-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sdg261cAU+B6pJiThL/chUoSQ6x/8XZLGigZKgqDDmpuTTTSHECanAIM9spYlJMH P0UOrbetKBZ9UNMZzfrZBA== 0000944209-99-001488.txt : 19990921 0000944209-99-001488.hdr.sgml : 19990921 ACCESSION NUMBER: 0000944209-99-001488 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEO CITY INC CENTRAL INDEX KEY: 0000773135 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE DISTRIBUTION [7822] IRS NUMBER: 953897052 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14023 FILM NUMBER: 99714138 BUSINESS ADDRESS: STREET 1: 370 AMAPOLA AVENUE SUITE 208 CITY: TORRANCE STATE: CA ZIP: 90501 BUSINESS PHONE: 3105333900 MAIL ADDRESS: STREET 1: 370 AMAPOLA AVENUE SUITE 208 CITY: TORRANCE STATE: CA ZIP: 90501 FORMER COMPANY: FORMER CONFORMED NAME: PRISM ENTERTAINMENT CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 0-14023 VIDEO CITY, INC. (Exact name of registrant as specified in its charter) Delaware 95-3897052 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 Amapola Avenue, Suite 208, Torrance, California 90501 (Address of principal executive offices) (Zip Code) (310) 533-3900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding at September 20, 1999 - ----- --------------------------------- Common Stock 14,914,803 PART I. FINANCIAL INFORMATION Item 1. Financial Statements VIDEO CITY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 1999 January 31, (Unaudited) 1999 ----------- ----------- ASSETS Current assets: Cash $ 127,207 $ 172,043 Customer receivables 3,347,864 2,932,807 Notes receivable (Note 3) 2,144,703 86,703 Merchandise inventories 4,114,836 2,026,628 Other 105,837 52,870 ----------- ----------- Total current assets 9,840,447 5,271,051 Videocassette rental inventory, net of accumulated amortization 16,649,841 21,119,897 Property and equipment, net 5,376,042 4,525,986 Goodwill 6,112,742 5,176,850 Deferred tax asset 1,235,139 883,249 Other assets 1,886,832 1,275,847 ----------- ----------- TOTAL ASSETS $41,101,043 $38,252,880 =========== ===========
See accompanying notes to condensed consolidated financial statements. VIDEO CITY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 1999 January 31, (Unaudited) 1999 ----------- ----------- LIABILITIES Current liabilities: Accounts payable $ 15,550,775 $ 9,328,556 Accrued expenses 3,430,187 3,422,724 Current portion of long-term debt 3,807,833 2,125,187 ------------ ----------- Total current liabilities 22,788,795 14,876,467 Senior secured revolving credit facility 9,949,063 16,044,502 Long-term debt, less current portion 1,368,408 1,636,646 Other liabilities 299,226 427,791 ------------ ----------- TOTAL LIABILITIES 34,405,492 32,985,406 ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock (Note 4) 7,779,297 3,763,963 Common stock, $.01 par value per share, 30,000,000 shares Authorized; 14,184,090 shares issued and outstanding at July 31, 1999 and 13,498,715 shares issued and outstanding at January 31, 1999 141,841 134,987 Additional paid-in capital 10,520,785 9,229,687 Accumulated deficit (11,746,372) (7,861,163) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY 6,695,551 5,267,474 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,101,043 $38,252,880 ============ ===========
See accompanying notes to condensed consolidated financial statements. VIDEO CITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- REVENUES Rental revenues and product sales $14,212,961 $ 6,009,738 $27,518,031 $ 9,401,061 Management fee income - 13,500 - 56,333 ----------- ----------- ----------- ----------- TOTAL REVENUES 14,212,961 6,023,238 27,518,031 9,457,394 ----------- ----------- ----------- ----------- OPERATING COSTS AND EXPENSES Store operating expenses 9,151,708 2,715,555 17,055,535 4,430,824 Amortization of videocassette rental inventory 1,733,543 710,143 3,506,033 1,163,380 Cost of product sales 2,395,466 1,070,747 4,355,781 1,283,696 Cost of leased product 1,651,808 469,794 2,151,592 706,885 General and administrative expenses 3,371,466 771,818 5,452,017 1,450,559 ----------- ----------- ----------- ----------- TOTAL OPERATING COSTS AND EXPENSES 18,303,991 5,738,057 32,520,958 9,035,344 INCOME (LOSS) FROM OPERATIONS (4,091,030) 285,181 (5,002,927) 422,050 Other (Income) Expense: Gain on sale of assets (Note 3) (1,913,178) - (1,913,178) - Interest expense 694,035 199,957 1,282,762 322,101 Other (31,418) (15,097) (54,736) (15,097) ----------- ----------- ----------- ----------- Income (Loss) before taxes (2,840,469) 100,321 (4,317,775) 115,046 Income tax expense (benefit) - (1,829,869) (546,603) (1,829,869) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $(2,840,469) $ 1,930,190 $(3,771,172) $ 1,944,915 =========== =========== =========== =========== Preferred stock dividends 114,037 - 114,037 - ----------- ----------- ----------- ----------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(2,954,506) $ 1,930,190 $(3,885,209) $ 1,944,915 =========== =========== =========== =========== Basic Earnings (Loss) Per Share $(0.21) $0.17 $(0.28) $0.18 Diluted Earnings (Loss) Per Share $(0.21) $0.16 $(0.28) $0.17 Weighted average number of common shares outstanding Basic 13,978,010 11,605,716 13,811,603 11,053,757 Diluted 13,978,010 12,220,067 13,811,603 11,626,322
See accompanying notes to condensed consolidated financial statements. VIDEO CITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended July 31, July 31, 1999 1998 ----------- ----------- Increase (Decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $(3,771,172) $ 1,944,915 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,602,772 1,308,495 Issuance of stock for services and inventory 2,681,682 145,343 Decrease (increase) in deferred tax asset (546,603) (1,610,781) Gain on sale of asset (1,913,178) - Changes in assets and liabilities, net of effects of acquisitions and disposition: Increase in customer receivable (1,333,347) (561,472) Decrease in notes receivable - 124,253 Increase in merchandise inventories (2,552,530) (558,030) Increase in other assets (420,777) (946,154) Increase (decrease) in accounts payable 3,321,290 (664,812) Decrease in accrued expenses (1,961,342) (133,080) Decrease in other liabilities (128,565) (283,126) ----------- ----------- Net cash provided by (used in) operating activities (2,021,771) (1,234,449) ----------- ----------- Cash flows from investing activities: Purchases of videocassette rental inventory (5,591,490) (1,626,505) Purchases of fixed assets (2,071,508) (455,096) Proceeds from sale of film library - 818,171 Proceeds from the sale of fixed assets 13,863,000 - Store acquisitions (167,036) (177,632) ----------- ----------- Net cash provided by (used in) investing activities 6,032,966 (1,441,062) ----------- ----------- Cash flows from financing activities: Principal payments on obligations under capital leases - (18,136) Repayment of long-term debt (285,592) (3,759,367) Proceeds from issuance of long-term debt 1,700,000 - Proceeds from the issuance of preferred stock 625,000 700,000 Proceeds from borrowings (repayments) under credit facility (6,095,439) 5,745,655 ----------- ----------- Net cash provided by (used in) financing activities (4,056,031) 2,668,152 ----------- ----------- Net decrease in cash (44,836) (7,359) Cash at beginning of the period 172,043 28,127 ----------- ----------- Cash at end of the period $ 127,207 $ 20,768 =========== ===========
See accompanying notes to condensed consolidated financial statements. VIDEO CITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
Six Months Ended July 31, July 31, 1999 1998 ----------- ----------- Supplementary disclosures of cash flow information Cash paid during the year: Interest $ 890,304 $ 255,903 Income taxes 17,924 800 Noncash investing and financing activities: Professional services and the purchase of inventory financed Through issuance of common stock 278,682 145,343 Liabilities converted to preferred stock 4,000,000 - Note receivable from sale of assets 2,058,000 - Preferred stock dividends 114,037 -
For acquisitions consummated during the six months ended July 31, 1999 and July 31, 1998, the Company paid $167,036 and $177,632, respectively, net of cash acquired. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 2,156,998 $ 3,826,781 Cash paid (167,036) (177,632) Note payable issued - (2,155,370) Common stock issued (641,394) (1,458,679) Preferred stock issued (1,251,230) - Goodwill 3,630,456 2,052,419 ----------- ----------- Liabilities assumed $ 3,727,794 $ 2,087,519 =========== ===========
See accompanying notes to condensed consolidated financial statements. VIDEO CITY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statement Presentation The accompanying condensed consolidated financial statements include the accounts of Video City, Inc. ("the Company") and all of its wholly owned subsidiaries. These subsidiaries include Old Republic Entertainment, Inc., Sulpizio One, Inc., Video Tyme, Inc., Videoland, Inc., and Video Galaxy, Inc. All material intercompany transactions have been eliminated. The financial statements include the operations of companies acquired from the dates of acquisition. The condensed consolidated balance sheet as of July 31, 1999, the condensed consolidated statement of operations for the three and six months ended July 31, 1999 and 1998, and the condensed consolidated statement of cash flows for the six months ended July 31, 1999 and 1998 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended January 31, 1999. The accompanying condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position as of July 31, 1999, the results of operations for the three and six months ended July 31, 1999 and 1998, and cash flows for the six months ended July 31, 1999 and 1998. All such adjustments are of a normal and recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. 2. Acquisitions On March 26, 1999, the Company issued 112 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box Office, LLC as part of the consideration for the purchase of the assets of a video store acquired from Box Office, LLC. The Series C Convertible Redeemable Preferred Stock is convertible into shares of the Company's Common Stock at a conversion price of $2.00 per share. On March 31, 1999, the Company acquired Video Galaxy, Inc. ("Video Galaxy") from the shareholders of Video Galaxy, in a transaction structured as a reverse triangular merger, with a newly formed subsidiary of Video City merging into Video Galaxy. Video Galaxy owns and operates 15 retail video stores in Connecticut and Massachusetts. The purchase price consisted of (i) 344,000 shares of Video City common stock (subject to post-closing adjustments, if any) and (ii) assumption and payment of indebtedness of Video Galaxy by the Company in the amount of $4,833,000 (of which approximately $1,757,000 was paid off by the Company at closing and $2,000,000 was converted into 2,000 shares of the Company's Series D Convertible Redeemable Preferred Stock and 500,000 warrants with an exercise price of $3.00 per share). The payoff of indebtedness at closing was provided by proceeds obtained from a note payable to an existing creditor of the Company. 3. Disposition of Assets On July 26, 1999, the Company sold the assets of 45 of its Videoland retail video stores located in the states of Washington and Oregon to Blockbuster, Inc ("Blockbuster"). The Company sold the assets of four additional Videoland stores to Blockbuster on August 30, 1999. The aggregate purchase price for the sale of the 49 stores was approximately $14 million in cash, and approximately $2 million in notes receivable which are subject to the sale of assets of the four additional Videoland stores and to certain post closing adjustments. The Company recognized the gain on the sale of approximately $1.9 million on July 26, 1999, which includes the four additional Videoland stores which were sold on August 30, 1999. 4. Preferred Stock On March 26, 1999, the Company issued 112 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box Office, LLC, as part of the consideration for the purchase of the assets of a video store acquired from Box Office, LLC. Each share of Series C Convertible Redeemable Preferred Stock is convertible into 500 shares of the Company's Common Stock at a conversion price of $2.00 per share. The Series C Preferred Stock was converted based on the market value of the Company's common stock on the date of issuance. On June 30, 1999, Box Office LLC converted 112 shares of the Company's Series C Convertible Redeemable Preferred Stock to 56,000 of the Company's common stock. On March 31, 1999, the Company issued 2,000 shares of the Company's Series D Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Mortco, Inc. (a subsidiary of Rentrak Corporation) in consideration for the cancellation of indebtedness from Video Galaxy, Inc., to such parties in the amount of $2,000,000. Each share of Series D Convertible Redeemable Preferred Stock is convertible into 333.3 shares of the Company's common stock at a conversion price of $3.00 per share. On May 12, 1999, the Company sold 750 shares of the Company's Series AA Convertible Redeemable Preferred Stock, $100 stated value per share, to Mortco, Inc. in consideration for cancellation of trade payables owed by the Company to Rentrak Corporation in the amount of $75,000. The shares of Series AA Preferred Stock are convertible into the Company's Common Stock at a conversion price of $2.00 per share. On June 2, 1999, the Company issued 303 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to The Value Group, LLC in consideration for cancellation of trade payables owed by the Company to The Value Group, LLC in the amount of $303,000. On July 13, 1999, the Company issued 100 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to DAZ Systems, Inc. in consideration for cancellation of trade payables owed by the Company to DAZ Systems, Inc. in the amount of $100,000. The shares of Series C Preferred Stock are convertible into the Company's Common Stock at a conversion price of $2.00 per share. On June 11, 1999, the Company issued 2,000 shares of the Company's Series E Convertible Preferred Stock, $1,000 stated value per share, to International Video Distributors, LLC ("IVD") and Common Stock Purchase Warrants to purchase 50,000 shares of the Company's Common Stock at an exercise price of $2.00 per share. IVD cancelled outstanding trade payables in the amount of $2,000,000 owed by the Company to IVD. Each share of Series E Preferred Stock is convertible into a number of shares of Common Stock determined by dividing $1,000 by the conversion price in effect on the conversion date. During certain periods, the conversion price is equal to the market price of the Company's Common Stock and ranges between $1.60 and $3.00; after such period, the conversion price is equal to $3.00. On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to eight accredited investors including an executive officer of the Company, for cash in the amount of $625,000 in a private placement transaction. The shares of Series C Preferred Stock are convertible into the Company's Common Stock at a conversion price of $2.00 per share. 5. Preferred Stock Dividends On July 6, 1999, the Company issued 20,294 shares of the Company's Common Stock to two holders of the Company's Series B Convertible Redeemable Preferred Stock as stock dividends with respect to the Series B Preferred Stock. In addition, the Company issued 27,950 shares of the Company's Common Stock to various shareholders as stock dividends with respect to the Company's Series AA Convertible Redeemable Preferred Stock. 6. Earnings Per Share Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that will consequently share in earnings. The following table summarizes the calculation of the Company's basic and diluted earnings per share for the periods presented:
For the three months ended July 31, ------------------------------------------------------------------------------------------ 1999 1998 --------------------------------------------- ---------------------------------------- Per-share Per-share Income Shares amount Income Shares amount ------------ ------------ --------- ------------ ------------ ------- Basic EPS Net income (loss) available to common shareholders $(2,954,506) 13,978,010 $(0.21) $1,930,190 11,605,716 $0.17 Effect of Dilutive Securities: Incremental shares from outstanding Common stock options, warrants, and Preferred stock - - - - 614,351 (.01) ------------ ------------ --------- ------------ ------------ ------- Diluted EPS Net income (loss) available to common shareholders $(2,954,506) 13,978,010 $(0.21) $1,930,190 12,220,067 $0.16 ============ ============ ========= ============ ============ =======
For the six months ended July 31, ------------------------------------------------------------------------------------------ 1999 1998 --------------------------------------------- ---------------------------------------- Per-share Per-share Income Shares amount Income Shares amount ------------ ------------ --------- ------------ ------------ ------- Basic EPS Net income (loss) available to common shareholders $(3,885,209) 13,811,603 $(0.28) $1,944,915 11,053,757 $0.18 Effect of Dilutive Securities: Incremental shares from outstanding Common stock options, warrants, and Preferred stock - - - - 527,566 (.01) ------------ ------------ --------- ------------ ------------ ------- Diluted EPS Net income (loss) available to common shareholders $(3,885,209) 13,811,603 $(0.28) $1,944,915 11,626,566 $0.17 ============ ============ ========= ============ ============ =======
All outstanding common stock options, warrants, and preferred stock for the three months and six months ended July 31, 1999, were not included in the computations of diluted earnings per share because the effect of exercise and/or conversion would have an antidilutive effect on earnings per share. 7. Deferred Tax Assets Statement of Financial Accounting Standards No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets of a company will not be realized. At January 31, 1999, no valuation allowance was recorded against the deferred tax asset because the Company determined from its projections that it is more likely than not that future taxable income will be sufficient to realize the deferred tax asset. Due to the pending acquisitions, management cannot determine if it is more likely than not that future taxable income will be sufficient to realize all of the deferred tax asset generated in the current quarter. Accordingly, a valuation allowance has been established against the current quarter's losses. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward Looking Statements Certain statements in this Quarterly Report on Form 10-Q, particularly under this Item 2, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1999. Results of Operations Three months and six months ended July 31, 1999 compared to the three months and six months ended July 31, 1998. Revenues Rental revenue and product sales for the three months and the six months ended July 31, 1999 totaled $14,212,887 and $27,518,031, compared to $6,009,738 and $9,401,061 for the three months and six months ended July 31, 1998. The increases in revenue for the three months and six months ended July 31, 1999 were $8,203,223 or 136% and $18,116,970 or 193%. The increase in revenue was primarily attributable to the acquisition of 101 stores since July 31, 1998. Of the 101 stores, 9 stores were acquired on September 30, 1998, 76 stores were acquired on December 28, 1998, one store was acquired on March 26, 1999, and 15 stores were acquired on March 31, 1999. Although 49 stores were sold to Blockbuster on July 26, 1999, the effect on revenue was minimal for the three months and six months ended July 31, 1999. Same store revenues for the three months and six months ended July 31, 1999 increased by approximately 1.65% and .60%, compared to the same periods of the previous year. At July 31, 1999 the Company operated 95 stores in twelve states compared to 47 stores in 3 states at July 31, 1998. The Company had no management fee income for the quarter ended July 31, 1999, compared to $56,333 for the quarter ended July 31, 1998. The decrease resulted from the reduction in the number of managed stores from two to none. Store Operating Expenses Store operating expenses for the three months and the six months ended July 31, 1999 totaled $9,151,708 and $17,055,535, as compared to $2,715,555 and $4,430,824 for the three months and six months ended July 31, 1998. Store operating expenses increased by $6,436,153 or 237% and $12,624,711 or 285% for the three months and six months ended July 31, 1999 as compared to the corresponding periods of the previous year. The increase in store operating expenses was primarily due to the acquisition of 101 stores since July 31, 1998. Store operating expenses as a percentage of total revenue for the three months and six months ended July 31, 1999 were 64% and 62% compared to 45% and 47% for the corresponding period of 1998. The increase in store expenses as a percentage of total revenue for the three months and six months ended July 31, 1999 compared to the corresponding periods of 1998 was primarily due to assimilation, payroll, training, and occupancy costs for the 76 stores acquired on December 28, 1998 and the 15 stores acquired on March 31, 1999. In addition, store operating expenses increased by approximately $290,000 due to one time store closure expenses for 7 stores, which included rent, utilities, field management and payroll expenses. Amortization of Videocassette Rental Inventory Amortization of videocassette rental inventory for the three months and six months ended July 31, 1999 totaled $1,733,543 and $3,506,033, compared to $710,143 and $1,163,380 for the three months and six months ended July 31, 1998. Amortization of videocassette rental inventory increased by $1,023,400 or 144% and $2,342,653 or 201% for the three months and six months ended July 31, 1999 as compared to the corresponding periods of the previous year. The primary reason for the increase in the amortization of videocassette rental inventory was the acquisition of 101 stores since July 31, 1998. Amortization of videocassette rental inventory as a percentage of revenue for the three months and six months ended July 31, 1999 were 12.1% and 12.7%, compared to 11.8% and 12.3% for the corresponding periods in 1998. Cost of Product Sales Cost of product sales for the three months and six months ended July 31, 1999 was $2,395,466 and $4,355,781, compared to $1,070,747 and $1,283,696 for the three months and six months ended July 31, 1998. Cost of product sales increased by $1,324,719 or 124% and $3,072,085 or 239% for the three and months and six months ended July 31, 1999 as compared to the corresponding periods of the previous year. The increase in the cost of product sales for the three months and six months ended July 31, 1999 was primarily due to aggregate growth in videocassette, concession, and accessory sales of 47% and 148% as compared to the corresponding periods of the previous year, resulting from the acquisition of 101 stores since July 31, 1998. Cost of Leased Product Cost of leased product for the three months and six months ended July 31, 1999 totaled $1,651,808 and $2,151,592, compared to $469,794 and $706,885 for the three months and six months ended July 31, 1998. Cost of leased product increased by $1,182,014 or 252% and $1,444,707 or 204% for the three months and six months ended July 31, 1999 as compared to the corresponding periods of the previous year. The increase to cost of leased product was primarily attributable to the acquisition of 101 stores since July, 31 1998. Cost of leased product as a percentage of total revenue was 11.6% and 7.8% for the three months and six months ended July 31, 1999 compared to 7.8% and 7.5% for the corresponding period in 1998. The cost of leased products as a percentage of total revenue for the three months ended July 31, 1999 increased due to a greater number of stores participating in the revenue sharing (the Company and its suppliers share in the revenue generated from the leased products) arrangement. Cost of leased product as a percentage of revenue remained fairly constant for the six months ending July 31, 1999 as compared to the corresponding period of July 31, 1998. General and Administrative Expenses General and administrative expenses for the three months and six months ended July 31, 1999 totaled $3,371,466 and $5,452,017, compared to $771,818 and $1,450,559 for the three months and six months ended July 31, 1998. General and administrative expenses increased by $2,599,648 or 337% and $4,001,458 or 276% for the three months and six months ended July 31, 1999 as compared to the corresponding periods of the previous year. The increase for the three months and six months ended July 31, 1999 was primarily due to additional costs incurred to support the 76 stores purchased on December 28, 1998, the 15 stores purchased on March 31, 1999 and the additional 10 stores that were either acquired or newly opened since August 1, 1998. General and administrative expenses as a percentage of revenues were 23.7% and 19.8% for the three months and six months ended July 31, 1999 compared to 12.8% and 15.3% for the corresponding period of 1998. The increase in general and administrative expenses is attributable to the Company's anticipation of the up-coming merger with West Coast Entertainment Corporation, and the additional resources that will be required to complete the acquisition. Gain on Sale of Assets Gain on sale of assets of $1,913,178 was realized, for the three months and six months ended July 31, 1999, resulted from the sale of 49 stores to Blockbuster, Inc. on July 26, 1999. The Company recognized the gain on the sale on July 26, 1999, which included the sale of assets of the four additional Videoland stores on August 30, 1999. Interest Expense Interest expense for the three months and six months ended July 31, 1999 totaled $694,035 and $1,282,762, compared to $199,957 and $322,101 for the three months and six months ended July 31, 1998. Interest expense increased by $494,078 or 247% and $960,661 or 298%, for the three months and six months ended July 31, 1999 as compared to the corresponding periods of the previous year. The increase in interest expense was primarily due to the increased level of borrowings under the Company's credit facility. Income Taxes Statement of Financial Accounting Standards No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets of a company will not be realized. At January 31, 1999, no valuation allowance was recorded against the deferred tax asset because the Company determined from its projections that it is more likely than not that future taxable income will be sufficient to realize the deferred tax asset. Due to the pending acquisitions, management cannot determine if it is more likely than not that future taxable income will be sufficient to realize all of the deferred tax asset generated in the current quarter. Accordingly, a valuation allowance has been established against the current quarter's losses. Liquidity and Capital Resources The Company funds its short-term working capital needs, including the purchase of videocassettes and other inventory, primarily through cash from operations. The Company expects that cash from operations and extended vendor terms will be sufficient to fund future videocassette and other inventory purchases and other working capital needs for its existing stores. As part of its aggressive growth strategy, the Company requires greater working capital to sustain its current level of growth. There can be no assurance, however, that cash from operations and extended vendor terms will be sufficient to fund future videocassette and inventory purchases and other working capital to sustain the continued aggressive growth of the Company. In the event the Company is unable to obtain equity financing and/or debt financing, the Company may not have the liquidity to sustain its current rate of growth. Videocassette rental inventory is accounted for as a non-current asset under generally accepted accounting principles because it is not an asset that is reasonably expected to be completely realized in cash or sold in the normal business cycle. Although the rental of this inventory generates a substantial portion of the Company's revenue, the classification of this asset as non- current excludes it from the computation of working capital. The acquisition cost of videocassette rental inventory, however, is reported as a current liability until paid and, accordingly, included in the computation of working capital. Consequently, the Company believes working capital is not as significant a measure of financial condition for companies in the video retail industry as it is for companies in other industries. Because of the accounting treatment of videocassette rental inventory as a noncurrent asset, the Company anticipates that it will operate with a working capital deficit during the fiscal year ending January 31, 2000. The Company's primary long-term capital needs are for opening and acquiring new stores. The Company expects to fund such needs through cash flows from operations, the net proceeds from the possible sale of debt or equity securities, bank credit facilities, trade credit, and equipment leases. On December 28, 1998, the Company and its subsidiaries entered into a Loan and Security agreement with BankBoston providing for a $30 million revolving credit facility secured by all of the assets of Video City and its subsidiaries. The BankBoston credit facility replaced the Company's previous loan facility. The loan agreement provides for a maturity date of December 29, 2001 and a per annum interest rate equal to either (a) the base rate announced from time to time by BankBoston, N.A. plus 0.5 percent or (b) LIBOR plus 3.0 percent, at Video City's election. In addition, the Company is obligated to pay various fees in connection with the credit facility. The amount available for borrowing under the line of credit is determined by deducting the Company's principal balance of the line of credit from its borrowing base. The borrowing base is determined by multiplying the applicable inventory advance rate by the number of units of the acceptable inventory, net of reserves. The agreement provides for various financial reporting and financial performance covenants that require the Company to meet or exceed certain financial ratios on a monthly basis. Due to the Company not meeting some of the financial covenants as required, the Company has requested and been granted a waiver by BankBoston. As of July 31, 1999 the total outstanding balance under the BankBoston credit facility was $9,949,065 and the availability on the credit facility was approximately $779,406. As of September 18, 1999, the total outstanding balance under the BankBoston credit facility was $9,479,458 and the availability on the credit facility was approximately $21,915. The Company currently intends to finance future acquisitions with funds from borrowings, through assumption of liabilities by the Company and net proceeds from possible debt or equity financing. There is no assurance that such financing will be available to the Company. The Company has outstanding indebtedness in the aggregate amount of $3,105,141 with certain of the Company's key suppliers that reached maturity in July 1999 and are now overdue. The debt agreements with the key suppliers provide for increased interest rates and penalty payment of 8% during the periods of default. Although there can be no assurances, the Company anticipates that it will be able to extend the maturity dates of such indebtedness. The Company has outstanding indebtedness in the aggregate amount of $1,660,142 with one of the Company's key suppliers and several other affiliates that reach maturity in January and February 2000. The Company has defaulted on the monthly payments and will be subject to increased interest rates. Although there can be no assurances, the Company anticipates that it will be able renew the agreement with the key supplier on favorable terms before the maturity and repay the outstanding balance to the affiliates before the maturity date. On June 14, 1999, the Company issued an aggregate of 2,000 shares of the Company's Series E Convertible Preferred Stock, $1,000 stated value per share, to International Video Distributors, and common stock purchase warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $2.00 per share. International Video Distributors agreed to cancel outstanding trade payables in the amount of $2,000,000 owed by the Company to International Video Distributors. On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share to various shareholders for $625,000 cash in the form of a private placement. Each share of Series C Convertible Redeemable Preferred Stock is convertible into 500 shares of the Company's common stock at a conversion price of $2.00 per share. On July 26, 1999, the Company sold the assets of 45 of its Videoland retail video stores located in the states of Washington and Oregon to Blockbuster, Inc. The Company sold the assets of four additional Videoland stores to Blockbuster on August 30, 1999. The aggregate purchase price for the sale of the 49 stores is approximately $16 million in cash, of which $15.3 million was received as of August 30, 1999. The net proceeds from the sale of assets were utilized to pay down the Company's Senior Credit Facility. On August 1, 1999, the Company and West Coast Entertainment Corporation ("West Coast") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which a wholly-owned subsidiary of the Company will merge with and into West Coast such that West Coast will become a wholly-owned subsidiary of the Company (the "Merger"). Pursuant to the Merger Agreement, upon the effectiveness of the Merger, each outstanding share of common stock of West Coast will be converted into the right to receive (i) a number of shares of Common Stock of the Company, as is calculated pursuant to the Common Stock Exchange Ratio (as defined in the Merger Agreement), subject to a maximum of .333 shares and a minimum of .250 shares, and (ii) 0.05 shares of the Company's Series F Convertible Redeemable Preferred Stock, having a liquidation preference of $25.00 per share. The consummation of the Merger is subject to certain terms and conditions set forth in the Merger Agreement, including the obtaining or arranging of financing, the approval by the stockholders of the Company and West Coast, certain regulatory approvals and the approval by creditors and other third parties. There can be no assurance that the Merger with West Coast will be consummated. The Company has retained the services of R.W. Pressprich & Co. to provide general advisory services and to act as the Company's private placement agent in connection with the financing of the West Coast Merger. The Company intends to used the net proceeds of the debt financing to refinance certain of the creditors and vendors of the Company and West Coast, and to pay the costs and expenses of the Merger. There can be no assurances that the Company will be successful in obtaining such financing. Quantitative and Qualitative Disclosure About Market Risk The Company's market risk sensitive instruments do not subject it to material market risk exposures, except for such risks related to interest rate fluctuations. The carrying value of the Company's bank debt approximates fair value at July 31, 1999 and 1998 since the note related thereto substantially bears interest at a floating rate based upon the lenders' "prime" rate. The carrying value of the notes receivable approximate fair market value. Cash Flows Six Months Ended July 31, 1999 Compared to the Six Months Ended July 31, 1998 The increase in net cash used in operating activities of $787,322 for the six months ended July 31, 1999 compared to the six months ended July 31, 1998 was primarily due to the decrease in accrued expenses and an increase in merchandise inventories and accounts payable, partially offset by an increase in other assets. Net cash provided by investing activities increased by $7,474,028 for the six months ended July 31, 1999 compared to the six months ended July 31, 1998, primarily due to the increase in the proceeds from the sale of fixed assets, partially offset by the increase in the purchases of videocassette rental inventory and fixed assets. Net cash used in financing activities increased $6,724,183 for the six months ended July 31, 1999 compared to the six months ended July 31, 1998 primarily due to the increase in the repayment of the revolving credit facility, partially offset by the decrease in repayments of long-term debt. Year 2000 The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer systems that uses time-sensitive software programming may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculation or system failures. The Company has completed its assessment of all its information technology systems, related computer applications, and any embedded systems contained in the Company's buildings, equipment, and other infrastructure and has determined that it is ready for the Year 2000. Substantially all of the Company's hardware and software systems have been verified as being Year 2000 compliant. The Company has important and material relationships with a number of its vendors and suppliers and has obtained written verification from these third parties that they expect to be Year 2000 compliant in time. However, if the Company's vendors and suppliers are unable to resolve such processing issues in a timely manner, it could result in material financial risk to the Company. Management has determined that the costs of addressing potential problems are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. The estimated total costs to address the Company's Year 2000 issues is approximately $25,000 which includes the cost of upgrading software and hardware systems. The worst case scenario for the Company would be the failure of its video stores' point of sale system. The Company is in the process of developing back- up systems that do not rely on computers in response to this unlikely event. PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds On May 12, 1999, the Company sold 750 shares of the Company's Series AA Convertible Redeemable Preferred Stock, $100 stated value per share and warrants to purchase 37,500 shares of the Company's Common Stock at an exercise price of $2.00 per share, to Mortco, Inc. in consideration for cancellation of trade payables owed by the Company to Rentrak Corporation in the amount of $75,000. The shares of Series AA Preferred Stock are convertible into the Company's Common Stock at a conversion price of $2.00 per share. On June 11, 1999, the Company issued 2,000 shares of the Company's Series E Convertible Preferred Stock, $1,000 stated value per share, to International Video Distributors, LLC ("IVD") and Common Stock Purchase Warrants to purchase 50,000 shares of the Company's Common Stock at an exercise price of $2.00 per share. IVD cancelled outstanding trade payables in the amount of $2,000,000 owed by the Company to IVD. Each share of Series E Preferred Stock is convertible into a number of shares of Common Stock determined by dividing $1,000 by the conversion price in effect on the conversion date. During certain periods, the conversion price is equal to the market price of the Company's Common Stock and ranges between $1.60 and $3.00; after such period, the conversion price is equal to $3.00. On June 1, 1999 the Company issued 78,750 shares of the Company's Common Stock to Nordic Information Systems Inc. in consideration for certain software services provided to the Company by Nordic Information Systems Inc. In June 1999, the Company also issued 25,000 shares of the Company's Common Stock to an employee of the Company as compensation pursuant to an employment agreement. On June 2, 1999, the Company issued 303 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share and warrants to purchase 57,312 shares of the Company's Common Stock at an exercise price of $2.00 per share, to The Value Group, LLC in consideration for cancellation of trade payables owed by the Company to The Value Group, LLC in the amount of $303,000. On July 13, 1999, the Company issued 100 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to DAZ Systems, Inc. in consideration for cancellation of trade payables owed by the Company to DAZ Systems, Inc. in the amount of $100,000. The shares of Series C Preferred Stock are convertible into the Company's Common Stock at a conversion price of $2.00 per share. On July 1, 1999, the Company issued warrants to purchase 1,048,451 shares of the Company's Common Stock at an exercise price of $2.00 per share to Ingram Entertainment Inc. These warrants include the warrants to purchase 404,225 shares of Common Stock previously issued by the Company in connection with the acquisition of Videoland, Inc. in December 1998, and were payable in the event the Company was unable to pay in full by June 30, 1999, approximately $3,600,000 owed to Ingram Entertainment Inc. by the Company. On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share, to eight accredited investors including an executive officer of the Company, for cash in the amount of $625,000 in a private placement transaction. The shares of Series C Preferred Stock are convertible into the Company's Common Stock at a conversion price of $2.00 per share. The Company believes that the issuance of securities in each of the foregoing transactions were exempt from registration in reliance on Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. On August 11, 1999, the Company filed a Current Report on Form 8-K, dated August 6, 1999, to report under Item 5 the description of the Company's Common Stock. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: -------- Numbers Description - ------- ----------- 10.1 Stock Purchase Agreement, dated June 2, 1999, by and between the Company and The Value Group, LLC. 10.2 Common Stock Purchase Warrant, dated May 11, 1999, by and between the Company and The Value Group, LLC. 10.3 Stock Purchase Agreement, dated June 11, 1999, by and between the Company and International Video Distributors, LLC. 10.4 Common Stock Purchase Warrant, dated June 11, 1999, by and between the Company and International Video Distributors, LLC. 10.5 Agreement and Plan of Merger, dated August 1, 1999, by and among the Company, Key Stone Merger Corp. and West Coast Entertainment Corporation (previously filed). 10.6 Employment Agreement, dated June 16, 1999, between the Company and Richard T. Gibson 10.7 Amendment to Loan Documents, dated as of December 31, 1998, by and among the Company, Ingram Entertainment Inc. and the debtors named therein. 10.8 Warrant to Purchase Common Stock, dated December 31, 1998, executed by the Company for Ingram Entertainment Inc. 27 Financial Data Schedule (b) Reports on Form 8-K: ------------------- On April 15, 1999, the Company filed a Current Report on Form 8-K, dated March 31, 1999, to report under Item 2 the acquisition of Video Galaxy, Inc. On June 14, 1999, the Company filed an amendment to such Current Report to report under Item 7 that the transaction was not considered significant to file financial statements and exhibits. On August 10, 1999, the Company filed a Current Report on Form 8-K, dated July 26, 1999, to report under Item 2 the disposition of 49 of the Company's stores to Blockbuster, Inc., to report under Item 5 the merger agreement entered into with West Coast Entertainment Corporation, and to report under Item 7 the pro forma financial information of the disposition of the 49 stores sold to Blockbuster, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VIDEO CITY, INC. Date: September 20, 1999 /s/ Robert Y. Lee ----------------- Robert Y. Lee Chief Executive Officer (Principal Executive Officer) Date: September 20, 1999 /s/ Timothy J. Denari --------------------- Timothy J. Denari Chief Financial Officer (Principal Financial Officer) EX-10.1 2 STOCK PURCHASE AGREEMENT, DATED JUNE 2, 1999 EXHIBIT 10.1 STOCK PURCHASE AGREEMENT 1. Purchase and Payment. The Value Group, LLC ("Value Group") hereby -------------------- agrees to purchase from Video City, Inc., a Delaware corporation (the "Company"), 303 shares (the "Shares") of the Company's Series C Convertible Redeemable Preferred Stock, with a stated Value of $1,000 per share (the "Series C Preferred Stock"), having terms and conditions in accordance with the form of the Certificate of Designations attached hereto as Exhibit A (the "Certificate of Designations"), at an aggregate purchase price of $303,000 (the "Purchase Price") and the Company hereby agrees to issue the Shares subject to the terms and conditions of this Stock Purchase Agreement. Value Group and the Company agree that the Purchase Price of the Shares to be purchased hereby consists of the cancellation by Value Group of outstanding fees in the amount of $303,000 owed by the Company to Value Group as of the date hereof. 2. Closing; Conveyances at Closing The closing of the transactions ------------------------------- contemplated by this Stock Purchase Agreement shall take place as soon as practicable from the date hereof (the "Closing Date"). On the Closing Date, the Company shall deliver to Value Group the stock certificate representing the Shares, and Value Group shall have deemed to have delivered to the Company the Purchase Price (consisting of the cancellation by Value Group of outstanding fees as set forth in Section 1). The Shares shall not be deemed issued to, or owned by, Value Group until the stock certificate representing the Shares is delivered to Value Group. 3. Value Group Representations and Warranties. Value Group hereby ------------------------------------------ represents and warrants to the Company as follows: (a) Value Group is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Act"). (b) Value Group is acquiring the Shares for Value Group's own account, for investment purposes only, and not with a view to or for sale in connection with any distribution of such securities. (c) Value Group acknowledges its understanding that the offer and sale of the Shares are intended to be exempt from registration under the Act, and exempt from qualification under the securities laws of certain states of United States by virtue of exemptions from such registration and qualification for transactions not involving any public offering. In furtherance thereof, Value Group represents and warrants to and agrees with the Company as follows: (i) Value Group has the financial ability to bear the economic risk of its investment in the Company (including its possible loss), has adequate means of providing for its current needs and contingencies and has no need for liquidity with respect to its investment in the Company; and (ii) Value Group has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Shares and has obtained, in its judgment, sufficient information from the Company to evaluate the merits and risks of an investment in the Shares. (d) Value Group: (i) has received copies of the Company's Annual Report on Form 10- 1. K for the fiscal year ended January 31, 1999, as amended, filed with the Securities and Exchange Commission (the "SEC"), and all other reports of the Company filed with the SEC since May 17, 1999 that has been requested from the Company (collectively, the "SEC Filings"), and has been furnished any other documents requested from the Company by Value Group, and understands and has evaluated the risks of a purchase of the Shares; (ii) has been given the opportunity to ask questions of the Company concerning the Company, the terms and conditions of this offering and other matters pertaining to this investment, has received complete and satisfactory answers to any such inquiries and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information which was provided in order for it to evaluate the merits and risks of an investment in the Company to the extent the Company possesses such information or can acquire it without unreasonable effort or expense; and (iii) has read and is familiar with the SEC Filings and other information provided to Value Group and has determined that the Shares are a suitable investment for Value Group. (e) Value Group acknowledges its understanding that although the Company's strategy contemplates additional future mergers, acquisitions, strategic divestitures and financing, there can be no assurances that any such future transactions will be consummated. (f) In making its decision to purchase the Shares, Value Group is not relying on the Company with respect to tax or other economic considerations involved in this investment. (g) Value Group represents, warrants, and agrees that it will not sell, transfer or otherwise dispose of the Shares or the shares of Common Stock issuable upon conversion of the Shares (i) without registration under the Act and any applicable state securities laws or (ii) without providing to the Company a written opinion of counsel to Value Group reasonably satisfactory to the Company opining that an exemption from registration or qualification is available. Value Group fully understands and agrees that Value Group must bear the economic risk of its investment for an indefinite period of time because, among other reasons, the Shares and the shares of Common Stock issuable upon conversion of the Shares have not been registered under the Act or under the securities laws of certain states and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Act and under applicable securities laws of such states, or an exemption from such registration is available. Value Group acknowledges that the Company's Common Stock is currently traded on the OTC Bulletin Board, that there is no established public trading market for the Series C Preferred Stock, and that there can be no assurance that such an established public trading market will develop in the future. 2. (h) Value Group acknowledges and agrees that the certificate representing the Shares shall bear the following (or substantially equivalent) legends on the face or reverse side thereof: "THE SECURITES REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON CONVERSION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER" Any certificate or other document issued at any time in exchange or substitution for, or upon conversion or exercise of, any security bearing such legends shall also bear such (or substantially equivalent) legend unless, in the sole opinion of counsel for the Company, the securities represented thereby need no longer be subject to such restrictions. (i) Value Group is duly organized and validly existing and has all power and authority to enter into this Stock Purchase Agreement and to invest in the Shares as contemplated herein. The execution, delivery and performance by Value Group of this Stock Purchase Agreement has been duly authorized by all necessary action on the part of Value Group. (j) No agency of the United States or any state thereof has passed upon the Shares or made any findings or determination as to the fairness of this investment. (k) The representations, warranties, agreements, undertakings and acknowledgements made by Value Group in this Stock Purchase Agreement are made with the intent that they be relied upon by the Company and its agent (including, without limitation, the Company's counsel) in determining Value Group's suitability as a purchaser of the Shares. (l) Value Group's place of residence is located in California. 4. Registration. The Company shall, at its sole cost and expenses, ------------ file a registration statement with the Securities and Exchange Commission covering the resale of the shares of Common Stock issuable upon conversion of the Shares under the Act on or before June 30, 1999 and shall use its best efforts to cause such registration statement to become effective as soon as practicable thereafter. The Company shall take all actions reasonably necessary to keep such registration statement continuously effective until that date upon which Value Group no longer owns any of the Shares or the shares of Common Stock issuable upon conversion of the Shares. The Company shall (i) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith; and (ii) furnish to Value Group copies of the registration statement and the prospectus included therein as Value Group may reasonably request in order to facilitate the public sale or other disposition of the shares of Common Stock covered by such registration statement. In connection with any registration hereunder, Value Group shall provide such information and execute such documents as may reasonably be requested by the Company in connection with such registration. 5. Indemnity by Value Group. Value Group agrees to indemnify and ------------------------ hold harmless the Company and its directors, officers, employees and counsel against any and all loss, liability, 3. claim, damage, and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) related to (i) any false representation or warranty made by Value Group herein or (ii) any transfer by Value Group of the Shares or the shares of Common Stock of the Company issuable upon conversion of the Shares in violation of any securities laws; or (iii) any claims arising out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement filed pursuant to Section 4 herein, or the omission or alleged omission therein to state a material fact required to be stated in such registration statement or necessary to make the statements therein not misleading, to the extent such claim arises out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished to the Company in writing by Value Group expressly for use therein. 6. Indemnity by the Company. The Company agrees to indemnify and hold ------------------------ harmless Value Group and its directors, officers, employees and counsel against any and all loss, liability, claim, damage, and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) related to (i) any false representation or warranty made by the Company herein or the failure by the Company to perform any covenant or agreement contained herein or in the Certificate of Designations or (ii) any issuance of the Shares or the shares of Common Stock of the Company issuable upon conversion of the Shares in violation of any securities laws; or (iii) any claims arising out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement filed pursuant to Section 4 herein, or the omission or alleged omission therein to state a material fact required to be stated in such registration statement or necessary to make the statements therein not misleading, except to the extent such claim arises out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished to the Company in writing by Value Group expressly for use therein. 7. Assignment. Neither this Stock Purchase Agreement nor any of the ---------- rights or obligations hereunder may be assigned by any party without the prior written consent of the other party. Subject to the foregoing, this Stock Purchase Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other person shall have any right, benefit or obligation under this Stock Purchase Agreement as a third party beneficiary or otherwise. 8. Notices. All notices, requests, demands and other communications ------- which are required or may be given under this Stock Purchase Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method (with proof of transmission); the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., FED EX); and upon receipt, if sent by ---- certified or registered mail, return receipt requested. 9. Governing Law. This Stock Purchase Agreement shall be governed by ------------- and construed in accordance with the laws of the State of California without reference to choice of law provisions. 10. Waiver of Right to Trial by Jury. Each party to this Stock Purchase -------------------------------- Agreement hereby waives its rights to a trial by jury. 4. 11. Expenses. Each party hereto shall pay its own legal, accounting, -------- out-of-pocket and other expenses incident to this Stock Purchase Agreement and to any action taken by such party in preparation for carrying this Stock Purchase Agreement into effect. 12. Invalidity. In the event that any one or more of the provisions ---------- contained in this Stock Purchase Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Stock Purchase Agreement or any other such instrument. 13. Entire Agreement. This Stock Purchase Agreement, together with all ---------------- exhibits hereto, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. 14. Attorneys' Fees. In the event of any legal action or proceeding to --------------- enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. 15. Multiple Counterparts. This Stock Purchase Agreement may be executed in --------------------- one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of June 2, 1999. VIDEO CITY, INC. By: /s/ Robert Y. Lee ------------------------------ Robert Y. Lee Chief Executive Officer THE VALUE GROUP, LLC /s/ John T. Sheehy ------------------------------ John T. Sheehy Managing Director 5. EX-10.2 3 COMMON STOCK PURCHASE WARRANT EXHIBIT 10.2 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. VIDEO CITY, INC. COMMON STOCK PURCHASE WARRANT 1. Issuance. For value received, the receipt of which is hereby -------- acknowledged, The Value Group, LLC (the "Holder") is hereby granted the right, subject to the terms and conditions of this Warrant, to purchase at any time commencing May 11, 1999 and continuing until 5:00 P.M., Pacific Daylight Time, on May 10, 2002, FIFTY SEVEN THOUSAND THREE HUNDRED AND TWELVE (57,312) fully paid and nonassessable shares of Common Stock, $0.01 par value per share (the "Common Stock"), of VIDEO CITY, INC. (the "Company"), at an exercise price of $2.00 per share (the "Exercise Price"), subject to adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. This Warrant is exercisable in whole or in part -------------------- (but not less than 1,000 shares of Common Stock covered by this Warrant) at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by check. Upon surrender of this Warrant with the annexed Notice of Exercise of Warrant form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. 3. Reservation of Shares. The Company hereby agrees that at all times --------------------- during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence ----------------------------- satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be -------------------- entitled to any rights of a stockholder of the Company, either at law or in equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. Nothing contained herein shall confer upon the Holder any right to consult for, or be employed with, the Company or any of its affiliates. 1. 6. Certain Adjustments. ------------------- 6.1 Adjustments for Stock Dividends, Stock Splits, Subdivisions etc. --------------------------------------------------------------- If the Company shall (i) declare a dividend or make a distribution in shares of Common Stock, (ii) effect a stock split or subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares, (iii) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares, or (iv) effect a capital reorganization or reclassification of the outstanding shares of Common Stock, the Exercise Price and the number of shares purchasable pursuant to this Warrant shall be appropriately adjusted proportionately so that the ratio of (i) the aggregate number of shares purchasable by exercise of this Warrant to (ii) the total number of shares outstanding immediately prior to such stock dividend, stock split, subdivision, combination, reorganization, reclassification or the like shall remain unchanged, and the aggregate purchase price of shares issuable pursuant to this Warrant shall remain unchanged. Successive adjustments shall be made whenever any event specified above shall occur. 6.2 Termination for Consolidation, Merger, etc. In case the Company ------------------------------------------ (i) shall consolidate with or merge into any other person and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) shall permit any other person to consolidate with or merge into the Company and the Company shall be the continuing or surviving person, but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property, or (iii) shall transfer all or substantially all of its properties or its assets to any other person (each a "Corporate Transaction"); then, and in each such case, this Warrant shall, to the extent not exercised, terminate effective upon the consummation of such Corporate Transaction. 6.3 Rounding of Calculations; Minimum Adjustment. All calculations -------------------------------------------- under this Section 6 shall be made to the nearest cent or to the nearest share, as the case may be. No adjustment shall be made if the amount of such adjustment would be less than $0.01, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.01 or more. 7. Tax Withholding. As a condition to exercise of this Warrant, the --------------- Company may require the Holder to pay over to the Company all applicable federal, state and local taxes which the Company is required to withhold with respect to the exercise of this Warrant. 8. Transfer to Comply with the Securities Act. This Warrant has not been ------------------------------------------ registered under the Securities Act of 1933, as amended, (the "Securities Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the 2. Securities Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Securities Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 9. Notices. All notices or other communications given or made ------- hereunder shall be in writing and shall be delivered by hand, against written receipt, or mailed by registered or certified mail, return receipt requested, postage prepaid, to the Holder at such Holder's address as shown on the books of the Company and to the Company at its principal executive offices. Notices shall be deemed given on the date of receipt or, if mailed, three business days after mailing, except notices of change of address, which shall be deemed given when received. Any party may designate another address or person for receipt of notices hereunder by notice given to the other parties in accordance with this Section. 10. Supplements and Amendments; Whole Agreement. This Warrant may be ------------------------------------------- amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof, and there are no representations, warranties, agreements or understandings other than expressly contained herein. 11. Governing Law. This Warrant shall be deemed to be a contract ------------- made under the laws of the State of California and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 12. Descriptive Headings. Descriptive headings of the several -------------------- Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the undersigned have executed this Warrant as of 11th day of May 1999. VIDEO CITY, INC. By: /s/ Robert Y. Lee ---------------------------- Robert Y. Lee Chief Executive Officer 3. THE VALUE GROUP, LLC By: /s/ John T. Sheehy ------------------------------ John T. Sheehy Managing Director 4. NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant dated as of May 11, 1999 to purchase _______________ shares of the Common Stock, $0.01 par value per share, of VIDEO CITY, INC., and tenders herewith payment in accordance with Section 2 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated: ----------------------- By: -------------------------- CASH: $ ------------- 5. EX-10.3 4 STOCK PURCHASE AGREEMENT EXHIBIT 10.3 STOCK PURCHASE AGREEMENT 1. Purchase and Payment. International Video Distributors, LLC -------------------- ("IVD") hereby agrees to purchase from Video City, Inc., a Delaware corporation (the "Company"), (i) 2,000 shares (the "Shares") of the Company's Series E Convertible Preferred Stock, with a stated value of $1,000 per share (the "Series E Preferred Stock"), having terms and conditions in accordance with the form of the Certificate of Designations attached hereto as Exhibit A (the "Certificate of Designations") and (ii) Common Stock Purchase Warrants (the "Warrants") to purchase 50,000 shares of the Company's Common Stock ("Common Stock") at an exercise price of $2.00 per share, having terms and conditions in accordance with the form of warrant attached hereto as Exhibit B, at an aggregate purchase price of $2,000,000 (the "Purchase Price") and the Company hereby agrees to issue the Shares and the Warrants subject to the terms and conditions of this Stock Purchase Agreement (the Shares and the Warrants are referred to herein, collectively, as the "Securities"). IVD and the Company agree that the Purchase Price of the Securities to be purchased hereby consists of the cancellation by IVD of outstanding trade payables in the amount of $2,000,000 owed by the Company to IVD as of the date hereof as set forth in the invoices attached hereto as Exhibit C. 2. Trading Price of Common Stock; Conversion Restriction. In the event ----------------------------------------------------- IVD provides notice to the Company of its election to convert all or any part of the Shares of Series E Preferred Stock during the 90 Day Period (as defined in the Certificate of Designations) in accordance with the provisions of the Certificate of Designations and the average of the Trading Price (as defined in the Certificate of Designations) of the Company's Common Stock for the five consecutive trading days immediately preceding the date in which IVD delivers such notice to the Company of IVD's election to convert (the "Applicable Average Trading Price") is less than $1.60, then in addition to issuing the number shares of Common Stock issuable to IVD upon such conversion pursuant to the Certificate of Designations, the Company shall pay to IVD, within five days of receipt of the applicable conversion notice, an amount equal to the difference between (i) $1,000, and (ii) 625 multiplied by the Applicable Average Trading Price, for each share of Series E Preferred Stock then converted by IVD. IVD agrees that of the 2,000 shares of Series E Preferred Stock to be issued to IVD pursuant to this Stock Purchase Agreement, IVD may only convert (i) up to 1,000 shares of such 2,000 Shares during the period from the date of issuance until the 30th day of the 90 Day Period (as defined in the Certificate of Designations), (ii) up to 1,500 shares of such 2,000 Shares during the period after the 30th day of the 90 Day Period until the 60th day of the 90 Day Period, and (iii) all or any of the 2,000 Shares at any time after the 60th day of the 90 Day Period, so that IVD may convert all or any of the 2,000 Shares after the 60th day of the 90 Day Period. 3. Closing; Conveyances at Closing. The closing of the transactions ------------------------------- contemplated by this Stock Purchase Agreement (the "Closing") shall take place on or before June 15, 1999 (the "Closing Date"). On the Closing Date, the Company shall deliver to IVD the stock certificate representing the Shares and the Warrants, and IVD shall have deemed to have delivered to the Company the Purchase Price (consisting of the cancellation by IVD of outstanding trade payables as set forth in Section 1). The Shares 1. shall not be deemed issued to, or owned by, IVD until the stock certificate representing the Shares is delivered to IVD. 4. Conditions to Closing by IVD. The obligations of IVD to consummate ---------------------------- the transactions contemplated hereby are subject to the satisfaction, at or prior to the Closing Date, of each of the following conditions, any of which may be waived by IVD: (a) All representations and warranties of the Company contained in this Stock Purchase Agreement shall be true and correct at and as of the date of this Stock Purchase Agreement and at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date. (b) All permits, waivers, consents, approvals and authorizations from governmental authorities and other parties necessary to consummate the transactions contemplated hereby shall have been obtained. (c) The Company shall have executed and filed the Certificate of Designations for the Series E Preferred Stock with the Secretary of State of the State of Delaware, and shall have delivered a copy thereof to IVD. (d) The Company shall have delivered to IVD stock certificates representing the Shares and the Warrants. 5. Conditions to Closing by the Company. The obligations of the ------------------------------------ Company to consummate the transactions contemplated hereby are subject to the satisfaction, at or prior to the Closing Date, of each of the following conditions, any of which may be waived by the Company: (a) All representations and warranties of IVD contained in this Stock Purchase Agreement shall be true and correct at and as of the date of this Stock Purchase Agreement and at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date. (b) All permits, waivers, consents, approvals and authorizations from governmental authorities and other parties necessary to consummate the transactions contemplated hereby shall have been obtained. (c) IVD shall have delivered to the Company the Purchase Price by acknowledging the cancellation by IVD of outstanding trade payables in the amount of $2,000,000 owed by the Company to IVD. 6. IVD Representations and Warranties. IVD hereby represents and warrants ---------------------------------- to the Company as follows: (a) IVD is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Act"). 2. (b) IVD is acquiring the Securities for IVD's own account, for investment purposes only, and not with a view to or for sale in connection with any distribution of such securities. (c) IVD acknowledges its understanding that the offer and sale of the Securities is intended to be exempt from registration under the Act, and exempt from qualification under the securities laws of certain states of United States by virtue of exemptions from such registration and qualification for transactions not involving any public offering. In furtherance thereof, IVD represents and warrants to and agrees with the Company as follows: (i) IVD has the financial ability to bear the economic risk of its investment in the Company (including its possible loss), has adequate means of providing for its current needs and contingencies and has no need for liquidity with respect to its investment in the Company; and (ii) IVD has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Securities and has obtained, in its judgment, sufficient information from the Company to evaluate the merits and risks of an investment in the Securities. (d) IVD: (i) has received copies of the Company's Annual Report on From 10-K for the fiscal year ended January 31, 1999, as amended, filed with the Securities and Exchange Commission (the "SEC"), and all other reports of the Company filed with the SEC since May 17, 1999 that has been requested from the Company (collectively, the "SEC Filings"), and has been furnished any other documents requested from the Company by IVD, and understands and has evaluated the risks of a purchase of the Securities; (ii) has been given the opportunity to ask questions of the Company concerning the Company, the terms and conditions of this offering and other matters pertaining to this investment, has received complete and satisfactory answers to any such inquiries and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information which was provided in order for it to evaluate the merits and risks of an investment in the Company to the extent the Company possesses such information or can acquire it without unreasonable effort or expense; and (iii) has read and is familiar with the SEC Filings and other information provided to IVD and has determined that the Securities are a suitable investment for IVD. (e) IVD acknowledges its understanding that although the Company's strategy contemplates additional future mergers, acquisitions, strategic dispositions and financing, there can be no assurances that any such future transactions will be 3. consummated. (f) In making its decision to purchase the Securities, IVD has relied solely upon independent evaluations or investigations made by IVD. IVD is not relying on the Company with respect to tax or other economic considerations involved in this investment. (g) IVD represents, warrants, and agrees that it will not sell, transfer or otherwise dispose of the Securities or the shares of Common Stock issuable upon conversion or exercise of the Securities (i) without registration under the Act and any applicable state securities laws or (ii) without providing to the Company a written opinion of counsel to IVD reasonably satisfactory to the Company opining that an exemption from registration or qualification is available. IVD fully understands and agrees that IVD must bear the economic risk of its investment for an indefinite period of time because, among other reasons, the Securities and the shares of Common Stock issuable upon conversion or exercise of the Securities have not been registered under the Act or under the securities laws of certain states and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Act and under applicable securities laws of such states, or an exemption from such registration is available. IVD acknowledges that the Company's Common Stock is currently traded on the OTC Bulletin Board, that there is no established public trading market for the Series E Preferred Stock or the Warrants, and that there can be no assurance that such an established public trading market will develop in the future. (h) IVD acknowledges and agrees that the certificate representing the Securities shall bear the following (or substantially equivalent) legends on the face or reverse side thereof: "THE SECURITES REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON CONVERSION OR EXERCISE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER" Any certificate or other document issued at any time in exchange or substitution for, or upon conversion or exercise of, any security bearing such legends shall also bear such (or substantially equivalent) legend unless, in the sole opinion of counsel for the Company, the securities represented thereby need no longer be subject to such restrictions. (i) IVD is a limited liability company duly organized and validly existing and has all power and authority to enter into this Stock Purchase Agreement and to invest in the Securities as contemplated herein. IVD is authorized and qualified to become an investor in the Company. The execution, delivery and performance by IVD of 4. this Stock Purchase Agreement has been duly authorized by all necessary action on the part of IVD. (j) No agency of the United States or any state thereof has passed upon the Securities or made any findings or determination as to the fairness of this investment. (k) The representations, warranties, agreements, undertakings and acknowledgements made by IVD in this Stock Purchase Agreement are made with the intent that they be relied upon by the Company and its agent (including, without limitation, the Company's counsel) in determining IVD's suitability as a purchaser of the Securities. (l) The principal executive offices of IVD are located at 59 Lake Drive, Hightstown, New Jersey 08520. 7. Company Representations and Warranties. The Company hereby represents -------------------------------------- and warrants to IVD as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full corporate power and authority to conduct its business as it is presently being conducted. (b) The execution, delivery and performance by the Company of this Stock Purchase Agreement and the consummation by the Company of the transactions contemplated hereby are within the corporate powers of the Company and have been duly authorized by all necessary corporate action on the part of the Company. This Stock Purchase Agreement is the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms. (c) The execution, delivery and performance by the Company of this Stock Purchase Agreement do not and will not (i) contravene or conflict with the Certificate of Incorporation, as amended, or Bylaws, as amended, of the Company, (ii) contravene or conflict with or constitute a violation of any provision of any law, statute, rule, regulation, judgment, injunction, order, writ or decree binding upon or applicable to the Company or any part of its business, (iii) constitute a default under or breach of, or violate or give rise to any right of termination, cancellation or acceleration of any right or obligation of the Company, or to a loss of any benefit relating to its business or operations to which the Company is entitled under any provision of any contract to which the Company is a party or by which any of its assets is or may be bound or (iv) result in the creation or imposition of any encumbrance on any of the Company's assets. (d) The Securities to be issued hereunder will, when issued and paid for in accordance with this Stock Purchase Agreement, be duly and validly issued, nonassessable shares free and clear of any and all encumbrances. 8. Registration. The Company shall, at its sole cost and expenses, ------------ file a registration statement with the Securities and Exchange Commission covering the resale of 5. the shares of Common Stock issuable upon conversion of the Shares and upon exercise of the Warrants under the Act on or before June 18, 1999 and shall use its best efforts to cause such registration statement to become effective as soon as practicable thereafter. The Company shall take all actions reasonably necessary to keep such registration statement continuously effective until that date upon which IVD no longer owns any of the Shares, the Warrants or the shares of Common Stock issuable upon conversion of the Shares or upon exercise of the Warrants. The Company shall (i) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith; and (ii) furnish to IVD copies of the registration statement and the prospectus included therein as IVD may reasonably request in order to facilitate the public sale or other disposition of the shares of Common Stock covered by such registration statement. In connection with any registration hereunder, IVD shall provide such information and execute such documents as may reasonably be requested by the Company in connection with such registration. 9. Indemnity by IVD. IVD agrees to indemnify and hold harmless the ---------------- Company and its directors, officers, employees and counsel against any and all loss, liability, claim, damage, and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) related to (i) any false representation or warranty made by IVD herein or (ii) any transfer by IVD of the Securities or the shares of Common Stock of the Company issuable upon conversion or exercise of the Securities in violation of any securities laws; or (iii) any claims arising out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement filed pursuant to Section 8 herein, or the omission or alleged omission therein to state a material fact required to be stated in such registration statement or necessary to make the statements therein not misleading, to the extent such claim arises out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished to the Company in writing by IVD expressly for use therein. 10. Indemnity by the Company. The Company agrees to indemnify and ------------------------ hold harmless IVD and its member, officers, employees and counsel against any and all loss, liability, claim, damage, and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) related to (i) any false representation or warranty made by the Company herein or the failure by the Company to perform any covenant or agreement contained herein or in the Warrants or Certificate of Designations or (ii) any issuance of the Securities or the shares of Common Stock of the Company issuable upon conversion or exercise of the Securities in violation of any securities laws; or (iii) any claims arising out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement filed pursuant to Section 8 herein, or the omission or alleged omission therein to state a material fact required to be stated in such registration statement or necessary to make the statements therein not misleading, except to the extent such claim arises out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission based upon 6. information furnished to the Company in writing by IVD expressly for use therein. 11. Assignment. Neither this Stock Purchase Agreement nor any of ---------- the rights or obligations hereunder may be assigned by any party without the prior written consent of the other party. Subject to the foregoing, this Stock Purchase Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other person shall have any right, benefit or obligation under this Stock Purchase Agreement as a third party beneficiary or otherwise. 12. Notices. All notices, requests, demands and other communications ------- which are required or may be given under this Stock Purchase Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method (with proof of transmission); the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., FED EX); and upon receipt, if sent by ---- certified or registered mail, return receipt requested. 13. Governing Law. This Stock Purchase Agreement shall be governed ------------- by and construed in accordance with the laws of the State of California without reference to choice of law provisions. 14. Waiver of Right to Trial by Jury. Each party to this Stock Purchase -------------------------------- Agreement hereby waives its rights to a trial by jury. 15. Expenses. Each party hereto shall pay its own legal, accounting, -------- out-of-pocket and other expenses incident to this Stock Purchase Agreement and to any action taken by such party in preparation for carrying this Stock Purchase Agreement into effect. 16. Invalidity. In the event that any one or more of the provisions ---------- contained in this Stock Purchase Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Stock Purchase Agreement or any other such instrument. 17. Entire Agreement. This Stock Purchase Agreement, together with all ---------------- exhibits hereto, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. 18. Attorneys' Fees. In the event of any legal action or proceeding to --------------- enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. 19. Multiple Counterparts. This Stock Purchase Agreement may be executed --------------------- in one or more counterparts, each of which shall be deemed an original but all of which 7. together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of June 11, 1999. VIDEO CITY, INC. By: /s/ Timothy J. Denari ------------------------------ Timothy J. Denari Chief Financial Officer INTERNATIONAL VIDEO DISTRIBUTORS, LLC By: /s/ Michael Koretsky ----------------------------- Michael Koretsky Managing Member 8. EX-10.4 5 COMMON STOCK PURCHASE WARRANT EXHIBIT 10.4 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. VIDEO CITY, INC. COMMON STOCK PURCHASE WARRANT 1. Issuance. For value received, the receipt of which is hereby -------- acknowledged, International Video Distributors, LLC (the "Holder") is hereby granted the right, subject to the terms and conditions of this Warrant, to purchase at any time commencing June 11, 1999 and continuing until 5:00 P.M., Pacific Daylight Time, on June 10, 2004, FIFTY THOUSAND (50,000) fully paid and nonassessable shares of Common Stock, $0.01 par value per share (the "Common Stock"), of VIDEO CITY, INC. (the "Company"), at an exercise price of $2.00 per share (the "Exercise Price"), subject to adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. This Warrant is exercisable in whole or in part -------------------- (but not less than 1,000 shares of Common Stock covered by this Warrant) at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by check. Upon surrender of this Warrant with the annexed Notice of Exercise of Warrant form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased no later than two business days after receipt of notice of exercise. 3. Reservation of Shares. The Company hereby agrees that at all times --------------------- during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence ----------------------------- satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be -------------------- entitled to any rights of a stockholder of the Company, either at law or in equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. Nothing contained herein shall confer upon the Holder any right to consult for, or be employed with, the Company or any of its affiliates. 1. 6. Certain Adjustments. ------------------- 6.1 Adjustments for Stock Dividends, Stock Splits, Subdivisions etc. --------------------------------------------------------------- If the Company shall (i) declare a dividend or make a distribution in shares of Common Stock, (ii) effect a stock split or subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares, (iii) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares, or (iv) effect a capital reorganization or reclassification of the outstanding shares of Common Stock, the Exercise Price and the number of shares purchasable pursuant to this Warrant shall be appropriately adjusted proportionately so that the ratio of (i) the aggregate number of shares purchasable by exercise of this Warrant to (ii) the total number of shares outstanding immediately prior to such stock dividend, stock split, subdivision, combination, reorganization, reclassification or the like shall remain unchanged, and the aggregate purchase price of shares issuable pursuant to this Warrant shall remain unchanged. Successive adjustments shall be made whenever any event specified above shall occur. 6.2 Termination for Consolidation, Merger, etc. In case the ------------------------------------------ Company (i) shall consolidate with or merge into any other person and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) shall permit any other person to consolidate with or merge into the Company and the Company shall be the continuing or surviving person, but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property, or (iii) shall transfer all or substantially all of its properties or its assets to any other person (each a "Corporate Transaction"); then, and in each such case, this Warrant shall, to the extent not exercised, terminate effective upon the consummation of such Corporate Transaction. The Company shall provide written notice of any Corporate Transaction to the Holder not less than 20 days prior to the effective date of such Corporate Transaction. 6.3 Rounding of Calculations; Minimum Adjustment. All calculations -------------------------------------------- under this Section 6 shall be made to the nearest cent or to the nearest share, as the case may be. No adjustment shall be made if the amount of such adjustment would be less than $0.01, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.01 or more. 7. Tax Withholding. As a condition to exercise of this Warrant, the --------------- Company may require the Holder to pay over to the Company all applicable federal, state and local taxes which the Company is required to withhold with respect to the exercise of this Warrant. 8. Transfer to Comply with the Securities Act. This Warrant has not been ------------------------------------------ registered under the Securities Act of 1933, as amended, (the "Securities Act") and has 2. been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Securities Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Securities Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 9. Notices. All notices, requests, demands and other communications which ------- are required or may be given under this Warrant shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method (with proof of transmission); the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., FED EX); and upon receipt, if sent by certified or registered mail, - ----- return receipt requested. 10. Supplements and Amendments; Whole Agreement. This Warrant may be ------------------------------------------- amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof, and there are no representations, warranties, agreements or understandings other than expressly contained herein. 11. Governing Law. This Warrant shall be deemed to be a contract made ------------- under the laws of the State of California and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 12. Descriptive Headings. Descriptive headings of the several Sections of -------------------- this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 13. Multiple Counterparts. This Warrant may be executed in one or more --------------------- counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 3. IN WITNESS WHEREOF, the undersigned have executed this Warrant as of the 11th day of June 1999. VIDEO CITY, INC. By: /s/ Timothy J. Denari ----------------------- Timothy J. Denari Chief Financial Officer INTERNATIONAL VIDEO DISTRIBUTORS, LLC By: /s/ Michael Koretsky ----------------------- Michael Koretsky Chief Executive Officer 4. NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant dated as of June 11, 1999 to purchase _______________ shares of the Common Stock, $0.01 par value per share, of VIDEO CITY, INC., and tenders herewith payment in accordance with Section 2 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated:___________________________ By:______________________________ CASH: $________________________ 5. EX-10.6 6 EMPLOYMENT AGREEMENT,DATED JUNE 16, 1999 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 16/th/ day of June 1999, by and between Video City, Inc., a Delaware corporation (the "Company"), and Richard Gibson ("Employee"). 1. Term of Employment. The Company hereby employs Employee, and Employee ------------------ hereby agrees to serve the Company, under and subject to all of the terms, conditions and provisions of this Agreement from the date hereof through June 15, 2001, in the capacity of President and Chief Operating Officer of the Company, or to serve in such other executive capacity with the Company as the Company's board of directors (the "Board of Directors") may from time to time designate, provided such assignment is consistent with Employee's level of experience and expertise. In the performance of his duties and the exercise of his discretion, Employee shall be under the supervision and control of, and shall report only to, the Chairman of the Board of the Company (the "Chairman of the Board"). Employee's duties shall be designated by the Chairman of the Board and shall be subject to such policies and directions as may be established or given by the Board of Directors from time to time. 2. Devotion of Time to Company Business. Employee shall devote ------------------------------------ substantially all of his productive time, ability and attention to the business of the Company during the term of this Agreement. Employee shall not, without the prior written consent of the Chairman of the Board, directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise, which may compete or conflict with the Company's business or with Employee's duties to the Company. 3. Compensation. ------------ 3.1 Base Salary. For all services rendered by Employee under this ----------- Agreement, the Company shall pay Employee a base salary ("Base Salary"), payable semi-monthly, at the rate of $20,833.33 per month. 3.2 Bonus. In addition to the Base Salary, the Company shall pay ----- Employee an incentive cash bonus ("Bonus") in the amount of $250,000 in the event that during any period of three consecutive months ending on or before October 31, 2000: (i) the average of the annualized revenue of all retail video stores that are owned and operated by the Company or its subsidiaries ("Video City Stores") as measured during such three month period (but adjusted for seasonal fluctuations) equals or exceeds $650,000 per store; and (ii) the aggregate store operating cash flow (i.e. store earnings before general and administrative expenses, interest, taxes, depreciation and amortization, but after all inventory purchases) of all Video City Stores owned and operated during such three month period equals or exceeds 17 percent of the aggregate revenues of such Video City Stores during such three month period. 3.3 Stock Options. In addition to the Base Salary and the Bonus, ------------- the Company shall grant to Employee options to purchase up to 400,000 shares of the Company's 1 Common Stock, at an exercise price of the greater of $2.00 per share or the last sale price of the Company's Common Stock on the date of grant as reported on the OTC Bulletin Board, pursuant to a stock option agreement containing terms and conditions satisfactory to the Company and Employee and consistent with stock options granted by the Company to other key employees. Such options shall vest as follows: (a) Options to purchase 100,000 shares shall vest and become exercisable on June 16, 2000; (b) Options to purchase an additional 100,000 shares shall vest and become exercisable on June 16, 2001; (c) Options to purchase an additional 100,000 shares shall vest and become exercisable only in the event that during any period of three consecutive months ending on or before October 31, 2000: (i) the average of the annualized revenue of all Video City Stores owned and operated by the Company as measured during such three month period (but adjusted for seasonal fluctuations) equals or exceeds $550,000 per store; and (ii) the aggregate store operating cash flow (i.e. store earnings before general and administrative expenses, interest, taxes, depreciation and amortization, but after all inventory purchases) of all Video City Stores owned and operated during any such three month period equals or exceeds 16 percent of the aggregate revenues of such Video City Stores during such three month period; and (d) Options to purchase an additional 100,000 shares shall vest and become exercisable only in the event that during any period of three consecutive months ending on or before October 31, 2000: (i) the average of the annualized revenue of all Video City Stores owned and operated by the Company as measured during such three month period (but adjusted for seasonal fluctuations) equals or exceeds $650,000 per store; and (ii) the aggregate store operating cash flow (i.e. store earnings before general and administrative expenses, interest, taxes, depreciation and amortization, but after all inventory purchases) of all Video City Stores owned and operated during any such three month period equals or exceeds 17 percent of the aggregate revenues of such Video City Stores during such three month period; and (iii) the average of the closing price of the Company's Common Stock, as reported by the national securities exchange, the Nasdaq Stock Market or the OTC Bulletin Board (as the case may be), during the 20 trading days preceding October 31, 2000 is greater than $6.00. All amounts of revenue and cash flow shall be determined under this Section 3 in accordance with the usual and customary accounting practices of the Company and consistent with generally accepted accounting principles. 4. Benefits. -------- (a) In addition to the compensation set forth in Section 3, Employee will be entitled to participate in all benefits of employment available to other members of the Company's management, on a commensurate basis as they may be offered from time to time by 2 the Company to the Company's other management employees. Such benefits include, but are not limited to, full medical, dental and long term disability insurance for Employee and his wife and minor children, and participation in group life insurance and retirement plans. During the period of his employment hereunder, Employee will be reimbursed for reasonable business, travel and entertainment expenses incurred in accordance with Company policy on behalf of the Company in connection with his employment, and will be required to submit appropriate expense reports for approval by signature of the Chairman of the Board as a condition of reimbursement of such expenses. (b) The Company shall pay a reasonable amount for Employee to have the use of one Company-provided automobile (or an equivalent expense allowance for an automobile owned by Employee), including insurance and other expenses for such automobile. (c) Employee shall be entitled to three weeks paid vacation for any full fiscal year of the term of this Agreement, and a prorated portion of three weeks vacation for any fiscal year in which Employee is not employed by the Company for the full fiscal year. (d) The Company shall pay Employee's reasonable relocation costs and moving expenses in an amount up to $4,000 in connection with Employee's commencement of employment with the Company. If the Company's principal office is moved from Torrance, California, such that Employee must move his residence in order to continue his employment as provided herein, the Company shall pay his reasonable relocation costs, including but not limited to moving expenses. 5. Authority. So long as Employee serves as President and Chief --------- Operating Officer of the Company under this Agreement, he shall have the authority and responsibilities specified in the Bylaws of the Company, except that he shall not proceed with any matters, or permit the Company to take any actions, which are prohibited by, or are in conflict with, resolutions or guidelines adopted by the Board of Directors. 6. Termination. This Agreement shall terminate in advance of the time ----------- specified in Section 1 above (and except as provided in Sections 6(c) and 6(e) below, Employee shall have no right to receive any compensation not due and payable to him or to his estate at the time of such termination) under any of the following circumstances: (a) Upon the death of Employee. (b) In the event that Employee shall become either physically or mentally incapacitated so as to not be capable of performing his duties as required hereunder, and if such incapacity shall continue for a period of three months consecutively, the Company may, at its option, terminate this Agreement by written notice to Employee at that time or at any time thereafter while such incapacity continues. In case of termination under this Section 6(b) or under Section 6(a), Employee or his estate shall be entitled to receive Base Salary and any other compensation accrued or earned as of or to the date of any termination and for six months 3 following such termination or until expiration of this Agreement, whichever is earlier. (c) By Employee, if the Company shall have materially breached any of the provisions of this Agreement, and such termination shall have the same effect on the payment of Employee's Base Salary and any other compensation as a termination by the Company under Section 6(e). (d) By the Company for Cause. The term "Cause" used in this Section 6(d) means Employee (i) after repeated notices and warnings, fails to perform his reasonably assigned duties as reasonably determined by the Company, (ii) materially breaches any of the terms or conditions of Sections 1, 2 or 5 of this Agreement, or (iii) commits or engages in a felony or any intentionally dishonest or fraudulent act which materially damages the Company or the Company's reputation. If the Company terminates Employee for Cause, no payments or benefits under this Agreement shall become payable after the date of Employee's termination. (e) By the Company at any time, without Cause; provided, however, in case of termination under this Section 6(e), Employee shall be entitled to receive Base Salary and any other compensation accrued or earned as of or to the date of any termination and for six months following such termination or until expiration of this Agreement, whichever is earlier. 7. Loyalty, Non-Competition and Confidentiality. -------------------------------------------- (a) Non-Competition. Employee agrees and covenants that, --------------- except for the benefit of the Company (and/or any successor, parent or subsidiary) during the Non-Competition Period (as defined in Section 7(b)) he will not engage, directly or indirectly (whether as an officer, director, consultant, employee, representative, agent, partner, owner, stockholder or otherwise), in any business engaged in by the Company in the Non-Competition Area (as defined on Section 7(c)). It is the parties' express intention that if a court of competent jurisdiction finds or holds the provisions of this Section 7 to be excessively broad as to time, duration, geographical scope, activity or subject, this Section 7 shall then be construed by limiting or reducing it so as to comport with then applicable law. (b) Non-Competition Period. As used herein, the "Non- ---------------------- Competition Period" means the period beginning on the date hereof and ending on a date which is two years after the later to occur of (i) June 16, 2003 or (ii) the date on which Employee's employment with the Company terminates; provided, -------- however, that if Employee's employment is terminated by the Company without - ------- Cause, the Non-Competition Period shall end on the date of such termination. (c) Non-Competition Area. As used herein, the term "Non- -------------------- Competition Area" means anywhere in any County in which the Company conducts business during the term of this Agreement and anywhere within a ten-mile radius of any store operated by the Company. (d) Other Employees. Employee agrees that during the Non- --------------- Competition Period he shall not, directly or indirectly, for his own account or as agent, servant or employee of 4 any business entity, engage, hire or offer to hire or entice away or in any other manner persuade or attempt to persuade any officer, employee or agent of the Company or any subsidiary to discontinue his or her relationship with the Company or any subsidiary. (e) Confidentiality. Employee acknowledges that he has learned --------------- and will learn Confidential Information, as defined in Section 7(f), relating to the business of the Company. Employee agrees that he will not, except in the normal and proper course of his duties, disclose or use or enable anyone else to disclose or use, either during the Non-Competition Period or subsequently thereto, any such Confidential Information without prior written approval of the Chairman of the Board of the Company. (f) Confidential Information. "Confidential Information" shall ------------------------ include, but not be limited to, the following types of information regarding the Company: corporate information, including contractual arrangements, plans, locations, strategies, tactics, potential acquisitions or business combinations or joint venture possibilities, policies and negotiations; marketing information, including sales, purchasing and inventory plans, strategies, tactics, methods, customers, advertising, promotion or market research data; financial information, including operating results and statistics, cost and performance data, projections, forecasts, investors, and holdings; and operational information, including trade secrets, secret formulae, control and inspection practices, accounting systems and controls, computer programs and data, personnel lists, resumes, personal data, organizational structure and performance evaluations. Confidential Information is limited to that information which is not generally known in the industries in which the Company or any subsidiary operates, and does not include skills, knowledge and experience acquired by Employee during his employment with any prior employer. (g) Corporate Documents. Employee agrees that all documents of ------------------- any nature pertaining to activities of the Company or to any of the foregoing matters in his possession now or at any time during the Non-Competition Period, including, without limitation, memoranda, notebooks, notes, computer records, disks, electronic information, data sheets, records and blueprints, are and shall be the property of the Company and that they and all copies of them shall be surrendered to the Company whenever requested by the Company from time to time during the Non-Competition Period or thereafter and with or without request upon termination of Employee's employment with the Company. (h) Equitable Remedies. In the event of a breach by Employee ------------------ of any of the provisions of this Section 7, the Company, in addition to any other remedies it may have, shall be entitled to an injunction restraining Employee from doing or continuing to do any such act in violation of this Section 7. 8. Attorney Fees. The successful party in any litigation relating to ------------- matters covered by this Agreement shall be entitled to an award of reasonable attorneys' fees in such action. 9. Assignment. Neither this Agreement nor any of the rights or ---------- obligations of either 5 party hereunder shall be assignable by either Employee or the Company, except that this Agreement shall be assignable by the Company to and shall inure to the benefit of and be binding upon (i) any successor of the Company by way of merger, consolidation or transfer of all or substantially all of the assets of the Company to an entity other than any parent, subsidiary or affiliate of the Company and (ii) any parent, subsidiary or affiliate of the Company to which the Company may transfer its rights hereunder. 10. Binding Effect. The terms, conditions, covenants and agreements set -------------- forth herein shall inure to the benefit of, and be binding upon, the heirs, administrators, successors and assigns of each of the parties hereto, and upon any corporation, entity or person with which the Company may become merged, consolidated, combined or otherwise affiliated. 11. Amendment. This Agreement may not be altered or modified except by --------- further written agreement between the parties. 12. Notices. Any notice required or permitted to be given under this ------- Agreement by one party to the other shall be sufficient if given or confirmed in writing and delivered personally or mailed by first class mail, registered or certified, return receipt requested (if mailed from the United States), postage prepaid, addressed to such party as respectively indicated below or as otherwise designated by such party in writing. If to the Company, to: Video City, Inc. 370 Amapola Avenue, Suite 208 Torrance, California 90501 Attention: Robert Y. Lee Fax: (310) 533-3901 If to Employee, to: Richard Gibson _______________________ _______________________ _______________________ 13. California Law. This Agreement is being executed and delivered and is -------------- intended to be performed and shall be governed by and construed in accordance with the laws of the State of California. 14. Invalidity. In the event that any one or more of the provisions ---------- contained in this Agreement, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. 15. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties, and all other 6 prior letters entered into by the parties. 16. Multiple Counterparts. This Agreement may be executed in one or more --------------------- counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Any or all signatures required pursuant to this Agreement may be a facsimile. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. VIDEO CITY, INC. By: /s/ Robert Y. Lee ------------------------------- Robert Y. Lee Chairman of the Board and Chief Executive Officer RICHARD GIBSON /s/ Richard Gibson ------------------------------- Richard Gibson 7 EX-10.7 7 AMENDMENT TO LOAN DOCUMENTS EXHIBIT 10.7 AMENDMENT TO LOAN DOCUMENTS THIS AMENDMENT TO LOAN DOCUMENTS ("Amendment") is executed as of the 31st day of December, 1998, by and among VIDEO CITY, INC., a Delaware corporation (formerly known as Prism Entertainment Corporation) ("Video City"), SULPIZIO ONE, INC., a California corporation ("Sulpizio"), OLD REPUBLIC ENTERTAINMENT, INC., a California corporation ("OREI"), VIDEO TYME, INC., a Nevada corporation ("VTI") and VIDEOLAND, INC., an Oregon corporation ("Videoland"; Sulpizio, OREI, VTI and Videoland are sometimes individually and collectively referred to herein as the "Subsidiaries"; the Subsidiaries and Video City are sometimes individually and collectively referred to herein as the "Debtors"), and INGRAM ENTERTAINMENT INC., a Tennessee corporation ("Secured Party"); WITNESSETH: WHEREAS, Video City has granted certain liens and security interests to Secured Party pursuant to (1) an Override Agreement, dated November 19, 1996, by and between Video City and Secured Party, and (2) a Security Agreement dated January 8, 1997, by and between Video City and Secured Party, both as amended from time to time (all of the foregoing documents are sometimes hereinafter referred to as the "VCI Documents"), all in order to secure certain indebtedness and obligations of Video City to Secured Party; and WHEREAS, Cianci's Videoland, Inc. (an entity to which Videoland is the successor by merger) ("Cianci's Videoland") has granted certain liens and security interests to Secured Party pursuant to a Security Agreement dated June 19, 1996, by and between Cianci's Videoland and Secured Party (the "Cianci's Videoland Security Agreement"), all in order to secure certain indebtedness and obligations of Cianci's Videoland to Secured Party. WHEREAS, Sulpizio, OREI and certain others have granted certain liens and security interests to Secured Party pursuant to a Security Agreement dated March 24, 1998, executed by Sulpizio, OREI and certain others in favor of Secured Party (the "Original Subsidiary Security Agreement"), all in order to secure certain indebtedness and obligations of such parties to Secured Party. WHEREAS, Videoland and VTI have granted certain liens and security interests to Secured Party pursuant to a Security Agreement of even date herewith, executed by Videoland and VTI in favor of Secured Party (the "Subsequent Subsidiary Security Agreement"; the VCI Documents, the Cianci's Videoland Security Agreement, the Original Subsidiary Security Agreement and the Subsequent Subsidiary Security Agreement are sometimes individually and collectively referred to herein as the "Loan Documents"), all in order to secure certain indebtedness and obligations of such parties to Secured Party. WHEREAS, certain indebtednesses of the Debtors have been consolidated pursuant to that certain Demand Secured Promissory Note of even date herewith, in the original principal amount of $3,623,903, made and executed by Debtors payable to the order of Secured Party (together with any and all extensions, renewals, replacements or modifications thereof, the "Note"); WHEREAS, in connection with the execution of the Note, Video City has also issued and delivered to Secured Party that certain Warrant to Purchase Common Stock No. 2 dated December 31, 1998 (the "Warrant"); WHEREAS, Debtor and Secured Party desire to (a) amend the Loan Documents in order to confirm that the indebtedness evidenced by the Note is secured thereby and to confirm and clarify certain other agreements and understandings, and (b) make certain covenants, representations and warranties relating to the issuance of the Note and the Warrant, all as more particularly hereinafter described; NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Without limiting any provision of the Loan Documents, and notwithstanding any provision of the Loan Documents to the contrary, the parties hereto represent, agree and acknowledge that (a) the indebtedness evidenced by the Note, together with any and all other indebtedness and obligations of any Debtor to Secured Party, whether now existing or hereafter incurred, direct or contingent, however evidenced or denominated, including without limitation, all of Debtor's obligations arising under that certain Supply Agreement dated January 8, 1997, by and between Video City and Secured Party, as amended from time to time, and all other trade debt of Debtors to Secured Party (collectively, the "Obligations"), are, and hereafter shall be, secured by each of the Loan Documents, and (b) the liens and security interests granted to Secured Party pursuant to the Loan Documents are, and hereafter shall be, second in priority only to the liens and security interests granted to BankBoston Retail Finance, Inc. ("BankBoston"), all as more particularly described in that certain Subordination Agreement dated December 28, 1998, by and between Secured Party and BankBoston and, in the case of Sulpizio and VTI, subordinate in priority to the security interests of Mortco, Inc. The Loan Documents are hereby amended in all respects necessary to reflect the foregoing. 2. Any provision of any of the VCI Documents that provides for the release of any of the collateral described therein upon the reduction of the Remaining Debt (as defined therein) by a specified amount is hereby deleted, it being agreed that all liens and security interests granted therein as to all collateral described therein shall not be terminated, but shall continue in full force and effect until repayment of the Obligations in full. 3. Debtors represent and warrant that no default or Event of Default exists under any of the Loan Documents. In addition, Debtors hereby additionally represent and warrant to Secured Party the following: 2 (a) Corporate Status. Each of the Debtors is a corporation duly ---------------- organized and validly existing under the laws of the state of its incorporation, and has the corporate power to own and operate its properties, to carry on its business as now conducted and to enter into and to perform its obligations under the Warrant, the Note and the other documents executed in connection with the Note and this Warrant (the "Transaction Documents") to which such entity is a party. Each of the Debtors is duly qualified to do business and in good standing in each state in which a failure to be so qualified would have a material adverse effect on such entity's financial position or its ability to conduct its business in the manner now conducted. (b) Authorization. Each of the Debtors has full legal right, power ------------- and authority to conduct its business and affairs in the manner contemplated by the Transaction Documents, and to enter into and perform its obligations thereunder, without the consent or approval of any other person, firm, governmental agency or other legal entity. The execution and delivery of the Warrant, the Note, the borrowing thereunder, the execution and delivery of each Transaction Document to which each such entity is a party and the performance by such entity of its obligations thereunder are within the corporate powers of such entity and have been duly authorized by all necessary corporate action properly taken, have received all necessary governmental approvals, if any were required, and do not and will not contravene or conflict with any provision of law, any applicable judgment, ordinance, regulation or order of any court or governmental agency, the charter or by-laws of such entity or any agreement binding upon such entity or its properties. The officer(s) executing the Warrant, the Note and all of the other Transaction Documents to which Video City and/or its Subsidiaries is a party are duly authorized to act on behalf of such entity. (c) Validity and Binding Effect. The Warrant, the Note and the other --------------------------- Transaction Documents are the legal, valid and binding obligations of the Debtors, enforceable in accordance with their respective terms. (d) Capitalization of Video City. The authorized equity securities of ---------------------------- Video City consist of 30,000,000 shares of common stock, par value $.01 per share ("Common Stock") and 2,000,000 shares of preferred stock (consisting of Series A preferred stock, which is convertible into Common Stock at a price of $2.00 per share, as more particularly described in the Series A Certificate of Designations (as hereinafter defined) and Series B preferred stock, which is convertible into Common Stock at a price of $3.1667 per share, as more particularly described in the Series B Certificate of Designations (as hereinafter defined)), par value $.01 per share ("Preferred Stock"), of which 13,474,191 shares of Common Stock and 83,000 shares of Preferred Stock (7,000 of which are Series A Preferred Stock and 76,000 of which are Series B Preferred Stock) are issued and outstanding as of the date of this Amendment; Debtors hereby represent that the foregoing amount of issued and outstanding shares includes, without limitation, all shares of Common Stock and Preferred Stock issued by the Company on December 31, 1998; provided, however, that certain additional shares are -------- ------- reserved for issuance as 3 described on Schedule 3(d)(i) attached hereto. All of the outstanding ---------------- equity securities of Video City have been duly authorized and validly issued, are fully paid and nonassessable and are free from preemptive rights, except the preemptive rights described on Schedule 3(d)(ii) attached hereto. Except as set forth on Schedule 3(d)(i) and 3(d)(ii), ----------------------------- there are no agreements or understandings relating to the issuance, sale, or transfer of any equity securities or other securities of Video City. The shares of Common Stock issuable upon the exercise by Secured Party of its rights under the Warrant have been duly authorized and reserved and, when issued upon the exercise of said rights, will be validly issued, fully paid and nonassessable and free of preemptive rights. If the holders of all of the shares of the Series A Preferred Stock that are issued and outstanding as of the date hereof (i.e., 7,000 shares) exercised their conversion rights described in Section 5 of the Series A Certificate of Designations, such Series A Preferred Stock would be convertible (after making any adjustments under Section 8 of the Series A Certificate of Designations that may be required as a result of any transactions or events occurring on or prior to the date hereof) into 350,000 shares of Common Stock. If the holders of all of the shares of the Series B Preferred Stock that are issued and outstanding as of the date hereof (i.e., 76,000 shares) exercised their conversion rights described in Section 5 of the Series B Certificate of Designations, such Series B Preferred Stock would be convertible (after making any adjustments under Section 9 of the Series B Certificate of Designations that may be required as a result of any transactions or events occurring on or prior to the date hereof) into 2,400,000 shares of Common Stock. (e) Other Transactions. Consummation of the transactions hereby ------------------ contemplated and the performance of the obligations of the Debtors under and by virtue of the Transaction Documents will not result in any breach of, or constitute a default under, any loan or credit agreement, indenture, mortgage, deed of trust, security deed or agreement, lease, corporate charter or by-laws, license, franchise or other instrument or agreement to which any Debtor is a party or by which any Debtor or its properties may be bound or affected. (f) Litigation. There are no material actions, suits or proceedings ---------- pending, or, to the knowledge of the Debtors, threatened, against or affecting the Debtors. There are no actions, suits or proceedings pending or, to the knowledge of the Debtors, threatened, involving the validity or enforceability of any of the Transaction Documents or the priority of the liens thereof, at law or in equity, or before any governmental or administrative agency. To the Debtors' knowledge, none of the Debtors is in material default with respect to any material order, writ, injunction, decree or demand of any court or any governmental authority. (g) Financial Statements. The financial statement(s) of the Debtors -------------------- heretofore delivered to Secured Party are true and correct in all material respects, have been prepared in accordance with generally accepted accounting principles consistently applied, and fairly present in all material respects the financial conditions of the subject(s) thereof as of the date(s) thereof. No material adverse change has occurred in the financial condition 4 of the Debtors since the date(s) thereof other than as disclosed in a subsequent financial statement delivered by Debtors to Secured Party, and no additional borrowings have been made or liabilities incurred by the Debtors (other than the borrowing of the Senior Indebtedness (as hereinafter defined) and other than indebtedness incurred to acquire inventory and otherwise in the ordinary course of business) since the date(s) thereof other than as disclosed in a subsequent financial statement delivered by Debtors to Secured Party. (h) No Defaults. No default or event of default by the Debtors exists ----------- under the Warrant or any of the other Transaction Documents, or under any other instrument or agreement evidencing or securing indebtedness of $100,000 or more to which any Debtor is a party or by which any Debtor or its properties may be bound or affected, and no event has occurred and is continuing that with notice or the passage of time or both would constitute a default or event of default under any of the foregoing. (i) Compliance With Law. Each of the Debtors has obtained all ------------------- necessary and material licenses, permits and governmental approvals and authorizations necessary or proper in order to conduct its business and affairs as heretofore conducted and as hereafter intended to be conducted. The Debtors are in compliance with all material laws, regulations, decrees and orders applicable to them (including but not limited to laws, regulations, decrees and orders relating to environmental, occupational and health standards and controls, antitrust, monopoly, restraint of trade or unfair competition). The Debtors have not received, nor do they expect to receive, any order or notice of any violation or claim of violation of any such law, regulation, decree, rule, judgment or order of any governmental authority or agency relating to the ownership and/or operation of their properties other than such order, notice or claim that will not have a material adverse effect on the business of the Debtors. (j) [Intentionally Deleted] (k) Taxes. The Debtors have filed or caused to be filed all tax ----- returns that, to the Debtors' knowledge, are required to be filed (except for returns that have been appropriately extended), and have paid all taxes shown to be due and payable on said returns and all other taxes, impositions, assessments, fees or other charges imposed on them by any governmental authority, agency or instrumentality, prior to any delinquency with respect thereto (other than taxes, impositions, assessments, fees and charges currently being contested in good faith by appropriate proceedings, for which appropriate amounts have been reserved and which have been reflected in the financial statements and records of the Debtors, as applicable). No tax liens have been filed against the Debtors or any of the property thereof. (l) Senior Indebtedness. As of the date hereof, the total outstanding ------------------- principal amount of the indebtedness of Video City (the "Senior Indebtedness") to BankBoston 5 Retail Finance, Inc. (the "Senior Lender") is no more than $24,000,000. No default, event of default or event that with the giving of notice, the passage of time or both would constitute an event of default has occurred and is continuing under any document, instrument or agreement evidencing, securing or otherwise relating to the Senior Indebtedness. The copies of all documents, instruments and agreements relating to the Senior Indebtedness heretofore delivered to Secured Party are true and accurate copies of the same, and such documents, instruments and agreements have not been modified or amended in any manner. (m) Affiliates. Each corporation, partnership, limited liability ---------- company or other entity in which Video City and/or its Subsidiaries, or any combination thereof, own or control, directly or indirectly, at least 5% of the outstanding ownership interests of such entity is listed on Schedule -------- 3(m) attached hereto, and the percentage ownership of Video City and such ---- Subsidiaries in each such entity is accurately described on Schedule 3(m). ------------- The Subsidiaries are wholly-owned subsidiaries of Video City. (n) Year 2000 Compliance. The Debtors have (i) initiated a review and -------------------- assessment of all areas within their business operations that could be materially and adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Debtors may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and time line for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. Based on the foregoing, the Debtors believe that all computer applications that are material to their business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a material adverse effect on the business and operations of the Debtors. (o) Locations. The only locations in which Debtors have video stores --------- or other operations or in which assets of the Debtors are located are the locations described on Schedule 3(o) attached hereto. ------------- 4. In connection with the amendments effected hereby and the transactions described in the recitals of this instrument, Debtors hereby covenant and agree with Secured Party as follows: (a) Financial Statements. The Debtors will furnish to Secured Party: -------------------- (i) As soon as practicable and in any event within one hundred five (105) days after the end of each fiscal year of Video City, a consolidated balance sheet of Video City and its Subsidiaries as of the close of such fiscal year, the 6 related statements of income, cash flow and shareholders' equity for such fiscal year and all notes to such financial statements, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied, audited in accordance with generally accepted auditing standards by independent certified public accountants reasonably satisfactory to Secured Party; (ii) As soon as practicable and in any event within fifty (50) days after the end of each fiscal quarter, a consolidated balance sheet of Video City and its Subsidiaries as of the close of such fiscal quarter, and the related statements of income, cash flow and shareholders' equity for such fiscal quarter, all in reasonable detail, and prepared in accordance with generally accepted accounting principles consistently applied, certified by the chief executive or chief financial officer of Video City; (iii) Within thirty (30) days after the end of each fiscal quarter, a certificate of Video City's chief executive or chief financial officer, showing the then-outstanding principal balance of the Senior Indebtedness; (iv) Promptly upon receipt thereof, copies of all accountants' reports, accompanying financial reports and internal control or management letters submitted to Video City or its Subsidiaries by independent accountants in connection with each annual examination of Video City and/or its Subsidiaries; (v) Copies of all management reports, certificates, notices and other documents from time to time delivered, or required to be delivered, to the Senior Lender with respect to the Senior Indebtedness; and (vi) With reasonable promptness, such other financial data as Secured Party reasonably may request. (b) Maintenance of Books and Records; Inspection. Each Debtor will -------------------------------------------- maintain its books, accounts and records in accordance with generally accepted accounting principles consistently applied, and permit any person designated by Secured Party in writing to visit and inspect any of its properties, corporate books and financial records, and to discuss its accounts, affairs and finances with Video City, its Subsidiaries or the principal officers of such entities during reasonable business hours, all at such times as Secured Party reasonably may request. (c) Insurance. Without limiting any of the requirements of any of the --------- other Transaction Documents, each Debtor will maintain insurance, all in amounts reasonably satisfactory to Secured Party, as follows: (i) Comprehensive public liability insurance; 7 (ii) Worker's compensation insurance (or maintain a legally sufficient amount of self insurance against worker's compensation liabilities, with adequate reserves, under a plan approved by Secured Party); (iii) "All-risk" property/casualty insurance on its properties against such hazards as are customary in the business of Video City and its Subsidiaries; and (iv) Rent or business interruption insurance against loss of income arising out of damage or destruction by such hazards as presently are included in so-called "all-risk coverage". At the request of Secured Party from time to time, the Debtors will deliver to Secured Party certificates issued by the insurer(s), specifying the details of such insurance in effect. All policies of property/casualty insurance shall name Secured Party as an additional insured or loss payee (as appropriate) and shall provide that such insurance shall be payable to Video City, its Subsidiaries and Secured Party as their respective interests may appear, and that at least thirty (30) days' prior written notice of cancellation or modification of the policy shall be given to Secured Party by the insurer. Each Debtor agrees that there shall be no recourse against Secured Party for the payment of premiums, commissions, assessments or advances in respect of any such policy, and at Secured Party's request, the Debtors will provide Secured Party with the agreement of the insurer(s) to this effect. At the request of Secured Party, all such policies (or duplicate original counterparts thereof) shall be delivered to and held by Secured Party. During the continuance of any event of default under the Transaction Documents, Secured Party may, at its option, act as attorney-in-fact for Video City and/or its Subsidiaries in obtaining, adjusting, settling and canceling such insurance and endorsing any drafts with respect thereto, and this power, being coupled with an interest, shall be irrevocable prior to payment in full of the Note and performance of all of the obligations of the Debtors to Secured Party in connection therewith. (d) Taxes and Assessments; Tax Indemnity. Each Debtor shall (i) file ------------------------------------ all tax returns and appropriate schedules thereto that are required to be filed under applicable law, prior to the date of delinquency, (ii) pay and discharge all taxes, assessments and governmental charges or levies imposed upon it, upon its income and profits or upon any properties belonging to it, prior to the date on which penalties attach thereto, and (iii) pay all taxes, assessments and governmental charges or levies that, if unpaid, might become a lien or charge upon any of its properties. If any tax is or may be imposed by any governmental entity in respect of sales by the Debtors of any inventory or the merchandise that is the subject of such sales, or as a result of any other transaction of the Debtors, which tax Secured Party is or may be required to withhold or pay, the Debtors agree to indemnify Secured Party and hold Secured Party harmless in connection with such taxes, and the Debtors will immediately reimburse Secured Party for any such taxes 8 paid by Secured Party. Notwithstanding the foregoing, any Debtor may contest any taxes or assessments described above by appropriate proceedings diligently conducted and pursued by such Debtor in good faith so long as (i) such Debtor gives prior written notice of such contest to Secured Party, and (ii) such contest does not impose any material risk that any collateral security for the Note or any material asset of such Debtor shall be subject to forfeiture. (e) Corporate Existence. Each Debtor will maintain its corporate ------------------- existence and good standing in the state of its incorporation, and its qualification and good standing as a foreign corporation in each jurisdiction in which such qualification is necessary pursuant to applicable law. (f) Compliance with Law and Other Agreements. Each Debtor shall ---------------------------------------- maintain its business operations and property owned or used in connection therewith in material compliance with (i) all applicable federal, state and local laws, regulations and ordinances governing such business operations and the use and ownership of such property, and (ii) all material agreements, licenses, franchises, indentures and mortgages to which it is a party or by which it or any of its properties is bound. Without limiting the foregoing, each Debtor will pay all of its material indebtedness promptly in accordance with the terms thereof. Notwithstanding the foregoing, any Debtor may contest any law, regulation or ordinance described above by appropriate proceedings diligently conducted and pursued by such Debtor in good faith so long as (i) such Debtor gives prior written notice of such contest to Secured Party, and (ii) such contest does not impose any material risk that any collateral security for the Note or any material asset of such Debtor shall be subject to forfeiture. (g) Notice of Default. The Debtors will give written notice to ----------------- Secured Party of the occurrence of any default or event of default under this Agreement or any other Transaction Document promptly upon the discovery thereof by the Debtors. (h) Notice of Litigation. The Debtors will give notice, in writing, -------------------- to Secured Party of (i) any actions, suits or proceedings that are required to be disclosed in public filings filed with the Securities and Exchange Commission and that are instituted by any persons whomsoever against Video City or its Subsidiaries, or that affect any of the assets of Video City or any of its Subsidiaries, and (ii) any dispute, not resolved within sixty (60) days of the commencement thereof, between Video City or any of its Subsidiaries on the one hand and any governmental regulatory body on the other hand, which dispute might interfere with the normal operations of Video City and/or its Subsidiaries. With respect to any dispute, litigation or other matter of which the Debtors are required to give notice to Secured Party pursuant to the foregoing sentence, the Debtors shall further provide Secured Party with such updates and additional information regarding the same from time to time as Secured Party may reasonably request. 9 (i) ERISA Plan. If any Debtor has in effect, or hereafter institutes ---------- (with Secured Party's consent, as hereinafter provided), a pension plan that is subject to the requirements of Title IV of the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. (S) 1001 et seq. (1975), as amended from time to time ("ERISA"), then the following warranty and covenants shall be applicable during such period as any such plan (the "Plan") shall be in effect: (i) the Debtors hereby warrant that no fact that might constitute grounds for the involuntary termination of the Plan, or for the appointment by the appropriate United States District Court of a trustee to administer the Plan, exists at the time of execution of this Agreement, (ii) the Debtors hereby covenant that throughout the existence of the Plan, the contributions of the Debtors under the Plan will meet the minimum funding standards required by ERISA and the Debtors will not institute a distress termination of the Plan, (iii) the Debtors hereby covenant that the Plan's annual financial and actuarial statements and the Plan's annual Form 5500 information return will be timely filed with the Internal Revenue Service and a copy delivered to Secured Party within thirty (30) days of the preparation thereof, and (iv) the Debtors covenant that they will send to Secured Party a copy of any notice of any Reportable Event (as defined in ERISA) required by ERISA to be filed with the Labor Department or the Pension Benefit Guaranty Corporation, at the time that such notice is so filed. No Plan shall be instituted by the any Debtor unless Secured Party shall have given its written consent thereto. (j) Mergers, Consolidations, Acquisitions and Sales. In no event ------------------------------------------------ shall any Debtor (a) enter into any transaction of merger or consolidation or contemplating the sale or transfer of all or substantially all of its assets; or (b) make any material change in the nature of its business as conducted and presently proposed to be conducted; or (c) change the form of organization of its business; provided, however, that nothing herein shall prevent a Debtor from entering into a transaction of merger where (i) such Debtor is the surviving party; (ii) upon the consummation of such merger, 50% or more in interest of the stockholders of such Debtor own and control 50% or more of the voting equity of the combined company; (iii) a majority of the board of directors of the combined company consist of directors of such Debtor immediately prior to such merger; and (iv) the terms of the Supply Agreement (as hereinafter defined) will continue to apply. (k) Management; Ownership. Video City will not permit any significant --------------------- change in the executive management of Video City without the prior written consent of Secured Party. The executive management of the Video City is a material factor in Secured Party's willingness to enter into the transactions contemplated by the Transaction Documents. As used in this Section 4(k), the term "executive management" refers to Robert Lee and Craig Kelly in substantially the same managerial capacities in which they serve as of the date hereof. (l) Dividends, Etc. The Debtors will not declare or pay any dividend -------------- of any kind (other than payments of dividends by the Subsidiaries to Video City and payments of 10 dividends required to be paid by Video City to the holders of its Preferred Stock pursuant to Section 2 of Video City's Certificate of Designations dated May 27, 1998, respecting the Series A Preferred Stock (the "Series A Certificate of Designations") and Section 2 of Video City's Certificate of Designations dated December 16, 1998, respecting the Series B Preferred Stock (the "Series B Certificate of Designations")), in cash or in property, on any class of the common or preferred stock, nor purchase, redeem, retire or otherwise acquire for value any shares of such stock, nor make any distribution of any kind in respect thereof, nor make any return of capital to shareholders, nor make any payments in respect of any pension, profit sharing, retirement, stock option, stock bonus, incentive compensation or similar plan (except as required or permitted hereunder), without the prior written consent of Secured Party; provided, however, that -------- ------- (i) Debtors may make payments in respect of any stock bonus or incentive compensation plan to its employees in the ordinary course of business so long as the amount(s) thereof are fair and reasonable and do not exceed the amount(s) of stock bonuses and incentive compensation paid by companies of similar size to employees having similar duties and responsibilities, and (ii) Secured Party shall not unreasonably withhold its consent to the creation of a new series of Preferred Stock upon which the payment of certain dividends shall be required or to the payment of such dividends upon Debtor's request. (m) Guaranties; Loans. The Debtors will not guarantee nor be liable ----------------- in any manner, whether directly or indirectly, or become contingently liable, after the date hereof, in connection with the obligations or indebtedness of any person or persons whomsoever (other than Video City and its Subsidiaries), except for the indorsement of negotiable instruments for deposit or collection in the ordinary course of business. The Debtors will not make any loan, advance or extension of credit (i) to any employee, except for advances to cover work-related travel expenses incurred by an employee in the ordinary course of business, or (ii) to any person other than in the normal course of their respective businesses. (n) Debt. Without the express prior written consent of Secured Party, ---- the Debtors will not create, incur, assume or suffer to exist indebtedness of any description whatsoever in an aggregate amount in excess of $1,000,000 (excluding the indebtedness evidenced by the Note, indebtedness existing as of the date hereof that is disclosed in financial statements heretofore delivered by Debtors to Secured Party, Senior Indebtedness in compliance with Section 4(o) below, trade accounts payable, accrued expenses incurred in the ordinary course of business and the indorsement of negotiable instruments for deposit or collection in the ordinary course of business). (o) Senior Indebtedness. In no event shall Video City allow the ------------------- aggregate principal amount of the Senior Indebtedness to exceed $30,000,000. Video City shall promptly provide and deliver to Secured Party any and all notices received from the holder(s) of the Senior Indebtedness of any default or event of default under the 11 documents, instruments and agreements evidencing, securing or otherwise relating to the Senior Indebtedness. (p) Maintenance of Property. Each Debtor shall maintain its property ----------------------- (whether real, personal or mixed, or tangible or intangible) in good and workable condition at all times, and make all material repairs, replacements, additions and improvements to its property reasonably necessary and proper to insure that the business carried on in connection with its property may be conducted properly and efficiently at all times. (q) Nature of Business. The Debtors shall not suffer or permit any ------------------ material changes to be made in the character of their businesses as carried on as of the date hereof. (r) Right of Inspection. Each Debtor shall permit any officer, ------------------- employee or agent of Secured Party to visit and inspect any of its property, to examine its books, records and accounts, to take copies and extracts from such books, records and accounts, and to discuss its affairs, finances and accounts with its officers, accountants, and auditors, all at such reasonable times and as often as Secured Party may reasonably desire and upon reasonable advance notice in the absence of an event of default. Without limiting Secured Party's right to obtain equitable relief as to any other appropriate right herein or in any of the other Transaction Documents, the Debtors agree that the rights in this Section 4(r) may be enforced by affirmative injunction and, to the extent that the right to review records may be denied, the right may be enforced by a restraining order prohibiting the interference by the Debtors with Secured Party's exercise of its right to review of the records. (s) Compensation. The Debtors shall not pay any salary, bonuses or ------------ other compensation to Robert Lee or any other officer or director to the extent the same is in excess of the salary, bonuses and other compensation customarily paid by companies of similar size to officers or directors, as applicable, having similar duties and responsibilities. (t) Agreements with Secured Party. In the event that Secured Party ----------------------------- terminates or cancels that certain Supply Agreement dated January 8, 1997, by and between Video City and Secured Party, as amended from time to time (the "Supply Agreement"), or any other supply agreement or other agreement between Secured Party and Video City as a result (directly or indirectly) of a breach thereof by Video City or its Subsidiaries, or a default thereunder or failure to perform with respect thereto, Video City and its Subsidiaries shall immediately prepay the Note in full. (u) Transactions with Affiliates. In no event shall any Debtor enter ---------------------------- into any transaction or series of transactions, whether or not in the ordinary course of business, 12 with any Affiliate (as hereinafter defined) of such entity, other than on terms and conditions as favorable to such Debtor, as would be attainable by such entity in a comparable arm's-length transaction with a person or entity other than an Affiliate. As used in this Agreement, the term "Affiliate" means, with respect to any person or entity, any other person or entity directly or indirectly controlling, controlled by or under direct or indirect common control with, such person or entity. A person or entity shall be deemed to control another person or entity if such person or entity possesses, directly or indirectly, the power to direct to cause the direction of the management and policies of such other person or entity, whether through the ownership of voting securities, by contract or otherwise. (v) Year 2000 Compliance. The Debtor shall fully implement its plan -------------------- to address the Year 2000 Problem and shall be and remain Year 2000 Compliant. The Debtors shall promptly notify Secured Party in the event they discover or determine that any computer application that is material to their businesses and operations will not be Year 2000 Compliant, except to the extent that such failure could not reasonably be expected to have a material adverse effect on the business and operations of the Company. (w) Further Assurances. Debtors will take all reasonable actions ------------------ requested by Secured Party to create and maintain in Secured Party's favor valid liens upon, security titles to and/or perfected security interests in the collateral security described in the Loan Documents and all other security for the Obligations now or hereafter held by or for Secured Party. Without limiting the foregoing, Debtors agree to execute such further instruments (including financing statements and continuation statements) as may be required or permitted by any law relating to notices of, or affidavits in connection with, the perfection of Secured Party's security interests, and to cooperate with Secured Party in the filing or recording and renewal thereof. (x) Duration of Covenants. The covenants and agreements set forth in --------------------- this Section 4 shall continue for so long as any of indebtedness evidenced by the Note shall remain outstanding. 5. Except as amended hereby, the Loan Documents shall remain in full force and effect. [The remainder of this page has been intentionally left blank.] 13 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the date first above written. SECURED PARTY: INGRAM ENTERTAINMENT INC., a Tennessee corporation By: /s/ Thomas H. Lunn ---------------------------------- Name:_________________________________ Title: Vice Chairman ------------------------------- DEBTORS: VIDEO CITY, INC., a Delaware corporation By: /s/ Robert Y. Lee ---------------------------------- Name: ________________________________ Title: Chief Executive ------------------------------- SULPIZIO ONE, INC., a California corporation By: /s/ Robert Y. Lee ---------------------------------- Name: ________________________________ Title: President ------------------------------- OLD REPUBLIC ENTERTAINMENT, INC., a California corporation By: /s/ Robert Y. Lee ---------------------------------- Name: ________________________________ Title: President -------------------------------- VIDEO TYME, INC., a Nevada corporation By: /s/ Robert Y. Lee ---------------------------------- Name: ________________________________ Title: President -------------------------------- VIDEOLAND, INC., an Oregon corporation By: /s/ Robert Y. Lee ---------------------------------- Name: ________________________________ Title: President -------------------------------- 14 SCHEDULE 3(d)(i) [Shares Reserved for Issuance] 15 SCHEDULE 3(d)(ii) [Preemptive Rights] 1. Preemptive Rights have been granted in favor of Secured Party pursuant to a Stockholders Agreement dated January 8, 1997, by and among Video City, Secured Party, Robert Y. Lee, both individually and as Trustee, and Barry Collier, as amended. 2. Preemptive Rights have been granted in favor of Mortco, Inc. pursuant to a Right of First Refusal and Co-Sale Agreement dated December 16, 1994, by and among Video City, Robert Y. Lee and Mortco, Inc. 16 SCHEDULE 3(m) [Affiliates] 1. Video City owns 100% of the outstanding ownership interests of each of the Subsidiaries. 17 SCHEDULE 3(o) [Business Locations] 18 EX-10.8 8 WARRANT TO PURCHASE COMMON STOCK EXHIBIT 10.8 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (2) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER. Void after 5:00 p.m., Los Angeles, California Time, on December 31, 2005 No. 2 VIDEO CITY, INC. December 31, 1998 Warrant to Purchase Common Stock -------------------------------- VIDEO CITY, INC., a Delaware corporation (formerly known as Prism Entertainment Corporation) (the "Company"), hereby certifies that INGRAM ENTERTAINMENT INC., a Tennessee corporation ("Ingram"), together with its successors and assigns, is entitled, subject to the terms set forth below and provided that this Warrant has not become void pursuant to the provisions of Section 6 below, to purchase from the Company upon surrender of this Warrant, at any time or times, but not after 5:00 p.m., Los Angeles, California time, on December 31, 2005, which date is the expiration date of this Warrant, the number of fully paid and nonassessable shares (the "Shares") of the Common Stock, par value $.01 per share, of the Company (the "Common Stock"), as hereinafter provided. As used herein, the term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder, and the term "Common Stock" includes all stock of any class or classes (however designated) of the Company, the holders of which shall have the right (without limitation as to amount) either to all or to a share of the balance of current dividends and liquidating distributions after the payment of dividends and distributions on any shares entitled to preference. 1. Compliance with the Securities Act of 1933. ------------------------------------------ The holder of this Warrant agrees that the Company will authorize transfers of this Warrant and all Shares purchased upon exercise hereof only when the securities which the holder desires to transfer have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and any applicable state or other jurisdiction's securities laws, or when the request for transfer is accompanied by an opinion of counsel (which opinion and the counsel rendering such opinion shall be reasonably acceptable to the Company) to the effect that the sale or proposed transfer does not require registration under the Securities Act or any state or other jurisdiction's securities laws, and the holder agrees that the following legend to such effect, if the Company so desires, may be placed on the certificate or certificates representing any of the Shares purchased upon exercise of this Warrant and a stop transfer order may be placed with respect thereto: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (2) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER. 2. Number of Shares Issuable Upon Exercise of Warrant; Price. --------------------------------------------------------- This Warrant may be exercised from time to time, in whole or in part, for up to an aggregate of 561,725 shares of Common Stock (i.e., 3% of the outstanding equity interests in the Company as of the date hereof, plus an additional 75,000 shares) at any time prior to the expiration of this Warrant, at an exercise price of two dollars ($2.00) per share; provided, however, that -------- ------- in the event the indebtedness evidenced by that certain Demand Secured Promissory Note of even date herewith, in the principal amount of $3,623,903, made and executed by Sulpizio One, Inc., a California corporation, Old Republic Entertainment, Inc,., a California corporation, Video Tyme, Inc., a Nevada corporation, Videoland, Inc., an Oregon corporation (all of the foregoing entities are sometimes individually and collectively referred to herein as the "Subsidiaries"), and the Company, payable to the order of Ingram (the "Note"), together with all interest thereon, is not paid in full on or before June 30, 1999, then this Warrant may instead be exercised from time to time thereafter, in whole or in part, for up to an aggregate of 1,048,451 shares of Common Stock (i.e., 6% of the outstanding equity interests in the Company as of the date hereof, plus an additional 75,000 shares) at any time prior to the expiration of this Warrant, at an exercise price of two dollars ($2.00) per share. Upon exercise of this Warrant, the holder hereof shall receive, in addition to the number of shares of Common Stock which it is entitled to receive hereunder, such additional number of shares of capital stock or other securities or property (other than cash) distributed by the Company from time to time after the original issue date of this Warrant with respect to the Common Stock which the holder of this Warrant would have received had the holder exercised the Warrant immediately prior to distribution or issuance of any such shares, securities or property by the Company with respect to the number of shares of Common Stock received upon exercise of this Warrant. 2 3. Adjustment for Reorganization. Consolidation, Merger, Etc. ----------------------------------------------------------- In case of any capital reorganization or reclassification of the Common Stock of the Company, or in case of any consolidation or merger of the Company with or into any other corporation, or in case of any sale to another corporation of the properties and assets of the Company as or substantially as an entirety, then, and in each such case, the holder of this Warrant shall have the right to receive upon the exercise hereof as provided in Section 9 hereof, at any time after the consummation of such reorganization, reclassification, consolidation, merger or sale, the kind and amount of shares of stock or other securities or property receivable upon such reorganization, reclassification, consolidation, merger or sale by a holder of the number of Shares issuable upon exercise of this Warrant if such number of shares had been held by such holder immediately prior to such reorganization, reclassification, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interests thereafter of the holder of this Warrant shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or property thereafter receivable upon the exercise of this Warrant. The above provisions of this Section 3 shall similarly apply to successive reclassifications and changes of Common Stock and to successive consolidations, mergers, sales or conveyances. 4. Notice of Dividends, Subscriptions, Reclassifications, Consolidations, ---------------------------------------------------------------------- Merger, Etc. - ------------ In case the Company shall pay any dividend or make any distribution (including a cash dividend) to the holders of its Common Stock, or shall offer for subscription to the holders of its Common Stock or any stock of any class of the Company or any other securities, or in the case of any capital reorganization or reclassification of the capital stock of the Company or a consolidation or merger of the Company with another corporation, or the final dissolution, liquidation or winding up of the Company, or a sale of all or substantially all its assets (whether voluntary or involuntary), then in any one or more of said cases, the Company shall mail (first class, postage prepaid) a notice thereof to the holder of this Warrant at the address of said holder on the records of the Company, at least ten days prior to the date on which the books of the Company shall close (or a record shall be taken) for such dividend, distribution or subscription rights, or such reorganization, reclassification, consolidation, merger, dissolution, liquidation, winding up or sale shall taker place, as the case may be. Such notice shall also specify the date as of which stockholders of record shall be entitled to participate in such dividend, distribution or subscription rights or to exchange their Shares for other securities or property pursuant to such reorganization, reclassification, consolidation or merger, or to receive their respective distributive shares in the event of such dissolution, liquidation, winding up or sale, as the case may be. Such notice shall also set forth a statement of the effect of such action (to the extent then known), if any, on the exercise price and on the kind and amount of shares of capital stock and property receivable upon exercise of this Warrant. 3 5. Covenants of the Company. ------------------------ The Company covenants and agrees that all Shares which may be issued upon the exercise of this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder and all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company further covenants and agrees that it will at all times have authorized and reserved, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. The Company will not, by amendment to its Charter or through any reorganization, reclassification, consolidation, merger, sale of assets, dissolution, issue or sale of securities or other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith carry out all such terms and take all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant. 6. Expiration. ---------- This Warrant shall be void after 5:00 p.m., Los Angeles, California time, on December 31, 2005, and no rights herein given to the holder of this Warrant shall exist thereafter. 7. Warrant Holder Not Deemed a Stockholder. --------------------------------------- No holder of this Warrant as such, shall be entitled to vote or receive dividends or be deemed the holder of shares of Common Stock of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance of record to the holder of this Warrant of the Shares which it is then entitled to receive upon the due exercise of this Warrant. 8. No Limitation on Corporate Action. --------------------------------- No provisions of this Warrant and no right or option granted or conferred hereunder shall in any way limit, affect or abridge the exercise by the Company of any of its corporate rights or powers to recapitalize, amend its Charter, reorganize, consolidate or merge with or into another corporation, or to transfer all or any part of its property or assets, or the exercise of any other of its corporate rights and powers. 9. Exercise of Warrant. ------------------- (a) Full Exercise. This Warrant may be exercised in accordance with ------------- Section 2 by the holder of this Warrant by surrendering this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at any time 4 on or prior to 5:00 p.m., Los Angeles, California time, on December 31, 2005, at the principal office of the Company's transfer agent (the "Transfer Agent") accompanied by payment either (i) in cash or by certified or official bank check, payable to the order of Company, or (ii) by the whole or partial tender of the Note, valued at the then outstanding principal balance thereof, plus accrued and unpaid interest thereon, or (iii) any combination of (i) and (ii) above, in any case in the amount of the sum called for by Section 2. Partial tenders of the Note shall be first applied against outstanding accrued interest. The Company agrees to notify the holder of this Warrant as to the address of the Transfer Agent's principal office. (b) Partial Exercise. This Warrant also may be exercised in part by ---------------- surrendering this Warrant in the manner specified in subsection (a) of this Section 9, except that the number of shares of Common Stock or other securities or property receivable upon the exercise of this Warrant as a whole shall be proportionately reduced. On any such partial exercise, the Company, at its expense, will forthwith issue to the holder hereof a new Warrant or Warrants of like tenor calling in the aggregate for the number of shares of Common Stock for which this Warrant shall not have been exercised, issued in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes and subject to the provisions of Section 1 hereof) may direct. (c) Delivery of Stock Certificates, Etc. As soon as practicable after ------------------------------------ any exercise of this Warrant and payment of the sum payable upon such exercise, and in any event within 10 days thereafter, the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable Shares or other securities or property to which such holder shall be entitled upon such exercise. No fractional Shares will be issued hereunder to any holder hereof; if the number of Shares to be issued hereunder includes a fractional amount, such amount shall be automatically rounded up to the next whole number, and the resultant whole number of Shares shall be issued to the holder, otherwise in accordance herewith. 10. Exchange and Transfer of Warrants. --------------------------------- Subject to the provisions of Section 1 hereof, upon surrender for exchange of this Warrant (in negotiable form, if not surrendered by the holder named on the face thereof) to the Company or its Transfer Agent's principal office, the Company, at its expense, will issue and deliver new Warrants of like tenor, calling in the aggregate for the same number of shares of Common Stock in the denomination or denominations requested, to or on the order of such holder and in the name of such holder or as such holder (upon payment to such holder of any applicable transfer taxes) may direct. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as absolute owner for all purposes without being affected by any notice to the contrary. 5 11. Notices. ------- All communications hereunder shall be in writing and, if sent to Ingram, shall be mailed by registered or certified mail or delivered or telegraphed and confirmed in writing to Two Ingram Boulevard, La Vergne, Tennessee 37089, Attention: Chief Financial Officer, and if sent to the Company, shall be mailed by registered or certified mail or delivered or telegraphed and confirmed in writing, to the Company at Video City, Inc., 370 Amapola Ave, Suite 208, Torrance CA 90501. 12. Registration Rights. ------------------- The shares of Common Stock issuable upon exercise of this Warrant constitute "Restricted Stock", as such term is defined in that certain Registration Rights Agreement dated January 8, 1997, by and between the Company and Ingram, as now or hereafter amended, and the holder of this Warrant is entitled to the registration rights provided by such agreement. 13. Consideration. ------------- This Warrant has been issued by the Company in consideration of Ingram's willingness to restructure certain indebtedness of the Company and its subsidiaries to Ingram and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. Dated: December 31, 1998 VIDEO CITY, INC., a Delaware corporation By: /s/ Robert Y. Lee ------------------------------------ Name: Robert Y. Lee ---------------------------------- Title: Chief Executive Officer ---------------------------------- 6 ASSIGNMENT FOR VALUE RECEIVED ____________________________________________ hereby sells, assigns and transfers unto ___________________________________________ the within Warrant and does hereby irrevocably constitute and appoint _____________________________, Attorney, to transfer the said Warrant on the books of the within named corporation with full power of substitution in the premises. Dated: _________________, _____ ___________________________________ Signature NOTICE: The signature of this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. 7 SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER IF IT DESIRES TO EXERCISE THIS WARRANT VIDEO CITY, INC. The undersigned hereby exercises the right to purchase ____ shares of Common Stock covered by this Warrant according to the conditions thereof and herewith makes payment of the purchase price of such shares of Common Stock in full. -------------------------------------- Signature Chief Executive Officer ___________________________________ Address Dated: ________________, _____ 8 EX-27 9 FINANCIAL DATA SCHEDULE
5 3-MOS 6-MOS JAN-31-2000 JAN-31-2000 MAY-01-1999 FEB-01-1999 JUL-31-1999 JUL-31-1999 127,207 127,207 0 0 5,492,567 5,492,567 0 0 4,114,836 4,114,836 9,840,447 9,840,447 8,073,140 8,073,140 2,697,098 2,697,098 41,101,043 41,101,043 22,788,795 22,788,795 15,125,304 15,125,304 0 0 7,779,297 7,779,297 141,841 141,841 (1,225,587) (1,225,587) 41,101,043 41,101,043 14,212,961 27,518,031 14,212,961 27,518,031 14,932,525 27,068,941 14,932,525 27,068,941 1,426,870 3,484,103 0 0 694,035 1,282,762 (2,840,469) (4,317,775) 0 (546,603) (2,840,469) (3,771,172) 0 0 0 0 0 0 (2,840,469) (3,771,172) (0.21) (0.28) (0.21) (0.28)
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