EXHIBIT 10.38
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY. IT HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND IT MAY NOT BE SOLD, ENCUMBERED
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN
EXEMPTION SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED. THIS LEGEND SHALL BE ENDORSED ON ANY NOTE ISSUED IN EXCHANGE FOR THIS
NOTE.
PROMISSORY NOTE
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May 11, 1999
FOR VALUE RECEIVED, the undersigned Video Update, Inc., a Delaware
corporation (the "Company"), promises to pay to the order of Xxxxxx
Entertainment Inc. ("Xxxxxx"), on the 11th day of May, 2002, Fourteen Million
Dollars ($14,000,000) with interest from the date hereof on the unpaid balance
from time to time outstanding at 12% per annum, calculated on the basis of a
360-day year to the extent permitted by applicable law; provided, however, that
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in no event shall the rate of interest payable in respect of the indebtedness
evidenced hereby exceed the maximum rate of interest from time to time allowed
to be charged by applicable law (the "Maximum Rate"). The principal and
interest of this Note shall be repaid in monthly installments in accordance with
the attached Schedule 1. All monthly payments set out in Schedule 1 shall be
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due and payable on the first day of such month, with the first such monthly
payment due and payable on July 1, 1999. This Note may be prepaid in whole or
in part at any time without premium penalty, fees or price notice. All payments
and prepayments hereunder shall be applied first to accrued, but unpaid
interest, with the remainder (if any) being applied to principal.
Time is of the essence of this Note. To the extent permitted by applicable
law, a late charge equal to 5% will be assessed on any monthly principal or
interest payment due pursuant to this Note that is not made when due to cover
additional expenses incident to the handling and processing of delinquent
payments. In the event that the Company (a) fails to make any payment required
under this Note as provided herein and such failure continues for a period of
five days after written notice, (b) is in default under the Trade Terms
Agreement, dated May 11, 1999, between the Company and Xxxxxx, (c) experiences a
"change in control," meaning the closing of a transaction after which (i)
Company stockholders currently owning a majority of the Company's Class A Common
Stock, $.01 par value, fail to continue to own such majority or (ii) the
individuals
who are, as of the date of the issuance of this Note, members of the Company's
Board of Directors (or designees approved by them), cease to constitute at least
2/3 of the Company's Board of Directors, (d) is in default of any Senior
Indebtedness (defined below), with the result that the entire amount of such
indebtedness is immediately due and payable, (e) is in default under the Warrant
to Purchase Common Stock of the Company dated as of May 11, 1999, issued to
Xxxxxx, (f) is in default under the Registration Rights Agreement dated as of
May 11, 1999, by and between the Company and Xxxxxx, (g) is in default under its
trade indebtedness or any other payment or contractual obligation to Xxxxxx,
however evidenced or documented, or (h) files or has filed against it any
petition under any bankruptcy or insolvency law or for the appointment of a
receiver a general assignment for the benefit of creditors or (i) is in default,
or there occurs an event of default under the Senior Debt (subject to subsection
(ii) of the Section 2 of the Subordination Section below and notice of which
must be given to Xxxxxx as provided herein)(each a "default"), then the holder
may, subject to the limitations on remedies set forth in the subordination
section below, by notice in writing to the Company declare the entire unpaid
principal of this Note, together with the accrued interest thereon, and any
other amounts due thereunder, and all other amounts advanced by Xxxxxx to the
Company of any kind, including pursuant to any agreement described in this
paragraph, immediately due and payable. No failure by the holder to take action
with respect to any such default shall affect its subsequent rights to take
action with respect to the same or any other default. In the event of default
the Company agrees to pay all reasonable costs of collection, including
reasonable attorneys' fees to the extent allowed by law.
Upon the occurrence of any default, at the option of the holder of this
Note and without notice to the Company, all accrued and unpaid interest, if any,
shall be added to the outstanding principal balance hereof, and the entire
outstanding principal balance, as so adjusted, shall bear interest thereafter
until paid at an annual rate (the "Default Rate") equal to the lesser of (a) the
rate that is three percentage points (3.0%) in excess of the above-specified
interest rate, or (b) the Maximum Rate, regardless of whether there has been an
acceleration of the payment of principal as set forth herein. All such interest
shall be paid at the time of and as a condition precedent to the curing of any
such default.
1. Subordination of Liabilities. Xxxxxx by its acceptance of this Note
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covenants and agrees, that the payment of the principal of, interest on, and all
other amounts owing in respect of, this Note (the "Subordinated Indebtedness")
is hereby expressly subordinated, to the extent and in the manner hereinafter
set forth, to the prior payment in full in cash of all Senior Debt. The
provisions of this Subordination Section shall constitute a continuing offer to
all persons who, in reliance upon such provisions, become payees of, or continue
to hold, Senior Debt, and such provisions are made for the benefit of the
holders of Senior Debt, and such holders are hereby made obligees hereunder the
same as if their names
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were written herein as such, and they and/or each of them may proceed to enforce
such provisions.
2. The Company is Not to Make Payments with Respect to Subordinated
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Indebtedness in Certain Circumstances.
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(i) Upon the maturity of any Senior Debt (including interest
thereon or fees or any other amounts owing in respect thereof), whether at
stated maturity, by acceleration or otherwise, all Obligations owing in
respect thereof, in each case to the extent due and owing, shall first be
paid in cash, before any payment (whether in cash, property, securities or
otherwise) is made on account of the Subordinated Indebtedness.
(ii) The Company may not, directly or indirectly make any payment
with respect to any Subordinated Indebtedness and may not acquire any
Subordinated Indebtedness for cash or property until all Senior Debt has
been paid in full in cash if any default or event of default under the
Credit Agreement or any other issue of Senior Debt is then in existence or
would result therefrom. Xxxxxx hereby agrees that, so long as any such
default or event of default in respect of any issue of Senior Debt exists,
it will not xxx for, or otherwise take any action to enforce the Company's
obligations to pay, amounts owing in respect of this Note. Xxxxxx
understands and agrees that to the extent that this Subordination Section
prohibits the payment of any Subordinated Indebtedness, such unpaid amount
shall not constitute a payment default under this Note and Xxxxxx may not
xxx for, or otherwise take action to enforce the Company's obligation to
pay such amount, provided that such unpaid amount shall remain an
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obligation of the Company to Xxxxxx pursuant to the terms of this Note and
provided that such unpaid amount shall, until paid, bear interest at the
Default Rate.
(iii) In the event that notwithstanding the provisions of the
preceding clauses (i) and (ii) of this Section 2 of this Subordination
Section, the Company shall make any payment on account of the Subordinated
Indebtedness at a time when payment is not permitted by said clause (i) or
(ii), such payment shall be held by Xxxxxx, in trust for the benefit of,
and shall be paid forthwith over and delivered to, the holders of Senior
Debt or their representative or the trustee under the indenture or other
agreement pursuant to which any instruments evidencing any Senior Debt may
have been issued, as their respective interests may appear, for application
pro rata to the payment of all Senior Debt remaining unpaid to the extent
necessary to pay all Senior Debt in full in accordance with the terms of
such Senior Debt, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt. Without in any way
modifying the provisions of this Subordination Section or affecting the
subordination effected hereby if the hereafter
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referenced notice is not given, the Company shall give Xxxxxx prompt
written notice of any event which would prevent payments under clause (i)
or (ii) of this Section 2.
3. Subordination to Prior Payment of All Senior Debt on Dissolution,
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Liquidation or Reorganization of the Company. Upon any distribution of assets
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of the Company upon dissolution, winding up, liquidation or reorganization of
the Company (whether in bankruptcy, insolvency or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise):
(i) the holders of all Senior Debt shall first be entitled to
receive payment in full cash of all Senior Debt (including, without
limitation, post-petition interest at the rate provided in the
documentation with respect to the Senior Debt, whether or not such post-
petition interest is an allowed claim against the debtor in any bankruptcy
or similar proceeding) before Xxxxxx is entitled to receive any payment of
any kind or character on account of the Subordinated Indebtedness;
(ii) any payment or distributions of assets of the Company of any
kind or character, whether in cash, property or securities to which Xxxxxx
would be entitled except for the provisions of this Subordination Section,
shall be paid by the liquidating trustee or agent or other person making
such payment or distribution, whether a trustee in bankruptcy, a receiver
or liquidating trustee or other trustee or agent, directly to the holders
of the Senior Debt or their representative or representatives, or to the
trustee or trustees under any indenture under which any instruments
evidencing any such Senior Debt may have been issued, to the extent
necessary to make payment in full in cash of all Senior Debt remaining
unpaid, after giving effect to any concurrent payment or distribution to
the holders of such Senior Debt; and
(iii) in the event that, notwithstanding the foregoing provision of
this Section 3 of this Subordination Section, any payment or distribution
of assets of the Company of any kind or character, whether in cash,
property or securities, shall be received by Xxxxxx on account of
Subordinated Indebtedness before all Senior Debt is paid in full in cash,
such payment or distribution shall be received and held in trust for and
shall be paid over to the holders of the Senior Debt remaining unpaid or
unprovided for or their representative or representatives, or to the
trustee or trustees under any indenture under which any instruments
evidencing any of such Senior Debt may have been issued, for application to
the payment of such Senior Debt until all such Senior Debt shall have been
paid in full in cash, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
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Without in any way modifying the provisions of this Subordination Section
or affecting the subordination effected hereby if the hereafter referenced
notice is not given, the Company shall give prompt written notice to Xxxxxx of
any dissolution, winding up, liquidation or reorganization of the Company
(whether in bankruptcy, insolvency or receivership proceedings or upon
assignment for the benefit of creditors or otherwise).
4. Subrogation. Subject to the prior payment in full in cash of all
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Senior Debt, Xxxxxx shall be subrogated to the rights of the holders of Senior
Debt to receive payments or distributions of assets of the Company applicable to
the Senior Debt until all amounts owing on this Note shall be paid in full, and
for the purpose of such subrogation no payments or distributions to the holders
of the Senior Debt by or on behalf of the Company or by or on behalf of Ingram
shall, as between them, its creditors other than the holders of Senior Debt, and
Xxxxxx, be deemed to be payment by the Company to or on account of the Senior
Debt, it being understood that the provisions of this Subordination Section are
and are intended solely for the purpose of defining the relative rights of
Xxxxxx, on the one hand, and the holders of the Senior Debt, on the other hand.
5. Obligation of the Company Unconditional. Nothing contained in this
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Subordination Section or otherwise in this Note is intended to or shall impair,
as between the Company and Xxxxxx, the obligation of the Company, which is
absolute and unconditional, to pay to Xxxxxx the principal of and interest on
this Note as and when the same shall become due and payable in accordance with
their terms, or is intended to or shall affect the relative rights of Xxxxxx and
creditors of the Company other than the holders of the Senior Debt, nor shall
anything herein or therein prevent Xxxxxx from exercising all remedies otherwise
permitted by applicable law upon an event of default under this Note, subject to
the limitations, if any, under this Subordination Section or the rights of
payees of Senior Debt to exercise rights and remedies, and subject to the
rights, if any, under this Subordination Section of the holders of Senior Debt
in respect of cash, property, or securities of the Company received upon the
exercise of any such remedy. Upon any distribution of assets of the Company
referred to in this Subordination Section, Xxxxxx shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction in which such
dissolution, winding up, liquidation or reorganization proceedings are pending,
or a certificate of the liquidating trustee or agent or other person making any
distribution to Xxxxxx, for the purpose of ascertaining the persons entitled to
participate in such distribution to Xxxxxx, the holders of the Senior Debt and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Subordination Section. The Company agrees to notify Xxxxxx of
any event of default under the Senior Debt documents.
6. Subordination Rights Not Impaired by Acts or Omissions of the Company
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or Holders of Senior Debt. No right of any present or future holders of
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any Senior Debt to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act of failure to act on the part of
the Company or by any act or failure to act in good faith by any such holder, or
by any noncompliance by the Company with the terms and provisions of this Note,
regardless of any knowledge thereof which any such holder may have or be
otherwise charged with. The holders of the Senior Debt may, without in any way
affecting the obligations of Xxxxxx with respect hereto, at any time or from
time to time and in their absolute discretion, change the manner, place or terms
of payment of, change or extend the time of payment of, or renew or alter, any
Senior Debt or amend, modify or supplement any agreement or instrument governing
or evidencing such Senior Debt or any other document referred to therein, or
exercise or refrain from exercising any other of their rights under this Senior
Debt including, without limitation, the waiver of default thereunder and the
release of any collateral securing such Senior Debt, all without notice to or
assent from Xxxxxx.
7. Additional Rights. In furtherance of the subordination provided
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herein, Xxxxxx hereby grants to the holder(s) of the Senior Debt irrevocable
authority, after any default in the payment of any amounts due on the Senior
Debt or in any event specified in Sections 2 or 3 above, to demand, collect,
file proofs of claim with respect to, receive and take any and all proceedings
for the recovery of any and all monies due or to become due on account of this
Note. In addition, Xxxxxx agrees to execute and deliver any and all documents
requested by the Company for delivery to its creditors (in the form as requested
by such creditors) in order to implement or verify this subordination.
8. Definitions. For purposes of this Note, the following capitalized
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terms have the following meanings:
"Credit Agreement" means the Credit Agreement (as amended, modified,
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supplemented, extended, restated, refinanced, replaced or refunded from time to
time, the "Credit Agreement"), dated as of March 6, 1998, by and among the
Company, various lending institutions (the "Banks") and Banque Paribas, as Agent
(the "Agent") and any amendment, modification, supplement, extension,
restatement, refinancing, replacement or refunding thereof (without regard to
whether the amount of Senior Debt thereunder has been increased) and the other
Credit Documents (as defined in the Credit Agreement).
"Obligation" means any principal, interest, premium, penalties, fees,
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expenses, indemnities and other liabilities and obligations (including any
guaranties of the foregoing liabilities and obligations) payable under the
documentation governing any indebtedness (including interest accruing after the
commencement of any bankruptcy, insolvency, receivership or similar proceeding,
whether or not such interest is an allowed claim against the debtor in any such
proceeding).
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"Senior Debt" means all Obligations (i) of the Company under, or in respect
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of, the Credit Agreement and any guaranty thereunder and (ii) of the
Company with respect to indebtedness for present and future borrowed money and
guarantees thereof from any public or private venture, mezzanine or high-yield
debt offering, but other than, with respect to subsection (ii) of this
Definition, (a) indebtedness which is pari passu with, or junior and subordinate
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in right of payment to, this Note, (b) Obligations in respect of trade payables
incurred in the ordinary course of business or (c) Obligations in respect of
federal, state, local or other taxes.
Presentation for payment, demand, protest and notice of demand, protest and
nonpayment are hereby waived by the Company and all other parties hereto. No
failure to accelerate indebtedness by reason of default, acceptance of a past-
due installment or other indulgences granted from time to time shall be
construed as a novation of this Note, as a waiver of such right of acceleration
or of the subsequent right to insist upon strict compliance with the terms of
this Note, or to prevent the exercise of a right of acceleration or any other
right. Unless otherwise specifically agreed by the holder in writing, the
liability of the Company and all other persons now or hereafter liable for
payment, or any portion thereof, shall not be affected by (a) any renewal of
this Note or other extension of the time for payment, (b) the release of all or
any part of any collateral now or hereafter securing payment, or (c) the release
of or resort to any person now or hereafter liable for payment. This Note may
not be changed orally, but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought.
To the extent permitted by applicable law, the Company hereby waives and
renounces for itself, its heirs, successors and assigns, all rights to the
benefits of any appraisement, exception or homestead now provided, or that may
hereafter be provided by the Constitution and laws of the United States of
America and of any state in and to all of its property, real and personal,
against the enforcement and collection of the obligations evidenced by this
Note.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds, acceleration of
maturity of the unpaid balance of this Note or otherwise, shall the interest and
loan charges agreed to be paid to any holder exceed the maximum amounts
collectible under applicable laws in effect from time to time (the "Maximum
Interest Amount"). If for any reason whatsoever the interest or loan charges
paid or contracted to be paid shall exceed the Maximum Interest Amount then,
ipso facto, the obligation to pay such interest and/or loan charges shall be
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reduced to the Maximum Interest Amount, and any amounts collected by Holder that
exceed the Maximum Interest Amount shall be applied to the reduction of the
principal balance remaining unpaid hereunder and/or refunded to the Company so
that at no time shall the interest or loan charges paid or payable exceed the
Maximum Interest Amount. This provision shall control every other provision in
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any and all other agreements and instruments now existing or hereafter arising
between the Company and any holder with respect to the indebtedness evidenced by
this Note.
All payments to the holder hereof shall be made at the following address or
at such other address as the holder hereof shall specify in writing to the
Company: Xxx Xxxxxx Xxxxxxxxx, Xx Xxxxxx, XX 00000, Attn: Chief Financial
Officer. All notices to the Company shall be made by certified or registered
mail to it at: 3100 World Trade Center, 00 Xxxx 0xx Xxxxxx, Xx. Xxxx, Xxxxxxxxx
00000-0000.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Delaware, without regard to its conflict of laws
provisions. The Company agrees that it has reasonable contacts with both the
State of Minnesota and the State of Tennessee. Any dispute or controversy with
respect to this Note shall be adjudicated in the courts located in one of these
two states and no other place.
IN WITNESS WHEREOF, the undersigned Company has caused this note to be
executed as a document under seal by its duly authorized officer.
Attest: Video Update, Inc.
______________________________ By: /s/ Xxxxxx X. Xxxxxx
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Name: Xxxxxx X. Xxxxxx
Title: Chief Executive Officer
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