<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 April 30, 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 June 18, 1999
- ----- ----------------------------
Common Stock 13,925,842
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30,
1999 January 31,
(Unaudited) 1999
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 85,211 $ 172,043
Customer receivables 3,499,623 2,932,807
Notes receivable 86,703 86,703
Merchandise inventories 3,908,093 2,026,628
Other 170,097 52,870
--------------------- ---------------------
Total current assets 7,749,727 5,271,051
Videocassette rental inventory, net of
accumulated amortization 24,364,804 21,119,897
Property and equipment, net 6,160,947 4,525,986
Goodwill 8,321,923 5,176,850
Deferred tax asset 1,236,020 883,249
Other assets 1,968,170 1,275,847
--------------------- ---------------------
TOTAL ASSETS $49,801,591 $38,252,880
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30,
1999 January 31,
(Unaudited) 1999
--------------------- ---------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable $12,481,195 $ 9,328,556
Accrued expenses 1,919,603 3,422,724
Current portion of long-term debt 3,795,664 2,125,187
--------------------- ---------------------
Total current liabilities 18,196,462 14,876,467
Senior secured revolving credit facility 23,243,514 16,044,502
Long-term debt, less current portion 1,508,319 1,636,646
Other liabilities 589,791 427,791
--------------------- ---------------------
TOTAL LIABILITIES 43,538,086 32,985,406
--------------------- ---------------------
STOCKHOLDERS' EQUITY
Preferred stock 5,015,192 3,763,963
Common stock, $.01 par value per share, 30,000,000 shares
authorized; 13,885,688 shares issued and outstanding at
April 30, 1999 and 13,498,715 shares issued and outstanding
at January 31, 1999 138,856 134,987
Additional paid-in capital 9,901,323 9,229,687
Accumulated deficit (8,791,866) (7,861,163)
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 6,263,505 5,267,474
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,801,591 $38,252,880
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Revenue
Rental revenues and product sales $13,305,070 $ 3,391,323
Management Fee Income - 42,833
Total revenues 13,305,070 3,434,156
--------------------- ---------------------
Operating costs and expenses
Store operating expenses 7,903,827 1,715,269
Amortization of videocassette rental inventory 1,772,490 453,237
Cost of product sales 1,960,315 212,949
Cost of leased product 499,784 237,091
General and administrative expenses 2,080,551 678,741
--------------------- ---------------------
Total operating costs and expenses 14,216,967 3,297,287
--------------------- ---------------------
Income (loss) from operations (911,897) 136,869
Other (income) expense
Interest expense, net 588,727 122,143
Other (23,318) -
--------------------- ---------------------
Income (loss) before taxes (1,477,306) 14,726
Income tax expense (benefit) (546,603) -
--------------------- ---------------------
Net income (loss) $ (930,703) $ 14,726
===================== =====================
Basic Earnings (Loss) Per Share $(0.07) $0.00
Diluted Earnings (Loss) Per Share $(0.07) $0.00
Weighted average number of common shares outstanding
Basic 13,639,587 10,540,308
Diluted 13,639,587 11,126,998
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
1999 1998
---------------------- ----------------------
<S> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (930,703) $ 14,726
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,256,099 520,213
Common stock issued for professional services 34,112 -
Increase in deferred tax assets (547,484) -
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in customer receivable (528,831) 227,046
Decrease in notes receivable - 124,253
Increase in merchandise inventories (1,740,046) (357,953)
Increase in other assets (433,750) (1,035,362)
Increase in accounts payable 281,394 1,374,043
Decrease in accrued expenses (2,329,706) (93,392)
Increase (decrease) in other liabilities 162,000 (131,984)
---------------------- ----------------------
Net cash provided by (used in) operating activities (3,776,915) 641,590
---------------------- ----------------------
Cash flows from investing activities:
Purchases of videocassette rental inventory, net (3,628,174) (836,834)
Purchases of fixed assets (1,255,869) (417,934)
Proceeds from Sale of Prism Film Library - 818,171
Cash portion of purchase price for store acquisitions (167,036) (177,632)
---------------------- ----------------------
Net cash used in investing activities (5,051,079) (614,229)
---------------------- ----------------------
Cash flows from financing activities:
Principal payments on obligations under capital leases - (18,136)
Repayment of long-term debt (157,850) (5,648,858)
Proceeds from issuance of long-term debt 1,700,000 -
Proceeds from borrowings under credit facility 7,199,012 5,652,071
---------------------- ----------------------
Net cash provided by (used in) financing activities 8,741,162 (14,923)
---------------------- ----------------------
Net increase (decrease) in cash (86,832) 12,438
Cash at beginning of the period 172,043 28,127
---------------------- ----------------------
Cash at end of the period $ 85,211 $ 40,565
====================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
1999 1998
---------------------- ---------------------
Supplementary disclosures of cash flow information
<S> <C> <C>
Cash paid during the year:
Interest $ 419,486 $120,734
Income taxes 17,924 800
Noncash investing and financing activities:
Professional services financed through issuance of common
stock 34,112 -
Liabilities converted to preferred stock 2,000,000 -
</TABLE>
For acquisitions consummated during the three months ended April 30, 1999 and
April 30, 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 $ 2,547,176 $ 3,826,781
Cash paid (167,036) (177,632)
Note payable issued - (562,574)
Common stock issued (641,394) (1,270,578)
Preferred stock issued (1,251,230) -
Goodwill 3,210,312 924,141
--------------------- ---------------------
Liabilities assumed $ 3,697,828 $ 2,740,138
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VIDEO CITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The accompanying 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 consolidated balance sheet as of April 30, 1999, the consolidated statement
of operations for the three months ended April 30, 1999, and the consolidated
statement of cash flows for the three months ended April 30, 1999 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 interim consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial position as of April 30, 1999, the results of operations for the
three months ended April 30, 1999 and 1998, and cash flows for the three months
ended April 30, 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. Recent Accounting Pronouncements
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which effectively changes the way mortgage
banking firms account for certain securities and other interests they retain
after securitizing mortgage loans that were held for sale. The adoption of SFAS
134 had no impact on the Company's financial position.
3. 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.
<PAGE>
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) 360,667
shares of Video City common stock (subject to post-closing adjustments, if any)
and (ii) assumption and payment of indebtedness of Video Galaxy by 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.
4. 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 then share in
earnings. The following table summarizes the calculation of the Company's basic
and diluted earnings per share for the periods presented:
<TABLE>
<CAPTION>
For the three months ended April 30,
-------------------------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------------------------
Per-share Per-share
Income Shares amount Income Shares amount
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available to common
stockholders:
Net income (loss) $(930,703) 13,639,587 $(0.07) $14,726 10,540,308 $0.00
Effect of Dilutive Securities:
Incremental shares from outstanding
common stock options, warrants, and
preferred stock - - - - 586,690 -
----------- ---------- ----------- ----------- ----------- -----------
Diluted EPS
Income (loss) available to common
stockholders:
Net income (loss) $(930,703) 13,639,587 $(0.07) $14,726 11,126,998 $0.00
=========== ========== =========== =========== =========== ===========
</TABLE>
All outstanding common stock options, warrants, and preferred stock 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.
<PAGE>
6. Recent Developments
On April 22, 1999 the Company entered into an Asset Purchase Agreement with
Blockbuster Inc. pursuant to which the Company has agreed to sell to Blockbuster
Inc. substantially all of the assets of 50 of the Company's retail video stores
located in the states of Washington and Oregon for approximately $16 million in
cash. The consummation of the sale is subject to certain conditions, including
the receipt of certain third-party consents. The company anticipates using the
net proceeds from the sale of the assets to pay off certain of the Company's
indebtedness and to finance future acquisitions. There can be no assurances that
the contemplated asset sale will be consummated.
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
Three months ended April 30, 1999 compared to the three months ended April 30,
1998.
Revenues
Rental revenue and product sales for the three months ended April 30, 1999
increased by $9,913,747 or 292%, to $13,305,070 compared to $3,391,323 for the
three months ended April 30, 1998. The increased revenues were primarily
attributable to the acquisition of 101 stores since April 30, 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 18, 1999, and 15 stores were
acquired on March 26, 1999. Same store revenues for the three months ended April
30, 1999 increased by approximately 6.6% compared to the same period of the
previous year. The Company ended the first quarter of 1999 with 135 stores
operating in twelve states compared to 47 stores operating in three states at
the end of the first quarter of 1998. The Company had no Management fee income
for the quarter ended April 30, 1999, compared to $42,833 for the quarter ended
April 30, 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 ended April 30, 1999 increased by
$6,188,558 or 361% to $7,903,827 compared to $1,715,269 for the three months
ended April 30, 1998. The increase in store operating expenses was primarily
due to the acquisition of 101 stores since April 30, 1998. Store operating
expenses as a percentage of total revenue was 59% for the three months ended
April 30, 1999 compared to 50% for the corresponding period of 1998. The
increase in store expenses as a percentage of total revenue for the three months
ended April 30, 1999 compared to the corresponding period of 1998 was
<PAGE>
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.
Amortization of Videocassette Rental Inventory
Amortization of videocassette rental inventory increased by $1,319,253, or 291%
to $1,772,490 compared to $453,237 for the three months ended April 30, 1998.
The primary reason for the increase was the acquisition of 101 stores since
April 30, 1998, partially offset by the effect of a change in the amortization
period for base inventory (copies 1-3) from 36 months to 60 months. Amortization
of videocassette rental inventory as a percentage of revenue remained fairly
consistent at 13% for the first quarters of 1998 and 1999.
Cost of Product Sales
Cost of product sales for the three months ended April 30, 1999 increased by
$1,747,366 or 820% to $1,960,315 compared to $212,949 for the comparable period
of 1998. The increase in the cost of product sales for the three months ended
April 30, 1999 was primarily due to aggregate growth in videocassette,
concession, and accessory sales of 542% resulting from the acquisition of 110
stores since April 30, 1998 and the addition of "sell through" videocassettes as
a new product line in the 29 stores acquired on March 25, 1998.
Cost of Leased Product
Cost of leased product for the three months ended April 30, 1999 increased
$262,693 or 111% to $499,784 compared to $237,091 for the corresponding period
of 1998. The increase was primarily attributable to the acquisition of 110
stores since the first quarter of 1998. Cost of leased product as a percentage
of total revenue was 3.7% for the three months ended April 30, 1999 compared to
6.9% for the same period of 1998. The decrease in cost of leased products as a
percentage of total revenue was due to the delay in the Videoland stores
conversion to the Company's revenue sharing program as of April 30, 1999.
General and Administrative Expenses
General and administrative expenses increased $1,401,810 or 206%, to $2,080,551
for the three months ended April 30, 1999, compared to $678,741 for the
corresponding period of 1998. The increase for the three months ended April 30,
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 opened since May 1, 1998.
General and administrative expenses as a percentage of revenues was 15.6 % for
the three months ended April 30, 1999 compared to 19.8% for the same period of
1998. The percentage decrease for the three months ended April 30, 1999 was
primarily the result of spreading the corporate expenses over significantly
higher revenues for that period.
Interest Expense
Interest expense increased $466,583 or 382%, to $588,727 for the three months
ended April 30, 1999, compared to $122,143 for the corresponding period of 1998.
The increase in interest expense was primarily due to the increase in borrowings
under the credit facility entered into with BankBoston Retail Finance Inc.
("BankBoston") on December 28, 1998 that was used primarily to fund the cash
portion of the December 28, 1998 acquisition of Videoland and to pay off the
balance of the FINOVA Capital Corporation 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. Due in a large part to
the recent acquisitions of Videoland and Video Galaxy, management has determined
from its projections that it is more likely than not that future taxable income
would be sufficient to enable the
<PAGE>
Company to realize all of its deferred tax assets. As a result, the Company has
not recorded a valuation allowance for its deferred tax assets.
Recent Accounting Pronouncements
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which effectively changes the way mortgage
banking firms account for certain securities and other interests they retain
after securitizing mortgage loans that were held for sale. The adoption of SFAS
134 had no impact on the Company's financial position.
Liquidity and Capital Resources
The Company funds its short-term working capital needs, including the purchase
of videocassettes and other inventory, primarily through cash from operations.
The Company expects that cash from operations and extended vendor terms will be
sufficient to fund future videocassette and other inventory purchases and other
working capital needs for its existing stores. As part of its aggressive growth
strategy, the Company requires greater working capital to sustain its current
level of growth. There can be no assurance, however, that cash from operations
and extended vendor terms will be sufficient to fund future videocassette and
inventory purchases and other working capital to sustain the continued
aggressive growth of the Company. In the event the Company is unable to obtain
the equity financing, debt financing or the contemplated strategic divestiture,
the Company may not have the liquidity to sustain its current rate of growth.
Videocassette rental inventories are accounted for as noncurrent assets under
generally accepted accounting principles because they are not assets which are
reasonably expected to be completely realized in cash or sold in the normal
business cycle. Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of these assets as
noncurrent excludes them from the computation of working capital. The
acquisition cost of videocassette rental inventories, however, is reported as a
current liability until paid and, accordingly, included in the computation of
working capital. Consequently, the Company believes working capital is not as
significant a measure of financial condition for companies in the video retail
industry as it is for companies in other industries. Because of the accounting
treatment of videocassette rental inventory as a noncurrent asset, the Company
anticipates that it will operate with a working capital deficit during fiscal
the year ended 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 $7.5 million loan
facility with FINOVA Capital Corporation. The new loan agreement provides for a
maturity date of December 29, 2001 and a per annum interest rate equal to either
(a) the base rate announced from time to time by BankBoston, N.A. plus 0.5
percent or (b) LIBOR plus 3.0 percent, at Video City's election. In addition,
Video City is obligated to pay various fees in connection with the credit
facility. The amount available for borrowing under the Line of Credit is
determined by deducting the Company's principal balance of the Line of Credit
from its borrowing base. The borrowing base is determined by multiplying the
applicable inventory advance rate and the number of units of the acceptable
inventory, net of reserves. The agreement provided for various financial
reporting and financial performance covenants that require the Company to meet
or exceed certain 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 April 30, 1999, the total outstanding balance under the BankBoston credit
facility was approximately $23,244,000 and the availability on the credit
facility was approximately $324,000. As of June 18, 1999, the total outstanding
balance under the BankBoston credit facility was approximately $23,679,000 and
the availability on the credit facility was approximately $10,000. The Company
currently intends to finance
<PAGE>
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 of $3,118,000 with
certain of the Company's key suppliers that have maturity dates of June and July
1999. Although there can be no assurances, the Company anticipates that it will
be able to renew the agreements on favorable terms before the maturity date of
these obligations.
On April 22, 1999 the Company entered into an Asset Purchase Agreement with
Blockbuster Inc. pursuant to which the Company has agreed to sell to Blockbuster
Inc. substantially all of the assets of 50 of the Company's retail video stores
located in the states of Washington and Oregon for approximately $16 million in
cash. The consummation of the sale is subject to certain conditions, including
the receipt of third-party consents. The company anticipates using the net
proceeds from the sale of the assets to pay off certain of the Company's
indebtedness and to finance future acquisition. There can be no assurances that
the contemplated asset sale will be consummated.
Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk sensitive instruments do not subject it to material
market risk exposures, except for such risks related to interest rate
fluctuations. The carrying value of the Company's bank debt approximates fair
value at January 31, 1999 and 1998 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate.
Cash Flows
Three Months Ended April 30, 1999 Compared to the Three Months Ended April 30,
1998
The increase in net cash used in operating activities of $4,418,000 for the
three months ended April 30, 1999 compared to the three months ended April 30,
1998 was primarily due to a decrease in accrued expenses and an increase in
merchandise inventories, partially offset by an increase in other liabilities.
Net cash used in investing activities increased by $4,437,000 for the three
months ended April 30, 1999 compared to the three months ended April 30, 1998
primarily due to an increase in the purchases of videocassette rental inventory
and fixed assets resulting from the growth in the number of stores. Net cash
provided by financing activities increased $8,756,000 for the three months ended
April 30, 1999 compared to the three months ended April 30, 1998 mainly due to
increased borrowings under the credit facility and proceeds received from the
issuance of debt, partially offset by a 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.
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 15, 1999, the Company issued 17,000 shares of the Company's Common
Stock in connection with the purchase by the Company of certain inventory and
fixtures for the Company's stores. The Company also issued 38,500 shares in
March 1999 as consideration for the purchase by the Company of certain other
inventory.
In March 1999, the Company issued 26,000 shares of the Company's Common Stock to
a law firm in consideration for certain legal services previously provided to
the Company by such law firm. The Company also issued 25,000 shares of the
Company's Common Stock in March 1999 to a financial advisor in consideration for
certain financial advisory services provided to the Company.
In March 1999, the Company issued a total of 545,900 shares of the Company's
Common Stock to C. Anthony Anderson, David A. Ballstadt and certain members of
Mr. Ballstadt's family as part of the consideration for the acquisitions that
were completed in March 1998.
On March 25, 1999, the Company granted options to purchase 20,000 shares of the
Company's Common Stock at an exercise price of $2.00 per share to each of the
five non-employee director of the Company.
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.
On March 31, 1999, the Company issued an aggregate of 344,000 shares of the
Company's Common Stock to the former shareholders of Video Galaxy, Inc. as part
of the consideration for the acquisition by the Company of Video Galaxy, Inc.
In addition, the Company issued 2,000 shares of the Company's Series D
Convertible Redeemable Preferred Stock, $1,000 stated value per share, and
warrants to purchase 500,000 shares of the Company's Common Stock at an exercise
price of $3.00 per share to Mortco, Inc. (a subsidiary of Rentrak Corporation)
in consideration for the cancellation by Mortco, Inc. and Rentrak Corporation of
amounts due 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.
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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
--------
Numbers Description
- ------- -----------
<PAGE>
3.1 Certificate of Designations for the Company's Series C Convertible
Redeemable Preferred Stock.
3.2 Certificate of Designations for the Company's Series D Convertible
Redeemable Preferred Stock.
3.3 Certificate of Designations for the Company's Series E Convertible
Preferred Stock.
10.1 Asset Purchase Agreement, dated as of April 22, 1999, by and among, the
Company, Videoland, Inc. and Blockbuster Inc.
10.2 Agreement of Merger and Plan of Reorganization, dated as of March 30,
1999, by and among the Company, Video Galaxy, Inc., James G. Howard,
George M. Peloso and Kurt Peterson (previously filed).
10.3 Debt Conversion Agreement, dated as of March 30, 1999, by and among the
Company, Rentrak Corporation, Mortco, Inc. and Video Galaxy, Inc.
10.4 Warrant to purchase 500,000 shares of common stock, dated as of March 31,
1999, between the Company and Mortco, Inc.
10.5 Form of Option Agreement for directors and executive officers of the
Company.
10.6 Form of Indemnity Agreement for directors and executive officers of the
Company.
10.7 Second Modification Agreement, dated as of March 31, 1999, to Loan and
Security Agreement by and among the Company, its subsidiaries and
BankBoston Retail Finance Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
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.
<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: June 21, 1999 /s/ Robert Y. Lee
-----------------
Robert Y. Lee
Chief Executive Officer
(Principal Executive Officer)
Date: June 21, 1999 /s/ Timothy J. Denari
---------------------
Timothy J. Denari
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT 3.1
VIDEO CITY, INC.
CERTIFICATE OF DESIGNATIONS
SERIES C CONVERTIBLE REDEEMABLE PREFERRED STOCK
_________________
Pursuant to Section 151
of the General Corporation Law of the State of Delaware
__________________
Video City, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
that pursuant to Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors adopted the following resolution on March 25,
1999, which resolution remains in full force and effect as of the date hereof:
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized, within the limitations and restrictions stated in the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to fix by resolution or resolutions the designation, powers,
preferences, voting rights and other rights of each series of preferred stock,
and the qualifications, limitations or restrictions thereof, and such other
subjects or matters as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series
of preferred stock on the terms and with the provisions herein set forth:
1. DESIGNATION OF SERIES. The designation of such series of preferred stock is
Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock").
The number of shares constituting such series is 10,000, with a value of $1,000
per share for the purpose of calculating dividends, if any, and amounts payable
upon liquidation, dissolution or winding up ("stated value"). Shares of Series C
Preferred Stock redeemed, converted or purchased by the Corporation shall be
canceled and shall revert to authorized but unissued shares of preferred stock
undesignated as to series. Shares of the Series C Preferred Stock shall rank
pari passu and share in dividends, if any, and other distributions on a pro rata
basis with the shares of Series AA Convertible Redeemable Preferred Stock,
Series B Voting Convertible Redeemable Preferred Stock and with shares of any
other series of preferred stock hereafter issued by the Corporation that may be
designated by the Corporation to rank pari passu with the Series C Preferred
Stock.
2. DIVIDENDS. The holders of the Series C Preferred Stock shall not be
entitled to any dividends unless declared by the Board of Directors at its sole
discretion.
1.
<PAGE>
3. VOTING. The holders of Series C Preferred Stock shall not be entitled to
vote upon any matter except as otherwise required by law.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series C Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share of Series C Preferred Stock equal to the stated
value of such share of Series C Preferred Stock and a further amount equal to
any dividends declared and unpaid thereon, if any, as provided in Paragraph 2
hereof, to the date that payment is made available to the holders of Series C
Preferred Stock, and no more, before any payment shall be made or any assets
distributed to the holders of shares of the Corporation's Common Stock ("Common
Stock") or shares of any other stock of the Corporation that rank junior to the
Series C Preferred Stock in rights upon liquidation.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series C Preferred Stock, and other series
of preferred stock that rank pari passu with the Series C Preferred Stock upon
liquidation, dissolution, or winding up, shall be insufficient to permit the
payment to such stockholders of the full preferential amounts aforesaid, then
the entire assets of the Corporation to be distributed shall be distributed
ratably among the holders of Series C Preferred Stock and such other series of
preferred stock in proportion to the respective stated value of shares of each
such series.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, subject to the provisions of the Corporation's
Certificate of Incorporation, and to all of the preferential rights of the
holders of Series C Preferred Stock and other series of preferred stock that
rank senior to the Common Stock on distribution or otherwise, the holders of
Common Stock shall be entitled to receive, ratably, all remaining assets of the
Corporation.
A consolidation or merger of the Corporation with or into any other
corporation or corporations or other business entities, or a sale of all or
substantially all of the assets of the Corporation, shall not be deemed to be a
liquidation, dissolution or winding up within the meaning of this Paragraph 4.
5. CONVERSION RIGHTS. Each holder of any shares of Series C Preferred Stock
shall have the right at any time commencing from the date of issuance to convert
any of his or her shares of Series C Preferred Stock into duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Corporation at the Conversion Price, as defined herein, and upon the terms set
forth herein.
The Corporation shall have the right to redeem the outstanding shares of
Series C Preferred Stock, in whole or in part, as provided in Paragraph 13.
2.
<PAGE>
6. CONVERSION PRICE. Each share of Series C Preferred Stock shall be converted
into a number of shares of Common Stock determined by dividing (i) $1,000 by
(ii) the Conversion Price in effect on the conversion date. The Conversion Price
at which shares of Common Stock shall be issuable upon conversion of the shares
of Series C Preferred Stock shall be $2.00. The Conversion Price shall be
subject to adjustment as set forth in Paragraph 8 hereof. No payment or
adjustment shall be made for any dividend or other distribution that is payable
on the Common Stock issued upon such conversion.
7. CONVERSION PROCEDURE. Each holder of any shares of the Series C Preferred
Stock may exercise his or her right to convert such shares into shares of Common
Stock by surrendering for such purpose to the Corporation, at its principal
office or at such other office or agency maintained by the Corporation for that
purpose, a certificate or certificates representing the shares of Series C
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Paragraph 7 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. As promptly as practicable, and in any event within ten business
days after the surrender of such certificates and the receipt of such notice
relating thereto and, if applicable, payment of all transfer taxes, the
Corporation shall deliver or cause to be delivered (i) certificates representing
the number of validly issued, fully paid and nonassessable shares of Common
Stock to which the holder of the Series C Preferred Stock so converted shall be
entitled and (ii) if less than the full number of shares of the Series C
Preferred Stock evidenced by the surrendered certificate or certificates are
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares converted. Such conversions shall be deemed to have been
made at the close of business on the date of giving of such notice and of such
surrender of the certificate or certificates representing the shares of the
Series C Preferred Stock to be converted so that the rights of the holder
thereof shall cease except for the right to receive Common Stock in accordance
herewith, and the converting holder shall be treated for all purposes as having
become the record holder of such Common Stock at such time.
Shares of the Series C Preferred Stock may not be converted after the close
of business of the fifth business day preceding the date fixed for redemption of
such shares pursuant to Paragraph 13 hereof.
Upon conversion of any shares of the Series C Preferred Stock, the holder
thereof shall not be entitled to receive any accumulated, accrued or unpaid
dividends in respect of the shares so converted, provided that such holder shall
be entitled to receive any dividends on such shares of the Series C Preferred
Stock declared prior to such conversion if such holder held such shares on the
record date fixed for the determination of holders of the Series C Preferred
Stock entitled to receive payment of such dividend.
3.
<PAGE>
8. CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to
adjustment from time to time upon the occurrence of certain events as follows:
a. Stock Dividends, Subdivisions, Reclassifications or Combinations. If
the Corporation shall (i) declare a dividend or make a distribution in shares of
Common Stock, (ii) subdivide or reclassify the outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect at the time of the record date of such dividend or distribution or on
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of Series C Preferred
Stock surrendered for conversion after such date shall be entitled to receive
the number of shares of Common Stock which he or she would have owned or been
entitled to receive had such Series C Preferred Stock been converted immediately
prior to such date. Successive adjustments in the Conversion Price shall be made
whenever any event specified above shall occur.
b. Other Distributions. In case the Corporation shall fix a record date
for the making of a distribution to all holders of shares of Common Stock, (i)
of shares of any class of capital stock of the Corporation other than shares of
Common Stock, or (ii) of evidences of indebtedness of the Corporation, or (iii)
of assets (excluding cash dividends or distributions, and dividends or
distributions referred to in subparagraph 8(a) hereof), or (iv) of rights or
warrants entitling the holders of Common Stock to subscribe for or purchase
shares of Common Stock at less than the Trading Price, as defined in Paragraph
13 hereof, on the record date fixed to determine stockholders entitled to
subscribe or purchase; in each such case, the Conversion Price in effect
immediately prior thereto shall be reduced immediately thereafter to the price
determined by dividing (1) an amount equal to the difference resulting from (A)
the number of shares of Common Stock outstanding on such record date multiplied
by the Conversion Price per share on such record date, less (B) the fair market
----
value (as determined by the Board of Directors in their reasonable discretion)
of said shares or evidences of indebtedness or assets or rights or warrants to
be so distributed by (2) the number of shares of Common Stock outstanding on
such record date. Such adjustment shall be made successively whenever such a
record date is fixed. In the event that such distribution is not so made, the
Conversion Price then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares, evidences
of indebtedness, assets, rights or warrants, as the case may be, to the
Conversion Price which was in effect prior to the fixing of the record date
(subject to any adjustments made pursuant to this Paragraph 8 since such record
date).
c. Rounding of Calculations; Minimum Adjustment. All calculations under
this Paragraph 8 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment in the Conversion Price
shall be made if the amount of such adjustment would be less than $0.01, but any
such amount shall be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent adjustment which,
together with such amount and any other
4.
<PAGE>
amount or amounts so carried forward, shall aggregate $0.01 or more.
d. Adjustments for Consolidation, Merger, etc. In case the Corporation,
(i) shall consolidate with or merge into any other person and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) shall
permit any other person to consolidate with or merge into the Corporation and
the Corporation shall be the continuing or surviving person, but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, (iii) shall transfer all or substantially all of its properties or its
assets to any other person, or (iv) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common stock for
which adjustment is provided in this Paragraph 8); then, and in each such case,
proper provision shall be made so that each share of Series C Preferred Stock
then outstanding shall be converted into, or exchanged for, one share of
preferred stock of the acquiring corporation entitling the holder thereof to all
of the rights (including voting rights), powers, privileges and preferences with
respect to the acquiring corporation to which the holder of a share of Series C
Preferred Stock is entitled with respect to the Corporation, and being subject
with respect to the acquiring corporation to the qualifications, limitations and
restrictions to which a share of Series C Preferred Stock is subject with
respect to the Corporation.
9. VOLUNTARY ADJUSTMENT. The Corporation may make, but shall not be obligated
to make, such decreases in the Conversion Price so as to increase the number of
shares of Common Stock into which the Series C Preferred Stock may be converted,
in addition to those required by Paragraph 8 hereof, as it considers to be
advisable in order to avoid federal income tax treatment as a dividend of stock
or stock rights.
10. RESERVATION OF SHARES OF COMMON STOCK FOR CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series C
Preferred Stock that are then outstanding.
11. NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever the Conversion Price is
adjusted as herein provided, the Corporation shall forthwith file with any
transfer agent or agents for the Series C Preferred Stock, if any, and at the
principal office of the Corporation, a statement signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary of the
Corporation setting forth the adjusted Conversion Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series C
Preferred Stock. The Corporation shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series C
Preferred Stock at their addresses appearing on the books of the Corporation or
supplied by such holder to the Corporation for the purpose of notice.
12. FRACTIONAL SHARES IN CONVERSION. The Corporation shall not be required to
issue fractions of shares of Common Stock on the conversion of Series C
5.
<PAGE>
Preferred Stock. If any fraction of a share of Common Stock would be issuable
upon the conversion of a share, except for the provisions hereof, the
Corporation shall purchase such fraction for an amount in cash equal to the
Trading Price (as defined in Paragraph 13 hereof) multiplied by such fraction.
If more than one certificate for shares of Series C Preferred Stock shall be
presented for conversion at any one time by the same registered holder, the
number of shares of Common Stock which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Common Stock
issuable upon conversion of the shares so presented. All calculations under
this Paragraph 12 shall be made to the nearest one-hundredth of a share.
13. REDEMPTION. The outstanding shares of Series C Preferred Stock may be
redeemed, in whole or in part, at any time at the option of the Corporation by
resolution of its Board of Directors, for cash at $1,000 per share; plus, in
----
each case, all declared and unpaid dividends thereon, if any, to the redemption
date. In case of the redemption of a part only of the outstanding shares of
Series C Preferred Stock, the shares so to be redeemed shall be selected pro
rata.
At least 30 days' previous notice by mail, postage prepaid, shall be given
to the holders of record of the shares of Series C Preferred Stock to be
redeemed, such notice to be addressed to each such stockholder at the address of
such holder appearing on the books of the Corporation or given by such holder to
the Corporation for the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the Corporation is located.
Such notice shall state the date fixed for redemption and the redemption price
and shall call upon such holder to surrender to the Corporation on said date at
the place designated in the notice such holder's certificate or certificates
representing the shares to be redeemed. On or after the date fixed for
redemption and stated in such notice, each holder of shares of Series C
Preferred Stock called for redemption shall surrender the certificate evidencing
such shares to the Corporation at the place designated in such notice and shall
thereupon be entitled to receive payment of the redemption price, together with
declared and unpaid dividends, if any, to the date fixed for redemption. If less
than all the shares represented by any such surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
If such notice of redemption shall have been duly given, and if on the date
fixed for redemption funds necessary for the redemption shall be available
therefor, then, notwithstanding that the certificate evidencing any shares of
Series C Preferred Stock so called for redemption shall not have been
surrendered, all rights pertaining to such shares shall terminate, except only
the right of the holders to receive the redemption price, together with declared
and unpaid dividends thereon, if any, to the date fixed for redemption, without
interest, upon surrender of their certificates therefor.
The term "Trading Price" shall determined as follows: (i) If the Common
Stock is listed or admitted to trade on a national securities exchange, on the
Nasdaq National Market System ("NMS"), or on the Nasdaq SmallCap Market
("SmallCap"), the closing price of the Common Stock on the composite tape of the
principal national securities exchange on which the Common Stock is so listed or
admitted to trade or on the NMS or SmallCap systems, as the case may be; (ii) If
the Common Stock is not listed or admitted
6.
<PAGE>
to trade on an exchange or a system that publishes daily closing prices, the
highest last bid price of the Common Stock quoted on such other trading system.
14. MUTILATED OR MISSING PREFERRED STOCK CERTIFICATES. If any of the Series C
Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the
Corporation shall issue, in exchange and substitution for and upon cancellation
of the mutilated Series C Preferred Stock certificate, or in lieu of and in
substitution for the Series C Preferred Stock certificate lost, stolen or
destroyed, a new Series C Preferred Stock certificate of like tenor and
representing an equivalent number of shares of Series C Preferred Stock, but
only upon receipt of evidence of such loss, theft or destruction of such Series
C Preferred Stock certificate and indemnity, if requested.
15. REISSUANCE OF PREFERRED STOCK. Shares of Series C Preferred Stock that
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of preferred stock undesignated as to series and may be redesignated and
reissued as part of any series of preferred stock other than the Series C
Preferred Stock.
16. BUSINESS DAY. If any payment, redemption or exchange shall be required by
the terms hereof to be made on a day that banks are not open in the State of
California, such payment, redemption or exchange shall be made on the
immediately succeeding day on which such banks are open.
17. HEADINGS OF SUBDIVISIONS. The headings of various subdivisions hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
18. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the
Series C Preferred Stock set forth in these resolutions and the Certificate of
Designations filed pursuant hereto (as such resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other rights, preferences and limitations set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
7.
<PAGE>
19. NOTICE TO THE CORPORATION. All notices and other communications required
or permitted to be given to the Corporation hereunder (a) 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, and (b) shall be made to the
Corporation at its principal executive offices located at 370 Amapola Avenue,
Suite 208, Torrance, California 90501, Attention: Chief Executive Officer.
20. LIMITATIONS. Except as may otherwise be required by law, the shares of
Series C Preferred Stock shall not have any powers, preferences or relative,
participating, optional or other special rights other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, Video City, Inc. has caused this certificate to be
executed by the undersigned on this 26th day of March 1999.
VIDEO CITY, INC.
By /s/Young J. Kim
-----------------
Young J. Kim
Senior Vice President and Secretary
8.
<PAGE>
EXHIBIT 3.2
VIDEO CITY, INC.
CERTIFICATE OF DESIGNATIONS
SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
_________________
Pursuant to Section 151
of the General Corporation Law of the State of Delaware
__________________
Video City, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
that pursuant to Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors adopted the following resolution on March 25,
1999, which resolution remains in full force and effect as of the date hereof:
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized, within the limitations and restrictions stated in the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to fix by resolution or resolutions the designation, powers,
preferences, voting rights and other rights of each series of preferred stock,
and the qualifications, limitations or restrictions thereof, and such other
subjects or matters as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series
of preferred stock on the terms and with the provisions herein set forth:
1. DESIGNATION OF SERIES. The designation of such series of preferred stock is
Series D Convertible Redeemable Preferred Stock ("Series D Preferred Stock").
The number of shares constituting such series is 10,000, with a value of $1,000
per share for the purpose of calculating dividends, if any, and amounts payable
upon liquidation, dissolution or winding up ("stated value"). Shares of Series D
Preferred Stock redeemed, converted or purchased by the Corporation shall be
canceled and shall revert to authorized but unissued shares of preferred stock
undesignated as to series. Shares of the Series D Preferred Stock shall rank
pari passu and share in dividends, if any, and other distributions on a pro rata
basis with the shares of Series AA Convertible Redeemable Preferred Stock,
Series B Convertible Redeemable Preferred Stock, Series C Convertible Redeemable
Preferred Stock and with shares of any other series of preferred stock hereafter
issued by the Corporation that may be designated by the Corporation to rank pari
passu with the Series D Preferred Stock.
2. DIVIDENDS. The holders of the Series D Preferred Stock shall not be
entitled to
1.
<PAGE>
any dividends unless declared by the Board of Directors at its sole discretion.
3. VOTING. The holders of Series D Preferred Stock shall not be entitled to
vote upon any matter except as otherwise required by law.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series D Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share of Series D Preferred Stock equal to the stated
value of such share of Series D Preferred Stock and a further amount equal to
any dividends declared and unpaid thereon, if any, as provided in Paragraph 2
hereof, to the date that payment is made available to the holders of Series D
Preferred Stock, and no more, before any payment shall be made or any assets
distributed to the holders of shares of the Corporation's Common Stock ("Common
Stock") or shares of any other stock of the Corporation that rank junior to the
Series D Preferred Stock in rights upon liquidation.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series D Preferred Stock, and other series
of preferred stock that rank pari passu with the Series D Preferred Stock upon
liquidation, dissolution, or winding up, shall be insufficient to permit the
payment to such stockholders of the full preferential amounts aforesaid, then
the entire assets of the Corporation to be distributed shall be distributed
ratably among the holders of Series D Preferred Stock and such other series of
preferred stock in proportion to the respective stated value of shares of each
such series.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, subject to the provisions of the Corporation's
Certificate of Incorporation, and to all of the preferential rights of the
holders of Series D Preferred Stock and other series of preferred stock that
rank senior to the Common Stock on distribution or otherwise, the holders of
Common Stock shall be entitled to receive, ratably, all remaining assets of the
Corporation.
A consolidation or merger of the Corporation with or into any other
corporation or corporations or other business entities, or a sale of all or
substantially all of the assets of the Corporation, shall not be deemed to be a
liquidation, dissolution or winding up within the meaning of this Paragraph 4.
5. CONVERSION RIGHTS. Each holder of any shares of Series D Preferred Stock
shall have the right at any time commencing from the date of issuance to convert
any of his or her shares of Series D Preferred Stock into duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Corporation at the Conversion Price, as defined herein, and upon the terms set
forth herein.
The Corporation shall have the right to redeem the outstanding shares of
Series D Preferred Stock, in whole or in part, as provided in Paragraph 13.
2.
<PAGE>
6. CONVERSION PRICE. Each share of Series D Preferred Stock shall be converted
into a number of shares of Common Stock determined by dividing (i) $1,000 by
(ii) the Conversion Price in effect on the conversion date. The Conversion Price
at which shares of Common Stock shall be issuable upon conversion of the shares
of Series D Preferred Stock shall be $3.00. The Conversion Price shall be
subject to adjustment as set forth in Paragraph 8 hereof. No payment or
adjustment shall be made for any dividend or other distribution that is payable
on the Common Stock issued upon such conversion.
7. CONVERSION PROCEDURE. Each holder of any shares of the Series D Preferred
Stock may exercise his or her right to convert such shares into shares of Common
Stock by surrendering for such purpose to the Corporation, at its principal
office or at such other office or agency maintained by the Corporation for that
purpose, a certificate or certificates representing the shares of Series D
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Paragraph 7 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. As promptly as practicable, and in any event within ten business
days after the surrender of such certificates and the receipt of such notice
relating thereto and, if applicable, payment of all transfer taxes, the
Corporation shall deliver or cause to be delivered (i) certificates representing
the number of validly issued, fully paid and nonassessable shares of Common
Stock to which the holder of the Series D Preferred Stock so converted shall be
entitled and (ii) if less than the full number of shares of the Series D
Preferred Stock evidenced by the surrendered certificate or certificates are
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares converted. Such conversions shall be deemed to have been
made at the close of business on the date of giving of such notice and of such
surrender of the certificate or certificates representing the shares of the
Series D Preferred Stock to be converted so that the rights of the holder
thereof shall cease except for the right to receive Common Stock in accordance
herewith, and the converting holder shall be treated for all purposes as having
become the record holder of such Common Stock at such time.
Shares of the Series D Preferred Stock may not be converted after the close
of business of the fifth business day preceding the date fixed for redemption of
such shares pursuant to Paragraph 13 hereof.
Upon conversion of any shares of the Series D Preferred Stock, the holder
thereof shall not be entitled to receive any accumulated, accrued or unpaid
dividends in respect of the shares so converted, provided that such holder shall
be entitled to receive any dividends on such shares of the Series D Preferred
Stock declared prior to such conversion if such holder held such shares on the
record date fixed for the determination
3.
<PAGE>
of holders of the Series D Preferred Stock entitled to receive payment of such
dividend.
8. CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to
adjustment from time to time upon the occurrence of certain events as follows:
a. Stock Dividends, Subdivisions, Reclassifications or Combinations. If
the Corporation shall (i) declare a dividend or make a distribution in shares of
Common Stock, (ii) subdivide or reclassify the outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect at the time of the record date of such dividend or distribution or on
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of Series D Preferred
Stock surrendered for conversion after such date shall be entitled to receive
the number of shares of Common Stock which he or she would have owned or been
entitled to receive had such Series D Preferred Stock been converted immediately
prior to such date and giving effect to the events identified in Subparagraphs
8.a.i, 8.a.ii, and 8.a.iii. Successive adjustments in the Conversion Price shall
be made whenever any event specified above shall occur.
b. Other Distributions. In case the Corporation shall fix a record date
for the making of a distribution to all holders of shares of Common Stock, (i)
of shares of any class of capital stock of the Corporation other than shares of
Common Stock, or (ii) of evidences of indebtedness of the Corporation, or (iii)
of assets (excluding cash dividends or distributions, and dividends or
distributions referred to in subparagraph 8(a) hereof), or (iv) of rights or
warrants entitling the holders of Common Stock to subscribe for or purchase
shares of Common Stock at less than the Trading Price, as defined in Paragraph
13 hereof, on the record date fixed to determine stockholders entitled to
subscribe or purchase; in each such case, the Conversion Price in effect
immediately prior thereto shall be reduced immediately thereafter to the price
determined by dividing (1) an amount equal to the difference resulting from (A)
the number of shares of Common Stock outstanding on such record date multiplied
by the Conversion Price per share on such record date, less (B) the fair market
----
value (as determined by the Board of Directors in their reasonable discretion)
of said shares or evidences of indebtedness or assets or rights or warrants to
be so distributed by (2) the number of shares of Common Stock outstanding on
such record date. Such adjustment shall be made successively whenever such a
record date is fixed. In the event that such distribution is not so made, the
Conversion Price then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares, evidences
of indebtedness, assets, rights or warrants, as the case may be, to the
Conversion Price which was in effect prior to the fixing of the record date
(subject to any adjustments made pursuant to this Paragraph 8 since such record
date).
c. Rounding of Calculations; Minimum Adjustment. All calculations under
this Paragraph 8 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment in the Conversion Price
shall be made if the amount of such adjustment would be less than $0.01, but any
such amount shall be
4.
<PAGE>
carried forward and an adjustment with respect thereto shall be made at the time
of and together with any subsequent adjustment which, together with such amount
and any other amount or amounts so carried forward, shall aggregate $0.01 or
more.
d. Adjustments for Consolidation, Merger, etc. In case the Corporation,
(i) shall consolidate with or merge into any other person and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) shall
permit any other person to consolidate with or merge into the Corporation and
the Corporation shall be the continuing or surviving person, but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, (iii) shall transfer all or substantially all of its properties or its
assets to any other person, or (iv) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common stock for
which adjustment is provided in this Paragraph 8); then, and in each such case,
proper provision shall be made so that each share of Series D Preferred Stock
then outstanding shall be converted into, or exchanged for, one share of
preferred stock of the acquiring corporation entitling the holder thereof to all
of the rights (including voting rights), powers, privileges and preferences with
respect to the acquiring corporation to which the holder of a share of Series D
Preferred Stock is entitled with respect to the Corporation, and being subject
with respect to the acquiring corporation to the qualifications, limitations and
restrictions to which a share of Series D Preferred Stock is subject with
respect to the Corporation.
9. VOLUNTARY ADJUSTMENT. The Corporation may make, but shall not be obligated
to make, such decreases in the Conversion Price so as to increase the number of
shares of Common Stock into which the Series D Preferred Stock may be converted,
in addition to those required by Paragraph 8 hereof, as it considers to be
advisable in order to avoid federal income tax treatment as a dividend of stock
or stock rights.
10. RESERVATION OF SHARES OF COMMON STOCK FOR CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series D
Preferred Stock that are then outstanding.
11. NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever the Conversion Price is
adjusted as herein provided, the Corporation shall forthwith file with any
transfer agent or agents for the Series D Preferred Stock, if any, and at the
principal office of the Corporation, a statement signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary of the
Corporation setting forth the adjusted Conversion Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series D
Preferred Stock. The Corporation shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series D
Preferred Stock at their addresses appearing on the books of the Corporation or
supplied by such holder to the Corporation for the purpose of notice.
5.
<PAGE>
12. FRACTIONAL SHARES IN CONVERSION. The Corporation shall not be required to
issue fractions of shares of Common Stock on the conversion of Series D
Preferred Stock. If any fraction of a share of Common Stock would be issuable
upon the conversion of a share, except for the provisions hereof, the
Corporation shall purchase such fraction for an amount in cash equal to the
Trading Price (as defined in Paragraph 13 hereof) multiplied by such fraction.
If more than one certificate for shares of Series D Preferred Stock shall be
presented for conversion at any one time by the same registered holder, the
number of shares of Common Stock which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Common Stock
issuable upon conversion of the shares so presented. All calculations under
this Paragraph 12 shall be made to the nearest one-hundredth of a share.
13. REDEMPTION. The outstanding shares of Series D Preferred Stock may be
redeemed, in whole or in part, at any time at the option of the Corporation by
resolution of its Board of Directors, for cash at $1,000 per share; plus, in
----
each case, all declared and unpaid dividends thereon, if any, to the redemption
date. In case of the redemption of a part only of the outstanding shares of
Series D Preferred Stock, the shares so to be redeemed shall be selected pro
rata.
At least 30 days' previous notice by mail, postage prepaid, shall be given
to the holders of record of the shares of Series D Preferred Stock to be
redeemed, such notice to be addressed to each such stockholder at the address of
such holder appearing on the books of the Corporation or given by such holder to
the Corporation for the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the Corporation is located.
Such notice shall state the date fixed for redemption and the redemption price
and shall call upon such holder to surrender to the Corporation on said date at
the place designated in the notice such holder's certificate or certificates
representing the shares to be redeemed. On or after the date fixed for
redemption and stated in such notice, each holder of shares of Series D
Preferred Stock called for redemption shall surrender the certificate evidencing
such shares to the Corporation at the place designated in such notice and shall
thereupon be entitled to receive payment of the redemption price, together with
declared and unpaid dividends, if any, to the date fixed for redemption. If less
than all the shares represented by any such surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
If such notice of redemption shall have been duly given, and if on the date
fixed for redemption funds necessary for the redemption shall be available
therefor, then, notwithstanding that the certificate evidencing any shares of
Series D Preferred Stock so called for redemption shall not have been
surrendered, all rights pertaining to such shares shall terminate, except only
the right of the holders to receive the redemption price, together with declared
and unpaid dividends thereon, if any, to the date fixed for redemption, without
interest, upon surrender of their certificates therefor.
The term "Trading Price" shall determined as follows: (i) If the Common
Stock is listed or admitted to trade on a national securities exchange, on the
Nasdaq National Market System ("NMS"), or on the Nasdaq SmallCap Market
("SmallCap"), the closing price of the Common Stock on the composite tape of the
principal national securities
6.
<PAGE>
exchange on which the Common Stock is so listed or admitted to trade or on the
NMS or SmallCap systems, as the case may be; (ii) If the Common Stock is not
listed or admitted to trade on an exchange or a system that publishes daily
closing prices, the highest last bid price of the Common Stock quoted on such
other trading system.
14. MUTILATED OR MISSING PREFERRED STOCK CERTIFICATES. If any of the Series D
Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the
Corporation shall issue, in exchange and substitution for and upon cancellation
of the mutilated Series D Preferred Stock certificate, or in lieu of and in
substitution for the Series D Preferred Stock certificate lost, stolen or
destroyed, a new Series D Preferred Stock certificate of like tenor and
representing an equivalent number of shares of Series D Preferred Stock, but
only upon receipt of evidence of such loss, theft or destruction of such Series
D Preferred Stock certificate and indemnity, if requested.
15. REISSUANCE OF PREFERRED STOCK. Shares of Series D Preferred Stock that
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of preferred stock undesignated as to series and may be redesignated and
reissued as part of any series of preferred stock other than the Series D
Preferred Stock.
16. BUSINESS DAY. If any payment, redemption or exchange shall be required by
the terms hereof to be made on a day that banks are not open in the State of
California, such payment, redemption or exchange shall be made on the
immediately succeeding day on which such banks are open.
17. HEADINGS OF SUBDIVISIONS. The headings of various subdivisions hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
18. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the
Series D Preferred Stock set forth in these resolutions and the Certificate of
Designations filed pursuant hereto (as such resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other rights, preferences and limitations set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
7.
<PAGE>
19. NOTICE TO THE CORPORATION. All notices and other communications required
or permitted to be given to the Corporation hereunder (a) 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, and (b) shall be made to the
Corporation at its principal executive offices located at 370 Amapola Avenue,
Suite 208, Torrance, California 90501, Attention: Chief Executive Officer.
20. LIMITATIONS. Except as may otherwise be required by law, the shares of
Series D Preferred Stock shall not have any powers, preferences or relative,
participating, optional or other special rights other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, Video City, Inc. has caused this certificate to be
executed by the undersigned on this 30th day of March 1999.
VIDEO CITY, INC.
By /s/ Robert Y. Lee
-----------------
Robert Y. Lee,
Chief Executive Officer
8.
<PAGE>
EXHIBIT 3.3
VIDEO CITY, INC.
CERTIFICATE OF DESIGNATIONS
SERIES E CONVERTIBLE PREFERRED STOCK
_________________
Pursuant to Section 151
of the General Corporation Law of the State of Delaware
__________________
Video City, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
that pursuant to Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors adopted the following resolution on March 25,
1999, which resolution remains in full force and effect as of the date hereof:
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") is authorized, within the limitations and restrictions stated in the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), to fix by resolution or resolutions the designation, powers,
preferences, voting rights and other rights of each series of preferred stock,
and the qualifications, limitations or restrictions thereof, and such other
subjects or matters as may be fixed by resolution or resolutions of the Board of
Directors under the General Corporation Law of Delaware; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares constituting such series:
NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series
of preferred stock on the terms and with the provisions herein set forth:
1. DESIGNATION OF SERIES. The designation of such series of preferred stock is
Series E Convertible Preferred Stock ("Series E Preferred Stock"). The number of
shares constituting such series is 20,000, with a value of $1,000 per share for
the purpose of calculating dividends, if any, and amounts payable upon
liquidation, dissolution or winding up ("stated value"). Shares of Series E
Preferred Stock converted, exchanged or purchased by the Corporation shall be
canceled and shall revert to authorized but unissued shares of preferred stock
undesignated as to series. Shares of the Series E Preferred Stock shall rank
pari passu and share in dividends, if any, and other distributions on a pro rata
basis with the shares of Series AA Convertible Redeemable Preferred Stock,
Series B Voting Convertible Redeemable Preferred Stock, Series C Convertible
Redeemable Preferred Stock, Series D Convertible Redeemable Preferred Stock, and
with shares of any other series of preferred stock hereafter issued by the
Corporation that may be designated by the Corporation to rank pari passu with
the Series E Preferred Stock.
1.
<PAGE>
2. DIVIDENDS. The holders of the Series E Preferred Stock shall not be
entitled to any dividends unless declared by the Board of Directors at its sole
discretion.
3. VOTING. The holders of Series E Preferred Stock shall not be entitled to
vote upon any matter except as otherwise required by law.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series E Preferred Stock shall be entitled to receive out of the
assets of the Corporation, whether such assets are capital or surplus of any
nature, an amount per share of Series E Preferred Stock equal to the stated
value of such share of Series E Preferred Stock and a further amount equal to
any dividends declared and unpaid thereon, if any, as provided in Paragraph 2
hereof, to the date that payment is made available to the holders of Series E
Preferred Stock, and no more, before any payment shall be made or any assets
distributed to the holders of shares of the Corporation's Common Stock ("Common
Stock") or shares of any other stock of the Corporation that rank junior to the
Series E Preferred Stock in rights upon liquidation.
If upon such liquidation, dissolution or winding up, the assets thus
distributed among the holders of the Series E Preferred Stock, and other series
of preferred stock that rank pari passu with the Series E Preferred Stock upon
liquidation, dissolution, or winding up, shall be insufficient to permit the
payment to such stockholders of the full preferential amounts aforesaid, then
the entire assets of the Corporation to be distributed shall be distributed
ratably among the holders of Series E Preferred Stock and such other series of
preferred stock in proportion to the respective stated value of shares of each
such series.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, subject to the provisions of the Corporation's
Certificate of Incorporation, and to all of the preferential rights of the
holders of Series E Preferred Stock and other series of preferred stock that
rank senior to the Common Stock on distribution or otherwise, the holders of
Common Stock shall be entitled to receive, ratably, all remaining assets of the
Corporation.
A consolidation or merger of the Corporation with or into any other
corporation or corporations or other business entities, or a sale of all or
substantially all of the assets of the Corporation, shall not be deemed to be a
liquidation, dissolution or winding up within the meaning of this Paragraph 4.
5. CONVERSION RIGHTS. Each holder of any shares of Series E Preferred Stock
shall have the right at any time commencing from the date of issuance to convert
any of his or her shares of Series E Preferred Stock into duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Corporation at the Conversion Price, as defined herein, and upon the terms set
forth herein.
6. CONVERSION PRICE. Each share of Series E Preferred Stock shall be
2.
<PAGE>
converted into a number of shares of Common Stock determined by dividing (i)
$1,000 by (ii) the Conversion Price in effect on the conversion date. The
Conversion Price at which shares of Common Stock shall be issuable upon
conversion of the shares of Series E Preferred Stock shall be as follows:
a. During the period commencing on the date of issuance of the shares of
Series E Preferred Stock until the date on which the holder receives written
notice from the Corporation that the registration statement covering the shares
of Common Stock issuable upon conversion of the shares of Series E Preferred
Stock first becomes effective with the Securities and Exchange Commission, the
Conversion Price shall be $3.00;
b. During the 90 day period (as such may be extended as provided below,
the "90 Day Period") commencing on the date which is one business day after the
holder receives written notice from the Corporation that the registration
statement covering the shares of Common Stock issuable upon conversion of the
shares of Series E Preferred Stock first becomes effective with the Securities
and Exchange Commission, and only during such 90 Day Period, the Conversion
Price shall be the average of the Trading Price (as defined in Paragraph 13
hereof) of the Common Stock for the five consecutive trading days immediately
preceding the date on which the holder of the Series E Preferred Stock delivers
notice to the Corporation of such holder's election to convert all or a
specified whole number of the shares of Series E Preferred Stock as provided
herein; provided, however, that during such 90 Day Period, (i) the Conversion
Price shall be $3.00 in the event such average of the Trading Price for the five
consecutive trading days immediately preceding the date on which the holder of
the Series E Preferred Stock delivers notice equals or exceeds $3.00 and (ii)
the Conversion Price shall be $1.60 in the event such average of the Trading
Price for the five consecutive trading days immediately preceding the date on
which the holder of the Series E Preferred Stock delivers notice equals or is
less than $1.60; and
c. During the period after the 90 Day Period, the Conversion Price shall
be $3.00.
d. Notwithstanding the foregoing, the 90 Day Period shall be extended (i)
for one additional week for each week during the 90 Day Period in which the
actual number of shares of Common Stock which are traded in such week (including
any shares traded by the holder of the Series E Preferred Stock) is less than
150,000 shares and (ii) for the number of days during the 90 Day Period during
which (x) a registration statement covering the resale of the shares of Common
Stock issuable upon conversion of the Shares is not effective or (y) the holder
of the Shares is otherwise not permitted under applicable laws or regulations to
effect the resale of the shares of Common Stock issuable upon conversion of the
Shares.
The applicable Conversion Price shall be determined by the date in which
the conversion shall be deemed to have been made in accordance with Paragraph 7
hereof. The Conversion Price shall be subject to adjustment as set forth in
Paragraph 8 hereof. No payment or adjustment shall be made for any dividend or
other distribution that is
3.
<PAGE>
payable on the Common Stock issued upon such conversion.
7. CONVERSION PROCEDURE. Each holder of any shares of the Series E Preferred
Stock may exercise his or her right to convert such shares into shares of Common
Stock by surrendering for such purpose to the Corporation, at its principal
office or at such other office or agency maintained by the Corporation for that
purpose, a certificate or certificates representing the shares of Series E
Preferred Stock to be converted, accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Paragraph 7 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. A holder may deliver such conversion notice by
facsimile transmission at (310) 533-3901, attention: Chief Financial Officer and
General Counsel. In case such notice shall specify a name or names other than
that of such holder, such notice shall be accompanied by payment of all transfer
taxes payable upon the issuance of shares of Common Stock in such name or names.
As promptly as practicable, and in any event within two business days after the
surrender of such certificates and the receipt of such notice relating thereto
and, if applicable, payment of all transfer taxes, the Corporation shall deliver
or cause to be delivered (i) certificates representing the number of validly
issued, fully paid and nonassessable shares of Common Stock to which the holder
of the Series E Preferred Stock so converted shall be entitled and (ii) if less
than the full number of shares of the Series E Preferred Stock evidenced by the
surrendered certificate or certificates are being converted, a new certificate
or certificates, of like tenor, for the number of shares evidenced by such
surrendered certificate or certificates less the number of shares converted.
Such conversions shall be deemed to have been made at the close of business on
the date of giving of such notice and of such surrender of the certificate or
certificates representing the shares of the Series E Preferred Stock to be
converted so that the rights of the holder thereof shall cease except for the
right to receive Common Stock in accordance herewith, and the converting holder
shall be treated for all purposes as having become the record holder of such
Common Stock at such time.
Upon conversion of any shares of the Series E Preferred Stock, the holder
thereof shall not be entitled to receive any accumulated, accrued or unpaid
dividends in respect of the shares so converted, provided that such holder shall
be entitled to receive any dividends on such shares of the Series E Preferred
Stock declared prior to such conversion if such holder held such shares on the
record date fixed for the determination of holders of the Series E Preferred
Stock entitled to receive payment of such dividend.
8. CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be subject to
adjustment from time to time upon the occurrence of certain events as follows:
a. Stock Dividends, Subdivisions, Reclassifications or Combinations. If
the Corporation shall (i) declare a dividend or make a distribution in shares of
Common Stock, (ii) subdivide or reclassify the outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares, the Conversion Price
in effect at the time of the record date of
4.
<PAGE>
such dividend or distribution or on the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of any shares of Series E Preferred Stock surrendered for conversion
after such date shall be entitled to receive the number of shares of Common
Stock which he or she would have owned or been entitled to receive had such
Series E Preferred Stock been converted immediately prior to such date.
Successive adjustments in the Conversion Price shall be made whenever any event
specified above shall occur.
b. Other Distributions. In case the Corporation shall fix a record date
for the making of a distribution to all holders of shares of Common Stock, (i)
of shares of any class of capital stock of the Corporation other than shares of
Common Stock, or (ii) of evidences of indebtedness of the Corporation, or (iii)
of assets (excluding cash dividends or distributions, and dividends or
distributions referred to in subparagraph 8(a) hereof), or (iv) of rights or
warrants entitling the holders of Common Stock to subscribe for or purchase
shares of Common Stock at less than the Trading Price, as defined in Paragraph
13 hereof, on the record date fixed to determine stockholders entitled to
subscribe or purchase; in each such case, the Conversion Price in effect
immediately prior thereto shall be reduced immediately thereafter to the price
determined by dividing (1) an amount equal to the difference resulting from (A)
the number of shares of Common Stock outstanding on such record date multiplied
by the Conversion Price per share on such record date, less (B) the fair market
----
value (as determined by the Board of Directors in their reasonable discretion)
of said shares or evidences of indebtedness or assets or rights or warrants to
be so distributed by (2) the number of shares of Common Stock outstanding on
such record date. Such adjustment shall be made successively whenever such a
record date is fixed. In the event that such distribution is not so made, the
Conversion Price then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares, evidences
of indebtedness, assets, rights or warrants, as the case may be, to the
Conversion Price which was in effect prior to the fixing of the record date
(subject to any adjustments made pursuant to this Paragraph 8 since such record
date).
c. Rounding of Calculations; Minimum Adjustment. All calculations under
this Paragraph 8 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment in the Conversion Price
shall be made if the amount of such adjustment would be less than $0.01, but any
such amount shall be carried forward and an adjustment with respect thereto
shall be made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate $0.01 or more.
d. Adjustments for Consolidation, Merger, etc. In case the Corporation,
(i) shall consolidate with or merge into any other person and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) shall
permit any other person to consolidate with or merge into the Corporation and
the Corporation shall be the continuing or surviving person, but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, (iii) shall transfer all or substantially all of its
5.
<PAGE>
properties or its assets to any other person, or (iv) shall effect a capital
reorganization or reclassification of the Common Stock (other than a capital
reorganization or reclassification resulting in the issue of additional shares
of Common stock for which adjustment is provided in this Paragraph 8); then, and
in each such case, proper provision shall be made so that each share of Series E
Preferred Stock then outstanding shall be converted into, or exchanged for, one
share of preferred stock of the acquiring corporation entitling the holder
thereof to all of the rights (including voting rights), powers, privileges and
preferences with respect to the acquiring corporation to which the holder of a
share of Series E Preferred Stock is entitled with respect to the Corporation,
and being subject with respect to the acquiring corporation to the
qualifications, limitations and restrictions to which a share of Series E
Preferred Stock is subject with respect to the Corporation.
9. VOLUNTARY ADJUSTMENT. The Corporation may make, but shall not be obligated
to make, such decreases in the Conversion Price so as to increase the number of
shares of Common Stock into which the Series E Preferred Stock may be converted,
in addition to those required by Paragraph 8 hereof, as it considers to be
advisable in order to avoid federal income tax treatment as a dividend of stock
or stock rights.
10. RESERVATION OF SHARES OF COMMON STOCK FOR CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized and unissued
shares of Common Stock such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all shares of Series E
Preferred Stock that are then outstanding.
11. NOTICE OF ADJUSTMENT OF CONVERSION PRICE. Whenever the Conversion Price is
adjusted as herein provided, the Corporation shall forthwith file with any
transfer agent or agents for the Series E Preferred Stock, if any, and at the
principal office of the Corporation, a statement signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary of the
Corporation setting forth the adjusted Conversion Price. The statement so filed
shall be open to inspection by any holder of record of shares of Series E
Preferred Stock. The Corporation shall also, at the time of filing any such
statement, mail notice to the same effect to the holders of shares of Series E
Preferred Stock at their addresses appearing on the books of the Corporation or
supplied by such holder to the Corporation for the purpose of notice.
12. FRACTIONAL SHARES IN CONVERSION. The Corporation shall not be required to
issue fractions of shares of Common Stock on the conversion of Series E
Preferred Stock. If any fraction of a share of Common Stock would be issuable
upon the conversion of a share, except for the provisions hereof, the
Corporation shall purchase such fraction for an amount in cash equal to the
Trading Price (as defined in Paragraph 13 hereof) multiplied by such fraction.
If more than one certificate for shares of Series E Preferred Stock shall be
presented for conversion at any one time by the same registered holder, the
number of shares of Common Stock which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Common Stock
issuable upon conversion of the shares so presented. All calculations under
this Paragraph 12 shall be made to the nearest one-hundredth of a share.
6.
<PAGE>
13. TRADING PRICE. The term "Trading Price" shall determined as follows: (i)
If the Common Stock is listed or admitted to trade on a national securities
exchange, on the Nasdaq National Market System ("NMS"), or on the Nasdaq
SmallCap Market ("SmallCap"), the closing price of the Common Stock on the
composite tape of the principal national securities exchange on which the Common
Stock is so listed or admitted to trade or on the NMS or SmallCap systems, as
the case may be; (ii) If the Common Stock is not listed or admitted to trade on
an exchange or a system that publishes daily closing prices, the highest last
bid price of the Common Stock quoted on such other trading system.
14. MUTILATED OR MISSING PREFERRED STOCK CERTIFICATES. If any of the Series E
Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the
Corporation shall issue, in exchange and substitution for and upon cancellation
of the mutilated Series E Preferred Stock certificate, or in lieu of and in
substitution for the Series E Preferred Stock certificate lost, stolen or
destroyed, a new Series E Preferred Stock certificate of like tenor and
representing an equivalent number of shares of Series E Preferred Stock, but
only upon receipt of evidence of such loss, theft or destruction of such Series
E Preferred Stock certificate and indemnity, if requested.
15. REISSUANCE OF PREFERRED STOCK. Shares of Series E Preferred Stock that
have been issued and reacquired in any manner, including shares purchased or
exchanged, shall (upon compliance with any applicable provisions of the laws of
the State of Delaware) have the status of authorized and unissued shares of
preferred stock undesignated as to series and may be redesignated and reissued
as part of any series of preferred stock other than the Series E Preferred
Stock.
16. BUSINESS DAY. If any payment or exchange shall be required by the terms
hereof to be made on a day that banks are not open in the State of California,
such payment or exchange shall be made on the immediately succeeding day on
which such banks are open.
17. HEADINGS OF SUBDIVISIONS. The headings of various subdivisions hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
18. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the
Series E Preferred Stock set forth in these resolutions and the Certificate of
Designations filed pursuant hereto (as such resolution may be amended from time
to time) is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, all other rights, preferences and limitations set
forth in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
7.
<PAGE>
19. NOTICE TO THE CORPORATION. All notices and other communications required
or permitted to be given to the Corporation hereunder (a) 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, and (b) shall be made to the
Corporation at its principal executive offices located at 370 Amapola Avenue,
Suite 208, Torrance, California 90501, Attention: Chief Executive Officer.
20. LIMITATIONS. Except as may otherwise be required by law, the shares of
Series E Preferred Stock shall not have any powers, preferences or relative,
participating, optional or other special rights other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, Video City, Inc. has caused this certificate to be
executed by the undersigned on this 10th day of June 1999.
VIDEO CITY, INC.
By /s/ Young J. Kim
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Young J. Kim,
Senior Vice President and Secretary
8.
<PAGE>
EXHIBIT 10.1
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into
this 22 day of April 1999 by and among VIDEOLAND, INC. an Oregon corporation
(the "Seller"), VIDEO CITY, INC., a Delaware corporation (the "Parent") and
BLOCKBUSTER INC., a Delaware corporation (the "Purchaser").
R E C I T A L S:
(a) The Seller operates 50 videocassette rental and sales stores (the
"Stores") located in the States of Washington and Oregon (the "Territory"),
which are described on Schedule I attached hereto.
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(b) The Seller and the Parent desire to sell to the Purchaser and the
Purchaser desires to purchase from the Seller, upon the terms and subject to the
conditions set forth herein, substantially all of the assets, properties and
business of the Seller relating to the Stores, and by doing so to acquire the
videocassette rental and sale business conducted in the Stores, together with
other ancillary businesses, presently conducted by the Seller in the Stores.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements, and subject to the conditions herein contained and
other good and valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
Purchase and Sale of Assets
1.1 Purchased Assets. At the Closing (as defined in Section 3.1),
the Seller shall sell, convey, transfer, assign and deliver to the Purchaser and
the Purchaser shall purchase from the Seller, free and clear of all liens,
mortgages, pledges, security interests, claims, assessments, restrictions,
encumbrances and charges of every kind (collectively, "Liens"), on the terms and
subject to the conditions set forth in this Agreement, all of the assets and
properties of every kind and description, whether real, personal or mixed,
tangible or intangible, whether accrued, contingent or otherwise, owned, leased
or licensed by the Seller which relate to the ownership, business or operation
of the Stores or otherwise used or useable by Seller in the ownership, business
or operation of the Stores, wherever located (except those assets of the Seller
which are specifically excluded from this sale by Section 1.2) as shall exist on
the Closing Date (as defined in Section 3.1), whether or not appearing on the
Last Balance Sheet (as hereinafter defined) (collectively, the "Purchased
Assets"). Without limiting the generality of the foregoing, the Purchased Assets
shall include the following:
1.1.1 all machinery, equipment, tools, supplies, leasehold
improvements, construction in progress, furniture and fixtures located at the
Stores or used in the business or operation of the Stores (the "Purchased Fixed
Assets");
1.1.2 all inventories of the Seller, including videocassettes (which
for all purposes under this Agreement shall include game cartridges), compact
discs, video compact discs, laser discs, beverages, confections or other food or
magazines held for rental or sale and any other assets of the
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<PAGE>
Seller relating to the ownership, business or operation of the Stores (the
"Purchased Inventory");
1.1.3 all receivables of the Seller, including all trade accounts
receivable arising from sales or rental of inventory in the ordinary course of
business, notes receivable and insurance proceeds receivable relating to the
ownership, business or operation of the Stores (the "Purchased Receivables");
1.1.4 all of the interest of and the rights and benefits accruing to
the Seller as lessee under (i) the leases of real property and all improvements
thereto and buildings thereon, described on Schedule 4.6.2 (the "Purchased
--------------
Leasehold Premises"); and (ii) all leases or rental agreements covering
machinery, equipment, tools, supplies, furniture and fixtures and other fixed
assets relating to the ownership, business or operation of the Stores, including
those described on Schedule 1.1.4 (the leasehold rights described in clauses (i)
--------------
and (ii) are collectively referred to as the "Purchased Leasehold Rights");
1.1.5 all of the rights and benefits accruing to the Seller under all
sales orders, sales contracts, supply contracts, service agreements, purchase
orders and purchase commitments made by the Seller in the ordinary course of
business, all other agreements to which the Seller is a party or by which it is
bound and all other choses in action, causes of action and other rights of every
kind of the Seller, in each case, which relate to the ownership, business or
operation of the Stores;
1.1.6 all operating data and records of the Seller relating to the
ownership, business or operation of the Stores, including customer lists and
records, financial, accounting and credit records, correspondence, budgets and
other similar documents and records (the "Purchased Records");
1.1.7 all of the proprietary rights (if any) of the Seller relating
to the ownership, business or operation of the Stores which are not included as
part of the Excluded Assets (as defined in Section 1.2), including all
trademarks, trade names, patents, patent applications, licenses thereof, trade
secrets, technology, know-how, formulae, designs and drawings, computer
programs, computer software, slogans, copyrights, processes, operating rights,
other licenses and permits, and other similar intangible property and rights, in
each case, relating to the ownership, business or operation of the Stores (the
"Purchased Proprietary Rights");
1.1.8 all cash in the drawers at the Stores, which shall not be less
than $1,000 per Store;
1.1.9 all prepaid and deferred items of the Seller, including prepaid
rent, utilities, common area maintenance ("CAM") charges, taxes and unbilled
charges and security and other deposits relating to the ownership, business or
operation of the Stores (provided, however, that certain of these assets will be
prorated in accordance with Section 2.8);
1.1.10 all insurance proceeds paid or payable to the Seller and all
claims made by the Seller relating to property or equipment used in the
ownership, business or operation of the Stores which has been repaired, replaced
or restored by or for the benefit of the Seller prior to the Closing Date;
1.1.11 all of the Seller's right, title and interest in and to all of
the intangibles of the Seller that relate solely to the ownership, business or
operation of the Stores which are not included as part of the Excluded Assets;
and
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<PAGE>
1.1.12 subject to Section 2.9, all inventory ordered prior to Closing
for which the "street date" is on or after the Closing.
1.2 Excluded Assets. Notwithstanding anything to the contrary in
Section 1.1, the Purchased Assets shall exclude the following assets ("Excluded
Assets") of the Seller:
1.2.1 the Purchase Price (as defined in Section 2.1.1) and the
Seller's other rights under this Agreement;
1.2.2 any shares of capital stock of the Seller which are owned and
held by the Seller as treasury shares;
1.2.3 the corporate minute books, stock records, any other books and
records of the Seller relating solely to internal corporate matters, and any
other books and records not related to the Stores or the ownership, business or
operation of the Stores;
1.2.4 except as provided in Section 1.1.9 and in each case determined
as of 11:59 p.m. on the day prior to the Closing Date, all of the Seller's cash
in any of the Seller's bank or savings accounts; letters of credit or other
similar items of the Seller; any stocks, bonds, certificates of deposit and
similar investments of the Seller; and any other cash equivalents of the Seller
determined as of the Closing Date;
1.2.5 the personal effects and other personal property including the
equipment, furniture and signage (which includes solely the face of the signage
that contains the Seller's name or other proprietary rights not included as part
of the Purchased Assets and excludes any poles, support or other structure to
which the face of the signage is affixed or attached) identified on
Schedule 1.2.5;
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1.2.6 all "employee benefit plans" within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and any bonus, deferred compensation, incentive compensation, stock ownership,
stock purchase, stock option, phantom stock, vacation, severance, disability,
death benefit, hospitalization or insurance plan providing benefits to any
present or former Store Employees (as defined in Section 4.20.1) or any other
trades or businesses under common control with the Seller within the meaning of
Section 4001(b)(1) of ERISA maintained by any such entity or as to which any
such entity has any liability or obligation (collectively, the "Employee Benefit
Plans");
1.2.7 all of Seller's inventory that is leased from or subject to any
buy-back or contingency program of a third-party;
1.2.8 subject to Section 10.6, all of Seller's right, title and
interest in and to "Video City, Inc." and "Videoland, Inc.";
1.2.9 all of the assets and properties relating to the Excluded
Stores. For purposes of this Agreement, the term "Excluded Stores" shall mean
(prior to the Closing Date) the five videocassette rental and retail stores of
the Seller described in Schedule 1.2.9, provided, however, that the Seller has
--------------
informed the Purchaser that within 60 days following the Closing Date, the
Seller will cease operations and close three of the Excluded Stores, and
therefore, for all purposes of this Agreement and the transactions contemplated
hereby, for the 60-day period following the Closing Date, the term "Excluded
Stores" shall mean the five videocassette rental and retail stores described on
Schedule 1.2.9, and thereafter, Excluded Stores shall mean only those two
- --------------
videocassette rental and
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<PAGE>
retail stores which are indicated on Schedule 1.2.9 as remaining stores
--------------
following the Closing Date; and
1.2.10 all of Seller's assets that are not related to the ownership,
business or operation of the Stores, or that are not otherwise used or usable by
the Seller in the ownership, business or operation of the Stores.
1.3 Assignment of Contracts. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an assignment of
any claim, contract, license, franchise, lease, commitment, sales order, sales
contract, supply contract, service agreement, purchase order or purchase
commitment if an attempted assignment thereof, without the consent of a third
party thereto, would constitute a breach thereof or in any way adversely affect
the rights of the Purchaser thereunder. If such consent is not obtained, or if
an attempted assignment thereof would be ineffective or would affect the rights
of the Seller thereunder so that the Purchaser would not in fact receive all
such rights, the Seller will cooperate with the Purchaser in any reasonable
arrangement, including actions taken by the Purchaser under the powers vested in
it pursuant to Section 10.2, designed to provide for the Purchaser the benefits
under such claims, contracts, licenses, franchises, leases, commitments, sales
orders, sales contracts, supply contracts, service agreements, purchase orders
or purchase commitments, including enforcement for the benefit of the Purchaser
of any and all rights of the Seller against a third party thereto arising out of
the breach or cancellation by such third party or otherwise.
ARTICLE 2
Purchase Price; Assumption of Liabilities
2.1 Purchase Price. As consideration for the Purchased Assets, at
the Closing the Purchaser shall, subject to and upon the terms and conditions
set forth in this Agreement, deliver, in the manner provided in Section 3.2.2,
an amount in cash equal to the Purchase Price, subject to any Purchase Price
adjustments made in accordance with Section 2.1.2.
2.1.1 Purchase Price. As used herein, the term "Purchase Price" shall
mean the sum of SIXTEEN MILLION, TWO HUNDRED THOUSAND AND NO/100 DOLLARS
($16,200,000.00).
2.1.2 Purchase Price Adjustments.
(a) Videocassette Inventory. If the actual number of videocassettes
held for rental and for sale (but excluding the "new" retail videocassette
inventory) and included as part of the Purchased Inventory (the "Actual Number
of Tapes") is less than the Minimum Number of Tapes (as defined in Section
4.7.3), then the Purchase Price shall be decreased as follows:
(i) The Purchase Price shall be decreased by an amount
equal to the result obtained by multiplying (A) the difference between
the Minimum Number of Tapes and the Actual Number of Tapes by (B)
$25.00 (which dollar amount is the agreed upon value of a
videocassette for the sole purpose of this Purchase Price adjustment).
(ii) The determination of the Actual Number of Tapes shall
be made by the Purchaser promptly following the Closing Date (the "
Tape Inventory Calculation"), and a copy of the Tape Inventory
Calculation shall be delivered to the Seller promptly following its
completion. The Seller may, at its option, participate in or appoint a
representative to participate in the Purchaser's determination of the
Actual Number of Tapes.
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<PAGE>
(iii) Any decrease in the Purchase Price pursuant to this
Section 2.1.2(a) shall be accomplished by the release from the Held
Back Amount (as defined in Section 3.2.2) of an amount in cash equal
to the result obtained by multiplying the difference between the
Minimum Number of Tapes and the Actual Number of Tapes by $25.00.
(b) Retail Inventory. If the actual number of new retail
----------------
videocassettes held for sale and included as part of the Purchased
Inventory (the "Actual Retail Inventory") is less than the Minimum Retail
Inventory (as defined in Section 4.7.3), then the Purchase Price shall be
decreased as follows:
(i) The Purchase Price shall be decreased by an amount
equal to the result obtained by multiplying (A) the difference between
the Minimum Retail Inventory and the Actual Retail Inventory by (B)
$20.00 (which dollar amount is the agreed upon value of a
videocassette for the sole purpose of this Purchase Price adjustment).
(ii) The determination of the Actual Retail Inventory shall
be made by the Purchaser promptly following the Closing Date (the
"Retail Inventory Calculation"), and a copy of the Retail Inventory
Calculation shall be delivered to the Seller promptly following its
completion. The Seller may, at its option, participate in or appoint a
representative to participate in the Purchaser's determination of the
Actual Retail Inventory.
(iii) Any decrease in the Purchase Price pursuant to this
Section 2.1.2(b) shall be accomplished by the release from the Held
Back Amount of an amount in cash equal to the result obtained by
multiplying the difference between the Minimum Retail Inventory and
the Actual Retail Inventory by $20.00.
2.1.3 No Prejudice. Any adjustment to the Purchase Price under
Section 2.1.2 shall be without prejudice to any rights or remedies which
the Purchaser may have under any other provision of this Agreement.
2.2 Assumed Liabilities. As of the Closing Date, the Purchaser
shall assume and agree to pay, discharge and perform when lawfully due only
those obligations of the Seller under the leases, contracts and agreements (the
"Assumed Contracts") set forth on Schedule 2.2 relating to the period beginning
------------
on, or arising out of events occurring on or after, the Closing Date and any
obligations to be assumed by the Purchaser in accordance with Section 2.9 (the
"Assumed Liabilities"). Schedule 2.2 identifies, as to each Assumed Contract
------------
listed thereon, (i) whether the consent of the other party thereto is required,
(ii) whether notice must be provided to any party thereto (and the length of
such notice) and (iii) whether any payments are required (and the amount of
those payments), in each case, in order for that Assumed Contract to continue in
full force and effect upon the consummation of the transactions contemplated by
this Agreement, and (iv) whether the Assumed Contract can be canceled by the
other party without liability to the other party as a result of the consummation
of the transactions contemplated hereby.
2.3 Excluded Liabilities. Notwithstanding anything to the contrary
in Section 2.2 or in any other provision of this Agreement or any schedule or
exhibit hereto, the Purchaser shall not assume any liabilities, obligations, or
commitments (the "Excluded Liabilities") of Seller or any of its Affiliates (as
defined in Section 10.4.2), or which in any manner relates to or arises out of
the operation or the business of the Stores or the ownership of the Purchased
Assets during any period prior to the Closing Date other than those obligations
and commitments constituting the Assumed Liabilities. Other than the Assumed
Liabilities, the Purchaser shall not assume, directly or indirectly, any
liabilities, obligations or commitments
-5-
<PAGE>
of the Seller, the Parent or any of their respective Affiliates
and shall not be liable therefor. Without limiting the foregoing, the Excluded
Liabilities shall include the following liabilities, contracts, commitments and
other obligations of the Seller:
2.3.1 any liability or obligation of the Seller or any other person
or entity (each a "Person") of any kind, absolute or contingent, known or
unknown, not expressly agreed to be assumed pursuant to the provisions of
Section 2.2;
2.3.2 any liability or obligation that arises out of the transactions
contemplated by this Agreement or results from any breach or default by the
Seller or the Parent under this Agreement or any agreement, certificate or
other document or instrument that may be executed or delivered in
connection with this Agreement or the transactions contemplated hereby, or
any liability or obligation where the existence, imposition, nature or
extent of such liability or obligation gives rise to or constitutes a
breach or default by the Seller or the Parent under this Agreement or any
other agreement, certificate or other document or instrument that may be
executed or delivered in connection with this Agreement or the transactions
contemplated hereby;
2.3.3 any liability or obligation relating to income, franchise,
sales, use, payroll, unemployment or withholding taxes of the Seller,
including any interest or penalties related thereto;
2.3.4 any liability or obligation relating to indebtedness for
borrowed money of the Seller;
2.3.5 any liability or obligation relating to those assets of the
Seller which are specifically excluded from this sale by Section 1.2,
including, without limitation, any liabilities or obligations under any
Employee Benefit Plans;
2.3.6 any liability or obligation relating to any default under any
of the Assumed Contracts set forth on Schedule 2.2 by the Seller or by any
------------
party thereto if the default arises out of or relates to events occurring
prior to the Closing Date;
2.3.7 any liability or obligation of the Seller relating to any
Hazardous Substance (as defined in Section 4.18.1) (including any
investigation, clean-up or other remedial action related thereto) that
arises out of or results from any act, omission, occurrence or state of
facts prior to the Closing;
2.3.8 any liability or obligation of the Seller relating to any
disease, illness or injury that arises out of or results from any act,
omission, occurrence or state of facts prior to the Closing;
2.3.9 any liability or obligation relating to employees of the Seller
that relate to the time period prior to the Closing Date or arise out of
events occurring prior to the Closing Date, including any severance, sick,
holiday or vacation pay obligation and any compensation required to be paid
and benefits required to be provided under any employee benefit plan of the
Seller;
2.3.10 any liability or obligation relating to any products sold by
the Seller prior to the Closing or any services performed by the Seller
prior to the Closing;
2.3.11 any liability or obligation relating to any violation of any
law, statute, rule or regulation by the Seller or any stockholder,
director, officer, employee or agent of the Seller that arises out of or
results from the Closing or any act, omission, occurrence or state of facts
prior to
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the Closing; and
2.3.12 any liability or obligation of the Seller to any of its
stockholders.
2.4 No Expansion of Third Party Rights. The (i) assumption by the
Purchaser of the Assumed Liabilities, (ii) transfer by the Seller of the Assumed
Liabilities and (iii) limitations in the description of Excluded Liabilities in
Section 2.3 shall in no way expand the rights or remedies of any third party
against the Purchaser or the Seller as compared to the rights and remedies which
such third party would have had against the Seller had the Purchaser not assumed
such liabilities. Without limiting the generality of the preceding sentence, the
assumption by the Purchaser of the Assumed Liabilities shall not create any
third party beneficiary rights.
2.5 Allocation of the Purchase Price. The Purchase Price shall be
temporarily allocated among each item or class of the Purchased Assets as
specifically set forth on or determined pursuant to Schedule 2.5, which
------------
allocation is intended to comply with Section 1060 of the Internal Revenue Code
of 1986, as amended (the "Code") and the regulations promulgated thereunder.
Upon finalizing the allocation or in the event any adjustment is made to the
Purchase Price pursuant to Section 2.1.2, the Purchaser shall amend the
allocation and submit to the Seller a new allocation. The Seller and the
Purchaser agree that this revised allocation will be used on the Form 8594 and
any other notice or filing required pursuant to Section 1060 of the Code.
2.6 Tax Treatment. The Purchaser and the Seller intend that the
transactions contemplated by this Agreement be treated as taxable transactions
under the Code pursuant to Section 1001.
2.7 Sales Tax. The Seller agrees that it promptly shall pay all
sales or similar taxes required to be paid by reason of the sale by the Seller
to the Purchaser of the Purchased Assets pursuant to this Agreement, based upon
the allocation provided for in Section 2.5, and the Seller agrees to provide the
Purchaser, within 30 days following the Closing Date, with evidence of the
payment of such taxes.
2.8 Proration of Certain Items. Real and/or personal property taxes
relating to the Purchased Assets, rent and CAM charges due under the Leases (as
defined in Section 4.6.2) included in the Purchased Assets, utilities relating
solely to the Stores and other accrued but unpaid (as of the Closing Date)
expenses which are customarily prorated shall be prorated as of the Closing Date
such that the Seller is responsible for such expenses accruing prior to the
Closing and the Purchaser is responsible for such expenses accruing from and
after the Closing. Any proration shall be made within 30 days after the Closing
Date based upon actual bills (or, if not available, based upon good faith
estimates) for such prorated expenses.
2.9 Inventory Orders. From the date of this Agreement through the
Closing Date, the Seller shall not make any buy orders of inventory for the
Stores that either will be received after the Closing Date or will be received
before the Closing Date but have a "street date" after the Closing Date, without
the prior written consent of the Purchaser. Notwithstanding anything to the
contrary in this Agreement, the Purchaser shall not be liable for and will not
assume any liabilities or obligations of the Seller relating to any inventory
ordered and received by the Seller prior to the Closing Date. Subject to the
Purchaser's prior written approval of any buy order made by the Seller, the
Purchaser shall assume all liabilities and obligations relating to all inventory
ordered by the Seller and either received after the Closing Date or received
before the Closing Date but having a "street date" after the Closing Date.
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ARTICLE 3
Closing
3.1 Time and Place of the Closing. The closing of the sale of the
Purchased Assets shall take place via facsimile and mail as of the first Monday
that is at least five business days following the later of (a) expiration or
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR Act"), (b) receipt of all other consents, authorizations,
approvals, licenses or permits of any governmental authority ("Governmental
Consents") deemed necessary by the Purchaser and the Seller to proceed with the
Closing, or (c) receipt of all consents, approvals, amendments and estoppels
from third parties (including, without limitation, landlords) (collectively,
"Third-Party Consents") deemed necessary by the Purchaser with respect to the
Closing, or such other date, time and place as the parties may agree. In this
Agreement, such event is referred to as the "Closing" and such date and time are
referred to as the "Closing Date." The Closing shall be effective as of 12:01
a.m., Central Time, on the Closing Date.
3.2 Procedure at the Closing. At the Closing, the parties shall
take the following actions and all such actions shall be deemed to have occurred
simultaneously:
3.2.1 The Seller's Deliveries.
(a) The Seller shall deliver to the Purchaser such deeds, bills of
sale, endorsements, assignments (including separate lease assignments),
releases and other instruments, in such form as in each case is
satisfactory to the Purchaser, as shall be sufficient to vest in the
Purchaser, good and marketable title to the Purchased Assets, free and
clear of any Liens.
(b) The Seller shall deliver to the Purchaser a certificate of good
standing of the Seller issued by the appropriate officer of the state in
which the Seller is incorporated and each state in which the Stores are
located, in each case dated not earlier than ten days prior to the Closing
Date.
(c) The Seller shall deliver to the Purchaser, in connection with
the assignment of the Leases and where otherwise necessary or appropriate,
consents and estoppel certificates, in form and substance satisfactory to
the Purchaser.
(d) The Seller shall deliver to the Purchaser evidence reasonably
satisfactory to the Purchaser of the consent or approval of each Person
that is a party to each Assumed Contract identified in Schedule 2.2, whose
------------
consent or approval shall be required in order to permit the consummation
of the transactions contemplated by this Agreement;
(e) The Seller shall deliver to the Purchaser copies of (i)
resolutions adopted by the board of directors and shareholders of the
Seller authorizing the transactions contemplated by this Agreement and (ii)
the charter and bylaws of the Seller, as in effect on the Closing Date,
certified in each case by the secretary or assistant secretary of the
Seller.
(f) The Seller shall deliver to the Purchaser an opinion dated the
Closing Date from counsel for the Seller, in substantially the form
attached hereto as Exhibit A.
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(g) The Seller shall execute and deliver a receipt acknowledging
receipt of the Purchase Price.
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<PAGE>
(h) The Seller shall execute and deliver the Bill of Sale,
Assignment and Assumption Agreement, in substantially the form attached
hereto as Exhibit B.
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(i) The Seller shall deliver to the Purchaser a certificate dated
as of the Closing Date executed by an officer of the Seller, in form and
substance reasonably satisfactory to the Purchaser to the effect that the
conditions set forth in Section 8.1 have been satisfied.
3.2.2 The Purchaser's Deliveries.
(a) The Purchaser shall deliver the Purchase Price in the following
manner: (i) the Purchaser shall set aside and hold, in accordance with
Section 12.2, an amount equal to 5% of the Purchase Price (such amount
being referred to herein as the "Held Back Amount"), and (ii) the Purchaser
shall deliver, by wire transfer to an account identified at least five
business days prior to the Closing, to the Seller an amount in cash equal
to the Purchase Price minus the Held Back Amount.
(b) The Purchaser shall execute and deliver the Bill of Sale,
Assignment and Assumption Agreement, in substantially the form attached
hereto as Exhibit B.
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(c) The Purchaser shall deliver to the Seller a certificate of an
officer of the Purchaser certifying that the Purchased Inventory to be
purchased by the Purchaser hereunder is being acquired by the Purchaser for
resale or rental in the ordinary course of the Purchaser's business.
(d) The Purchaser shall deliver to the Seller a certificate dated
as of the Closing Date executed by an executive officer of the Purchaser,
in form and substance reasonably satisfactory to the Seller to the effect
that the conditions set forth in Section 9.1 have been satisfied.
ARTICLE 4
Representations and Warranties of the Seller
To induce the Purchaser to enter into this Agreement and to consummate the
transactions contemplated hereunder, the Seller and the Parent, jointly and
severally represent and warrant, which representations and warranties shall
survive the Closing as provided in Section 12.1, the following:
4.1 Organization, Power and Authority; Subsidiaries;
Capitalization. The Seller is a corporation duly organized, validly existing and
is in good standing under the laws of the State of Oregon and has all requisite
corporate power and authority (i) to own or lease its properties and to carry on
its business as it is now being conducted; (ii) to enter into this Agreement and
each other agreement, document or instrument required to be executed by it in
accordance with this Agreement and to sell, convey, transfer, assign and deliver
the Purchased Assets to the Purchaser as provided herein; and (iii) to carry out
the other transactions and agreements contemplated by this Agreement. The Seller
is legally qualified to transact business as a foreign corporation and is in
good standing in the State of Washington. The Parent owns 100% of the issued and
outstanding shares of capital stock of the Seller. The Seller does not own, of
record or beneficially, any capital stock or equity interest or investment in
any corporation, partnership, joint venture, association or business entity.
4.2 Due Authorization; Binding Obligation; No Conflicts; Consents.
The execution, delivery and performance of this Agreement and each of the other
agreements contemplated hereby and the consummation of the transactions
contemplated hereby have been duly authorized by all
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<PAGE>
necessary corporate action of the Seller and the Parent. This Agreement has been
duly executed and delivered by the Seller and the Parent and is a valid and
binding obligation of the Seller and the Parent, enforceable against each of
them in accordance with its terms, subject as to enforceability to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and
similar laws affecting creditors' rights and remedies generally and to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity). The execution and delivery of this Agreement by
the Seller and the Parent does not, and the consummation of the transactions
contemplated herein will not, (i) contravene any provision of the Seller's or
the Parent's charter or bylaws; (ii) violate or conflict with any federal, state
or local law, statute, ordinance, rule, regulation or any decree, writ,
injunction, judgment or order of any court or administrative or other
governmental body or of any arbitration award which is either applicable to,
binding upon or enforceable against the Seller, the Parent or the Purchased
Assets; (iii) conflict with, result in any breach of, or constitute a default
(or an event which would, with the passage of time or the giving of notice or
both, constitute a default) under, or give rise to a right to terminate, amend,
modify, abandon or accelerate, any mortgage, contract, agreement, lease,
license, indenture, will, trust or other instrument which is either binding upon
or enforceable against the Seller, the Parent or the Purchased Assets; (iv)
violate any legally protected right arising in the ownership, business or
operation of the Stores of any Person or give to any Person a right or claim
against the Purchaser or the Purchased Assets; (v) result in or require the
creation or imposition of any Lien upon or with respect to the Purchased Assets;
or (vi) require any Governmental Consent or Third-Party Consent (other than (A)
as required under the HSR Act, (B) the consents of the landlords under the
Leases, which will be obtained by the Seller prior to Closing and (C) the
consent of BankBoston Retail Finance Inc., which will be obtained by the Seller
and the Parent prior to the Closing).
4.3 Financial Statements. The Seller previously has furnished to
the Purchaser the following financial statements, including the notes pertaining
thereto (the "Financial Statements"), of the Seller:
(a) balance sheets at December 31, 1996 and 1997;
(b) balance sheet at September 30, 1998 (the "Last Balance Sheet");
(c) statements of income and cash flow for the years ended December
31, 1996 and 1997; and
(d) statement of income for the nine-month period ended September
30, 1998.
The Financial Statements present fairly and are true, correct and complete
statements of the financial position of the Seller at and as of the periods
indicated therein, and they have been prepared in accordance with generally
accepted accounting principles consistently applied; the Financial Statements
have been certified by the Chief Financial Officer of the Seller to such affect,
such certification being attested to by the Secretary of the Seller. The books
and records of the Seller properly and accurately reflect all material
transactions, properties, assets and liabilities of the Seller.
4.4 Liabilities. The Seller has no liabilities or obligations,
whether known or unknown, accrued, absolute, contingent or otherwise affecting
or relating to the Stores or the Purchased Assets, except: (i) to the extent
reflected in or taken into account in determining net worth in the Last Balance
Sheet and not heretofore paid or discharged; (ii) to the extent specifically set
forth in or incorporated by express reference to Schedule 4.4; and (iii) normal
------------
liabilities incurred in the ordinary course of business since the date of the
Last Balance Sheet.
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<PAGE>
4.5 Tax Matters.
4.5.1 The Seller has timely filed all sales and property tax returns
and reports affecting the Stores or the Purchased Assets which are required
to be filed by it, and all such tax returns and reports which have been
filed are accurate and complete. There are no tax liens upon any property
or assets of the Stores or the Purchased Assets. There are no outstanding
agreements or waivers extending the statute of limitations applicable to
any sales or property tax returns of the Seller affecting the Stores or the
Purchased Assets for any period.
4.5.2 All taxes and other assessments and levies which the Seller was
required by law to withhold or to collect relating to the Stores or the
Store Employees have been duly withheld and collected and have been paid
over to the proper governmental authority or are being held by the Seller
in separate bank accounts for such payment.
4.5.3 There are no legal, administrative or tax proceedings pursuant
to which the Seller is or could be made liable for any taxes, penalties,
interest, or other charges, the liability for which could extend to the
Purchaser as transferee of the business of the Stores or the Purchased
Assets. None of the Purchased Assets directly or indirectly secures any
debt the interest on which is exempt from tax under (S) 103(a) of the Code,
and none of the Purchased Assets are "tax-exempt use property" within the
meaning of (S) 168(h) of the Code.
4.6 Real Estate.
4.6.1 The Seller owns no real estate.
4.6.2 Schedule 4.6.2 contains an accurate and complete description of
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the lease agreements with respect to the Purchased Leasehold Premises and
all amendments, modifications and supplements thereto and assignments
thereof (as amended, modified or supplemented, the "Leases") and sets
forth: (i) the lessor and lessee thereof and the date and term of each
Lease; (ii) the location, including the address, thereof; (iii) a brief
description (including size and function) of the principal improvements and
buildings thereon, all of which are within the property, set-back and
building lines of the Purchased Leasehold Premises, (iv) the rent payable,
security deposit (if any) and renewal terms for the Purchased Leasehold
Premises and (v) the commencement and termination dates of each Lease. A
true and complete copy of each Lease has been delivered to the Purchaser
prior to the date hereof. Schedule 4.6.2 also sets forth a description (i)
--------------
of the nature and amount of all Liens (including environmental Liens) on,
and subleases of, the Seller's interest in the Purchased Leasehold Premises
and (ii) of all non-disturbance agreements in favor of the tenants under
the Leases. Each Lease constitutes a valid and binding obligation of the
Seller and is in full force and effect. The Seller is not in default under
or breach of any Lease and no event has occurred which with the passage of
time or the giving of notice or both would cause a breach of, or default
under, any Lease by the Seller. To the best of the Seller's or the Parent's
knowledge, there is no breach of, or default under, or anticipated breach
of, or default under, any Lease by any other party to such Lease and no
event has occurred which with the passage of time or the giving of notice
or both would cause a breach of, or default under, any Lease by any other
party to such Lease. The Seller has full legal power and authority to
assign its rights under the Leases to the Purchaser.
4.6.3 The Seller has valid leasehold interests in the Purchased
Leasehold Premises, free and clear of any Liens, covenants and easements,
subleases or title defects of any nature whatsoever, except for (i) Liens
set forth on Schedule 4.6.2; (ii) Liens for real estate taxes not yet
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<PAGE>
due and payable; and (iii) such imperfections of title and encumbrances, if
any, as are not material in character, amount or extent and do not detract
from the value, or interfere with the present use, of such properties or
otherwise impair business operations in any respect. Except as set forth on
Schedule 4.6.3, there are no parties in possession of any portion of the
--------------
Purchased Leasehold Premises other than Seller, whether as lessees,
sublessees, licensees or tenants at will.
4.6.4 The portions of the buildings located on the Purchased
Leasehold Premises that are used in the Seller's ownership, business or
operation of the Stores are each in good operating condition, normal wear
and tear excepted, and are sufficient to satisfy the Seller's current and
reasonably anticipated normal videocassette rental and sales levels and
other business activities conducted by the Seller at the Stores.
4.6.5 Each of the Purchased Leasehold Premises: (i) has direct access
to public roads or access to public roads by means of a perpetual access
easement, such access being sufficient to satisfy the current and
reasonably anticipated normal transportation requirements of the Seller's
business as presently conducted at such parcel; and (ii) is served by all
drainage, storm and sanitary services and utilities in such quantity and
quality as are sufficient to satisfy the current normal videocassette
rental and sales levels and business activities as conducted at such
parcel.
4.6.6 The Seller has not received notice of or is aware of (i) any
condemnation proceeding with respect to any portion of the Purchased
Leasehold Premises or any access thereto, and, to the best of the Seller's
or the Parent's knowledge, no proceeding is contemplated by any
governmental authority; or (ii) any special assessment which may affect any
of the Purchased Leasehold Premises, and, to the best of the Seller's or
the Parent's knowledge, no such special assessment is contemplated by any
governmental authority.
4.6.7 All rents, additional rents, percentage rents and all other
charges payable under the Leases have been paid.
4.6.8 The use which the Seller makes of the Purchased Leasehold
Premises and, to the Seller's or the Parent's knowledge, the Purchased
Leasehold Premises comply with all applicable laws and governmental
requirements in all material respects. The Seller has obtained all
requisite zoning, utility, building, health and operating permits from the
applicable governmental authorities having jurisdiction over the Purchased
Leasehold Premises which have not been otherwise obtained by the landlords
of the Purchased Leasehold Premises, except for those permits that would
not have a material adverse effect on the business or operation of the
Stores, and, to the Seller's or the Parent's knowledge, there is nothing
that could jeopardize any of those permits. There are no facts known to
Seller which would prevent any portion of the Purchased Leasehold Premises
from being occupied after the Closing in substantially the same manner as
before or as it was occupied by the Seller prior to the Closing.
4.6.9 Seller has paid, or shall have paid prior to Closing, all
amounts owing to any architect, contractor, subcontractor or materialman
for labor or materials performed, rendered or supplied to or in connection
with the Purchased Leasehold Premises. Schedule 4.6.9 sets forth a true and
--------------
complete list of all construction, architect, engineering and other similar
agreements relating to uncompleted construction projects entered into by
Seller in connection with any Purchased Leasehold Premises. Seller has
heretofore delivered to Purchaser true and complete copies of such
construction agreements. All contributions required to have been paid by a
landlord or Seller in connection with the construction of, or modification
to, any Purchased Leasehold Premises have been paid.
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<PAGE>
4.7 Good Title to and Condition of the Purchased Assets.
4.7.1 The Seller has good and marketable title to all of the
Purchased Assets (other than the Purchased Leasehold Rights), free and
clear of any Liens other than the Liens held by BankBoston Retail Finance
Inc. and Ingram Entertainment Inc. and described on Schedule 4.7.1, which
--------------
Liens will be released by BankBoston Retail Finance Inc. and Ingram
Entertainment Inc. on or before the Closing Date.
4.7.2 The Purchased Fixed Assets of the Seller currently in use or
necessary for normal rental and sales levels are in good operating
condition, normal wear and tear excepted.
4.7.3 The Purchased Inventory (which includes videocassettes
capitalized as depreciable assets) consists of items of a quality and
quantity usable and saleable in the ordinary course of the Seller's
business relating to the Stores and, except for videocassette rental
inventory, at values in the aggregate not materially less than the values
at which such items are carried on its books. Videocassettes held for
rental at the Stores as of the Closing Date do not include any unreasonable
accumulation of slow moving videocassettes or videocassettes of below
standard quality. All of the Purchased Inventory is located at the Stores
or is out on rental in the ordinary course of business. As of the Closing
Date, the aggregate number of (i) videocassettes held for rental or for
sale (but excluding the "new" retail videocassette inventory) and included
as part of the Purchased Inventory shall not be less than 400,000 (the
"Minimum Number of Tapes") and (ii) new retail videocassette inventory held
for sale and included as part of the Purchased Inventory shall not be less
than 16,934 (the "Minimum Retail Inventory").
4.8 Receivables. The Seller has no accounts receivable, notes
receivable or insurance proceeds receivable relating to the ownership, business
or operation of the Stores other than certain delinquent customer accounts, a
listing of which is set forth on Schedule 4.8. All of the Purchased Receivables
------------
are valid and legally binding in all material respects and represent bona fide
transactions and arose in the ordinary course of business of the Seller,
provided that the foregoing shall not be deemed a warranty of the collectability
of the Purchased Receivables. The Seller has no knowledge of any facts or
circumstances generally which would result in any material increase in the
uncollectability of the Purchased Accounts Receivable in excess of the reserves
reflected on the Last Balance Sheet.
4.9 Licenses and Permits. The Seller possesses all licenses and
required governmental or official approvals, permits or authorizations
(collectively, the "Permits") for the ownership, business or operation of the
Stores, except for those Permits that would not have a material adverse effect
on the business or operation of the Stores. All of the Permits are valid and in
full force and effect. The Seller is in compliance with all requirements of the
Permits, and no proceeding is pending or, to the best of the Seller's or the
Parent's knowledge, threatened to revoke or amend any of the Permits.
Schedule 4.9 contains a complete list of all the Permits. Except as indicated on
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Schedule 4.9, none of the Permits is or will be impaired or in any way affected
- ------------
by the execution and delivery of this Agreement or the consummation of the
transactions contemplated herein.
4.10 Proprietary Rights.
4.10.1 The Purchased Proprietary Rights include all proprietary rights
relating to the ownership, business or operation of the Stores which, if
Seller did not possess such proprietary rights, would have an adverse
effect on the business, financial condition or results of operations of the
Stores. Schedule 4.10.1 contains an accurate and complete list of all of
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the Purchased Proprietary Rights.
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<PAGE>
4.10.2 Except as set forth on Schedule 4.10.2, (i) the Seller owns all
---------------
right, title and interest in and to all of the Purchased Proprietary
Rights; (ii) there have been no claims made against the Seller for the
assertion of the invalidity, abuse, misuse, or enforceability of any such
rights, and, to the best of the Seller's or the Parent's knowledge, there
are no grounds for the same; (iii) the Seller has not received a notice of
conflict with the asserted rights of others within the last three years;
and (iv) the conduct of the Seller's business relating to the Stores has
not infringed upon any asserted rights of any Person, and the Seller is not
aware of any infringement by any Person of any of the Purchased Proprietary
Rights.
4.11 Adequacy of the Purchased Assets; Relationships with Customers
and Suppliers. The Purchased Assets constitute, in the aggregate, all of the
property necessary for the conduct of the business of the Seller relating to the
Stores in the manner in which and to the extent to which it is currently being
conducted. The Seller knows of no written or oral communication, fact, event or
action which exists or has occurred prior to the date of this Agreement which
would tend to indicate that:
4.11.1 any current customer of the Stores which accounted for over 1%
of the total consolidated revenue of the Stores for the year ended December
31, 1998 will terminate its business relationship with the Seller; or
4.11.2 any current supplier to the Stores of items essential to the
conduct of its business, which items cannot be replaced by the Stores at
comparable cost to the Seller and the loss of which would have an adverse
effect on the business or operations of the Stores, will terminate its
business relationship with the Seller. Neither the Seller nor any of its
Affiliates has any direct or indirect interest in any customer, supplier or
competitor of the Stores, or in any Person from whom or to whom the Stores
lease real or personal property, or in any Person with whom the Stores are
doing business. The Seller is not restricted by agreement from carrying on
its business anywhere in the world.
4.12 Documents of and Information with Respect to the Seller.
4.12.1 Schedule 4.12 is an accurate and complete list of the
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following, in each case, which relates to the ownership, business or
operation of the Stores: (i) each policy of insurance in force with respect
to the assets and properties of the Seller and each of the performance or
other surety bonds maintained by the Seller in the conduct of its business;
(ii) each loan, credit agreement, guarantee, security agreement or similar
document or instrument to which the Seller is a party or by which it or the
Purchased Assets are otherwise bound; (iii) each lease of personal property
to which the Seller is a party or by which it is bound, (iv) any other
agreement, contract or commitment to which the Seller is a party or by
which it is bound which involves a future commitment by the Seller in
excess of $5,000 per year and which cannot be terminated without liability
on 30 days or less notice; (v) the name and current annual salary of each
Store Employee of the Seller and the profit sharing, bonus or any other
form of compensation paid or payable by the Seller to or for the benefit of
each Store Employee for the year ended December 31, 1998, and any
employment or other agreement of the Seller with any of the Store
Employees; and (vi) the name of each bank in which the Seller has an
account or safe deposit box relating to the Stores, the name in which the
account or box is held and the names of all persons authorized to draw
thereon or to have access thereto. The Seller has previously furnished the
Purchaser with an accurate and complete copy of each such agreement,
contract or commitment listed in Schedule 4.12. There has not been any
-------------
breach of or default in any obligation to be performed under any such
instrument. All of such instruments are valid, binding and enforceable and
in full force and effect in accordance with their
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<PAGE>
respective terms.
4.12.2 The Seller is not a party to any oral or written agreement,
plan or arrangement with any of the Store Employees (A) the benefits of
which are contingent upon or result from, or the terms of which are
materially altered as a result of, the occurrence of a transaction
involving the Seller of the nature of any of the transactions contemplated
by this Agreement, (B) providing severance benefits or other benefits after
the termination of employment or other contractual relationship regardless
of the reason for such termination and regardless of whether such
termination is before or after a change of control, (C) under which any
Person may receive payments subject to the tax imposed by Section 4999 of
the Code or (D) any of the benefits of which will be increased, or the
vesting of benefits of which will be accelerated by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement.
4.12.3 The Seller carries insurance, which is adequate in character
and amount, with reputable insurers, covering all of the Purchased Assets,
and it has provided all required performance or other surety bonds. All
premiums and other payments which have become due under the policies of
insurance listed on Schedule 4.12 have been paid in full, all of such
-------------
policies are now in full force and effect and the Seller has not received
notice from any insurer, agent or broker of the cancellation of, or any
increase in premium with respect to, any of such policies or bonds. Except
as set forth on Schedule 4.12, the Seller has not received any notification
-------------
from any insurer, agent or broker denying or disputing any claim made by
the Seller or denying or disputing any coverage for any such claim or the
amount of any claim. Except as set forth on Schedule 4.12, the Seller has
-------------
no claim against any of its insurers under any of such policies pending or
anticipated and there has been no occurrence of any kind which would give
rise to any such claim.
4.13 Litigation. Except as set forth on Schedule 4.13, there are no
-------------
actions, suits, claims, inquiries, governmental investigations or arbitration
proceedings (collectively, "Proceedings") pending or, to the best of the
Seller's knowledge, threatened against or affecting the Seller relating in any
way to the Stores or any of the Purchased Assets or Assumed Liabilities that
could result in the incurrence of expenses, losses, costs, deficiencies,
liabilities, penalties, charges and damages (including actual, punitive and
consequential damages) in excess of the Litigation Materiality Amount (as
hereinafter defined). Except as set forth on Schedule 4.13, there are no
-------------
Proceedings which question the validity or enforceability of this Agreement or
any action contemplated herein, and there is no basis for any of the foregoing.
There are no outstanding orders, decrees or stipulations issued by any federal,
state, local or foreign judicial or administrative authority in any Proceeding
to which the Seller is or was a party and which relate to the Stores or which
affect the Purchased Assets or Assumed Liabilities. As used in this Section
4.13, the term Litigation Materiality Amount means $1,000 for any individual
Proceeding and $5,000 for all Proceedings considered in the aggregate.
4.14 Records. The Seller's records included as part of the Purchased
Assets are accurate and complete in all material respects and there are no
material matters as to which appropriate entries have not been made in such
records. A record of all action taken by the stockholders and the board of
directors of the Seller which relate to the Stores and all minutes of their
meetings are contained in the minute books of the Seller and are accurate and
complete. The records book and stock ledger of the Seller contain an accurate
and complete record of all issuances, transfers and cancellations of shares of
capital stock of the Seller.
4.15 No Adverse Change. Since the date of the Last Balance Sheet,
there has not been (i) any change in the business or properties of the Stores,
or in the financial condition of the Stores, other
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<PAGE>
than changes occurring in the ordinary course of business which have not had an
adverse effect on the business, properties, financial condition, business
prospects or operating results of the Stores; or (ii) to the best of the
Seller's or the Parent's knowledge, any threatened or prospective event or
condition of any character whatsoever which could adversely affect the Purchased
Assets or the business, financial condition, business prospects or results of
operations of the Stores.
4.16 Absence of Certain Acts or Events. Except as disclosed in
Schedule 4.16, since the date of the Last Balance Sheet, the Seller has not (i)
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authorized or issued any of its shares of capital stock (including any held in
its treasury) or any other securities; (ii) declared or paid any dividend or
made any other distribution of or with respect to its shares of capital stock or
other securities or purchased or redeemed any shares of its capital stock or
other securities; (iii) paid any bonus or increased the rate of compensation of
any of the Store Employees; (iv) sold or transferred any of its assets relating
to the Stores other than in the ordinary course of business; (v) made or
obligated itself to make capital expenditures with respect to the Stores
aggregating more than $5,000; (vi) made any payment in respect of the Excluded
Liabilities other than in the ordinary course of business; (vii) incurred any
material obligations or liabilities (including any indebtedness) or entered into
any material transaction relating to the ownership, business or operation of the
Stores, except for this Agreement and the transactions contemplated hereby;
(viii) suffered any theft, damage, destruction or casualty loss in excess of
$5,000 with respect to the Stores; (ix) suffered any extraordinary losses with
respect to the Stores; or (x) waived any right of material value relating to the
ownership, business or operation of the Stores.
4.17 Compliance with Laws.
4.17.1 The Seller is in compliance with all laws, regulations and
orders applicable to it relating to the Stores or the Purchased Assets. The
Seller has not been cited, fined or otherwise notified of any asserted past
or present failure to comply with any laws relating to the Stores and, to
the best of the Seller's or the Parent's knowledge, no proceeding with
respect to any such violation is contemplated.
4.17.2 Neither the Seller nor, to the Seller's or the Parent's
knowledge, any employee of the Seller has made any payment of funds in
connection with the ownership, business or operation of the Stores
prohibited by law, and no funds have been set aside to be used in
connection with the ownership, business or operations of the Stores for any
payment prohibited by law.
4.17.3 The Seller is and at all times has been in full compliance with
the terms and provisions of the Immigration Reform and Control Act of 1986
(the "Immigration Act") with respect to the Store Employees. With respect
to each Employee (as defined in 8 C.F.R. 274a.1(f)) of the Seller at the
Stores for whom compliance with the Immigration Act by the Seller as
Employer is required, the Seller has supplied to the Purchaser an accurate
and complete copy of (i) each Store Employee's Form I-9 (Employment
Eligibility Verification Form) and (ii) all other records, documents or
other papers prepared, procured and/or retained by the Seller pursuant to
the Immigration Act. The Seller has not been cited, fined, served with a
Notice of Intent to Fine or with a Cease and Desist Order, nor has any
action or administrative proceeding been initiated or, to the best of the
Seller's or the Parent's knowledge, threatened against the Seller by reason
of any actual or alleged failure to comply with the Immigration Act with
respect to the Store Employees.
4.18 Environmental Matters.
4.18.1 The Seller has not transported, stored, handled, treated or
disposed, nor has it allowed or arranged for any third parties to
transport, store, handle, treat or dispose of Hazardous
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Substances or other waste to or at any location other than a site lawfully
permitted to receive such Hazardous Substances or other waste for such
purposes, nor has it performed, arranged for or allowed by any method or
procedure such transportation, storage, treatment or disposal in
contravention of any laws or regulations. The Seller has not stored,
handled, treated or disposed of, or allowed or arranged for any third
parties to store, handle, treat or dispose of, Hazardous Substances or
other waste upon property owned or leased by it, except as permitted by
law. For purposes of this Section 4.18, the term "Hazardous Substances"
shall mean and include: (i) any "Hazardous Substance," "Pollutant" or
"Contaminant" as defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. Section 9601, et
seq., or the regulations promulgated thereunder ("CERCLA"); (ii) any "Solid
Waste" or "Hazardous Waste" as those terms are defined in the Solid Waste
Disposal Act, as amended, 42 U.S.C. Section 6901 et seq., or in applicable
state or local law; (iii) any substance containing petroleum, as that term
is defined in Section 9001(8) of the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Section 6991(8) or in 40 C.F.R. Section 280.1;
or (iv) any other substance, material or waste for which any governmental
authority with any jurisdiction over the Purchased Assets requires special
handling in its generation, handling, use, collection, storage, treatment
or disposal.
4.18.2 To the Seller's or the Parent's knowledge, there has not
occurred, nor is there presently occurring, a Release, threatened Release,
or migration of any Hazardous Substance to, from, on, into or beneath any
parcel of the Purchased Leasehold Premises. For purposes of this Section
4.19, the term "Release" shall have the meaning given it in CERCLA.
4.18.3 The Seller has not shipped, transported or disposed of, nor has
it allowed or arranged, by contract, agreement or otherwise, for any third
parties to ship, transport or dispose of, any Hazardous Substance from the
Stores to a site which, pursuant to CERCLA or any similar state law, (i)
has been placed on the National Priorities List or its state equivalent;
(ii) the Environmental Protection Agency or the relevant state agency has
proposed or is proposing to place on the National Priorities List or its
state equivalent or (iii) the Environmental Protection Agency or the
relevant state or local agency has or is investigating. The Seller has not
received notice, and neither the Seller nor the Parent has any knowledge of
any facts which could give rise to any notice, that the Seller is a
potentially responsible party for a federal or state environmental cleanup
site or for corrective action under CERCLA or any other applicable law or
regulation. The Seller has not submitted nor was required to submit any
notice pursuant to Section 103(c) of CERCLA with respect to the Purchased
Leasehold Premises. The Seller has not received any written or oral request
for information in connection with any federal or state environmental
cleanup site. The Seller has not been required to or has not undertaken any
response or remedial actions or clean-up actions of any kind relating to
the Stores at the request of any federal state or local governmental
entity, or at the request of any other person or entity.
4.18.4 The Seller does not use, and has not used, any Underground
Storage Tanks and, to the Seller's or the Parent's knowledge, there are not
now nor, have there ever been any Underground Storage Tanks on the
Purchased Leasehold Premises. For purposes of this Section 4.18, the term
"Underground Storage Tanks" shall have the meaning given it in the Resource
Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.).
4.18.5 To the Seller's or the Parent's knowledge, there is no physical
condition existing on the Purchased Leasehold Premises nor are there any
physical conditions existing on any other property that may have been
impacted by the use of the Purchased Leasehold Premises which could give
rise to any remedial obligation or liability under any Environmental Laws
or which could
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result in any liability to any third party claiming damage to person or
property as a result or consequence of said physical condition. For
purposes of this Section 4.18, the term "Environmental Laws" shall mean any
and all laws, statutes, ordinances, rules, regulations, orders, or
determinations relating to the prevention of pollution or the protection of
the environment or human health and safety.
4.18.6 The Seller is not responsible under any of the Leases for
asbestos abatement or removal and, to the Seller's or the Parent's
knowledge, except as listed on Schedule 4.18.6, there is not installed,
---------------
placed, deposited, stored, disposed of or located on the Purchased
Leasehold Premises any asbestos in any form.
4.18.7 To the Seller's or the Parent's knowledge, there is not
installed, placed, deposited, stored, disposed of nor located on the
Purchased Leasehold Premises any polychlorinated biphenyls ("PCBs") nor
turbines, compressors, transformers, capacitors, ballasts, or other
equipment which contain fluid containing PCBs.
4.18.8 There are no laws, regulations, ordinances, licenses, permits
or orders relating to any environmental or worker safety matters requiring
any work, repairs, construction or capital expenditures with respect to the
assets or properties of the Stores. There are no violations of any
Environmental Laws relating to (i) to the Seller's or the Parent's
knowledge, the Purchased Leasehold Premises or any property or parcel
adjacent thereto, or (ii) the Seller's use of the Purchased Leasehold
Premises.
4.18.9 Schedule 4.18.9 identifies (i) all environmental audits,
---------------
assessments or occupational health studies undertaken by the Seller, the
Parent or their respective agents or, to the best of the Seller's or the
Parent's knowledge, undertaken by governmental authorities relating to or
affecting the Stores or any of the Purchased Leasehold Premises; (ii) the
results of any ground, water, soil, air or asbestos monitoring undertaken
by the Seller, the Parent or their respective agents or, to the best of the
Seller's or the Parent's knowledge, undertaken by governmental authorities
relating to or affecting the Stores or any of the Purchased Leasehold
Premises; (iii) all written communications between the Seller or the Parent
and environmental agencies relating to the Stores; and (iv) all citations
issued under the Occupational Safety and Health Act (29 U.S.C. Sections 651
et seq.) relating to or affecting the Stores or any of the Purchased
Leasehold Premises.
4.19 Labor and Employee Relations. The Seller is not a party to or
bound by any collective bargaining agreement or any other agreement with a labor
union or other collective bargaining representative, and there has been no
effort by any labor union or other collective bargaining representative during
the 24 months prior to the date hereof to organize any Store Employees into one
or more collective bargaining units. There is not pending or, to the best of the
Seller's or the Parent's knowledge, threatened any labor dispute, strike or work
stoppage which affects or which may affect the business or operations of the
Stores or which may interfere with its continued operation. The Seller (A) is
not engaged, nor has it since January 1, 1995, engaged, in any unfair labor
practices, and has no, and has not had since January 1, 1995, any unfair labor
practice charges or complaints before the National Labor Relations Board pending
or, to the best of the Seller's or the Parent's knowledge, threatened against
it, and (B) has no, and has not had since January 1, 1995, any grievances,
arbitrations, or other proceedings arising or asserted to arise under any
collective bargaining agreement, pending or, to the best of the Seller's or the
Parent's knowledge threatened, against it. There has been no strike, walkout or
work stoppage involving any of the Store Employees during the 24 months prior to
the date hereof. Neither the Seller nor the Parent is aware that any executive
or key employee or group of employees relating to the Stores has any plans to
terminate his, her or their employment with the Seller. The Seller (i) is, and
has always been since January 1, 1995, in
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substantial compliance with all applicable laws and regulations regarding labor
and employment practices which relate to the Stores, including, without
limitation, terms and conditions of employment, equal employment opportunity,
employee compensation, employee benefits, affirmative action, wages and hours,
plant closing and mass layoff, occupational safety and health, immigration,
workers' compensation, disability, unemployment compensation, child labor,
whistleblower laws or other employment or labor relations laws, and (ii) has no,
and has not had since January 1, 1995, any charges, complaints, or proceedings
before the Equal Employment Opportunity Commission, Department of Labor or any
other governmental authority responsible for regulating labor or employment
practices which relate to the Stores, pending, or, to the best of the Seller's
or the Parent's knowledge, threatened against it other than as set forth in
Schedule 4.19.
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4.20 Employee Benefits.
4.20.1 Schedule 4.20.1 contains a list of the following, which list
---------------
shall be updated by the Seller as of Closing:
(a) separately by location, of the names, job titles and current
salary or wage rates of all of Seller's employees at the Stores ("Store
Employees") and their hourly rate or yearly salary, together with a summary
of all bonus, incentive compensation or other additional compensation or
similar benefits paid to each Store Employee for the 1998 calendar year and
estimated for the 1999 calendar year.
(b) separately by location, the names, job titles and current
salary or wage rates of all independent contractors, consultants, employees
of third party employment agencies, and leased employees who perform
services for the Stores.
4.20.2 Schedule 4.20.2 sets forth a true and complete list of all (i)
---------------
employee benefit plans, arrangements or policies (whether or not subject to
ERISA), including without limitation any stock option, stock purchase,
pension, deferred compensation, bonus, incentive, health, cafeteria,
flexible spending, vacation pay, severance pay plan, policy or arrangement
for the Store Employees and (ii) any employment, severance or consulting
agreement maintained or contributed to by Seller for any current or former
Store Employee (collectively, the "Plans").
4.20.3 Except as set forth on Schedule 4.20.3:
---------------
(a) None of the Seller, the Parent or any Store has communicated
to present or former Store Employees, or formally adopted or authorized,
any additional Plan, or any change in or termination of any existing Plan.
(b) Each Plan has been operated and administered, in all material
respects, in accordance with its terms, the terms of any applicable
collective bargaining agreement, and all applicable laws.
(c) Each Plan that is a "group health plan" subject to the
continuation coverage requirements of Section 4980B of the Code and Part 6
of Title I of ERISA ("COBRA") has been operated and administered, in all
material respects, in accordance with such requirements.
4.20.4 None of the Purchased Assets are subject to a Lien under ERISA
or the Code.
4.20.5 No Plan is a "multiemployer plan" within the meaning of
Section 3(37)(a) of
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ERISA and Seller does not have any outstanding liability, contingent or
otherwise, with respect to such Plan.
4.20.6 No event has occurred and no condition exists that could be
reasonably expected to subject Purchaser to any fine, tax, penalty or other
liability, arising under, or with respect to any Plan, or any other
employee benefit plan maintained by Seller for employees other than Store
Employees.
4.21 Affiliate Relationships. There are no contracts or other
arrangements involving the Stores in which any shareholder, officer, director or
Affiliate of the Seller or the Parent has a financial interest, including
indebtedness to the Seller relating to the Stores which will continue following
the Closing.
4.22 No Brokers. Neither the Seller nor the Parent has employed any
broker, agent or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the transactions contemplated by
this Agreement.
4.23 Solvency. The Seller is not now insolvent, nor will the Seller
be rendered insolvent by the consummation of the transactions contemplated by
this Agreement. In addition, immediately after giving effect to the transactions
contemplated by this Agreement (a) the Seller will be able to pay its debts as
they become due, (b) the Seller will not have unreasonably small capital and
will not have insufficient capital with which to conduct its present or proposed
business and (c) taking into account pending and threatened litigation, final
judgments against the Seller in actions for money damages are not reasonably
anticipated to be rendered at a time when, or in amounts such that, the Seller
will be unable to satisfy any such judgments promptly in accordance with their
terms (taking into account the maximum probable amount of such judgments in any
such actions and the earliest reasonable time at which such judgments might be
rendered). The cash available to the Seller, after taking into account all other
anticipated uses of the cash of the Seller, will be sufficient to pay all
judgments promptly in accordance with their terms. The Seller is receiving
reasonably equivalent value in exchange for the Purchased Assets and Assumed
Liabilities being conveyed and transferred to Purchaser, and the transactions
contemplated by this Agreement are not being undertaken with any intent to
hinder, delay or defraud any creditor of the Seller. As used in this Section
4.23, (x) the term "insolvent" means that the sum of the present fair saleable
value of the Seller's assets does not and/or will not exceed its debts and other
probable liabilities, and (y) the term "debts" includes any legal liability,
whether matured or unmatured, liquidated or unliquidated, absolute, fixed or
contingent, disputed or undisputed or secured or unsecured.
4.24 Accuracy of Information Furnished by the Seller and the
Parent. No representation, statement or information made or furnished by the
Seller or the Parent to the Purchaser, in or pursuant to this Agreement and the
other information and statements referred to herein and previously furnished by
the Seller or the Parent to the Purchaser pursuant hereto, contains or shall
contain any untrue statement of a material fact or omits or shall omit any
material fact necessary to make the information contained therein not
misleading.
ARTICLE 5
Representations and Warranties of the Purchaser
To induce the Seller and the Parent to enter into this Agreement and to
consummate the transactions contemplated hereunder, the Purchaser represents and
warrants to Seller and the Parent, which representations and warranties shall
survive the Closing for a period of three years, the following:
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5.1 Organization, Power and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
enter into this Agreement and all other agreements contemplated hereby and to
perform its obligations hereunder and thereunder.
5.2 Due Authorization; Binding Obligation; No Conflicts. The
execution, delivery and performance of this Agreement and all other agreements
contemplated hereby and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action of the Purchaser.
This Agreement has been duly executed and delivered by the Purchaser and is a
valid and binding obligation of the Purchaser, enforceable in accordance with
its terms, subject as to enforceability to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium, and similar laws affecting
creditors' rights and remedies generally and to general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity). Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will: (i) contravene any
provision of the certificate of incorporation or bylaws of the Purchaser; (ii)
violate or conflict with any federal, state or local law, statute, ordinance,
rule, regulation or any decree, writ, injunction, judgment or order of any court
or administrative or other governmental body or of any arbitration award which
is either applicable to, binding upon or enforceable against the Purchaser;
(iii) conflict with, result in any breach of or default (or an event which
would, with the passage of time or the giving of notice or both, constitute a
default) under any material mortgage, contract, agreement, lease, license,
indenture, trust or other instrument which is either binding upon or enforceable
against the Purchaser; or (iv) require the consent, approval or authorization of
any governmental authority or any other Person (other than under the HSR Act).
ARTICLE 6
Covenants of the Seller
6.1 Reasonable Efforts. The Seller will use reasonable efforts to
cause to be satisfied as soon as practicable and prior to the Closing Date all
of the conditions set forth in Article 8 to the obligation of the Purchaser to
purchase the Purchased Assets hereunder.
6.2 Conduct of Business Pending the Closing. From and after the
execution and delivery of this Agreement and until the Closing Date, except as
otherwise provided by the prior written consent of the Purchaser:
6.2.1 The Seller will conduct its business and operations of the
Stores in the manner in which the same have heretofore been conducted, and
will use its best efforts in each case with respect to the Purchased Assets
and the ownership, business or operation of the Stores, to (i) preserve its
business organization intact; (ii) keep available to the Purchaser the
services of its officers, employees, agents and distributors; (iii)
preserve its relationships with customers, suppliers and others having
dealings with the Seller; (iv) ensure that there is no material diminution
in the quality, quantity and condition of the Seller's basic stock
inventory (including, without limitation, the Seller's videocassette and
video game inventory); and (v) refrain from selling the Purchased Assets,
except in the ordinary course of business.
6.2.2 The Seller will maintain all of the Purchased Assets in
customary repair, order and condition, reasonable wear and use and damage
by unavoidable casualty excepted, and will maintain insurance of the types
and in such amounts upon all of the Purchased Assets and with respect to
the conduct of its business at the Stores as are in effect on the date of
this Agreement;
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6.2.3 The Seller will not, in each case with respect to the Purchased
Assets and the ownership, business and operation of the Stores, (i) pay any
bonus or increase the rate of compensation of any of its Store Employees,
except in the ordinary course of business, (ii) enter into any new
employment agreement or amend any existing employment agreement with any
salaried Store Employees with an annual salary of greater than $50,000,
(iii) establish any new employee benefit plan or amend any existing
employee benefit plan, or (iv) waive any right of material value;
6.2.4 The Seller will not enter, in each case with respect to the
Purchased Assets and the ownership, business and operation of the Stores,
into (i) any renewals or extensions of any Purchased Leasehold Premises, or
any agreement for any new lease; (ii) any new contract or other commitment,
except in the ordinary course of business; or (iii) any agreements for the
purchase or sale of real property;
6.2.5 The Seller will not commence or agree to the commencement of
any new construction or improvements to any Purchased Leasehold Premises
other than in the ordinary course of business, in any event not to exceed
$5,000;
6.2.6 The Seller will not make or pay any non-cash distributions or
dividends; and
6.2.7 The Seller will not fail to remit to the Purchaser any amounts
relating to tenant improvements with respect to the Purchased Leasehold
Premises immediately upon receipt by the Seller unless the Seller is using
those funds to complete the improvements for which the funds relate and
completion of those improvements actually occurs prior to the Closing Date.
6.3 Access to the Seller's Properties and Records. From and after
the execution and delivery of this Agreement, the Seller will afford to
representatives of the Purchaser access, during normal business hours and upon
reasonable notice, to the Seller's premises and personnel sufficient to enable
the Purchaser to inspect the Purchased Assets and review the business affairs of
the Stores, and the Seller will furnish to such representatives during such
period all such information relating to the foregoing investigation as the
Purchaser may reasonably request; provided, however, that any furnishing of such
--------- -------
information to the Purchaser and any investigation by the Purchaser shall not
affect the right of the Purchaser to rely on the representations and warranties
made by the Seller in or pursuant to this Agreement.
6.4 No Disclosure. Without the prior written consent of the
Purchaser, neither the Seller nor the Parent will, prior to the Closing Date,
disclose the existence, or any term or condition, of this Agreement to any
Person, except as may be required under the federal securities laws or other
applicable law, and further, such disclosure may be made to any lender or other
Person in a business relationship with the Seller to whom such disclosure is
necessary in order to satisfy any of the conditions to the consummation of the
purchase of the Purchased Assets which are set forth in this Agreement.
6.5 No Other Discussions. The Seller and the Parent agree that from
and after the date of this Agreement until the Closing Date or earlier
termination of this Agreement, the Seller, the Parent and their respective
Affiliates, officers, directors, employees, shareholders, partners, members,
agents and representatives, either alone or together, (i) will not initiate or
encourage the initiation by others of discussions or negotiations with third
parties or respond to solicitations by third parties relating to any merger,
sale or other disposition of any substantial part of the shares of capital stock
of the Seller or the Purchased Assets (except in the ordinary course of business
with respect to sales of inventory), (ii) will immediately notify the Purchaser
if any third party attempts to initiate any such solicitation,
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discussion or negotiation with the Seller, the Parent or any of their respective
Affiliates, officers, directors, managers, employees, shareholders, partners,
members, agents or representatives and (iii) will not enter into any agreement
with respect thereto with any third party.
ARTICLE 7
Covenants of the Purchaser
7.1 Reasonable Efforts. The Purchaser will use reasonable efforts
to cause to be satisfied as soon as practicable and prior to the Closing Date
all of the conditions set forth in Article 9 to the obligation of the Seller to
sell the Purchased Assets hereunder.
7.2 No Disclosure. Without the prior written consent of the Seller,
the Purchaser will not, except as required by applicable law, prior to the
Closing Date, disclose the existence of any term or condition of this Agreement
to any Person, other than Purchaser's Affiliates (including Viacom Inc.) and any
other Person in a business relationship with the Purchaser to whom such
disclosure is necessary in order to satisfy any of the conditions to the
consummation of the purchase of the Purchased Assets which are set forth in this
Agreement.
7.3 Confidentiality. Purchaser shall hold in confidence, and shall
ensure that its directors, officers, employees, subsidiaries and representatives
(including, without limitation, auditors, legal advisors and financial advisors)
(collectively, the "Purchaser Representatives") hold in confidence, all
information relating to the Stores provided to Purchaser or the Purchaser
Representatives (collectively, the "Confidential Information"), and shall not
disclose the Confidential Information to any third party, except as may be
required by applicable law and except for information that (i) is or becomes
generally available to the public or the video rental and retail industry, (ii)
becomes available to the Purchaser or any Purchaser Representative on a non-
confidential basis from a source which to Purchaser's knowledge is entitled to
disclose the information to Purchaser or the Purchaser Representative, (iii) was
known to Purchaser or any Purchaser Representative prior to its disclosure by
the Seller or (iv) is developed by Purchaser or any Purchaser Representative
without the benefit of the Confidential Information.
ARTICLE 8
Conditions to Obligations of the Purchaser
The obligation of the Purchaser to purchase the Purchased Assets and
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions, any or all of which the Purchaser shall have the right to waive at
its sole option:
8.1 Accuracy of Representations and Warranties and Compliance with
Obligations. The representations and warranties of the Seller contained in this
Agreement shall be true and correct in all respects, at and as of the date of
this Agreement and shall be repeated as of the Closing Date with the same force
and effect as though made at and as of that time. The Seller shall have
performed and complied with all of its obligations and agreements required by
this Agreement to be performed or complied with by it at or prior to the Closing
Date.
8.2 Receipt of Consents Required Under Real Property Leaseholds.
All consents, authorizations, licenses, amendments or approvals of, or notices
to, the parties to any of the Purchased Leasehold Premises in which such
consent, amendment, approval or notice is required for the
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consummation of the transactions contemplated by this Agreement shall (a) have
been obtained, (b) not have been rescinded, revoked, withdrawn or otherwise
invalidated, and (c) have been shown by written evidence satisfactory to the
Purchaser. The form and substance of such consents, amendments, approvals or
notices shall be reasonably satisfactory to the Purchaser.
8.3 Governmental Consents. All Governmental Consents required for
the consummation of the transactions contemplated by this Agreement (including
expiration or early termination of the waiting period under the HSR Act) shall
(a) have been obtained, (b) not have been rescinded, revoked, withdrawn or
otherwise invalidated, and (c) have been shown by written evidence satisfactory
to the Purchaser.
8.4 Actions or Proceedings. No action, suit, proceeding or
investigation by or before any court, administrative agency or other
governmental authority shall have been instituted or threatened by any Person
other than the Purchaser or any of its Affiliates to restrain, prohibit or
invalidate the transactions contemplated by this Agreement.
8.5 Closing Deliveries. All of the deliveries required to be made
by Seller under Section 3.2.1 shall have been made.
8.6 Excluded Inventory. All leased inventory or inventory subject
to any buy-back or contingency programs located at the Stores shall be removed
from the Stores by the Seller.
8.7 Purchaser's Investigation. The investigation ("Purchaser's
Investigation") by the Purchaser and its representatives in connection with the
proposed transactions shall not have caused the Purchaser or its representatives
during the 30-day period commencing on the date of this Agreement, to become
aware of any facts or circumstances relating to the business, operations,
assets, properties, liabilities, employees, financial condition or results of
operations of the Stores, or any of the Purchased Assets, that, in the sole and
absolute discretion of the Purchaser, make it inadvisable for the Purchaser to
proceed with the transactions contemplated by this Agreement.
ARTICLE 9
Conditions to Obligations of the Seller
The obligations of the Seller and the Parent to sell the Purchased Assets
and to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, any or all of which the Seller and the Parent shall have
the right to waive at their sole option:
9.1 Accuracy of Representations and Warranties and Compliance with
Obligations. The representations and warranties of the Purchaser contained in
this Agreement shall be true and correct in all respects at and as of the date
of this Agreement and be repeated on and as of the Closing Date with the same
force and effect as though made at and as of that time. The Purchaser shall have
performed and complied in all material respects with all of its obligations and
agreements required by this Agreement to be performed or complied with by it at
or prior to the Closing Date.
9.2 Governmental Consents. All Governmental Consents required for
the consummation of the transactions contemplated by this Agreement (including
expiration or early termination of the waiting period under the HSR Act) shall
(a) have been obtained, (b) not have been rescinded, revoked, withdrawn or
otherwise invalidated, and (c) have been shown by written evidence
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satisfactory to the Purchaser.
9.3 Actions or Proceedings. No action, suit, proceeding or
investigation by or before any court, administrative agency or other
governmental authority shall have been instituted or threatened by any Person
other than the Seller or any of its Affiliates to restrain, prohibit or
invalidate the transactions contemplated by this Agreement.
9.4 Closing Deliveries. All of the deliveries required to be made
by Purchaser under Section 3.2.2 shall have been made.
ARTICLE 10
Certain Actions After the Closing
10.1 Delivery of Property Received by the Seller After Closing. From
and after the Closing, the Purchaser shall have the right and authority to
collect, for the account of the Purchaser, all receivables and other items which
shall be transferred or are intended to be transferred to the Purchaser as part
of the Purchased Assets as provided in this Agreement, and to endorse with the
name of the Seller any checks or drafts received on account of any receivables
or other items of the Purchased Assets. The Seller agrees that it will transfer
or deliver to the Purchaser, promptly after the receipt thereof, any cash or
other property which the Seller receives after the Closing Date in respect of
any claims, contracts, licenses, leases, commitments, sales orders, purchase
orders, receivables of any character or any other items transferred or intended
to be transferred to the Purchaser as part of the Purchased Assets under this
Agreement.
10.2 The Purchaser Appointed Attorney for the Seller. Effective at
the Closing Date, the Seller hereby constitutes and appoints the Purchaser, its
successors and assigns, the true and lawful attorney of the Seller, in the name
of either the Purchaser or the Seller (as the Purchaser shall determine in its
sole discretion) but for the benefit of the Purchaser, (i) to institute and
prosecute all proceedings which the Purchaser may deem proper in order to
collect, assert or enforce any claim, right or title of any kind in or to the
Purchased Assets as provided for in this Agreement; (ii) to defend or compromise
any and all actions, suits or proceedings in respect of any of the Purchased
Assets, and to do all such acts and things in relation thereto as the Purchaser
shall deem advisable; and (iii) to take all action which the Purchaser may
reasonably deem proper in order to provide for the Purchaser the benefits under
any of the Purchased Assets where any required consent of another party to the
sale or assignment thereof to the Purchaser pursuant to this Agreement shall not
have been obtained. The Seller acknowledges that the foregoing powers are
coupled with an interest and shall be irrevocable. The Purchaser shall be
entitled to retain for its own account any amounts collected pursuant to the
foregoing powers, including any amounts payable as interest in respect thereof.
10.3 Execution of Further Documents. From and after the Closing,
upon the reasonable request of the Purchaser, the Seller shall execute,
acknowledge and deliver all such further acts, deeds, bills of sale,
assignments, transfers, conveyances, powers of attorney and assurances as may be
required to convey and transfer to and vest in the Purchaser and protect its
right, title and interest in all of the Purchased Assets, and as may be required
or otherwise appropriate to carry out the transactions contemplated by this
Agreement.
10.4 Employment by the Purchaser of the Seller's Employees.
10.4.1 The Purchaser shall have no obligation to employ any of the
Persons currently employed by the Seller. On or prior to the Closing Date,
the Purchaser may offer employment to
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the Store Employees best qualified for employment with the Purchaser, at
the sole discretion of the Purchaser. Any offers of employment extended by
the Purchaser to any of the Store Employees shall be on terms and
conditions that the Purchaser shall determine in its sole discretion, and
the Purchaser shall have absolutely no obligation to continue, or institute
any replacement or substitution for, any vacation, severance, incentive,
bonus, profit sharing, pension or other employee benefit plan or program of
the Seller, nor assume any liability for entitlements under the Family and
Medical Leave Act of 1993. 29 U.S.C. (S)(S) 2601 et seq. or analogous state
statutes. Any of the Store Employees not hired by the Purchaser prior to or
on the Closing Date shall be terminated by the Seller as of the Closing
Date. The Seller shall compensate the Store Employees for all amounts due
to them for compensated absences accrued as of the Closing Date including,
but not limited to, vacation, holiday and sick pay benefits.
10.4.2 Except with the written consent of the Purchaser, neither the
Seller, nor any of its Affiliates shall solicit or cause, directly or
indirectly, to be solicited, nor attempt to induce, for a period of three
years following the Closing Date, any Store Employee employed by the Seller
at or at any time within 180 days prior to the Closing Date, unless that
Person was not offered employment by the Purchaser, (i) to refuse an offer
of employment from the Purchaser, (ii) if an offer of employment with the
Purchaser is accepted, to terminate his or her employment with the
Purchaser, or (iii) to work, directly or indirectly, with or for the Seller
or any of its Affiliates. As used in this Agreement, the term "Affiliate"
means, with respect to a specified Person, any other Person which directly
or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, the Person specified and,
with respect to any natural Person, shall include all Persons related to
that Person by blood or marriage.
10.4.3 Seller shall be responsible for any continuation of group
health coverage required under COBRA with respect to any Store Employee or
former Store Employee, or any "qualified beneficiary" of any Store
Employee, who incurs a "qualifying event" prior to that Store Employee's
date of hire by the Purchaser, including any such qualifying event incurred
by reason of the Store Employee's termination of employment with the
Seller.
10.4.4 The Seller agrees to pay and be responsible for all liability,
cost or expense for severance, termination indemnity payments, salary
continuation, special bonuses and like costs arising under the Seller's
severance plans, policies or arrangements, with respect to any Store
Employee or former Store Employee, including but not limited to any such
liability, cost or expense that arises out of or relating to the
transactions described in or contemplated by this Agreement. The Seller
agrees to pay and be responsible for all liability, cost, expense and
sanctions resulting from any failure to comply with the WARN Act, or any
similar state or local law, in connection with the consummation of the
transactions described in or contemplated by this Agreement.
10.5 Restrictive Covenants.
10.5.1 To assure that the Purchaser will realize the value and
goodwill inherent in the Purchased Assets, the Seller agrees with the
Purchaser that neither the Seller nor any of its Affiliates shall:
(a) directly or indirectly, for a period of three years following
the Closing Date, (i) engage in (as an owner, partner, employee, agent,
consultant or otherwise) any business which owns and/or operates any retail
store that is engaged in the rental, sale and/or distribution of movies
and/or video games (the "Excluded Business") in the States of Washington
and Oregon (but
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excluding (x) the Excluded Stores, provided, however, that neither the
Seller nor the Parent may expand or relocate the Excluded Stores beyond the
size and location existing as of the Closing Date, and (y) the existing or
anticipated mail order and Internet business of the Seller or the Parent
relating to videocassette rental and sales, provided, however, that such
activities do not constitute "doing business" in the States of Washington
and Oregon under applicable state laws currently in effect on the date of
this Agreement), or (ii) acquire or retain any financial interest having a
fair value in excess of the lesser of $5,000,000 in, or 5% of the equity
of, any business which is engaged in the Excluded Business in the States of
Washington and Oregon;
(b) directly or indirectly, for a period of three years following
the Closing Date: (i) induce any customer of the Stores at the Closing Date
to patronize any business similar to the Excluded Business; (ii) canvass,
solicit or accept from any customer of the Stores at the Closing Date any
business similar to the Excluded Business; (iii) request or advise any
Person which is a customer of the Stores at the Closing Date to withdraw,
curtail or cancel that customer's business with the Purchaser; (iv) induce
or attempt to influence any employee of the Purchaser to terminate his or
her employment; or (v) disclose or communicate to any other Person the
names of past or present customers of the Stores or any names of past or
present employees of the Stores; or
(c) directly or indirectly, at any time following the Closing Date,
in any way utilize, disclose, copy, reproduce or retain in its possession
any of the Purchased Proprietary Rights or the Purchased Records.
10.5.2 The Seller agrees and acknowledges that the restrictions
contained in Section 10.5.1 are reasonable in scope and duration and are
necessary to protect the Purchaser after the Closing Date. If, however, any
provision of Section 10.5.1, as applied to any party or to any
circumstances, is adjudged by a court to be invalid or unenforceable, the
same will in no way affect any other provision of Section 10.5.1 or any
other part of this Agreement, the application of that provision in any
other circumstances or the validity or enforceability of this Agreement. If
any such provision, or any part thereof, is held to be unenforceable
because of the duration of such provision or the area covered thereby, the
parties agree that the court making such determination will have the power
to reduce the duration and/or area of such provision, and/or to delete
specific words or phrases, and in its reduced form that provision will then
be enforceable and will be enforced. Upon breach of any provision of
Section 10.5.1, the Purchaser will be entitled to injunctive relief, since
the remedy at law would be inadequate and insufficient. In addition, the
Purchaser will be entitled to such damages as it can show it has sustained
by reason of such breach.
10.6 Right to Use Name. The Seller hereby grants to the Purchaser at
no cost the non-exclusive, non-transferable right to use the "Video City" and/or
"Videoland" names for a period not to exceed 90 days following the Closing Date
solely for the purpose of conducting the Transition Activities. For purposes of
this Section 10.6, the term "Transition Activities" shall include (i) the use of
the existing signage whether located inside or outside the Stores, (ii) the use
of any packaging currently used by the Seller in connection with the
videocassette rental and retail sales, (iii) the use of the Video City or
Videoland name in any correspondence to any customer, supplier or other third
party having a business relationship with the Seller relating to the ownership,
business or operation of the Stores prior to the Closing Date, and (iv) any
other activities that are reasonably necessary for the Purchaser to transition
the business and operation of the Stores from Seller to Purchaser. The Purchaser
agrees that its use of the Video City and/or Videoland name pursuant to this
right does not give the Purchaser any ownership interest or any other interest
in or to such names, other than the rights granted in this Section 10.6.
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ARTICLE 11
Termination
11.1 Termination. This Agreement may be terminated at any time prior
to the Closing Date:
(a) by written agreement of the parties hereto;
(b) by Purchaser if all Governmental Consents (including
expiration or early termination of the required waiting period under
the HSR Act) or all Third-Party Consents have not been received on or
prior to July 30, 1999;
(c) by Purchaser at any time prior to the 30th day following
the date of his Agreement for any reason or no reason as a result of
Purchaser's Investigation;
(d) by Purchaser if a default or breach shall be made by Seller
with respect to the due and timely performance of any of Seller's
covenants and agreements contained in this Agreement, or the accuracy
of any of the Seller's representations and warranties contained in
this Agreement, which cannot be cured or which has not been waived by
Purchaser prior to July 30, 1999; or
(e) by Purchaser or Seller if the transactions contemplated by
this Agreement have not been consummated by July 30, 1999, unless such
date shall be extended by the mutual written consent of the parties
hereto.
11.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to this Article 11, this Agreement shall become void and have
no effect, without any liability in respect of or in connection with the
transactions contemplated hereby on the part of any party to this Agreement or
any of their respective officers, directors, employees, agents, representatives
or Affiliates, except (a) as specified in Section 13.16 or (b) for any expenses,
losses, liabilities, penalties, charges and damages (including attorneys'
expenses and disbursements) suffered by Purchaser resulting from Seller's
default or breach of any of its covenants and agreements contained in this
Agreement.
ARTICLE 12
Indemnification
12.1 Agreement by the Seller and the Parent to Indemnify.
The Seller and the Parent, jointly and severally, agree that they will indemnify
and hold the Purchaser and each officer, director, employee, consultant,
stockholder and Affiliate of the Purchaser (the "Purchaser Indemnified Parties")
harmless in respect of the aggregate of all Indemnifiable Damages (as defined in
Section 12.1.1) of the Purchaser.
12.1.1 "Indemnifiable Damages" of the Purchaser Indemnified
Parties means, without duplication, the aggregate of all expenses, losses,
costs, deficiencies, liabilities, penalties, charges and damages (including
court costs and related counsel and paralegal fees and expenses) incurred
or suffered by the Purchaser Indemnified Parties, on a pre-tax basis, to
the extent (i) resulting from any breach of a representation or warranty of
the Seller or the Parent in or pursuant to Article 4 or elsewhere herein;
(ii) resulting from any breach of the covenants or agreements of the Seller
or the Parent in this Agreement; (iii) resulting from the Seller's
operation or control of the Stores prior to the Closing Date, including any
and all liabilities arising under the Assumed Liabilities which relate to
events occurring prior to the Closing Date; (iv) resulting from the failure
of the Seller to pay, discharge or perform any liability or obligation of
the Seller which is not expressly assumed by the
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Purchaser pursuant to this Agreement or resulting from any dispute
concerning any such liability or obligation; or (v) resulting from the
failure of the Seller to comply with applicable Bulk Transfer Provisions
(as defined in Section 13.12).
12.1.2 Without limiting the generality of the foregoing, with respect
to the measurement of Indemnifiable Damages, the Purchaser Indemnified
Parties shall have the right to be put in the same financial position as
each would have been in had each of the representations and warranties of
the Seller and the Parent been true and complete and had each of the
covenants and agreements of the Seller and the Parent been fully performed
in full.
12.1.3 Each of the representations and warranties made by the Seller
and the Parent in this Agreement or pursuant hereto, shall survive for a
period of three years following the Closing Date, notwithstanding any
investigation at any time made by or on behalf of the Purchaser Indemnified
Parties, and upon the expiration of the three-year period such
representations and warranties shall expire except as follows: (i) the
representations and warranties of the Seller and the Parent contained in
Sections 4.5 and 4.20 shall expire at the time the period of limitations
expires for the assessment by the applicable taxing authority of additional
taxes with respect to which the representations and warranties relate; (ii)
the representations and warranties of the Seller and the Parent contained
in Sections 4.17 and 4.18 shall expire at the time the latest period of
limitations expires for the enforcement by an applicable governmental
authority of any remedy with respect to which the particular representation
or warranty relates; and (iii) the representations and warranties of the
Seller and the Parent contained in Sections 4.1, 4.2 and 4.7.1 shall not
expire but shall continue indefinitely. No claim for the recovery of
Indemnifiable Damages with respect to representations and warranties may be
asserted by the Purchaser Indemnified Parties against the Seller or the
Parent or their successors in interest after such representations and
warranties shall thus expire; provided, however, that claims for
Indemnifiable Damages first asserted in writing within the applicable
period shall not thereafter be barred.
12.1.4 The Purchaser acknowledges and consents that its exclusive
remedy for breach of any representation, warranty, covenant or agreement
made by the Seller and the Parent in or pursuant to this Agreement, until
the same shall be exhausted or terminated in accordance with the terms of
this Agreement, shall be the recovery by setoff against the Held Back
Amount pursuant to Section 12.2 hereof. Notwithstanding the foregoing, upon
either the exhaustion or termination of the Held Back Amount in accordance
with the terms of this Agreement, the Purchaser Indemnified Parties may
thereupon seek to recover by any legal means Indemnifiable Damages directly
from the Seller, the Parent or any of their successors in interest.
12.2 Security for the Seller's Indemnification Obligation. As
security for the obligations of the Seller's and the Parent's indemnification
obligations under Section 12.1, at the Closing, the Purchaser shall set aside
and deposit in an interest-bearing account designated for the benefit of the
Seller, the Held Back Amount.
12.2.1 The Purchaser may set off against the Held Back Amount any
Indemnifiable Damages which any of the Purchaser Indemnified Parties is
entitled to recover under Section 12.1, subject, however, to the following
terms and conditions:
(a) A Purchaser Indemnified Party shall give written notice to the
Seller of the Purchaser Indemnified Party's claim for Indemnifiable
Damages, which notice shall set forth in reasonable detail (i) the amount
of Indemnifiable Damages which the Purchaser Indemnified Party claims to
have sustained by reason thereof and (ii) the basis of the claim therefor;
provided that the
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failure of the Purchaser Indemnified Party to exercise promptness in such
notification shall not amount to a waiver of that claim unless the
resulting delay materially prejudices the position of the Seller with
respect to the claim;
(b) The setoff shall be effected on the later to occur of the
expiration of 15 business days from the date of the Purchaser Indemnified
Party's notice (the "Notice of Contest Period") or, if the claim is
contested, the date the dispute is resolved;
(c) If, prior to the expiration of the Notice of Contest Period,
the Seller shall notify the Purchaser Indemnified Party in writing of its
intention to dispute the claim and if the dispute is not resolved within 30
days after expiration of that period (the "Resolution Period"), then the
dispute shall be resolved in accordance with Section 12.5;
12.2.2 The Purchaser agrees to deliver to the Seller no later than six
months from the Closing Date any Held Back Amount then held by the
Purchaser unless there remains any unresolved claim for Indemnifiable
Damages as to which notice has been given as provided in this Section 12.2,
in which event any Held Back Amount remaining on deposit after that claim
shall have been satisfied shall be returned to the Seller promptly after
the time of satisfaction.
12.2.3 The remedies provided for in this Section 12.2 shall be in
addition to and not in lieu of any other remedies available to the
Purchaser under this Agreement.
12.3 Agreement by the Purchaser to Indemnify. Purchaser agrees that
it will indemnify and hold the Seller, the Parent and each of their respective
officers, directors, employees, consultants, stockholders and Affiliates (the
"Seller Indemnified Parties") harmless in respect of the aggregate of all Seller
Indemnifiable Damages. For purposes of this Section 12.3, the term "Seller
Indemnifiable Damages" of the Seller Indemnified Parties means, without
duplication, the aggregate of all expenses, losses, costs, deficiencies,
liabilities, penalties, charges and damages (including court costs and related
counsel and paralegal fees and expenses) incurred or suffered by the Seller
Indemnified Parties, on a pre-tax basis to the extent (i) resulting from a
breach of a representation or warranty of the Purchaser in or pursuant to
Article 5 or elsewhere herein, (ii) resulting from any breach of the covenants
or agreements of Purchaser in this Agreement, or (iii) resulting from the
operation or control of the Stores by Purchaser following the Closing Date,
including any and all liabilities arising under the Assumed Liabilities which
relate to events occurring on or after the Closing Date.
12.4 Limitations. Notwithstanding any of the provisions contained in
this Article 12 or otherwise, neither the Seller and the Parent on the one hand,
nor the Purchaser on the other hand, shall have any liability to the other party
pursuant to this Article 12 unless and until the aggregate amount of the
Indemnifiable Damages or the Seller Indemnifiable Damages, as the case may be,
shall exceed $20,000 (the "Basket"), provided, however, that once the Basket
limitation has been exceeded by an indemnifying party, that indemnifying party
will be liable for the full amount of all claims for Indemnifiable Damages or
Seller Indemnifiable Damages, as the case may be, including the Basket and any
amount in excess thereof, and provided further that the Basket limitation shall
not apply to any offset made by the Purchaser against the Held Back Amount that
relates to any Purchase Price adjustments made in accordance with Section 2.1.2,
which offset rights may be exercised or realized upon with respect to all
Purchase Price Adjustments whether or not the Basket limitation has been
exceeded. Notwithstanding any of the provisions contained in this Article 12 or
otherwise, in no event shall the aggregate amount of either the Indemnifiable
Damages or the Seller Indemnifiable Damages exceed $16,200,000.
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12.4 Arbitration. Any controversy or claim arising pursuant to this
Article 12 shall be submitted to and resolved by a committee of three
arbitrators, one appointed by the Seller, one appointed by the Purchaser and one
appointed by the other two so appointed. The party instituting such arbitration
shall give notice to that effect to the other party, which notice shall specify
the arbitrator appointed by such party. Within 20 days after the giving of such
notice, the other party shall give notice specifying the arbitrator appointed by
that party and promptly thereafter, the two arbitrators so appointed shall meet
and designate the third arbitrator. The arbitration proceeding will commence
promptly thereafter, and the arbitrators shall abide by the then current
commercial rules of J*A*M*S/Endispute. The arbitration proceeding shall be held
in Dallas, Texas, unless the parties agree in writing to the contrary. The
determination of the arbitrators shall be conclusive upon the parties to the
arbitration. The parties agree to act in compliance therewith, and judgment upon
the same may be entered in any court having jurisdiction thereof. The
arbitrators shall give written notice to the parties to the arbitration stating
the determination of the arbitrators and shall furnish to each party to the
arbitration a signed copy of such determination. Each party shall bear its own
expenses of the arbitration proceeding, and the expenses of the third arbitrator
shall be borne equally by the Seller and the Purchaser.
12.5 Tax Related Adjustments. The Seller, the Parent and the
Purchaser agree that any payment of Indemnifiable Damages made hereunder will be
treated by the parties on their tax returns as an adjustment to the Purchase
Price. If, notwithstanding such treatment by the parties, any payment of
Indemnifiable Damages is determined to be taxable income rather than an
adjustment to the Purchase Price by any taxing authority, then the Seller and
the Parent shall indemnify the Purchaser for any taxes payable by the Purchaser
or any subsidiary by reason of the receipt of such payment (including any
payments under this Section 12.4), determined at an assumed marginal tax rate
equal to the highest marginal tax rate then in effect for corporate taxpayers in
the relevant jurisdiction.
ARTICLE 13
Miscellaneous
13.1 Transaction Expenses. The Purchaser will indemnify and hold
harmless the Seller from the commission, fee or claim of any Person employed or
retained or claiming to be employed or retained by the Purchaser to bring about,
or to represent it in, the transactions contemplated hereby. The Seller and the
Parent will indemnify and hold harmless the Purchaser from the commission, fee
or claim of any Person employed or retained or claiming to be employed or
retained by the Seller or the Parent to bring about, or to represent it in the
transactions contemplated hereby.
13.2 Amendment and Modification. The parties hereto may amend,
modify and supplement this Agreement in such manner as may be agreed upon by
them in writing.
13.3 Entire Agreement. This Agreement, including the exhibits and
schedules, contains the entire agreement of the parties hereto with respect to
the purchase of the Purchased Assets and the other transactions contemplated
herein, and supersedes all prior understandings and agreements (oral or written)
of the parties with respect to the subject matter hereof. The parties expressly
represent and warrant that in entering into this Agreement they are not relying
on any prior representations made by any other party concerning the terms,
conditions or effects of this Agreement which terms, conditions or effects are
not expressly set forth herein. Any reference herein to this Agreement shall be
deemed to include the schedules and exhibits.
13.4 Interpretation. When a reference is made in this Agreement to
an article, section, paragraph, clause,
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schedule or exhibit, such reference shall be to an article, section, paragraph,
clause, schedule or exhibit of this Agreement unless otherwise indicated. The
headings contained herein and on the schedules are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement
or the schedules. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Time shall be of the essence in this Agreement.
13.5 Execution in Counterpart. This Agreement may be executed by
facsimile signature and in any number of counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
13.6 Notices. Any notice, consent, approval, request,
acknowledgment, other communications or information to be given or made
hereunder to any of the parties by any other party shall be in writing and
delivered personally or sent by certified mail, postage prepaid, as follows:
If to the Seller, addressed to:
Video City, Inc.
370 Amopola Avenue, Suite 208
Torrance, California 90501
Facsimile: (310) 533-3901
Attention: General Counsel
With copies to:
Troy & Gould
1801 Century Park East, 16th Floor
Los Angeles, California 90067
Facsimile: (310) 201-4746
Attention: William J. Feis, Esq.
If to the Purchaser, addressed to:
Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Facsimile: (214) 854-3271
Attn: General Counsel
Any party may change the address to which notices hereunder are to be sent to it
by giving written notice of such change of address in the manner herein provided
for giving notice. Any notice delivered personally shall be deemed to have been
given on the date it is so delivered, and any notice delivered by registered or
certified mail shall be deemed to have been given on the date it is received.
13.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed therein.
13.8 Confidentiality; Publicity. Except as may be required by law or
as otherwise permitted or expressly contemplated herein, no party hereto or
their respective Affiliates, employees, agents and representatives shall
disclose to any third party the subject matter or terms of this Agreement
without the prior consent of the other parties hereto. No press release or other
public announcement related to this
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Agreement or the transactions contemplated hereby will be issued by any party
hereto without the prior approval of the other parties, except that any party
may make such public disclosure which it believes in good faith to be required
by law or by the terms of any listing agreement with a securities exchange (in
which case such party will consult with the other parties prior to making such
disclosure).
13.9 Severability. Subject to the provisions of Section 10.5.2, if
any term or other provision of this Agreement is invalid, illegal or incapable
of being enforced by any rule of law or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the greatest extent possible.
13.10 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior consent of the other parties; provided, however, that
upon notice to the Seller and without releasing the Purchaser from any of its
obligations or liabilities hereunder, the Purchaser may assign or delegate any
or all of its rights or obligations under this Agreement to any Affiliate of the
Purchaser.
13.11 Parties in Interest. This Agreement shall inure to the benefit
of, be binding upon and be enforceable by and against the Seller and the
Purchaser and their respective successors and permitted assigns, and nothing
herein expressed or implied shall be construed to give any other person any
legal or equitable rights hereunder, except as expressly set forth herein.
13.12 Bulk Transfer. Subject to the Purchaser Indemnified Parties'
right of indemnification pursuant to Article 12, the Purchaser and the Seller
hereby waive compliance with any state's Uniform Commercial Code - Bulk Transfer
provisions ("Bulk Transfer Provisions"), which may be applicable to the
transactions contemplated hereby.
13.13 Additional Representations. Each party hereto expressly
represents and warrants to all other parties hereto that (a) before executing
this Agreement, said party has fully informed itself or himself of the terms,
contents, conditions and effects of this Agreement; (b) said party has relied
solely and completely upon its own judgment in executing this Agreement; (c)
said party has had the opportunity to seek and has obtained the advice of
counsel before executing this Agreement; (d) said party has acted voluntarily
and of its own free will in executing this Agreement; (e) said party is not
acting under duress, whether economic or physical, in executing this Agreement;
and (f) this Agreement is the result of arm's-length negotiations conducted by
and among the parties and their counsel.
13.14 No Waiver Relating to Claims for Fraud. The liability of any
party under Article 12 shall be in addition to, and not exclusive of any other
liability that such party may have at law or equity based on such party's
fraudulent acts or omissions. None of the provisions set forth in this
Agreement, including but not limited to the provisions set forth in Section
12.1.3 (relating to limitations on the period of time during which a claim for
indemnification may be brought), or 12.1.4 (relating to recourse against the
Held Back Amount), shall be deemed a waiver by any party to this Agreement of
any right or remedy which such party may have at law or equity based on any
other party's fraudulent acts or omissions, nor shall any such provisions limit,
or be deemed to limit, (i) the amounts of recovery sought or awarded in any such
claim for fraud, (ii) the time period during which a claim for fraud may be
brought, or (iii) the recourse which any such party may seek against another
party with respect to a claim for fraud; provided, that with respect to such
rights and remedies at law or equity, the parties further acknowledge and agree
that
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none of the provisions of this Section 13.14 nor any reference to this Section
13.14 throughout this Agreement, shall be deemed a waiver of any defenses which
may be available in respect of actions or claims for fraud, including but not
limited to, defenses of statutes of limitations or limitations of damages.
13.15 Director and Officer Liability. The directors, officers and
stockholders of (i) the Purchaser and its Affiliates and (ii) the Parent and the
Seller (other than the Parent) shall not have any personal liability or
obligation arising under this Agreement (including any claims that any party to
this Agreement may assert) other than as an assignee of this Agreement.
13.16 Expenses and Obligations. Except as otherwise expressly
provided in this Agreement or as provided by law, all costs and expenses
incurred by the parties hereto in connection with the consummation of the
transactions contemplated hereby shall be borne solely and entirely by the party
which has incurred such expense. In the event of a dispute between the parties
in connection with this Agreement and the transactions contemplated hereby, each
of the parties hereto hereby agrees that the prevailing party shall be entitled
to reimbursement by the other party of reasonable legal fees and expenses
incurred in connection with any action or proceeding.
13.17 Waiver of Compliance. Any failure of the Purchaser on the one
hand, or the Seller, on the other hand, to comply with any obligation, covenant,
agreement or condition contained herein may be waived only if set forth in an
instrument in writing signed by the party or parties to be bound thereby, but
such waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any other failure.
[Signature Page Follows]
-34-
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed as of the day and year first above written.
BLOCKBUSTER INC.
By: /s/ Mark Gilman
________________________________
Name: Mark Gilman
________________________________
Title: Executive Vice President
________________________________
VIDEOLAND, INC.
By: /s/ Robert Y. Lee
________________________________
Name: Robert Y. Lee
________________________________
Title: President
________________________________
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
________________________________
Name: Robert Y. Lee
________________________________
Title: Chief Executive Officer
________________________________
-35-
<PAGE>
INDEX OF SCHEDULES
TO
ASSET PURCHASE AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule I - Store Locations
Schedule 1.1.4 - Lease or Rental Agreements for Personal Property
Schedule 1.2.5 - Excluded Personal Property, Equipment, Furniture, Etc.
Schedule 1.2.9 - Excluded Stores
Schedule 2.2 - Assumed Contracts
Schedule 2.5 - Purchase Price Allocation
Schedule 4.4 - Exceptions to Liabilities
Schedule 4.6.2 - Lease Agreements; Liens on Purchased Leasehold Premises
Schedule 4.6.3 - Parties in Possession of Purchased Leasehold Premises
Schedule 4.6.9 - Agreements Related to Construction in Progress
Schedule 4.7.1 - Liens on Purchased Assets
Schedule 4.8 - Receivables
Schedule 4.9 - Licenses and Permits
Schedule 4.10.1 - Purchased Proprietary Rights
Schedule 4.10.2 - Exceptions to Purchased Proprietary Rights
Schedule 4.12 - Documents and Information
Schedule 4.13 - Litigation
Schedule 4.16 - Acts or Events Since Last Balance Sheet
Schedule 4.18.6 - Asbestos Located on Purchased Leasehold Premises
Schedule 4.18.9 - Environmental Audits
Schedule 4.19 - Labor and Employee Relations
Schedule 4.20.1 - Store Employees
Schedule 4.20.2 - Employee Benefit Plans
Schedule 4.20.3 - Exceptions to Employee Benefit Plans
</TABLE>
Exhibit A - Form of Legal Opinion of Seller's and the Parent's Counsel
Exhibit B - Form of Bill of Sale, Assignment and Assumption Agreement
-36-
<PAGE>
EXHIBIT 10.3
DEBT CONVERSION AGREEMENT
This Debt Conversion Agreement (this "Agreement") is made and entered into
as of this 30th day of March, 1999, by and between RENTRAK CORPORATION, an
Oregon corporation ("Rentrak"), MORTCO, INC., an Oregon corporation and a
wholly-owned subsidiary of Rentrak ("Mortco"), VIDEO CITY, INC., a Delaware
corporation ("VCI"), and VIDEO GALAXY, INC., a Delaware corporation ("Galaxy").
RECITALS
A. Rentrak distributes pre-recorded video programming on videocassettes
and other media through its proprietary Pay-Per-Transaction/SM/ ("PPT/(R)/")
system (the "PPT/(R)/ System"). VCI and Galaxy are engaged in the business of
renting and selling to the public pre-recorded video programming on
videocassettes and other media;
B. VCI and each of its wholly-owned subsidiaries (Sulpizio One, Inc., Old
Republic Entertainment, Inc., Video Tyme, Inc. and Videoland, Inc.) currently
participate in the PPT(R) System pursuant to, and are jointly and severally
legally bound by, all terms and conditions contained in that certain Rentrak
Chain or Multiple Store Account Agreement, dated as of March 25, 1998, as
amended and supplemented by a First Addendum to Rentrak Chain or Multiple Store
Account Agreement, dated as of even date therewith, an Addendum, dated as of
June 8, 1998, a Third Addendum to Rentrak Chain or Multiple Store Account
Agreement, dated as of July 28, 1998, and a Fourth Addendum to Rentrak Chain or
Multiple Store Account Agreement, dated as of September 30, 1998 (collectively,
the "VCI/Subsidiaries PPT/(R)/ Agreement"), which VCI/Subsidiaries PPT/(R)/
Agreement is hereby ratified and confirmed in all respects;
C. Galaxy currently participates in the PPT/(R)/ System pursuant to, and
is legally bound by, all terms and conditions contained in that certain Rentrak
National Account Agreement, dated as of February 11, 1997, as amended and
supplemented by a First Addendum to Rentrak National Account Agreement, dated as
of even date therewith, an Addendum, dated as of June 8, 1998, and a Third
Addendum to Rentrak National Account, dated as of August 6, 1998 (collectively,
the "Galaxy PPT/(R)/ Agreement"), which Galaxy PPT/(R)/ Agreement is hereby
ratified and confirmed in all respects;
D. As of March 31, 1999, VCI and Galaxy acknowledge and agree that Galaxy
owes to Rentrak and Mortco an aggregate of at least $3,257,391.79, which sum is
comprised of: (i) $3,117,001.49 (the "Galaxy Loan Balance") under that certain
Loan Agreement, dated as of February 11, 1997 (the "Galaxy Loan Agreement"), and
Promissory Note, dated as of even date therewith (the "Galaxy Note"), consisting
of $2,600,000 in principal and $517,001.49 in interest as of March 31, 1999;
(ii) $56,774.70 in past due accounts receivable owing under the Galaxy PPT(R)
Agreement (the "Galaxy Past Due Accounts Receivable"), based on accounts
receivable invoiced and interest calculated through March 31, 1999; and (iii)
$83,615.60 in current accounts receivable owing under the Galaxy PPT(R)
Agreement (the "Galaxy Current Accounts Receivable"), based on accounts
receivable invoiced through March 31, 1999;
Page 1 - DEBT CONVERSION AGREEMENT
<PAGE>
E. VCI desires to acquire Galaxy pursuant to the terms and conditions of
that certain Agreement of Merger and Plan of Reorganization, attached hereto as
Exhibit A (the "Merger Agreement"), between VCI, Galaxy and James G. Howard,
George M. Peloso and Kurt Peterson, whereby Galaxy will become a wholly-owned
subsidiary of VCI;
F. Under their respective agreements with Rentrak and Mortco, VCI and
Galaxy are both required to obtain Rentrak's and Mortco's written consent to the
proposed a cquisition; and
G. In connection with the proposed acquisition, VCI and Galaxy desire to
satisfy a portion of Galaxy's obligations to Rentrak and Mortco by (a)
converting a portion of the Galaxy Loan Balance into VCI Series D Convertible
Redeemable Preferred Stock, (b) paying to Rentrak the remainder of the Galaxy
Loan Balance in cash at the Closing (as defined herein), and (c) paying to
Rentrak all accounts receivable owing from Galaxy to Rentrak that become due and
payable after the date hereof and before the Closing Date (as defined herein),
all in accordance with the terms and conditions of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
in reliance on and subject to the terms, conditions, representations,
warranties, covenants and agreements contained herein, the parties agree as
follows:
1. CONVERSION OF GALAXY INDEBTEDNESS; PAYMENT OF CERTAIN GALAXY OBLIGATIONS;
CONSENT TO ACQUISITION.
1.1 Conversion of VCI Preferred Shares. At the Closing (as defined below
in Section 1.3), VCI shall issue to Mortco and, subject to and in reliance upon
the representations, warranties, covenants, terms and conditions of this
Agreement, Mortco shall accept from VCI, a total of 2,000 shares of VCI's
authorized and unissued Series D Convertible Redeemable Preferred Stock
containing the rights and preferences set forth in Exhibit B hereto (the "VCI
Preferred Shares") as consideration for Rentrak's and Mortco's cancellation of
two million dollars and no/100 (US$2,000,000.00) of the Galaxy Loan Balance.
1.2 Payment of Certain Galaxy Obligations.
1.2.1 Remainder of Galaxy Loan Balance. On the Closing Date, VCI
shall pay to Mortco, by check dated the Closing Date and sent via an
overnight express mail delivery service for next day delivery, one million
one hundred seventeen thousand one dollars and 49/100 (US$1,117,001.49),
which amount represents that portion of the Galaxy Loan Balance that is not
converted into VCI Preferred Shares pursuant to Section 1.1 hereof (the
"Remaining Galaxy Loan Balance"). If the check does not clear in the
Page 2 - DEBT CONVERSION AGREEMENT
<PAGE>
ordinary course of business, commencing on the date that Rentrak receives
notice of insufficient funds and continuing until payment is made in full,
VCI shall pay interest on the entire unpaid balance of the Remaining Galaxy
Loan Balance, if any, at a rate of twenty-four percent (24%) per annum;
provided, however, that if interest accruing at such rate would be deemed
-----------------
usurious, the rate shall be reduced to the highest rate allowed by law. All
such interest payments shall be due and payable, in full, on the first
calendar day of each month until the Remaining Galaxy Loan Balance and all
accrued interest thereon is paid in full.
1.2.2 Galaxy Past Due Accounts Receivable and Other Amounts. On the
Closing Date, VCI shall pay to Rentrak, by check dated one calendar day
after the Closing Date and sent via an overnight express mail delivery
service for next day delivery, the Galaxy Past Due Accounts Receivable and
all additional accounts receivable and other amounts that become due and
payable under any agreement between Galaxy and Rentrak and/or Mortco between
the date hereof and the Closing Date (collectively, the "Total Galaxy Past
Due Obligations"). If the check does not clear in the ordinary course of
business, commencing on the date that Rentrak receives notice of
insufficient funds and continuing until payment is made in full, VCI shall
pay interest on the entire unpaid balance of the Total Galaxy Past Due
Obligations, if any, at a rate of twenty-four percent (24%) per annum;
provided, however, that if interest accruing at such rate would be deemed
-----------------
usurious, the rate shall be reduced to the highest rate allowed by law. All
such interest payments shall be due and payable, in full, on the first day
of each month until the Total Galaxy Past Due Obligations and all accrued
interest thereon are paid in full.
1.3 Closing. The transactions contemplated by this Agreement (including,
without limitation, the conversion of the VCI Preferred Shares and the payment
of certain Galaxy obligations as contemplated by Sections 1.1 and 1.2 hereof)
are subject to, contingent upon and shall be closed (the "Closing")
simultaneously with the closing of VCI's acquisition of Galaxy at the Effective
Time (as defined in the Merger Agreement). The date of the Effective Time is
referred to herein as the "Closing Date."
1.4 Actions To Be Taken at the Closing. The parties shall take the
following actions on or prior to the Closing, each of which shall be conditioned
upon the completion of all other actions and all of which shall be deemed to
take place simultaneously:
1.4.1 Closing of VCI's Acquisition of Galaxy. VCI shall close its
acquisition of Galaxy in strict compliance with the terms and conditions set
forth in the Merger Agreement.
1.4.2 Delivery of Certificates Representing the VCI Preferred Shares.
VCI shall issue and deliver to Mortco a stock certificate evidencing the VCI
Preferred Shares being issued to Mortco under Section 1.1, registered in
Mortco's name. The stock certificate delivered to Mortco in compliance with
this section shall bear a legend, prominently stamped or printed thereon,
reading substantially as follows:
Page 3 - DEBT CONVERSION AGREEMENT
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS (THE "ACTS"), HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS A REGISTRATION
STATEMENT UNDER THE ACTS IS IN EFFECT WITH REGARD THERETO OR
UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. AN
OPINION OF COUNSEL SHALL, UPON REQUEST BY VCI, BE FURNISHED
OPINING AS TO THE AVAILABILITY OF AN EXEMPTION.
1.4.3 Payment by VCI to Rentrak. VCI shall pay to Rentrak and
Mortco, as applicable, the Remaining Galaxy Loan Balance, the Total Galaxy
Past Due Obligations and all other amounts specified in, and in strict
compliance with the terms of, Sections 1.2.1 and 1.2.2 hereof.
1.4.4 Other Agreements. The parties shall, as applicable, execute
and deliver the following agreements on or prior to the Closing: (a) the
Assumption Agreement attached hereto as Exhibit C (the "Assumption
Agreement"); and (b) the Warrant attached hereto as Exhibit D (the
"Warrant").
1.4.5 Additional Deliveries. The parties hereto shall execute and
deliver all other documents and certificates required to be delivered at
Closing pursuant to this Agreement.
1.5 Termination; Effect of Termination. Any party may terminate this
Agreement if the Closing does not occur (other than through the terminating
party's failure to comply with its obligations under this Agreement or the
Merger Agreement) on or before April 15, 1999, by delivering written notice of
termination to the other parties; provided, however, that a party may not
-----------------
exercise its termination rights under this Section 1.5 if the Closing does not
timely occur because such party has failed to timely comply with its obligations
under this Agreement or the Merger Agreement. Upon termination of this Agreement
pursuant to this Section 1.5, this Agreement shall be void and no party shall
have any liability or further obligation to any other party under or by reason
of this Agreement or the transactions contemplated hereby.
1.6 Consent to Acquisition; Cancellation of Notes. Subject to and
contingent upon the satisfaction of all conditions precedent set forth in
Section 6.1 hereof, as determined in Rentrak's and Mortco's sole discretion, the
closing of all transactions contemplated by this Agreement, and the clearance in
the ordinary course of business of all checks sent to Rentrak and Mortco
pursuant to Sections 1.2.1 and 1.2.2 hereof: (a) Rentrak and Mortco consent to
VCI's acquisition of Galaxy in accordance with the terms of the Merger
Agreement; (b) the Galaxy Loan Agreement, the Galaxy Note, the Warrant, dated as
of February 11, 1997, issued by Galaxy to Mortco, and the Security Agreement,
dated as of February 11, 1997, between Galaxy, Rentrak and Mortco, shall all be
deemed null and void and of no further binding force and effect; and (c) Mortco
shall mark the Galaxy Note as "cancelled" and forward the same to John Moncure,
Page 4 - DEBT CONVERSION AGREEMENT
<PAGE>
present counsel to Galaxy, at Moncure & Barnicle, Fort Andross, 14 Maine Street,
Brunswick, Maine 04011.
2. REGISTRATION OF SHARES.
2.1 Filing of Registration Statement. As soon as practicable after the
Closing Date, VCI shall file with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
that covers the resale of all shares of VCI common stock issuable upon the
conversion of the VCI Preferred Shares (the "VCI Common Shares") and such other
shares of VCI common stock as Mortco may hereafter elect to include in the
Registration Statement pursuant to its rights under that certain Registration
Rights Agreement, dated as of March 25, 1998, between VCI and Mortco (the
"Registration Rights Agreement"). All shares that Mortco now or hereafter elects
to include in the Registration Statement are referred to herein as the
"Registered Shares."
2.2 Additional Registration Obligations. In connection with the
registration required by Section 2.1 hereof, VCI shall, at its sole cost and
expense:
2.2.1 Exercise its best efforts to cause the Registration Statement
to become effective as soon as practicable after the filing thereof, and
thereafter remain effective until the earlier of: (a) the date on which the
distribution of the Registered Shares described in the Registration
Statement has been completed; or (b) two years after the effective date of
the Registration Statement;
2.2.2 Promptly prepare and file with the Commission such amendments
and supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all Registered Shares.
2.2.3 Promptly furnish to Mortco such numbers of copies of the
Registration Statement and prospectus, including a preliminary prospectus in
conformity with the requirements of the Securities Act, and such other
documents as Mortco may reasonably request in order to facilitate the
disposition of the Registered Shares.
2.2.4 Promptly register and qualify the sale of the Registered
Shares under such other securities or Blue Sky laws of such jurisdictions as
Mortco may reasonably request.
2.2.5 Promptly notify Mortco, during the time when a prospectus
relating to any VCI Common Shares is required to be delivered under the
Securities Act, of the happening of any event, the result of which would
cause the prospectus included in the Registration Statement, as then in
effect, to include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
Page 5 - DEBT CONVERSION AGREEMENT
<PAGE>
2.3 Furnish Information. Mortco shall furnish to VCI such information
regarding itself, the Registered Shares and Mortco's intended method of
disposing of the Registered Shares as VCI may reasonably request in writing from
time to time to effect the registration of the Registered Shares.
2.4 Expenses. Except as otherwise provided in this Section 2.4, VCI shall
be solely responsible for paying all fees and expenses relating to the
Registration Statement and offering contemplated by this Agreement, including
without limitation, all registration, filing and qualification fees, printing
and accounting fees, fees and disbursements of counsel for VCI, and NASD,
transfer agent and registrar fees. Mortco shall be solely responsible for paying
the fees and disbursements of its own counsel and all sales commissions with
respect to the sale o f the Registered Shares.
2.5 Prior Registration Rights. Mortco's rights under this Section 2 are in
addition to, and not in lieu of, Mortco's rights under the Registration Rights
Agreement.
2.6 Effectiveness After 150 Day Period. If for any reason the Registration
Statement first becomes effective more than one hundred fifty (150) days after
the Closing Date, VCI shall issue to Mortco one hundred fifty thousand (150,000)
shares of VCI common stock, at no additional cost or expense to Mortco, as
consideration for the delay, and VCI shall continue to exercise its best efforts
to cause the Registration Statement to become effective as soon as practicable
thereafter.
2.7 Indemnification and Contribution.
2.7.1 VCI will indemnify and hold harmless Mortco and each person, if
any, who controls Mortco within the meaning of the Securities Act, against
any losses, claims, damages or liabilities, joint or several, to which
Mortco or any controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement of any material fact contained in the Registration Statement, any
preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will pay the
legal fees and other expenses of Mortco and each such controlling person
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that VCI will
-----------------
not be liable to Mortco in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so
made in reliance upon and in conformity with information furnished by Mortco
or any such controlling person in writing; and provided further that VCI
----------------
will not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue or
alleged untrue statement or omission or an alleged omission made in any
preliminary prospectus or final prospectus if (1) Mortco failed to send or
deliver a copy of the final prospectus or
Page 6 - DEBT CONVERSION AGREEMENT
<PAGE>
prospectus supplement with or prior to the delivery of written confirmation
of the sale of Registered Shares; and (2) the final prospectus or prospectus
supplement would have corrected such untrue statement or omission.
2.7.2 Mortco will indemnify and hold harmless VCI, each person, if
any, who controls VCI within the meaning of the Securities Act, each officer
of VCI who signs the registration statement and each director of VCI against
all losses, claims, damages or liabilities, joint or several, to which VCI
or such officer, director or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will pay the legal fees and other
expenses of VCI and each such officer, director and controlling person
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that Mortco
-----------------
will be liable hereunder in any such case only to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in reliance upon and in conformity with information furnished in writing to
VCI by Mortco for use in Registration Statement or prospectus.
2.7.3 Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party in writing thereof, but the failure
to so notify the indemnifying party shall not relieve it from any liability
that it may have to such indemnified party other than under this Section 2.7
and shall only relieve it from any liability that it may have to such
indemnified party under this Section 2.7 if and to the extent the
indemnifying party is prejudiced thereby. In case any such action shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereto, the indemnifying party shall be entitled
to participate in and, to the extent it shall wish, to assume and undertake
the defense thereof with counsel reasonably satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified
party of its election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
Section 2.7 for any legal expenses subsequently incurred by such indemnified
party in connection with the defense thereof; provided, however, that, if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
(based on the advice of counsel) that there may be reasonable defenses
available to it which are different from or additional to those available to
the indemnifying party or if the interests of the indemnified party
reasonable may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate
counsel and to assert such legal defenses and otherwise to participate in
the defense of such
Page 7 - DEBT CONVERSION AGREEMENT
<PAGE>
action, with the expenses and fees of such separate counsel and other
expenses related to such participation to be reimbursed by the indemnifying
party as incurred, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees
and expenses of more than one separate firm of attorneys (together with
appropriate local counsel as required by the local rules of such
jurisdiction) at any time for all such indemnified parties.
2.7.4 No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding
3. REPRESENTATIONS AND WARRANTIES OF VCI. As a material inducement to Rentrak
and Mortco to enter into this Agreement, VCI makes the following representations
and warranties to Rentrak and Mortco:
3.1 Organization and Standing. VCI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
VCI has all requisite corporate power and authority for the ownership and
operation of its properties and for the carrying on of its business as now
conducted or as now proposed to be conducted. VCI is duly licensed or qualified
and in good standing as a foreign corporation authorized to do business in all
jurisdictions wherein the character of the property owned or leased, or the
nature of the activitie s conducted, by VCI makes such licensing or
qualification necessary.
3.2 Authorization; Corporate Action. VCI has all necessary corporate power
and authority, and has taken all corporate action required, to enter into,
execute and deliver this Agreement and all other agreements and instruments
contemplated herein, as applicable, including all Exhibits attached hereto
(collectively the "Related VCI Documents"), to fully perform its obligations
hereunder and thereunder, and to carry out and consummate the transactions
contemplated hereby and thereby. This Agreement and the Related VCI Documents
have been duly executed and delivered by a duly authorized officer of VCI and
are the legal, valid, and binding obligations of VCI, enforceable in accordance
with their terms. A sufficient number of authorized but unissued shares of VCI
common stock have been reserved by appropriate corporate action in connection
with the prospective exercise of the Warrant and the conversion of the VCI
Preferred Shares. The issuance of the VCI Preferred Shares is not, and the
issuance of VCI common stock upon exercise of the Warrant and the conversion of
the VCI Preferred Shares will not, be subject to preemptive rights or other
preferential rights in any present or future shareholders of VCI and will not
conflict with any provision of any agreement or instrument to which VCI is a
party or by which it or its property is bound.
Page 8 - DEBT CONVERSION AGREEMENT
<PAGE>
3.3 Capitalization; Status of Capital Stock. The authorized capital stock
of VCI consists solely of 30,000,000 shares of voting common stock, $.01 par
value per share, and 2,000,000 shares of preferred stock, $.01 par value per
share, of which an aggregate of 13,572,436 shares of common stock, 7,000 shares
of Series AA Convertible Redeemable Preferred Stock, 76,000 shares of Series B
Convertible Redeemable Preferred Stock and 112 shares of Series C Convertible
Redeemable Preferred Stock are presently issued and outstanding. Immediately
after giving effect to the transactions described herein, an aggregate of
13,916,436 shares of VCI common stock, 7,000 shares of Series AA Convertible
Redeemable Preferred Stock, 76,000 shares of Series B Convertible Redeemable
Preferred Stock, 112 shares of Series C Convertible Redeemable Preferred Stock
and 2,000 shares of Series D Convertible Redeemable Preferred Stock will be
issued and outstanding. All of the outstanding shares of capital stock of VCI
have been duly authorized, are validly issued, and are fully paid and
nonassessable. The VCI Preferred Shares (when issued and delivered in accordance
with the terms of this Agreement), the shares to be issued to Mortco upon
exercise of the Warrant (when issued in accordance with the terms of the
Warrant), and the VCI Common Shares (when issued upon conversion of the VCI
Preferred Shares) will be duly authorized, validly issued, fully paid and
nonassessable, and free and clear of all claims, pledges, liens, encumbrances
and restrictions of every kind. The offer and sale of all capital stock and
other securities of VCI issued before the Closing complied with or was exempt
from all applicable federal and state securities laws, and no stockholder has a
right of rescission with respect thereto. Upon closing VCI's acquisition of
Galaxy in compliance with the Merger Agreement, VCI shall own all of the issued
and outstanding capital stock of Galaxy.
3.4 Subsidiaries. Immediately following the completion of the transactions
contemplated hereby: (a) VCI will not own, directly or indirectly, any capital
stock or other equity, ownership or proprietary interest in any corporation,
limited liability company, partnership, association, trust, joint venture or
other entity, except for Sulpizio One, Inc., Old Republic Entertainment, Inc.,
Video Tyme, Inc., Videoland, Inc. and Galaxy; and (b) Galaxy will not own,
directly or indirectly, any capital stock or other equity, ownership or
proprietary interest in any corporation, limited liability company, partnership,
association, trust, joint venture or other entity except for Video Galaxy
Franchise, Inc.
3.5 Compliance with Other Instruments. The execution and delivery of this
Agreement and the Related VCI Documents, the consummation of the transactions
contemplated hereby and thereby, and the performance by VCI of its obligations
hereunder and thereunder will not (a) violate any provision of VCI's Articles of
Incorporation or Bylaws; (b) violate, conflict with or result in the breach of
any of the terms of, result in a modification of the effect of, give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default under, any material contract or other
agreement to which VCI is a party or by or to which VCI is bound or subject; (c)
violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon, VCI or
upon the securities, properties or business of VCI; or (d) violate any statute,
law or regulation of any jurisdiction as such statute, law or regulation relates
to VCI or to the securities, properties or business of VCI. VCI is in full
compliance in all respects with the terms and provisions of its
Page 9 - DEBT CONVERSION AGREEMENT
<PAGE>
Articles of Incorporation and Bylaws, as amended and in effect as of the date
hereof, and in compliance in all material respects with the terms and provisions
of all material leases, agreements and other instruments by which it is bound or
to which it or any of its properties or assets are subject.
3.6 Brokers and Finders. VCI has not employed any broker or finder in
connection with the transactions contemplated by this Agreement, or taken any
action that would give rise to a valid claim against any party for a brokerage
commission, finder's fee, or other like payment (collectively "Fees"). VCI
agrees to defend, indemnify and hold Rentrak and Mortco harmless from any and
all Fees that may be owing to any person or entity that claims to be engaged by
VCI in connection with the transactions contemplated by this Agreement.
3.7 Securities Laws. VCI has complied and will comply with all applicable
federal and state securities laws in connection with the offer, issuance and
sale of the VCI Preferred Shares and the shares of common stock to be issued
upon the conversion of the VCI Preferred Shares and the exercise of the Warrant.
3.8 Disclosure. Neither this Agreement, the Related VCI Documents, nor any
other agreement, document, certificate or written statement furnished to
Rentrak, Mortco, or their counsel, by or on behalf of VCI in connection with the
transactions contemplated hereby or thereby, contains any untrue statement of
material fact or, to the best of VCI's knowledge, omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading. There is no fact within VCI's knowledge which has not been disclosed
herein or in writing by VCI to Rentrak and Mortco and which materially adversely
affects, or in the future in its opinion may, insofar as they can now foresee,
materially adversely affect the business, properties, assets or condition,
financial or otherwise, of VCI or Galaxy.
4. REPRESENTATIONS AND WARRANTIES OF GALAXY. As a material inducement to
Rentrak and Mortco to enter into this Agreement, Galaxy makes the following
representations and warranties to Rentrak and Mortco:
4.1 Organization and Standing. Galaxy is a corporation that is duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Galaxy has all requisite corporate power and authority for the
ownership and operation of its properties and for the carrying on of its
business as now conducted or as now proposed to be conducted. Galaxy is duly
licensed or qualified and in good standing as a foreign corporation authorized
to do business in all jurisdictions wherein the character of the property owned
or leased, or the nature of the activities conducted, by Galaxy makes such
licensing or qualification necessary.
4.2 Authorization; Corporate Action. Galaxy has all necessary corporate
power and authority, and has taken all corporate action required, to enter into,
execute and deliver this Agreement and all other agreements and instruments
contemplated herein, as applicable, including the Assumption Agreement
(collectively, the "Related Galaxy Documents"), to fully perform its obligations
hereunder and thereunder, and to carry out and consummate the
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<PAGE>
transactions contemplated hereby and thereby. This Agreement and the Related
Galaxy Documents have been duly executed and delivered by a duly authorized
officer Galaxy and are the legal, valid, and binding obligations of Galaxy,
enforceable in accordance with their terms.
4.3 Capital Stock. The offer and sale of all capital stock and other
securities of Galaxy issued before the Closing complied with or was exempt from
all applicable federal and state securities laws, and no stockholder has a right
of rescission with respect thereto. Upon closing VCI's acquisition of Galaxy in
compliance with the Merger Agreement, VCI shall own all of the issued and
outstanding capital stock of Galaxy.
4.4 Compliance with Other Instruments. The execution and delivery of this
Agreement and the Related Galaxy Documents, the consummation of the transactions
contemplated hereby and thereby, and the performance by Galaxy of its
obligations hereunder and thereunder will not (a) violate any provision of
Galaxy's Articles of Incorporation or Bylaws; (b) violate, conflict with or
result in the breach of any of the terms of, result in a modification of the
effect of, give any other contracting party the right to terminate, or
constitute (or with notice or lapse of time or both constitute) a default under,
any material contract or other agreement to which Galaxy is a party or by or to
which Galaxy is bound or subject; (c) violate any order, judgment, injunction,
award or decree of any court, arbitrator or governmental or regulatory body
against, or binding upon, Galaxy or upon the securities, properties or business
of Galaxy; or (d) violate any statute, law or regulation of any jurisdiction as
such statute, law or regulation relates to Galaxy or to the securities,
properties or business of Galaxy. Galaxy is in full compliance in all respects
with the terms and provisions of their Articles of Incorporation and Bylaws, as
amended and in effect as of the date hereof, and in compliance in all material
respects with the terms and provisions of all material leases, agreements and
other instruments by which it is bound or to which it or any of its respective
properties or assets are subject.
4.5 Brokers and Finders. Galaxy has not employed any broker or finder in
connection with the transactions contemplated by this Agreement, or taken any
action that would give rise to a valid claim against any party for a brokerage
commission, finder's fee, or other like payment (collectively "Fees"). Galaxy
agrees to defend, indemnify and hold Rentrak and Mortco harmless from any and
all Fees that may be owing to any person or entity that claims to be engaged by
Galaxy in connection with the transactions contemplated by this Agreement.
4.6 Disclosure. Neither this Agreement, the Related Galaxy Documents, nor
any other agreement, document, certificate or written statement furnished to
Rentrak, Mortco, or their counsel, by or on behalf of Galaxy in connection with
the transactions contemplated hereby or thereby, contains any untrue statement
of material fact or, to the best of Galaxy's knowledge, omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact within Galaxy's knowledge which has not
been disclosed herein or in writing by them to Rentrak and Mortco and which
materially adversely affects, or in the future in its opinion may, insofar as
they can now foresee, materially adversely affect the business, properties,
assets or condition, financial or otherwise, of VCI or Galaxy.
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<PAGE>
5. REPRESENTATIONS AND WARRANTIES OF MORTCO. As a material inducement to
VCI and Galaxy to enter into this Agreement, Mortco makes the following
representations and warranties:
5.1 Investment Intent. Mortco is acquiring the VCI Preferred Shares for
its own account and not with the view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act. Mortco acknowledges that VCI Preferred Shares have not been registered
under the Securities Act or any state securities laws, and that such shares may
not be resold without registration under the Securities Act or applicable state
securities laws or an exemption therefrom. Mortco is an "Accredited Investor" as
that term is defined in Rule 501(a) of Regulation D promulgated under the
Securities Act and has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its investment
hereunder.
5.2 Authorization. This Agreement, the Assumption Agreement and the
Warrant have been duly authorized by all necessary corporate action on the part
of Mortco and Rentrak, as the case may be, and have been duly executed and
delivered by Mortco and Rentrak, and are valid and binding agreements.
5.3 No Brokers or Finders. Neither Mortco nor Rentrak have employed any
broker or finder in connection with the transactions contemplated by this
Agreement, or taken any action that would give rise to a valid claim against any
party for a brokerage commission, finder's fee, or other like payment.
6. CONDITIONS OF CLOSING.
6.1 Conditions Precedent to Obligations of Rentrak and Mortco. Rentrak's
and Mortco's respective obligations to consummate the transactions contemplated
by this Agreement are subject, in Rentrak's and Mortco's sole discretion, to the
fulfillment of each of the following conditions precedent on or prior to the
Closing Date, any of which Rentrak and Mortco may, in their sole discretion,
waive in whole or in part:
6.1.1 Representations and Warranties. VCI's and Galaxy's respective
representations and warranties under this Agreement shall be true and
correct in all respects at and as of the Closing Date with the same effect
as though made on and as of the Closing Date.
6.1.2 Compliance with Agreement. VCI and Galaxy, as applicable,
shall have performed and complied with all agreements or conditions required by
this Agreement, the Related VCI Documents and the Related Galaxy Documents that
they are required to perform or comply with prior to or as of the Closing Date,
specifically including without limitation taking all actions required under
Section 1.4 above.
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<PAGE>
6.1.3 Simultaneous Closing of VCI's Acquisition of Galaxy. VCI
shall have simultaneously closed its acquisition of Galaxy in strict
compliance with the terms and conditions set forth in the Merger Agreement.
6.1.4 Closing Certificate. VCI and Galaxy shall have each
delivered to Rentrak and Mortco a certificate, duly signed by their
respective President or Chief Executive Officer, dated as of the Closing
Date, certifying that the conditions specified in Sections 6.1.1, 6.1.2 and
6.1.3 have been satisfied and fulfilled.
6.1.5 Execution and Delivery of Documents. VCI and Galaxy, as
applicable, shall have executed and delivered to Rentrak and Mortco this
Agreement and all other documents required to be executed and delivered at
Closing hereunder, specifically including without limitation the Assumption
Agreement and the Warrant.
6.1.6 Qualification Under State Securities Laws. All registrations,
qualifications, permits and approvals required under applicable state and
federal securities laws for the lawful execution and delivery of this
Agreement and the offer, sale, issuance and delivery of VCI Preferred Shares
and the Warrant shall have been obtained.
6.1.7 Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions
contemplated hereby and all certificates, opinions, agreements, instruments
and documents mentioned herein or incident to any such transactions shall be
satisfactory in form and substance to Rentrak and Mortco.
6.1.8 No Litigation. No suit, action, governmental proceeding or
order shall have been instituted or threatened which makes the transactions
contemplated hereby illegal or otherwise prohibited or otherwise seeks to
restrain or prohibit the consummation of the transactions contemplated by
this Agreement.
6.1.9 Third-Party Consents. All consents and approvals from parties
to contracts or other agreements with VCI or Galaxy that may be required in
connection with the performance by VCI and Galaxy of their obligations under
this Agreement or the continuance of such contracts or other agreements with
VCI or Galaxy after the Closing shall have been obtained.
6.2 Conditions Precedent to Obligations of VCI and Galaxy.
The obligations of VCI and Galaxy to consummate the transactions contemplated by
this Agreement are subject, in VCI's and Galaxy's discretion, to the fulfillment
prior to or on the Closing Date of each of the following conditions, any of
which VCI and Galaxy may waive in whole or in part:
6.2.1 Representations and Warranties. The representations and
warranties of Mortco under this Agreement shall be true and correct in all
respects at and as of the Closing Date with the same effect as though made
on and as of the Closing Date.
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<PAGE>
6.2.2 Compliance with Agreement. Rentrak and Mortco shall have
performed and complied with all agreements or conditions required by this
Agreement to be performed and complied with by it prior to or as of the
Closing Date.
6.2.3 Simultaneous Closing of VCI's Acquisition of Galaxy. VCI
shall have simultaneously closed its acquisition of Galaxy in strict
compliance with the terms and conditions set forth in the Merger Agreement.
6.2.4 Execution and Delivery of Documents. Rentrak and Mortco, as
the case may be, shall have executed this Agreement and all other documents
that they are required to execute and deliver at Closing hereunder.
6.2.5 No Litigation. No suit, action, governmental proceeding or
order shall have been instituted or threatened which makes the transactions
contemplated hereby illegal or otherwise prohibited or otherwise seeks to
restrain or prohibit the consummation of the transactions contemplated by
this Agreement.
7. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.
7.1 Survival. Notwithstanding any right of Rentrak or Mortco to fully
investigate the affairs of VCI or Galaxy and notwithstanding any knowledge of
facts determined or determinable by Rentrak or Mortco pursuant to such
investigation or right of investigation, Rentrak and Mortco have the right to
rely fully upon the representations, warranties, covenants, indemnities and
agreements of VCI and Galaxy contained in or made pursuant to this Agreement,
the Related VCI Documents or the Related Galaxy Documents (including all
Exhibits and Schedules thereto) or in any certificate, document or statement
delivered pursuant thereto (collectively, the "Ancillary Documents"). All
representations, warranties, covenants, indemnities and agreements of the
parties contained in or made pursuant to this Agreement, the Related VCI
Documents, the Related Galaxy Documents or the Ancillary Documents shall survive
the Closing.
7.2 Obligation to Indemnify. VCI and Galaxy, jointly and severally, shall
indemnify, defend and hold harmless Rentrak and Mortco, and their respective
directors, officers, employees, affiliates, successors and assigns
(collectively, the "Indemnitees") from and against any and all losses,
liabilities, damages, deficiencies, costs or expenses (including interest,
penalties and reasonable attorneys' fees and disbursements) ("Losses") that are
suffered or incurred by any of the Indemnitees or to which any of the
Indemnitees may become subject at any time (whether or not such Losses relate to
any third party claim) and which arise from or as a result of, or are directly
or indirectly connected with:
(a) any inaccuracy in or any breach of any representation or warranty
made by VCI or Galaxy in this Agreement, the Related VCI Documents, the
Related Galaxy Documents or the Ancillary Documents; or
Page 14 - DEBT CONVERSION AGREEMENT
<PAGE>
(b) any breach of any obligation of VCI or Galaxy contained in this
Agreement, the Related VCI Documents, the Related Galaxy Documents or the
Ancillary Documents.
8. MISCELLANEOUS.
8.1 Entire Agreement. This Agreement (including the Exhibits attached
hereto) is the entire, final and complete Agreement and understanding of the
parties with respect to the transactions contemplated hereby, and supersedes and
replaces all written and oral agreements and understandings heretofore made or
existing by and between the parties or their representatives with respect
thereto.
8.2 Waiver. No waiver of any provision of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
8.3 Binding Effect. All rights, remedies and liabilities herein given to
or imposed upon the parties shall extend to, inure to the benefit of and bind,
as the circumstances may require, the parties and their respective heirs,
personal representatives, administrators, successors and permitted assigns.
8.4 Notices. Any notice of other communication required or permitted under
this Agreement shall be in writing and shall be deemed given on the date of
transmission when sent by telex or facsimile transmission, on the third business
day after the day of mailing when mailed by certified mail, postage prepaid,
return receipt requested, from within the United States, or on the date of
actual delivery, whichever is the earliest, and shall be sent to the parties at
the following addresses, or at such other address as the party may hereafter
designate by written notice to the others:
Rentrak: Mortco:
Rentrak Corporation Mortco, Inc.
One Airport Center One Airport Center
7700 N.E. Ambassador Place 7700 N.E. Ambassador Place
Portland, Oregon 97218 Portland, Oregon 97218
Attn: Ron Berger Attn: Ron Berger
With a copy to:
A. Jeffery Bird
Garvey, Schubert & Barer
121 S.W. Morrison, 11/th/ Floor
Portland, Oregon 97204
Page 15 - DEBT CONVERSION AGREEMENT
<PAGE>
VCI: Galaxy:
Video City, Inc. Video Galaxy, Inc.
370 Amapola Avenue, Suite 208 370 Amapola Avenue, Suite 208
Torrance, California 90501 Torrance, California 90501
Attn: Robert Y. Lee Attn: Robert Y. Lee
8.5 Amendment. No supplement, modification or amendment of this Agreement
shall be valid unless the same is in writing and signed by all parties hereto.
8.6 Severability. In the event any provision or portion of this Agreement
is held to be unenforceable or invalid by any court of competent jurisdiction,
the remainder of this Agreement shall remain in full force and effect and shall
in no way be affected or invalidated thereby.
8.7 Survival of Covenants. Any covenants, the full performance of which
are not required before Closing, shall survive the Closing and be fully
enforceable thereafter in accordance with their terms.
8.8 Governing Law and Venue; Waiver of Jury Trial. This Agreement and all
other agreements contemplated hereunder, including the Related VCI Documents and
the Related Galaxy Documents, and the rights of the parties hereunder and
thereunder shall be governed, construed and enforced in accordance with by the
laws of the State of Oregon, without regard to its conflict of law principles.
Any suit or action arising out of or in connection with this Agreement, the
Related VCI Documents or the Related Galaxy Documents, or any breach hereof or
thereof, shall be brought and maintained exclusively in the federal or state
courts in Portland, Oregon. The parties hereby irrevocably submit to the
exclusive jurisdiction of such courts for the purpose of such suit or action and
hereby expressly and irrevocably waive, to the fullest extent permitted by law,
any objection it may now or hereafter have to the venue of any such suit or
action in any such court and any claim that any such suit or action has been
brought in an inconvenient forum. VCI and Galaxy hereby irrevocably waive their
right to a jury trial in any claim or cause of action based upon or arising out
of this Agreement, the Related VCI Documents or the Related Galaxy Documents or
any dealings between VCI, Galaxy and Rentrak and/or Mortco relating to this
Agreement, the Related VCI Documents or the Related Galaxy Documents.
8.9 Recitals. The "Recitals" set forth at the beginning of this Agreement
are true and accurate and are incorporated herein by this reference as though
set forth in full.
8.10 Captions. The caption headings of the sections and subsections of this
Agreement are for convenience of reference only and are not intended to be, and
should not be construed as, a part of this Agreement.
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<PAGE>
8.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute a single agreement.
8.12 Cross-References. Unless expressly stated otherwise herein, all
references in this Agreement to sections and exhibits refer to sections and
exhibits of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate as of the day and year first above written.
VIDEO CITY, INC. RENTRAK CORPORATION
By: /s/ Timothy J. Denari By: /s/ Ron Berger
-------------------------------- --------------------------
Name: Timothy J. Denari
------------------------------
Title: Chief Financial Officer
-----------------------------
VIDEO GALAXY, INC. MORTCO, INC.
By: /s/ James G. Howard By: /s/ Ron Berger
-------------------------------- ---------------------------
Name: James G. Howard
------------------------------
Title: President
-----------------------------
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<PAGE>
LIST OF EXHIBITS
Exhibit A - Agreement of Merger and Plan of Reorganization
Exhibit B - Rights and Privileges of Series D Convertible
Redeemable Preferred Stock
Exhibit C - Assumption Agreement
Exhibit D - Warrant
<PAGE>
EXHIBIT 10.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND THE BLUE SKY LAWS OF
ANY JURISDICTIONPreferred CustomerFinancial Printing GroupTHE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND THE BLUE SKY LAWS OF
ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED OR OTHERWISE DISPOSED OF, BENEFICIALLY OR ON THE
RECORDS OF THE COMPANY, UNLESS THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS OR THERE HAS BEEN
DELIVERED TO THE COMPANY AN OPINION OF COUNSEL, SATISFACTORY TO
THE COMPANY, TO THE EFFECT THAT SUCH REGISTRATION AND
QUALIFICATION IS NOT REQUIRED.
THE TRANSFER OF THIS WARRANT IS RESTRICTED
AS PROVIDED IN SECTIONS 7 AND 8
- --------------------------------------------------------------------------------
WARRANT CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
VIDEO CITY, INC.
Video City, Inc., a Delaware corporation (the "Company"), grants to Mortco
Inc., an Oregon corporation ("Mortco") the right, subject to the terms and
conditions of this Warrant, to purchase at any time during the period commencing
on the date hereof and ending on March 31, 2004 (the "Expiration Date"), for an
aggregate purchase price of $1,500,000 (the "Aggregate Exercise Price"), 500,000
shares of the Company's Common Stock. The number and character of shares that
may be purchased upon exercise of this Warrant and payment of the Aggregate
Exercise Price are subject to adjustment from time to time as hereinafter
provided. This Warrant is being issued pursuant to the Agreement of Merger and
Plan of Reorganization, dated as of March 30, 1999, between the Company, Video
Galaxy, Inc. and James G. Howard, George M. Peloso and Kurt Peterson (the
"Merger Agreement").
Section 1. Definitions. As used in this Warrant, unless the context
otherwise requires:
1.1 "Aggregate Exercise Price" is defined in the first paragraph
of this Warrant.
1.2 "Common Stock" means all classes of common stock of the
Company.
Page 1 - WARRANT CERTIFICATE
<PAGE>
1.3 "Company" is defined in the first paragraph of this Warrant.
1.4 "Exercise Date" means the date when this Warrant is exercised
in the manner indicated in Section 2.2.
1.5 "Exercise Period" means the period commencing on the Grant
Date and ending on the Expiration Date.
1.6 "Exercise Price" means the price per Warrant Share, which is
determined by dividing the Aggregate Exercise Price by the number of shares of
Common Stock issuable upon the exercise of this Warrant.
1.7 "Expiration Date" is defined in the first paragraph of this
Warrant.
1.8 "Grant Date" is the date of the Effective Time (as defined in
the Merger Agreement).
1.9 "Holder" means initially Mortco and its subsequent
transferees.
1.10 "Mortco" is defined in the first paragraph of this Warrant.
1.11 "Related Warrant" means any other Warrant executed and
delivered by the Company on terms identical with the terms of this Warrant
(except as to the identity of Holder, number of Warrant Shares or execution
date) that is granted pursuant to Section 6 of this Agreement.
1.12 "Related Warrant Shares" means any shares of Common Stock or
other securities issued or issuable upon exercise of any Related Warrant.
1.13 "Rentrak" is defined in the first paragraph of this Warrant.
1.14 "Securities Act" means the Securities Act of 1933, as amended
from time to time, and all rules and regulations promulgated thereunder, or any
act, rules or regulations that replace the Securities Act or any such rules and
regulations.
1.15 "Warrant" means this Common Stock Warrant and each previously
executed and cancelled Common Stock Warrant, if any, for which this Warrant has
been exchanged.
1.16 "Warrant Shares" means any shares of Common Stock or other
securities issued or subject to issuance upon exercise of this Warrant or upon
exchange of a Warrant Share for Warrant Shares of different denominations.
Page 2 - WARRANT CERTIFICATE
<PAGE>
Section 2. Duration and Exercise of Warrant; Computation of Shares.
2.1 Vesting. This Warrant shall vest in its entirety on the Grant
Date and expire on the Expiration Date.
2.2 Exercise of Warrant; Issuance of Shares. This Warrant is
immediately exercisable by Holder, in whole or in part, at any time during the
Exercise Period. Holder may exercise this Warrant during the Exercise Period by
(i) surrendering this Warrant to the Company; (ii) tendering to the Company the
payment due with regard to the Aggregate Exercise Price applicable to the number
of Warrant Shares being acquired by Holder; and (iii) executing and delivering
to the Company the attached Exercise Form.
Upon exercising this Warrant, the Company shall issue to Holder that
number of Warrant Shares for which the Warrant is being exercised, together with
such additional number of shares of capital stock or other securities or
property (other than cash) distributed by the Company from time to time after
the Grant Date of this Warrant with respect to the Common Stock which Holder
would have received had Holder exercised the Warrant immediately prior to the
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.
2.3 Certificates. Within a reasonable time, but no more than
fifteen (15) days after exercise, the Company shall deliver certificates for all
Warrant Shares to Holder.
2.4 Securities Act Compliance. Unless the issuance or transfer of
the Warrant Shares shall have been registered under the Securities Act, as a
condition of its delivery of the certificates for the Warrant Shares, the
Company may require Holder (including any transferee of the Warrant Shares in
whose name the Warrant Shares are to be registered) to deliver to the Company,
in writing, representations regarding the purchaser's sophistication, investment
intent, acquisition for its own account and such other matters as are reasonable
and customary for purchasers of securities in an unregistered private offering,
and the Company may place conspicuously upon each certificate representing the
Warrant Shares a legend substantially in the following form, the terms of which
are agreed to by Holder (including such transferee):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND THE BLUE SKY LAWS OF
ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED OR OTHERWISE DISPOSED OF, BENEFICIALLY OR ON THE
RECORDS OF THE COMPANY, UNLESS THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS OR THERE HAS BEEN
DELIVERED TO THE COMPANY AN OPINION OF COUNSEL, SATISFACTORY TO
THE COMPANY, TO THE EFFECT THAT SUCH REGISTRATION AND
QUALIFICATION IS NOT REQUIRED.
The Company need not register a transfer of this Warrant or the Warrant Shares
unless the
Page 3 - WARRANT CERTIFICATE
<PAGE>
conditions specified in this legend and in Section 8 are satisfied.
Section 3. Validity and Reservation of Warrant Shares. The Company
covenants and warrants that this Warrant and any Warrant Shares will be validly
issued, fully paid, nonassessable and free of preemptive rights. The Company
agrees that so long as this Warrant may be exercised, the Company will have
authorized and reserved for issuance upon the exercise of this Warrant a
sufficient number of Warrant Shares to provide for exercise in full.
Section 4. Fractional Shares. No fractional Warrant Share shall be issued
upon the exercise of this Warrant. With respect to any fraction of a Warrant
Share otherwise issuable upon any such exercise, the Company shall pay to Holder
an amount in cash equal to such fraction multiplied by the Exercise Price.
Section 5. Limited Rights of the Warrant Holder. Holder shall not, solely
by virtue of being the holder of this Warrant, have any of the rights of a
holder of Common Stock of the Company, either at law or equity, until such
Warrant shall have been exercised and Holder shall have been issued certificates
representing the Warrant Shares and Holder shall be deemed to be the holder of
record of Warrant Shares as provided in this Warrant, at which time the person
or persons in whose name or names the certificate or certificates for Warrant
Shares being purchased are to be issued shall be deemed the holder or holders of
record of such shares for all purposes.
Section 6. Adjustments Upon Certain Events.
(a) If this Warrant shall be exercised subsequent to any stock
split, stock dividend, recapitalization, combination of shares of the
Company, or other similar event, occurring after the date hereof, then the
Holder exercising this Warrant shall receive upon the exercise of this
Warrant and payment of no additional consideration other than the Aggregate
Exercise Price applicable to the number of Warrant Shares being acquired,
the aggregate number and class of shares which such Holder would have
received if this Warrant had been exercised immediately prior to such stock
split, stock dividend, recapitalization, combination of shares, or other
similar event. If any adjustment under this Section 6(a), would create a
fractional share of Common Stock or a right to acquire a fractional share,
such fractional share shall be disregarded and the number of shares subject
to this Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an adjustment pursuant to this
Section 6(a), the Company shall forthwith notify the Holder or Holders of
this Warrant of such adjustment, setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment was
calculated.
(b) If this Warrant shall be exercised subsequent to any merger,
consolidation, exchange of shares, separation, reorganization, sale of all
or substantially all of the Company's assets, liquidation of the Company,
or other similar event, occurring after the
Page 4 - WARRANT CERTIFICATE
<PAGE>
Grant Date, as a result of which shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class
or classes of securities of the Company or another entity or are otherwise
entitled to receive shares of stock or other securities or property, then
the Holder exercising this Warrant shall receive, upon the exercise of this
Warrant and payment of no additional consideration other than the Aggregate
Exercise Price applicable to the number of Warrant Shares being acquired,
the aggregate number and class of shares or other property which such
Holder would have received if this Warrant had been exercised immediately
prior to such merger, consolidation, exchange of shares, separation,
reorganization, sale of all or substantially all of the Company's assets,
or liquidation, or other similar event. If any adjustment under this
Section 6(b) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares subject to this Warrant shall be the
next higher number of shares, rounding all fractions upward. Whenever there
shall be an adjustment pursuant to this Section 6(b), the Company shall
forthwith notify the Holder or Holders of this Warrant of such adjustment,
setting forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated. The above provisions of
this Section 6(b) shall apply to successive events described above.
Section 7. Exchange, Transfer or Loss of Warrant.
7.1 Exchange. This Warrant is exchangeable, without expense to
Holder and upon surrender hereof to the Company, for Related Warrants of
different denominations entitling Holder to purchase Related Warrant Shares
equal in total number and identical in type to the Warrant Shares covered by
this Warrant.
7.2 Transfer. Subject to the provisions of Section 8, upon
surrender of this Warrant to the Company with the attached Assignment Form duly
executed, the Company shall, without charge, execute and deliver a Related
Warrant to the assignee named in such Assignment Form, and this Warrant shall
promptly be cancelled.
7.3 Loss, Theft, Destruction or Mutilation. Upon receipt by the
Company of satisfactory evidence of the loss, theft, destruction or mutilation
of this Warrant and either (in the case of loss, theft or destruction)
indemnification or bond in form and substance acceptable to the Company, or (in
the case of mutilation) the surrender of this Warrant for cancellation, the
Company will execute and deliver to Holder, without charge, a Related Warrant of
like denomination. Any such Related Warrant executed and delivered shall
constitute an additional obligation of the Company, whether or not this Warrant,
reportedly lost, stolen, destroyed or mutilated, shall be at any time presented
by anyone to the Company for exercise.
Section 8. Transfer Restriction.
8.1 General. Anything contained hereto to the contrary
notwithstanding, this
Page 5 - WARRANT CERTIFICATE
<PAGE>
Warrant may not be assigned, transferred (by operation of law or otherwise),
hypothecated or sold (other than to Rentrak or a wholly-owned subsidiary of
Rentrak), except as set forth in Section 8.2. Any such assignment or transfer
shall be made by surrender of this Warrant to the Company or at the office of
its transfer agent, if any, with the Form of Assignment annexed hereto duly
executed and funds sufficient to pay any transfer tax, whereupon the Company
shall, without charge, execute and deliver a Related Warrant in the name of the
assignee and this Warrant shall promptly be cancelled.
8.2 Securities Law Compliance. Except pursuant to the requirements
of Rule 144 of the Securities Act, the Warrant and Warrant Shares may not be
sold, transferred, assigned or otherwise disposed of except as follows:
(a) to a person who, in the opinion of counsel satisfactory to the
Company and in the opinion of the Company's counsel, is a person to whom
the Warrant or Warrant Shares may legally be transferred without
registration under the Securities Act and without the delivery of a current
prospectus with respect thereto; or
(b) to any person upon delivery of a prospectus then meeting the
requirements of the Securities Act relating to such securities (as to which
a registration statement under the Securities Act shall then be in effect)
and the offering thereof for such sale or disposition.
Holder agrees that it will not at any time offer to sell, sell, transfer,
pledge or otherwise dispose of this Warrant, or, upon receipt of the Warrant
Shares after exercise hereof, any of such Warrant Shares, except pursuant to
either (a) an effective registration statement under the Securities Act or (b)
an opinion of counsel reasonably satisfactory to the Company to the effect that
such registration is not required. Holder acknowledges that, in taking this
unregistered Warrant, or in taking unregistered Warrant Shares upon exercise
hereof, Holder must continue to bear the economic risk of such investments for
what may be an indefinite period of time. Holder further agrees hereby that,
prior to any transfer of this Warrant or any Warrant Shares received upon any
exercise hereof (if such Warrant and/or Warrant Shares are not registered under
the Securities Act), it will give written notice to the Company of its intention
to effect such transfer. Upon receipt of such notice, the Company will promptly
present it to counsel for the Company and counsel for Holder and if the Company
receives the opinion of such counsel, in form and substance satisfactory to the
Company, that the proposed transfer may be effected without registration under
the Securities Act and applicable state law, Holder shall be promptly notified
and shall be entitled to effect the transfer of this Warrant and/or the Warrant
Shares in accordance with the terms specified in the notice delivered to the
Company. The provisions of this Section 8.2 shall be binding upon all
subsequent Holders of this Warrant and upon all subsequent holders of the
certificates for the Common Stock bearing the legend specified in Section 2.5
hereof.
8.3 Representations of Holder. Holder represents that it has
acquired this
Page 6 - WARRANT CERTIFICATE
<PAGE>
Warrant for investment purposes only, for its own account, and not with any
present view to, or any offer to sell in connection with, the distribution
thereof. Holder represents that it is an "accredited investor" as that term is
defined under Regulation D of the Securities Act.
Section 9. Representations and Warranties. The Company represents and
warrants to Rentrak the following:
9.1 Authority. The Company has full right, power and authority to
enter into this Agreement and to perform all of its obligations hereunder or
contemplated hereby; this Agreement has been duly authorized, executed and
delivered by the Company and is enforceable in accordance with its terms.
9.2 Valid Agreement. This Warrant, and the issue and delivery
thereof has been duly and validly authorized, and this Warrant, when issued and
delivered as provided in this Agreement, will be duly and validly issued and
outstanding, and will constitute a valid and binding obligation of the Company.
Section 10. Registration Rights. The Warrant Shares are hereby granted
and shall have all of the registration rights granted to Mortco under that
certain Registration Rights Agreement, dated as of the date hereof (the "Rights
Agreement"), by and between Mortco and the Company, the terms of which are
incorporated herein by this reference as if fully set forth herein; provided,
--------
however, that (a) the term "Shares" used in the Rights Agreement shall mean the
- -------
Warrant Shares, (b) the term "Mortco" used in the Rights Agreement shall mean a
Holder as defined herein, and (c) the term "Agreement" used in the Rights
Agreement shall mean this Warrant.
Section 11. Miscellaneous.
11.1 Successors and Assigns. All the covenants and provisions of
this Warrant that are by or for the benefit of the Company shall bind and inure
to the benefit of its successors and assigns hereunder.
11.2 Notice. Notice or demand pursuant to this Warrant to be given
or made by Holder to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed, until another address is
designated in writing by the Company, as follows:
Video City, Inc.
370 Amapola Avenue, Suite 208
Torrance, California 90501
Attention: Robert Y. Lee
Any notice or demand authorized by this Warrant to be given or made by the
Company to or on
Page 7 - WARRANT CERTIFICATE
<PAGE>
Holder shall be given to Holder by first-class mail, postage prepaid, addressed,
until another address is designated in writing by the Company, as follows:
Rentrak Corporation
One Airport Center
7700 N.E. Ambassador Place
Portland, OR 97220
Attention: Ron Berger
and to any other Holder addressed at his last known address as it shall appear
on the books of the Company, until another address is designated in writing,
with a copy to Rentrak Corporation by like mail.
11.3 Applicable Law. The validity, interpretation and performance
of this Warrant shall be governed by the laws of the State of Oregon. For any
action related to the judicial enforcement or interpretation of this Agreement,
the parties hereby expressly submit themselves to the exclusive jurisdiction of
the Circuit Court for the County of Multnomah, State of Oregon or the Federal
Court for the District of Oregon.
11.4 Headings. The article headings herein are for convenience
only and are not part of this Warrant and shall not affect the interpretation
thereof.
This Warrant is executed as of March 31, 1999.
AGREED AND ACCEPTED:
COMPANY: MORTCO:
Video City, Inc. Mortco, Inc.
By: /s/Tim Denari By: /s/ Ron Berger
------------------------------- -----------------------------
Tim Denari, Chief Financial Ron Berger, President
Officer
Page 8 - WARRANT CERTIFICATE
<PAGE>
EXERCISE FORM
(To Be Executed by the Warrant Holder if the Warrant is Exercised)
TO: VIDEO CITY, INC.
The undersigned
-----------------------------------------------------------------
(Please insert name and Social Security or other identifying
number of Subscriber)
hereby irrevocably elects to exercise the right of purchase represented by the
attached Warrant for, and to purchase thereunder, __________ shares of the
Company's Common Stock which, and tenders payment herewith to the order of Video
City, Inc., in the amount of $___________.
The undersigned requests that certificates for such shares of Common Stock be
issued as follows:
Name:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Deliver To:
---------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Note: Signature must correspond with the name as written upon the face of the
Warrant in every particular, without alteration or enlargement or any change
whatever.
Page 9 - WARRANT CERTIFICATE
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto [name] , of [address] , the right to
-------------------------- -----------------------------
purchase __________ shares of Common Stock evidenced by the within Warrant, and
appoints [name] to transfer the same on the books of Video
--------------------------
City, Inc., with the full power of substitution in the premises.
Dated: Signature:
------------------------ --------------------------------------
Note: Signature must correspond with the name as written upon the face of the
Warrant.
Page 10 - WARRANT CERTIFICATE
<PAGE>
EXHIBIT 10.5
VIDEO CITY, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT ("Agreement"), is made as of the
_________ day of _______________, 1999 by and between Video City, Inc., a
Delaware corporation (the "Company"), and ________________ ("Optionee").
R E C I T A L
Pursuant to the [1996 or 1998] Stock Option Plan (the "Plan") of the Company,
the Board of Directors of the Company or a committee to which administration of
the Plan is delegated by the Board of Directors (in either case, the
"Administrator") has authorized the granting to Optionee of a nonqualified stock
option to purchase the number of shares of Common Stock of the Company specified
in Paragraph 1 hereof, at the price specified therein, such option to be for the
term and upon the terms and conditions hereinafter stated.
A G R E E M E N T
NOW, THEREFORE, in consideration of the promises and of the undertakings of
the parties hereto contained herein, it is hereby agreed:
1. Number of Shares; Option Price. Pursuant to said action of the
------------------------------
Administrator, the Company hereby grants to Optionee the option ("Option") to
purchase, upon and subject to the terms and conditions of the Plan, ___________
shares of Common Stock of the Company ("Shares") at the price of $ ______ per
share.
2. Term. This Option shall expire on the day before the fifth anniversary of
----
the date of grant of the Option (the "Expiration Date") unless such Option shall
have been terminated prior to that date in accordance with the provisions of the
Plan or this Agreement. The term "Affiliate" as used herein shall have the
meaning as set forth in the Plan.
3. Shares Subject to Exercise. All Shares shall be subject to exercise
--------------------------
immediately on the date hereof and during the term specified in Paragraph 2
hereof, provided that Optionee is then and has continuously been a director or
is otherwise providing services to the Company, or its Affiliate, subject,
however, to the provisions of Paragraph 6 hereof.
4. Method and Time of Exercise. The Option may be exercised by written
---------------------------
notice delivered to the Company at its principal executive office stating the
number of shares with respect to which the Option is being exercised, together
with:
(A) a check or money order made payable to the Company in the amount of
1.
<PAGE>
the exercise price and any withholding tax, as provided under Paragraph 5
hereof; or
(B) if expressly authorized in writing by the Administrator, in its
sole discretion, at the time of the Option exercise, the tender to the Company
of shares of the Company's Common Stock owned by Optionee having a fair market
value not less than the exercise price, plus the amount of applicable federal,
state and local withholding taxes; or
(C) if expressly authorized in writing by the Administrator, in its
sole discretion, at the time of the Option exercise, the Optionee's full
recourse promissory note in a form approved by the Company; or
(D) if any other method such as cashless exercise is expressly
authorized in writing by the Administrator, in its sole discretion, at the time
of the Option exercise, the tender of such consideration having a fair market
value not less than the exercise price, plus the amount of applicable federal,
state and local withholding taxes.
Only whole shares may be purchased.
5. Tax Withholding. Should the Optionee become an employee of the Company
---------------
and this Option remains in effect, as a condition to exercise of this Option,
the Company may require Optionee 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 Option. At the discretion of the Administrator
and upon the request of Optionee, the minimum statutory withholding tax
requirements may be satisfied by the withholding of shares of Common Stock of
the Company otherwise issuable to Optionee upon the exercise of this Option.
6. Exercise on Termination of Employment. If for any reason Optionee
-------------------------------------
ceases to be a director of the Company or is not otherwise employed by the
Company or any of its Affiliates (such event being called a "Termination"), this
Option (to the extent then exercisable) may be exercised in whole or in part at
any time within three months of the date of such Termination, but in no event
after the Expiration Date. For purposes of this Paragraph 6, "employment"
includes service as a director or as a consultant or as an employee. For
purposes of this Paragraph 6, Optionee's employment shall not be deemed to
terminate by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not exceed
90 days or, if longer, if Optionee's right to reemployment by the Company or any
Affiliate is guaranteed either contractually or by statute.
7. Nontransferability. Except with the express written approval of the
------------------
Administrator, this Option may not be assigned or transferred except by will or
by the laws of descent and distribution, and may be exercised only by Optionee
during his lifetime and after his death, by his personal representative or by
the person entitled thereto under his will or the laws of intestate succession.
2.
<PAGE>
8. Optionee Not a Stockholder. Optionee shall have no rights as a
--------------------------
stockholder with respect to the Common Stock of the Company covered by this
Option until the date of issuance of a stock certificate or stock certificates
to him upon exercise of this Option. No adjustment will be made for dividends
or other rights for which the record date is prior to the date such stock
certificate or certificates are issued.
9. No Right to Employment. Should Optionee become an employee or
----------------------
consultant, nothing in the Option granted hereby shall interfere with or limit
in any way the right of the Company or of any of its Affiliates to terminate
Optionee's employment or consulting services at any time, nor confer upon
Optionee any right to continue in the employ of, or consult with, the Company or
any of its Affiliates.
10. Modification and Termination. The rights of Optionee are subject to
----------------------------
modification and termination in certain events as provided in Sections 6.1 and
6.2 of the Plan.
11. Restrictions on Sale of Shares. Optionee represents and agrees that
------------------------------
upon his exercise of this Option, in whole or in part, unless there is in effect
at that time under the Securities Act of 1933 a registration statement relating
to the Shares issued to him, he will acquire the Shares issuable upon exercise
of this Option for the purpose of investment and not with a view to their resale
or further distribution, and that upon such exercise thereof he will furnish to
the Company a written statement to such effect, satisfactory to the Company in
form and substance. Optionee agrees that any certificates issued upon exercise
of this Option may bear a legend indicating that their transferability is
restricted in accordance with applicable state and federal securities law. Any
person or persons entitled to exercise this Option under the provisions of
Paragraphs 6 and 7 hereof shall, upon each exercise of this Option under
circumstances in which Optionee would be required to furnish such a written
statement, also furnish to the Company a written statement to the same effect,
satisfactory to the Company in form and substance.
12. Plan Governs. This Agreement and the Option evidenced hereby are made
------------
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan, as it may be construed by the
Administrator. Optionee hereby acknowledges receipt of a copy of the Plan.
13. Notices. All notices to the Company shall be addressed to the
-------
Corporate Secretary at the principal executive office of the Company at 370
Amapola Avenue, Suite 208, Torrance, California, 90501, and all notices to
Optionee shall be addressed to Optionee at the address of Optionee on file with
the Company, or to such other address as either may designate to the other in
writing. A notice shall be deemed to be duly given if and when enclosed in a
properly addressed sealed envelope deposited, postage prepaid, with the United
States Postal Service. In lieu of giving notice by mail as aforesaid, written
notices under this Agreement may be given by personal delivery to Optionee or to
the Corporate Secretary (as the case may be).
3.
<PAGE>
14. Sale or Other Disposition. If Optionee at any time contemplates the
-------------------------
disposition (whether by sale, gift, exchange, or other form of transfer) of any
Shares acquired by exercise of this Option, he or she shall first notify the
Company in writing of such proposed disposition and cooperate with the Company
in complying with all applicable requirements of law, which, in the judgment of
the Company, must be satisfied prior to such disposition.
15. Corporate Transactions. In the event of a Corporate Transaction (as
----------------------
defined below), the Administrator shall notify Optionee at least 30 days prior
thereto or as soon as may be practicable. To the extent not previously
exercised, this Option shall terminate immediately prior to the consummation of
such Corporate Transaction unless the Administrator determines otherwise in its
sole discretion; provided, however, that the Administrator, in its sole
discretion, may permit exercise of this Option prior to its termination, even if
this Option would not otherwise have been exercisable. The Administrator may,
in its sole discretion, provide that this Option shall be assumed or an
equivalent option substituted by an applicable successor corporation or any
Affiliate of the successor corporation in the event of a Corporate Transaction.
A "Corporate Transaction" means a liquidation or dissolution of the Company, a
merger or consolidation of the Company with or into another corporation or
entity, a sale of all or substantially all of the assets of the Company, or a
purchase or other acquisition of more than 50 percent of the outstanding capital
stock of the Company in a single transaction or a series of related transactions
by one person or more than one person acting in concert.
[remainder of page left intentionally blank]
4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
VIDEO CITY, INC.
By__________________________
Name:
Title:
OPTIONEE
By__________________________
Address:
____________________________
____________________________
____________________________
____________________________
Social Security Number
5.
<PAGE>
EXHIBIT 10.6
INDEMNITY AGREEMENT
-------------------
This Agreement is made as of the 25th day of March, 1999, by and between Video
City, Inc., a Delaware corporation (the "Corporation"), and ___________ (the
"Indemnitee"), a director and/or officer of the Corporation.
WHEREAS, it is essential to the Corporation to retain and attract as directors
and officers the most capable persons available; and
WHEREAS, the substantial amount of corporate litigation subjects directors and
officers to expensive litigation risks; and
WHEREAS, it is now and has been the express policy of the Corporation to
indemnify its directors and officers so as to provide them with the maximum
possible protection permitted by law; and
WHEREAS, the Corporation does not regard the protection available to the
Indemnitee as adequate in the present circumstances, and realizes that the
Indemnitee may not be willing to serve as a director or officer without adequate
protection, and the Corporation desires the Indemnitee to serve in such
capacity;
NOW, THEREFORE, in consideration of the Indemnitee's service as a director or
officer after the date hereof, the parties agree as follows:
I. Definitions. As used in this Agreement:
-----------
(a) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought by or in the right of the
Corporation or otherwise and whether of a civil, criminal, administrative or
investigative nature.
(b) The term "Expenses" shall include, but is not limited to, expenses of
investigations, judicial or administrative proceedings or appeals, damages,
judgments, fines, amounts paid in settlement by or on behalf of the Indemnitee,
attorneys fees and disbursements, and any expenses of establishing a right to
indemnification under this Agreement.
(c) The terms "director" and "officer" shall include the Indemnitee's
service at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
1.
<PAGE>
other enterprise as well as director or officer of the Corporation.
(d) For purposes of Section 3 and 4, the phrase "decided in a
Proceeding" shall mean a decision by a court, arbitrator, hearing officer or
other judicial agent having the requisite legal authority to make such a
decision has become final and from which no appeal or other review proceeding is
permissible.
2. Indemnification of the Indemnitee. Subject only to the limitations set
---------------------------------
forth in Section 3, the Corporation will pay on behalf of the Indemnitee all
Expenses actually and reasonably incurred by the Indemnitee because of any claim
or claims made against him or her in a Proceeding by reason of the fact that he
or she is or was a director and/or officer.
3. Limitations on Indemnity. The Corporation shall not be obligated under
------------------------
this Agreement to make any payment of Expenses to the Indemnitee:
(a) the payment of which is prohibited by applicable law; or
(b) for which and to the extent payment is actually and unqualifiedly
made to the Indemnitee under an insurance policy or otherwise; or
(c) resulting from a claim in a Proceeding decided adversely to the
Indemnitee based upon or attributable to the Indemnitee gaining in fact any
personal profit or advantage to which he or she was not legally entitled.
4. Advance Payment of Costs. Expenses incurred by the Indemnitee in
------------------------
defending a claim against him in a Proceeding shall be paid by the Corporation
as incurred and in advance of the final disposition of such Proceeding. The
Indemnitee hereby agrees and undertakes to repay such amounts advanced if it
shall be decided in a Proceeding that he or she is not entitled to be
indemnified by the Corporation pursuant to this Agreement or otherwise.
5. Enforcement. If a claim under this Agreement is not paid by the
-----------
Corporation, or on its behalf, within 30 days after a written claim has been
received by the Corporation, the Indemnitee may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and if
successful in whole or in part, the Indemnitee shall be entitled to be paid also
the Expenses of prosecuting such claim.
2.
<PAGE>
6. Subrogation. In the event of payment under this Agreement, the
-----------
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.
7. Notice. The Indemnitee, as a condition precedent to his right to be
------
indemnified under this Agreement, shall give to the Corporation notice in
writing as soon as practicable of any claim made against him or her for which
indemnity will or could be sought under this Agreement. Notice to the
Corporation shall be given at its principal office and shall be directed to the
Corporate Secretary (or such other address as the Corporation shall designate in
writing to the Indemnitee); notice shall be deemed received if sent by prepaid
mail properly addressed, the date of such notice being the date postmarked. In
addition, the Indemnitee shall give Corporation such information and cooperation
as it may reasonably request.
8. Saving Clause. If this Agreement or any portion hereof shall be
-------------
invalidated on any ground by any court of competent jurisdiction, the
Corporation shall nevertheless indemnify the Indemnitee to the full extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated or by any other applicable law.
9. Indemnification Hereunder Not Exclusive. Nothing herein shall be
---------------------------------------
deemed to diminish or otherwise restrict the Indemnitee's right to
indemnification under any provision of the Certificate of Incorporation or
Bylaws of the Corporation or under Delaware law.
10. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with Delaware law.
11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall constitute the original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Corporation and its successors and assigns.
13. Continuation of Indemnification. The indemnification under this
-------------------------------
Agreement shall continue as to the Indemnitee even though he or she may have
ceased to be a director and/or officer and shall inure to the benefit of the
heirs and personal representatives of the Indemnitee.
3.
<PAGE>
14. Coverage of Indemnification. The indemnification under this Agreement
---------------------------
shall cover the Indemnitee's service as a director and/or officer and all of his
or her acts in such capacity, whether prior to or on or after the date of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
VIDEO CITY, INC.
By:___________________________
INDEMNITEE:
______________________________
4.
<PAGE>
EXHIBIT 10.7
SECOND MODIFICATION AGREEMENT
This SECOND MODIFICATION AGREEMENT entered into as of March 31, 1999,
between Video City, Inc., a Delaware corporation with its principal executive
offices at 370 Amapola Avenue, Suite 208, Torrance, California, 90501, (as a
"Borrower" and "Agent Borrower") and its wholly owned subsidiaries listed as "a
Borrower" below ("Subsidiaries", and together with Video City, Inc., the
"Borrowers") and BankBoston Retail Finance Inc., a Delaware corporation with an
address of 40 Broad Street, Boston 02109 (the "Lender").
WHEREAS, the Lender established a revolving line of credit pursuant to a
certain Loan and Security Agreement by and between the Lender and the Borrowers
dated as of December 29, 1998, as amended by that certain Modification Agreement
dated as of January 8, 1999 (the "Loan Agreement") whereby Lender agreed to lend
to Borrowers upon Borrowers' request, but subject to the terms and conditions
set forth in the Loan Agreement, up to Thirty Million Dollars and Zero Cents
($30,000,000).
WHEREAS, the Borrowers intend to acquire 100% of the issued and outstanding
stock of Video Galaxy, Inc., a Delaware corporation ("Video Galaxy"), pursuant
to an Agreement of Merger and Plan of Reorganization by and among Video City,
Inc., Video Galaxy, Inc. and James G. Howard, George M. Peloso and Kurt Peterson
dated as of March 30, 1999 (the "Galaxy Purchase Agreement").
WHEREAS, the Loan Agreement prohibits the Borrowers from consummating the
transactions contemplated by the Galaxy Purchase Agreement absent the consent of
the Lender.
WHEREAS, the Borrowers have requested that the Lender consent to the
consummation the transactions contemplated by the Galaxy Purchase Agreement by
the Borrowers.
WHEREAS, the Lender is willing to consent to the consummation of the
transactions contemplated by the Galaxy Purchase Agreement on the terms and
conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Lender and the Borrowers
mutually agree as follows:
1. Definitions. All capitalized terms used herein shall have the same
------------
meaning as set forth in the Loan Agreement, unless otherwise defined herein.
2. Effective Date. This Modification Agreement shall be effective upon
---------------
receipt by the Lender of each of the following documents in a form acceptable to
Lender in its sole discretion: (i) an original executed copy of this Agreement
signed by the Borrowers and Lender; (ii) evidence that the transactions
contemplated by the Galaxy Purchase Agreement, including the funding of at least
$1,700,000 of the cash purchase price by Ingram Entertainment, Inc., have closed
and been fully consummated; (iii) an Amended and Restated Revolving Credit Note
in the form attached hereto as Exhibit 1; (iv) an agreement executed by Ingram
Entertainment, Inc., modifying its Subordination Agreement dated as of December
28, 1998 to
<PAGE>
increase the minimum availability requirement in Section 4 thereof to
$3,000,000; and (v) such other documents as it may require in its sole
discretion.
3. Modifications to Loan Agreement.
-------------------------------
(a) Schedule 1 to the Loan Agreement shall be deleted and
Schedule 1 attached hereto shall be substituted therefor.
(b) The words "Video Galaxy, Inc." shall be added to the list of
Related Entities attached as Exhibit 4-2 to the Loan
Agreement.
(c) The words "Video Galaxy, Inc. - Video Galaxy" shall be added
to the list of Trade Names attached as Exhibit 4-3 to the
Loan Agreement.
(d) Exhibit 4-5(i) attached hereto, scheduling the new locations
to be acquired by the Borrowers, shall be incorporated by
reference into Exhibit 4-5 to the Loan Agreement.
(e) The following shall be added to the schedule of Indebtedness
attached as Exhibit 4-7 to the Loan Agreement: "Ingram
Entertainment Inc. (Video Galaxy, Inc.) $1,700,000"
(f) The figure "$1,250,000" shall be substituted for the figure
"$500,000" in the "Excess Availability" provision of Exhibit
5-12(a) Financial Performance Covenants.
(g) The Video City Deposit Accounts listed on the attached Annex
-----
G shall be added to the list of deposit accounts set forth
-
on Exhibit 7-1 to the Loan Agreement.
(h) The Credit Card Numbers listed on the attached Annex H shall
-------
be added to the list of credit card accounts set forth on
Exhibit 7-2 to the Loan Agreement.
4. Modification to Agented Borrowing Agreement.
-------------------------------------------
(a) Schedule 1 of the Agented Borrowing Agreement shall be
deleted and Schedule 1 attached hereto shall be substituted
therefor.
5. Representations and Warranties. In addition to all other
------------------------------
representations, warranties, and covenants made by the Borrowers in the
Loan Agreement, the Borrowers hereby represent and warrant to the
Lender as follows:
(a) Acquisition.
-----------
(i) The Galaxy Purchase Agreement has been duly authorized,
executed and delivered by each of the parties thereto
and constitutes a complete legal, valid and binding
obligation of each of the parties thereto, in
accordance with its terms.
2
<PAGE>
(ii) All necessary governmental and third party consents,
approvals, releases and filings required to be obtained
to effect the transactions contemplated by the Galaxy
Purchase Agreement have been obtained and are in full
force and effect.
(iii) The closing pursuant to the Galaxy Purchase Agreement,
including the funding of at least $1,700,000 of the
cash purchase price by Ingram Entertainment, Inc., has
occurred, or will occur simultaneously with the
execution of this Modification Agreement and Video
City, Inc. has acquired all of the right, title, and
interest in and to all of the capital stock of Video
Galaxy in accordance with the terms of the Galaxy
Purchase Agreement.
(iv) All representations and warranties of the parties to
the Galaxy Purchase Agreement are, to the best of the
Borrowers' knowledge, including the schedules and
exhibits thereto, were, at the time of the closing,
true and correct in all material respects.
(v) The Borrowers have delivered to the Lender a true,
correct and complete copy of the Galaxy Purchase
Agreement, including all exhibits and schedules
thereto.
(b) Unrelated Entities. The Borrowers hereby represent and
--------------------
warrant that the following entities are not and have never
been a Related Entity of any of the Borrowers: Macat
Enterprises, Inc. And Franklin Design, and the Collateral is
not subject to any liens by the Town of Rocky Hill or the
Town of Plainsfield, Connecticut.
(c) Representations and Warranties: No Event of Default. The
---------------------------------------------------
representations and warranties herein, in the Loan Agreement
and in each other Loan Document and certificate or other
writing delivered to the Lender pursuant to the Loan
Agreement on or prior to the Effective Date of this
Modification Agreement shall be correct and accurate as to
each Borrower on and as of the Effective Date of this
Modification Agreement as though made on and as of such
date; and no Default or Event of Default shall have occurred
and be continuing as of the Effective Date of this Agreement
or would result from this Agreement becoming effective in
accordance with its terms.
(d) Organization, Good Standing, Etc. Each Borrower (i) is a
---------------------------------
corporation, duly organized, validly existing and in good
standing under the laws of its state of organization, (ii)
has all requisite power and authority to execute, deliver
and perform this Agreement, and to perform the Loan
Agreement, as amended hereby, and (iii) is duly qualified to
do business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it
or in which the transaction of its business makes such
qualification necessary.
3
<PAGE>
(e) Authorization, Etc. The execution, delivery and performance
-------------------
by the Borrowers of this Agreement, and the performance by
the Borrowers of the Loan Agreement, as amended hereby, (i)
have been duly authorized by all necessary action, (ii) do
not and will not contravene the Borrowers' charter or by-
laws, any applicable law or any contractual restriction
binding on or otherwise affecting it or any of its
properties, (iii) do not and will not result in or require
the creation of any lien or other encumbrance (other than
pursuant to any Loan Documents) upon or with respect to any
of its properties, and (iv) do not and will not result in
any suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval
applicable to its operations or any of its properties.
(f) Governmental Approvals. No authorization or approval of
----------------------
other action by, and no notice to or filing with, any
governmental authority or agency or other regulatory body is
required in connection with the due execution, delivery and
performance by the Borrowers of this Agreement, or for the
performance of the Loan Agreement, as amended hereby.
(g) Enforceability of Loan Documents. This Agreement, the Loan
--------------------------------
Agreement, as amended hereby, and each other Loan Document
to which each Borrower is a party is a legal, valid and
binding obligation of such Borrower, enforceable against
such Borrower in accordance with its terms, except as such
enforceability may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally.
6. Miscellaneous.
-------------
(a) Continued Effectiveness of the Loan Documents. Except as
---------------------------------------------
otherwise expressly provided herein, the Loan Agreement and
the other Loan Documents are, and shall continue to be, in
full force and effect and are hereby ratified and confirmed
in all respects, except that on and after the date hereof
(i) all references in the Loan Agreement to "this
Agreement", "hereto", "hereof", "hereunder" or words of like
import referring to the Loan Agreement shall mean the Loan
Agreement as amended by this Agreement and (ii) all
references in the other Loan Documents to the "Loan
Agreement", "thereto", "thereof", "thereunder" or words of
like import referring to the Loan Agreement shall mean the
Loan Agreement as amended by this Agreement. Except as
expressly provided herein, the execution, delivery and
effectiveness of this Agreement shall not operate as an
amendment of any right, power or remedy of the Lenders under
the Loan Agreement or any other Loan Document, nor
constitute an amendment of any provision of the Loan
Agreement or any other Loan Documents.
4
<PAGE>
(b) Counterparts. This Agreement may be executed in any number
------------
of counterparts and by different parties hereto in separate
counterparts (including, without limitation, by telecopy),
each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same
agreement.
(c) Headings. Section headings herein are included for
--------
convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
(d) Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the law of the Commonwealth of
Massachusetts.
(e) Costs and Expenses. The Borrowers agree to pay on demand
------------------
all fees, costs and expenses of the Lender (including,
without limitation, the reasonable fees, costs and other
client charges of legal counsel to the Lender) in connection
with the preparation, execution and delivery of this
Agreement and the other related agreements, instruments and
documents.
(f) Modification Agreement as Loan Document. The Borrowers
---------------------------------------
hereby acknowledge and agree that this Agreement constitutes
a "Loan Document" under the Loan Agreement. Accordingly, it
shall be an Event of Default under the Loan Agreement if
(i) any representation or warranty made by the Borrowers
under or in connection with this Agreement shall have been
untrue, false or misleading in any material respect when
made, or (ii) the Borrowers shall fail to perform or observe
any term, covenant or agreement contained in this Agreement.
(g) Waiver of Jury Trial. EACH BORROWER AND THE LENDER EACH
--------------------
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON
CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF THE LENDER IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
HEREOF.
INTENTIONALLY LEFT BLANK
5
<PAGE>
Executed under seal as of the date written above.
Video City, Inc. ("Borrower" and "Agent Old Republic Entertainment, Inc.
Borrower") ("Borrower")
/s/ Timothy J. Denari /s/ Timothy J. Denari
- ---------------------- ----------------------
By: Timothy J. Denari By: Timothy J. Denari
Title: Chief Financial Officer Title: Chief Financial Officer
Sulpizio One, Inc. ("Borrower") Video Tyme, Inc. ("Borrower")
/s/ Timothy J. Denari /s/ Timothy J. Denari
- ---------------------- ----------------------
By: Timothy J. Denari By: Timothy J. Denari
Title: Chief Financial Officer Title: Chief Financial Officer
Videoland, Inc. ("Borrower") Video Galaxy, Inc. ("Borrower")
/s/ Timothy J. Denari /s/ Timothy J. Denari
- ---------------------- ----------------------
By: Timothy J. Denari By: Timothy J. Denari
Title: Chief Financial Officer Title: Chief Financial Officer
BANKBOSTON RETAIL FINANCE INC.
("Lender")
/s/ Robert DeAngelis
- ---------------------
By: Robert DeAngelis
Title: Senior Vice President
Signature Page to Second Modification Agreement
6
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 85,211
<SECURITIES> 0
<RECEIVABLES> 3,586,326
<ALLOWANCES> 0
<INVENTORY> 28,272,897
<CURRENT-ASSETS> 7,749,727
<PP&E> 8,461,772
<DEPRECIATION> 2,300,825
<TOTAL-ASSETS> 49,801,591
<CURRENT-LIABILITIES> 18,196,462
<BONDS> 24,751,833
0
5,015,192
<COMMON> 138,856
<OTHER-SE> 1,109,457
<TOTAL-LIABILITY-AND-EQUITY> 49,801,591
<SALES> 13,305,070
<TOTAL-REVENUES> 13,305,070
<CGS> 12,136,416
<TOTAL-COSTS> 12,136,416
<OTHER-EXPENSES> 2,080,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 588,727
<INCOME-PRETAX> (1,477,306)
<INCOME-TAX> (546,603)
<INCOME-CONTINUING> (930,703)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (930,703)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
