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RETAIL STORE OPTION AGREEMENT
AGREEMENT made this first day of October, 1996, by and among
Reel Entertainment, Inc., a Louisiana corporation ("Developer")
and West Coast Entertainment Corporation, a Delaware corporation
with its principal office at 0000 Xxxxxx Xxxx, Xxxxxxxxxxxx,
Xxxxxxxxxxxx 00000 ("Buyer").
WHEREAS, the Developer is party to a Development Agreement
(the "Development Agreement") of even date herewith with West
Coast Franchising Company, a Delaware corporation and wholly-owned
subsidiary of the Buyer ("WCFC"), pursuant to which the Developer
has certain rights to establish, acquire and operate West Coast
Video Franchise Stores (each, a "Retail Store" and collectively,
"Retail Stores") pursuant to the terms of a Franchise Agreement
between the Developer and WCFC; and
WHEREAS, the execution and delivery of this Agreement was a
condition to the execution of the Development Agreement by the
parties thereto.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
Developer and the Buyer hereby agree as follows:
1. DEFINITIONS. As used herein, each of the following
terms shall have the respective meaning set forth below:
(a) "Asset Purchase Agreement" shall mean the form of
asset purchase agreement attached hereto as EXHIBIT A and executed
by the Buyer and Developer after the exercise of a Buy Option or
Sell Option.
(b) "Buy Option" shall mean the right of the Buyer,
exercised by written notice to the Developer, to cause the
Developer to transfer and sell to the Buyer, and the Buyer to
purchase from the Developer, pursuant to the Asset Purchase
Agreement all of the assets of a Tranche of Stores identified by
the Developer no later than 14 days after the exercise of the Buy
Option.
(c) "Net Operating Cash Flow" shall mean with respect
to a Retail Store included in a Tranche of Stores an amount equal
to the pre-tax income from the Retail Store during the 12-month
period (or, if a Retail Store included in a Tranche of Stores has
been open for less than 12 months, then for the period since such
store has been open and not prior thereto) ending on the last day
of the calendar month preceding the delivery of the Buy Option or
Sell Option, as applicable, plus all debt-related interest expense
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and depreciation and amortization expenses attributable to the
Retail Store for such 12-month period, less all rental product
purchases reasonably attributable to the Retail Store during such
12-month period (including revenue sharing expenses if not
previously expensed), less all earned income interest reasonably
attributable to the Retail Store for such 12-month period, plus
all royalty expenses attributable to the Retail Store during such
12-month period (if expensed). The Net Operating Cash Flow shall
be determined in accordance with generally accepted accounting
principles applied consistently with the Developer's past
practice.
(d) "Prospectus" shall mean the prospectus included in
an effective Registration Statement filed by the Buyer with the
Securities and Exchange Commission relating to the registration of
WCEC Shares under the Securities Act of 1933, as amended.
(e) "Purchase Price" shall mean with respect to all of
the assets of a Tranche of Stores an amount equal to the product
of (x) 4.5 multiplied by (y) the aggregate amount of the Net
Operating Cash Flow for each Retail Store included in the Tranche
of Stores.
(f) "Sell Option" shall mean the right of the
Developer, exercised by written notice to the Buyer, to cause the
Buyer to purchase from the Developer, and the Developer to
transfer and sell to the Buyer, pursuant to the Asset Purchase
Agreement all of the assets of a Tranche of Stores identified by
the Developer.
(g) "Tranche of Stores" shall mean a group of Retail
Stores identified in writing by the Developer at the time of
exercise by the Developer of a Sell Option, or, in the case of the
exercise by the Buyer of a Buy Option a group of Retail Stores
identified in writing by the Developer no later than 14 days after
the exercise of a Buy Option; PROVIDED HOWEVER, that the first,
second and third Tranche of Stores shall be comprised of at least
eight, ten and thirteen Retail Stores, respectively, that have
been newly-developed by the Developer pursuant to the terms of the
Development Agreement (as opposed to Acquired Video Stores, as
that term is defined in the Development Agreement).
(h) "Tranche Financial Statements" shall mean (i) the
balance sheet as of the most recent calendar year end and the
related statements of income, retained earnings and changes in
financial condition for the year then ended for the Tranche of
Stores on a combined basis (collectively, the "Annual Financials")
and (ii) the balance sheet as of the most recent month end and the
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related statements of income, retained earnings and changes in
financial condition for the period beginning on the previous
January 1 and ended on such most recent month end (collectively,
the "Stub Financials"). The Annual Financials shall be prepared
in accordance with generally accepted accounting principles
applied consistently with past practice and certified without
qualification by the Developer's independent public accountants
(which shall be licensed to practice before the Securities and
Exchange Commission), and the Stub Financials shall be reviewed by
such accountants and certified by the Developer's chief financial
officer; provided, however, that, at the election of the
Developer, the Annual Financials delivered to Buyer in connection
with the exercise of a Buy Option may be reviewed by such
accountants and certified by the Developer's chief financial
officer.
(i) "WCEC Shares" shall mean shares of Common Stock,
$.01 per value per share, of Buyer.
2. OPTION TO SELL. The Buyer hereby grants the
Developer the right to exercise up to four Sell Options during the
period beginning April 1, 1998 and ending June 30, 2001, except
that no Sell Option may be exercised within six months after the
closing of the sale to the Buyer of a Tranche of Stores. If any
Tranche of Stores identified by the Developer in connection with
the exercise of any Sell Option includes less than 10 Retail
Stores, then thereafter the Developer shall no longer have any
right to exercise a Sell Option. Notwithstanding the above, prior
to exercising a Sell Option, the Developer shall provide to the
Buyer not less than 75 days', nor more than 105 days', prior
notice of its preliminary (and non-binding) intention to do so.
During such 75-day period, the Buyer shall deliver to the
Developer a then-current Prospectus (or such other information as
Buyer reasonably determines is required in order to comply with
applicable state and federal securities laws). Following receipt
of such Prospectus, the Developer may then exercise the Sell
Option; provided, however, that the Developer shall have no
obligation to exercise a Sell Option (and its failure to do so
shall not preclude the Developer from providing any further notice
of its preliminary intention to exercise a Sell Option).
3. OPTION TO BUY. The Developer hereby grants the Buyer the
right to exercise up to four Buy Options during the period
beginning October 1, 1998 and ending December 31, 2001, provided,
that the Buyer may not exercise more than (1) one Buy Option prior
to October 1, 1999, (ii) two Buy Options prior to July 1, 2000 and
(iii) three Buy Options prior to April 1, 2001.
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4. FINANCIAL STATEMENTS. The Developer shall provide
Tranche Financial Statements for each Tranche of Stores within 45
days of the exercise of a Sell Option or a Buy Option.
5. ASSET PURCHASE AGREEMENT. Upon exercise of a Buy Option
or Sell Option, both Buyer and Developer shall diligently complete
the blank provisions of and execute and deliver the form of asset
purchase agreement attached hereto as EXHIBIT A.
6. DETERMINATION OF PURCHASE PRICE. Promptly following the
delivery of the Buy Option or Sell Option, as applicable, the
Buyer shall cause independent certified public accountants for the
Buyer (the "Accountants"), to review the books and records of the
Developer and the Retail Stores. Not later than 20 days after the
delivery of the Tranche Financial Statements, the Buyer shall
cause the Accountants to deliver a statement to the Buyer and the
Developer setting forth the Purchase Price (the "Accountants'
Report"). The Purchase Price shall be included in the Asset
Purchase Agreement.
In the event that the Buyer or the Developer dispute the
calculation of the Purchase Price, the disputing party shall
notify the other party hereto in writing (the "Dispute Notice") of
the amount, nature and basis of such dispute, within 5 business
days after delivery of the Accountants' Report. In the event of
such a dispute, the parties hereto shall first use their best
efforts to resolve such dispute among themselves. If the parties
are unable to resolve the dispute within 10 business days after
delivery of the Accountants' Report, the dispute shall be
submitted to the Accountants and, independent accountants for the
Developer ("Developer's Accountants"), for resolution. The
Accountants and Developer's Accountants shall use their best
efforts to resolve the dispute within 5 business days after
submission. If they are unable to agree upon a resolution of the
dispute within such 5-business day period, the dispute shall be
submitted to arbitration in accordance with Section 13.
The fees and expenses of the Accountants in connection with
the preparation of the Accountants' Report and the resolution of
disputes pursuant to the preceding paragraph shall be borne by the
Buyer and the fees and expenses of Developer's Accountants in
connection with the resolution of disputes pursuant to the
preceding paragraph shall be borne by the Developer.
Promptly upon the expiration of the 5-business day period for
giving the Dispute Notice, if no Dispute Notice is given, or
promptly upon the resolution of disputes, if any, as provided
above, the Closing shall occur.
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The Purchase Price for the first Tranche of Stores shall be
increased or decreased to reflect any adjustment required pursuant
to Section 1.3(d) of that certain Asset Purchase Agreement of even
date herewith among the Buyer, Developer and the Principals
identified therein.
7. THE CLOSING. Following each exercise of a Buy Option or
Sell Option, the closing of the acquisition by the Buyer of the
assets of the related Tranche of Stores (the "Closing") shall take
place within 60 days following the date of delivery of the Tranche
Financial Statements (or if later within 5 business days after
resolution of any dispute in accordance with Section 6 above) at
the offices of Xxxx and Xxxx, 00 Xxxxx Xxxxxx, Xxxxxx,
Xxxxxxxxxxxxx, at such time or date as may be selected by Buyer,
on not less than five days prior notice to Developer (which notice
may be given orally), or at such other time and date as may be
mutually agreed upon in writing by the parties hereto.
8. PAYMENT OF PURCHASE PRICE. At each Closing, the
Purchase Price shall be paid in accordance with the Asset Purchase
Agreement. The value of each WCEC Share delivered to Developer as
part of the payment of the Purchase Price shall be equal to the
average of the bid and asked prices per share of common stock of
WCEC as reported on the Nasdaq Stock Exchange for each of the
fifteen trading days ending on the third business day immediately
preceding the Closing.
9. ASSUMPTION OF LIABILITIES. The Buyer shall assume no
liabilities of the Developer other than accounts payable for new
release rental and sell-through videotapes and interactive
electronic games relating to the Tranche of Stores that have been
outstanding for 60 days or less at the Closing and that have been
incurred in the ordinary course of business. Such amount of
payables shall not reduce the Purchase Price. All other
liabilities of the Developer relating to such Tranche of Stores
shall be paid in full by Developer at or prior to the Closing.
10. RESTRICTIONS ON TRANSFER OF RETAIL STORES. Developer
hereby agrees that it shall not, without Buyer's prior written
consent (which may be granted or denied in Buyer's sole and
absolute discretion), sell, transfer or dispose of, directly or
indirectly, by sale of stock, assets, merger, consolidation or
otherwise, all or any portion of, or any interest in, any Retail
Store until such time as the Buy Options have expired unexercised.
11. REPRESENTATION OF THE DEVELOPER. The Developer hereby
represents and warrants to the Buyer that the execution and
delivery of this Agreement by the Developer, and the agreements
provided for herein, and the consummation by the Developer of all
transactions contemplated hereby, have been duly authorized by all
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requisite corporate and shareholder action; that this Agreement
and all such other agreements and obligations entered into and
undertaken in connection with the transactions contemplated hereby
to which the Developer is a party constitute the valid and legally
binding obligations of the Developer, enforceable against the
Developer in accordance with their respective terms.
12. NOTICES. Any notices or other communications required
or permitted hereunder shall be sufficiently given if delivered
personally or sent by telex, federal express, registered or
certified mail, postage prepaid, addressed as follows or to such
other address of which the parties may have given notice:
To the Developer: Reel Entertainment Inc.
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With a copy to:
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To the Buyer: West Coast Entertainment Corporation
0000 Xxxxxx Xxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000
Attn: President
With a copy to: Xxxx and Xxxx
00 Xxxxx Xxxxxx
Xxxxxx, XX 00000
Attn: Xxxx X. Xxxxx, Esq.
Unless otherwise specified herein, such notices or other
communications shall be deemed received (a) on the date delivered,
if delivered personally; (b) one business day after delivery to an
overnight courier, if sent by overnight courier; or (c) three
business days after being sent, if sent by registered or certified
mail.
13. Arbitration.
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(a) Any dispute, controversy or claim between the
parties arising out of or relating to this Agreement, a breach
hereof or the transactions contemplated hereby, shall be settled
by arbitration in accordance with the provisions of this Section.
Any arbitration pursuant to this Section shall be conducted by a
single arbitrator appointed by the Boston, Massachusetts office of
the American Arbitration Association upon the request of either
party. The arbitrator shall have a minimum of five years of
experience in the area of business relevant to the particular
dispute. Each party shall be permitted to submit only one
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proposal to the arbitrator, and the arbitrator shall be required
to choose one of such two proposals as the resolution of the
dispute. The arbitrator may proceed to a resolution notwith-
standing the failure of a party to participate in the proceedings.
Each of the parties shall pay its own costs and expenses in
connection with any such arbitration, and the parties shall share
equally in the fees and expenses of the arbitrator.
(b) The parties agree that any such arbitration will
occur in Boston, Massachusetts, any such arbitration award shall
be final and binding upon the parties, may be entered in any court
having jurisdiction and shall not be appealable by either party in
any court.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Buyer and the
Developer may not assign their respective obligations hereunder
without the prior written consent of the other party; provided,
however, that the Buyer may assign this Agreement, and its rights
and obligations hereunder, to a subsidiary or affiliate. Any
assignment in contravention of this provision shall be void. No
assignment shall release the Buyer from any obligation or
liability under this Agreement.
15. Entire Agreement; Amendments; Attachments.
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(a) This Agreement, all Schedules and Exhibits hereto,
and all agreements and instruments to be delivered by the parties
pursuant hereto represent the entire understanding and agreement
between the parties hereto with respect to the subject matter
hereof and supersede all prior oral and written and all
contemporaneous oral negotiations, commitments and understandings
between such parties. The Buyer and the Developer may amend or
modify this Agreement, in such manner as may be agreed upon, by a
written instrument executed by the Buyer and the Developer.
(b) If the provisions of any Schedule or Exhibit to
this Agreement are inconsistent with the provisions of this
Agreement, the provision of the Agreement shall prevail. The
Exhibits and Schedules attached hereto or to be attached hereafter
are hereby incorporated as integral parts of this Agreement.
16. EXPENSES. Except as otherwise expressly provided herein,
the Buyer and the Developer shall each pay their own expenses in
connection with this Agreement and the transactions contemplated
hereby.
17. LEGAL FEES. In the event that legal or arbitration
proceedings are commenced by the Buyer against the Developer, or by the
Developer against the Buyer, in connection with this Agreement or the
transactions contemplated hereby, the party or parties which do not
prevail in such proceedings shall pay the reasonable attorneys' fees
and other costs and expenses, including investigation costs, incurred
by the prevailing party in such proceedings.
18. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
19. SECTION HEADINGS. The section headings are for the
convenience of the parties and in no way alter, modify, amend, limit,
or restrict the contractual obligations of the parties.
20. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not effect the validity or
enforceability of any other provision of this Agreement.
21. COUNTERPARTS. This Agreement may be excuted in one or more
counterparts, each which shall be deemed to be an original, but all of
which shall be one and the same document.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of and on the date first above written.
DEVELOPER:
REEL ENTERTAINMENT, INC.
By: /s/ T. Xxxxxx Xxxxxxx
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Title: President
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BUYER:
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ T. Xxxx Xxxxxxxx
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Title: President and CEO
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