EXHIBIT 10.5
XXXXXX ENTERTAINMENT INC.
Xxx Xxxxxx Xxxx. Xx Xxxxxx, XX 00000 XXXXX X. XXXXXX
(000) 000-0000 Fax (000) 000-0000 Chairman and President
January 8, 1997
Xx. Xxxxxx X. Xxx
Video City, Inc.
0000 XxXxxxxx Xxxxx, Xxxxx X
Xxxxxxxxxxx, XX 00000
Re: Supply Agreement
Dear Xxxxxx:
The following is the supply agreement (the "Agreement") between Video City, Inc.
(formerly known as Prism Entertainment Corporation) on its own behalf and on
behalf of any present or future affiliated entities engaged in the sale or
rental of product described in this Agreement ("Video City") and Xxxxxx
Entertainment Inc. ("Xxxxxx"):
1. RENTAL PRICING:
Video City will receive a 34.5% discount off suggested retail price on all
rental product ($30 and higher). Video City will receive multi-pack pricing
and discounts on single purchases of multi-pack titles.
2. SELL-THROUGH PRICING:
Video City will receive a 37% discount off suggested retail price on catalog
sellthrough product ($29.99 and lower), subject to Paragraph 9 below. Feature
sellthrough titles (i.e. titles released for the first time to the home video
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market at $29.99 and lower having grossed $50 million or more at the box
office) will be offered at specially discounted prices based on quantities
ordered. Video City may purchase feature sell-through titles from a source
other than Xxxxxx provided Video City offers Xxxxxx the right of first
refusal to match the price offered to Video City from the other source, which
offer must be arms length, written, and furnished to Xxxxxx.
3. RETURNS:
Video City will receive a 50% return allowance on all unopened sell-through
product in mint, resalable condition, provided Xxxxxx and Video City mutually
agree on purchase quantities eligible for returns. Returns of undamaged
product must be received by Xxxxxx within three months after initial street
date. Video City will also receive return allowances for damaged product.
Damaged return product must be received by Xxxxxx within 60 days of initial
street date. Xxxxxx will issue
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January 8, 1997
call tags for store damaged returns based on each store up to a maximum of
two damaged returns shipments per store per month. For all returned product,
credits will be applied to Video City's account within 15 business days of
receipt by Xxxxxx.
4. VIDEO GAMES:
Video City will receive Xxxxxx gross cost plus 7% pricing on all video game
rental and sell-through titles. Video City will receive a 100% return
allowance on all unopened video game sell-through product in mint, resalable
condition, provided Xxxxxx and Video City mutually agree on purchase
quantities eligible for returns. Returns must be received by Xxxxxx within 60
days after initial street date.
5. LASER:
Video City will receive a 25% discount off suggested retail price on laser
purchases and a 50% return allowance on all unopened laser product in mint,
resalable condition. Returns must be received by Xxxxxx within three months
after initial street date.
6. AUDIO BOOKS:
Video City will receive a 40% discount off suggested retail price on audio
book rental product purchases (rental ready or non-rental ready). Video City
will receive a 20% return allowance on all unopened non-rental ready product
in mint, resalable condition. Returns must be received by Xxxxxx within three
months after initial street date.
7. MULTIMEDIA:
Video City will receive a 35% discount off suggested retail price on CD ROM
product and net pricing on CDI, 3DO, and Jaguar product. Video City will
receive a 20% title-by-title return allowance on all unopened product in
mint, resalable condition. Returns must be received by Xxxxxx within 9O days
after invoice date.
8. ACCESSORIES:
Video City will receive "end-lot" pricing on all accessories.
9. TERMS:
Payment terms will be net 60 days from invoice for all rental and sell-
through product purchases; provided, however, that for (i) catalog sell-
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through product intended for new store openings; (ii) Christmas catalog sell-
through product; and (iii) catalog sell-through product intended for new
sell-through departments in existing stores, Video City will have a one time
right to elect either (a) payment
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terms of net 9O days from invoice or (b) payment terms of net 120 days from
invoice; provided, further, that pricing for catalog sell-through product in
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the event of alternative (b) shall be a 36.5% discount off suggested retail
price. Video City understands that its credit line with Xxxxxx will be as
established or modified from time-to-time based upon Xxxxxx'x credit review
and credit policies. Any amounts not paid when due will bear interest at the
rate of 1 1/2% per month (18% per annum) on the overdue balance (or, if less,
at the maximum rate permitted by applicable law, with any payments in excess
of such maximum treated as principal payments on the past due amount).
Payments received from Video City will be credited first to unpaid interest
as set out above.
10.ADVERTISING:
Co-op on rental video titles will be handled "in-house" and will be paid at a
rate of 3% for titles that accrue co-op, following studio guidelines. For
sell-through titles, Video City will receive "pass-through" co-op and MDF
advertising funds, also following studio guidelines. Rental titles will also
receive "pass through" of MDF advertising funds, following studio guidelines.
11.RENTAL READY PROCESSING:
Rental ready processing is available and will be billed as a separate invoice
line item. If rental ready processing is desired, pricing will be determined
after an analysis of the specific requirements is made. Video City will be
entitled to Xxxxxx'x most favored customer pricing for this service.
12.FREIGHT:
Freight for all product will be pre paid to Video City locations, without
limitations as to the size or dollar amount of orders. Special orders may be
"piggybacked" by Xxxxxx on new release shipments as long "available/on-hand"
special order titles are delivered within one week of the order.
13.PROGRAMS AND SERVICES:
Xxxxxx will, when possible, extend terms on special programs such as holiday
promotions and new store start-up packages. Xxxxxx will provide home office
services such as marketing, creative services and help with management
information systems requests whenever possible. Video City will receive free
monthly in-store "video guides" (average 1,200 per store). Video City
understands that it may not have an exclusive representative, but Xxxxxx
intends that Video City will receive the same high level of hands-on
involvement and assistance that Xxx Video City, Inc. ("VCI") has received
from Ingram representatives in the past. Xxxxxx also intends to maintain the
same high level of representative service to
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Video City as Video City encounters rapid growth and to consider appointment
of an exclusive representative as may be warranted by that growth. Video City
will be eligible to participate in any advertised programs offered by Xxxxxx.
14.QUANTITY:
Video City agrees to purchase from Xxxxxx 100% of its yearly requirements for
the video rental, video sell-through, game, and other products covered by
this Agreement, except in the following circumstances:
(a) The product is not carried by Xxxxxx (such as adult product);
(b) Video City is required to purchase product from Rentrak Corporation
or its affiliates ("Rentrak") under the present terms of its
agreement with Rentrak by which Video City is bound due to the
merger of VCI into Video City, but only to the extent of minimum
purchases required under that agreement;
(c) Purchases of used product;
(d) Purchases of non-prerecorded product;
(e) Orders which Xxxxxx is unable to fill in a reasonably timely manner;
(f) Orders in excess of the credit limit extended to Video City by
Xxxxxx, provided that Video City is within its credit terms with
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Xxxxxx; or
(g) Purchases of feature sell-through titles from a source other than
Xxxxxx following Xxxxxx'x failure to exercise its right of first
refusal, as permitted by Paragraph 2.
15.PAYMENT IN CERTAIN EVENTS:
An "Extraordinary Transaction" for purposes of this Paragraph shall be deemed
to occur upon consummation of one of the following events:
(a) a sale or other disposition of retail locations by Video City other than
in the ordinary course of business, 90% of the proceeds from which are not
redeployed in a similar video business within 9O days of such transaction (an
"Asset Sale"); provided however, that a sale or other disposition of retail
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locations in a transaction
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or series of transactions, which locations in the aggregate accounted for
less than 20% of purchases under this Agreement over the 12 months preceding
such disposition, shall not constitute an Asset Sale; or
(b) a merger or consolidation of, into, or involving Video City, in which
Video City is not the surviving corporation.
Upon the consummation of an Extraordinary Transaction, Video City shall
immediately pay Xxxxxx in cash the following amounts (the "Termination
Payment"):
EXTRAORDINARY TRANSACTION
ON OR BEFORE THE FOLLOWING
ANNIVERSARY OF THIS AGREEMENT TERMINATION PAYMENT DUE
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First $1,300,000
Second 1,300,000
Third 1,200,000
Fourth 1,200,000
Fifth 1,000,000
Sixth 900,000
Seventh 800,000
Eighth 700,000
Ninth 600,000
Tenth 400,000
The parties have agreed to the above payments in lieu of a formula designed
to calculate the discounted present value of anticipated annual future
payments under this Agreement, due to the uncertainty inherent in any such
formula calculation.
The following shall apply notwithstanding the above:
(x) in the event of an Asset Sale of less than 100% of the retail locations
of Video City, the payment set out above shall be prorated based upon the
required payments made to Xxxxxx under this Agreement by Video City, with
respect to the locations so sold, during the 12 months preceding the
Extraordinary Transaction, prorated for any partial year of the unexpired
term of this Agreement; and
(y) in the event of an Extraordinary Transaction in which this Agreement is
assigned to and assumed by a third party of credit quality at least equal to
that of
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Video City on terms and conditions reasonably acceptable to Xxxxxx, Video
City will not be required to make any payment pursuant to this Paragraph
unless and until subsequent annual payments by the assignee to Xxxxxx under
this Agreement in each 12 month period after the Extraordinary Transaction
("Subsequent Annual Payments") fail to equal or exceed required payments made
to Xxxxxx under this Agreement during the 12 months preceding the
Extraordinary Transaction ("Prior Annual Payments"). If in any such 12 month
period Subsequent Annual Payments are less than the Prior Annual Payments (a
"Shortage Period"), Video City shall pay to Xxxxxx a pro rata portion of the
Termination Payment determined by multiplying the Termination Payment due as
if the Extraordinary Transaction had occurred at the beginning of the
Shortage Period by a fraction, the numerator of which is the amount of
Subsequent Annual Payments and the denominator of which is the amount of
Prior Annual Payments.
16.TERM OF AGREEMENT:
The term of this Agreement will commence on the date the merger of VCI with
and into Video City becomes effective, and shall terminate on the tenth
anniversary of that effective date. This Agreement may, however, be
terminated by Xxxxxx at any time for any reason upon prior written notice to
Video City. Upon the commencement of this Agreement, the existing purchasing
contract, dated effective as of July 1, 1996, between Xxxxxx and VCI, shall
be terminated.
17.ASSIGNMENT:
Video City may not assign this Agreement without the express written consent
of Xxxxxx.
XXXXXX ENTERTAINMENT INC. VIDEO CITY, INC.
/s/ Xxxxx X. Xxxxxx /s/ Xxxxxx X. Xxx
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Xxxxx X. Xxxxxx Xxxxxx X. Xxx
Chairman and President CEO
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