EXHIBIT 10.7
ESCROW AND WARRANT AGREEMENT
This Escrow and Warrant Agreement (the "Agreement") is made and entered
into as of January 8, 1997 by and among Video City, Inc., a Delaware corporation
(formerly known as Prism Entertainment Corporation) (the "Company"); ▇▇▇▇▇▇ ▇.
▇▇▇, an individual resident of California, on behalf of himself and as Trustee
of the ▇▇▇▇▇▇ ▇. ▇▇▇ Revocable Living Trust UDT 1/9/91 (collectively, with the
Trust, "▇▇▇" or "grantor"); ▇▇▇▇▇▇ Entertainment Inc., a Tennessee corporation
("▇▇▇▇▇▇") and ▇▇▇▇ & ▇▇▇▇ LLP, a California limited liability partnership
("Escrow Agent") with reference to the following:
RECITALS
▇. ▇▇▇ Video City, Inc. ("VCI") and the Company have entered into that
certain Agreement and Plan of Reorganization and Merger dated as of October 25,
1996, as amended by that certain Amendment to Agreement and Plan of
Reorganization and Merger, dated December 20, 1996, and that certain Second
Amendment to Agreement and Plan of Reorganization and Merger, dated December 24,
1996, with respect to the merger of VCI into the Company (the "Merger").
B. In connection with the Merger, the Grantor will be issued and own
shares of the Common Stock of the Company (the "Common Stock").
C. Pursuant to that certain Override Agreement dated as of November 19,
1996 (the "Override Agreement"), among the Company, VCI, ▇▇▇ and ▇▇▇▇▇▇, the
Grantor has agreed to grant to ▇▇▇▇▇▇ a warrant to purchase the number of fully
paid and nonassessable shares ("Shares") of the Common Stock as hereinafter
provided.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
herefrom and the mutual agreements hereinafter set forth, the parties hereto
hereby agree as follows:
1. Deposit of Shares. Simultaneously with the consummation of the
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Merger, the Company, on behalf of the Grantor, will deposit in escrow (the
"Escrow") with the Escrow Agent an aggregate of 404,403 Shares (the "Warrant
Shares") of Common Stock representing 8.5% of the aggregate number of shares of
Common Stock (net of 250,000 shares of ▇▇▇ that are subject to redemption
pursuant to (s) 8.2(g) of the Merger Agreement) issued to the shareholders of
VCI pursuant to the Merger. Certificates representing the Warrant Shares shall
be issued in the names of the Grantor. Receipt of the Warrant Shares is hereby
acknowledged by the Escrow Agent. Escrow Agent shall hold the Warrant Shares as
provided in this Agreement. ▇▇▇▇▇▇, ▇▇▇ and the Grantor understand and agree
that the Warrant Shares are
"restricted securities" as defined under Rule 144 of the Securities Act of 1933
as amended (the "Securities Act") and the certificate(s) evidencing the Warrant
Shares shall bear a legend to the following effect:
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 (i) A
REGISTRATION STATEMENT UNDER SUCH SECURITIES
ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
SHALL HAVE BECOME EFFECTIVE WITH REGARD
THERETO, OR (ii) IN THE OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY REGISTRATION
UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE
STATED SECURITIES LAWS IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER.
2. Grant of Warrant. Grantor hereby grants to ▇▇▇▇▇▇, subject to the
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terms set forth below, a warrant (the "Warrant") to purchase the Warrant Shares
from the Grantor at any time and from time to time, in whole or in part, but not
before 12:01 a.m., Los Angeles, California time, on January 8, 1997 and not
after 5:00 p.m., Los Angeles, California time, on January 8, 2002, which date
is the expiration date of this Warrant (the "Expiration Date") at an exercise
price of $.6085 per share. This Warrant is being granted in substitution for,
and in cancellation of, a previous warrant which VCI had granted to ▇▇▇▇▇▇ to
purchase 8.5% of the aggregate fully diluted capital stock of VCI.
3. Number of Shares Issuable Upon Exercise of Warrant.
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Upon exercise of this Warrant, the holder hereof shall receive, in
addition to the number of Warrant Shares which it is entitled to receive
hereunder and to the extent the following distributions are otherwise
distributed to the Grantor, 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 date of this Agreement 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
Warrant Shares. Grantor shall deposit with the Escrow Agent upon receipt thereof
all such additional shares of capital stock or other securities or property.
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4. Adjustment for Reorganization, Consolidation, Merger, Etc.
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In case of capital reorganization or reclassification of the Common
Stock, 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, and,
with respect to all of the foregoing, to the extent the following right would
otherwise inure to the benefit of the Grantor, then, and in each such case, the
holder of this Warrant shall have the right to receive upon the exercise 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 5 shall similarly apply to successive reclassifications and changes of
Common Stock and to successive consolidations, mergers, sales or conveyances.
Grantor shall deposit with the Escrow Agent upon receipt thereof all such
additional shares of capital stock or other securities or property.
5. Notice of Dividends, Subscriptions, Reclassifications,
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Consolidations, Merger, Etc.
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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 take
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
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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 (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.
6. Covenants of Grantor.
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The Grantor covenants and agrees that he will at all times have
deposited in Escrow with the Escrow Agent the Warrant Shares, together with such
duly executed and endorsed stock powers and other instruments of assignment or
transfer relating thereto as the holder hereof may reasonably require to provide
for the exercise of the rights represented by this Warrant. Grantor will not
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 action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant.
7. Warrant Holder Not Deemed a Stockholder
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No holder of this Warrant as such shall be entitled to vote or receive
dividends or be deemed the holder of the Warrant Shares 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 stockholder 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 Warrant Shares which he is then entitled to
receive upon the due exercise of this Warrant.
8. Exercise of Warrant.
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(a) Full Exercise. This Warrant may be exercised in
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accordance with Section 2 by the holder of this Warrant by delivering the form
of subscription at the end hereof duly executed by such holder, to the Escrow
Agent at any time on or prior to 5:00 p.m., Los Angeles, California time, on the
Expiration Date, at the principal office of the Escrow Agent accompanied by
payment in cash or by certified or official bank check, payable to the order of
the Company, of the sum called by Section 2. The Grantor agrees to notify the
holder of this Warrant as to any change in the address of the Escrow Agent's
principal office.
(b) Partial Exercise. This Warrant also may be exercised in
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part in the manner specified in subsection (a) of this Section 8, except that
the number of shares of Common Stock or other securities or property receivable
upon any subsequent exercise of this Warrant as a whole shall be proportionately
reduced.
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(c) Delivery of Stock Certificates, Etc. As soon as
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practicable after any exercise of this Warrant and payment of the sum payable
upon such exercise, and in any event with 10 days thereafter, the Escrow Agent
at the Grantor's 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, a certificate or certificates for the number of fully paid and non-
assessable Warrant 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 Warrant Shares shall be
issued to the holder, otherwise in accordance herewith.
9. Transfer of Warrants.
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Subject to the provisions of Section 3 hereof, upon notice of
assignment to the Escrow Agent's principal office, the holder of this Warrant
may transfer all or part of its right to the Warrant.
10. Notices.
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All communications hereunder shall be in writing and, if sent to
▇▇▇▇▇▇ Entertainment Inc., shall be mailed by registered or certified mail or
delivered or telegraphed and confirmed in writing to Two ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, Attention: Chief Financial Officer, and if sent to the
Grantor, shall be mailed by registered or certified mail or delivered or
telegraphed and confirmed in writing to ▇▇▇▇▇▇ ▇. ▇▇▇, ▇▇▇ Video City, Inc.,
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇, ▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, and if sent to the
Escrow Agent, addressed to the principal office of the Escrow Agent.
11. Provisions Regarding Escrow Agent. The following provisions
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shall control with respect to the rights, duties and liabilities of the Escrow
Agent:
(a) No Responsibility For Validating or Sufficiency. The
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Escrow Agent shall have no duty to know or determine the performance or
non-performance of any provision of any agreement between the other parties
hereto, including, but not limited to, the Override Agreement, and the original
or a copy of any such agreement deposited with the Escrow Agent shall not bind
the Escrow Agent in any manner. The Escrow Agent assumes no responsibility for
the validity or sufficiency of any documents or papers or payments deposited or
called for hereunder except as may be expressly and specifically set forth
herein, and the duties and responsibilities of the Escrow Agent hereunder are
limited to those expressly stated herein.
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(b) Modification and Amendments. The provisions of this
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Agreement may be supplemented, altered, amended modified or revoked only by a
writing signed by the Grantor and ▇▇▇▇▇▇ and approved in writing by the Escrow
Agent.
(c) Exculpation of Escrow Agent. The Escrow Agent shall
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not be personally liable for any act it may do or omit to do hereunder as such
agent while acting in good faith and in the exercise of its own best judgement,
and any act done or omitted by it pursuant to the written advice of its own
attorneys shall be conclusive evidence of such good faith. The Escrow Agent
shall have the right at any time to consult with its counsel upon any question
arising hereunder and shall incur no liability for any delay reasonably required
to obtain the advice of counsel.
(d) Conflicting Notices. Other than those which are
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specifically referred to in this Escrow Agreement, the Escrow Agent is hereby
authorized to disregard any and all notices or warnings given by the Grantor or
▇▇▇▇▇▇, or by any other person, firm or corporation, except that the Escrow
Agent is hereby expressly authorized to comply with any and all final processes,
orders, judgments or decrees of any court. To the extent the Escrow Agent obeys
or complies with any process, order, judgment or decree of any court, it shall
not be liable to any other party hereto or to any other person, firm or
corporation by reason of such compliance.
(e) Fees and Expenses of Escrow Agent. In consideration of
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the acceptance of this Escrow by the Escrow Agent (as evidenced by its signature
below), the Company shall, for itself and its successors and assigns, pay Escrow
Agent its reasonable charges, fees, and expenses hereunder.
(f) Authority of Signing Parties. The Escrow Agent shall be
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under no duty or obligation to ascertain the identity, authority or right of the
Grantor, ▇▇▇▇▇▇ or the Company (or their agents) to execute or deliver this
Agreement or any documents, certificates, or payments deposited, delivered or
given hereunder.
(g) No Liability for Lapse of Rights. The Escrow Agent
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shall not be liable for the lapse of any rights under any statue of limitations
or by reason of laches with respect to this Agreement or any funds, securities,
documents or papers deposited, delivered or given hereunder.
(h) Duties in Event of Dispute. In the event of any dispute
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among the parties hereto as to any fact or matter relating hereto or to the
transactions contemplated in the Override Agreement, the Escrow Agent is
instructed that it shall be under no obligation to act except under process or
order of court, or if there be no such process or order, until it has filed or
caused to be filed an appropriate action
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impleading the Grantor, ▇▇▇▇▇▇ and the Company. the Escrow Agent shall sustain
no liability for its failure to act pending such process of court, order or
impleader action.
(i) Resignation. The Escrow Agent, or any successor Escrow
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Agent, may at any time resign by giving notice in writing to the Grantor, the
Company and ▇▇▇▇▇▇ and shall be discharged from its duties under this Escrow
Agreement on the first to occur of the appointment of a successor Escrow Agent
as provided in this Section, or the expiration of thirty (30) calendar days
after such resignation notice is given. In the event of any such resignation, a
successor Escrow Agent shall be appointed within thirty (30) days by the
agreement of the Grantor and ▇▇▇▇▇▇. Any successor Escrow Agent shall deliver to
the Company, the Grantor and ▇▇▇▇▇▇ a written instrument accepting appointment
under this Agreement, and thereupon it shall succeed to all the rights and
duties of the Escrow Agent hereunder and shall be entitled to receive any funds,
securities, documents, instruments, certificates, checks, or agreements held by
the predecessor Escrow Agent.
(j) Replacement. At their option, the Grantor and ▇▇▇▇▇▇
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may terminate the appointment of Escrow Agent hereunder and appoint another
person as escrow agent in its place. Upon any such appointment, the escrow agent
so replaced shall deliver to the successor escrow agent all of the Warrant
Shares and such other documents, certificates and agreements held by it
hereunder and the successor escrow agent shall assume all rights and duties of
"Escrow Agent" hereunder.
(k) Waiver of Right to Set-Off. Escrow Agent hereby waives
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the benefit of, and any right to, any setoff or recoupment or any other claim it
may have now or herafter have in or with respect to the Warrant Shares.
(l) Discharge. Escrow Agent, having delivered all of the
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funds, securities, documents, instruments, checks, certificates or agreements
pursuant to the terms of this Agreement, shall be discharged from any further
obligation hereunder.
(m) Indemnity. In the event Escrow Agent becomes involved
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in litigation in connection with this Escrow Agreement, or any transaction
related in any way hereto, the Company, the Grantor and ▇▇▇▇▇▇, jointly and
severally, shall indemnify and save the Escrow Agent harmless from all loss,
cost, damage, expense and attorneys' fees suffered or incurred by the Escrow
Agent as a result thereof, except for any loss, cost, damage, or expense
resulting from the Escrow Agent's breach of this Agreement or its willful
misconduct or gross negligence.
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12. Return of Warrant Shares. The Escrow Agent shall return to the
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Grantor or their designees all Warrant Shares remaining after the Expiration
Date.
Dated: January 8, 1997
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇
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▇▇▇▇▇▇ ▇. ▇▇▇, individually
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇
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▇▇▇▇▇▇ ▇. ▇▇▇, Trustee of the ▇▇▇▇▇▇ ▇. ▇▇▇
Revocable Living Trust UDT 1/9/91
Escrow Agent
Loeb & Loeb LLP, a California limited liability
partnership
By: /s/illegible
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Name: /s/illegible
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Title: Partner
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▇▇▇▇▇▇ ENTERTAINMENT INC.
By: /s/▇▇▇▇▇▇ ▇. ▇▇▇▇
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Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇
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Title: Vice Chairman
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VIDEO CITY, INC.
By: /s/▇▇▇▇▇▇ ▇. ▇▇▇
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Name: ▇▇▇▇▇▇ ▇. ▇▇▇
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Title: CEO
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ASSIGNMENT
FOR VALUE RECEIVED [ ]
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hereby sells, assigns and transfers unto [ ]
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the within Warrant and does hereby irrevocably constitute and appoint
[ ], Attorney, to transfer the
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said Warrant on the books of the within named corporation with full power of
substitution in the premises.
Dated: [ , ]
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[ ]
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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.
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SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER
IF IT DESIRES TO EXERCISE THIS WARRANT
VIDEO CITY, INC.
To: [ESCROW AGENT]
The undersigned hereby exercises the right to purchase the shares of Common
Stock covered by this Warrant according to the conditions thereof and herewith
makes payment of the Exercise Price of such shares of Common Stock in full.
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Signature
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Address
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Number of shares of Common Stock Being
Purchased
Dated: [ , ]
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