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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended October 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____ to _____
Commission file number: 0-24346
VIDEO UPDATE, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 41-1461110
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3100 World Trade Center
30 East 7th Street
ST. PAUL, MINNESOTA 55101
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(Address of Principal Executive Offices)
(612) 222-0006
--------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
On December 9, 1996, the Issuer had 18,017,735 outstanding shares of Class
A Common Stock, $.01 par value, and 2,000,000 outstanding shares of Class B
Common Stock, $.01 par value.
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VIDEO UPDATE, INC.
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1. Financial Statements
Consolidated Balance Sheets - April 30, 1996, and
October 31, 1996........................................ 3
Consolidated Statements of Income - Three Months and Six
Months ended October 31, 1995 and October 31, 1996...... 4
Consolidated Statements of Cash Flows - Six Months ended
October 31, 1995 and October 31, 1996.................. 5
Notes to Consolidated Financial Statements - October 31,
1996................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Information............................................ 15
ITEM 5. Other Information............................................ 15
ITEM 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES............................................................ 16
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PART 1 - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
VIDEO UPDATE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
April 30, October 31,
1996 1996
--------- -----------
(UNAUDITED)
Cash and cash equivalents $ 676 $ 13,790
Accounts receivable 558 1,534
Notes receivable from related parties 1,555 1,265
Inventory 4,545 3,599
Videocassette rental inventory -- net 25,701 33,974
Property and equipment -- net 18,988 23,706
Prepaid expenses 682 1,153
Goodwill -- net 25,973 25,402
Other assets 840 932
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Total assets $79,518 $105,355
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 4,859 $ 660
Accounts payable 8,692 11,335
Accrued compensation 1,334 1,250
Accrued expenses 977 1,460
Accrued rent expense 228 271
Income tax payable 593 425
Deferred income taxes 841 972
Other liabilities 494 1,152
Commitments and contingnecies
Stockholders' equity:
Preferred Stock, par value $.01 per share:
Authorized shares -- 5,000,000
Issued shares -- none - -
Class A Common Stock, par value $.01 per share:
Authorized shares -- 50,000,000
Issued and outstanding shares -- 11,017,735 at
April 30, 1996 and 18,017,735 at October 31, 1996 110 180
Class B Common Stock, par value $.01 per share:
Authorized, issued and outstanding shares --
2,000,000 at April 30, 1996 and October 31, 1996 20 20
Additional paid-in capital 61,029 85,991
Retained earnings 2,186 3,219
Foreign currency translation (34) 100
--------- -----------
63,311 89,510
Notes receivable from officers for the exercise of
options (1,811) (1,680)
--------- -----------
Total stockholders' equity 61,500 87,830
--------- -----------
Total liabilities and stockholders' equity $79,518 $105,355
--------- -----------
--------- -----------
SEE ACCOMPANYING NOTES.
Note: The balance sheet at April 30, 1996 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
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VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
October 31, October 31,
1995 1996 1995 1996
-------- ------- ------- -------
Revenues:
Rental revenue $ 9,810 $18,444 $14,612 $35,628
Service fees 77 165 203 284
Product sales 784 1,515 1,028 2,775
------- ------- ------- -------
10,671 20,124 15,843 38,687
Costs and expenses:
Store operating expenses 7,962 15,890 11,510 30,426
Selling, general and administrative 1,173 2,044 2,004 4,022
Cost of product sales 491 956 658 1,636
Amortization of goodwill 227 371 346 743
------- ------- ------- -------
9,853 19,261 14,518 36,827
------- ------- ------- -------
Operating income 818 863 1,325 1,860
Interest expense (101) (152) (152) (318)
Other income 148 141 223 269
------- ------- ------- -------
47 (11) 71 (49)
------- ------- ------- -------
Income before income taxes 865 852 1,396 1,811
Income tax expense 379 382 610 778
------- ------- ------- -------
Net income $ 486 $ 470 $ 786 $ 1,033
------- ------- ------- -------
------- ------- ------- -------
Net income per share, primary $ 0.05 $ 0.03 $ 0.10 $ 0.08
------- ------- ------- -------
------- ------- ------- -------
Net income per share, fully diluted $ 0.05 $ 0.03 $ 0.09 $ 0.08
------- ------- ------- -------
------- ------- ------- -------
SEE ACCOMPANYING NOTES.
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VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended October 31,
----------------------------
1995 1996
---------- ----------
OPERATING ACTIVITIES
Net income $ 786 $ 1,033
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,703 11,409
Deferred rent and other liabilities 256 700
Deferred income taxes 192 131
Changes in operating assets and
liabilities, net of acquisitions
of businesses:
Accounts receivable (103) (976)
Notes receivable (1) 420
Inventory (2,116) 946
Other assets (252) (722)
Accounts payable 3,552 2,643
Income taxes payable 419 (168)
Other liabilities (921) 529
---------- ----------
Net cash provided by operating activities 5,515 15,945
INVESTING ACTIVITIES
Purchase of videocassette rental inventory (7,911) (17,169)
Purchase of property and equipment (5,899) (6,329)
Investment in businesses, net of cash acquired (14,568) (166)
Loan advance to executives (1,252) -
---------- ----------
Net cash used in investing activities (29,630) (23,664)
FINANCING ACTIVITIES
Proceeds from bank line - 5,300
Proceeds from notes payable - 26
Payments on bank line - (9,400)
Payments on notes payable (3,200) (125)
Proceeds from exercise of employee options 2 -
Proceeds from exercise of Class A warrants,
net 28,414 -
Proceeds from issuance of common stock, net 992 25,032
---------- ----------
Net cash provided by financing activities 26,208 20,833
---------- ----------
Increase in cash and cash equivalents 2,093 13,114
Cash and cash equivalents at beginning of the
period 5,573 676
---------- ----------
Cash and cash equivalents at end of the period $ 7,666 $ 13,790
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES.
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VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended October 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending April 30, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended April 30, 1996.
RECLASSIFICATION
Certain prior year items have been reclassified to conform with the fiscal
1997 presentation.
2. NET INCOME PER COMMON SHARE
Net income per share is computed by dividing net income for the year by the
weighted average number of shares of common stock and common stock equivalents,
if dilutive, outstanding during the year. The weighted average number of shares
used in the net income per share calculation was reduced by the common shares
placed in escrow in connection with the Company's initial public offering.
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------ ----------------
1995 1996 1995 1996
-------- -------- -------- --------
(In thousands, except per share amounts)
Net income $ 486 $ 470 $ 786 $ 1,033
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding:
Class A common shares outstanding
at quarter end 10,775 18,018 10,775 18,018
Class B common shares outstanding
at quarter end 2,000 2,000 2,000 2,000
Less: Class B common shares placed
in escrow in connection with the
initial public offering (1,300) (1,300) (1,300) (1,300)
Effect of using weighted average
common shares outstanding (2,206) (4,465) (4,159) (5,740)
Effect of shares issuable under stock
options and warrants based on the
treasury stock method 1,249 348 915 483
-------- -------- -------- --------
10,518 14,601 8,231 13,461
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common and common
equivalent share, primary $ 0.05 $ 0.03 $ 0.10 $ 0.08
-------- -------- -------- --------
-------- -------- -------- --------
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THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------ ----------------
1995 1996 1995 1996
-------- -------- -------- --------
(In thousands, except per share amounts)
Net income $ 486 $ 470 $ 786 $ 1,033
Weighted average shares outstanding:
Class A common shares outstanding
at quarter end 10,775 18,018 10,775 18,018
Class B common shares outstanding
at quarter end 2,000 2,000 2,000 2,000
Less: Class B common shares placed
in escrow in connection with the
initial public offering (1,300) (1,300) (1,300) (1,300)
Effect of using weighted average
common shares outstanding (2,206) (4,465) (4,159) (5,740)
Effect of shares issuable under stock
options and warrants based on the
treasury stock method 1,249 348 1,336 483
-------- -------- -------- --------
10,518 14,601 8,652 13,461
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common and common
equivalent share, fully diluted $ 0.05 $ 0.03 $ 0.09 $ 0.08
-------- -------- -------- --------
-------- -------- -------- --------
3. CHANGE IN AMORTIZATION METHOD FOR VIDEOCASSETTE RENTAL INVENTORY
Effective February 1, 1996, videocassettes that are considered base stock
(including copies one through three of new releases) are amortized over 36
months on a straight-line basis to a salvage value of $6.00 per videocassette.
New release videocassettes are amortized as follows: the fourth through ninth
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over 30 months with no salvage value; and the tenth and any succeeding
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over three months with no salvage value. The changes, which represent in
part a change in accounting principle and a change in accounting estimate, were
reflected in the Company's consolidated financial statements in total as a
change in an accounting estimate in the fourth quarter of fiscal 1996.
Prior to February 1, 1996, base stock videocassettes were amortized over 36
months on a straight-line basis with no salvage value. Prior to May 1, 1995,
new release videocassettes were amortized as follows: copies one through three
of each title per store were amortized as base stock; the fourth through ninth
copies of each title per store were amortized 40% in the first year and 30% in
each of the second and third years; and the tenth and any succeeding copies of
each title per store were amortized over nine months on a straight-line basis.
The new method of amortization was adopted because the Company believes
accelerating expense recognition for new release videocassettes (copies four and
greater) during the first six months more closely matches the typically higher
revenue generated following a title's release, and believes that $6.00
represents a reasonable salvage value for base stock videocassettes after 36
months.
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The effect of the application of the new method of amortizing
videocassettes during the first half of fiscal 1996 (six months ended October
31, 1995) would have increased amortization expense by approximately
$1,024,000 and decreased net income by approximately $577,000, or $.07 per
share, for the period.
4. ACQUISITIONS
In connection with six acquisitions in which the Company has issued an
aggregate of 650,613 shares of Class A Common Stock in fiscal 1996, the Company
may be obligated to make deficiency payments to such sellers equal to the
difference between the guaranteed price of $7.00 to $15.00 for each share
issued, and the actual market price of such shares as of specified dates between
July 1996 and October 1998. During October 1996, a deficiency payment was made
with regard to one acquisition in the cash amount of $87,135. As of October 31,
1996, the remaining deficiency payments are estimated to be approximately
$2,600,000 based on the closing stock price at October 31, 1996. In two of
these acquisitions, the Company has the option of satisfying approximately
$1,300,000 of this liability at October 31, 1996 through the issuance of
approximately 192,000 additional shares of Class A Common Stock.
5. STOCKHOLDER'S EQUITY
On October 2, 1996, the Company announced the closing of its public
offering of 6.1 million shares of Class A Common Stock. The net proceeds from
the offering were approximately $21,628,000 and will be used to provide
working capital, make acquisitions, reduce outstanding debt, open additional
stores and meet other general corporate purposes.
On October 9, 1996, the Company announced the closing of the
over-allotment option of 915,000 shares of Class A Common Stock providing
approximately $3,404,000 in additional net proceeds.
In June 1996, the Board of Directors approved an additional stock option
plan (the "1996 Plan"). The 1996 Plan provides for the granting of up to
820,000 options to eligible individuals to purchase shares of Class A Common
Stock of the Company. Options under the 1996 Plan may be incentive stock
options or non-qualified options.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's unaudited
consolidated financial statements and notes thereto appearing elsewhere herein.
OVERVIEW
The Company franchised its first store in January 1983 and opened its first
Company-owned store in September 1989. By July 1994, when the Company completed
its initial public offering, the Company had grown to 15 Company-owned stores
and 30 franchised stores. Subsequently, the Company substantially accelerated
its growth and as of October 31, 1996 operates 237 Company-owned stores in 13
states and in Canada, and has 28 franchised stores predominantly in the United
States. All of the Company's stores located in the United States are
superstores. Superstores are video specialty stores that carry more than 7,500
rental units.
As a result of the acquisitions completed during fiscal 1995 and fiscal
1996, the Company anticipates that its results of operations will be reduced
by the amortization of goodwill of approximately $25,402,000, with anticipated
quarterly non-cash charges of approximately $372,000 for goodwill. The
Company anticipates that future acquisitions will involve the recording of
additional significant amounts of goodwill and deferred charges on its
balance sheet.
The Company generates revenues primarily from the rental of videocassettes
and video games, from service fees from its franchisees, and from the sale of
products. As reflected in the chart below, rental revenues at Video Update
stores have accounted for the substantial majority of the Company's revenues.
The Company expects that this trend will continue.
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------ ----------------
1995 1996 1995 1996
-------- -------- -------- --------
(In thousands) (In thousands)
Rental revenue $ 9,810 $ 18,444 $ 14,612 $ 35,628
Service fees 77 165 203 284
Product sales 784 1,515 1,028 2,775
-------- -------- -------- --------
$ 10,671 $ 20,124 $ 15,843 $ 38,687
-------- -------- -------- --------
Effective February 1, 1996, videocassettes that are considered base stock
(including copies one through three of new releases) are amortized over 36
months on a straight-line basis to a salvage value of $6.00 per videocassette.
New release videocassettes are amortized as follows: the fourth through ninth
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over 30 months with no salvage value; and the tenth and any succeeding
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over three months with no salvage value.
Amortization expense as a percentage of revenue for future periods may
vary based on the Company's purchase of videocassette inventory, which is
subject to change based on the Company's rate of expansion, studio release
schedules and anticipated market demand.
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OPERATING RESULTS
The table below sets forth the percentage of revenues represented by
certain items included in the Company's statement of operations for the periods
indicated.
Six months ended October 31,
----------------------------
1995 1996
----------- -----------
Revenues:
Rental revenue 92.2 % 92.1 %
Service fees 1.3 0.7
Product sales 6.5 7.2
----------- -----------
Total revenues 100.0 100.0
Costs and expenses:
Store operating expenses 72.6 78.7
Selling, general and administrative 12.6 10.4
Cost of product sales 4.2 4.2
Amortization of goodwill 2.2 1.9
----------- -----------
Total cost and expenses 91.6 95.2
----------- -----------
Operating income 8.4 4.8
Other income (expense):
Interest expense (1.0) (0.8)
Other income 1.4 0.7
----------- -----------
Total other income (expense) 0.4 (0.1)
----------- -----------
Income from operations before income taxes 8.8 4.7
Income tax expense 3.8 2.0
----------- -----------
Net income 5.0 % 2.7 %
----------- -----------
----------- -----------
SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1995
RENTAL REVENUE. Rental revenue was approximately $35,628,000 and
$14,612,000, or 92.1% and 92.2% of total revenues for the six months ended
October 31, 1996 and 1995, respectively. The increase in rental revenue of
$21,016,000 was derived primarily from video stores acquired after the first
quarter of fiscal 1996 which accounted for approximately $11,289,000 or 53.7%
of the increase, from the opening of 60 new Company-owned stores since the
second quarter of fiscal 1996 which accounted for approximately $6,661,000 or
31.7% of the increase, and from a 7% increase in same store revenues.
SERVICE FEES. Service fees were approximately $284,000 and $203,000, or
.7% and 1.3% of total revenues for the six months ended October 31, 1996 and
1995, respectively. Continuing service fees and royalties from franchisees
accounted for 89.4% and 100.0% of total service fees, respectively. The decrease
in service fees as a percentage of total revenues was due to a significant
increase in the number of Company-owned stores without a corresponding increase
in the number of franchised stores.
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PRODUCT SALES. Product sales were approximately $2,775,000 and
$1,028,000, or 7.2% and 6.5% of total revenues for the six months ended
October 31, 1996 and 1995, respectively. The increase in product sales of
$1,747,000 was primarily a result of product sales by the video stores
acquired after the first quarter of fiscal 1996 which accounted for
approximately $743,000 or 42.5% of the increase, from the opening of 60
Company-owned video stores since the second quarter of fiscal 1996 which
accounted for approximately $294,000 or 16.8% of the increase and from the
increase in sales of fixed assets to franchisees which accounted for
approximately $262,000 or 15.0% of the increase.
STORE OPERATING EXPENSES. Store operating expenses consist primarily of
compensation and related expenses, occupancy expenses, depreciation and
amortization expenses and regional management expenses. Operating expenses were
approximately $30,426,000 and $11,510,000, or 78.7% and 72.6% of total revenues
for the six months ended October 31, 1996 and 1995, respectively. The increase
in store operating expenses of $18,916,000, was primarily the result of video
stores acquired after the first quarter of fiscal 1996, the opening of 60
Company-owned video stores since the second quarter of fiscal 1996, and an
increase in amortization expense related to videocassettes. The increase in
store operating expenses as a percentage of total revenues was primarily due to
the application of the old amortization method in fiscal 1996 which accounted
for 6.5% of the change, higher initial expenses related to new store openings
prior to revenue reaching maturity during the first year of operations and
additional regional expenses related to developing new markets.
Compensation and related expenses were approximately $8,256,000 and
$3,502,000, or 21.3% and 22.1% of total revenues for the six months ended
October 31, 1996 and 1995, respectively. The increase of $4,754,000 was
primarily due to video stores acquired after the first quarter of fiscal 1996
which accounted for approximately $2,582,000 or 54.3% of the increase and from
the opening of 60 Company-owned video stores since the second quarter of fiscal
1996 which accounted for approximately $1,596,000 or 33.6% of the increase.
Occupancy expenses were approximately $8,917,000 and $3,378,000, or 23.0%
and 21.3% of total revenues for the six months ended October 31, 1996 and 1995,
respectively. The increase of approximately $5,539,000 was primarily due to
video stores acquired after the first quarter of fiscal 1996, which accounted
for approximately $2,311,000 or 41.7% of the increase and from the opening of
60 Company-owned stores since the second quarter of fiscal 1996 which accounted
for approximately $2,422,000 or 43.7% of the increase. The increase as a
percentage of total revenues was primarily due to higher costs associated with
the opening of new video stores prior to revenue reaching maturity during the
first year of operations.
Depreciation and amortization expenses were approximately $10,267,000
and $3,280,000, or 26.5% and 20.7% of total revenues for the six months ended
October 31, 1996 and 1995, respectively. Depreciation and amortization
expense reflects the depreciation of store equipment and fixtures and the
amortization of videocassettes. The increase of $6,987,000 was primarily
attributable to the addition of new release videocassette inventory for new,
existing, and acquired stores. The effect of the application of the new
method of amortizing videocassettes during the first six months of fiscal
1996 (six months ended October 31, 1995) would have increased amortization
expense to approximately $4,304,000 or 27.2% of total revenues. Amortization
expense also increased as a percentage of sales in the first six months of
fiscal 1997 (six months ended October 31, 1996) due to additional tape
purchases as a percentage of sales for new store openings prior to reaching
maturity during the first year of operations. Amortization expense as a
percentage of revenues for future periods may vary based on the Company's
purchase of videocassette inventory, which is subject to change based on the
Company's rate of expansion, studio release schedules and anticipated market
demand.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were approximately $4,022,000 and $2,004,000, or 10.4% and 12.6% of
total revenues for the six months ended October 31, 1996 and 1995, respectively.
The increase of approximately $2,018,000 was primarily due to adding management
personnel and administrative staff to support the Company's growth and related
expenditures. The decrease as a percentage of total revenues was due to the
increase in total revenues without a proportional increase in corporate
overhead.
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COST OF PRODUCT SALES. Cost of product sales was approximately $1,636,000
and $658,000, or 4.2% of total revenues for the six months ended October 31,
1996 and 1995. The cost of product sales as a percentage of total product sales
revenue was approximately 59.0% and 64.0% for fiscal 1996 and 1995,
respectively. The decrease in the cost of product sales as a percentage of total
product sales was primarily the result of a different mix of products sold.
AMORTIZATION OF GOODWILL. Amortization of goodwill was approximately
$743,000 and $346,000 or 1.9% and 2.2% of total revenues for the six months
ended October 31, 1996 and 1995, respectively. The decrease as a percentage of
total sales was primarily attributable to an increase in sales from new store
openings without a proportional increase in the amortization of certain
intangible assets resulting from the video stores acquired in fiscal 1996.
INTEREST EXPENSE. Interest expense was approximately $318,000 and
$152,000, or .8% and 1.0% of total revenues for the six months ended October 31,
1996 and 1995, respectively. The increase of $166,000 was primarily attributable
to interest on increased borrowings under the Company's bank line of credit.
OTHER INCOME. Other income was approximately $269,000 and $223,000, or .7%
and 1.4% of total revenues for the six months ended October 31, 1996 and 1995,
respectively. The increase of $46,000 was primarily due to interest earned on
notes receivable from officers.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through cash from
operations, the proceeds of prior equity and debt offerings, borrowings under
bank facilities, trade credit and equipment leases. The Company's principal
capital requirements are for the acquisition of existing stores, the opening
of new superstores, and the purchase of videocassette rental inventory, each
of which varies based on market conditions and expansion plans.
At October 31, 1996, the Company had cash and cash equivalents of
approximately $13,790,000. The Company uses an unclassified balance sheet in
its financial statements, and as a result, does not classify its assets or
liabilities as current or noncurrent. If the Company were to use a classified
balance sheet, a portion of videocassette rental inventories would be classified
as noncurrent because they are not assets that are reasonably expected to be
completely realized in cash or sold in one year. The acquisition cost of these
inventories, however, would be reflected in current liabilities. The Company
believes that classification of videocassette rental inventories as noncurrent
assets would be misleading because it would not indicate the level of assets
expected to be converted into cash in the next year as a result of rentals or
sales of these videocassettes.
For the six months ended October 31, 1996 net cash provided by operating
activities was approximately $15,945,000. Net cash used in investment
activities was approximately $23,664,000 consisting primarily of
approximately $6,329,000 for new and remodeled stores, and approximately
$17,169,000 for the purchase of videocassette inventory for existing and new
stores. Net cash generated from financing activities was approximately
$20,833,000 resulting primarily from the proceeds of the Company's subsequent
public offering which was completed in October 1996 and from payments net of
borrowings on the bank line of credit of approximately $4,100,000.
The Company has promissory notes (the "Recourse Notes") from the Company's
Chief Executive Officer and from the President for approximately $1,853,000 and
$1,029,000, respectively, including accrued interest through October 31, 1996.
The Recourse Notes were issued by the executives upon their exercise in August
1995 of 420,000 options granted to them under the Stock Option Plans in May 1995
at an exercise price of $4.3125, the fair market value of the stock on the date
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to satisfy
then anticipated tax liabilities. The Recourse Notes, which provide for full
recourse against the respective officer's personal assets and Company
stockholdings, are due and payable
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in October 1999, and accrue interest at 8% per annum. In the event that the
obligors sell shares of the Company's stock, the net proceeds thereof will be
applied to payment, in part or in full, of the Recourse Notes.
In addition, as of October 31, 1996, the Company has a note receivable
from the President of the Company for $30,000 which accrues interest at 8%
per annum and is due November 1996. The note represents advances from the
Company to the President form January 1994 to April 1994, together with
accrued interest.
In April 1996, the Company entered into a one-year revolving credit
facility with Bank of America Illinois (the "Line of Credit") under which the
Company may borrow up to $10,000,000, with amounts borrowed thereunder
bearing interest at variable rates based on the federal funds rate, prime
rate or the interbank Eurodollar rate. The Line of Credit is convertible into
a two-year term loan if it is not renewed. During the term of the Line of
Credit and thereafter to the extent any amounts are outstanding under the
Line of Credit, the Company is subject to various restrictive covenants,
including limitations on further indebtedness, other than trade credit and
capital or operating leases, and requirements that the Company obtain the
written consent of Bank of America Illinois (the "Bank") for certain
acquisitions of new businesses or their assets (excluding new superstore
openings) or entering into business combinations, including mergers,
syndicates or joint ventures. The Line of Credit also restricts the amount
and terms of debt that may be issued to sellers of acquired businesses and
requires that the Company maintain certain cash flow ratios as well as
certain ratios of total liabilities to tangible net worth. In August 1996,
the Bank and the Company entered into an amendment to the Line of Credit,
effective upon the closing of the Company's subsequent public offering (the
"Amendment"). The Amendment modified certain net worth covenants relating to
mergers, acquisitions and purchases and provides that during the term of the
Line of Credit, the Bank's consent is required for (i) any one transaction or
series of substantially contemporaneous related transactions involving
$25,000,000 in consideration and (ii) all transactions in the aggregate
involving consideration equal to the lessor of $25,000,000 or the net
proceeds received by the Company from the Company's subsequent public
offering. In October, 1996 the Company paid off its line of credit borrowing
of approximately $9,400,000 with proceeds from the subsequent public offering.
To the extent that the Company pursues any future acquisitions, the Company
expects to finance such acquisitions from the net proceeds of debt and equity
offerings, with cash from operations, and from borrowings under credit
facilities.
In connection with six acquisitions in which the Company has issued an
aggregate of 650,613 shares of Class A Common Stock in fiscal 1996, the Company
may be obligated to make deficiency payments to such sellers equal to the
difference between the guaranteed price of $7.00 to $15.00 for each share
issued, and the actual market price of such shares as of specified dates between
July 1996 and October 1998. During October 1996, a deficiency payment was made
with regard to one acquisition in the cash amount of $87,135. As of October 31,
1996, the remaining deficiency payments are estimated to be approximately
$2,600,000 based on the closing stock price at October 31, 1996. In two of
these acquisitions, the Company has the option of satisfying approximately
$1,300,000 of this liability at October 31, 1996 through the issuance of
approximately 192,000 additional shares of Class A Common Stock.
On October 2,1996, the Company announced the closing of its public
offering of 6.1 million shares of Class A Common Stock. The net proceeds
from the offering were approximately $21,628,000 and will be used to provide
working capital, make acquisitions, reduce outstanding debt, open additional
stores and meet other general corporate purposes.
On October 9, 1996, the Company announced the closing of the
over-allotment option of 915,000 shares of Class A Common Stock providing
approximately $3,404,000 in additional net proceeds.
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The Company generally does not offer lines of credit or guarantees for the
obligations of its franchisees, although on occasion, the Company has made short
term loans to current franchisees. The Company intends to evaluate the
possibility of providing loans or limited guarantees for certain franchisee
obligations, which in the aggregate are not expected to be material to the
Company's financial condition.
Substantially all Company-owned stores are in leased premises, except for
three stores that are located on premises owned by the Company. The Company
expects that most future stores will occupy leased premises.
The Company believes that the net proceeds of its recent equity offering,
together with its current cash from operations and borrowing capabilities, will
be sufficient to meet its anticipated cash requirements and anticipated growth
over the next twelve months.
INFLATION
To date, inflation has not had a material effect on the Company's business.
The Company anticipates that its business will be affected by general economic
trends. Although the Company has not operated during a period of high inflation,
it believes that it would generally be able to pass increased costs resulting
from inflation on to customers.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The video rental industry generally experiences revenue declines in April
and May, due in part to the change to Daylight Savings Time and to improved
weather, and in September and October, due in part to school openings and the
introduction of new network and cable television programs.
The Company's video rental business may be affected by other factors,
including acquisitions by the Company of existing video stores, additional and
existing competition, marketing programs, weather, special or unusual events,
variations in the number of superstore openings, the quality of new release
titles available for rental and sale, and other factors that may affect
retailers in general.
14 of 16
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PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
A. In connection with the acquisition of the assets of Talerico
Enterprises, Inc. and Michael Talerico ("TEI") in October 1995, the
Company advised TEI of what it believed to be various breaches of
representations and warranties made by TEI in its asset purchase
agreement with the Company. Accordingly, the Company withheld a
portion of the purchase price, including 55,000 shares of Class A
Common Stock. In December 1995, TEI filed an action against the
Company in Arizona state court for breach of contract (the "Action").
In August 1996, the Company and TEI agreed to settle the disputes
underlying the Action. Under the terms of the settlement, the Company
agreed to pay TEI $225,000 and to issue 40,000 shares of Class A
Common Stock (the "TEI Common Stock"). TEI has agreed not to sell,
pledge or encumber any of the TEI Common Stock until April 1997, and
thereafter not more than 10,000 shares of TEI Common Stock within any
six month period through August 1998. The Company has agreed to make
deficiency payments to TEI (payable in either cash or stock at the
Company's option) if the aggregate sale proceeds of the TEI Common
Stock do not equal or exceed $500,000 through arms-length sales at
different intervals through September 1998.
B. In connection with the acquisition of the assets of Videoland, Inc.
("Videoland") in November 1995, the Company issued 239,163 shares of
its Class A Common Stock (the "Videoland Shares") to the sellers of
the assets of Videoland (the "Videoland Sellers"). With respect to
the Videoland Shares, the Company agreed to make a deficiency payment
in October 1996 to the Videoland Sellers if the gross proceeds
received by such sellers from the sale of the Videoland Shares during
the six months from March 1996 through September 1996 is not equal to
the number of shares of Videoland Shares sold multiplied by $12.00.
The Videoland Sellers were subject to certain "lockup" or sale
restrictions as a condition to any deficiency payment. Although the
Videoland Sellers have now requested a deficiency payment of
approximately $1,220,000 in October 1996 based on a sale of all of the
Videoland Shares, the Company believes that the Videoland Sellers have
violated the contractual lockup and sale restrictions. Accordingly,
the Company has initiated an action in federal district court in
Minnesota for a declaratory judgment that the Videoland Sellers are
not entitled to any deficiency payment. Although no assurances can be
given as to the outcome of such action, the Company intends to
vigorously pursue the matter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. The following Exhibit is filed herewith:
Exhibit
No. Title
------- -----
27 Financial Data Schedule
B. The Company filed a Current Report on 8-K dated October 22,
1996, to report the closing of a public offering.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VIDEO UPDATE, INC.
Date: December 9, 1996 By: /S/ DANIEL A. POTTER
-----------------------------------
DANIEL A. POTTER,
Chief Executive Officer and
Chairman of the Board of
Directors
Date: December 9, 1996 By: /S/ CHRISTOPHER J. GONDECK
-----------------------------------
CHRISTOPHER J. GONDECK,
Principal Accounting Officer
16 of 16
<PAGE>
EXHIBIT
- -------
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
This MUTUAL RELEASE AND SETTLEMENT AGREEMENT is entered into this 9th day
of August, 1996, by MICHAEL TALERICO, TALERICO ENTERPRISES, INC., an Arizona
corporation (hereafter, collectively, "TALERICO"), and VIDEO UPDATE, INC., a
Delaware corporation, (hereafter, "VUI" or "Video Update").
1.0 On October 5, 1995 TALERICO and VUI entered a contract for a sale of
assets from Talerico to VUI (hereafter, the "CONTRACT").
2.0 Subsequent to the closing of the CONTRACT, various disputes arose
between VUI and TALERICO concerning various alleged breaches of representations,
warranties and obligations under the CONTRACT; as a result of these disputes,
various claims and counterclaims were asserted in an action, presently pending
in United States District Court for the District of Arizona. That action, Cause
No. CIV-96-234-PHX-PGR, captioned TALERICO ENTERPRISES, INC., an Arizona
corporation, and MICHAEL TALERICO, Plaintiffs, vs. VIDEO UPDATE, INC., a
Delaware corporation, Defendant, shall hereafter be referred to as the "ACTION."
3.0 TALERICO and VUI have reached an understanding and an amicable
settlement with respect to all claims, disputes, and potential causes of action
that exist now or might exist in the future, with regard to the CONTRACT or the
ACTION.
4.0 Therefore, in consideration of the payments and covenants set forth
herein, TALERICO and VUI hereby mutually release and forever discharge each
other, their agents, shareholders, officers, directors and employees, of and
from any and all claims, demands, damages debts, liabilities, accounts,
obligations, actions and causes of action of every kind and nature whatsoever,
whether now known or unknown, suspected or unsuspected, which they now have, or
at any time heretofore ever had, owned or held, or would, shall or may hereafter
have against each other, based upon or arising in any way out of or connected
with, directly or indirectly, the CONTRACT or the ACTION.
5.0 SUBJECT TO PARAGRAPHS 8.0 AND 8.1 HERETO, AS BETWEEN VUI AND
TALERICO, THIS RELEASE SHALL FOREVER SETTLE, ADJUST AND DISCHARGE ALL CLAIMS
OF WHATEVER KIND OR NATURE, EITHER IN LAW OR IN EQUITY, ARISING FROM OR BY
REASON OF ANY AND ALL DAMAGES (KNOWN OR UNKNOWN) RESULTING OR TO RESULT FORM
ANY ACT OR CONDUCT, ALLEGED OR ATTRIBUTABLE TO VUI OR TALERICO INCLUDING
THEIR EMPLOYEES, AGENTS, OFFICERS OR DIRECTORS, ARISING IN ANY WAY OUT OF THE
CONTRACT OR ACTION.
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6.0 AGREED TRANSFERS:
I. VUI agrees to a payment of TWO HUNDRED AND TWENTY FIVE THOUSAND
DOLLARS to TALERICO; TALERICO hereby acknowledges he has received these funds;
II. VUI agrees to transfer to TALERICO 40,000 shares of Class A Common
Stock, $.01 par value (the "Video Update Shares"), to be registered in
accordance with paragraph (H), below, and subject to the terms, restrictions and
conditions set forth below in paragraphs (A) - (N).
PROCEEDS GUARANTEE:
(A) With respect to the first 10,000 Video Update Shares issued to
Talerico, if the aggregate gross consideration received by Talerico in
connection with the sale (the "First Sales Proceeds") in documented bona fide
arm's length transactions of any of such 10,000 Video Update Shares (the "First
Shares") during the period commencing April 9, 1997 and ending May 9, 1997 (the
"First Measurement Period") does not equal or exceed the amount determined by
multiplying the number of First Shares so sold by $10.00 (the "First
Contemplated Proceeds"), then Video Update shall pay Talerico, by cash, check or
wire, the amount by which the First Contemplated Proceeds exceeds the First
Sales Proceeds by June 9, 1997.
(B) With respect to the second 10,000 Video Update Shares issued to
Talerico, if the aggregate gross consideration received by Talerico in
connection with the sale (the "Second Sales Proceeds") in documented bona fide
arm's length transactions of any of such 10,000 Video Update Shares (the "Second
Shares") during the period commencing August 9, 1997 and ending September 9,
1997 (the "Second Measurement Period") does not equal or exceed the amount
determined by multiplying the number of Second Shares so sold by $10.00 (the
"Second Contemplated Proceeds"), then Video Update shall pay Talerico, by cash,
check or wire, the amount by which the Second Contemplated Proceeds exceeds the
Second Sales Proceeds by October 9, 1997.
(C) With respect to the third 10,000 Video Update Shares issued to
Talerico, if the aggregate gross consideration received by Talerico in
connection with the sale (the "Third Sales Proceeds") in documented bona fide
arm's length transactions of any of such 10,000 Video Update Shares (the "Third
Shares") during the period commencing February 9, 1998 and ending March 9, 1998
(the "Third Measurement Period") does not equal or exceed the amount determined
by multiplying the number of Third Shares so sold by $15.00 (the "Third
Contemplated Proceeds"), then Video Update shall pay Talerico, by cash, check or
wire, the amount by which the Third Contemplated Proceeds exceeds the Third
Sales Proceeds by April 9, 1998.
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(D) With respect to the fourth 10,000 Video Update Shares issued to
Talerico, if the aggregate gross consideration received by Talerico in
connection with the sale (the "Fourth Sales Proceeds") in documented bona fide
arm's length transactions of any of such 10,000 Video Update Shares (the "Fourth
Shares") during the period commencing August 9, 1998 and ending September 9,
1998 (the "Fourth Measurement Period") does not equal or exceed the amount
determined by multiplying the number of Fourth Shares so sold by $15.00 (the
"Fourth Contemplated Proceeds"), then Video Update shall pay Talerico, by cash,
check or wire, the amount by which the Fourth Contemplated Proceeds exceeds the
Fourth Sales Proceeds by October 9, 1998.
(E) EACH PROCEEDS GUARANTEE SHALL LAST NO LONGER THAN ITS APPLICABLE
THIRTY DAYS MEASUREMENT PERIOD, AT WHICH TIME, THE PROCEEDS GUARANTEE IN FORCE
SHALL FOREVER EXPIRE AS TO THE 10,000 SHARES THAT WERE SUBJECT TO THAT PROCEEDS
GUARANTEE, AND NO FURTHER GUARANTEE SHALL BE EXTENDED AS TO THOSE SHARES. For
example, with respect to 9,000 Video Update Shares sold in each of the First and
Second Measurement Periods (an aggregate of 18,000 shares), if the First Sale
Proceeds and the Second Sale Proceeds were $90,000 and $80,000 respectively,
Talerico would be entitled to a deficiency payment in the amount of $10,000 for
9,000 shares sold during the Second Measurement Period, but not as to 1,000
shares not sold during the Second Measurement Period and not as to any shares
that were or could have been sold in the First Measurement Period.
INVESTMENT REPRESENTATION AS TO VIDEO UPDATE SHARES
Talerico represents and warrants to Video Update as follows:
(F) RESTRICTIONS ON TRANSFER OR ENCUMBRANCE. Talerico hereby
agrees that he has no intention to and will not resell or otherwise
distribute or encumber such Video Update Shares in violation of any federal
or state securities laws and understands and agrees that the Video Update
Shares to be issued hereunder are restricted on transfer and must be held
unless (i) they are registered under the Securities Act of 1933, as amended
(the "Act") or (ii) an exemption from registration is available, and Video
Update has received an opinion of counsel, in form and substance satisfactory
to it, to such effect.
(G) UNREGISTERED SECURITIES. Talerico understands that the Video
Update Shares have not been registered under the Act, or the securities laws
of any state, in reliance upon specific exemptions from registration
thereunder, and agree that such Video Update Shares may be neither sold,
offered for sale, transferred, pledged, hypothecated or otherwise disposed of
except in compliance with the Act, applicable state securities laws and this
Agreement. Talerico has been advised that Video Update shall register the
Video Update Shares pursuant to this Agreement. Talerico understands that it
is not anticipated that any market for resale of the Video Update Shares will
exist until such registration is completed and that it may not be possible
for Talerico to liquidate an investment in the Video Update Shares on an
emergency basis. Talerico acknowledges that the following restrictive
legends shall be placed on the
3
<PAGE>
reverse side of each certificate representing the Video Update Shares issued
pursuant to this Agreement:
"The Shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or under any
state law and, except pursuant to an effective registration statement
under the Act and other laws, may not be offered, sold, transferred,
or otherwise disposed of without an opinion of counsel, satisfactory
to the Company, that such disposition may be made without such
registration.
These Shares are subject to certain "lockup restrictions" agreed upon
by the Holder and the Company and may not be offered, sold,
transferred, or otherwise disposed of without an opinion of counsel,
satisfactory to the Company, that such disposition may be made in
compliance with such restrictions."
REGISTRATION RIGHTS
(H) VUI shall register the 40,000 Video Update Shares issued to
Talerico within eight months of the date of this Agreement. VUI shall bear
all registration and qualification fees and expenses (excluding underwriters'
discounts, commissions and expenses), and all legal, accounting or printing
expenses related to such registration statement. In addition, Talerico shall
bear the fees and costs of any separate counsel he may select.
(I) In connection with such registration, to the extent permitted
by law, Video Update will indemnify and hold harmless Talerico against any
losses, claims, damages, or liabilities, joint or several, to which they may
become subject under the 1933 Act or otherwise, insofar as such losses,
claims, damages, or liabilities (or acts in respect thereof) arise out of or
are based on any untrue or alleged untrue statement of any material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein ,or necessary to make the statements therein not misleading or arise
out of any violation by Video Update of any rule or regulation promulgated
under, or any provision of, the 1933 Act applicable to Video Update and
relating to action or inaction required of Video Update in connection with
any such registration; and will reimburse Talerico for any legal or other
expenses reasonably incurred by him in connection with investigating or
defending any such loss, claim , damage, liability, or action; provided,
however, that the indemnity agreement contained in this Section shall not
apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the written
consent of Video Update (which consent shall not be unreasonably withheld)
nor shall Video Update be liable in any such case for any such loss, claim,
damage, liability, or action to the extent that it arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in connection with such registration statement, preliminary
prospectus, final prospectus, or amendments or supplements thereto, in
reliance upon and in conformity with information furnished in connection with
registration by Talerico.
4
<PAGE>
(J) In addition, to the extent permitted by law, Talerico agrees
to indemnify and hold harmless Video Update (and if in connection with an
underwritten offering, the underwriter(s) of such offering) each of its
directors, each of its officers who have signed the registration statement,
each person, if any, who controls Video Update within the meaning of the 1933
Act, and each agent and any underwriter for Video Update (within the meaning
of the 1933 Act) against any losses, claims, damages, or liabilities to which
Video Update or any such director, officer, controlling persons, agent, or
underwriter may become subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages, or liabilities to which Video Update or any
such director, officer, controlling person or agent, or underwriter may
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such registration
statement, preliminary or final prospectus, or amendments or supplements
thereto, in reliance upon and in conformity with information furnished by
Talerico for use in connection with such registration, and Talerico will
reimburse any legal or other expenses reasonably incurred by Video Update or
any such director, officer, controlling person, agent, or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability, or action.
(K) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party under this subsection, notify the indemnifying party who shall have the
right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel mutually satisfactory to the parties.
The failure to notify an indemnifying party promptly of the commencement of
any such action, if prejudicial to his ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party
under this subjection, but the omission so to notify the indemnifying party
will not relieve him of any liability that he may have to any indemnified
party otherwise than under this Section.
(L) The registration rights under this Section may not be
transferred to any transferee without Video Update's consent.
(M) Notwithstanding anything to the contrary to this Section,
Video Update shall not be required to register any Video Update Shares that
may, at the time such registration would occur, be sold pursuant to Rule 144
under the 1933 Act.
5
<PAGE>
LOCKUP
(N) Talerico agrees not to sell, transfer, grant an option for,
pledge, hypothecate or encumber any Video Update Shares held by him
(individually or beneficially) until April 9, 1997, and thereafter, no more
than 10,000 Video Update Shares within any of the following periods: (1)
April 9, 1997 to August 8, 1997, (2) August 9, 1997 to February 8, 1998, (3)
February 9, 1998 to August 8, 1998. Talerico shall furnish to VUI such
information as to the actual or intended method of disposition of such
securities as Video Update or its counsel shall request and as shall be
required in connection with this section.
III. VUI agrees to obtain a release of TALERICO's debt to Baker &
Taylor arising from inventory purchases TALERICO made before the CONTRACT was
executed, and agrees to provide TALERICO with a valid written release or
satisfaction of judgment from Baker & Taylor, the receipt of which is
acknowledged by TALERICO.
IV. TALERICO also agrees to release to VUI all funds held in the
escrow that was held in furtherance of the CONTRACT, and that the funds
therein are now property of VUI, who acknowledges receipt of those funds.
V. TALERICO agrees that concurrently with the execution of this
MUTUAL RELEASE AND SETTLEMENT AGREEMENT, counsel for TALERICO shall deliver
to counsel for VUI an executed Stipulation to Dismiss, With Prejudice, the
ACTION for filing with the Court, and they will perform any other acts
necessary for the Court to enter an Order of dismissal with prejudice, each
party to bear his/its own costs and fees.
7.0 TALERICO and VUI acknowledge that this MUTUAL RELEASE AND
SETTLEMENT AGREEMENT is a compromise of disputed claims, and that the
AGREEMENT and its terms and conditions are not to be construed as an
admission of liability on the part of either TALERICO or VUI, both of whom
enter into the AGREEMENT only to avoid the expense and uncertainty of further
litigation and to protect their respective interests. The parties hereto
acknowledge and declare that this MUTUAL RELEASE AND SETTLEMENT AGREEMENT is
entered into in good faith and for no collusive purpose.
8.0 INDEMNIFICATION: TALERICO agrees and promises that, in the
event that any governmental entity or any other lien holder asserts or brings
any claim, demand, action, or cause of action against VUI arising from or
related to any debts or liabilities incurred by TALERICO in operating any or
all of the six video stores transferred by the CONTRACT, TALERICO shall fully
indemnify and hold harmless VUI and its directors, officers, employees and
agents, and shall fully reimburse them for reasonable attorneys' fees and
costs with respect to any such claim, demand, action, or cause of action, and
shall pay any settlement or judgment against VUI with respect to any such
claim, demand, action, or cause of action.
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<PAGE>
8.1 PRIOR NOTICE: If VUI is presented with any claim, lien or demand
which it believes arises from alleged debts or liabilities incurred by
TALERICO or arising during TALERICO's operation of any or all of the six
video stores transferred by the CONTRACT, VUI shall first notify TALERICO of
such claim, lien or demand in the manner set forth in Section 14.0 below.
Thereafter, TALERICO shall, within 21 calendar days of the date said notice
is sent, submit a written response to VUI, either authorizing VUI to exercise
setoff, or stating TALERICO's position and defenses concerning the claim,
lien or demand, and any steps he intends to take concerning the claim, lien
or demand. After such response is received, VUI may request additional
information, or attempt to reach an agreement with TALERICO concerning any
area of disagreement.
8.2 RESOLUTION OF DISPUTES CONCERNING INDEMNIFICATION: If TALERICO
fails to respond to the initial notice described in Section 8.1 or if VUI
determines, after considering the response, that TALERICO's position is not
acceptable, VUI may initiate setoff by either (a) canceling shares held by or
owing to TALERICO and depositing in escrow the same number and class of
shares owing to TALERICO or (2) depositing in escrow funds owing to TALERICO,
but the amount of any such deposit of funds or cancellation of shares shall
be limited to the amount reasonably necessary to reimburse VUI for the
reasonably contemplated amount of the claim, demand or lien, including costs
and attorneys fees. Such shares or funds shall be held in escrow until
either (1) TALERICO and VUI agree in writing to their disposition; or (2) the
validity and amount of the claimed setoff is determined, either by judgment
or arbitration if arbitration is mutually agreed. In the event any such
litigation or arbitration is required, reasonable costs and attorneys fees
incurred therein shall be awarded to the "successful party," as defined under
Arizona law.
8.3 REAFFIRMATION OF SECTIONS 1.2, 7 AND 8: TALERICO reaffirms and
agrees to continue to be bound by Sections 1.2, 7 and 8 of the CONTRACT, and
the confidentiality, non-competition and other restrictions contained in
Sections 7 and 8.
9.0 CONFIDENTIALITY: TALERICO, VUI and their attorneys understand
that the claims asserted by them and their counsel and this MUTUAL RELEASE
AND SETTLEMENT AGREEMENT Release involve matters which are confidential, and
as a consequence thereof, they hereby agree that they shall keep confidential
and not disclose to any other person or entity, except as required by court
order or other law or as a confidential communication with VUI bankers: (1)
any information regarding any negotiations and/or correspondence regarding
the claims asserted by them and/or on their behalf prior to entering into a
Settlement Agreement, and (2) the substance and/or contents of this
AGREEMENT, the settlement of the claim, or the agreements of the parties.
9.1 TALERICO, VUI and their attorneys also agree that the terms and
conditions of this MUTUAL RELEASE AND SETTLEMENT AGREEMENT will not be
disclosed to anyone and shall remain confidential between the parties to this
MUTUAL RELEASE AND SETTLEMENT AGREEMENT and the attorneys representing those
parties. Only those disclosures required or compelled by court order or legal
authority are to be made. If such disclosure is required, the disclosing
party shall request or take steps to ensure that any further dissemination by
the information recipient is precluded or restricted as narrowly as possible.
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10.0 This MUTUAL RELEASE AND SETTLEMENT AGREEMENT, complete in nine
(9) pages (plus two signature pages), contains all the terms and conditions
of, and expresses the complete and only agreement between, TALERICO and VUI
with respect to its subject matter. The terms of this AGREEMENT are
contractual and not mere recitals. No change or modification to the MUTUAL
RELEASE AND SETTLEMENT AGREEMENT shall be binding on any party unless it is
in writing and executed by all parties.
11.0 This MUTUAL RELEASE AND SETTLEMENT AGREEMENT shall be governed by
the laws of the State of Arizona.
12.0 If any one or more of the provisions of this MUTUAL RELEASE AND
SETTLEMENT AGREEMENT shall be held invalid or unenforceable, such provision
shall be modified to the minimum extent necessary to make It or its
application valid and enforceable and, in any event, the validity and
enforceability of all other provisions of this MUTUAL RELEASE AND SETTLEMENT
AGREEMENT shall not be affected.
13.0 Each of the parties to this MUTUAL RELEASE AND SETTLEMENT
AGREEMENT, or their authorized attorneys, has participated in the preparation
and finalization of this MUTUAL RELEASE AND SETTLEMENT AGREEMENT, and for the
purposes of the principles of law governing the construction of the terms of
this MUTUAL RELEASE AND SETTLEMENT AGREEMENT, no party shall be deemed to be
the drafter of the MUTUAL RELEASE AND SETTLEMENT AGREEMENT. Each of the
parties acknowledges that their attorney(s) have reviewed and approved the
MUTUAL RELEASE AND SETTLEMENT AGREEMENT as to form.
14.0 Notices to either party shall be made in writing by delivery or
mail addressed to the following addresses:
Michael Talerico
c/o Daryl M. Williams, Esq.
BAIRD, WILLIAMS, DAVIS & SMITH
340 E. Palm Lane, Suite 275
Phoenix, AZ 85004
Video Update, Inc.
Attn: Daniel Potter
30 East 7th Street
3100 World Trade Center
St. Paul, MN 55101
Notice shall be deemed to be given upon actual delivery or three business
days after deposit in the U.S. Mail, postage prepaid.
8
<PAGE>
THE UNDERSIGNED HEREBY ACKNOWLEDGE AND REPRESENT THAT THEY HAVE READ THE
MUTUAL RELEASE AND SETTLEMENT AGREEMENT IN ITS ENTIRETY, THAT THEY HAVE HAD THE
OPPORTUNITY TO CONSULT WITH THEIR ATTORNEY CONCERNING THE AGREEMENT, AND THAT
THEY FULLY UNDERSTAND IT AND AGREE TO ITS TERMS AND CONDITIONS.
9
<PAGE>
DATE 10-24-96 /S/ MICHAEL TALERICO
-------- --------------------
Michael Talerico
STATE OF ARIZONA )
) SS:
County of MARICOPA )
--------
SUBSCRIBED AND SWORN to before me this 24TH day of October, 1996, by
Michael Talerico.
/S/ KIMBERLY K. ERICKSON
------------------------
NOTARY PUBLIC
My Commission Expires:
6-16-2000
- ---------------------
DATE 10-24-96 /S/ MICHAEL TALERICO
-------- --------------------
TALERICO ENTERPRISES, INC.
by Michael Talerico, its President
STATE OF ARIZONA )
) SS:
County of MARICOPA )
--------
SUBSCRIBED AND SWORN to before me this 24TH day of October, 1996, by
Michael Talerico, as President of Talerico Enterprises, Inc.
/S/ KIMBERLY K. ERICKSON
------------------------
NOTARY PUBLIC
My Commission Expires:
6-16-2000
- ---------------------
10
<PAGE>
DATE /S/ DANIEL A. POTTER (CEO)
-------- --------------------------
VIDEO UPDATE, INC.
by Daniel Potter, its
Chief Executive Officer
STATE OF ARIZONA )
) SS:
County of )
-----------
SUBSCRIBED AND SWORN to before me this day of August, 1996, by Daniel
Potter, as Chief Executive Officer of Video Update, Inc.
/S/ ROSANNE NOVAK
-----------------
NOTARY PUBLIC
My Commission Expires:
31 JANUARY, 2000
- --------------------------
APPROVED AS TO FORM:
BAIRD, WILLIAMS, DAVIS & SMITH O'CONNOR, BROUDE & ARONSON
/S/ J. ERNEST BAIRD /S/ LAWRENCE GENNARI
- ------------------- ---------------------
Daryl M. Williams, Esq. Lawrence H. Gennari, Esq.
Baird, Williams, Davis & Smith O'Connor, Broude & Aronson
340 E. Palm Lane Bay Colony Corporate Center
Suite 275 Rte. 128 and Winter St.
Phoenix, Arizona 85004 950 Winter St., Suite 2300
Attorneys for Michael Talerico Waltham, Mass. 02154
and Talerico Enterprises, Inc. Attorneys for Video Update, Inc.
MITTEN, GOODWIN & RAUP
/S/ STEVEN P. KRAMER
- --------------------
Steven P. Kramer
Mitten, Goodwin & Raup
3636 North Central Avenue, Ste. 1200
Phoenix, Arizona 85012
Attorneys for Video Update, Inc.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 1,124
<SECURITIES> 12,666
<RECEIVABLES> 1,534
<ALLOWANCES> 0
<INVENTORY> 37,573
<CURRENT-ASSETS> 0<F1>
<PP&E> 27,641
<DEPRECIATION> 3,935
<TOTAL-ASSETS> 105,355
<CURRENT-LIABILITIES> 14,862<F1>
<BONDS> 539
0
0
<COMMON> 200
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 105,355
<SALES> 2,775
<TOTAL-REVENUES> 38,687
<CGS> 1,636
<TOTAL-COSTS> 36,827
<OTHER-EXPENSES> (269)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318
<INCOME-PRETAX> 1,811
<INCOME-TAX> 778
<INCOME-CONTINUING> 1,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,033
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>The Company utilizes an unclassified balance sheet presentation. This format
was followed based on the premise that the videocassette rental inventory
represents assets used by the Company to generate current operating income, and
management believes that to classify all of these costs as noncurrent would be
misleading to the readers of the financial statements because it would not
indicate the level of assets expected to be converted into cash in the next
year as a result of the rentals of the videocassettes.
</FN>
</TABLE>
