Revenue Sharing Term Sheet - MGM Home Entertainment and Hollywood Entertainment Corp.
REVENUE SHARING TERM SHEET
HOLLYWOOD ENTERTAINMENT CORPORATION
The following (this "Agreement") sets forth the principal terms of the
revenue sharing agreement between MGM Home Entertainment ("MGM") and Hollywood
Entertainment Corporation ("Retailer") concerning certain motion picture titles
made available to the public by MGM.
TITLES: All motion pictures and programs released by MGM during
the Term as Rental-Priced (defined below) new release
VHS and day-and-date DVD (in the English and Spanish
language) (hereafter collectively referred to as
"Units"), intended for non-commercial, private in-home
viewing, on an output basis, to the extent that MGM owns
or controls the necessary revenue-sharing rights in each
such motion picture or program (individually a "Title").
For purposes of this Agreement, "day-and-date DVD"
shall include DVD new releases where the DVD release
date is within * of the VHS Street Date. In addition,
Retailer shall have the option to *. Other video
products, and all other media, shall not be included
within this Agreement. Retailer agrees to lease all
Titles offered by MGM during the Term. Notwithstanding
the foregoing, Retailer shall be under no obligation to
lease from MGM more than * Titles per year that have a
Gross Box Office (defined below) of * and that MGM has
not participated in such Title's production (e.g., as
evidenced in the credit block) ("Class C Pictures"). If
MGM releases more than * Class C Pictures in any given
year, Retailer and MGM shall mutually select the * to be
included hereunder and any additional Class C Pictures
shall only be leased by Retailer in Retailer's sole
discretion. "Gross Box Office" shall mean the box
office gross receipts earned by a title in the United
States and Canada measured from the Title's initial
theatrical release in the Territory until the date
ordered by Retailer, as reported by the Hollywood
Reporter. "Rental-Priced" shall mean new release VHS
format Titles not priced for sell-through (as the term
is commonly understood in the United States video
industry).
Retailer agrees that Units of Titles will only be
obtained on a revenue sharing basis in accordance with
this Agreement. For the avoidance of doubt, this
Agreement is on an output (versus a Title-by-Title)
basis, excluding * and excluding certain Class C
Pictures as outlined above.
*Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
TERM: The term of this Agreement (the "Term") shall commence upon the
date this Agreement is fully executed, and shall
continue thereafter for a period of three (3) years;
provided, however, that MGM or Retailer may terminate
this Agreement at any time after December 15, 2002, upon
ninety (90) days' written notice (which notice may be
given before or after December 15, 2002).
TERRITORY: United States, its territories and possessions.
TRANSACTION: Lease, with rights to purchase Units at end of the
Revenue Sharing Period.
ORDER DATE: With respect to ordering each and every Title pursuant to this
Agreement, Retailer shall provide to MGM (or its
designee) order quantities determined by Retailer for
such Title not later than six (6) weeks prior to such
Title's Street Date (the "Order Date"). The orders shall
specify the number of Units (VHS and DVD) for each
Title.
SHIPPING: MGM shall ship (at MGM's sole cost and expense) the Units
leased by Retailer to not more than two (2) distribution
centers designated by Retailer. MGM shall ship such
Units to such designated locations for arrival at such
locations not less than fifteen (15) days prior to
Street Date. The individual Units will not be shrink-
wrapped.
LEASE
COMMITMENT: Retailer and MGM shall mutually agree on the number of Units
for each respective title that Retailer shall lease from
MGM. In the event the parties cannot agree on the
number of Units on or before forty five (45) days prior
to the Street Date of any Title, the number of Units
shall be determined by reference to the matrix attached
hereto as Exhibit A ("MGM Matrix"). Retailer agrees to
provide MGM with written notice of the inability of the
parties to agree on or before the expiration of said
forty-five (45)-day period ("Matrix Notice").
*
In the event * is used to determine the number of Units
acquired by Retailer, Retailer agrees to pay *
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
The allocation between VHS and DVD within the number of
Units leased shall be determined by Retailer in
Retailer's sole discretion; provided, however, that in
the event Retailer elects to increase the percentage of
DVD acquired in excess of * percent (*%) of the
Retailer's * at the time of the allocation, the
allocation in excess of such * percent (*%) increase
shall be subject to MGM's prior written consent, which
consent shall not be unreasonably withheld. For
purposes of illustration, if at the time of the
allocation *
Matrix Adjustment: The parties agree that the MGM
Matrix * shall be adjusted semi-annually during the term
of this Agreement. The first such adjustment shall be
made effective December 15, 2001, with later adjustments
being made on June 15, 2002, December 15, 2002, June 15,
2003, and December 15, 2003 ("Adjustment Date(s)"). The
adjustment in the * for the next period shall be a pro
rata increase or decrease in the Unit ranges based upon
the percentage year-over-year increase or decrease in
Store Revenue for Retailer's stores for the six (6)-
month period ending the month prior to the month of the
Adjustment Date ("Adjustment Period"); provided,
however, that unless the adjustment is greater than *
percent (*%), there shall be no adjustment made in the
*. Year-over-year increases or decreases shall be
effective as of the Adjustment Date and shall be
determined by comparison of Store Revenue for the prior
Adjustment Period to Store Revenue for the same six (6)-
month period of the prior year. The Store Revenue
percentage increase or decrease shall determine the
percentage increase or decrease in the Unit ranges in
the *. For purposes of this Agreement, Store Revenue
for Retailer's stores is defined as average store
revenue determined from all Comp-stores owned by
Retailer and all franchises or licensed stores for which
Retailer is responsible for new release acquisitions.
The * for any period shall apply to Titles that have a
Street Date within such period. For purposes of this
Agreement, "Comp-stores" are defined as stores over one
(1) year old compared to the same store for the same
period for the prior year.
REVENUE
SHARE: For purposes of this Agreement, Revenue Share includes
*, excluding any sales taxes, use taxes, and any other
government-levied transaction fees collected from the
customer.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
Rental Revenue: Retailer shall pay to MGM an amount
equal to * percent (*%) of all Rental Revenue (defined
below) with respect to each and every Unit leased by
Retailer pursuant to this Agreement ("MGM's Rental
Share") during the period commencing upon the respective
Street Date for such Title and continuing for *
thereafter ("Revenue Sharing Period"). "Rental Revenue"
is defined as all monies actually tendered by consumers,
including rental fees and extended viewing fees (less
amounts refunded * and excluding any sales taxes, use
taxes, and any other government-levied transaction fees
collected from the customer. For purposes of the
foregoing, Promotional or Operation Credit or Discount
shall mean *
DVD PVT: *
VHS PVT: *
MINIMUM PER
TRANSACTION: With respect to each Title, Retailer shall pay to MGM the
greater of: (i) * per Rental Transaction (defined
below) averaged over the aggregate number of rental
transactions for all Units of such Title during the
Revenue Sharing Period, or (ii) * amount for such
Title. For purposes of this Agreement, "Rental
Transaction" is defined as a single-night or multiple-
night Rental Transaction involving a Unit, whether or
not paid for.
MGM acknowledges that one of Retailer's operation
programs is the free rental of new releases to
Retailer's store employees prior to Street Date. The
purpose of the program is to educate Retailer's
employees so they may better serve customers. MGM
acknowledges that such program transactions are excluded
from Rental Revenue and Rental Transactions. Retailer
acknowledges that such program shall be applied to MGM
in a manner consistent with its application to other
major motion picture studios.
AD ALLOWANCE: * shall be made available by MGM to Retailer for
advertising purposes; provided, however, that amounts,
if any, in excess of such minimum shall be determined by
MGM at MGM's sole discretion. The allowance may be
deducted monthly by Retailer from MGM's Revenue Share
otherwise payable by Retailer.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
END-OF-TERM
BUYOUT FEE: VHS Units: With respect to VHS Units of each Title leased by
Retailer, Retailer shall, on the date which is * after
such Title's Street Date, *
In the event MGM elects to have Retailer return Units,
MGM shall provide the destination address for its
distribution center for return of the Units and Retailer
shall deliver the Units to such location. Retailer may
reasonably retain and consolidate return shipments to
fully utilize truck capacities, provided returns shall
not be delayed by such for more than *
DVD Units: With respect to DVD Units of each Title
leased by Retailer which have not been sold during the
Revenue Sharing Period for such Title, Retailer shall,
on the date which is * after such Title's Street Date,
*
In the event MGM elects to have Retailer return Units,
MGM shall provide the destination address for its
distribution center for return of the Units and Retailer
shall deliver the Units to such location. Retailer may
reasonably retain and consolidate return shipments to
fully utilize truck capacities, provided returns shall
not be delayed by such for more than *.
PVT
CONSUMER
SALES: Only Units that have previously been rented to consumers
(PVT) may be sold pursuant to this Agreement during the
Revenue Sharing Period. There shall be no PVT sales
prior to the date which is * after each Title's
respective Street Date for VHS and * after each Title's
respective Street Date for DVD (the "Permitted Sale
Date"). Thereafter, Retailer may sell Units for each
Title leased by Retailer pursuant hereto. *.
PAYMENT
TERMS: MGM's Rental Share and * revenue shall be paid by
Retailer to MGM not later than * days after the end of
the month during which each respective transaction
occurred. With respect to the * any * shall be payable
within * days after the expiration of the applicable
Revenue Sharing Period for the Title.
MGM's * shall be paid by Retailer to MGM not later than
* days after the date such amount is due to MGM in
accordance with * provision set forth above.
*Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
DATA
REPORTING: With respect to each and every Title pursuant to this
Agreement, Retailer shall provide to MGM (or its
designee), on a weekly basis, all transactional data,
excluding Retailer's customer data, for all amounts
payable by Retailer to MGM pursuant to this Agreement in
the manner set forth in Exhibit "C" attached hereto.
MGM acknowledges that Retailer's current electronic
reporting capabilities are satisfactory to MGM.
Retailer agrees that it will maintain its system to
continue to provide such data. Retailer agrees to
consider reasonable data format changes requested by
MGM, provided that such changes do not require
significant expenditures or otherwise present processing
problems.
DEFECTIVES: VHS: MGM shall allow Retailer a credit, as the sole remedy for
damaged or defective VHS Units, in an amount equal to *
of Revenue Share for VHS Units.
DVD: MGM shall allow Retailer a credit, as the sole
remedy for damaged or defective DVD Units, in an amount
equal to * of Revenue Share for DVD Units.
The credits may be deducted monthly by Retailer from
MGM's Revenue Share otherwise payable by Retailer.
PRODUCT
ALLOCATION: In the event Retailer closes one (1) or more stores during the
term of this Agreement, Retailer shall have the right to
transfer Units to other stores or to Retailer's
distribution centers.
PRODUCT
PLACEMENT: Retailer shall stock all DVD and VHS Units of all Titles leased
in Retailer's stores. Retailer shall have the right to
transfer Units between its stores. Retailer agrees that
Retailer shall stock and transfer Units consistent with
Retailer's handling of similar product of other major
motion picture studios.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
AUDIT RIGHTS: With respect to each and every Title pursuant to this
Agreement, MGM shall hold all audit and inspection
rights in connection with all Units pursuant to this
Agreement (including, but not limited to, the right to
audit the Matrix Adjustment determinations); provided,
however, that MGM shall not audit Retailer more than
once per quarter. Such audits shall not continue for
more than twenty (20) business days so long as Retailer
provides requested audit documentation to MGM in a
timely manner. In no event shall MGM have the right to
examine records relating to Retailer's business
generally or with respect to projects or areas not
directly relating to Revenue Share with MGM. The
foregoing sentence shall not limit MGM's right to audit
and inspect the Matrix Adjustment determinations and the
transactional data provided to MGM set forth above.
NO ASSIGNMENT: This Agreement may not be assigned by Retailer without
MGM's prior written consent. The sale or exchange of
Retailer's stock in a public offering and the subsequent
sale of Retailer's stock on a nationally recognized
exchange or in NASDAQ, a change in ownership of Retailer
as a result of a merger, consolidation, reorganization,
joint venture, the exchange of stock between Retailer's
parent company and a subsidiary or between subsidiaries,
or the sale of all or substantially all of Retailer's
stock, or the sale of all or substantially all of
Retailer's assets shall not be considered an Assignment.
Retailer shall not be required to obtain MGM's consent
and MGM shall have no right to delay, alter, or impede
any of the foregoing transactions or combinations
thereof. Only the event of change in ownership or
control of Retailer as a result of such a transaction
shall the successor entity have the right to assume
Retailer's rights and obligations under this Agreement;
provided, however, no such assignment shall operate to
release Retailer of its obligations under this
Agreement.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
CONFIDENTIALITY: Neither MGM nor Retailer shall disclose to any third party
(other than its respective employees, in their capacity
as such) any information with respect to the terms and
provisions of this Agreement except: (a) to the extent
necessary to comply with law, administrative order, or
rule or the valid order or decree of a court of
competent jurisdiction, in which event the party making
such disclosure shall so notify the other and shall seek
confidential treatment of such information, (b) as part
of its normal reporting or review procedure to its
partners, its divisions, its corporate affiliates, its
financiers, its financial advisers, auditors, and its
attorneys, and its profit participants (to the extent
deemed necessary by the disclosing party), (c) for
reasonable conduct of its business, to Retailer's
employees, agents, and business advisors or consultants
authorized by Retailer who have a reasonable need to
know such information; provided, however, that any and
all such parties are advised of the confidential nature
of the information and agree in writing to be bound by
the confidentiality requirements of this Agreement.
INDEMNIFICATION: MGM hereby indemnifies and holds harmless Retailer, its
successors and assigns, including any customers, from
any loss, liability, claim, or damage (including, but
not limited to, reasonable outside attorney fees)
arising out of or in relation to the content of any Unit
of a Title leased by Retailer pursuant to this
Agreement; provided, however, that such Unit(s) has not
been altered or modified by Retailer.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
MGM and Retailer contemplate that a more formal agreement shall be entered into
by MGM and Retailer with respect to the foregoing matters and standard terms
and conditions to be negotiated
in good faith. Pending the preparation and execution of such more formal
documentation, this Agreement shall be binding upon MGM and Retailer.
MGM HOME ENTERTAINMENT INC. HOLLYWOOD ENTERTAINMENT
CORPORATION, an Oregon corporation
By: /s/ David Bishop By: /s/ F. Bruce Giesbrecht
David Bishop F. Bruce Giesbrecht
Its: President Its: Executive Vice President
Business Development
Dated: 7/31/01 Dated: 7/30/01
EXHIBIT A
*
EXHIBIT B
*
EXHIBIT C
*