewals, replacements or
modifications thereof, the "Note");
WHEREAS, in connection with the execution of the Note, Video City has also
issued and delivered to Secured Party that certain Warrant to Purchase Common
Stock No. 2 dated December 31, 1998 (the "Warrant");
WHEREAS, Debtor and Secured Party desire to (a) amend the Loan Documents in
order to confirm that the indebtedness evidenced by the Note is secured thereby
and to confirm and clarify certain other agreements and understandings, and (b)
make certain covenants, representations and warranties relating to the issuance
of the Note and the Warrant, all as more particularly hereinafter described;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Without limiting any provision of the Loan Documents, and
notwithstanding any provision of the Loan Documents to the contrary, the parties
hereto represent, agree and acknowledge that (a) the indebtedness evidenced by
the Note, together with any and all other indebtedness and obligations of any
Debtor to Secured Party, whether now existing or hereafter incurred, direct or
contingent, however evidenced or denominated, including without limitation, all
of Debtor's obligations arising under that certain Supply Agreement dated
January 8, 1997, by and between Video City and Secured Party, as amended from
time to time, and all other trade debt of Debtors to Secured Party
(collectively, the "Obligations"), are, and hereafter shall be, secured by each
of the Loan Documents, and (b) the liens and security interests granted to
Secured Party pursuant to the Loan Documents are, and hereafter shall be, second
in priority only to the liens and security interests granted to BankBoston
Retail Finance, Inc. ("BankBoston"), all as more particularly described in that
certain Subordination Agreement dated December 28, 1998, by and between Secured
Party and BankBoston and, in the case of Sulpizio and VTI, subordinate in
priority to the security interests of Mortco, Inc. The Loan Documents are
hereby amended in all respects necessary to reflect the foregoing.
2. Any provision of any of the VCI Documents that provides for the
release of any of the collateral described therein upon the reduction of the
Remaining Debt (as defined therein) by a specified amount is hereby deleted, it
being agreed that all liens and security interests granted therein as to all
collateral described therein shall not be terminated, but shall continue in full
force and effect until repayment of the Obligations in full.
3. Debtors represent and warrant that no default or Event of Default
exists under any of the Loan Documents. In addition, Debtors hereby
additionally represent and warrant to Secured Party the following:
2
<PAGE>
(a) Corporate Status. Each of the Debtors is a corporation duly
----------------
organized and validly existing under the laws of the state of its
incorporation, and has the corporate power to own and operate its
properties, to carry on its business as now conducted and to enter into and
to perform its obligations under the Warrant, the Note and the other
documents executed in connection with the Note and this Warrant (the
"Transaction Documents") to which such entity is a party. Each of the
Debtors is duly qualified to do business and in good standing in each state
in which a failure to be so qualified would have a material adverse effect
on such entity's financial position or its ability to conduct its business
in the manner now conducted.
(b) Authorization. Each of the Debtors has full legal right, power
-------------
and authority to conduct its business and affairs in the manner
contemplated by the Transaction Documents, and to enter into and perform
its obligations thereunder, without the consent or approval of any other
person, firm, governmental agency or other legal entity. The execution and
delivery of the Warrant, the Note, the borrowing thereunder, the execution
and delivery of each Transaction Document to which each such entity is a
party and the performance by such entity of its obligations thereunder are
within the corporate powers of such entity and have been duly authorized by
all necessary corporate action properly taken, have received all necessary
governmental approvals, if any were required, and do not and will not
contravene or conflict with any provision of law, any applicable judgment,
ordinance, regulation or order of any court or governmental agency, the
charter or by-laws of such entity or any agreement binding upon such entity
or its properties. The officer(s) executing the Warrant, the Note and all
of the other Transaction Documents to which Video City and/or its
Subsidiaries is a party are duly authorized to act on behalf of such
entity.
(c) Validity and Binding Effect. The Warrant, the Note and the other
---------------------------
Transaction Documents are the legal, valid and binding obligations of the
Debtors, enforceable in accordance with their respective terms.
(d) Capitalization of Video City. The authorized equity securities of
----------------------------
Video City consist of 30,000,000 shares of common stock, par value $.01 per
share ("Common Stock") and 2,000,000 shares of preferred stock (consisting
of Series A preferred stock, which is convertible into Common Stock at a
price of $2.00 per share, as more particularly described in the Series A
Certificate of Designations (as hereinafter defined) and Series B preferred
stock, which is convertible into Common Stock at a price of $3.1667 per
share, as more particularly described in the Series B Certificate of
Designations (as hereinafter defined)), par value $.01 per share
("Preferred Stock"), of which 13,474,191 shares of Common Stock and 83,000
shares of Preferred Stock (7,000 of which are Series A Preferred Stock and
76,000 of which are Series B Preferred Stock) are issued and outstanding as
of the date of this Amendment; Debtors hereby represent that the foregoing
amount of issued and outstanding shares includes, without limitation, all
shares of Common Stock and Preferred Stock issued by the Company on
December 31, 1998; provided, however, that certain additional shares are
-------- -------
reserved for issuance as
3
<PAGE>
described on Schedule 3(d)(i) attached hereto. All of the outstanding
----------------
equity securities of Video City have been duly authorized and validly
issued, are fully paid and nonassessable and are free from preemptive
rights, except the preemptive rights described on Schedule 3(d)(ii)
attached hereto. Except as set forth on Schedule 3(d)(i) and 3(d)(ii),
-----------------------------
there are no agreements or understandings relating to the issuance, sale,
or transfer of any equity securities or other securities of Video City. The
shares of Common Stock issuable upon the exercise by Secured Party of its
rights under the Warrant have been duly authorized and reserved and, when
issued upon the exercise of said rights, will be validly issued, fully paid
and nonassessable and free of preemptive rights. If the holders of all of
the shares of the Series A Preferred Stock that are issued and outstanding
as of the date hereof (i.e., 7,000 shares) exercised their conversion
rights described in Section 5 of the Series A Certificate of Designations,
such Series A Preferred Stock would be convertible (after making any
adjustments under Section 8 of the Series A Certificate of Designations
that may be required as a result of any transactions or events occurring on
or prior to the date hereof) into 350,000 shares of Common Stock. If the
holders of all of the shares of the Series B Preferred Stock that are
issued and outstanding as of the date hereof (i.e., 76,000 shares)
exercised their conversion rights described in Section 5 of the Series B
Certificate of Designations, such Series B Preferred Stock would be
convertible (after making any adjustments under Section 9 of the Series B
Certificate of Designations that may be required as a result of any
transactions or events occurring on or prior to the date hereof) into
2,400,000 shares of Common Stock.
(e) Other Transactions. Consummation of the transactions hereby
------------------
contemplated and the performance of the obligations of the Debtors under
and by virtue of the Transaction Documents will not result in any breach
of, or constitute a default under, any loan or credit agreement, indenture,
mortgage, deed of trust, security deed or agreement, lease, corporate
charter or by-laws, license, franchise or other instrument or agreement to
which any Debtor is a party or by which any Debtor or its properties may be
bound or affected.
(f) Litigation. There are no material actions, suits or proceedings
----------
pending, or, to the knowledge of the Debtors, threatened, against or
affecting the Debtors. There are no actions, suits or proceedings pending
or, to the knowledge of the Debtors, threatened, involving the validity or
enforceability of any of the Transaction Documents or the priority of the
liens thereof, at law or in equity, or before any governmental or
administrative agency. To the Debtors' knowledge, none of the Debtors is
in material default with respect to any material order, writ, injunction,
decree or demand of any court or any governmental authority.
(g) Financial Statements. The financial statement(s) of the Debtors
--------------------
heretofore delivered to Secured Party are true and correct in all material
respects, have been prepared in accordance with generally accepted
accounting principles consistently applied, and fairly present in all
material respects the financial conditions of the subject(s) thereof as of
the date(s) thereof. No material adverse change has occurred in the
financial condition
4
<PAGE>
of the Debtors since the date(s) thereof other than as disclosed in a
subsequent financial statement delivered by Debtors to Secured Party, and
no additional borrowings have been made or liabilities incurred by the
Debtors (other than the borrowing of the Senior Indebtedness (as
hereinafter defined) and other than indebtedness incurred to acquire
inventory and otherwise in the ordinary course of business) since the
date(s) thereof other than as disclosed in a subsequent financial statement
delivered by Debtors to Secured Party.
(h) No Defaults. No default or event of default by the Debtors exists
-----------
under the Warrant or any of the other Transaction Documents, or under any
other instrument or agreement evidencing or securing indebtedness of
$100,000 or more to which any Debtor is a party or by which any Debtor or
its properties may be bound or affected, and no event has occurred and is
continuing that with notice or the passage of time or both would constitute
a default or event of default under any of the foregoing.
(i) Compliance With Law. Each of the Debtors has obtained all
-------------------
necessary and material licenses, permits and governmental approvals and
authorizations necessary or proper in order to conduct its business and
affairs as heretofore conducted and as hereafter intended to be conducted.
The Debtors are in compliance with all material laws, regulations, decrees
and orders applicable to them (including but not limited to laws,
regulations, decrees and orders relating to environmental, occupational and
health standards and controls, antitrust, monopoly, restraint of trade or
unfair competition). The Debtors have not received, nor do they expect to
receive, any order or notice of any violation or claim of violation of any
such law, regulation, decree, rule, judgment or order of any governmental
authority or agency relating to the ownership and/or operation of their
properties other than such order, notice or claim that will not have a
material adverse effect on the business of the Debtors.
(j) [Intentionally Deleted]
(k) Taxes. The Debtors have filed or caused to be filed all tax
-----
returns that, to the Debtors' knowledge, are required to be filed (except
for returns that have been appropriately extended), and have paid all taxes
shown to be due and payable on said returns and all other taxes,
impositions, assessments, fees or other charges imposed on them by any
governmental authority, agency or instrumentality, prior to any delinquency
with respect thereto (other than taxes, impositions, assessments, fees and
charges currently being contested in good faith by appropriate proceedings,
for which appropriate amounts have been reserved and which have been
reflected in the financial statements and records of the Debtors, as
applicable). No tax liens have been filed against the Debtors or any of
the property thereof.
(l) Senior Indebtedness. As of the date hereof, the total outstanding
-------------------
principal amount of the indebtedness of Video City (the "Senior
Indebtedness") to BankBoston
5
<PAGE>
Retail Finance, Inc. (the "Senior Lender") is no more than $24,000,000. No
default, event of default or event that with the giving of notice, the
passage of time or both would constitute an event of default has occurred
and is continuing under any document, instrument or agreement evidencing,
securing or otherwise relating to the Senior Indebtedness. The copies of
all documents, instruments and agreements relating to the Senior
Indebtedness heretofore delivered to Secured Party are true and accurate
copies of the same, and such documents, instruments and agreements have not
been modified or amended in any manner.
(m) Affiliates. Each corporation, partnership, limited liability
----------
company or other entity in which Video City and/or its Subsidiaries, or any
combination thereof, own or control, directly or indirectly, at least 5% of
the outstanding ownership interests of such entity is listed on Schedule
--------
3(m) attached hereto, and the percentage ownership of Video City and such
----
Subsidiaries in each such entity is accurately described on Schedule 3(m).
-------------
The Subsidiaries are wholly-owned subsidiaries of Video City.
(n) Year 2000 Compliance. The Debtors have (i) initiated a review and
--------------------
assessment of all areas within their business operations that could be
materially and adversely affected by the "Year 2000 Problem" (that is, the
risk that computer applications used by the Debtors may be unable to
recognize and perform properly date-sensitive functions involving certain
dates prior to and any date after December 31, 1999), (ii) developed a plan
and time line for addressing the Year 2000 Problem on a timely basis, and
(iii) to date, implemented that plan in accordance with that timetable.
Based on the foregoing, the Debtors believe that all computer applications
that are material to their business and operations are reasonably expected
on a timely basis to be able to perform properly date-sensitive functions
for all dates before and after January 1, 2000 (that is, be "Year 2000
Compliant"), except to the extent that a failure to do so could not
reasonably be expected to have a material adverse effect on the business
and operations of the Debtors.
(o) Locations. The only locations in which Debtors have video stores
---------
or other operations or in which assets of the Debtors are located are the
locations described on Schedule 3(o) attached hereto.
-------------
4. In connection with the amendments effected hereby and the transactions
described in the recitals of this instrument, Debtors hereby covenant and agree
with Secured Party as follows:
(a) Financial Statements. The Debtors will furnish to Secured Party:
--------------------
(i) As soon as practicable and in any event within one hundred
five (105) days after the end of each fiscal year of Video City, a
consolidated balance sheet of Video City and its Subsidiaries as of
the close of such fiscal year, the
6
<PAGE>
related statements of income, cash flow and shareholders' equity for
such fiscal year and all notes to such financial statements, all in
reasonable detail, prepared in accordance with generally accepted
accounting principles consistently applied, audited in accordance with
generally accepted auditing standards by independent certified public
accountants reasonably satisfactory to Secured Party;
(ii) As soon as practicable and in any event within fifty (50)
days after the end of each fiscal quarter, a consolidated balance
sheet of Video City and its Subsidiaries as of the close of such
fiscal quarter, and the related statements of income, cash flow and
shareholders' equity for such fiscal quarter, all in reasonable
detail, and prepared in accordance with generally accepted accounting
principles consistently applied, certified by the chief executive or
chief financial officer of Video City;
(iii) Within thirty (30) days after the end of each fiscal
quarter, a certificate of Video City's chief executive or chief
financial officer, showing the then-outstanding principal balance of
the Senior Indebtedness;
(iv) Promptly upon receipt thereof, copies of all accountants'
reports, accompanying financial reports and internal control or
management letters submitted to Video City or its Subsidiaries by
independent accountants in connection with each annual examination of
Video City and/or its Subsidiaries;
(v) Copies of all management reports, certificates, notices and
other documents from time to time delivered, or required to be
delivered, to the Senior Lender with respect to the Senior
Indebtedness; and
(vi) With reasonable promptness, such other financial data as
Secured Party reasonably may request.
(b) Maintenance of Books and Records; Inspection. Each Debtor will
--------------------------------------------
maintain its books, accounts and records in accordance with generally
accepted accounting principles consistently applied, and permit any person
designated by Secured Party in writing to visit and inspect any of its
properties, corporate books and financial records, and to discuss its
accounts, affairs and finances with Video City, its Subsidiaries or the
principal officers of such entities during reasonable business hours, all
at such times as Secured Party reasonably may request.
(c) Insurance. Without limiting any of the requirements of any of the
---------
other Transaction Documents, each Debtor will maintain insurance, all in
amounts reasonably satisfactory to Secured Party, as follows:
(i) Comprehensive public liability insurance;
7
<PAGE>
(ii) Worker's compensation insurance (or maintain a legally
sufficient amount of self insurance against worker's compensation
liabilities, with adequate reserves, under a plan approved by Secured
Party);
(iii) "All-risk" property/casualty insurance on its properties
against such hazards as are customary in the business of Video City
and its Subsidiaries; and
(iv) Rent or business interruption insurance against loss of
income arising out of damage or destruction by such hazards as
presently are included in so-called "all-risk coverage".
At the request of Secured Party from time to time, the Debtors will
deliver to Secured Party certificates issued by the insurer(s), specifying
the details of such insurance in effect. All policies of property/casualty
insurance shall name Secured Party as an additional insured or loss payee
(as appropriate) and shall provide that such insurance shall be payable to
Video City, its Subsidiaries and Secured Party as their respective
interests may appear, and that at least thirty (30) days' prior written
notice of cancellation or modification of the policy shall be given to
Secured Party by the insurer. Each Debtor agrees that there shall be no
recourse against Secured Party for the payment of premiums, commissions,
assessments or advances in respect of any such policy, and at Secured
Party's request, the Debtors will provide Secured Party with the agreement
of the insurer(s) to this effect. At the request of Secured Party, all
such policies (or duplicate original counterparts thereof) shall be
delivered to and held by Secured Party. During the continuance of any
event of default under the Transaction Documents, Secured Party may, at its
option, act as attorney-in-fact for Video City and/or its Subsidiaries in
obtaining, adjusting, settling and canceling such insurance and endorsing
any drafts with respect thereto, and this power, being coupled with an
interest, shall be irrevocable prior to payment in full of the Note and
performance of all of the obligations of the Debtors to Secured Party in
connection therewith.
(d) Taxes and Assessments; Tax Indemnity. Each Debtor shall (i) file
------------------------------------
all tax returns and appropriate schedules thereto that are required to be
filed under applicable law, prior to the date of delinquency, (ii) pay and
discharge all taxes, assessments and governmental charges or levies imposed
upon it, upon its income and profits or upon any properties belonging to
it, prior to the date on which penalties attach thereto, and (iii) pay all
taxes, assessments and governmental charges or levies that, if unpaid,
might become a lien or charge upon any of its properties. If any tax is or
may be imposed by any governmental entity in respect of sales by the
Debtors of any inventory or the merchandise that is the subject of such
sales, or as a result of any other transaction of the Debtors, which tax
Secured Party is or may be required to withhold or pay, the Debtors agree
to indemnify Secured Party and hold Secured Party harmless in connection
with such taxes, and the Debtors will immediately reimburse Secured Party
for any such taxes
8
<PAGE>
paid by Secured Party. Notwithstanding the foregoing, any Debtor may
contest any taxes or assessments described above by appropriate proceedings
diligently conducted and pursued by such Debtor in good faith so long as
(i) such Debtor gives prior written notice of such contest to Secured
Party, and (ii) such contest does not impose any material risk that any
collateral security for the Note or any material asset of such Debtor shall
be subject to forfeiture.
(e) Corporate Existence. Each Debtor will maintain its corporate
-------------------
existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each
jurisdiction in which such qualification is necessary pursuant to
applicable law.
(f) Compliance with Law and Other Agreements. Each Debtor shall
----------------------------------------
maintain its business operations and property owned or used in connection
therewith in material compliance with (i) all applicable federal, state and
local laws, regulations and ordinances governing such business operations
and the use and ownership of such property, and (ii) all material
agreements, licenses, franchises, indentures and mortgages to which it is a
party or by which it or any of its properties is bound. Without limiting
the foregoing, each Debtor will pay all of its material indebtedness
promptly in accordance with the terms thereof. Notwithstanding the
foregoing, any Debtor may contest any law, regulation or ordinance
described above by appropriate proceedings diligently conducted and pursued
by such Debtor in good faith so long as (i) such Debtor gives prior written
notice of such contest to Secured Party, and (ii) such contest does not
impose any material risk that any collateral security for the Note or any
material asset of such Debtor shall be subject to forfeiture.
(g) Notice of Default. The Debtors will give written notice to
-----------------
Secured Party of the occurrence of any default or event of default under
this Agreement or any other Transaction Document promptly upon the
discovery thereof by the Debtors.
(h) Notice of Litigation. The Debtors will give notice, in writing,
--------------------
to Secured Party of (i) any actions, suits or proceedings that are required
to be disclosed in public filings filed with the Securities and Exchange
Commission and that are instituted by any persons whomsoever against Video
City or its Subsidiaries, or that affect any of the assets of Video City or
any of its Subsidiaries, and (ii) any dispute, not resolved within sixty
(60) days of the commencement thereof, between Video City or any of its
Subsidiaries on the one hand and any governmental regulatory body on the
other hand, which dispute might interfere with the normal operations of
Video City and/or its Subsidiaries. With respect to any dispute,
litigation or other matter of which the Debtors are required to give notice
to Secured Party pursuant to the foregoing sentence, the Debtors shall
further provide Secured Party with such updates and additional information
regarding the same from time to time as Secured Party may reasonably
request.
9
<PAGE>
(i) ERISA Plan. If any Debtor has in effect, or hereafter institutes
----------
(with Secured Party's consent, as hereinafter provided), a pension plan
that is subject to the requirements of Title IV of the Employee Retirement
Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88
Stat. 829, 29 U.S.C.A. (S) 1001 et seq. (1975), as amended from time to
time ("ERISA"), then the following warranty and covenants shall be
applicable during such period as any such plan (the "Plan") shall be in
effect: (i) the Debtors hereby warrant that no fact that might constitute
grounds for the involuntary termination of the Plan, or for the appointment
by the appropriate United States District Court of a trustee to administer
the Plan, exists at the time of execution of this Agreement, (ii) the
Debtors hereby covenant that throughout the existence of the Plan, the
contributions of the Debtors under the Plan will meet the minimum funding
standards required by ERISA and the Debtors will not institute a distress
termination of the Plan, (iii) the Debtors hereby covenant that the Plan's
annual financial and actuarial statements and the Plan's annual Form 5500
information return will be timely filed with the Internal Revenue Service
and a copy delivered to Secured Party within thirty (30) days of the
preparation thereof, and (iv) the Debtors covenant that they will send to
Secured Party a copy of any notice of any Reportable Event (as defined in
ERISA) required by ERISA to be filed with the Labor Department or the
Pension Benefit Guaranty Corporation, at the time that such notice is so
filed. No Plan shall be instituted by the any Debtor unless Secured Party
shall have given its written consent thereto.
(j) Mergers, Consolidations, Acquisitions and Sales. In no event
------------------------------------------------
shall any Debtor (a) enter into any transaction of merger or consolidation
or contemplating the sale or transfer of all or substantially all of its
assets; or (b) make any material change in the nature of its business as
conducted and presently proposed to be conducted; or (c) change the form of
organization of its business; provided, however, that nothing herein shall
prevent a Debtor from entering into a transaction of merger where (i) such
Debtor is the surviving party; (ii) upon the consummation of such merger,
50% or more in interest of the stockholders of such Debtor own and control
50% or more of the voting equity of the combined company; (iii) a majority
of the board of directors of the combined company consist of directors of
such Debtor immediately prior to such merger; and (iv) the terms of the
Supply Agreement (as hereinafter defined) will continue to apply.
(k) Management; Ownership. Video City will not permit any significant
---------------------
change in the executive management of Video City without the prior written
consent of Secured Party. The executive management of the Video City is a
material factor in Secured Party's willingness to enter into the
transactions contemplated by the Transaction Documents. As used in this
Section 4(k), the term "executive management" refers to Robert Lee and
Craig Kelly in substantially the same managerial capacities in which they
serve as of the date hereof.
(l) Dividends, Etc. The Debtors will not declare or pay any dividend
--------------
of any kind (other than payments of dividends by the Subsidiaries to Video
City and payments of
10
<PAGE>
dividends required to be paid by Video City to the holders of its Preferred
Stock pursuant to Section 2 of Video City's Certificate of Designations
dated May 27, 1998, respecting the Series A Preferred Stock (the "Series A
Certificate of Designations") and Section 2 of Video City's Certificate of
Designations dated December 16, 1998, respecting the Series B Preferred
Stock (the "Series B Certificate of Designations")), in cash or in
property, on any class of the common or preferred stock, nor purchase,
redeem, retire or otherwise acquire for value any shares of such stock, nor
make any distribution of any kind in respect thereof, nor make any return
of capital to shareholders, nor make any payments in respect of any
pension, profit sharing, retirement, stock option, stock bonus, incentive
compensation or similar plan (except as required or permitted hereunder),
without the prior written consent of Secured Party; provided, however, that
-------- -------
(i) Debtors may make payments in respect of any stock bonus or incentive
compensation plan to its employees in the ordinary course of business so
long as the amount(s) thereof are fair and reasonable and do not exceed the
amount(s) of stock bonuses and incentive compensation paid by companies of
similar size to employees having similar duties and responsibilities, and
(ii) Secured Party shall not unreasonably withhold its consent to the
creation of a new series of Preferred Stock upon which the payment of
certain dividends shall be required or to the payment of such dividends
upon Debtor's request.
(m) Guaranties; Loans. The Debtors will not guarantee nor be liable
-----------------
in any manner, whether directly or indirectly, or become contingently
liable, after the date hereof, in connection with the obligations or
indebtedness of any person or persons whomsoever (other than Video City and
its Subsidiaries), except for the indorsement of negotiable instruments for
deposit or collection in the ordinary course of business. The Debtors will
not make any loan, advance or extension of credit (i) to any employee,
except for advances to cover work-related travel expenses incurred by an
employee in the ordinary course of business, or (ii) to any person other
than in the normal course of their respective businesses.
(n) Debt. Without the express prior written consent of Secured Party,
----
the Debtors will not create, incur, assume or suffer to exist indebtedness
of any description whatsoever in an aggregate amount in excess of
$1,000,000 (excluding the indebtedness evidenced by the Note, indebtedness
existing as of the date hereof that is disclosed in financial statements
heretofore delivered by Debtors to Secured Party, Senior Indebtedness in
compliance with Section 4(o) below, trade accounts payable, accrued
expenses incurred in the ordinary course of business and the indorsement of
negotiable instruments for deposit or collection in the ordinary course of
business).
(o) Senior Indebtedness. In no event shall Video City allow the
-------------------
aggregate principal amount of the Senior Indebtedness to exceed
$30,000,000. Video City shall promptly provide and deliver to Secured
Party any and all notices received from the holder(s) of the Senior
Indebtedness of any default or event of default under the
11
<PAGE>
documents, instruments and agreements evidencing, securing or otherwise
relating to the Senior Indebtedness.
(p) Maintenance of Property. Each Debtor shall maintain its property
-----------------------
(whether real, personal or mixed, or tangible or intangible) in good and
workable condition at all times, and make all material repairs,
replacements, additions and improvements to its property reasonably
necessary and proper to insure that the business carried on in connection
with its property may be conducted properly and efficiently at all times.
(q) Nature of Business. The Debtors shall not suffer or permit any
------------------
material changes to be made in the character of their businesses as carried
on as of the date hereof.
(r) Right of Inspection. Each Debtor shall permit any officer,
-------------------
employee or agent of Secured Party to visit and inspect any of its
property, to examine its books, records and accounts, to take copies and
extracts from such books, records and accounts, and to discuss its affairs,
finances and accounts with its officers, accountants, and auditors, all at
such reasonable times and as often as Secured Party may reasonably desire
and upon reasonable advance notice in the absence of an event of default.
Without limiting Secured Party's right to obtain equitable relief as to any
other appropriate right herein or in any of the other Transaction
Documents, the Debtors agree that the rights in this Section 4(r) may be
enforced by affirmative injunction and, to the extent that the right to
review records may be denied, the right may be enforced by a restraining
order prohibiting the interference by the Debtors with Secured Party's
exercise of its right to review of the records.
(s) Compensation. The Debtors shall not pay any salary, bonuses or
------------
other compensation to Robert Lee or any other officer or director to the
extent the same is in excess of the salary, bonuses and other compensation
customarily paid by companies of similar size to officers or directors, as
applicable, having similar duties and responsibilities.
(t) Agreements with Secured Party. In the event that Secured Party
-----------------------------
terminates or cancels that certain Supply Agreement dated January 8, 1997,
by and between Video City and Secured Party, as amended from time to time
(the "Supply Agreement"), or any other supply agreement or other agreement
between Secured Party and Video City as a result (directly or indirectly)
of a breach thereof by Video City or its Subsidiaries, or a default
thereunder or failure to perform with respect thereto, Video City and its
Subsidiaries shall immediately prepay the Note in full.
(u) Transactions with Affiliates. In no event shall any Debtor enter
----------------------------
into any transaction or series of transactions, whether or not in the
ordinary course of business,
12
<PAGE>
with any Affiliate (as hereinafter defined) of such entity, other than on
terms and conditions as favorable to such Debtor, as would be attainable by
such entity in a comparable arm's-length transaction with a person or
entity other than an Affiliate. As used in this Agreement, the term
"Affiliate" means, with respect to any person or entity, any other person
or entity directly or indirectly controlling, controlled by or under direct
or indirect common control with, such person or entity. A person or entity
shall be deemed to control another person or entity if such person or
entity possesses, directly or indirectly, the power to direct to cause the
direction of the management and policies of such other person or entity,
whether through the ownership of voting securities, by contract or
otherwise.
(v) Year 2000 Compliance. The Debtor shall fully implement its plan
--------------------
to address the Year 2000 Problem and shall be and remain Year 2000
Compliant. The Debtors shall promptly notify Secured Party in the event
they discover or determine that any computer application that is material
to their businesses and operations will not be Year 2000 Compliant, except
to the extent that such failure could not reasonably be expected to have a
material adverse effect on the business and operations of the Company.
(w) Further Assurances. Debtors will take all reasonable actions
------------------
requested by Secured Party to create and maintain in Secured Party's favor
valid liens upon, security titles to and/or perfected security interests in
the collateral security described in the Loan Documents and all other
security for the Obligations now or hereafter held by or for Secured Party.
Without limiting the foregoing, Debtors agree to execute such further
instruments (including financing statements and continuation statements) as
may be required or permitted by any law relating to notices of, or
affidavits in connection with, the perfection of Secured Party's security
interests, and to cooperate with Secured Party in the filing or recording
and renewal thereof.
(x) Duration of Covenants. The covenants and agreements set forth in
---------------------
this Section 4 shall continue for so long as any of indebtedness evidenced
by the Note shall remain outstanding.
5. Except as amended hereby, the Loan Documents shall remain in full
force and effect.
[The remainder of this page has been intentionally left blank.]
13
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
as of the date first above written.
SECURED PARTY:
INGRAM ENTERTAINMENT INC., a Tennessee
corporation
By: /s/ Thomas H. Lunn
----------------------------------
Name:_________________________________
Title: Vice Chairman
-------------------------------
DEBTORS:
VIDEO CITY, INC., a Delaware corporation
By: /s/ Robert Y. Lee
----------------------------------
Name: ________________________________
Title: Chief Executive
-------------------------------
SULPIZIO ONE, INC., a California corporation
By: /s/ Robert Y. Lee
----------------------------------
Name: ________________________________
Title: President
-------------------------------
OLD REPUBLIC ENTERTAINMENT, INC.,
a California corporation
By: /s/ Robert Y. Lee
----------------------------------
Name: ________________________________
Title: President
--------------------------------
VIDEO TYME, INC., a Nevada corporation
By: /s/ Robert Y. Lee
----------------------------------
Name: ________________________________
Title: President
--------------------------------
VIDEOLAND, INC., an Oregon corporation
By: /s/ Robert Y. Lee
----------------------------------
Name: ________________________________
Title: President
--------------------------------
14
<PAGE>
SCHEDULE 3(d)(i)
[Shares Reserved for Issuance]
15
<PAGE>
SCHEDULE 3(d)(ii)
[Preemptive Rights]
1. Preemptive Rights have been granted in favor of Secured Party pursuant to a
Stockholders Agreement dated January 8, 1997, by and among Video City, Secured
Party, Robert Y. Lee, both individually and as Trustee, and Barry Collier, as
amended.
2. Preemptive Rights have been granted in favor of Mortco, Inc. pursuant to a
Right of First Refusal and Co-Sale Agreement dated December 16, 1994, by and
among Video City, Robert Y. Lee and Mortco, Inc.
16
<PAGE>
SCHEDULE 3(m)
[Affiliates]
1. Video City owns 100% of the outstanding ownership interests of each of the
Subsidiaries.
17
<PAGE>
SCHEDULE 3(o)
[Business Locations]
18
<PAGE>
EXHIBIT 10.8
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (2) IN THE
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES
ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED TRANSFER.
Void after 5:00 p.m., Los Angeles, California Time,
on December 31, 2005
No. 2 VIDEO CITY, INC. December 31, 1998
Warrant to Purchase Common Stock
--------------------------------
VIDEO CITY, INC., a Delaware corporation (formerly known as Prism
Entertainment Corporation) (the "Company"), hereby certifies that INGRAM
ENTERTAINMENT INC., a Tennessee corporation ("Ingram"), together with its
successors and assigns, is entitled, subject to the terms set forth below and
provided that this Warrant has not become void pursuant to the provisions of
Section 6 below, to purchase from the Company upon surrender of this Warrant, at
any time or times, but not after 5:00 p.m., Los Angeles, California time, on
December 31, 2005, which date is the expiration date of this Warrant, the number
of fully paid and nonassessable shares (the "Shares") of the Common Stock, par
value $.01 per share, of the Company (the "Common Stock"), as hereinafter
provided.
As used herein, the term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder, and the term
"Common Stock" includes all stock of any class or classes (however designated)
of the Company, the holders of which shall have the right (without limitation as
to amount) either to all or to a share of the balance of current dividends and
liquidating distributions after the payment of dividends and distributions on
any shares entitled to preference.
1. Compliance with the Securities Act of 1933.
------------------------------------------
The holder of this Warrant agrees that the Company will authorize transfers
of this Warrant and all Shares purchased upon exercise hereof only when the
securities which the holder desires to transfer have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state or other jurisdiction's securities laws, or when the request for transfer
is accompanied by an opinion of counsel (which opinion and the counsel rendering
such opinion shall be reasonably acceptable to the Company) to the effect that
the sale or proposed transfer does not require registration under the Securities
Act or any state or other jurisdiction's securities laws, and the holder agrees
that the following legend to such effect, if the
<PAGE>
Company so desires, may be placed on the certificate or certificates
representing any of the Shares purchased upon exercise of this Warrant and a
stop transfer order may be placed with respect thereto:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (2) IN
THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER.
2. Number of Shares Issuable Upon Exercise of Warrant; Price.
---------------------------------------------------------
This Warrant may be exercised from time to time, in whole or in part, for
up to an aggregate of 561,725 shares of Common Stock (i.e., 3% of the
outstanding equity interests in the Company as of the date hereof, plus an
additional 75,000 shares) at any time prior to the expiration of this Warrant,
at an exercise price of two dollars ($2.00) per share; provided, however, that
-------- -------
in the event the indebtedness evidenced by that certain Demand Secured
Promissory Note of even date herewith, in the principal amount of $3,623,903,
made and executed by Sulpizio One, Inc., a California corporation, Old Republic
Entertainment, Inc,., a California corporation, Video Tyme, Inc., a Nevada
corporation, Videoland, Inc., an Oregon corporation (all of the foregoing
entities are sometimes individually and collectively referred to herein as the
"Subsidiaries"), and the Company, payable to the order of Ingram (the "Note"),
together with all interest thereon, is not paid in full on or before June 30,
1999, then this Warrant may instead be exercised from time to time thereafter,
in whole or in part, for up to an aggregate of 1,048,451 shares of Common Stock
(i.e., 6% of the outstanding equity interests in the Company as of the date
hereof, plus an additional 75,000 shares) at any time prior to the expiration of
this Warrant, at an exercise price of two dollars ($2.00) per share.
Upon exercise of this Warrant, the holder hereof shall receive, in addition
to the number of shares of Common Stock which it is entitled to receive
hereunder, such additional number of shares of capital stock or other securities
or property (other than cash) distributed by the Company from time to time after
the original issue date of this Warrant with respect to the Common Stock which
the holder of this Warrant would have received had the holder exercised the
Warrant immediately prior to distribution or issuance of any such shares,
securities or property by the Company with respect to the number of shares of
Common Stock received upon exercise of this Warrant.
2
<PAGE>
3. Adjustment for Reorganization. Consolidation, Merger, Etc.
-----------------------------------------------------------
In case of any capital reorganization or reclassification of the Common
Stock of the Company, or in case of any consolidation or merger of the Company
with or into any other corporation, or in case of any sale to another
corporation of the properties and assets of the Company as or substantially as
an entirety, then, and in each such case, the holder of this Warrant shall have
the right to receive upon the exercise hereof as provided in Section 9 hereof,
at any time after the consummation of such reorganization, reclassification,
consolidation, merger or sale, the kind and amount of shares of stock or other
securities or property receivable upon such reorganization, reclassification,
consolidation, merger or sale by a holder of the number of Shares issuable upon
exercise of this Warrant if such number of shares had been held by such holder
immediately prior to such reorganization, reclassification, consolidation,
merger or sale; and in any such case, if necessary, the provisions set forth
herein with respect to the rights and interests thereafter of the holder of this
Warrant shall be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of stock or other securities or property thereafter
receivable upon the exercise of this Warrant. The above provisions of this
Section 3 shall similarly apply to successive reclassifications and changes of
Common Stock and to successive consolidations, mergers, sales or conveyances.
4. Notice of Dividends, Subscriptions, Reclassifications, Consolidations,
----------------------------------------------------------------------
Merger, Etc.
- ------------
In case the Company shall pay any dividend or make any distribution
(including a cash dividend) to the holders of its Common Stock, or shall offer
for subscription to the holders of its Common Stock or any stock of any class of
the Company or any other securities, or in the case of any capital
reorganization or reclassification of the capital stock of the Company or a
consolidation or merger of the Company with another corporation, or the final
dissolution, liquidation or winding up of the Company, or a sale of all or
substantially all its assets (whether voluntary or involuntary), then in any one
or more of said cases, the Company shall mail (first class, postage prepaid) a
notice thereof to the holder of this Warrant at the address of said holder on
the records of the Company, at least ten days prior to the date on which the
books of the Company shall close (or a record shall be taken) for such dividend,
distribution or subscription rights, or such reorganization, reclassification,
consolidation, merger, dissolution, liquidation, winding up or sale shall taker
place, as the case may be. Such notice shall also specify the date as of which
stockholders of record shall be entitled to participate in such dividend,
distribution or subscription rights or to exchange their Shares for other
securities or property pursuant to such reorganization, reclassification,
consolidation or merger, or to receive their respective distributive shares in
the event of such dissolution, liquidation, winding up or sale, as the case may
be. Such notice shall also set forth a statement of the effect of such action
(to the extent then known), if any, on the exercise price and on the kind and
amount of shares of capital stock and property receivable upon exercise of this
Warrant.
3
<PAGE>
5. Covenants of the Company.
------------------------
The Company covenants and agrees that all Shares which may be issued upon
the exercise of this Warrant shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable and free from all preemptive rights of any
stockholder and all taxes, liens and charges with respect to the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue). The Company further covenants and agrees that it will at all times
have authorized and reserved, a sufficient number of shares of its Common Stock
to provide for the exercise of the rights represented by this Warrant. The
Company will not, by amendment to its Charter or through any reorganization,
reclassification, consolidation, merger, sale of assets, dissolution, issue or
sale of securities or other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith carry out all such terms and take all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant.
6. Expiration.
----------
This Warrant shall be void after 5:00 p.m., Los Angeles, California time,
on December 31, 2005, and no rights herein given to the holder of this Warrant
shall exist thereafter.
7. Warrant Holder Not Deemed a Stockholder.
---------------------------------------
No holder of this Warrant as such, shall be entitled to vote or receive
dividends or be deemed the holder of shares of Common Stock of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder hereof, as such, any of the rights of a shareholder of the
Company or any right to vote, give or withhold consent to any corporate action
(whether any reorganization, issue of stock, reclassification of stock,
consolidation, merger, conveyance or otherwise), receive notice of meetings,
receive dividends or subscription rights, or otherwise, prior to the issuance of
record to the holder of this Warrant of the Shares which it is then entitled to
receive upon the due exercise of this Warrant.
8. No Limitation on Corporate Action.
---------------------------------
No provisions of this Warrant and no right or option granted or conferred
hereunder shall in any way limit, affect or abridge the exercise by the Company
of any of its corporate rights or powers to recapitalize, amend its Charter,
reorganize, consolidate or merge with or into another corporation, or to
transfer all or any part of its property or assets, or the exercise of any other
of its corporate rights and powers.
9. Exercise of Warrant.
-------------------
(a) Full Exercise. This Warrant may be exercised in accordance with
-------------
Section 2 by the holder of this Warrant by surrendering this Warrant, with
the form of subscription at the end hereof duly executed by such holder, to
the Company at any time
4
<PAGE>
on or prior to 5:00 p.m., Los Angeles, California time, on December 31,
2005, at the principal office of the Company's transfer agent (the
"Transfer Agent") accompanied by payment either (i) in cash or by certified
or official bank check, payable to the order of Company, or (ii) by the
whole or partial tender of the Note, valued at the then outstanding
principal balance thereof, plus accrued and unpaid interest thereon, or
(iii) any combination of (i) and (ii) above, in any case in the amount of
the sum called for by Section 2. Partial tenders of the Note shall be first
applied against outstanding accrued interest. The Company agrees to notify
the holder of this Warrant as to the address of the Transfer Agent's
principal office.
(b) Partial Exercise. This Warrant also may be exercised in part by
----------------
surrendering this Warrant in the manner specified in subsection (a) of this
Section 9, except that the number of shares of Common Stock or other
securities or property receivable upon the exercise of this Warrant as a
whole shall be proportionately reduced. On any such partial exercise, the
Company, at its expense, will forthwith issue to the holder hereof a new
Warrant or Warrants of like tenor calling in the aggregate for the number
of shares of Common Stock for which this Warrant shall not have been
exercised, issued in the name of the holder hereof or as such holder (upon
payment by such holder of any applicable transfer taxes and subject to the
provisions of Section 1 hereof) may direct.
(c) Delivery of Stock Certificates, Etc. As soon as practicable after
------------------------------------
any exercise of this Warrant and payment of the sum payable upon such
exercise, and in any event within 10 days thereafter, the Company, at its
expense (including the payment by it of any applicable issue taxes), will
cause to be issued in the name of and delivered to the holder hereof, or as
such holder (upon payment by such holder of any applicable transfer taxes)
may direct, a certificate or certificates for the number of fully paid and
nonassessable Shares or other securities or property to which such holder
shall be entitled upon such exercise. No fractional Shares will be issued
hereunder to any holder hereof; if the number of Shares to be issued
hereunder includes a fractional amount, such amount shall be automatically
rounded up to the next whole number, and the resultant whole number of
Shares shall be issued to the holder, otherwise in accordance herewith.
10. Exchange and Transfer of Warrants.
---------------------------------
Subject to the provisions of Section 1 hereof, upon surrender for exchange
of this Warrant (in negotiable form, if not surrendered by the holder named on
the face thereof) to the Company or its Transfer Agent's principal office, the
Company, at its expense, will issue and deliver new Warrants of like tenor,
calling in the aggregate for the same number of shares of Common Stock in the
denomination or denominations requested, to or on the order of such holder and
in the name of such holder or as such holder (upon payment to such holder of any
applicable transfer taxes) may direct. Until this Warrant is transferred on the
books of the Company, the Company may treat the registered holder of this
Warrant as absolute owner for all purposes without being affected by any notice
to the contrary.
5
<PAGE>
11. Notices.
-------
All communications hereunder shall be in writing and, if sent to Ingram,
shall be mailed by registered or certified mail or delivered or telegraphed and
confirmed in writing to Two Ingram Boulevard, La Vergne, Tennessee 37089,
Attention: Chief Financial Officer, and if sent to the Company, shall be mailed
by registered or certified mail or delivered or telegraphed and confirmed in
writing, to the Company at Video City, Inc., 370 Amapola Ave, Suite 208,
Torrance CA 90501.
12. Registration Rights.
-------------------
The shares of Common Stock issuable upon exercise of this Warrant
constitute "Restricted Stock", as such term is defined in that certain
Registration Rights Agreement dated January 8, 1997, by and between the Company
and Ingram, as now or hereafter amended, and the holder of this Warrant is
entitled to the registration rights provided by such agreement.
13. Consideration.
-------------
This Warrant has been issued by the Company in consideration of Ingram's
willingness to restructure certain indebtedness of the Company and its
subsidiaries to Ingram and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged.
Dated: December 31, 1998
VIDEO CITY, INC., a Delaware corporation
By: /s/ Robert Y. Lee
------------------------------------
Name: Robert Y. Lee
----------------------------------
Title: Chief Executive Officer
----------------------------------
6
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ____________________________________________ hereby
sells, assigns and transfers unto ___________________________________________
the within Warrant and does hereby irrevocably constitute and appoint
_____________________________, Attorney, to transfer the said Warrant on the
books of the within named corporation with full power of substitution in the
premises.
Dated: _________________, _____
___________________________________
Signature
NOTICE: The signature of this assignment must correspond
with the name as written upon the face of the Certificate,
in every particular, without alteration or enlargement or
any change whatever.
7
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER
IF IT DESIRES TO EXERCISE THIS WARRANT
VIDEO CITY, INC.
The undersigned hereby exercises the right to purchase ____ shares of Common
Stock covered by this Warrant according to the conditions thereof and herewith
makes payment of the purchase price of such shares of Common Stock in full.
--------------------------------------
Signature
Chief Executive Officer
___________________________________
Address
Dated: ________________, _____
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-2000
<PERIOD-START> MAY-01-1999 FEB-01-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 127,207 127,207
<SECURITIES> 0 0
<RECEIVABLES> 5,492,567 5,492,567
<ALLOWANCES> 0 0
<INVENTORY> 4,114,836 4,114,836
<CURRENT-ASSETS> 9,840,447 9,840,447
<PP&E> 8,073,140 8,073,140
<DEPRECIATION> 2,697,098 2,697,098
<TOTAL-ASSETS> 41,101,043 41,101,043
<CURRENT-LIABILITIES> 22,788,795 22,788,795
<BONDS> 15,125,304 15,125,304
0 0
7,779,297 7,779,297
<COMMON> 141,841 141,841
<OTHER-SE> (1,225,587) (1,225,587)
<TOTAL-LIABILITY-AND-EQUITY> 41,101,043 41,101,043
<SALES> 14,212,961 27,518,031
<TOTAL-REVENUES> 14,212,961 27,518,031
<CGS> 14,932,525 27,068,941
<TOTAL-COSTS> 14,932,525 27,068,941
<OTHER-EXPENSES> 1,426,870 3,484,103
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 694,035 1,282,762
<INCOME-PRETAX> (2,840,469) (4,317,775)
<INCOME-TAX> 0 (546,603)
<INCOME-CONTINUING> (2,840,469) (3,771,172)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,840,469) (3,771,172)
<EPS-BASIC> (0.21) (0.28)
<EPS-DILUTED> (0.21) (0.28)
</TABLE>
