VIDEO UPDATE INC, PRE 14A, 1996-11-01

VIDEO UPDATE INC
PRE 14A, 1996-11-01
VIDEO TAPE RENTAL

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PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934

FILED BY THE REGISTRANT |X|
FILED BY A PARTY OTHER THAN THE REGISTRANT |_|

Check the appropriate box:
|X| Preliminary Proxy Statement*

|_| Definitive Proxy Statement

|_| Definitive Additional Materials

|_| Soliciting Material Pursuant to ss.240.14a-11(c)
or ss.240.14a-12

|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))

VIDEO UPDATE, INC.
(Name of Registrant as Specified in Its Charter)

-----------------------------------------------
Name of Person(s) Filing Proxy Statement

Payment of Filing Fee (Check the appropriate box):

|X| $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),or 14a-6(j)
(2).

|_| $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).

|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined.):

-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:

-----------------------------------------------------------------------
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

-----------------------------------------------------------------------
(3) Filing Party:

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(4) Date Filed:

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* Definitive copies of the attached Proxy Statement and Form of Proxy are
intended to be released to security holders on November 13, 1996.

VIDEO UPDATE, INC.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
(612) 222-0006

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO THE STOCKHOLDERS OF VIDEO UPDATE, INC.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of VIDEO
UPDATE, INC. (the "Company"), a Delaware corporation, will be held on Tuesday,
December 17, 1996, at 10:00 a.m. at the Company's headquarters located at 3100
World Trade Center, 30 East Seventh Street, St. Paul, Minnesota 55101 for the
following purposes:

1. To elect six (6) members of the Board of Directors;

2. To ratify the selection of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending April 30,
1997;

3. To approve the proposed amendment to the Company's Restated
Certificate of Incorporation to increase the number of
authorized shares of the Company's Class A Common Stock from
50,000,000 shares to 60,000,000 shares;

4. To approve and adopt the Company's 1996 Stock Option Plan (the
"1996 Plan"), under which 820,000 shares have been reserved
for issuance; and

5. To consider and act upon any matters incidental to the
foregoing and any other matters that may properly come before
the meeting or any adjournment or adjournments thereof.

The Board of Directors has fixed the close of business on November 12,
1996, as the record date for the determination of stockholders entitled to
notice of and vote at the meeting and any adjournment or adjournments thereof.

We hope that all stockholders will be able to attend the meeting in
person. In order to assure that a quorum is present at the meeting, please sign,
date and promptly return the enclosed proxy whether or not you expect to attend
the meeting. A postage-prepaid envelope, addressed to American Stock Transfer &
Trust Company, the Company's transfer agent and registrar, has been enclosed for
your convenience. If you attend the meeting, your proxy will, at your request,
be returned to you and you may vote your shares in person.

By Order of the Board of Directors

Daniel C. Howard
Secretary

St. Paul, Minnesota
November 13, 1996

VIDEO UPDATE, INC.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101

-------------------

PROXY STATEMENT

-------------------

November 13, 1996

The enclosed proxy is solicited by the Board of Directors of VIDEO
UPDATE, INC. (the "Company"), a Delaware corporation, for use at the Annual
Meeting of Stockholders to be held on Tuesday, December 17, 1996 at 10:00 a.m.
at the Company's headquarters located at 3100 World Trade Center, 30 East
Seventh Street, St. Paul, Minnesota 55101 and at any adjournment or adjournments
thereof.

Stockholders of record at the close of business on November 12, 1996,
will be entitled to vote at the meeting or any adjournment or adjournments
thereof. On that date, _____ shares of Class A Common Stock, $.01 par value per
share ("Class A Common Stock") and 2,000,000 shares of Class B Common Stock,
$.01 par value per share ("Class B Common Stock") (collectively, the Class A
Common Stock and the Class B Common Stock may be referred to as the "Common
Stock" herein) were issued and outstanding and entitled to vote at the meeting.
The Class A Common Stock and the Class B Common Stock are essentially identical,
except that the Class B Common Stock has five votes per share and the Class A
Common Stock has one vote per share on all matters upon which stockholders may
vote. The Company has no other voting securities.

The presence of the holders of a majority of the issued and outstanding
shares of Common Stock entitled to vote at the meeting, either in person or
represented by a properly executed proxy, is necessary to constitute a quorum
for the transaction of business at the meeting.

The election of Directors, adoption of the 1996 Plan and ratification
of the selection of independent auditors will be determined by a plurality of
the votes cast. The proposed amendment to the Restated Certificate of
Incorporation authorizing an increase in the number of outstanding shares of
Class A Common Stock to be voted upon by the stockholders of the Company
requires the votes of two-thirds of the Common Stock, voting together as a
single class, and represented at the meeting for passage. Abstentions and broker
non-votes (which result when a broker holding shares for a beneficial holder has
not received timely voting instructions on certain matters from such beneficial
holder and the broker does not have discretionary voting power on such matters)
are counted for purposes of determining the presence or absence of a quorum at
the meeting. Abstentions are counted in tabulation of the votes cast on
proposals presented to stockholders, whereas broker non-votes are not counted
for purposes of determining whether a proposal has been approved.

The Directors, nominated Directors and officers of the Company as a
group own or may be deemed to control ______% of the outstanding shares of Class
A Common Stock, and one hundred percent (100%) of the outstanding shares of
Class B Common Stock. Accordingly, such persons control approximately _________
percent (__%) of the votes on all matters upon which stockholders may vote. Each
of the Directors and officers has indicated his intent to vote all shares of
Common Stock owned or controlled by him in favor of each item set forth herein.

Execution of a proxy will not in any way affect a stockholder's right
to attend the meeting and vote in person. The proxy may be revoked at any time
before it is exercised by written notice to the Secretary prior to the meeting,
or by giving to the Secretary a duly executed proxy bearing a later date than
the proxy being revoked at any time before such proxy is voted, or by appearing
at the meeting and voting in person. The shares represented by all properly
executed proxies received in time for the meeting will be voted as specified
therein. In the absence of other instructions set forth on a proxy, shares will
be voted in favor of the election of Directors of those persons named in this
Proxy Statement and in favor of all other items set forth herein.

The Board of Directors knows of no other matter to be presented at the
meeting. If any other matter should be presented at the meeting upon which a
vote may be taken, such shares represented by all proxies received by the Board
of Directors will be voted with respect thereto in accordance with the judgment
of the person named in the proxies. The Board of Directors knows of no matter to
be acted upon at the meeting that would give rise to appraisal rights for
dissenting security holders.

An annual report containing financial statements for the fiscal year
ended April 30, 1996 ("fiscal 1996") is being mailed herewith to all
stockholders entitled to vote at the meeting. This Proxy Statement and the
accompanying proxy were first mailed to stockholders on or about November 13,
1996.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

Each Director of the Company is elected for a period of one year at the
Company's Annual Meeting of Stockholders and serves until his or her successor
is duly elected by the stockholders. Vacancies and newly created Directorships
resulting from any increase in the number of authorized Directors may be filled
by a majority vote of Directors then remaining in office. Officers are elected
by and serve at the discretion of the Board of Directors, subject to their
employment agreements.

Shares represented by all proxies received by the Board of Directors
and not so marked so as to withhold authority to vote for an individual
Director, or for all Directors, will be voted (unless one or more nominees are
unable or unwilling to serve) for the election of the nominees named below. The
Board of Directors knows of no reason why any such nominee should be unwilling
to

-2-

serve, but if such should be the case, proxies will be voted for the election of
some other person or for fixing the number of Directors at a lesser number.

The following table sets forth the year each nominee Director was
elected a Director and the age, positions and offices currently held by each
Director:

<TABLE>
<CAPTION>
Year Nominee
First Became
Name Age Director Position
- ---- --- -------- --------

<S> <C> <C> <C>
Daniel A. Potter 38 1983 Chairman and Chief Executive Officer

John M. Bedard 38 1983 President and Director

Daniel C. Howard 35 1994 Chief Operations Officer and Director

Robert E. Yager 32 1994 Vice President of Store Operations and
Director

Jana Webster Vaughn 33 1994 Director

Paul M. Kelnberger 53 1994 Director

</TABLE>

BACKGROUND

The following is a brief summary of the background of each nominee
Director, executive officer, and significant employee of the Company:

DANIEL A. POTTER, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF
EXECUTIVE OFFICER. Mr. Potter co-founded the Company in 1983 and has served as
the Company's Chairman and Chief Executive Officer since its inception. Mr.
Potter devised, initiated, and structured the franchising strategy implemented
by the Company and is primarily responsible for the Company's financial and
strategic planning. Mr. Potter is the brother-in-law of Robert E. Yager, a
Vice-President of Store Operations and Director of the Company. Mr. Potter holds
a B.A. degree from the University of Minnesota and a J.D. degree from William
Mitchell College of Law.

JOHN M. BEDARD, PRESIDENT AND DIRECTOR. Mr. Bedard co-founded the
Company in 1983 with Mr. Potter and has served as the Company's President and as
a Director since its inception. Mr. Bedard, together with Mr. Potter, devised
and implemented the Company's real estate development program and operations.
Mr. Bedard is the brother of Richard Bedard, an Executive Vice President of the
Company.

-3-

DANIEL C. HOWARD, CHIEF OPERATIONS OFFICER AND DIRECTOR. Mr. Howard has
served as the Company's Chief Operations Officer since 1990, has coordinated the
Company's operations since 1983, and has served as a Director since August 1994.
He holds a B.S. degree from the University of Minnesota School of Management.
Mr. Howard is a member of the audit and executive compensation committees.

CHRISTOPHER J. GONDECK, CHIEF FINANCIAL OFFICER. Mr. Gondeck has served
as the Company's Chief Financial Officer since January 1995. From May 1994 to
September 1994, Mr. Gondeck was a financial consultant to Corning-Donahue, Inc.
and Fire Brick Supply, privately held brick and tile businesses. From 1992 to
March 1994, Mr. Gondeck served as Senior Vice President and Chief Financial
Officer for Premier Salons International, Inc. ("Premier"), a privately held
company based in Toronto, Ontario. Prior to December 1993, Premier was known as
MEI Salon Corp., a wholly owned subsidiary of MEI Diversified, Inc. ("MEI
Diversified"), which operated over 1,000 hair care salon locations throughout
the United States and Canada. While Mr. Gondeck was Chief Financial Officer of
MEI Salon, in February 1993, MEI Salon and MEI Diversified filed for bankruptcy
protection under federal law. Prior to 1992, Mr. Gondeck served in various
financial and management capacities for MEI Diversified. Mr. Gondeck also has
served as a staff accountant with Ernst & Young LLP. Mr. Gondeck holds a B.S.
degree from St. Cloud State University in St. Cloud, Minnesota and is a
certified public accountant.

RICHARD BEDARD, EXECUTIVE VICE PRESIDENT. Mr. Bedard has served as an
Executive Vice President of the Company since September 1995. From 1986 to 1995,
he served as the Company's Vice President of Franchise Development. Mr. Bedard
is the brother of John M. Bedard, the Company's President and a Director.

BRUCE D. CARLSON, VICE PRESIDENT OF REAL ESTATE. Mr. Carlson has served
as the Company's Vice President of Real Estate Operations since 1990. From 1984
to 1990, Mr. Carlson held the positions of Director of Advertising and Regional
Corporate Store Manager.

MICHAEL G. SCHIFSKY, VICE PRESIDENT OF STORE DEVELOPMENT. Mr. Schifsky
has served as Vice President of Store Development since rejoining the Company in
1990. Mr. Schifsky has also served as a District Manager of the Company from
1984 to 1988. From 1988 to 1990, he was the principal stockholder of Bankshot
Investments, Inc., a privately held company engaged in the development of
billiard facilities.

ROBERT E. YAGER, VICE PRESIDENT OF STORE OPERATIONS AND DIRECTOR. Mr.
Yager has served as a Vice President of Store Operations since November 1995 and
as a Director since August 1994. From September 1994 to November 1995, Mr. Yager
served as a Regional Manager of the Company. Prior to that time, since 1989, Mr.
Yager owned and operated two franchised Video Update superstores in the Twin
Cities area, until such store operations were purchased by the Company in
September 1994. From 1984 to 1989, Mr. Yager was a computer programmer for a
division of NCR Corporation. Mr. Yager holds an Associate's degree from
Northwestern Electronic Institute in

-4-

Minneapolis, Minnesota. Mr. Yager is the brother-in-law of Daniel A. Potter, the
Company's Chairman and Chief Executive Officer. See "Certain Transactions."

PAUL M. KELNBERGER, DIRECTOR. Mr. Kelnberger has served as a Director
since August 1994. Mr. Kelnberger has been a member of Johnson, West & Co., PLC
("Johnson, West & Co."), a certified public accounting firm with its principal
offices in St. Paul, Minnesota, since 1975. In addition, since November 1995 Mr.
Kelnberger has served as a Director of Leuthold Funds, a publicly held mutual
fund. Johnson, West & Co. performed auditing services for the Company prior to
the fiscal year ended April 30, 1993. Since that time, Johnson West & Co. has
provided and continues to provide to the Company accounting services in
connection with the Company's acquisitions and for tax return preparation
services. Mr. Kelnberger has significant franchise and retail company accounting
experience. Mr. Kelnberger is a certified public accountant and holds a
Certificate of Accounting from the Academy of Accountancy in Minneapolis,
Minnesota. He chairs the Board's audit committee and is a member of the
executive compensation committee. See "Certain Transactions."

JANA WEBSTER VAUGHN, DIRECTOR. Ms. Vaughn has served as a Director
since August 1994. Ms. Vaughn has been the Director of Marketing and Development
of Adoptive Families of America, a non-profit, national education, legislation
and advocacy organization, since June 1995. From May 1992 to July 1995, Ms.
Vaughn was the Executive Director of the Greater Anoka County, Minnesota Humane
Society. From 1989 to 1992, she served as Special Projects Manager for KARE 11
Television, a network television station in Minneapolis, Minnesota. Ms. Vaughn
holds a B.A. degree from the University of Minnesota. Ms. Vaughn is a member of
the audit and executive compensation committees.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), requires executive officers and Directors, and
persons who beneficially own more than ten percent (10%) of the Company's Common
Stock, to file initial reports of ownership on Form 3 and reports of changes in
ownership on Form 4 with the Securities and Exchange Commission (the "SEC") and
any national securities exchange on which the Company's securities are
registered. Executive officers, Directors and greater than ten percent (10%)
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and Directors
that no other reports were required, the Company believes that during fiscal
1996, its executive officers, Directors and greater than ten percent (10%)
beneficial owners complied with all applicable Section 16(a) filing
requirements.

-5-

COMMITTEES OF THE BOARD - BOARD MEETINGS

The Board of Directors established an Audit Committee and an Executive
Compensation Committee in August 1994. Members of the Audit Committee are Daniel
C. Howard, the Company's Chief Operations Officer, Jana Webster Vaughn and Paul
M. Kelnberger. The purpose of the Audit Committee is to (i) review the Company's
financial results and recommend the selection of the Company's independent
auditors; (ii) review the effectiveness of the Company's accounting policies and
practices, financial report and internal controls; and (iii) review the scope of
independent audit coverages, the fees charged by the independent auditors, any
transactions which may involve a potential conflict of interest, and internal
control systems. The Audit Committee met once during fiscal 1996.

The Executive Compensation Committee consists of Messrs. Howard and
Kelnberger and Ms. Vaughn. The Executive Compensation Committee has
responsibilities that include, but are not limited to, the following: (i)
reviewing the Company's executive compensation policy to ensure that the policy
appropriately rewards the Company's Chief Executive Officer and President for
their contributions; (ii) establishing the total compensation, annual bonus, and
salary range for the Company's Chief Executive Officer and President, and
appraising the performance of each. During fiscal 1996, Mr. Kelnberger and Ms.
Vaughn were responsible for administering the Company's 1994 Stock Option Plan
(the "1994 Plan"), and 1995 Stock Option Plan (the "1995 Plan") (the 1994 Plan,
and 1995 Plan together with the 1996 Plan are often collectively referred to
herein as the "Stock Option Plans" or the "Plans"), including the timing,
pricing, and amount of option grant awards under such plans. The Executive
Compensation Committee met once during fiscal 1996. The full Board will
administer the Plans and the 1994 Formula Stock Option Plan (the "Formula Plan")
for fiscal year 1997.

The Board of Directors also established, in August 1994, an Executive
Committee consisting of Messrs. Potter and John Bedard. The Executive Committee
has and exercises all the powers and authority of the Board of Directors in the
management and affairs of the Company, including, without limitation, the power
to issue stock and declare dividends, all as set forth in Section 141 of
Delaware General Corporation Law, as amended. The Executive Committee did not
formally meet during fiscal 1996. All corporate actions required to be voted on
by the Executive Committee were undertaken by written consents.

The Company does not have a standing nominating committee or a
committee performing similar functions.

The Board of Directors met twice during fiscal 1996. All of the
Company's Directors attended all of the meetings of the Board of Directors and
the committees on which they served in fiscal 1996 during the period for which
they were Directors.

-6-

With the exceptions of Daniel Potter and Robert Yager, who are
brothers-in-law, and John and Richard Bedard, who are brothers, no Director or
executive officer is related to any other Director or executive officer by blood
or marriage.

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following tables sets forth, as of November 13, 1996, the number
and percentage of shares of Class A Common Stock and Class B Common Stock
beneficially owned by (i) all persons known by the Company to be the beneficial
owner of more than five percent (5%) of the outstanding Class A Common Stock or
Class B Common Stock, (ii) each named executive officer and Director, and (iii)
all Directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage
Beneficial Owner(1) Beneficially Owned(2)(3) of Class
------------------- ------------------------ --------
<S> <C> <C>
Daniel A. Potter, Chief Executive
Officer and Director(3)(4)...................... 1,356,759 %

John M. Bedard, President and
Director(3)(5).................................. 1,028,117 %

Daniel C. Howard, Chief Operating
Officer and Director(3)(6)...................... 69,499 %

Christopher J. Gondeck, Chief Financial
Officer(7)...................................... 41,000 %

Richard Bedard, Executive Vice
President(8).................................... 20,000 %

Bruce D. Carlson, Vice President of
Real Estate (9)................................. 34,375 %

Michael G. Schifsky, Vice President of
Store Development(10)........................... 34,200 %

Robert E. Yager, Vice President of Store
Operations and Director(11)..................... 85,250 %

Paul M. Kelnberger, Director(12)................... 2,250 %

Jana Webster Vaughn, Director(12).................. 2,250 %

All Directors and executive
officers as a group (10 persons)

-7-

(4)(5)(6)(7)(8)(9)(10)(11)(12).................. 2,673,700 %
- ----------------------------------
*Less than one percent (1%) of the outstanding common stock.
</TABLE>

(1) The address of Messrs. Potter, John Bedard, Howard, Gondeck, Richard
Bedard, Carlson, Schifsky, Yager and Kelnberger and Ms. Vaughn is c/o
Video Update, Inc., 3100 World Trade Center, 30 East Seventh Street,
St. Paul, Minnesota 55101.

(2) Shares of common stock which an individual or group has a right to
acquire within sixty (60) days upon the exercise of options or warrants
are deemed outstanding for the purposes of computing the percentage of
shares beneficially owned by such individual or group. Such shares are
not deemed to be outstanding for the purpose of computing the
percentage of shares of beneficially owned by any other person shown in
the table. In addition, certain options granted herein pursuant to the
1996 Plan are subject to stockholder approval of the 1996 Plan.

(3) Approximately sixty-five (65%) of the shares of Class B Common Stock
beneficially owned by Messrs. Potter, Bedard and Howard or 706,394,
570,776 and 22,830 shares of Class B Common Stock, respectively
(1,300,000 shares of Class B Common Stock in the aggregate), are being
held in escrow pursuant to the terms of an Escrow Agreement entered
into during the Company's initial public offering. So long as such
shares are in escrow, the beneficial owner may vote but not dispose of
such shares.

(4) Excludes an aggregate of 300,000 shares of Class A Common Stock
issuable upon the exercise of various stock options that have not yet
vested. Includes an aggregate of 39,515 shares of Class B Common Stock
held in custodial accounts for Mr. Potter's children. Does not include
26,250 shares of Class A Common Stock owned by Mr. Potter's father, in
which Mr. Potter disclaims beneficial ownership.

(5) Excludes an aggregate of 165,000 shares of Class A Common Stock
issuable upon the exercise of various stock options that have not yet
vested. Includes 39,515 shares of Class B Common Stock held by Mr.
Bedard's mother, but subject to a voting trust of which Mr.
Bedard is the voting trustee.

(6) Includes an aggregate of 34,375 shares of Class A Common Stock issuable
upon the exercise of various stock options. Excludes an aggregate of
59,125 shares of Class A Common Stock issuable upon the exercise of
various stock options that have not yet vested.

(7) Includes an aggregate of 37,000 shares of Class A Common Stock issuable
upon the exercise of various stock options. Excludes an aggregate of
94,500 shares of Class A Common Stock issuable upon the exercise of
various stock options that have not yet vested.

(8) Includes an aggregate of 20,000 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 70,000 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.

-8-

(9) Includes an aggregate of 34,375 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 59,125 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.

(10) Includes an aggregate of 34,200 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 58,800 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.

(11) Includes an aggregate of 6,500 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 7,000 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.

(12) Includes an aggregate of 2,250 shares of Class A Common Stock issuable
upon the exercise of stock options that have vested. Excludes 750
shares of Class A Common Stock that have not vested.

COMPENSATION OF OFFICERS AND DIRECTORS

EXECUTIVE OFFICERS' COMPENSATION

The following table sets forth the compensation paid to the Company's
officers with respect to services rendered to the Company during the fiscal
years ended April 30, 1996, 1995 and 1994. No other executive officer's total
salary and bonus exceeded $100,000 during the fiscal year ended April 30, 1996.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

Long Term
Compensation
Annual Compensation Awards
Securities
Other Annual Underlying All Other
Salary (1) Bonus Compensation (2) Options/SARs(3) Compensation (4)
Name and Principal Position Year ($) ($) ($) (#) ($)
(a) (c) (b) (d) (e) (g) (i)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter............. 1996 $248,002 $0 $894,357 270,000 $21,122
Chairman of the Board 1995 $216,671 $0 $ 0 0 $ 0
and Chief Executive Officer 1994 $288,520 $0 $ 0 0 $ 0

John M. Bedard............... 1996 $158,755 $0 $496,875 150,000 $18,081
President and Director 1995 $125,000 $0 $ 0 0 $19,200
1994 $ 43,906 $0 $ 0 0 $19,200

Christopher J. Gondeck(5).... 1996 $114,548 $0 $ 0 45,000 $ 2,854

-9-

Chief Financial Officer..... 1995 $ 34,000 $0 $ 0 30,000 $ 0

- -----------------
(1) Amounts shown indicate cash compensation earned and received by executive
officers; no amounts were earned but deferred at the election of those
officers. Executive officers participate in the Company's group health
insurance plan.

(2) Amounts shown reflect the difference between the aggregate exercise price
of the options exercised by Messrs. Potter and Bedard during the period,
and the aggregate fair market value of the shares of Class A Common Stock
issued to Messrs. Potter and Bedard upon such exercises, as of the date
of issuance.

(3) Amounts shown reflect grants of options to purchase Class A Common Stock
pursuant to the Company's Stock Option Plans. During fiscal years 1994
through 1996, the Company made no awards of restricted stock and did not
have a long-term incentive plan.

(4) Amounts shown reflect payment for automobile expenses and insurance.

(5) Mr. Gondeck has been employed by the Company since January 2, 1995.
</TABLE>

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN FISCAL YEAR 1996

Potential Realizable
Value at
Assumed Annual
Rates of Stock
Price Appreciation
For Option
Individual Grants Term(1)(2)
----------------- ----------
Number of
Securities Percent of Total
Underlying Options/SARs
Options/SARs Granted to Exercise of
Granted(1) Employees in Fiscal Base Price Expiration
Name (#) Year(3) ($/Sh) Date (4) 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- ------------------------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter........... 270,000 33.7% $4.3125 05/02/2005 0 0
John M. Bedard............. 150,000 18.7% $4.3125 05/02/2005 0 0
Christopher J. Gondeck..... 45,000 5.6% $4.3125 05/02/2005 $122,045 $309,286
- ------------

(1) Mr. Potter and Mr. Bedard exercised all outstanding options held by them during fiscal 1996. Mr. Gondeck did
not exercise any options granted during fiscal 1996.

(2) The dollar gains under these columns result from calculations assuming
hypothetical growth rates as set by the Commission and are not intended
to forecast future price appreciation of the Class A Common Stock.

(3) In fiscal 1996, options to purchase a total of 801,000 shares of Class A
Common Stock were granted to employees of the Company, including
executive officers.

(4) These options are subject to earlier termination upon certain events related
to termination of employment.
</TABLE>

-10-

<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996
AND FY-END OPTION/SAR VALUES

Number of
Unexercised Value of
Securities Unexercised
Underlying In-The-Money
Options/SARs Options/SARs
Shares Value at FY-End(#) at FY-End($)
Acquired on Realized(1) Exercisable/ Exercisable/
Name Exercise(#) ($) Unexercisable(2) Unexercisable (3)
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel A. Potter........... 270,000 $894,375 0/0 0/0
John M. Bedard............. 150,000 $496,875 0/0 0/0
Christopher J. Gondeck..... 3,500 $ 10,938 22,000/49,500 $82,563/$185,063
- --------------------------
(1) The options exercised by Mr. Potter and Mr. Bedard carried an exercise
price of $4.3125. The options exercised by Mr. Gondeck carried an
exercise price of $4.50. The last reported sale price for one share of
Class A Common Stock on August 23, 1995, the date on which all options
were exercised, was $7.625.

(2) Mr. Gondeck holds 45,000 options to purchase Class A Common Stock at an
exercise price of $4.3125 per share, of which 15,000 were exercisable at
the end of fiscal 1996 and 26,500 options to purchase Class A Common
Stock at an exercise price of $4.50 per share, of which 7,000 were
exercisable at the end of fiscal 1996.

(3) In-the-Money options are those options for which the fair market value of
the underlying Common Stock is greater than the exercise price of the
option. On April 30, 1996, the fair market value of the Company's Class A
Common Stock underlying the options (as determined by the last sale price
quoted on the Nasdaq National Market) was $8.125.

</TABLE>

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, OFFICER LOANS AND CHANGE IN
CONTROL ARRANGEMENTS

In February 1996, the Company entered into employment agreements with
Daniel A. Potter, its Chairman and Chief Executive Officer and John Bedard, its
President, each of whom also is a Director and a principal stockholder of the
Company. The agreements are for three year terms, expiring in February 1999. Mr.
Potter and Mr. Bedard are to receive salaries of $300,000 and $200,000,
respectively. Such compensation may be increased and bonuses may be awarded at
the discretion of the Board of Directors of the Company. Each of Messrs. Potter
and Bedard have agreed to devote their full time and best efforts to fulfill
their duties and responsibilities to the Company. Each of them will be entitled
to participate in employee benefit plans.

The Company has a right to terminate each of the agreements for "cause"
as defined in the agreements or as a result of the employee's disability. Except
in the case of termination for cause, upon early termination of the agreements
of the Company, each of Messrs. Potter and Bedard shall be entitled to receive
their salary plus fringe benefits for 36 months from the date of termination. In
the event of a change of control of the Company, Messrs. Potter and Bedard have
the option to terminate their employment subject to the provisions of the
employment agreements and to receive severance and fringe benefits for 36 months
subject to the provisions of their agreements. A "change

-11-

in control" includes an acquisition of 15% of the voting power of the securities
of the Company by any person, certain changes in the composition of the Board of
Directors, and an approval by the stockholders of the Company of a merger,
consolidation, reorganization, liquidation, dissolution or sale of all or
substantially all of the assets of the Company.

Each of Messrs. Potter and Bedard has agreed not to disclose any
confidential information of the Company during the term of his employment or to
compete with the Company during the term of his employment or for a period of
one year following termination of his employment except in accordance with the
employment agreement.

The Company has Recourse Notes from the Company's Chief Executive
Officer and from the President for approximately $1,852,606 and $1,029,225,
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 the
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 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. See "Certain Transactions."

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 from January 1994 to April, 1994, together with accrued interest.

COMPENSATION OF DIRECTORS

Members of the Board of Directors who are not employees of the Company
receive $750 for each meeting of the Board of Directors and for each committee
meeting of the Board of Directors attended by such Director, in addition to
reimbursement of reasonable expenses incurred in attending such meetings, and
receive $2,000 for each quarter of service as a Director. Additionally,
non-employee Directors receive options under the Formula Plan, as follows: (i)
Mr. Kelnberger and Ms. Vaughn each receive options annually in September to
purchase 1,500 shares of Class A Common Stock, which vest in two equal annual
installments on the first two anniversaries of the date of grant and which are
exercisable at a price equal to the fair market value of the Class A Common
Stock on the date of grant, provided that each of them is a Director on the date
of the grant and each of them has attended at least 75% of the meetings he or
she was eligible to attend, and (ii) any non-employee Directors appointed in the
future will receive on the date of such appointment, options to purchase 3,000
shares of Class A Common Stock, which will vest in three equal annual
installments on the first three anniversaries of the date of grant and which
will be exercisable at a price equal to the fair market value of the Class A
Common Stock on the date of grant.

-12-

PRICE RANGE OF COMMON STOCK

The Company's Class A Common Stock traded on the NASDAQ SmallCap Market
from July 1994 until April 1995, and, from April 1995 to date, has traded on the
NASDAQ National Market System under the symbol "VUPDA." On November 12, 1996,
the last bid price for the Class A Common Stock as reported by NASDAQ was
$______ per share.

The following table sets forth the range of high and low bid prices for
the Class A Common Stock as reported by NASDAQ for the periods indicated.

<TABLE>
<CAPTION>
CLASS A COMMON STOCK
HIGH LOW
---- ---

<S> <C> <C>
Quarter ended October 31, 1995.................... $ 12 3/4 $7 1/4
Quarter ended January 31, 1996.................... $ 9 3/4 $3 7/8
Quarter ended April 30, 1996...................... $ 8 1/4 $5 1/2
Quarter ended July 31, 1996....................... $ 9 1/2 $6 3/8
Quarter ended October 31, 1996....................
</TABLE>

As of November 12, 1996, there were __ stockholders of record of the
Company's Class A Common Stock. Management believes that there are approximately
______ beneficial holders of the Company's Class A Common Stock.

DIVIDENDS

The Company has not paid any dividends on its Common Stock since its
inception and management does not anticipate the payment of any dividends to its
stockholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business. The
declaration of dividends in the future will be at the election of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors.

CERTAIN TRANSACTIONS

Effective August 31, 1995, the Company entered into a Purchase
Agreement with Bedard Entertainment, Inc. ("BEI"), a privately held Minnesota
corporation that owned and operated three video superstores, and the
stockholders of BEI. Under the Purchase Agreement, the Company acquired
substantially all of the assets of BEI in exchange for 15,000 shares of Class A
Common Stock and the assumption of indebtedness of BEI of approximately
$275,000. The stockholders of BEI are Glenn and Deborah Bedard, the brother and
sister-in-law of John M. Bedard, the Company's President and a Director.

-13-

On September 2, 1994, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Koonrod, Inc. ("KRI"), a privately held Minnesota
corporation that owned and operated two of the Company's franchised superstores,
and the stockholders of KRI. Under the Agreement, the Company acquired all of
the outstanding capital stock of KRI in exchange for $75,000 in cash and 105,000
shares of the Company's Class A Common Stock, and KRI was merged with and into
the Company. All of the outstanding stock of KRI was owned by Donald Potter, the
father of Daniel Potter, the Company's Chief Executive Officer and Chairman, and
Robert Yager, Vice President of Store Operations and a Director of the Company,
the brother-in-law of Daniel Potter, and the son-in-law of Donald Potter. In
exchange for their shares of the capital stock of KRI, Donald Potter received
26,250 shares of the Company's Class A Common Stock and $19,200 in cash, and
Robert Yager received 78,750 shares of the Company's Class A Common Stock and
$55,800 in cash.

Craig Belisle entered into the Company's standard ten-year franchise
agreement in February 1984 for the operation of a superstore in the Twin Cities
area. Mr. Belisle recently entered into another standard ten-year franchise
agreement that expires in June 2005. Mr. Belisle is the brother- in-law of John
M. Bedard, the Company's President and a Director.

During fiscal 1996, the Company paid approximately $245,000 to Johnson,
West & Co. for accounting services in connection with the Company's acquisitions
and for tax preparation services. For the six months ended October 31, 1996, the
Company incurred fees of approximately $______ to Johnson, West & Co. for
accounting and tax preparation services. Mr. Kelnberger, a Director of the
Company, is a member of Johnson, West & Co.

The Company believes that the above arrangements are on terms at least
as favorable as could be obtained from unaffiliated parties.

-14-

PROPOSAL NO. 2

ACCOUNTING MATTERS AND RATIFICATION OF AUDITORS

The person named in the enclosed proxy will vote to ratify the
selection of Ernst & Young LLP as independent auditors for the fiscal year
ending April 30, 1997 unless otherwise directed by the stockholders. A
representative of Ernst & Young LLP is expected to be present at the meeting of
stockholders, and will have the opportunity to make a statement and answer
questions from stockholders if he or she so desires.

In July 1993, the Company, in contemplation of its initial public
offering, changed its independent auditors, Johnson, West & Company and engaged
the services of Ernst & Young LLP as its principal independent accountants. The
decision to engage the services of Ernst & Young LLP was approved by the
Company's Board of Directors.

During the two most recent fiscal years and the subsequent interim
period, the reports prepared by Ernst & Young LLP on the Company's financial
statements contained no adverse opinions or disclaimers of opinion, or
modifications as to uncertainty, audit scope, or accounting principles.

Further, during the two most recent fiscal years and the subsequent
interim period, no disagreements existed between the Company and Ernst & Young
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Ernst & Young LLP would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.

None of the "reportable events" described in Item 304(a)(1)(iv) of
Regulation S-B occurred with respect to the Company within the two most recent
fiscal years and the subsequent interim period preceding such change.

RECOMMENDATION AND VOTE

THE SELECTION OF AUDITORS REQUIRES A MAJORITY VOTE OF THE HOLDERS OF
COMMON STOCK VOTING TOGETHER AS A SINGLE CLASS. THE BOARD RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR RATIFICATION OF THE AUDIT COMMITTEE'S SELECTION OF ERNST &
YOUNG LLP AS INDEPENDENT AUDITORS FOR FISCAL 1997.

-15-

PROPOSAL NO. 3

APPROVAL OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS A COMMON STOCK

GENERAL

The Board of Directors has authorized, subject to stockholder approval
as required by the General Corporation Law of the State of Delaware, an
amendment to the Company's Restated Certificate of Incorporation, as amended
(the "Restated Certificate of Incorporation"), to increase the number of
authorized shares of Class A Common Stock from 50,000,000, $.01 par value shares
to 60,000,000, $.01 par value shares. The complete text of the amendment to the
Restated Certificate of Incorporation (the "Amendment") is set forth below in
the form in which it was adopted by the Directors subject to the stockholders
approval; however, such text is subject to change as may be required by the
Secretary of State of the State of Delaware. If the Amendment is approved by a
two-thirds vote of the Company's stockholders, upon filing of the Amendment with
the Secretary of State of the State of Delaware, the number of authorized shares
of Class A Common Stock authorized by the Restated Certificate of Incorporation
will be increased from 50,000,000 shares to 60,000,000 shares, and the aggregate
number of shares of authorized stock will be 67,000,000, including 60,000,000
shares of Class A Common Stock, 2,000,000 shares of Class B Common Stock, and
5,000,000 shares of Preferred Stock. The Board of Directors may make any and all
changes to the Restated Certificate of Incorporation that it deems necessary to
file the Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware and to give effect to the increase in the authorized
Common Stock of the Company.

At the close of business on November 12, 1996, _____ shares of the
Company's Class A Common Stock were issued and outstanding; an aggregate of
______ shares were reserved for issuance upon the exercise of options granted or
to be granted under the Stock Option Plans; and ________ shares are reserved for
issuance upon the exercise of outstanding Class A and Class B warrants.

THE AMENDMENT

Pursuant to the provisions of Delaware Corporation Law, Title 8,
Section 242, the stockholders of the Company hereby approve and consent to the
action proposed by the Board of Directors of the Company that the number of
shares of Class A Common Stock, $.01 par value per share, that the Company shall
be authorized to issue be increased from 50,000,000 shares to 60,000,000; and
that the Restated Certificate of Incorporation be amended by deleting the first
paragraph of Article 4 thereof and substituting a new provision therefor, so
that, as amended, said first paragraph of Article 4 shall be and read as
follows:

-16-

"4. The total number of shares of stock which the Corporation shall
have the authority to issue is Sixty-Seven Million (67,000,000) shares,
Sixty Million (60,000,000) of which shall be Class A Common Stock, $.01
par value per share, Two Million (2,000,000) of which shall be Class B
Common Stock, $.01 par value per share, and Five Million (5,000,000) of
which shall be Preferred Stock, $.01 par value per share, amounting in
the aggregate to Six Hundred Seventy Thousand and 00/100 Dollars
($670,000.00)."

The remainder of Article 4 is otherwise ratified and confirmed, and the Restated
Certificate of Incorporation as so amended and all prior actions of the Board of
Directors in connection therewith are, and hereby shall be, ratified, confirmed,
adopted and approved.

PURPOSES AND REASONS FOR THE AMENDMENT

If the Amendment is approved by the stockholders at the Annual Meeting,
an additional 10,000,000 shares of authorized Class A Common Stock will be
available and not otherwise reserved for issuance under the Plans, upon the
exercise of the Class A Warrants or the Class B Warrants or for other present
obligations. These shares will be available for issuance from time to time, for
such purposes and consideration, and on such terms, as the Board of Directors
may approve, and no further vote of the stockholders of the Company will be
required, except as required by Delaware law or the rules, if any, of the
securities exchange(s) upon which the Common Stock is listed.

The Board of Directors of the Company believes it is in the Company's
best interest to have such additional shares authorized, as such shares will
provide the Company added flexibility in the future to issue Common Stock in
connection with acquisitions and to take advantage of opportunities in which the
issuance of shares of Common Stock may be deemed advisable. By adopting the
Amendment at this time, issuance of shares of Common Stock would be facilitated
by eliminating the delay and expense incident to the calling of a special
meeting of the Company's stockholders, in cases where such meeting would not
otherwise be required, would be avoided. The timing of the actual issuance of
additional shares of Common Stock will depend upon market conditions, the
specific purpose for which the stock is to be issued and other similar factors.
Any additional issuance of Common Stock, including upon the exercise of the
Class A or Class B Warrants, would have a dilutive effect on the existing
holders of Common Stock. The Company currently has no plans, agreements or
commitments for the issuance of Common Stock other than pursuant to the Stock
Option Plans or pursuant to current outstanding options, warrants and
acquisition agreements.

The terms of the additional shares of Class A Common Stock for which
authorization is sought will be identical to the shares of Class A Common Stock
currently authorized and outstanding, and the Amendment will not affect the
terms, or the rights of the holders of issued and outstanding shares of Class A
Common Stock. However, if such additional authorized shares of Class A Common
Stock are subsequently issued to other than existing stockholders, the
percentage interest of existing stockholders will be diluted. The issuance of
any additional shares will be on terms deemed to be in the best interests of the
Company and its stockholders. The Class A Common Stock has no conversion,
preemptive or subscription rights and is not redeemable.

-17-

RECOMMENDATION AND VOTE

APPROVAL OF THE AMENDMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS
OF TWO-THIRDS OF THE SHARES OF COMMON STOCK ISSUED AND OUTSTANDING VOTING
TOGETHER AS A SINGLE CLASS. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF THE AMENDMENT.

PROPOSAL NO. 4

PROPOSAL TO APPROVE THE COMPANY'S 1996 STOCK OPTION PLAN

On June 28, 1996 the Board of Directors proposed and approved the 1996
Plan that provides for the granting to employees, officers, Directors,
consultants and non-employees (other than non-employee Directors) of the Company
of options to purchase up to 820,000 shares of Class A Common Stock, $.01 par
value per share. The Board of Directors believes that the 820,000 shares
reserved under the 1996 Plan will be needed in the foreseeable future in order
to attract, keep and motivate key employees.

THE PLAN

Options under the 1996 Plan may be either "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or non-qualified options. Incentive stock options may be
granted only to employees of the Company, while non-qualified options may be
issued to non-employee Directors, employees, consultants and any other
non-employees of the Company.

The 1996 Plan is administered by disinterested members (as defined by
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended) of
the Board of Directors. Their duties involve determining those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock that may be purchased
under each option, and the option price.

The per share exercise price of the Class A Common Stock subject to
incentive stock options granted pursuant to the 1996 Plan may not be less than
the fair market value of the Class A Common Stock on the date the option is
granted. The 1996 Plan provides that the aggregate fair market value (determined
as of the date the option is granted) of the Class A Common Stock that first
becomes exercisable by any employee in any one calendar year pursuant to the
exercise of incentive stock options may not exceed $100,000. No person who owns,
directly or indirectly, at the time of the granting of an incentive stock option
to him or her, more than 10% of the total combined voting power of all classes
of stock of the Company (a "10% Stockholder") shall be eligible to receive any
incentive stock options under the 1996 Plan unless the option price is at least
110% of the fair market value of the Class A Common Stock subject to the option,
determined on the date of grant.

-18-

No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution, and during the lifetime of an optionee,
the option will be exercisable only by him or her. If an incentive stock option
optionee (an "ISO optionee") ceases to be employed by the Company, other than by
reason of death or disability, the ISO optionee will have three months after
such termination to exercise the option. If an ISO optionee ceases to be
employed by the Company by reason of death or disability, his or her ISO may be
exercised, to the extent of the number of shares which could have been exercised
by the optionee on the date of his or her death or disability, for one year from
the date of such death or disability.

Options under the 1996 Plan must be granted within ten years from the
effective date of the 1996 Plan. The incentive stock options granted under the
1996 Plan cannot be exercised more than ten years from the date of grant except
that incentive stock options issued to a 10% Stockholder are limited to five
year terms.

All options granted under the 1996 Plan provide for the payment of the
exercise price in cash or by delivery to the Company of shares of Class A Common
Stock of the Company already owned by the optionee having a fair market value
equal to the exercise price of the options being exercised, or by a combination
of such methods of payment. Therefore, an optionee may be able to tender shares
of Class A Common Stock to purchase additional shares of Class A Common Stock
and may theoretically exercise all of his stock options with no additional
investment other than his or her original shares.

Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed with the Company become available once again
for issuance.

FEDERAL INCOME TAX CONSEQUENCES

Under the 1996 Plan, no tax obligation will arise for the optionee or
the Company upon the granting of incentive stock options, or non-qualified stock
options whose exercise price is equal to or greater than fair market value. Upon
exercise of a non-qualified stock option, an optionee will recognize ordinary
income in an amount equal to the excess, if any, of the fair market value on the
date of exercise of the stock acquired over the exercise price of the option.
Thereupon, the Company will be entitled to a tax deduction (as a compensation
expense) in an amount equal to the ordinary income recognized by the optionee.
Any additional gain or loss realized by an optionee on disposition of the stock
generally will be capital gain or loss to the optionee and will not result in
any additional tax deduction to the Company. The taxable event arising from the
exercise of non-qualified stock options by officers of the Company subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, occurs on the
later of the date on which the option is exercised or the date six months after
the date the option was granted unless the optionee elects, within thirty (30)
days of the date of exercise, to recognize ordinary income as of the date of
exercise. The income recognized at the end of any deferred period will include
any appreciation in the value of the stock during that period and the capital
gain holding period will not begin to run until the completion of such period.

-19-

Upon the exercise of an incentive stock option, an optionee recognizes
no immediate taxable income. The tax cost is deferred until the optionee
ultimately sells the shares of stock. If the optionee does not dispose of the
option shares within two years from the date the option was granted and within
one year after the exercise of the option, and the option is exercised no later
than three months after the termination of the optionee's employment, the gain
on the sale will be treated as long-term capital gain. Subject to limitations in
the 1996 Plan, certain of these holdings periods and employment requirements may
be liberalized in the event of the optionee's death or disability while employed
by the Company. The Company is not entitled to any tax deduction, except that if
the stock is not held for the full term of the holding period outlined above,
the gain on the sale of such stock, being the lesser of (i) the fair market
value of the stock on the date of exercise minus the option price, or (ii) the
amount realized on disposition minus the option price, will be taxed to the
optionee as ordinary income and the Company will be entitled to a deduction in
the same amount. Any additional gain or loss realized by an optionee upon
disposition of the stock prior to the expiration of the full term of the holder
period outlined above generally will be capital gain or loss to the optionee and
will not result in any additional tax deduction to the Company. The "spread"
upon exercise of an incentive stock option constitutes a tax preference item
within the computation of the "alternative minimum tax"under the Code. The tax
benefits which might otherwise accrue to an optionee maybe affected by the
imposition of the alternative minimum tax if applicable to the optionee's
individual circumstances.

EFFECT OF STOCKHOLDER APPROVAL

Pursuant to the terms of the 1996 Plan, all provisions relating to
incentive stock options ("ISOs") are subject to the approval of the Company's
stockholders within 12 months of the date on which the plan was adopted by the
Board of Directors. If the 1996 Plan is not approved by the stockholders at the
Annual Meeting, all option grants under the 1996 Plan will be of no force or
effect.

Subsequent to April 30, 1996, the Company's Board of Directors has
approved the granting of options to purchase up to 669,000 shares of Class A
Common Stock under the 1996 Plan at an exercise price equal to the market value
at the time of grant to the following executives:

Number of
Name Shares
---- ------

Daniel A. Potter.................................... 300,000
John M. Bedard...................................... 165,000
Christopher J. Gondeck.............................. 60,000
Daniel C. Howard.................................... 36,000
Richard Bedard...................................... 36,000
Bruce D. Carlson.................................... 36,000
Michael G. Schifsky................................. 36,000

-20-

RECOMMENDATION AND VOTE

APPROVAL OF THE 1996 PLAN REQUIRES A MAJORITY VOTE OF THE HOLDERS OF
COMMON STOCK VOTING TOGETHER AS A SINGLE CLASS. THE BOARD RECOMMENDS A VOTE FOR
APPROVAL OF THE 1996 PLAN.

VOTING AT MEETING

The Board of Directors has fixed Tuesday, November 12, 1996, as the
record date for the determination of stockholders entitled to vote at this
meeting. At the close of business on that date, _________ shares of Class A
Common Stock and 2,000,000 shares of Class B Common Stock were outstanding and
entitled to vote.

SOLICITATION OF PROXIES

The cost of solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by mail, officers and employees of the
Company may solicit in person or by telephone. The Company may reimburse brokers
or persons holding stock in their names, or in the names of their nominees, for
their expenses in sending proxies and proxy material to beneficial owners.

REVOCATION OF PROXY

Subject to the terms and conditions set forth herein, all proxies
received by the Company will be effective, notwithstanding any transfer of the
shares to which such proxies relate, unless prior to the meeting the Company
receives a written notice of revocation signed by the person who, as of the
record date, was the registered holder of such shares. The Notice of Revocation
must indicate the certificate number or numbers of the shares to which such
revocation relates and the aggregate number of shares represented by such
certificate(s).

STOCKHOLDER PROPOSALS

In order to be included in proxy material for the 1997 Annual Meeting,
stockholders' proposed resolutions must be received by the Company on or before
March 31, 1997. The Company suggests that proponents submit their proposals by
certified mail, return receipt requested, addressed to the Chief Executive
Officer of the Company. All proposals must comply with applicable Securities and
Exchange Commission rules and regulations.

ANNUAL REPORT

The Company is providing to each stockholder, without charge, a copy of
the Company's annual report, including the financial statements for the
Company's most recent fiscal year ended April 30, 1996.

-21-

MISCELLANEOUS

Management does not know of any other matters which may come before
this meeting. However, if any other matters are properly presented to the
meeting, it is the intention of the person named in the accompanying proxy to
vote, or otherwise act, in accordance with his judgement on such matters.

By Order of the Board of Directors

Daniel C. Howard
Secretary

St. Paul, Minnesota
November 13, 1996

MANAGEMENT HOPES THAT THE STOCKHOLDERS WILL ATTEND THE MEETING. WHETHER
OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY
EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.

-22-

VIDEO UPDATE, INC.

1996 STOCK OPTION PLAN

ARTICLE I

Purpose of the Plan

The purpose of this Plan is to encourage and enable employees,
consultants, directors and others who are in a position to make significant
contributions to the success of VIDEO UPDATE, INC. and of its affiliated
corporations upon whose judgment, initiative and efforts the Corporation depends
for the successful conduct of its business, to acquire a closer identification
of their interests with those of the Corporation by providing them with
opportunities to purchase stock in the Corporation pursuant to options granted
hereunder, thereby stimulating their efforts on behalf of the Corporation and
strengthening their desire to remain involved with the Corporation. Any
employee, consultant or advisor designated to participate in the Plan is
referred to as a "Participant."

ARTICLE II

Definitions

2.1 "Affiliated Corporation" means any stock corporation of which a
majority of the voting common or capital stock is owned directly or indirectly
by the Corporation.

2.2 "Award" means an Option granted under Article V.

2.3 "Board" means the Board of Directors of the Corporation or, if one
or more has been appointed, a Committee of the Board of Directors of the
Corporation.

2.4 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.

2.5 "Committee" means a Committee of not less than two members of the
Board appointed by the Board to administer the Plan.

2.6 "Corporation" means VIDEO UPDATE, INC., a Delaware corporation,
or its successor.

2.7 "Employee" means any person who is a regular full-time or part-
time employee of the Corporation or an Affiliated Corporation on or after
May 1, 1995.

2.8 "Incentive Stock Option" ("ISO") means an option that qualifies
as an incentive stock option as defined in Section 422 of the Code, as amended.

2.9 "Non-Qualified Option" means any option not intended to qualify
as an Incentive Stock Option.

2.10 "Option" means an Incentive Stock Option or Non-Qualified Option
granted by the Board under Article V of this Plan in the form of a right to
purchase Stock evidenced by an instrument containing such provisions as the
Board may establish. Except as otherwise expressly provided with respect to an
Option grant, no Option granted pursuant to the Plan shall be an Incentive Stock
Option.

2.11 "Participant" means a person selected by the Committee to receive
an award under the Plan.

2.12 "Plan" means this 1996 Stock Option Plan.

2.13 "Reporting Person" means a person subject to Section 16 of the
Securities Exchange Act of 1934 or any successor provision.

- 2 -

2.14 "Restricted Period" means the period of time selected by the
Committee during which an award may be forfeited by the person.

2.15 "Stock" means the Common Stock, $.01 par value, of the Corporation
or any successor, including any adjustments in the event of changes in capital
structure of the type described in Article IX.

ARTICLE III

Administration of the Plan

3.1 Administration by Board. This Plan shall be administered by the
Board of Directors of the Corporation. The Board may, from time to time,
delegate any of its functions under this plan to one or more Committees. All
references in this Plan to the Board shall also include the Committee or
Committees, if one or more have been appointed by the Board. From time to time
the Board may increase the size of the Committee or committees and appoint
additional members thereto, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies however caused, or remove
all members of the Committee or committees and thereafter directly administer
the Plan. No member of the Board or a committee shall be liable for any action
or determination made in good faith with respect to the Plan or any options
granted under it.

If a Committee is appointed by the Board, a majority of the members of
the Committee shall constitute a quorum, and all determinations of the Committee
under the Plan may be made without notice or meeting of the Committee by a
writing signed by a majority of Committee members. On

- 3 -

or after registration of the Stock under the Securities Exchange Act of 1934,
the Board shall delegate the power to select directors and officers to receive
Awards under the Plan, and the timing, pricing and amount of such Awards to a
Committee, all members of which shall be "disinterested persons" within the
meaning of Rule 16b-3 under that Act.

3.2 Powers. The Board of Directors and/or any committee appointed by
the Board shall have full and final authority to operate, manage and administer
the Plan on behalf of the Corporation.
This authority includes, but is not limited to:

(a) The power to grant Awards conditionally or unconditionally,

(b) The power to prescribe the form or forms of any instruments
evidencing Awards granted under this Plan,

(d) The power to provide regulations for the operation of the
incentive features of the Plan, and otherwise to prescribe
and rescind regulations for interpretation, management and
administration of the Plan,

(e) The power to delegate responsibility for Plan operation,
management and administration on such terms, consistent with
the Plan, as the Board may establish,

(f) The power to delegate to other persons the responsibility of
performing ministerial acts in furtherance of the Plan's
purpose, and

- 4 -

(g) The power to engage the services of persons, companies, or
organizations in furtherance of the Plan's purpose, including
but not limited to, banks, insurance companies, brokerage
firms and consultants.

3.3 Additional Powers. In addition, as to each Option to buy Stock of
the Corporation, the Board shall have full and final authority in its
discretion: (a) to determine the number of shares of Stock subject to each
Option; (b) to determine the time or times at which Options will be granted; (c)
to determine the option price of the shares of Stock subject to each Option,
which price shall be not less than the minimum price specified in Article V of
this Plan; (d) to determine the time or times when each Option shall become
exercisable and the duration of the exercise period (including the acceleration
of any exercise period), which shall not exceed the maximum period specified in
Article V; (e) to determine whether each Option granted shall be an Incentive
Stock Option or a Non- qualified Option; and (f) to waive compliance by a
Participant with any obligation to be performed by him under an Option, to waive
any condition or provision of an Option, and to amend or cancel any Option (and
if an Option is cancelled, to grant a new Option on such terms as the Board may
specify), except that the Board may not take any action with respect to an
outstanding option that would adversely affect the rights of the Participant
under such Option without such Participant's consent. Nothing in the preceding
sentence shall be construed as limiting the power of the Board to make
adjustments required by Article XI.

In no event may the Company grant an Employee any Incentive Stock
Option that is first exercisable during any one calendar year to the extent the
aggregate fair market value of the Stock

- 5 -

(determined at the time the options are granted) exceeds $100,000 (under all
stock option plans of the Corporation and any Affiliated Corporation); provided,
however, that this paragraph shall have no force and effect if its inclusion in
the Plan is not necessary for Incentive Stock Options issued under the Plan to
qualify as such pursuant to Section 422(d)(1) of the Code.

ARTICLE IV

Eligibility

4.1 Eligible Employees. All Employees (including Directors who
are Employees) are eligible to be granted Incentive Stock Option and
Non-Qualified Option Awards under this Plan.

4.2 Consultants, Directors and other Non-Employees. Any
Consultant, Director (whether or not an Employee) and any other Non-Employee is
eligible to be granted Non-Qualified Option Awards under the Plan, provided the
person has not irrevocably elected to be ineligible to participate in the Plan.

4.3 Relevant Factors. In selecting individual Employees,
Consultants, Directors and other Non-Employees to whom Awards shall be granted,
the Board shall weigh such factors as are relevant to accomplish the purpose of
the Plan as stated in Article I. An individual who has been granted an Award may
be granted one or more additional Awards, if the Board so determines. The
granting of an Award to any individual shall neither entitle that individual to,
nor disqualify him from, participation in any other grant of Awards.

ARTICLE V

Stock Option Awards

- 6 -

5.1 Number of Shares. Subject to the provisions of Article IX of
this Plan, the aggregate number of shares of Stock for which Options may be
granted under this Plan shall not exceed 820,000 shares. The shares to be
delivered upon exercise of Options under this Plan shall be made available, at
the discretion of the Board, either from authorized but unissued shares or from
previously issued and reacquired shares of Stock held by the Corporation as
treasury shares, including shares purchased in the open market.

Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Board of Directors.

5.2 Effect of Expiration, Termination or Surrender. If an Option
under this Plan shall expire or terminate unexercised as to any shares covered
thereby, or shall cease for any reason to be exercisable in whole or in part, or
if the Company shall reacquire any unvested shares issued pursuant to Options
under the Plan, such shares shall thereafter be available for the granting of
other Options under this Plan.

5.3 Term of Options. The full term of each Option granted
hereunder shall be for such period as the Board shall determine. In the case of
Incentive Stock Options granted hereunder, the term shall not exceed ten (10)
years from the date of granting thereof. Each Option shall be subject to earlier
termination as provided in Sections 6.3 and 6.4. Notwithstanding the foregoing,
the term of options intended to qualify as "Incentive Stock Options" shall not
exceed five (5) years from the date of granting thereof if such option is
granted to any employee who at the time such option is granted owns more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Corporation.

- 7 -

5.4 Option Price. The Option price shall be determined by the
Board at the time any Option is granted. In the case of Incentive Stock Options,
the exercise price shall not be less than l00% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted (but in
no event less than par value), provided that no Incentive Stock Option shall be
granted hereunder to any Employee if at the time of grant the Employee, directly
or indirectly, owns Stock possessing more than 10% of the combined voting power
of all classes of stock of the Corporation and its Affiliated Corporations
unless the Incentive Stock Option price equals not less than 110% of the fair
market value of the shares covered thereby at the time the Incentive Stock
Option is granted. In the case of Non-Qualified Stock Options, the exercise
price shall not be less than par value.

5.5 Fair Market Value. "Fair market value" shall be deemed to be
the fair value of the Stock as determined in good faith by the Board after
taking into consideration all factors that it deems appropriate, including
without limitation, recent sale and offer prices of the Stock in private
transactions negotiated at arm's length. If, at the time an Option is granted
under the Plan, the Corporation's Stock is publicly traded, then "fair market
value" shall be determined as of the last business day for which the prices or
quotes discussed in this sentence are available prior to the date such Option is
granted and shall mean (i) the average (on that date) of the high and low prices
of the Stock on the principal national securities exchange on which the Stock is
traded, if the Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on that date) of the Stock on the NASDAQ National
Market List, if the Stock is not then traded on a national securities exchange;
or (iii) the closing bid price (or average of bid prices) last quoted (on that
date) by an

- 8 -

established quotation service for over-the-counter securities, if the Stock is
not reported on the NASDAQ National Market List.

5.6 Non-Transferability of Options. No Option granted under this
Plan shall be transferable by the grantee otherwise than by will or the laws of
descent and distribution, and such Option may be exercised during the grantee's
lifetime only by the grantee.

5.7 Foreign Nationals. Awards may be granted to Participants who
are foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.

ARTICLE VI

Exercise of Option

6.1 Exercise. Each Option granted under this Plan shall be
exercisable on such date or dates and during such period and for such number of
shares as shall be determined pursuant to the provisions of the instrument
evidencing such Option. The Board shall have the right to accelerate the date of
exercise of any option, provided that, the Board shall not accelerate the
exercise date of any Incentive Stock Option granted if such acceleration would
violate the annual vesting limitation contained in Section 422(d)(1) of the
Code.

6.2 Notice of Exercise. A person electing to exercise an Option
shall give written notice to the Corporation of such election and of the number
of shares he or she has elected to purchase and shall at the time of exercise
tender the full purchase price of the shares he or she has elected to purchase.
The purchase price can be paid partly or completely in shares of the
Corporation's stock valued at Fair Market Value as defined in Section 5.5
hereof, or by any such other lawful

- 9 -

consideration as the Board may determine. Until such person has been issued a
certificate or certificates for the shares so purchased, he or she shall possess
no rights of a record holder with respect to any of such shares.

6.3 Option Unaffected by Change in Duties. No Incentive Stock
Option (and, unless otherwise determined by the Board of Directors, no
Non-Qualified Option granted to a person who is, on the date of the grant, an
Employee of the Corporation or an Affiliated Corporation) shall be affected by
any change of duties or position of the optionee (including transfer to or from
an Affiliated Corporation), so long as he or she continues to be an Employee.
Employment shall be considered as continuing uninterrupted during any bona fide
leave of absence (such as those attributable to illness, military obligations or
governmental service) provided that the period of such leave does not exceed 90
days or, if longer, any period during which such optionee's right to
reemployment is guaranteed by statute. A bona fide leave of absence with the
written approval of the Board shall not be considered an interruption of
employment under the Plan, provided that such written approval contractually
obligates the Corporation or any Affiliated Corporation to continue the
employment of the optionee after the approved period of absence.

If the optionee shall cease to be an Employee for any reason other than
death, such Option shall thereafter be exercisable only to the extent of the
purchase rights, if any, which have accrued as of the date of such cessation;
provided that (i) the Board may provide in the instrument evidencing any Option
that the Board may in its absolute discretion, upon any such cessation of
employment, determine (but be under no obligation to determine) that such
accrued purchase rights shall be

- 10 -

deemed to include additional shares covered by such Option; and (ii) unless the
Board shall otherwise provide in the instrument evidencing any Option, upon any
such cessation of employment, such remaining rights to purchase shall in any
event terminate upon the earlier of (A) the expiration of the original term of
the Option; or (B) where such cessation of employment is on account of
disability, the expiration of one year from the date of such cessation of
employment and, otherwise, the expiration of three months from such date. For
purposes of the Plan, the term "disability" shall mean "permanent and total
disability" as defined in Section 22(e)(3) of the Code.

In the case of a Participant who is not an employee, provisions
relating to the exercisability of an Option following termination of service
shall be specified in the award. If not so specified, all Options held by such
Participant shall terminate on termination of service to the Corporation.

6.4 Death of Optionee. Should an optionee die while in possession
of the legal right to exercise an Option or Options under this Plan, such
persons as shall have acquired, by will or by the laws of descent and
distribution, the right to exercise any Options theretofore granted, may, unless
otherwise provided by the Board in any instrument evidencing any Option,
exercise such Options at any time prior to one year from the date of death;
provided, that such Option or Options shall expire in all events no later than
the last day of the original term of such Option; provided, further, that any
such exercise shall be limited to the purchase rights which have accrued as of
the date when the optionee ceased to be an Employee, whether by death or
otherwise, unless the Board provides in the instrument evidencing such Option
that, in the discretion of the Board, additional shares covered by such Option
may become subject to purchase immediately upon the death of the optionee.

ARTICLE VII

- 11 -

Reporting Person Limitations

To the extent required to qualify for the exemption provided by Rule
16b-3 under the Securities Exchange Act of 1934, and any successor provision, at
least six months must elapse from the date of acquisition of an Option by a
Reporting Person to the date of disposition of such Option (other than upon
exercise) or its underlying Common Stock.

ARTICLE VIII

Terms and Conditions of Options

Options shall be evidenced by instruments (which need not be identical)
in such forms as the Board may from time to time approve. Such instruments shall
conform to the terms and conditions set forth in Articles V and VI hereof and
may contain such other provisions as the Board deems advisable which are not
inconsistent with the Plan, including restrictions applicable to shares of Stock
issuable upon exercise of Options. In granting any Non-Qualified Option, the
Board may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to Incentive Stock Options, or to
such other termination and cancellation provisions as the Board may determine.
The Board may from time to time confer authority and responsibility on one or
more of its own members and/or one or more officers of the Corporation to
execute and deliver such instruments. The proper officers of the Corporation are
authorized and directed to take any and all action necessary or advisable from
time to time to carry out the terms of such instruments.

ARTICLE IX

Benefit Plans

Awards under the Plan are discretionary and are not a part of regular
salary. Awards may not be used in determining the amount of compensation for any
purpose under the benefit plans of

- 12 -

the Corporation, or an Affiliated Corporation, except as the Board may from time
to time expressly provide. Neither the Plan, an Option or any instrument
evidencing an Option confers upon any Participant any right to continue as an
employee of, or consultant or advisor to, the Company or an Affiliated
Corporation or affect the right of the Corporation or any Affiliated Corporation
to terminate them at any time. Except as specifically provided by the Board in
any particular case, the loss of existing or potential profits granted under
this Plan shall not constitute an element of damages in the event of termination
of the relationship of a Participant even if the termination is in violation of
an obligation of the Corporation to the Participant by contract or otherwise.

- 13 -

ARTICLE X

AMENDMENT, SUSPENSION OR TERMINATION

OF THE PLAN

The Board may suspend the Plan or any part thereof at any time or may
terminate the Plan in its entirety. Awards shall not be granted after Plan
termination.

The Board may also amend the Plan from time to time, except that
amendments which affect the following subjects must be approved by stockholders
of the Corporation:

(a) Except as provided in Article XI relative to capital changes,
the number of shares as to which Options may be granted
pursuant to Article V;

(b) The maximum term of Options granted;

(d) The term of the Plan; and

(e) The requirements as to eligibility for participation in the
Plan.

Awards granted prior to suspension or termination of the Plan may not
be cancelled solely because of such suspension or termination, except with the
consent of the grantee of the Award.

ARTICLE XI

CHANGES IN CAPITAL STRUCTURE

The instruments evidencing Options granted hereunder shall be subject
to adjustment in the event of changes in the outstanding Stock of the
Corporation by reason of Stock dividends, Stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges or other
relevant changes in capitalization occurring after the date of an Award to the
same extent as would

- 14 -

affect an actual share of Stock issued and outstanding on the effective date of
such change. Such adjustment to outstanding Options shall be made without change
in the total price applicable to the unexercised portion of such options, and a
corresponding adjustment in the applicable option price per share shall be made.
In the event of any such change, the aggregate number and classes of shares for
which Options may thereafter be granted under Section 5.1 of this Plan may be
appropriately adjusted as determined by the Board so as to reflect such change.

Notwithstanding the foregoing, any adjustments made pursuant to this
Article XI with respect to Incentive Stock Options shall be made only after the
Board, after consulting with counsel for the Corporation, determines whether
such adjustments would constitute a "modification" of such Incentive Stock
Options (as that term is defined in Section 424 of the Code) or would cause any
adverse tax consequences for the holders of such Incentive Stock Options. If the
Board determines that such adjustments made with respect to Incentive Stock
Options would constitute a modification of such Incentive Stock Options, it may
refrain from making such adjustments.

In the event of the proposed dissolution or liquidation of the
Corporation, each Option will terminate immediately prior to the consummation of
such proposed action or at such other time and subject to such other conditions
as shall be determined by the Board.

Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Corporation.

- 15 -

No fractional shares shall be issued under the Plan and the optionee
shall receive from the Corporation cash in lieu of such fractional shares.

- 16 -

ARTICLE XII

EFFECTIVE DATE AND TERM OF THE PLAN

The Plan shall become effective on June 28, 1996. The Plan shall
continue until such time as it may be terminated by action of the Board or the
Committee; provided, however, that no Options may be granted under this Plan on
or after the tenth anniversary of the effective date hereof.

ARTICLE XIII

CONVERSION OF ISOS INTO NON-QUALIFIED

OPTIONS; TERMINATION OF ISOS

The Board, at the written request of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's
Incentive Stock Options, that have not been exercised on the date of conversion,
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the optionee is an employee of the
Corporation or an Affiliated Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of such Options. At the time of such conversion, the
Board or the Committee (with the consent of the optionee) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the Board
or the Committee in its discretion may determine, provided that such conditions
shall not be inconsistent with the Plan. Nothing in the Plan shall be deemed to
give any optionee the right to have such optionee's Incentive Stock Options
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Board or the Committee takes appropriate action. The Board, with
the consent of the

- 17 -

optionee, may also terminate any portion of any Incentive Stock Option that has
not been exercised at the time of such termination.

ARTICLE XIV

APPLICATION OF FUNDS

The proceeds received by the Corporation from the sale of shares
pursuant to Options granted under the Plan shall be used for general corporate
purposes.

ARTICLE XV

GOVERNMENTAL REGULATION

The Corporation's obligation to sell and deliver shares of Stock under
this Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.

ARTICLE XVI

WITHHOLDING OF ADDITIONAL INCOME TAXES

Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition (as defined in Article XVI) the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includible in such person's gross income. The Board in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.

ARTICLE XVII

NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION

Each employee who receives an Incentive Stock Option must agree to
notify the Corporation in writing immediately after the employee makes a
Disqualifying Disposition of any Stock acquired

- 18 -

pursuant to the exercise of an Incentive Stock Option. A Disqualifying
Disposition is any disposition (including any sale) of such Stock before the
later of (a) two years after the date the employee was granted the Incentive
Stock Option or (b) one year after the date the employee acquired Stock by
exercising the Incentive Stock Option. If the employee has died before such
stock is sold, these holding period requirements do not apply and no
Disqualifying Disposition can occur thereafter.

ARTICLE XVIII

GOVERNING LAW; CONSTRUCTION

The validity and construction of the Plan and the instruments
evidencing Options shall be governed by the laws of the State of Delaware
(without regard to the conflict of law principles thereof). In construing this
Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.

- 19 -

VIDEO UPDATE, INC.
PROXY OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 17, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

THE UNDERSIGNED hereby appoints Daniel A. Potter as Proxy, with full
power of substitution, to vote for and on behalf of the undersigned at the
Annual Meeting of Stockholders of VIDEO UPDATE, INC. (the "Corporation") to be
held at the Corporation's principal place of business, 3100 World Trade Center,
30 East Seventh Street, St. Paul, Minnesota 55101, on Tuesday, December 17, 1996
at 10:00 a.m., and at any adjournment or adjournments thereof, upon and with
respect to all shares of the Class A Common Stock of the Corporation to which
the undersigned would be entitled to vote and act if personally present. The
undersigned hereby directs Daniel A. Potter to vote in accordance with his
judgment on any matters which may properly come before the Annual Meeting, all
as indicated in the Notice of the Annual Meeting, receipt of which is hereby
acknowledged, and to act on the following matters set forth in such Notice as
specified by the undersigned:

(1) Proposal to elect six (6) members of the Board of Directors of the
Corporation, each of whom is currently serving as a Director of the
Corporation:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Daniel A. Potter o FOR o AGAINST o WITHHOLD VOTE
John M. Bedard o FOR o AGAINST o WITHHOLD VOTE
Daniel C. Howard o FOR o AGAINST o WITHHOLD VOTE
Robert E. Yager o FOR o AGAINST o WITHHOLD VOTE
Paul M. Kelnberger o FOR o AGAINST o WITHHOLD VOTE
Jana Webster Vaughn o FOR o AGAINST o WITHHOLD VOTE
</TABLE>

(2) Proposal to ratify the selection of Ernst & Young LLP as independent
auditors of the Corporation for the fiscal year ending April 30, 1997.

o FOR o AGAINST o ABSTAIN

(3) Proposal to approve an amendment to the Corporation's Restated
Certificate of Incorporation to increase from 50,000,000 to 60,000,000
the aggregate number of authorized shares of Class A Common Stock of
the Corporation.

o FOR o AGAINST o ABSTAIN

(4) Proposal to approve the Corporation's 1996 Stock Option Plan under
which an aggregate of 820,000 shares of Class A Common Stock of the
Corporation will be reserved for issuance.

o FOR o AGAINST o ABSTAIN

MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 and 4.

(5) In the Corporation's discretion to transact such other business as may
properly come before the meeting or any adjournment or adjournments
thereof.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR AND IN FAVOR OF
THE ITEMS SET FORTH ABOVE UNLESS A CONTRARY SPECIFICATION IS MADE.

PLEASE MARK, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.

Please sign exactly as name appears below.

Dated: , 1996

---------------------------
Signature

---------------------------
Signature if held jointly

---------------------------
Printed Name

---------------------------

---------------------------
Address

Note: When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If the person named on the stock certificate has died, please submit
evidence of your authority. If a corporation, please sign in full corporate name
by the President or authorized officer and indicate the signer's office. If a
partnership, please sign in partnership name by authorized person.