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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended July 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____ to _____
Commission file number: 0-24346
VIDEO UPDATE, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 41-1461110
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3100 World Trade Center
30 East 7th Street
St. Paul, Minnesota 55101
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(Address of Principal Executive Offices)
(612) 222-0006
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(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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On September 2, 1996, the Issuer had 11,002,735 outstanding shares of Class
A Common Stock, $.01 par value, and 2,000,000 outstanding shares of Class B
Common Stock, $.01 par value.
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VIDEO UPDATE, INC.
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
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ITEM 1. Financial Statements
Consolidated Balance Sheets - April 30, 1996, and
July 31, 1996 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - Three Months ended
July 31, 1995 and July 31, 1996 . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - Three Months ended
July 31, 1995 and July 31, 1996 . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements - July 31, 1996 . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 8
PART II - OTHER INFORMATION
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ITEM 1. Legal Information. . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
VIDEO UPDATE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
April 30, July 31,
1996 1996
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(UNAUDITED)
Cash and cash equivalents $ 676 $ 1,062
Accounts receivable 558 690
Notes receivable from related parties 1,555 1,608
Inventory 4,545 4,930
Videocassette rental inventory -- net 25,701 29,120
Property and equipment -- net 18,988 21,288
Prepaid expenses 682 1,064
Goodwill -- net 25,973 25,602
Other assets 840 913
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Total assets $ 79,518 $ 86,277
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LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 4,859 $ 9,418
Accounts payable 8,692 10,253
Accrued compensation 1,334 1,307
Accrued expenses 977 1,270
Accrued rent expense 228 236
Income tax payable 593 311
Deferred income taxes 841 797
Other liabilities 494 688
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.01 per share:
Authorized shares--5,000,000
Issued shares--None -- --
Class A Common Stock, par value $.01 per share:
Authorized shares--50,000,000
Issued and outstanding shares--11,017,735 at April 30,
1996 and at July 31, 1996 110 110
Class B Common Stock, par value $.01 per share:
Authorized, issued and outstanding shares--
2,000,000 at April 30, 1996 and July 31, 1996 20 20
Additional paid-in capital 61,029 61,029
Retained earnings 2,186 2,749
Foreign currency translation (34) (100)
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63,311 63,808
Notes receivable from officers for the exercise
of options (1,811) (1,811)
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Total stockholders' equity 61,500 61,997
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Total liabilities and stockholders' equity $ 79,518 $ 86,277
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SEE ACCOMPANYING NOTES.
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Note: The balance sheet at April 30, 1996 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended July 31,
1995 1996
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Revenues:
Rental revenue $ 4,803 $ 17,184
Service fees 126 119
Product sales 243 1,260
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5,172 18,563
Costs and expenses:
Store operating expenses 3,549 14,539
Selling, general and administrative 830 1,978
Cost of product sales 167 680
Amortization of goodwill 119 371
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4,665 17,568
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Operating income 507 995
Interest expense (51) (165)
Other income 75 128
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24 (37)
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Income before income taxes 531 958
Income tax expense 231 395
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Net income $ 300 $ 563
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Net income per share $ .05 $ .05
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SEE ACCOMPANYING NOTES.
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VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended July 31,
1995 1996
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OPERATING ACTIVITIES
Net income $ 300 $ 563
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,208 5,701
Deferred rent and other liabilities 47 202
Deferred income taxes 34 (44)
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Accounts receivable (110) (132)
Notes receivable (1) (53)
Inventory (511) (384)
Other assets 2 (531)
Accounts payable 2,094 1,560
Income taxes payable 197 (282)
Other liabilities 150 198
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Net cash provided by operating activities 3,410 6,798
INVESTING ACTIVITIES
Purchase of videocassette rental inventory (2,975) (7,910)
Purchase of property and equipment (1,335) (3,062)
Investment in businesses, net of cash acquired (4,356) --
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Net cash used in investing activities (8,666) (10,972)
FINANCING ACTIVITIES
Proceeds from bank line of credit -- 4,600
Proceeds from notes payable -- 28
Payments on notes payable (146) (68)
Proceeds from issuance of common stock 992 --
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Net cash provided by financing activities 846 4,560
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Increase (decrease) in cash and cash equivalents (4,410) 386
Cash and cash equivalents at beginning of the period 5,573 676
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Cash and cash equivalents at end of the period $ 1,163 $ 1,062
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SEE ACCOMPANYING NOTES.
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VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considerded necessary for a fair presentation have
been included. Operating results for the three months ended July 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending April 30, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended April 30, 1996.
RECLASSIFICATION
Certain prior year items have been reclassified to conform with the fiscal
1997 presentation.
2. NET INCOME PER COMMON SHARE
Net income per share is computed by dividing net income for the year by the
weighted average number of shares of common stock and common stock equivalents,
if dilutive, outstanding during the year. The weighted average number of shares
used in the net income per share calculation was reduced by the common shares
placed in escrow in connection with the Company's initial public offering.
THREE MONTHS ENDED JULY 31,
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1995 1996
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(In thousands, except per share amounts)
Net income $ 300 $ 563
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Weighted average shares outstanding:
Class A common shares outstanding
at quarter end 5,206 11,018
Class B common shares outstanding at
quarter end 2,000 2,000
Less: Class B common shares placed
in escrow in connection with the
initial public offering (1,300) (1,300)
Effect of using weighted average common
shares outstanding (542) --
Effect of shares issuable under stock
options and warrants based on the
treasury stock method 576 629
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Shares used in computing net income
per share 5,940 12,347
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Net income per common and common
equivalent share, primary $ .05 $ .05
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3. CHANGE IN AMORTIZATION METHOD FOR VIDEOCASSETTE RENTAL INVENTORY
Effective February 1, 1996, videocassettes that are considered base stock
(including copies one through three of new releases) are amortized over 36
months on a straight-line basis to a salvage value of $6.00 per videocassette.
New release videocassettes are amortized as follows: the fourth through ninth
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over 30 months with no salvage value; and the tenth and any succeeding
copies of each title per store are amortized on a straight-line basis during
their first
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six months to a net book value of $6.00 and then on a straight-line basis over
three months with no salvage value. The changes, which represent in part a
change in accounting principle and a change in accounting estimate, were
reflected in the Company's consolidated financial statements in total as a
change in an estimate in the fourth quarter of fiscal 1996.
Prior to February 1, 1996, base stock videocassettes were amortized over 36
months on a straight-line basis with no salvage value. Prior to May 1, 1995,
new release videocassettes were amortized as follows: copies one through three
of each title per store were amortized as base stock; the fourth through ninth
copies of each title per store were amortized 40% in the first year and 30% in
each of the second and third years; and the tenth and any succeeding copies of
each title per store were amortized over nine months on a straight-line basis.
The new method of amortization was adopted because the Company believes
accelerating expense recognition for new release videocassettes (copies four and
greater) during the first six months more closely matches the typically higher
revenue generated following a title's release, and believes that $6.00
represents a reasonable salvage value for base stock videocassettes after 36
months.
The effect of the application of the new method of amortizing
videocassettes during the first quarter of fiscal 1996 (three months ended
July 31, 1995) would have increased amortization expense by $288,000 and
decreased net income by $171,000, or $.02 per share, for the period.
4. ACQUISITIONS
In connection with five acquistions in which the Company has issued an
aggregate of 610,613 shares of Class A Common Stock in fiscal 1996, the Company
may be obligated to make deficiency payments to such sellers equal to the
difference between the guaranteed price of $7.00 to $12.00 for each share
issued, and the actual market price of such shares as of specified dates between
July and October 1996. As of July 31, 1996 the deficiency payments are
estimated to be approximately equal to $1,435,000. In three of these
acquistions, the Company has the option of satisfying approximately $1,310,000
of this liability at July 31, 1996 through the issuance of approximately 190,008
additional shares of Class A Common Stock.
5. SUBSEQUENT EVENTS
The Company and the Selling Stockholders (the Company's CEO and President)
filed a registration statement with the Securities and Exchange Commission in
July 1996 to offer for sale approximately 5,500,000 shares of its Class A Common
Stock in an underwritten public offering ("Subsequent Offering"). Included as a
part of the shares to be sold are 420,000 shares of common stock currently held
by the Company's CEO and President as a result of their exercise of options in
August 1995. The proceeds to be received by the Company's CEO and President
from the sale of their shares will be applied toward payment of the notes
receivable and interest thereon totaling $3,250,000 as of July 31, 1996. To
the extent that such proceeds are not sufficient to satisfy the notes
receivable in full, any remaining amounts due under such notes shall be
evidenced by promissory notes, bearing market rates of interest, with payment
of principal due on the third anniversary of the closing of the Subsequent
Offering.
In June 1996, the Board of Directors approved an additional stock option
plan (the "1996 Plan"). The 1996 Plan provides for the granting of up to
820,000 options to eligible individuals to purchase shares of Class A Common
Stock of the Company. Options under the 1996 Plan may be incentive stock
options or non-qualified options.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto appearing elsewhere herein.
OVERVIEW
The Company franchised its first store in January 1983 and opened its
first Company-owned store in September 1989. By July 1994, when the Company
completed its initial public offering, the Company had grown to 15
Company-owned stores and 30 franchised stores. Subsequently, the Company
substantially accelerated its growth and as of July 31, 1996 operates 151
acquired and 65 developed stores in 11 states and in Canada, and has 25
franchised stores predominantly in the United States as of July 31, 1996. All
of the Company's stores located in the United States are superstores.
Superstores are video specialty stores that carry more than 7,500 rental
units.
The Company generates revenues primarily from the rental of
videocassettes and video games, from service fees from its franchisees, and
from the sale of products. As reflected in the chart below, rental revenues
at Video Update stores have accounted for the substantial majority of the
Company's revenues. The Company expects that this trend will continue.
THREE MONTHS ENDED JULY 31,
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1995 1996
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(IN THOUSANDS)
Rental revenue . . . . . . . . . . . . . . . $ 4,803 $ 17,184
Service fees . . . . . . . . . . . . . . . . 126 119
Product sales . . . . . . . . . . . . . . . 243 1,260
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$ 5,172 $ 18,563
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Effective February 1, 1996, videocassettes that are considered base
stock (including copies one through three of new releases) are amortized over
36 months on a straight-line basis to a salvage value of $6.00 per
videocassette. New release videocassettes are amortized as follows: the
fourth through ninth copies of each title per store are amortized on a
straight-line basis during their first six months to a net book value of
$6.00 and then on a straight-line basis over 30 months with no salvage value;
and the tenth and any succeeding copies of each title per store are amortized
on a straight-line basis during their first six months to a net book value of
$6.00 and then on a straight-line basis over three months with no salvage
value.
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Amortization expense as a percentage of revenue for future periods
may vary based on the Company's purchase of videocassette inventory, which is
subject to the Company's rate of expansion, studio release schedules and
anticipated market demand.
OPERATING RESULTS
The table below sets forth the percentage of revenues represented by
certain items included in the Company's statement of operations for the periods
indicated.
THREE MONTHS ENDED JULY 31,
----------------------------
1995 1996
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Revenues:
Rental revenue 92.9 % 92.6 %
Service fees 2.4 0.6
Product sales 4.7 6.8
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Total revenues 100.0 100.0
Costs and expenses:
Store operating expenses 68.6 78.3
Selling, general and administrative 16.1 10.7
Cost of product sales 3.2 3.7
Amortization of goodwill 2.3 2.0
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Total cost and expenses 90.2 94.7
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Operating income 9.8 5.3
Other income (expense):
Interest expense (1.0) (0.9)
Amortization of debt costs - -
Other income 1.5 0.7
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Total other income (expense) 0.5 (0.2)
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Income from operations before income taxes 10.3 5.1
Income tax expense 4.5 2.1
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Net income 5.8 % 3.0 %
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THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1995.
RENTAL REVENUE. Rental revenue was approximately $17,184,000 and
$4,803,000, or 92.6% and 92.9% of total revenues for the three months ended July
31, 1996 and 1995, respectively. The increase in rental revenue of $12,381,000
was derived from video stores acquired during fiscal 1996 which accounted
for approximately $6,401,000 or 51.7% of the increase, from the opening of 42
new Company-owned stores since the first quarter of fiscal 1996 which accounted
for approximately $3,552,000 or 28.7% of the increase, and from an 8% increase
in same store revenues.
SERVICE FEES. Service fees were approximately $119,000 and
$126,000, or 0.6% and 2.4% of total revenues for the three months ended July
31, 1996 and 1995, respectively. Continuing service fees and royalties from
franchisees accounted for 97% and 100% of total service fees, respectively.
The decrease in service fees as a percentage of total revenues was due to a
significant increase in the number of Company-owned stores without a
corresponding increase in the number of franchised stores.
PRODUCT SALES. Product sales were approximately $1,260,000 and
$243,000, or 6.8% and 4.7% of total revenues for the three months ended July
31, 1996 and 1995, respectively. The increase in product sales of $1,017,000
was a result of product sales by the video stores acquired during fiscal 1996
which accounted for approximately $558,000 or 54.9% of the increase and from the
opening of 42 Company-owned video stores since the first quarter of fiscal
1996. The increase in product sales as a percentage of total revenues was a
result of higher product sales as a percentage of total revenues by video stores
acquired in fiscal 1996.
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STORE OPERATING EXPENSES. Store operating expenses consist primarily
of compensation and related expenses, occupancy expenses, and depreciation
and amortization expenses. Operating expenses were approximately $14,539,000
and $3,549,000, or 78.3% and 68.6% of total revenues for the three months
ended July 31, 1996 and 1995, respectively. The increase in store operating
expenses of $10,990,000, was primarily the result of video stores acquired
during fiscal 1996, from the opening of 42 Company-owned video stores since
the first quarter of fiscal 1996, and an increase in amortization expense
related to videocassettes. The increase in store operating expenses as a
percentage of total revenues was primarily due to a change in accounting
method for amortizing videocassettes, additional regional expenses related to
developing new markets, higher initial expenses related to new store
openings, and the higher compensation and occupancy costs of video stores
acquired during fiscal 1996.
Compensation and related expenses were approximately $3,977,000 and
$1,017,000, or 21.4% and 19.7% of total revenues for the three months ended July
31, 1996 and 1995, respectively. The increase of $2,960,000 was primarily due to
video stores acquired during fiscal 1996 which accounted for approximately
$1,612,000 or 54.5% of the increase and from the opening of 42 Company-owned
video stores since the first quarter of fiscal 1996. The increase as a
percentage of total revenues was primarily due to additional regional management
expenses related to developing new markets and higher initial payroll costs
associated with the opening of new Company-owned video stores.
Occupancy expenses were approximately $4,041,000 and $963,000, or
21.8% and 18.6% of total revenues for the three months ended July 31, 1996
and 1995, respectively. The increase of approximately $3,078,000 was primarily
due to video stores acquired during fiscal 1996, which accounted for $1,327,000
or 43.1% of the increase, from the expansion of several stores in fiscal 1996
and from the opening of 42 Company-owned stores since the first quarter of
fiscal 1996. The increase as a percentage of total revenues was primarily due
to higher occupancy costs associated with the video stores acquired and opened
during fiscal 1996 and since the first quarter of fiscal 1996, and higher costs
as a percentage of total revenues associated with the opening of new video
stores prior to revenue reaching maturity during the first year of operations.
Depreciation and amortization expenses were approximately $5,144,000
and $1,050,000, or 27.7% and 20.3% of total revenues for the three months
ended July 31, 1996 and 1995, respectively. Depreciation and amortization
expense reflects the depreciation of store equipment and fixtures and the
amortization of videocassettes. The increase of $4,094,000 was primarily
attributable to the addition of new release videocassette inventory for new,
existing, and acquired stores. The effect of the application of the new
method of amortizing videocassettes during the first quarter of fiscal 1996
(three months ended July 31, 1995), would have increased amortization expense
to $1,338,000 or to approximately 25.9% of total revenues. Amortization
expense also increased as a percentage of sales in the first quarter of
fiscal 1997 (three months ended July 31, 1996) due to additional tape
purchases as a percentage of sales for new store openings prior to reaching
maturity during the first year of operations. Amortization expense as a
percentage of revenues for future periods may vary based on the Company's
purchase of videocassette inventory, which is subject to the Company's rate
of expansion, studio release schedules and anticipated market demend.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were approximately $1,978,000 and $830,000, or 10.7%
and 16.1% of total revenues for the three months ended July 31, 1996 and
1995, respectively. The increase of approximately $1,148,000 was primarily
due to adding management personnel and administrative staff to support the
Company's growth and related expenditures. The decrease as a percentage of
total revenues was due to the increases in total revenues without a
proportional increase in corporate overhead.
COST OF PRODUCT SALES. Cost of product sales was approximately
$680,000 and $167,000, or 3.7% and 3.2% of total revenues for the three
months ended July 31, 1996 and 1995, respectively. The cost of product sales
as a percentage of total product sales revenue was approximately 54.0% and
68.7% for fiscal 1996 and 1995, respectively. The decrease in the cost of
product sales as a percentage of total product sales was primarily the result
of a different mix of products sold in video stores acquired during fiscal 1996.
AMORTIZATION OF GOODWILL. Amortization of goodwill was
approximately $371,000 and $119,000 or 2.0% and 2.3% of total revenues for
the three months ended July 31, 1996 and 1995, respectively. The decrease as
a percentage of total revenues was primarily attributable to an increase in
sales from new store
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openings without a proportional increase in the amortization of certain
intangible assets resulting from the video stores acquired in fiscal 1996.
INTEREST EXPENSE. Interest expense was approximately $165,000 and
$51,000, or 0.9% and 1.0% of total revenues for the three months ended July
31, 1996 and 1995, respectively. The increase of $114,000 was primarily
attributable to interest on increased borrowings under the Company's bank line
of credit.
OTHER INCOME. Other income was approximately $128,000 and $75,000,
or 0.7% and 1.5% of total revenues for the three months ended July 31, 1996
and 1995, respectively. The increase of $53,000 was primarily due to interest
earned on notes receivable from officers.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations through cash from operations,
the proceeds of prior equity and debt offerings, borrowings under bank
facilities, trade credit and equipment leases. The Company's principal
capital requirements are for the acquisition of existing stores, the opening
of new superstores, and the purchase of videocassette rental inventory, each
of which varies based on market conditions and expansion plans.
At July 31, 1996, the Company had cash and cash equivalents of
approximately $1,062,000. The Company uses an unclassified balance sheet in
its financial statements, and as a result, does not classify its assets or
liabilities as current or noncurrent. If the Company were to use a classified
balance sheet, a portion of videocassette rental inventories would be
classified as noncurrent because they are not assets that are reasonably
expected to be completely realized in cash or sold in one year. The
acquisition cost of these inventories, however, would be reflected in current
liabilities. The Company believes that classification of videocassette rental
inventories as noncurrent assets would be misleading because it would not
indicate the level of assets expected to be converted into cash in the next
year as a result of rentals or sales of these videocassettes.
For the three months ended July 31, 1996 net cash provided by operating
activities was approximately $6,798,000. Net cash used in investment activities
was approximately $10,972,000 consisting primarily of approximately $3,062,000
for new and remodeled stores, and approximately $7,910,000 for the purchase of
videocassette inventory for existing and new stores, and for the conversion of
stores acquired during fiscal 1996. Net cash generated from financing
activities was approximately $4,560,000 resulting primarily from borrowings from
the Company's bank line of credit.
In April 1996, the Company entered into a one-year revolving credit
facility with Bank of America Illinois (the "Line of Credit") under which the
Company may borrow up to $10,000,000, with amounts borrowed thereunder bearing
interest at variable rates based on the federal funds rate, prime rate or the
interbank Eurodollar rate. The Line of Credit is convertible into a two-year
term loan if it is not renewed. As of July 31, 1996, approximately $8,700,000
was outstanding under the Line of Credit, bearing interest at 8.25%. During the
term of the Line of Credit and thereafter to the extent any amounts are
outstanding under the Line of Credit, the Company is subject to various
restrictive covenants, including limitations on further indebtedness, other than
trade credit and capital or operating leases, and requirements that the Company
obtain the written consent of Bank of America (the "Bank") for certain
acquisitions of new businesses or their assets (excluding new superstore
openings) or entering into business combinations, including mergers, syndicates
or joint ventures. In particular, the Bank's prior consent is required for any
merger, acquisition or purchase in which the consideration paid by the Company
exceeds (a) 5% of the Company's consolidated stockholder's equity ("Net
Worth") immediately prior to any one acquisition and (b) 10% of the Company's
Net Worth as of its most recent fiscal year end in the aggregate as to all such
acquisitions. The Line of Credit also restricts the amount and terms of debt
that may be issued to sellers of acquired businesses and requires that the
Company maintain certain cash flow ratios as well as certain ratios of total
liabilities to tangible net worth. In August 1996, the Bank and the Company
entered into an amendment to the Line of Credit, which will be effective upon
the closing of the Subsequent Offering (the "Amendment"). The Amendment modifies
the Net Worth covenants relating to mergers, acquisitions and purchases and
provides that during the term of the Line of Credit, the Bank's consent is
required for (i) any one transaction or series of substantially
contemporaneous related transactions involving $25,000,000 in consideration and
(ii) all transactions in the aggregate involving consideration equal to the
lesser of $55,000,000 or the net proceeds received by the Company from the
Subsequent Offering.
In connection with five of the Company's prior year acquisitions in
which the Company has issued an aggregate of 610,613 shares of Class A Common
Stock to sellers, the Company may be obligated to make deficiency payments to
such sellers equal to the difference between the Guaranteed Price for each
share issued, and the actual market or sales price of such shares as of a
specified date. Based upon the closing sale price of the Class A Common Stock
of $6.875 on July 31, 1996 and subject to the satisfaction of certain
conditions by the holders of such shares, the aggregate deficiency payments that
the Company may be liable for is approximately $1,310,000 (all of which, except
for payments that may be due with respect to 40,000 shares, may be paid in
shares of Class A Common Stock, at the Company's option).
On July 11, 1996, the Company filed a registration statement on Form
S-3 to sell 5,500,000 shares of Class A Common Stock, of which, 5,080,000
shares are being sold by the Company and 420,000 shares are being sold by the
Company's CEO and President. The proceeds to be received by the CEO and
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President from the sale of their shares will be applied toward payment of the
notes receivable and interest thereon totaling $3,250,000 as of July 31, 1996.
To the extent that such proceeds are not sufficient to satisfy the notes
receivable in full, any remaining amounts due under such notes shall be
evidenced by promissory notes, bearing market rates of interest, with payment
of principal due on the third anniversary of the closing of the Subsequent
Offering.
Although management will have broad discretion in allocating and
applying the net proceeds of the Offering, the Company's primary planned use
of the net proceeds will be to provide working capital to make acquisitions,
reduce outstanding debt of approximately $9,000,000 at August 31, 1996, open
additional stores, and to meet other general corporate purposes.
INFLATION
To date, inflation has not had a material effect on the Company's
business. The Company anticipates that its business will be affected by
general economic trends. Although the Company has not operated during a
period of high inflation, it believes that it would generally be able to pass
increased costs resulting from inflation on to customers.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The video rental industry generally experiences revenue declines in
April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to school
openings and the introduction of new network and cable television programs.
The Company's video rental business may be affected by other
factors, including acquisitions by the Company of existing video stores,
additional and existing competition, marketing programs, weather, special or
unusual events, variations in the number of superstore openings, the quality
of new release titles available for rental and sale, and other factors that
may affect retailers in general.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A. In connection with the acquisition of the assets of Talerico
Enterprises, Inc. and Michael Talerico ("TEI") in October 1995,
the Company advised TEI of what it believed to be various breaches
of representations and warranties made by TEI in its asset
purchase agreement with the Company. Accordingly, the Company
withheld a portion of the purchase price, including 55,000 shares
of Class A Common Stock. In December 1995, TEI filed an action
against the Company in Arizona state court for breach of contract
(the "Action"). In August 1996, the Company and TEI agreed to
settle the disputes underlying the Action. Under the terms of the
settlement, the Company agreed to pay TEI $225,000 and to issue
40,000 shares of Class A Common Stock (the "TEI Common Stock").
TEI has agreed not to sell, pledge or encumber any of the TEI
Common Stock until April 1997, and thereafter not more than 10,000
shares of TEI Common Stock within any six month period through
August 1998. The Company has agreed to make deficiency payments
to TEI (payable in either cash or stock at the Company's option)
if the aggregate sale proceeds of the TEI Common Stock do not
equal $500,000 through arms-length sales at different intervals
through September 1998.
B. In connection with the acquisition of the assets of Videoland,
Inc. ("Videoland") in November 1995, the Company issued 239,163
shares of its Class A Common Stock (the "Videoland Shares") to
the sellers of the assets of Videoland (the "Videoland Sellers").
With respect to the Videoland Shares, the Company agreed to make a
deficiency payment in October 1996 to the Videoland Sellers if the
gross proceeds received by such sellers from the sale of the
Videoland Shares during the six months from March 1996 through
September 1996 is not equal to the number of shares of Videoland
Shares sold multiplied by $12.00. The Videoland Sellers were
subject to certain "lockup" or sale restrictions as a condition to
any deficiency payment. Although the Videoland Sellers have now
requested a deficiency payment of approximately $1,220,000 in
October 1996 based on a sale of all of the Videoland Shares, the
Company believes that the Videoland Sellers have violated the
contractual lockup and sale restrictions. Accordingly, the Company
has initiated an action in federal district court in Minnesota for
a declaratory judgment that the Videoland Sellers are not entitled
to any deficiency payment. Although no assurances can be given as
to the outcome of such action, the Company intends to vigorously
pursue the matter.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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ITEM 5. OTHER INFORMATION
Effective August 1, 1996, the Company consolidated its Canadian
operations by amalgamating two of its wholly owned subsidiaries
1149463 Ontario Limited, an Ontario Corporation and Alexsay Holdings
Ltd., a British Columbia Corporation, into Video Update Canada
Inc., an Ontario corporation and wholly owned subsidiary of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(i) the following exhibits are filed herewith:
Exhibit No. Title
---------- ------
10a 1996 Stock Option Plan
10b Form of Franchise Offering Circular
10C Form of Second Amendment to Credit Agreement
by and between the Company and Bank of America
Illinois.
(b) Reports on Form 8-K.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEO UPDATE, INC.
Date: September 6, 1996 By: /s/ Daniel A. Potter
---------------------------------
DANIEL A. POTTER,
Chief Executive Officer and
Chairman of the Board of
Directors
Date: September 6, 1996 By: /s/ Christopher J. Gondeck
---------------------------------
CHRISTOPHER J. GONDECK,
Principal Accounting Officer
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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.
<PAGE>
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.
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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 or after registration of
the Stock under the Securities Exchange Act of 1934, the Board shall delegate
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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,
(c) The power to interpret the 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
(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.
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<PAGE>
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 (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.
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<PAGE>
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
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
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<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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
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
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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 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.
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<PAGE>
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;
(c) The minimum price at which Options may be 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
affect an actual share of Stock issued and outstanding on the effective date of
such change. Such
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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.
No fractional shares shall be issued under the Plan and the optionee shall
receive from the Corporation cash in lieu of such fractional shares.
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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
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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 pursuant to the exercise of an Incentive Stock
Option. A Disqualifying Disposition is any
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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.
- 17 -
<PAGE>
INFORMATION FOR PROSPECTIVE FRANCHISEES
REQUIRED BY THE FEDERAL TRADE COMMISSION
VIDEO UPDATE, INC.
3100 WORLD TRADE CENTER
30 EAST SEVENTH STREET
ST. PAUL, MINNESOTA 55101-4913
(612) 222-0006
To protect you, we've required Video Update to give you this information. WE
HAVEN'T CHECKED IT. AND DON'T KNOW IF IT'S CORRECT. It should help you make up
your mind. Study it carefully. While it includes some information about your
contract, don't rely on it alone to understand your contract. Read all of your
contract carefully. Buying a franchise is a complicated investment. Take your
time to decide. If possible, show your contract and this information to an
advisor, like a lawyer or an accountant. If you find anything you think may be
wrong or anything important that's been left out, you should let us know about
it. It may be against the law.
There may also be laws on franchising in your state. Ask your state agencies
about them.
Federal Trade Commission
Washington, D.C. 20580
<PAGE>
[LOGO] FRANCHISE OFFERING CIRCULAR
NAME OF FRANCHISOR AND NAME
UNDER WHICH DOING BUSINESS Video Update, Inc. and
Video Update
TYPE OF BUSINESS ORGANIZATION Corporation organized under the Laws of the
State of Delaware
PRINCIPAL BUSINESS ADDRESS 3100 World Tr ade Center
30 East Seventh Street
St. Paul, Minnesota 55101-4913
TELEPHONE NUMBER (612) 222-0006
NAME AND ADDRESS OF FRANCHISOR'S
AGENT TO RECEIVE PROCESS Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101-4913
DESCRIPTION OF FRANCHISE: The franchise offered consists of the right to operate
a retail store for the sale and rental of video tapes, video games, video
equipment, video supplies and services. Other sale and rental items may be
offered at certain locations, including candy, snacks, etc. All franchises use
the trade name VIDEO UPDATE and have the right to obtain advertising,
advertising materials and merchandise from Video Update for a fee.
FRANCHISEE'S INITIAL FEE: $29,500
FRANCHISEE'S TOTAL ESTIMATED INITIAL INVESTMENT: From $227,000 to $399,000. This
sum does not represent a franchisee's total investment. Refer to Items 5, 6 and
7 of this Offering Circular for further explanation regarding the total
investment.
THE FRANCHISE AGREEMENT REQUIRES THAT ALL DISAGREEMENTS BE SETTLED BY
ARBITRATION, AT THE ELECTION OF VIDEO UPDATE, IN THE STATE OF MINNESOTA. THE
FRANCHISE AGREEMENT FURTHER STATES THAT MINNESOTA LAW GOVERNS THE AGREEMENT.
<PAGE>
Information about comparisons of franchisors is available. Call the state
administrators listed in Appendix 5 to this Offering Circular or your public
library for sources of information.
Registration of this franchise with the state does not mean that the state
recommends it or has verified the information in this Offering Circular. If you
learn that anything in this Offering Circular is untrue, contact the Federal
Trade Commission and (State or Provincial authority).
THIS OFFERING CIRCULAR IS EFFECTIVE AS OF AUGUST 15, 1995.
<PAGE>
TABLE OF CONTENTS
-----------------
ITEM PAGE
- ---- ----
1. THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES . . . . . . . . . . . . . 1
2. BUSINESS EXPERIENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. BANKRUPTCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. INITIAL FRANCHISE FEE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6. OTHER FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7. INITIAL INVESTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES. . . . . . . . . . . . .10
9. FRANCHISEE'S OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . .12
10. FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
11. FRANCHISOR'S OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . .14
12. TERRITORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
13.. TRADEMARKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
14.. PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION . . . . . . . . . . . . .19
15. OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
16. RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL. . . . . . . . . . . . . . .19
17. RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION . . . . . . . . . .20
18. PUBLIC FIGURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
19. EARNINGS CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
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20. LIST OF OUTLETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
21. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .24
22 CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
23. RECEIPT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25, 26
APPENDIX:
1. Franchise Agreement, including Exhibit A (model territory designation),
Exhibit B (required opening inventory) and Exhibit C (termination of
business name).
2. Audited Financial Statements for the fiscal year ended April 30, 1995, 1994
and 1993.
3. Information Regarding Franchisees and Company Stores.
4. Table of Contents of Video Update's Operations Manual.
5. Names, addresses and telephone numbers of State Administrators regulating
franchises in states where Video Update conducts business.
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<PAGE>
1. THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES
A. THE FRANCHISOR.
Video Update, Inc. is a Delaware corporation which conducts business under
the name "Video Update." To simplify the language in this Offering Circular,
"Video Update" means Video Update, Inc., the franchisor. "You" means the person
who buys the franchise and may include a partner or shareholder if a partnership
or corporation buys the franchise.
Video Update was originally incorporated in Minnesota in October 1983. In
March 1994, Video Update was reincorporated in the State of Delaware prior to
the time it became a publicly held corporation. Video Update's principal
business address is 3100 World Trade Center, 30 East Seventh Street, St. Paul,
Minnesota 55101-4913. Service of legal process may be made on Video Update at
this address, or, alternatively, on the agents for service of process listed in
Appendix 5. Video Update has no affiliates that are related to its business.
B. VIDEO UPDATE'S BUSINESS AND FRANCHISES TO BE OFFERED. Video Update
offers and grants franchises to operate retail video stores using its names and
proprietary marks and to rent or sell private label video products and supplies
produced by or for Video Update. Video Update also owns and operates a
significant number of retail video stores that are engaged in the same business
as its franchisees. Further information regarding Video Update's existing
franchisees, as well as the company owned stores presently operated by it, may
be found in Appendix 3.
Franchise products and services are marketed on a retail basis to persons
desiring to purchase or rent recorded movies and games, and other video
equipment and materials.
Video Update produces and sells innovative advertising and sales promotion
materials. It attempts to negotiate group discount rates for the benefit of its
franchisees for wholesale supplies, merchandise, services and insurance. Video
Update produces its own private label items to be sold by its franchisees.
These items are identified in the Operations Manual (the "Private Label"
merchandise).
The products and services offered by Video Update franchises are used
primarily by the general public. You will have to compete with other businesses
and franchise programs selling and renting recorded movies, games and video
equipment.
C. PRIOR BUSINESS EXPERIENCE OF THE FRANCHISOR.
Video Update has been continuously engaged in the retail video store
franchising business since 1983. At no time has Video Update been engaged in
any other line of business, and no such other business activities are presently
planned.
2. BUSINESS EXPERIENCE
The members of the Board of Directors and the executive officers of Video
Update and their positions are as follows:
<PAGE>
NAME POSITION
Daniel A. Potter . . . . . . Chairman and Chief Executive Officer
John M. Bedard . . . . . . . President and Director
Daniel C. Howard . . . . . . Chief Operations Officer
Christopher J. Gondeck . . . Chief Financial Officer
Richard P. Bedard . . . . . . Vice President of Franchise Development
Bruce D. Carlson . . . . . . Vice President of Real Estate
Michael G. Schifsky . . . . . Vice President of Store Development
Robert E. Yager . . . . . . . District Manager and Director
Jana Webster Vaughn . . . . . Director
Paul Kelnberger . . . . . . . Director
Daniel A. Potter, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER. Mr. Potter co-founded Video Update in 1983 and has served as Video
Update's Chairman and Chief Executive Officer since its inception. Mr. Potter
devised, initiated and structured the franchising strategy implemented by Video
Update and is primarily responsible for Video Update's financial and strategic
planning. 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 Video Update
in 1983 with Mr. Potter and has served as Video Update's President and as a
Director since its inception.
Daniel C. Howard, CHIEF OPERATIONS OFFICER. Mr. Howard has coordinated
Video Update's operations since 1983. He holds a B.S. degree from the
University of Minnesota School of Management.
Christopher J. Gondeck, CHIEF FINANCIAL OFFICER. Mr. Gondeck has served as
Video Update'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, a privately held brick and tile company. 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"). Prior to 1992, he 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. from St. Cloud
State University in St. Cloud, Minnesota and is a certified public accountant.
Richard P. Bedard, VICE PRESIDENT OF FRANCHISE DEVELOPMENT. Prior to
January 1, 1991, Mr. Bedard owned a Video Update franchise and was also the Vice
President of Franchise Development for Video Update. From January 1, 1991 to
June 1, 1995, Mr. Bedard was a franchise consultant for Video Update and various
restaurants. On June 1, 1995, Mr. Bedard assumed his present position of Vice
President of Franchise Development. Mr. Bedard is the brother of John M.
Bedard, Video Update's President.
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<PAGE>
Bruce D. Carlson, VICE PRESIDENT OF REAL ESTATE. Mr. Carlson has served as
Video Update's Vice President of Real Estate 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
served as District Manager of Video Update from 1984 to 1988. From 1988 to 1990
he was a principal stockholder of Bankshot Investments, Inc., a privately held
company engaged in the development of billiard facilities. Mr. Schifsky
rejoined Video Update in 1990 and has served in his current capacity since that
time.
Robert E. Yager, DISTRICT MANAGER AND DIRECTOR. Mr. Yager has served as
District Manager of Video Update since September 1994. 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 Video
Update in September 1994. Mr. Yager is the brother-in-law of Daniel A. Potter,
Video Update's Chairman and Chief Executive Officer.
Paul M. Kelnberger, DIRECTOR. Mr. Kelnberger has been a partner of
Johnson, West & Company, a public accounting firm with its principal offices in
St. Paul, Minnesota, since 1975. Johnson, West & Company performed auditing
services for Video Update prior to the fiscal year ended April 30, 1993. Mr.
Kelnberger is a certified public accountant and holds a Certificate of
Accounting from the Academy of Accountancy in Minneapolis, Minnesota.
Jana Webster Vaughn, DIRECTOR. Ms. Vaughn has been Executive Director of
the Greater Anoka County, Minnesota, Humane Society since 1992. From 1989 to
1992, she served as Special Projects Manager for KARE Eleven Television, a
network television station in Minneapolis, Minnesota. Ms. Vaughn holds a B.A.
degree from the University of Minnesota.
3. LITIGATION
No litigation is required to be set forth in this Offering Circular.
4. BANKRUPTCY
No person previously identified in Items 1 or 2 of this Offering Circular
has been involved as a debtor in proceedings under the U.S. Bankruptcy Code
required to be disclosed in this Item.
5. INITIAL FRANCHISE FEE
The Initial Franchise Fee is Twenty-nine Thousand Five Hundred Dollars
($29,500). It is paid in consideration for Video Update's sales expenses,
administrative overhead and start-up costs related to the execution of the
Franchise Agreement and the opening of the franchise store. The entire sum of
$29,500 is payable upon Video Update's acceptance of the Franchise Agreement.
3
<PAGE>
You must commence performance of your obligations under the Franchise
Agreement upon Video Update's acceptance of the Franchise Agreement and must
secure a satisfactory location for the franchise business within ninety (90)
days of such date. You must also open the store location for retail business
within one hundred eighty (180) days of Video Update's acceptance of the
Franchise Agreement.
In the event you are reasonably unable to secure a suitable retail location
within ninety (90) days following Video Update's acceptance of the Franchise
Agreement, you may request a refund of the Initial Franchise Fee less Video
Update's expenses and service fees. Video Update's expenses include the costs
of store site evaluation, lease negotiations, market research, travel, lodging,
telephone and other reasonably related expenses. Video Update's service fees
are calculated at a rate of Seventy-Five Dollars ($75) per hour dedicated to
franchise store site location and development.
If you obtain a store location within ninety (90) days following Video
Update's acceptance of the Franchise Agreement, or if you elect not to request a
refund as permitted above, the Initial Franchise Fee is thereafter non-
refundable. The ninety (90) day time obligation may be substantially modified in
multiple franchise transactions. If such modified time obligation is not
fulfilled, Video Update may elect to terminate a multiple franchise agreement
and apply the same refund policy. The Initial Franchise Fee is not refundable
under any other circumstance. (See Section 3 of the Franchise Agreement.)
Proceeds of the Initial Franchise Fee are, in part, profit for Video Update
and, in part, used to pay Video Update's costs and expenses for:
(i) Legal fees, accounting fees and costs of compliance with Federal,
state and other laws;
(ii) Enforcement and protection of Video Update, Inc. commercial symbols,
marks and names;
(iii) Employee salaries and fringe benefits;
(iv) Selling, general and administrative expenses; and
(v) Franchise assistance and supervision.
Under some circumstances, the Initial Franchise Fee may be less than
$29,500; however, at no time during the past year was an Initial Franchise Fee
of less than $29,500 charged. Under no circumstances will the Initial Franchise
Fee exceed $29,500 per store. The Initial Franchise Fee may be reduced for
various reasons, in the sole discretion of Video Update, including the fact that
the prospective franchisee is currently operating a video store or stores or is
proposing a multiple franchise purchase. Any Initial Franchise Fee which is
reduced for a multiple franchise purchase may, in the sole discretion of Video
Update, be modified if the franchises are not opened in accordance with the
timetable set forth in Item 11.
4
<PAGE>
In addition to the Initial Franchise Fee, you are required to purchase from
Video Update an initial inventory of movies and games at a cost ranging from
$115,000 to $150,000. See Item 7 of this Offering Circular for further
information.
6. OTHER FEES
You will be required to make the payments to Video Update and others
summarized in the table below, none of which are refundable. Reference should
also be made to the remarks which follow the table for a more complete
explanation of these fees.
NAME OF FEE AMOUNT DUE DATE
Royalty(1)(5) 5% of "Gross Monthly 10th day of each
Revenue" (as defined month for the
in note (3) below) preceding calendar
for the preceding month (4)
month
Advertising(2)(5) 1% of "Gross Monthly 10th day of each
Revenue" for the month for the
preceding month preceding calendar
month (4)
You must also spend
3% of "Gross
Quarterly Revenue"
(as defined in note
(3) below) for
advertising specific
to your store
Late Payment of Royalty 10% of amount owed Upon billing
or Advertising Fees(6) plus interest on
amount owed equal to
1 1/2% per month (or
the highest legal
rate if lower)
Audit(7) Cost of audit 90 days following
first year of
business; thereafter
only required if
there is an
understatement of
more than 2% of
Gross Revenue for
any reporting period
Transfer(8) $5,000. An Upon billing
additional 10% of
the gross transfer
price is payable if
Video Update obtains
the transferee
5
<PAGE>
(1) ROYALTY FEES.
You are required to pay Video Update a continuing monthly royalty fee
equal to five percent (5%) of your Gross Monthly Revenue (as defined in note (3)
below) for the preceding month. The obligation to pay monthly royalty fees
begins and is calculated from the date your store opens for business. This fee
is due and payable on the tenth day of each month for the preceding calendar
month.
(2) ADVERTISING FEES AND CONTRIBUTIONS.
You are required to pay Video Update a monthly advertising fee equal
to one percent (1%) of your Gross Monthly Revenue (as defined in note (3) below)
for the preceding month. The obligation to pay the monthly advertising fee
begins and is calculated from the date your store opens for business. This fee
is due and payable on the tenth day of each month for the preceding calendar
month. You are also required to expend, on a basis not less than quarterly, an
amount equal to three percent (3%) of your Gross Quarterly Revenue (as defined
below), for advertising specific to your individual retail store operation.
The percentage of Monthly Gross Revenues which you are required to
contribute to Video Update's advertising fund is uniform as to all persons
currently acquiring a franchise and is non-refundable. Video Update maintains a
separate dedicated advertising account which it administers within its sole
discretion. Funds from the advertising account are used to provide artwork for
advertising, decor items and periodic newsletters for the benefit of Video
Update franchisees. Funds are also used to pay Video Update for its actual
costs of operating an advertising department.
(3) GROSS MONTHLY AND QUARTERLY REVENUE DEFINED. "Gross Monthly Revenue"
is any income, excluding sales taxes and refunds, generated at the franchise
store location during the month from any source, including cash sales, credit
sales when charged, rentals, exchanges, repairs and services. "Gross Quarterly
Revenue" is the total of any such revenue for any fiscal quarter.
(4) FINANCIAL POSITION AND GROSS MONTHLY REVENUE TO BE REPORTED. On or
before the tenth day of each month, you must deliver to Video Update an itemized
report of your Gross Monthly Revenue for the preceding month. Royalty and
advertising fees based upon the Gross Monthly Revenue for the preceding month
shall be submitted with the report.
(5) REFUNDS. The royalty fee and advertising fee are uniform as to all
persons currently acquiring a franchise and are not collected on behalf of nor
paid directly to any third party. Neither the royalty fee nor the advertising
fee is refundable.
(6) LATE PAYMENT CHARGES ON DELINQUENT FEES. Any royalty or advertising
fees and contributions which remain unpaid five (5) days after becoming due
shall bear interest on the principal amount owed at a rate the greater of one
and one-half percent (1-1/2%) per month, or the maximum rate permitted by the
law of the state where the franchise store is located, calculated on a daily
basis from the date the principal amount became due.
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<PAGE>
(7) AUDITS. You must submit monthly sales reports (which are broken down
by day), quarterly and annual financial statements, and tax returns to Video
Update. All such forms, statements and returns must be in a form approved by
Video Update. Video Update or any other designated party shall have the right
to audit your books, business records, sales reports, financial statements and
tax returns at any time.
Upon the completion of your first full fiscal year, you shall obtain, at
your expense, a certified audit of your business. You must furnish Video Update
with the results of the audit within ninety (90) days of the end of your fiscal
year.
Any other audits shall be conducted at Video Update's expense, unless you
willfully understate by more than two percent (2%) of the Gross Revenue for any
reported period or periods. Your willful failure to report Gross Revenue for any
time period shall be deemed a willful understatement if understated by more than
two percent (2%). In the event of a willful understatement, you shall reimburse
Video Update for audit costs, including the expenses and charges of any
independent accountant and the travel expenses, room, board and compensation of
Video Update's employees incurred in connection with the audit.
(8) TRANSFER FEES. You or your transferee shall pay Video Update Five
Thousand Dollars ($5,000) to reimburse Video Update for legal, accounting,
credit and investigative expenses related to an authorized transfer of the
franchise. If Video Update obtains the transferee for the franchise, you shall
pay Video Update a ten percent (10%) commission on the gross transfer price paid
to you.
7. INITIAL INVESTMENT
Based upon the experience of the Video Update franchises operating as of
the date of this Offering Circular, the following figures are a reasonable
estimate of your initial investment expenditures. Initial inventories of movies
and games, and certain merchandise items bearing the title of Video Update's
Private Labels (as specified in the Operations Manual) must be purchased either
from Video Update or from sources approved in writing by Video Update. Other
than the Initial Franchise Fee, the initial inventory of movies and games, the
Private Label inventory and advertising fee indicated in the table, none of the
initial investment expenditures are paid to Video Update or parties affiliated
with Video Update. They are paid to third parties selected by you at the time
and on the terms you negotiate. The initial investment expenditures will
generally be paid prior to the opening of the franchise store for business. You
are solely responsible for all initial investment expenditures and for obtaining
financing for them.
7
<PAGE>
YOUR ESTIMATED INITIAL INVESTMENT
To Whom
Payment is
Type of Fee Amount Payment When Due to be Made
- ----------- ------ ------- -------- ---------
Initial Fee $29,500(1) Lump Sum At signing of the Video Update
Franchise
Agreement
Real Property- $7,500 to Note(2) Note(2) Note(2)
3 months $30,000(2)
Equipment, $65,000 to Lump Sum Prior to Opening Vendors
Fixtures, Fixed $150,000(3)
Assets,
Leasehold
Improvements
and Decorating
Beginning $115,000 to Lump Sum Prior to Opening Video Update
Inventory $150,000(4)
Security $5,000 to As Incurred As Incurred Vendors and
Deposits, $25,000(5) Utilities
Prepaid Expenses,
Working Capital
Insurance $1,000 to Lump Sum Prior to Opening Insurance
$2,500(6) Companies
Additional Funds- $4,000 to As Incurred As Incurred Vendors,
3 months $12,000(7) Suppliers,
Employees
TOTAL $227,000 to
$399,000(8),(9)
(1) See Item 5 for the conditions when this fee is refundable. In
instances where this fee is refundable, you will be responsible for
paying Video Update's expenses and service fees (calculated at the
rate of $75 per hour) incurred in connection with your Franchise
Agreement.
(2) You are solely responsible to obtain and pay for a location for the
franchise store. Generally, the franchise store will be located on
leased property. In some instances, Video Update may lease property it
owns or sublet property it is currently leasing to various
franchisees. Lessors may require some rent payments and security
deposits in advance. The amounts of lease payments and security
deposits vary with the location and size of the premises; rent is
8
<PAGE>
estimated from $2,500 to $10,000 per month. The recommended store size
is at least 5,000 square feet, excluding storage and office space, in
a major metropolitan market and 4,000 square feet in a second tier
city.
(3) Shelving, signs and computer systems must be obtained from vendors
approved by Video Update in writing to insure that these fixtures and
equipment are in conformity with Video Update's standard requirements.
(See Item 8 of this Offering Circular.) Video Update has also
developed requirements relating to merchandise, supplies, equipment,
stationery, business forms, store layout and decor materials. These
requirements are outlined in the Operations Manual. These requirements
are subject to occasional variations depending upon individual
franchise circumstances. You must purchase and have in stock all
items specified in the Operations Manual at all times. Video Update
may, if requested, provide supplies, fixtures and decor materials to
you at Video Update's established wholesale prices.
(4) The initial inventory of movies and games for your store must be
purchased from Video Update to insure an appropriate selection and
quality of movies and games. (See Item 8.) You must also purchase
certain video merchandise that bears Video Update's Private Labels (as
specified in the Operations Manual). Inventory and merchandise
bearing Video Update's Private Labels must be obtained from sources
approved in writing by Video Update. You may obtain all other
required inventory, supplies, fixtures and decor items from any source
so long as you conform to the specifications for such items set forth
by Video Update in the Operations Manual. The total cost for all of
these beginning inventory items will range from $115,000 to $150,000
and must be financed by you.
(5) Telephone, alarm and electric companies often require security
deposits. Video Update suggests that you have, at a minimum, from
$5,000 to $25,000 as a reserve for initial working capital in addition
to security deposits, rental payments, inventory, equipment and
fixture costs.
(6) You are required to insure Video Update against any claims for loss or
damage to persons or property arising from the franchise operation. If
Video Update is sued for such loss or damage, the action shall be
defended at your expense.
(7) You can expect to have other usual business expenses involved in
establishing a business during your first three months of operation.
These expenses vary greatly and include attorneys' fees, license
costs, accounting fees, insurance premiums and deposits, sales tax
bonds (where applicable), pre-opening advertising and recruiting
expenses, employee wages, utility costs, supply expenses, and
miscellaneous costs to secure the lease, fixtures and initial
inventories.
(8) Video Update has relied on its 12 years of experience in the videotape
rental business to compile these estimates. You should review these
figures carefully with a business advisor before making any decision
to purchase the franchise.
9
<PAGE>
(9) Video Update does not offer financing to franchisees, either directly
or indirectly, for any purpose. The availability and terms of
financing will depend on various factors, including the availability
of financing generally, your credit-worthiness, security available to
you, lending institution policies concerning the type of business to
be operated by you and other comparable elements.
8. RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES
A. ADVERTISING, INVENTORY, REAL PROPERTY, FIXTURES, SIGNS,
BUSINESS FORMS, OFFICE SUPPLIES AND MERCHANDISING SPECIFICATIONS.
(i) ADVERTISING. Imprudent advertising may tend to reduce
the effectiveness of Video Update's national and regional advertising efforts
and may adversely affect Video Update's business image. Therefore, advertising
using the names or proprietary marks of Video Update must be approved in writing
by Video Update. The name "Video Update" may not be combined with any other name
or words, and Video Update's proprietary marks and names must be used in exact
conformity with specifications set by Video Update.
(ii) INVENTORY. Video Update stocks inventory and supply
items. From time to time, Video Update also approves other vendors of such items
in writing. You are required to purchase all of your initial inventory of
movies and games from Video Update; thereafter, you may purchase additional
movies and games from vendors of your choice. You are also required to purchase
Video Update's Private Label merchandise from approved vendors. You may sell
this Private Label merchandise at retail from the franchise location only.
Suggested inventory levels are set forth in the Operations Manual.
(iii) REAL PROPERTY AND FIXTURES. You are obligated to
purchase or lease real property, shelving, signs and other improvements from
sources approved by Video Update in writing. It is your obligation to determine
the site of the franchise store within the franchise territory. Final written
approval of the franchise location, however, must be received from Video Update.
All leases entered must include:
(a) A clause restricting your use of the premises
solely to the operation of the franchised business;
(b) A clause prohibiting you from subleasing or
assigning the lease without Video Update's prior consent;
(c) A clause granting Video Update the right to
enter the premises and to make modifications necessary to
protect Video Update's Proprietary Marks;
(d) A term clause indicating that the initial term
of the lease shall be at least as long as the initial term of
the Franchise Agreement;
10
<PAGE>
(e) A clause requiring the landlord to notify Video
Update in writing of any deficiency in your performance of
lease obligations; and
(f) A clause permitting Video Update the right to
assume your occupancy rights, including the right to assign or
sublease the premises, in the event the lease is terminated.
(iv) OPERATIONS MANUAL AND OTHER FRANCHISE STANDARDS. An
Operations Manual will be loaned to each franchisee upon payment in full of the
Initial Franchise Fee. (See Appendix 4 for a copy of the Table of Contents of
the Operations Manual.) The Operations Manual shall remain confidential and the
property of Video Update. You must not copy or duplicate any part of the
Operations Manual for any reason. You shall restrict the availability of the
Operations Manual, and the information contained in it, to employees and other
persons as authorized by Video Update. You shall not remove the Operations
Manual from the franchise premises and shall promptly update the Operations
Manual with materials as periodically furnished by Video Update. You shall,
within ten (10) days of the expiration or termination of the franchise, return
the Operations Manual to Video Update. You will be subject to various legal
remedies, including possible injunctions or monetary damages, for the improper
use of or failure to return the Operations Manual.
Video Update will add to and otherwise modify the
Operations Manual as it deems necessary to maintain the quality standards of the
franchise business. No modification or addition shall materially affect your
rights under the Franchise Agreement. Additions and/or modifications to the
Operations Manual may include, among other things, standards in employee dress,
store layout and decor, sales promotion, consumer guarantees, pledges, store
hours, holidays, employee benefit programs and sales incentive programs.
You are required to comply with the Operations Manual
and any changes made to it in the future. Franchisees may not deviate from the
prescribed procedures and rules contained in the Operations Manual without the
prior written consent of Video Update.
(v) NAME MATERIALS. Video Update has set specifications
for materials which carry its proprietary marks and brand names, such as sacks,
signs and video merchandise. These items may be purchased from vendors approved
by Video Update in writing. You must comply with all specifications for quality
and name use established by Video Update.
(vi) COMPUTER SYSTEMS. You are required to install and
use accounting, inventory control and sales register computer systems. You must
lease, purchase or otherwise acquire, from sources acceptable to Video Update
and at your expense, computer hardware (including but not limited to cash
registers) which strictly conforms to specifications set from time to time by
Video Update. You must also acquire and utilize Video Update's "point of sale"
software system. Your total purchase cost for computer hardware and software
should range from $15,000 to $30,000.
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<PAGE>
B. VIDEO UPDATE SPECIFICATIONS. All specifications required by Video
Update will be published in the Operations Manual. Video Update will use its
best judgment in setting and modifying specifications to maintain the quality
and integrity of the franchise system.
C. APPROVED SUPPLIERS. Video Update will approve suppliers to you from
time to time. You shall purchase merchandise bearing Video Update's Private
Labels from approved suppliers only. Such merchandise includes, for example,
Video Update receipt forms and uniforms.
Video Update does not participate in any purchasing or distribution
cooperatives.
D. INSURANCE. You must at all times maintain in force, at your expense,
appropriate fire and extended coverage, vandalism, malicious mischief, general
liability and products liability insurance. This insurance must be in an amount
sufficient to replace your business premises, inventory and other business
assets in the event of loss or damage. Liability insurance must be in an amount
not less than $2,000,000 for each person and $2,000,000 for each occurance of
bodily injury and property damage combined. All policies of insurance must
contain a separate endorsement naming Video Update as an additional insured and
must be obtained from insurance companies approved in writing by Video Update.
E. INCOME TO VIDEO UPDATE FROM PURCHASES FROM IT OR FROM APPROVED
SUPPLIERS.
Video Update will derive income through mark-ups in the prices it charges
to you for goods and services. This income may be in the form of rebates, price
adjustments or discounts on products or services sold to you by approved
suppliers. Video Update may also receive advertising allowances, free goods and
other incentives for selling merchandise to its franchisees. Video Update may
additionally earn sales commissions or volume discounts for introducing
franchisees to certain vendors or suppliers of fixtures, signs, registers,
carpets, showcases, stationery, insurance, merchandise inventory, and other
products or services.
It is estimated that the required purchases from Video Update total from
40% to 65% of the cost to establish a franchise and 6% to 10% of the annual
operating expenses thereafter. These figures are based upon the range of actual
franchise expenses together with volume projections for sales of newly
introduced name brand products. Each franchisee's experience may vary
significantly depending upon actual sales volume.
During the fiscal year ending April 30, 1995, Video Update's revenue from
the sale of advertising, inventory, Private Label merchandise and other items to
franchises totalled approximately $422,000, or approximately 4.7% of Video
Update's total revenues of $9,051,000.
9. FRANCHISEE'S OBLIGATIONS
The table below lists your principal obligations under the Franchise
Agreement. It will help you find more detailed information about your
obligations in the Franchise Agreement and in other items of this Offering
Circular.
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<PAGE>
<TABLE>
<CAPTION>
OBLIGATIONS SECTION IN FRANCHISE AGREEMENT ITEM IN OFFERING CIRCULAR
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
a. Site selection and Sections 9 and 10 Items 10 and 11
acquisition/lease
b. Pre-opening purchases/ Section 11 Item 7
leases
c. Site development and Sections 11, 12 and 14 Items 7 and 8
other pre-opening
requirements
d. Initial and ongoing Sections 24 and 25 Item 11
training
e. Opening Section 10 Item 5
f. Fees Sections 3, 4, 5, 6 and 8 Items 5, 6 and 7
g. Compliance with stand- Sections 11 and 13 Item 8
ard sand policies/
Operating Manual
h. Trademarks and pro- Sections 15-19 Items 13 and 14
prietary information
i. Restrictions on products Section 11 Item 16
/services offered
j. Warranty and customer Section 13 Item 8
service requirements
k. Territorial development Sections 1 and 2 Item 12
and sales quotas
l. Ongoing product/ Section 11 Item 8
service purchases
m. Maintenance, Section 13 Item 8
appearance and re-
modeling requirements
n. Insurance Section 31 Item 7
o. Advertising Sections 5 and 20 Items 6 and 11
p. Indemnification Section 31 Items 6 and 7
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<PAGE>
q. Owner's participation/ Section 13 Item 15
management/staffing
r. Records/reports Section 7 Item 6
s. Inspections/audits Section 8 Item 6
t. Transfer Sections 33 and 36 Item 17
u. Renewal Section 34 Item 17
v. Post-termination Section 37 Item 17
obligations
w. Non-competition Sections 28 and 29 Item 17
covenants
x. Dispute resolution Sections 40 and 41 Item 17
</TABLE>
10. FINANCING
Video Update does not offer or supply, either directly or indirectly, any
financing to franchisees for any reason. Video Update makes no representations
as to your ability to secure financing for the franchise enterprise or as to the
terms of such financing.
11. FRANCHISOR'S OBLIGATIONS
Except as listed below in this Item 11, Video Update is not obligated to
provide any assistance to you.
A. OBLIGATIONS OF VIDEO UPDATE PRIOR TO THE OPENING OF THE FRANCHISE
BUSINESS.
Video Update will lend you an Operations Manual upon payment in full of the
Initial Franchise Fee. (Agreement, Section 11.) A copy of the Table of Contents
to the Operations Manual is attached to this Offering Circular as Appendix 4.
You are responsible for determining the site of the franchise store within the
franchise territory, subject to the written approval of Video Update. If you
request store site location assistance, Video Update will provide reasonable
assistance, as requested, to aid in finding a location acceptable to you.
(Agreement, Section 9)
Video Update will, upon request, provide to you a list of recommended or
approved sources for merchandise and supplies. You must use such sources for
Video Update's Private Label video merchandise. (Agreement, Sections 11, 21 and
22)
Video Update will provide a mandatory five-day training course at a
location to be chosen by Video Update. Your manager must attend the course
prior to the opening of the franchise store. Any additional replacement managers
must also complete the course. Reasonable transportation and
14
<PAGE>
lodging expenses for the original manager only will be paid by Video Update. All
expenses related to training replacement managers will be paid by you.
(Agreement, Section 24)
At your request, Video Update will supply a trainer to work in your store
and train you and your employees for up to two (2) work days. You will be
required to pay all the trainer's expenses. (Agreement, Section 24)
Upon your written request, and at Video Update's expense, Video Update will
provide you with appropriate grand opening promotion advertising consisting of
movie posters and pamphlets. (Agreement, Section 23)
B. OTHER PRE-OPENING SUPERVISION AND ASSISTANCE OFFERED BY VIDEO UPDATE.
Except as expressly indicated herein, Video Update does not offer supervision,
assistance or services prior to the opening of the franchise business.
C. OBLIGATIONS OF VIDEO UPDATE DURING THE TERM OF THE AGREEMENT. Video
Update will continually update and maintain the Operations Manual. (Agreement,
Section 11) Video Update will inspect the franchise premises from time to time.
It will conduct activities to insure compliance with the terms of the Franchise
Agreement and the Operations Manual to assure consistent quality and service
throughout the franchise system. (Agreement, Section l3D)
Video Update will use the Advertising Fees received from franchisees for
the purchase and production of franchise advertising, decor items and
newsletters. Video Update also will provide artwork for advertising, decor
items and periodic newsletters for the benefit of Video Update franchisees.
Video Update's internal artwork, advertising and newsletter preparation and
production costs will be calculated at rates established by Video Update.
Advertising using the names or proprietary marks of Video Update must be
approved in writing by Video Update. For further information, see Items 6, 8
and 9 of this Offering Circular. (Agreement, Section 20)
You may, at your option and upon not less than fourteen (14) days' prior
written notice to Video Update, receive additional training at a location Video
Update may designate. The training will consist of visiting with the management
and staff of successful franchisees and will include in-store work experience
and first-hand observation of franchise operations. You must bear all expenses
of attending, including travel, lodging and meals. (Agreement, Section 25)
Video Update will provide a periodic newsletter to inform franchisees of
matters of importance to the franchise operation and to give suggestions and
advice. (Agreement, Section 25)
D. OTHER ASSISTANCE TO FRANCHISEES. Although not obligated to do so by
the Franchise Agreement or any other agreement, Video Update may offer advice,
make suggestions and answer questions through its managing officers and
employees.
E. SELECTION OF THE LOCATION FOR YOUR BUSINESS. Although it is your
obligation to determine the site of the franchise store within the franchise
territory, Video Update will, upon
15
<PAGE>
request, aid in the selection process through advice and information on location
selection and negotiation of leases. In assisting you in selecting a franchise
site, Video Update considers such factors as traffic patterns, population
density and ease of access. All other site selection and negotiation expenses
shall be borne by you. (Agreement, Section 9)
F. THE LENGTH OF TIME BETWEEN THE SIGNING OF THE FRANCHISE AGREEMENT OR
FIRST PAYMENT OF CONSIDERATION FOR THE FRANCHISE AND THE OPENING OF YOUR
BUSINESS. The length of time between signing the Franchise Agreement, which is
the date of the payment of the Initial Franchise Fee, and the opening of your
business may vary from seven (7) days to a maximum allowable one hundred eighty
(180) days. Factors affecting this length of time include, among other things,
obtaining and preparing a site, arranging financing, receiving training and
stocking merchandise and supplies. (Agreement, Section 10)
For multiple franchise purchases, the maximum time allowed to open your
business is as follows:
1st Franchise Store 180 days
2nd Franchise Store 9 months
3rd Franchise Store 12 months
4th Franchise Store 15 months
5th Franchise Store 18 months
6th Franchise Store 21 months
7th Franchise Store 24 months
8th Franchise Store 27 months
9th and all other Franchise Stores 30 months
G. VIDEO UPDATE'S TRAINING PROGRAM. You are expected to know how to
operate a business before entering into the Franchise Agreement. Video Update
will, however, provide training courses at locations to be chosen by Video
Update to assist you in the start-up and ongoing operation of your business.
The following table summarize Video Update's training obligations:
<TABLE>
<CAPTION>
HOURS OF HOURS OF ON
INSTRUCTION CLASSROOM THE JOB
SUBJECT TIME BEGUN -AL MATERIAL TRAINING TRAINING(4) INSTRUCTORS(5)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mandatory 14 to 30 Operations None 40 hours D.C.Howard
Pre-Opening days before Manual B.D.Carlson
Training store M.G.Schifsky
for opening R.P. Bedard
Managers(1)(2)
Optional At your Operations None Up to 40 Same
Training request Manual hours
for
Franchise
Employees(3)
</TABLE>
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<PAGE>
(1) Your manager must attend this course prior to the opening of your franchise
store. You must request Video Update to schedule a training session at
least fourteen (14) days before the session is to start. The manager's
reasonable transportation, lodging and training expenses will be paid by
Video Update. (Agreement, Section 24)
(2) Depending upon the particular needs of your franchise, as determined by
Video Update, this course will cover employee guidelines, customer
relations, general business operations including retail sales and rental
practices, franchise systems management, bookkeeping and financing
management, inventory control and purchase, security practices and
equipment operations.
(3) Upon your request, Video Update will also provide, at your expense, a
trainer to train you and your employees in customer relations, business
management and use of the Operations Manual. This training will take place
for up to five (5) full days. This training will cover the same subject
areas described in note (2) above. (Agreement, Sections 24 and 25)
(4) All training by Video Update will take place at a company store operated by
Video Update.
(5) The employment history and experience of Video Update's current training
instructors who are available to train, supervise and consult with new and
existing franchises are set forth in Item 2 of this Offering Circular.
Additional training instructors will be added at such times as Video Update
deems necessary.
12. TERRITORY
A. DESCRIPTION OF YOUR TERRITORY. You will be granted an exclusive
territory. The typical franchise territory will be a circular area having a
one-mile radius from the location of the franchise store.
Prior to signing the Franchise Agreement, the applicable territory will be
described by:
(i) Inserting a description and boundaries of the territory in the
Franchise Agreement; or
(ii) Attaching a map or other description of the territory as an
exhibit to the Franchise Agreement.
B. USE OF VIDEO UPDATE'S NAMES OR PROPRIETARY MARKS IN TERRITORY. Video
Update will not license anyone other than you to use Video Update's names or
proprietary marks in your exclusive geographical territory.
C. VIDEO UPDATE'S COMPANY-OWNED OUTLETS. Video Update has not and will
not establish company-owned outlets using Video Update's names or proprietary
marks in the territory granted to you without your advance written permission.
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<PAGE>
D. ESTABLISHMENT OF OTHER FRANCHISEES OR COMPANY-OWNED OUTLETS. Video
Update has not and may not establish within the franchised territory, other
franchises or company-owned outlets to sell or lease goods or services similar
to or in competition with your franchise, under the same or different trade
names or proprietary marks, except with your advance written permission.
E. CONTINUATION OF YOUR TERRITORY. The continuation of your exclusive
area or territory is not dependent upon achievement of a certain sales volume or
market penetration.
F. ONLY ONE FRANCHISE STORE IN A TERRITORY. You are required to operate
the franchise business at one location only within the franchise territory.
Relocation of the operation within a territory shall require Video Update's
written approval, which approval will not be unreasonably withheld. You may not
transact franchise business except at the franchise business location.
Your territory may be altered only by mutual written agreement between you
and Video Update.
13. TRADEMARKS
A. REGISTRATION OF PROPRIETARY MARKS. Video Update has been granted
registration by the United States Patent and Trademark Office and by the
Register of Trade Marks of Canada for its Service Marks "VIDEO UPDATE," (United
States Registration No. 1,297,231; Canadian Registration No. 309991) "KEEPING IN
TIME WITH YOU." (United States Registration No. 1,303,251; Canadian Registration
No. 305160) the YIPPIDY character design, (United States Registration
No. 1,297,233; Canadian Registration No. 305161) and a composite mark using
VIDEO UPDATE, YIPPIDY characters, and the slogan KEEPING IN TIME WITH YOU
(United States Registration No. 1,297,299; Canadian Registration No. 306309).
The United States registrations are on the Principal Trademark Register of the
United States. A registration application for the mark "GAMESTERS" is
presently pending with the United States Patent and Trademark Office.
You are not authorized to use these proprietary marks except in strict
compliance with the Franchise Agreement and the Operations Manual.
B. NO DETERMINATIONS, ORDERS, OR LITIGATION INVOLVING NAMES OR MARKS. No
adverse determinations have been made by the United States Patent Office, the
Canadian Patent Office, by the Trademark Office of this state or by any court
with respect to the proprietary marks. There is no pending interference,
opposition or cancellation proceeding nor litigation involving the proprietary
marks.
C. AGREEMENTS LIMITING THE USE OF THE PROPRIETARY MARKS. Video Update
has not entered into any agreements which limit its rights to use or license to
use the proprietary marks.
D. PROTECTION OF PROPRIETARY MARKS. Video Update will protect your rights
to use the franchise trade name and proprietary marks. In the event of any
infringement of, or challenge to, your
18
<PAGE>
use of the franchise trade name or proprietary marks, you are obligated to
notify Video Update immediately, which will have sole discretion to take such
action as it deems appropriate.
You are obligated to modify or discontinue use of any name or mark or to
use one or more substitute names or marks, if it becomes advisable at any time
in the sole discretion of Video Update. The sole obligation of Video Update in
any such event will be to reimburse you for the tangible costs of complying with
this obligation.
E. NO KNOWN INFRINGING USE OF THE PROPRIETARY MARKS. Video Update has
secured a federal registration for each of the proprietary marks named above,
with the exception of the "GAMESTERS" mark for which an application is pending.
Video Update is not aware of any infringing uses which could materially affect
your use of the proprietary marks in this state.
14. PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
Item 11 of this Offering Circular describes the Operations Manual and the
manner in which you are permitted to use it. Although Video Update has not
filed an application for a copyright registration for the Operations Manual, it
claims a copyright and the information is proprietary. You must tell us
immediately if you learn about any misuse of the Operations Manual or
infringement of Video Update's copyright. Video Update is not obligated to take
any action, but will respond to any infringement as it deems appropriate.
15. OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS
You are not required to participate personally in the direct operation of
the franchise business. You are free to hire on-site supervisors and managers
at your discretion. The identity of such managers or supervisors must be made
known to Video Update in writing at the time they are initially employed. Your
manager will be expected to complete successfully Video Update's training
program described in Item 11.
16. RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
You may offer only those goods and services authorized by law and not
prohibited by terms and provisions contained in the Operations Manual. The
Franchise Agreement provides that you must offer all the products and services
required by Video Update. You may sell products and services to retail
customers from your franchise location only.
Video Update may also establish standards for, among other things, sales
promotion, consumer guarantees, pledges, assurances, rights, sales privileges,
repair or service policies, and membership or exchange policies.
Video Update will use professional shopping services to monitor your
compliance with the Franchise Agreement. You must repurchase merchandise and
otherwise fully reimburse these
19
<PAGE>
shopping services for goods, services and other items they receive, lease or buy
from you in the process of verifying compliance. You must hold Video Update
harmless from any charges of this nature incurred by the shopping services.
Video Update will bear all other costs charged by the shopping services.
17. RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION
This table lists certain important provisions of the franchise and related
agreements. You should read these provisions in the Franchise Agreement
attached to this Offering Circular as Appendix 1.
<TABLE>
<CAPTION>
SECTION IN FRANCHISE
PROVISION AGREEMENT SUMMARY
- --------------------------------------------------------------------------------------------
<S> <C> <C>
a. Term of the franchise Section 1 Term is 10 years.
b. Renewal or extension of the Section 34(a) If you are not in default, you
term may renew the franchise for
two periods of five years each.
c. Requirements for you to Section 34(b) Sign new Franchise Agreement;
renew or extend there is no renewal fee.
d. Termination by you None
e. Termination by Video None
Update without cause
f. Termination by Video Section 35 Video Update may terminate
Update with cause your franchise only if you
default.
g. "Cause" defined - curable Section 35(a) You have 60 days to cure;
defaults curable defaults include failure
to submit reports,
noncompliance with Operations
Manual, etc.
h. "Cause" defined - defaults Section 35(b) Non-curable defaults include
which cannot be cured failure to pay fees to Video
Update, insolvency, violations
of law, etc.
20
<PAGE>
i. Your obligation on Section 37 Obligations include return of
termination/non-renewal Operations Manual,
discontinuance of use of
trademarks, payment of
remaining fees, etc. (See also
Provision "r" below.)
j. Assignment of contract by Section 33 No restriction on Video
Video Update Update's right to assign
franchise.
k. "Transfer" by you - defined Section 33 Includes any transfer by sale,
assignment, gift or lease.
l. Video Update's approval of Section 33 Video Update's prior written
transfer by you consent is required for any
transfer.
m. Conditions for Video Section 33 Conditions include execution of
Update's approval of then-current Franchise
transfer Agreement, payment of $5,000
transfer fee, execution of
general release by you, etc.
n. Video Update's right of first Section 33 Video Update has 30-day right
refusal to acquire your of first refusal to purchase your
business business for the same bona fide
price offered to you.
o. Video Update's option to Section 36 Video Update has an option
purchase your business to purchase your business at a
mutually agreeable price upon
termination of the Franchise
Agreement.
p. Your death or disability Section 42 Your heirs have the same rights
and obligations under the
Franchise Agreement as you do.
q. Non-competition covenants Section 28 You may not compete with
during the term of the Video Update during the term
franchise of the franchise.
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<PAGE>
r. Non-competition covenants Section 29 You may not compete with
after the franchise terminates Video Update for one year
or expires following expiration or
termination of the franchise.
s. Modification of the Sections 42 and 50 No modifications generally, but
agreement Operations Manual is subject to
change.
t. Integration /merger clause Section 53 Only the terms of the Franchise
Agreement are binding.
u. Dispute resolution by Section 41 Except for certain claims, all
arbitration or mediation disputes must be arbitrated in
Minnesota.
v. Choice of forum Section 45 Litigation must be in
Minnesota.
w. Choice of law Section 45 The law where the franchise
business is located will apply.
</TABLE>
18. PUBLIC FIGURES
No public figure or personality is used in the name or symbol of the
franchise nor is there any endorsement or recommendation of the franchise by a
public figure in advertisements. No public figure or personality is involved in
the franchise in any way.
You may not use the name of a public figure or personality in promotional
efforts or advertising without Video Update's prior written approval.
19. EARNINGS CLAIMS
VIDEO UPDATE DOES NOT FURNISH OR AUTHORIZE ITS SALESPERSONS TO FURNISH ANY
ORAL OR WRITTEN INFORMATION CONCERNING THE ACTUAL OR PROJECTED SALES, COSTS,
INCOME OR PROFITS OF A VIDEO UPDATE FRANCHISE. ACTUAL RESULTS MAY VARY FROM
STORE TO STORE, AND VIDEO UPDATE CANNOT ESTIMATE THE RESULTS OF ANY PARTICULAR
FRANCHISE.
20. LIST OF OUTLETS
Set forth in Appendix 3 to this Offering Circular is a complete list of the
names of all franchises and the addresses and telephone numbers of all Video
Update outlets, including stores owned by Video Update. During the fiscal year
ended April 30, 1995, no Video Update franchises were terminated or cancelled,
nor did any franchise discontinue doing business.
22
<PAGE>
The following tables set forth additional information concerning Video
Update's franchises and company owned stores.
FRANCHISED
STORE STATUS SUMMARY
FOR YEARS 1995-1994-1993*
<TABLE>
<CAPTION>
REACQUIRED LEFT THE TOTAL FROM FRANCHISES
CANCELLED OR BY SYSTEM LEFT OPERATING
STATE TRANSFERS TERMINATED NOT RENEWED FRANCHISOR OTHER COLUMNS AT YEAR END
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minnesota 0/0/2 6/0/0 0/0/0 6/0/2 8/15/11
Pennsylvania 2/0/0 2/0/0 1/4/3
New Hampshire 3/3/1
Virginia 8/6/5
Indiana 1/1/0
Wisconsin 1/1/1
TOTALS: 0/0/0 0/0/0 0/0/2 8/0/0 0/0/0 8/0/2 22/30/21
</TABLE>
* All numbers are as of April 30 for each year.
STATUS OF COMPANY OWNED STORES
FOR YEARS 1995/1994/1993*
<TABLE>
<CAPTION>
STATE STORES CLOSED DURING STORES OPENED DURING TOTAL STORES OPERATING
YEAR YEAR AT YEAR-END
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minnesota 0/0/0 10/5/2 25/15/10
Pennsylvania 0/0/0 2/0/0 2/0/0
Washington 0/0/0 5/0/0 5/0/0
TOTALS: 0/0/0 17/5/2 32/15/10
</TABLE>
* All numbers are as of April 30 for each year.
23
<PAGE>
PROJECTED OPENINGS
BETWEEN 5/1/94 AND 4/30/95
<TABLE>
<CAPTION>
FRANCHISE PROJECTED FRANCHISED PROJECTED COMPANY
AGREEMENTS SIGNED NEW STORES IN NEXT OWNED OPENINGS IN
STATE BUT STORE NOT OPEN FISCAL YEAR NEXT FISCAL YEAR
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Minnesota 1 2 10
Pennsylvania 2
Missouri 4
Illinois 6
Wisconsin 1
Washington 5
TOTALS: 1 4 26
</TABLE>
21. FINANCIAL STATEMENTS
Attached as Appendix 2 are the Audited Financial Statements of Video Update
for the three fiscal years ended April 30, 1995, April 30, 1994 and April 30,
1993.
22. CONTRACTS
Attached as Appendix 1 is the Franchise Agreement and Exhibits A-C thereto.
There are no other lease agreements, option agreements, purchase agreements
or other contracts or agreements except as contained therein.
24
<PAGE>
RECEIPT
THIS OFFERING CIRCULAR SUMMARIZES CERTAIN PROVISIONS OF THE FRANCHISE
AGREEMENT AND OTHER INFORMATION IN PLAIN LANGUAGE. READ THIS OFFERING CIRCULAR
AND ALL AGREEMENTS CAREFULLY.
IF VIDEO UPDATE OFFERS YOU A FRANCHISE, VIDEO UPDATE MUST PROVIDE THIS
OFFERING CIRCULAR TO YOU BY THE EARLIEST OF:
(1) THE FIRST PERSONAL MEETING TO DISCUSS OUR FRANCHISE; OR
(2) TEN BUSINESS DAYS BEFORE THE SIGNING OF A BINDING AGREEMENT; OR
(3) TEN BUSINESS DAYS BEFORE A PAYMENT TO VIDEO UPDATE.
YOU MUST ALSO RECEIVE A FRANCHISE AGREEMENT CONTAINING ALL MATERIAL TERMS
AT LEAST FIVE BUSINESS DAYS BEFORE YOU SIGN A FRANCHISE AGREEMENT.
IF VIDEO UPDATE DOES NOT DELIVER THIS OFFERING CIRCULAR ON TIME OR IF IT
CONTAINS A FALSE OR MISLEADING STATEMENT, OR A MATERIAL OMISSION, A VIOLATION OF
FEDERAL AND STATE LAW MAY HAVE OCCURRED AND SHOULD BE REPORTED TO THE FEDERAL
TRADE COMMISSION, WASHINGTON, D.C. 20580, AND _____________________________.
VIDEO UPDATE HAS AUTHORIZED _____________________________________________
TO RECEIVE SERVICE OF PROCESS FOR VIDEO UPDATE.
I HEREBY ACKNOWLEDGE RECEIPT OF VIDEO UPDATE'S UNIFORM FRANCHISE OFFERING
CIRCULAR DATED _____________________________.
DATE: _____________________________
_____________________________________________
FRANCHISEE
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RECEIPT
THIS OFFERING CIRCULAR SUMMARIZES CERTAIN PROVISIONS OF THE FRANCHISE
AGREEMENT AND OTHER INFORMATION IN PLAIN LANGUAGE. READ THIS OFFERING CIRCULAR
AND ALL AGREEMENTS CAREFULLY.
IF VIDEO UPDATE OFFERS YOU A FRANCHISE, VIDEO UPDATE MUST PROVIDE THIS
OFFERING CIRCULAR TO YOU BY THE EARLIEST OF:
(1) THE FIRST PERSONAL MEETING TO DISCUSS OUR FRANCHISE; OR
(2) TEN BUSINESS DAYS BEFORE THE SIGNING OF A BINDING AGREEMENT; OR
(3) TEN BUSINESS DAYS BEFORE A PAYMENT TO VIDEO UPDATE.
YOU MUST ALSO RECEIVE A FRANCHISE AGREEMENT CONTAINING ALL MATERIAL TERMS
AT LEAST FIVE BUSINESS DAYS BEFORE YOU SIGN A FRANCHISE AGREEMENT.
IF VIDEO UPDATE DOES NOT DELIVER THIS OFFERING CIRCULAR ON TIME OR IF IT
CONTAINS A FALSE OR MISLEADING STATEMENT, OR A MATERIAL OMISSION, A VIOLATION OF
FEDERAL AND STATE LAW MAY HAVE OCCURRED AND SHOULD BE REPORTED TO THE FEDERAL
TRADE COMMISSION, WASHINGTON, D.C. 20580, AND _____________________________.
VIDEO UPDATE HAS AUTHORIZED _____________________________________________
TO RECEIVE SERVICE OF PROCESS FOR VIDEO UPDATE.
I HEREBY ACKNOWLEDGE RECEIPT OF VIDEO UPDATE'S UNIFORM FRANCHISE OFFERING
CIRCULAR DATED _____________________________.
DATE: _____________________________
_____________________________________________
FRANCHISEE
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Appendix 1
FRANCHISE AGREEMENT
THIS AGREEMENT, made and entered into this _____ day of ____________ 199__,
by and between Video Update, Inc. ("Franchisor"), and
_________________________________________ ("Franchisee").
WITNESSETH:
WHEREAS, Franchisor is die owner of various and several proprietary marks,
including but not limited to names, marks, logos, commercial symbols and styles,
"VIDEO UPDATE" and "YIPPIDY UPDATE", both in present and future forms as
designated by Franchisor; and
WHEREAS, Franchisor owns valuable good will and has valuable expertise,
trade secrets, methods, procedures, techniques, Operations Manuals, systems,
store layouts, Private Label merchandise and materials connected with the
operation, promotion and advertising of businesses which sell and rent video
supplies, tapes, equipment and related services to the public under the
Proprietary Marks, in forms both existing and as may be designated by the
Franchisor in the future (collectively, the "Method of Operation"); and
WHEREAS, Franchisee desires to operate a high caliber video store to sell
and rent quality video tapes, equipment, and services at retail to the public
and to use the Franchisor's Method of Operation and Proprietary Marks in
connection therewith; and
WHEREAS, Franchisor is willing to provide Franchisee with marketing,
advertising, operational and other confidential and proprietary business
information and know-how concerning the Method of Operation that has been
developed by Franchisor over time and at a significant cost to Franchisor; and
WHEREAS, Franchisee acknowledges that it would take substantial capital and
human resources to develop a high caliber video business similar to a "VIDEO
UPDATE" business and, as a result, desires to acquire the right to use the
Method of Operation and Proprietary Marks from Franchisor on the terms and
conditions set forth in this Agreement; and
WHEREAS, Franchisee acknowledges that Franchisor would not provide
Franchisee with any information or know-how about the Method of Operation or a
"VIDEO UPDATE" business unless Franchisee agreed to comply in all respects with
the terms and conditions of this Agreement, including those provisions relating
to the payment of certain fees, compliance with standards established by
Franchisor, the confidentiality of information, covenants against competitive
activities, obligations upon the termination or expiration of this Agreement,
and Franchisor's rights to obtain injunction relief; and
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WHEREAS, Franchisee has had a full and adequate opportunity to thoroughly
review the terms and conditions of this Agreement, and has had sufficient time
to evaluate and investigate both the Method of Operation and the financial
investment requirements associated with the Method of Operation;
NOW, THEREFORE, in consideration of the following promises and covenants,
the parties agree as follows:
1. GRANT OF FRANCHISE AND FRANCHISE TERRITORY. Franchisor hereby grants
to Franchisee, on the terms and conditions set forth below, the personal non-
exclusive franchise, license and privilege to use Franchisor's Proprietary
Marks, Private Label merchandise, and Method of Operation for a period of ten
(10) years from the date of this Agreement. Pursuant to this grant, and in
accordance with the terms and conditions set forth below, Franchisee undertakes
the obligation to operate one (1) "VIDEO UPDATE" retail store, the location of
which shall be determined according to the provisions contained in the "Site
Selection Addendum" attached as Exhibit A.
2. ONE LOCATION FOR FRANCHISED PREMISES. Franchisee shall do business
under this Agreement at only one location within the territory described in
Exhibit A. All land, buildings and improvements at the location, including
parking, are hereafter called the "Franchise Premises." Relocation of the
Franchise Premises shall require the Franchisor's written approval.
3. INITIAL FRANCHISE FEE. The Initial Franchise Fee shall be Nineteen
Thousand Five Hundred Dollars ($19,500.00). It is paid in consideration for the
Franchisor's sales expenses, administrative overhead, and start-up costs related
to the execution of the Franchise Agreement and the opening of the franchise
store. The entire sum of $19,500.00 is payable upon the Franchisor's acceptance
of the Franchise Agreement.
The Franchisee must commence performance of its obligations under the
Franchise Agreement upon the Franchisor's acceptance of the Franchise Agreement
and must secure a location satisfactory to Franchisor for the franchise business
within ninety (90) days of such date. The Franchisee must open the store
location for retail business within one hundred eighty (180) days of the
Franchisor's acceptance of the Franchise Agreement.
In the event the Franchisee is reasonably unable to secure a suitable
retail location within ninety (90) days following the Franchisor's acceptance of
the Franchise Agreement, the Franchisee may request a refund of the Initial
Franchise Fee less the Franchisor's expenses and service fees. The Franchisor's
expenses shall include the costs of store site evaluation, lease negotiations,
market research, travel, lodging, telephone and other reasonably related
expenses. The Franchisor's service fees shall be calculated at a rate of
Seventy-Five Dollars ($75.00) per hour dedicated to franchise store site
location and development.
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If the Franchisee obtains a store location within ninety (90) days
following the Franchisor's acceptance of the Franchise Agreement, or the
Franchisee elects not to request a refund as permitted above, the Initial
Franchise Fee shall thereafter be non refundable.
4. MONTHLY ROYALTY FEE. Except as provided below, the Franchisee is
required to pay the Franchisor a continuing monthly royalty fee equal to five
percent (5%) of Franchisee's Gross Monthly Revenue (as defined below) for the
preceding month. The Franchisee shall pay a continuing monthly royalty fee equal
to one percent (1%) of Franchisee's Gross Monthly Revenue derived specifically
from the sale of videocassette recorders and players, video cameras and
camcorders, televisions, blank tape, new and used movies, and head cleaners. The
obligation to pay monthly royalty fees begins and is calculated from the date
the Franchise store opens for business. This fee is due and payable on the tenth
day of each month for the preceding calendar month.
Commencing with the first full month following the first anniversary date
on which the Franchise store opened for business, the Franchisee shall pay the
Franchisor a minimum monthly royalty fee of Five Hundred Dollars ($500.00). The
minimum monthly royalty fee must be paid in advance on the first day of every
month throughout the remaining term of the Franchise Agreement. In addition, by
the tenth day of each month, the Franchisee shall pay the Franchisor the amount
by which five percent (5%) of the Franchisee's Gross Monthly Revenue plus one
percent (1%). of the Franchisee's Gross Monthly Revenue derived specifically
from the sale of the items listed above, for the preceding month exceeds the
minimum royalty fee payment.
5. ADVERTISING FEE. The Franchisee is required to pay the Franchisor a
monthly advertising fee equal to one percent (1%) of Franchisee's Gross Monthly
Revenue (as defined below) for the preceding month. For the purpose of
determining Advertising Fees due, Franchisee shall exclude from Gross Monthly
Revenue income derived from the sale of videocassette recorders and players,
video cameras and camcorders, televisions, blank tape, new and used movies, and
head cleaners. The obligation to pay the monthly advertising fee begins and is
calculated from the date the Franchise store opens for business. This fee is due
and payable on the tenth day of each month for the preceding calendar month.
Commencing with die first full month following the first anniversary date
on which the Franchise store opened for business, the Franchisee shall pay the
Franchisor a minimum monthly advertising fee of One Hundred Dollars ($100.00).
The minimum monthly advertising fee must be paid in advance on the first day of
every month throughout the remaining term of the Franchise Agreement. In
addition, by the tenth day of each month, the Franchisee shall pay the
Franchisor the amount by which one percent (1%) of the Franchisee's Gross
Monthly Revenue for the preceding month exceeds the minimum advertising fee
payment.
The Franchisee is required to expend, on a basis not less than quarterly,
an amount equal to three percent (3%) of Franchisee's Gross Quarterly Revenue
(as defined below), for advertising specific to Franchisee's individual retail
store operation. Advertising conducted by the Franchisee shall be in conformance
with the requirements contained in Section 20 of this Agreement. The Franchisee
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agrees to furnish the Franchisor with receipts evidencing such expenditures as
the Franchisor may request upon reasonable notice.
Except as specifically otherwise stated in paragraph 4 above and this
paragraph 5, as used in this Agreement, "Revenue" shall include any income,
excluding sales taxes and refunds, generated at the Franchise Premises from any
source including, but not limited to, sales, whether by cash or credit, and if
by credit, evidenced by sales as charged, not as collected, rentals, exchanges,
repairs, services, viewings, and labor service charges. "Gross Monthly Revenue"
means the total Revenue for any calendar month. "Gross Quarterly Revenue" means
the total Revenue for any fiscal quarter.
6. LATE CHARGE ASSESSED IF ROYALTY FEES OR ADVERTISING FEES NOT PAID
PROMPTLY. Any royalty or advertising fees and contributions which remain unpaid
five (5) days after becoming due shall bear a late charge equal to ten percent
(10%) of the amount owed plus interest on the principal amount owed at a rate
the greater of one and one-half percent (1-1/2%) per month, or the maximum rate
permitted by the law of the state where the Franchise store is located,
calculated on a daily basis from the date the principal amount became due. The
Franchisor's right to collect late charges and interest shall be in addition to,
and not exclusive of, any other remedies available to the Franchisor under this
Agreement or at law or equity.
To verify accurate payment, Franchisee shall submit current sales, service
and leasing reports, financial statements, and tax returns to Franchisor at such
time intervals as Franchisor may reasonably demand.
7. RECORDS. Franchisee agrees to keep a complete and accurate set of
books and records of the franchise operation, to produce quarterly financial
statements, signed by the Franchisee and attested to be true and correct, in
accordance with generally accepted accounting principles and to furnish copies
of these statements to the Franchisor within sixty (60) days after the end of
each quarter. Franchisee shall furnish to the Franchiser, on or before the tenth
day of each month, an itemized report of the Gross Monthly Revenue for the prior
month. This report shall be broken down by day, shall be in the form set forth
in the Operations Manual and shall be certified by Franchisee to be true and
correct.
Franchisee shall, at Franchisee's expense, within ninety (90) days after
the end of Franchisee's first fiscal year, provide the Franchisor with a
certified, audited financial statement of the Franchisee's business operation.
Thereafter, the Franchisee shall submit, at the Franchisor's discretion and
request, fiscal year and profit and loss statements and balance sheets within
ninety (90) days after the end of the Franchisee's fiscal year. The Franchisee
shall use the calendar year as its fiscal year.
Franchisee shall keep records of all business done and Revenue received at
the Franchise Premises. These records shall include, but are not limited to,
order sheets, cash register tapes, sales and rental agreement forms, tax
returns, financial statements and invoices. Franchisee shall date, file in
consecutive order, retain for a period of six (6) years, and make available to
Franchisor for inspection and audit during normal business hours all of
Franchisee's records.
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All records, reports, statements and returns required by Franchisor shall
be prepared and maintained in the form or format established by Franchisor.
8. AUDITS. In addition to the audit required in paragraph 7, Franchisor,
or any other party designated by Franchisor, may audit the Franchisee's reports,
books, statements, business records and tax returns. Audits shall be conducted
at Franchisor's expense unless Franchisee willfully understates the Gross
Monthly Revenue for any reported period or periods by more than two percent (2%)
or unless Franchisee willfully fails to timely deliver any required report of
Gross Monthly Revenue or any required financial statement. In the event of such
an understatement or failure to deliver, Franchisee shall reimburse Franchisor
for all audit costs. These shall include, among other things, the charges and
expenses of any independent accountant and the travel expenses, room, board and
compensation of Franchisor's employees incurred in connection with the audit.
The remedies contained in this Section are in addition to and not exclusive of,
any other remedies the Franchisor may have under this Agreement or at law or
equity.
9. FRANCHISOR TO ASSIST IN LEASE LOCATION. Franchisee is responsible to
determine the location of the Franchise Premises within the franchise territory.
Final written approval of the franchise location, however, must be received from
Franchisor. Franchisor does not warrant or guaranty the success of a "Video
Update" business operated at a location identified, reviewed, or approved by
Franchisor. If Franchisee requests assistance in selecting a site for the
Franchise Premises, Franchisor will provide, subject to the availability of
Franchisor's personnel, reasonable assistance to aid in finding a location
acceptable to the Franchisee. All site selection and negotiation expenses shall
be borne by Franchisee.
Franchisee shall, before entering into any lease for a franchise location,
obtain Franchisor's approval of the lease agreement to be signed. The lease
agreement shall include, along with other standard provisions, the following:
a. A clause restricting the Franchisee's use of the premises solely
to the operation of the franchised business;
b. A clause prohibiting the Franchisee from subleasing or assigning
the lease without the Franchisor's prior consent;
c. A clause granting the Franchisor the right to enter the premises
and to make modifications necessary to protect the Franchisor's Proprietary
Marks;
d. A term clause indicating that the initial term of the lease shall
be at least as long as the initial term of the Franchise Agreement;
e. A clause requiring the landlord to notify the Franchisor in
writing of any deficiency in the Franchisee's performance of lease obligations;
and
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f. A clause permitting the Franchisor the right to assume the
Franchisee's occupancy rights, including the right to assign or sublease the
premises, in the event the lease is terminated.
10. FRANCHISEE TO COMMENCE FULL OPERATION. Franchisee shall obtain a
franchise store location acceptable to Franchisor within ninety (90) days of
Franchisor's acceptance of this Franchise Agreement. Franchisee shall commence
full and continuous operation of the franchise store within one hundred eighty
(180) days after Franchisor's acceptance of this Agreement. All other
obligations of Franchisee under this Agreement shall commence upon Franchisor's
acceptance of this Agreement.
In the event Franchisee fails to obtain a store location suitable to
Franchisor within ninety (90) days following Franchisor's acceptance of this
Agreement, Franchisee may request, and Franchisor shall provide, a refund of
Franchisee's Initial Franchise Fee less Franchiser's expenses and service fees
related to the location and development of the franchise store. Franchisor's
costs shall include, but not be limited to, the cost of store site evaluation,
lease negotiations, market research, travel, lodging, telephone and other
related expenses. The Franchisor's service fees shall be calculated at a rate of
Seventy-Five Dollars ($75.00) per hour dedicated to franchise store location and
development.
In the event Franchisee shall obtain a franchise store location suitable to
Franchisor within ninety (90) days of Franchiser's execution of this Agreement,
or Franchisee fails to request a refund of Franchisee's Initial Franchise Fee,
the Initial Franchise Fee shall thereafter be non refundable.
11. OPERATIONS MANUAL, MINIMUM INVENTORY, SUPPLIES,. DECOR AND STORE
LAYOUT. Franchisor develops minimum requirements for bookkeeping systems,
merchandise, inventory, supplies, stationery, business forms, advertising,
decor, store layout, materials, fixtures, and signs, among other things. These
requirements are outlined in the Operations Manual. Initial inventory items
purchased from Franchisor shall be delivered prior to the opening of the
Franchise Premises for business.
Franchisor agrees to lend Franchisee a copy of the Operations Manual upon
payment in full of the Initial Franchise Fee. The Operations Manual contains the
Method of Operation, including specifications, standards, operating procedures,
accounting and bookkeeping methods, marketing ideas, inventory requirements and
control techniques, store layout, fixture and decor requirements and other rules
and procedures prescribed from time to time by Franchiser. The Operations Manual
is and shall remain confidential and exclusive property of Franchisor. The
Franchisee shall not copy or duplicate any part of the Manual for any reason.
Franchisee shall restrict the availability of the Operations Manual, and the
information contained in it to Franchisee's employees and other persons as
authorized by Franchisor. Franchisee shall not remove die Operations Manual from
the Franchise Premises and shall promptly update the Operations Manual with
materials as periodically furnished by Franchisor. Franchisee shall, within ten
(10) days of the expiration or termination of this Agreement, return the
Operations Manual to Franchisor.
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Franchisee recognizes that the information, methods and systems contained
in the Operations Manual are fundamental to the success of Franchisor and the
entire network of Franchisor's franchised businesses. Improper or unauthorized
use or retention of the Operations Manual during the term of this Agreement or
upon its expiration or termination could cause irreparable harm to Franchiser
and its other franchisees. Franchisee agrees that in the event Franchisor
determines Franchisee has permitted such improper or unauthorized use, or if
Franchisee fails to return to Franchiser the Operations Manual as required
above, Franchiser shall be entitled to, and Franchisee shall acquiesce in,
without claim or defense, an injunction restraining such improper or
unauthorized use and/or a decree of specific performance ordering a return of
the Operations Manual. Franchisor shall be entitled to these remedies without
showing or proving any actual damages. Such remedies shall be in addition to,
and not exclusive of, any other judgment for damages or remedies at law or in
equity.
Franchisee shall adhere to the inventory and supply requirements specified
in the Operations Manual. The specified inventory and supplies include certain
video merchandise, supplies and inventory bearing Franchiser's "Private Label."
Franchisee must purchase required Private Label items from suppliers approved in
advance by Franchiser. The list of approved suppliers may include Franchiser. If
Franchisee purchases private label items or any other required inventory or
supplies from Franchiser, Franchisor will sell the inventory, supplies and items
at Franchiser's then-current wholesale prices. Payment to Franchiser for such
sales shall be made upon placement of Franchisee's order.
Except for those items bearing Franchiser's Private Labels, Franchisee may
obtain any other required inventory and supply items from sources of
Franchisee's choosing, so long as Franchisee conforms to the specifications for
such items set forth in the Operations Manual.
All sales by Franchisee of items specified in the Operations Manual shall
be restricted to the Franchise Premises.
12. COMPUTER SYSTEMS. Franchiser shall require Franchisee to install
accounting, inventory control and sales register computer systems. Franchisee
shall purchase, lease, or otherwise acquire, from sources of Franchisee's choice
and at Franchisee's expense, computer hardware (including but not limited to
cash registers) which shall be totally compatible with and shall strictly
conform to all requirements, standards and specifications Franchiser may set
from time to time.
13. STANDARDS TO BE MAINTAINED. Full compliance with this Agreement is
essential to best preserve, maintain and enhance the reputation, trade demand
and goodwill built up by the Franchiser and any retail outlets operating under
Franchisor's Method of Operation. Through experience the Franchisor has
formulated the Method of Operation and intends to continue to make improvements
in it.
If any franchisee of the Franchiser fails to follow the Method of Operation
or does not maintain standards of merchandising and service prescribed by the
Franchiser, it will damage the integrity of Franchiser's franchise system. If
Franchisee operates its franchise store below the
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standards required by the Franchiser, customers who patronize that store will be
less likely to patronize other "VIDEO UPDATE" stores, thereby damaging the
business of others. Furthermore, it will be difficult for the Franchiser to
obtain new franchisees for "VIDEO UPDATE" stores if a prospective purchaser
observes that Franchisee does not maintain the required standards.
THEREFORE, it is understood and agreed:
a. Franchisee shall operate the franchise business in a clean,
orderly, and respectable manner in strict compliance with this Agreement and the
Operations Manual.
b. Franchiser shall establish additional franchise standards, or may
modify existing standards, applicable to all franchisees. Such standards may
govern, among other things:
(1) Employee dress or uniforms;
(2) Store hours and holidays;
(3) Membership or exchange programs;
(4) Sales incentive programs;
(5) Store layout, decor, signage, and fixturing; and
(6) Sales promotion.
All standards shall be established in the sole discretion of Franchisor.
Any modified or additional standards shall be set forth in the Operations Manual
or otherwise stated in writing to Franchisee. Franchisee shall conform with all
modifications within a reasonable period of time, as determined by Franchisor.
c. Franchisee shall maintain a sign on the Franchise Premises which
has been given written approval by Franchisor (and which complies with local
sign ordinances) describing the premises only as a "VIDEO UPDATE" franchise.
d. Franchisor, or Franchisor's agent or representatives, may enter
upon the Franchise Premises at reasonable times to verify Franchisee's
compliance with the terms of this Agreement. Franchisee shall cooperate with
such inspections. In the event Franchisor notes any deficiency in Franchisee's
compliance as a result of such inspection, Franchisor shall provide Franchisee
with written notice of such deficiencies. Franchisee shall, within ten (10) days
of receipt of such notice, supply Franchisor with satisfactory proof of
Franchisee's correction of such deficiencies. In the event Franchisee fails to
correct such deficiencies to the sole satisfaction of Franchisor, Franchisor
shall retain the right to correct such deficiencies at Franchisee's sole
expense.
e. Franchisee shall comply with all applicable ordinances, laws, and
statutes. Franchisee shall not permit unlawful activities on the Franchise
Premises and shall not sell, exchange, offer, hold, show, rent, or permit to be
sold, exchanged, offered, held, shown, or rented any material Franchisee knows
or reasonably suspects to be an unauthorized duplication in violation of
copyright law or to be otherwise illegal.
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f. Franchisor may employ professional shopping services to monitor
Franchisee's compliance with this Agreement. Franchisee shall repurchase
merchandise and otherwise fully reimburse these shopping services for goods,
services and other items they receive, lease or buy from Franchisee in the
process of verifying compliance. Franchisee shall hold Franchisor harmless from
any such charges incurred by any shopping service. Franchisor shall bear all
other charges incurred by the shopping services.
14. FRANCHISEE TO OBTAIN PERMITS AND LICENSES. Prior to commencing
business operations Franchisee shall obtain all local and state permits and
licenses necessary to operate the franchise.
15. BUSINESS NAME. Franchisor has registered in various states, pursuant
to applicable law, a certificate of doing business under the name "VIDEO
UPDATE". Franchisees operating in those states are hereby licensed to use that
name and the Proprietary Marks consistent with the terms of this Agreement.
Franchisees operating in states in which Franchisor has not obtained a
certificate to do business are licensed to use the name "VIDEO UPDATE" and the
Proprietary Marks consistent with the terms of this Agreement. Franchisees
operating in such states shall comply with the Franchisor's instructions
regarding registration of assumed or fictitious names.
Franchisee shall execute and deliver to Franchisor the form attached as
Exhibit C and such other documents as Franchisor may request, evidencing that
Franchisee claims no right or interest in or to the Proprietary Marks and/or
name "VIDEO UPDATE". Such documents shall be retained by Franchiser for filing
with the applicable state and/or federal governmental authority upon expiration
or termination of this Agreement.
16. PROPRIETARY MARKS, OPERATIONS MANUAL, MEMBERSHIP OR EXCHANGE PROGRAMS,
AND METHOD OF OPERATION ARE EXCLUSIVE PROPERTY OF FRANCHISOR. It is expressly
understood and agreed the Proprietary Marks, Operations Manual, Membership or
Exchange Programs and Method of Operation are the sole and exclusive property of
Franchisor. Nothing in this Agreement shall give Franchisee or others any right,
title, or interest whatsoever in or to the Proprietary Marks, Operations Manual,
Membership or Exchange Programs or Method of Operation. Franchisor will make
reasonable efforts to protect the rights of Franchisee to use the Proprietary
Marks.
Franchisee shall immediately notify Franchisor of any infringement of, or
challenge to, Franchisee's use of the Proprietary Marks. Franchisor shall have
sole discretion to take such action or inaction it deems appropriate. Franchisee
shall modify or discontinue use of any franchise names or Proprietary Marks, or
shall use one or more substitute names or marks, if Franchisor so directs in
writing at any time. The Franchisor shall reimburse Franchisee for tangible
costs in complying with any such direction (i.e., cost of changing signs,
stationery, etc.). All obligations or requirements imposed upon Franchisee
relating to the Proprietary Marks shall apply with equal force to any modified
or substituted names or marks.
Franchisee shall not make any use of the Proprietary Marks which would
incur any obligation or indebtedness on behalf of the Franchisor. Franchiser
retains the right to grant other licenses for the
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use of the Proprietary Marks, to use the Proprietary Marks in connection with
selling products and services, and to develop, establish, and franchise other
systems and products, and grant franchises under other systems, without creating
any additional rights in Franchisee therein.
If franchisee is named as a defendant or party in any action involving the
Service Mark and if Franchisee is named as a defendant or party solely because
the plaintiff is alleging that Franchisee does not have the right to use the
Service Mark licensed by Franchisor to Franchisee at the Franchised Premises
pursuant to this Agreement, then Franchisee shall have the right to tender the
defense of the action to Franchisor and Franchisor will, at its expense, defend
Franchisee in the action. Franchisor will indemnify and hold Franchisee harmless
from any damages assessed against Franchisee in any actions resulting solely
from Franchisee's use of the Service Mark at the Franchised Premises.
Any and all goodwill associate with the Proprietary Marks, including any
goodwill that might be deemed to have arisen through Franchisee's activities,
shall inure directly and exclusively to the benefit of Franchisor, except as
otherwise provided by applicable law.
17. FRANCHISEE NOT TO USE NAMES OR MARKS IN COMBINATION. Except as
provided in this Agreement, Franchisee shall not use or give others permission
to use the Proprietary Marks, or any colorable imitation thereof, combined with
any other words or phrases. Neither Franchisee nor its officers or agents shall
form or participate in the formation of any company, firm, corporation or other
entity having a name containing the words of the Proprietary Marks. Franchisee
may not combine or associate any came or mark of the Proprietary Marks with any
other name or word in any advertising or sign. The Proprietary Marks must be
used in exact conformity to specifications set by Franchisor in its Operations
Manual.
18. FRANCHISEE TO DISCONTINUE USE OF PROPRIETARY MARKS, OPERATIONS MANUAL
AND METHOD OF OPERATION ON TERMINATION OR EXPIRATION OF AGREEMENT. Upon
termination or expiration of this Agreement, Franchisee shall immediately cease
and discontinue the use of the Proprietary Marks (or any names or marks
deceptively similar thereto), the Operations Manual and Method of Operation in
its operations, advertising, and promotions. Franchisee shall immediately remove
and destroy within ten (10) days after such termination or expiration all signs,
designs, and insignia in any way indicating or suggesting that Franchisee's
business establishment is related to or connected with Franchisor, its
affiliated companies, or any of Franchisor's franchisees. Within the ten (l0)
day period, Franchisor may purchase from Franchisee any of Franchisee's
materials, signs, etc. associated with the Proprietary Marks.
Franchisee agrees damages to Franchisor caused by Franchisee's use of the
Proprietary Marks (or any names or marks deceptively similar thereto),
Operations Manual or Method of Operation after termination of this Agreement
will be substantial and are not now capable of accurate determination.
Therefore, Franchisee shall not use the Proprietary Marks (or any deceptively
similar names or marks), Operations Manual or the Method of Operation after the
termination of this Agreement for any reason or in any way. In the event
Franchisee fails to comply with these restrictions, Franchisor shall be entitled
to, without claim or defense by Franchisee, an injunction restraining such use
of the
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Proprietary Marks, Operations Manual or the Method of Operation, and/or a decree
of specific performance requiring compliance with the terms of the Agreement.
Franchisor shall be entitled to these remedies upon demonstration of
Franchisee's violation of the terms of this Agreement. Such remedies shall be in
addition to, and not exclusive of, any other judgment for damages or remedy at
law, in equity, or contained in this Agreement.
19. PROPRIETARY MARKS, OPERATIONS MANUAL, MEMBERSHIP OR EXCHANGE PROGRAMS
AND METHOD OF OPERATION MAY BE CHANGED. Franchisee acknowledges the Proprietary
Marks, Operations Manual, Membership or Exchange Programs and Method of
Operation of the Franchisor, including any future amendments or modifications to
them, have substantial value. It is understood and agreed that the conditions,
restrictions, covenants not to compete and other limitations imposed by this
Agreement are necessary, equitable and reasonable for the general benefit of
Franchisee, Franchisor and others enjoying any lawful economic interest in the
Proprietary Marks, Operations Manual, Membership or Exchange Programs and Method
of Operation.
Franchisee recognizes and agrees that the Franchisor may change or modify
any part of the Proprietary Marks, Operations Manual, Membership or Exchange
Programs or Method of Operation from time to time at Franchisor's sole
discretion. Franchisee will accept, use and protect, for the purposes of this
Agreement, all such changes and modifications as if they were a part of the
Proprietary Marks, Method of Operation and Membership or Exchange Programs at
the time this Agreement is executed. No modification or change will materially
affect Franchisee's rights under this Agreement.
20. FRANCHISER TO PROVIDE ADVERTISING. Franchiser shall use the
Advertising Fee received from Franchisee pursuant to Section 5 above to provide
artwork, advertising, decor items and periodic newsletters for the benefit of
VIDEO UPDATE franchisees. Franchiser's internal artwork, advertising and
newsletter preparation and production costs shall be calculated at rates
established by Franchisor.
Franchisor will use Franchisee's Advertising Fee to place advertising in
such geographic areas, and in such media and at such times as Franchisor deems
to be in the best interest of its franchisees.
In the event Franchisee desires to originate and utilize its own
advertising or promotional materials, Franchisee shall submit, for Franchisor's
prior approval, samples of all advertising and promotional plans and materials
utilizing franchisor's names or proprietary marks before Franchisee may publish
or otherwise utilize such advertising or promotional materials.
21. FRANCHISOR TO PROVIDE SOURCE LIST FOR SUPPLIES. Upon Franchisee's
request, Franchisor shall provide merchandise and supply source lists at no
charge to Franchisee. Franchisee shall use only sources approved in writing by
Franchisor for the Franchisor's Private Label video merchandise, supply and
inventory items. The Franchisee shall hold Franchisor harmless from any claims
arising from Franchisee's use of any such sources.
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Franchisor may, from time to time, provide Franchisee with listings of
recommended movies; however, Franchisee is not obliged to carry the movies
listed.
22. FORMS AND SPECIFICATIONS. All sales, service and rental forms to be
used at the Franchise Premises shall be designed by and purchased from
Franchisor or suppliers previously approved by Franchisor in writing. Franchisee
shall use only such approved forms in the operation of the Franchise Premises.
Franchisee acknowledges and understands that the Franchisor's membership
card system is an integral part of the successful operation of the franchise
businesses. Therefore, all membership cards (or substitutes approved from time
to time by Franchisor in the Operations Manual) shall be purchased from
Franchisor. Franchisee shall not reproduce the membership cards. Franchisee
shall maintain the numbering system used on the membership cards and supply to
Franchisor, with the monthly reports required in this Agreement, a list of the
names and addresses of all individuals receiving membership cards, together with
the membership number assigned to such member. Franchisor shall determine
membership fees from time to time which Franchisee shall charge to all members
on a uniform basis.
Franchisee also acknowledges and understands that the Membership or
Exchange Program is the exclusive property of Franchisor, and Franchisor may
make changes in the Membership or Exchange Program from time to time. These
changes will be set forth in detail in the Operations Manual and shall be
adhered to by the Franchisee. The procedure for membership renewals shall also
be set forth in the Operations Manual and adhered to by the Franchisee.
23. FRANCHISOR TO SUPPLY GRAND OPENING KIT. At Franchisee's written
request, prior to the opening of the Franchise Premises for business, Franchisor
will provide, at Franchisor's expense, such grand opening advertising materials,
consisting of movie posters and pamphlets, as Franchisor deems advisable.
24. TRAINING. Franchisor will provide a mandatory five (5) day training
course for Franchisee's franchise manager at a location Franchisor shall
designate. Franchisee's manager shall attend the session prior to the opening of
the franchise store. Franchisor will pay the manager's reasonable transportation
and lodging expenses related to this training. Franchisee shall be responsible
for the manager's meals and wages. The manager shall complete the training to
Franchisor's satisfaction.
Upon not less than fourteen (14) days' prior written notice, at any time
during the term of this Agreement, Franchisor shall provide the full-time
services of one of its training personnel at the Franchise Premises for up to
two (2) work days to assist with employee training, form use, store decor,
merchandise location, and sales assistance. The trainer's expenses for this
assistance shall be borne by Franchisee.
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All replacement managers must complete the initial training program unless
waived in writing by Franchisor. Franchisee shall pay all expenses related to
replacement management training.
25. FURTHER TRAINING. At its option and upon not less than fourteen (14)
days' prior written notice to the Franchisor, Franchisee may receive additional
training at Franchisor's headquarters or at such other location as Franchisor
may designate. Any expenses of this training incurred by Franchisee, including
but not limited to travel, lodging, and meals, shall be borne by Franchisee.
This additional training consists of visits to VIDEO UPDATE franchises,
store work experience and observation of franchise operations. The duration of
such training is negotiable depending upon Franchisee's needs.
On occasion, at Franchisor's discretion, Franchisor may convene meetings of
franchisees on a regional or national basis. Franchisee may, but is not required
to, attend any such meeting at Franchisee's convenience.
26. FRANCHISOR TO PROVIDE NEWSLETTER. Franchisor shall use a portion of
the Advertising Fee to produce and distribute periodic newsletters to provide
Franchisee with industry news, suggestions and advice on franchise operations.
27. FRANCHISEE NOT TO COMMUNICATE INFORMATION ON FRANCHISE OPERATION.
Franchisee shall not communicate or divulge the contents of Franchisor's
Operations Manual or any other proprietary information related to the operation
of the franchise business to any person except those authorized in writing by
Franchisor to receive such information. Franchisee shall obtain written
agreements, in a form specified by Franchisor, from all employees or other
persons in Franchisee's control, to whom any such information is communicated,
that they will keep, preserve and protect all confidential information.
28. FRANCHISEE AND PRINCIPALS NOT TO COMPETE DURING TERM OF AGREEMENT.
During the term of this Agreement neither Franchisee nor the principals of
Franchisee, if it is a partnership or a corporation, shall participate as an
owner, partner, director, officer, employee, consultant, or agent, or serve in
any other capacity in any business engaged in the sale or rental of products or
services the same as or similar to those of the franchise within the franchise
territory, the franchise territory of any other franchisee of Franchisor, any
company store owned by Franchisor or its affiliates, or any other location where
Franchiser could reasonably expect to establish a franchise territory or company
store during the term of this Agreement, without first receiving the written
permission of Franchisor. Franchisee shall not divert business from any company
store owned by Franchisor, its affiliates, or other franchisees, nor employ any
persons employed by Franchisor, its affiliates or other franchisees.
29. FRANCHISEE AND PRINCIPALS NOT TO COMPETE ON TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement for any reason, for a period of
one (1) year, Franchisee shall not divert business from any company store owned
by Franchisor, its affiliates, or other franchisees, nor employ any persons
employed by Franchisor, its affiliates or other franchisees.
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Neither Franchisee nor its principals, if it is a partnership or a corporation,
shall directly or indirectly participate as an owner, director, partner,
officer, employee, consultant, advisor or agent, or serve in any other capacity
in any business engaged in the sale or rental of products or services the same
as or similar to those of the franchise, within the franchise territory, the
territory of any franchisee of the Franchiser or of any company store owned by
Franchisor or its affiliates, or any other location where Franchisor could
reasonably expect to establish a franchise territory or company store during the
one (1) year period.
In the event any of the foregoing provisions of Sections 28 or 29 limiting
the conduct of Franchisee, its affiliates or agents is found by a court of
competent jurisdiction to be excessive as it may apply to any franchisees of
Franchisor, Franchisor retains the right to unilaterally reduce any of the
provisions as they pertain to Franchisee.
Franchisee shall obtain from its management employees agreements not to
compete reflecting the terms of Sections 28 and 29, and in a form acceptable to
Franchisor.
Franchisee recognizes that the violation by Franchisee, its agents or
affiliates of any of the provisions of Sections 28 or 29 will cause Franchisor
irreparable harm, the value of which presently is indeterminable. In the event
of such violation, Franchisor shall be entitled to, and Franchisee shall not
contest, appropriate injunctive relief in addition to any other damages or
remedies at law, in equity, or under this Agreement.
A claim by Franchisee of breach by Franchisor of any of the provisions of
this Agreement shall not constitute a defense to the enforcement of any other
provision.
30. FRANCHISOR AND FRANCHISEE NOT JOINT VENTURERS, PARTNERS. OR AGENTS.
Franchisee and Franchisor are not and shall never be considered joint venturers,
partners, employees, or agents one for the other. Neither shall have the power
to bind or obligate the other except as otherwise outlined in this Agreement. No
representation shall be made by either party to anyone which would create any
apparent agency, employment or partnership. Franchisor and Franchisee shall hold
each other harmless mom each other's debts, acts, omissions, liabilities, and
representations.
In all public and private records, documents, relationships and dealings,
Franchisee shall indicate it is an independent owner of the franchise
established by this Agreement. Franchisee shall prominently indicate on all
letterheads, business forms, and the like that it is a licensed Franchise of
Franchisor by using language substantially stating Franchisee is "A Franchisee
of Video Update, Inc."
Franchisee shall maintain employee records in such a manner as to clearly
show Franchisee and its employees are not employees of the Franchisor.
31. INDEMNITY AND INSURANCE. Franchisee shall indemnify and hold
Franchisor harmless from all fines, suits, proceedings, claims, demands,
actions, losses, or damages of any kind or nature arising out of or otherwise
connected with the Franchise Premises or Franchisee's business activities.
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Franchisor shall not be liable to Franchisee or to any other person by reason of
any act, omission, neglect, or default of Franchisee or Franchisee's agents or
employees or otherwise arising on the Franchise Premises.
Franchisee shall defend Franchisor in any legal or administrative action
arising under this Section 31 at its own expense. Franchisee shall immediately
pay and discharge any liability that may be rendered against Franchisor in any
such action. If Franchisee fails or neglects to defend any action, Franchisor
may defend the same at Franchisee's expense, including reasonable attorneys'
fees and attorneys' fees on appeal which Franchisor may pay or incur in
defending such action.
Prior to commencement of any operations under this Agreement, and at all
times during the entire term of this Agreement and any extensions thereof,
Franchisee shall, at its own expense, keep in force by advance payment of
premium appropriate fire and extended coverage, vandalism, malicious mischief,
general liability, and products liability insurance. Such insurance shall be in
an amount sufficient to replace the Franchise Premises and the personal property
located thereon in the event of loss or damage. Liability insurance shall be not
less than One Million Dollars ($1,000,000.00) for each person and not less than
One Million Dollars ($1,000,000.00) for each occurrence of bodily injury and
property damage combined. The insurance shall insure the Franchisor against any
liability that may accrue by reason of the operation by Franchisee of the
Franchise Premises and the franchise business. All policies of insurance to be
maintained by the Franchisee shall contain a separate endorsement naming the
Franchisor as an additional insured, as its interest may appear. The insurance
shall be placed with an insurance carrier or carriers approved in writing by the
Franchisor or rating in Best's as AAA or better and shall not be subject to
cancellation except upon ten (10) days' written notice to the Franchisor. All
insurance policies or certificates evidencing these policies, with a copy of the
original policy attached, showing full compliance with the requirements of this
provision shall be at all times kept on deposit with the Franchisor.
If Franchisee fails to comply with any of the requirements of this section,
the Franchisor may, but is not obligated to, obtain such insurance and keep it
in force and effect. Franchisee shall pay Franchiser upon demand the premium
cost of such insurance together with interest on the amount of premiums paid by
Franchisor at the maximum lawful rate. Franchisor reserves the right to require
reasonable additional coverages and higher policy limits from time to time and
upon reasonable notice to Franchisee.
32. FRANCHISEE TO PAY TAXES. Franchisee shall pay all taxes, regardless of
their nature, assessed against it when due and before delinquent except when
being contested in good faith by appropriate proceedings. If Franchisor is
charged with any tax by the authorized taxing authority of any state or
political subdivision thereof, including taxes on sales made to or licenses
granted to Franchisee, or sales made by Franchisee at the Franchise Premises,
Franchisee shall pay such taxes on Franchisor's behalf.
33. SALE OR ASSIGNMENT OF AGREEMENT. Franchisee's rights and obligations
under this Agreement are exclusive to Franchisee. Franchisee, its agents,
affiliates, or representatives, shall not
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voluntarily, involuntarily or by operation of the law, sell, transfer, assign,
encumber, give, lease or sublease (collectively referred to as "transfer") the
whole or any part of this Agreement, the assets of the franchise business, any
ownership or control of Franchisee, or any lease or sublease of real or personal
property Franchisee is leasing, without Franchisor's prior written consent. No
other act or forbearance by Franchisor shall constitute consent to any transfer
of the whole or any part of Franchisee's rights and obligations. Any attempted
transfer, whether by agreement or operation of the law, without Franchisor's
prior written consent shall be a default under the terms of this Agreement.
Prior to the effective date of a transfer otherwise approved by Franchisor:
(1) All obligations of Franchisee in connection with the franchise
business shall be assumed by the transferee;
(2) All material debts in connection with the franchise business
shall be paid by Franchisee;
(3) Franchisee shall not be in default in any way under this
Agreement;
(4) The transferee shall pay for and complete the training programs
required of new franchisees;
(5) The Franchisee or transferee shall pay Seven Thousand Five
Hundred Dollars ($7,500.00) to reimburse Franchisor for its reasonable legal,
accounting, credit, and investigation expenses incurred as a result of the
transfer;
(6) Franchisee shall pay Franchisor a ten percent (10%) commission on
the gross transfer price, if Franchisor obtained the transferee for Franchisee;
(7) The transferee shall execute all documents Franchisor then
requires of new Franchisees, including a new Franchise Agreement containing the
economic and general terms required by Franchisor;
(8) The transferee shall meet the standards established by Franchisor
for quality of character, financial capacity, and experience required of a new
or renewing Franchisee; and
(9) Franchisee and its owners, officers and directors shall execute a
general release in favor of Franchisor.
(10) Franchisee shall cause the Franchise Premises to conform to
Franchisor's then current standards and specifications.
Franchisee may transfer its rights and obligations under this Agreement to
a corporation in which Franchisee continuously owns a majority of the issued and
outstanding shares of capital stock;
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provided that the corporation must promptly agree in writing to be bound by the
terms of this Agreement and Franchisee must promptly agree in writing to
guarantee the obligations of the corporation and to remain personally liable in
all respects under this Agreement. The corporation must be newly organized and
restricted by its Articles of Incorporation solely to operating the franchised
business. Copies of the Articles of Incorporation, By-Laws, and other governing
documents shall promptly be furnished to the Franchisor. Stop-transfer
restrictions shall appear in the corporate records and on stock certificates
indicating that all transfers of stock are subject to restrictions imposed by
the Franchise Agreement. Stockholder lists shall be furnished to the Franchisor
upon request. Franchisee shall be in default under the terms of this Agreement
it Franchisee at any time disposes of any interest sufficient to reduce its
ownership in the corporation to less than a majority interest.
In the event of any proposed transfer by Franchisee, its agents,
affiliates, or representatives, Franchisor shall have the right to purchase and
acquire all of Franchisee's business and rights under this Agreement at a bona
fide price acceptable to Franchisee and on the same terms and conditions as
offered to Franchisee. Franchisor shall have such right to purchase for the cash
equivalent of any consideration offered Franchisee by a third party. Within five
(5) business days after receipt by Franchisee of a bona fide offer acceptable to
Franchisee, Franchisee shall notify Franchisor thereof in writing. Franchisor
may exercise the right granted herein in writing within thirty (30) days after
receipt of such notice from Franchisee.
If Franchisor does not accept the offer within thirty (30) days, Franchisee
may thereafter transfer the Franchise business to a third party, but not at a
lower price nor on more favorable terms than had been disclosed to Franchisor in
writing. Any such transfer shall be subject to the prior written permission of
Franchiser described above. If the Franchise business is not transferred by
Franchisee within six (6) months from the date it is offered to Franchisor, then
Franchisee must re-offer to transfer to Franchisor prior to a transfer to a
third party.
Nothing contained herein shall limit the right of Franchisor to transfer or
assign any of its rights or obligations under this Agreement.
34. RENEWAL OF FRANCHISE.
a. If Franchisee is not in default under this Agreement, Franchisee
may renew the franchise for two periods of five (5) years each under the terms
of Franchisor's then current Franchise Agreement forms. Franchisee shall
exercise its renewal option by giving written notice to Franchisor at least
ninety (90) days prior to the end of the franchise or renewal term established
by this Agreement.
There is no additional Initial Franchise Fee upon renewal of the franchise.
The renewed Franchise Agreement will be evidenced by signing the Franchise
Agreement forms then being used by Franchisor. Such forms may vary materially
from this Agreement. Royalty Fees, Advertising Fees, and other fees will be
determined at the then prevailing rates and terms. Failure or refusal of
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Franchisee to execute the Renewal Franchise Agreement forms within thirty (30)
days after delivery to Franchisee shall be deemed an election by Franchisee not
to renew. Upon renewal, the Franchise Premises must remain located in the
geographical territory designated in this Agreement.
b. The Franchisor may refuse to renew the Franchise Agreement if, in
the sole discretion of the Franchisor, the Franchisee has failed to comply with
the terms of the Franchise Agreement. The Franchisor must give the Franchisee
prior written notice of its intent not to renew at least 60 days before the end
of the initial term of the Franchise Agreement. If the Franchise Store is
located in Minnesota, then except under certain circumstances, the Franchisee
must, by law, be given at least 180 days prior written notice of nonrenewal.
35. TERMINATION OF AGREEMENT FOR CAUSE.
a. At the option of Franchisor and for good cause, this Agreement
and the franchise may be terminated if Franchisee:
(1) Does not commence performing its obligations under this
Agreement within thirty (30) days after signing this Agreement;
(2) Fails to begin full and continuous operation of the
franchise business within one hundred eighty (180) days after signing this
Agreement;
(3) Fails to provide an audit of first year business activities,
provide monthly statements of Gross Monthly Revenue (broken down into daily
totals and in all other respects in the form set out in the Operations Manual),
provide quarterly financial statements, maintain financial records pertaining to
the franchise business, and permit inspection and audit by Franchisor on
request;
(4) Does not comply with the standards and policies set forth in
the Operations Manual and changes, additions, or modifications thereto;
(5) Does not comply with other standards established by
Franchisor;
(6) Does not permit Franchisor to inspect the Franchise Premises
or fails to remove from the Franchise Premises signs or materials prohibited by
the Operations Manual;
(7) Allows unlawful activities to occur on the Franchise
Premises or sells, rents, or exchanges any unauthorized or illegal material on
the Franchise Premises;
(8) Fails to maintain the Franchise Premises in conformity with
the Operations Manual and applicable laws;
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(9) Operates the Franchise Premises without obtaining and
maintaining all necessary permits and licenses;
(10) Uses the Franchise trade names or Proprietary Marks outside
the franchise territory or combines with other franchisees to place advertising
in locations outside the franchise territory;
(11) Uses the Franchisor's Proprietary Marks or words of the
Proprietary Marks in combination with other names or words in the Franchisee's
corporate or business name;
(12) Opens, owns, operates, or has any interest in business
marketing services and products similar to those authorized by this Agreement
within the franchise territory, within the territory of any other franchisee or
outlet licensed or owned by Franchisor or within any other area where Franchisor
could reasonably expect to establish a franchise territory or company store
during the term of this Agreement without first securing written permission from
Franchisor;
(13) Transfers (as defined in Section 33 herein) all or part of
the franchise or Franchise Premises without first obtaining the written
permission of Franchisor;
(14) Fails to maintain insurance as required by this Agreement to
insure Franchisor against loss or damage caused by reason of injury to persons
or property arising out of or in connection with the franchise or fails to
promptly pay any costs or judgments entered against Franchisor as a result of
such injury;
(15) Does not pay all sales or other taxes when due and before
delinquent, except when being contested in good faith by appropriate
proceedings;
(16) Engages in conduct which reflects materially and unfavorably
upon the operation or reputation of the franchise business or Franchisor's
franchise system; or
(17) Fails to comply with any provision of this Agreement or any
authorized specification, standard, policy, or operating procedure hereafter
prescribed by Franchisor.
Franchisor shall give Franchisee a ninety (90) day written notice of
Franchisee's failure to comply with any provision of items l through 17 above.
If Franchisee does not correct such failure within sixty (60) days of delivery
of the notice, Franchisor shall have the option either to cure Franchisee's
default at Franchisee's expense or terminate this Agreement. Termination shall
be effective automatically upon the expiration of the ninety (90) day cure
period if Franchisee has not cured to Franchisor's satisfaction or Franchisor
has elected not to cure.
b. Franchisor may terminate the Franchise Agreement and the
franchise without other cause, and without giving Franchisee an opportunity to
cure, effective upon delivery of a
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written declaration of termination to Franchisee, if Franchisee voluntarily
abandons the franchise relationship. Voluntary abandonment shall include, but
not be limited to, the following:
(1) An assignment for the benefit of creditors, an admission of
inability to pay obligations as they become due, filing a voluntary petition of
bankruptcy, failure to obtain the dismissal of involuntary bankruptcy
proceedings within thirty (30) days of commencement, or an adjudication of
bankruptcy or insolvency;
(2) Failure to comply with any requirement of this Agreement
within twelve (12) months after having corrected a deficiency in performance of
the same requirement under a ninety (90) day notice pursuant to subparagraph (A)
of this Section 35;
(3) Understatement of Gross Monthly Revenue for any two (2)
reporting periods during the term of this Agreement by more than two percent
(2%), or distortion of other material information;
(4) Material misrepresentation or misstatement on the franchise
application or with respect to ownership of the franchise;
(5) Permitting the franchise business or Franchise Premises to
be seized, taken over, or foreclosed by a creditor, lienholder, or lessor;
permitting a final judgment against Franchisee to remain unsatisfied for thirty
(30) days (unless a supersedeas or other appeal bond is filed); or allowing a
levy of execution to be made upon the franchise or upon any property used in the
franchise business, that is not discharged by means other than levy within five
(5) days of such levy;
(6) Failure for a period of ten (10) days after notification of
noncompliance, to comply with any federal, state or local law or regulation
applicable to the operation of the franchise;
(7) Failure to pay any franchise fees or other amounts owed to
Franchisor within five (5) days after receipt of written notice that such fees
are overdue;
(8) Failure to keep information related to the Franchise
business confidential except to employees or persons authorized to know, or
failure to obtain agreements from its employees to keep such information
confidential;
(9) Closing the franchise store for a period of ten (l0) or more
consecutive days without the prior written approval of Franchisor, except for
acts of God or other circumstances clearly beyond Franchisee's control;
(10) Convicted of any criminal misconduct relevant to the
operation of the franchise;
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(11) Material impairment of the goodwill associated with the
Service Marks and failure to cure such impairment within twenty-four (24) hours
after the Franchisee has received written notice of cure; or
(12) Operating the franchise in such manner that, in the
reasonable determination of Franchisor, will result in an imminent danger to
public health or safety.
In the event this Agreement is terminated by Franchisor pursuant to this
Section 35, or if Franchisee breaches this agreement by a wrongful termination
of this Agreement, then franchisor will be entitled to seek recovery from
Franchisee for all damages that Franchisor has sustained and will sustain in the
future as a result of Franchisee's breach of this Agreement, taking into
consideration the royalty and advertising fees that would have been payable by
Franchisee for the remaining term of this Agreement.
Nothing in this Section 35 will preclude Franchisor from seeking other
remedies under state or federal laws or under this Agreement against Franchisee
including, but not limited to, attorney's fees and injunctive relief.
36. FRANCHISOR'S RIGHT TO PURCHASE BUSINESS.
Upon termination of the Franchise Agreement, by lapse of time or any other
reason, the Franchisor shall have the exclusive right to purchase and assume the
Franchisee's interest in the franchise business, the Franchised Premises, and
all related personal property. The parties must agree upon a purchase price and
terms within five (5) business days after termination of this Agreement. If they
do not, Franchisor may assume exclusive control of Franchisee's franchise
operations pending a resolution of the purchase terms through the arbitration
provisions of Section 41 below. Whether Franchiser or Franchisee operates the
franchise pending arbitration, the operator shall be considered the trustee for
the other party and shall be required to make full accounting of such operation
subject to the determination of the arbitration.
The arbitrator shall exclude from his or her decision any amount or factor
for the goodwill or going concern value of the franchise business created by the
Service Mark, private label goods, and Method of Operation licensed to
Franchisee. The decision of the arbitrator will be conclusive. At any time
within thirty (30) days after having received the arbitrator's written decision,
Franchiser may purchase the franchise business and its assets at the price and
upon the terms determined by the arbitrator. Nothing contained in this Agreement
shall, however, require Franchisor to repurchase Franchisee's interest in the
franchise.
37. OBLIGATIONS OF FRANCHISEE AFTER EXPIRATION OR TERMINATION OF THE
FRANCHISE. Upon expiration or termination of the franchise for any reason,
Franchisee shall:
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a. Immediately return to Franchisor all copies of the Operations
Manual, any advertising materials, and any other printed materials pertaining to
the Method of Operation in its possession or control;
b. Notify all telephone, directory and listing companies of the
termination of Franchisee's right to use the franchise names and Proprietary
Marks and authorize the transfer of all telephone numbers and directory listings
to the Franchisor or its designated franchisees. Franchisor is hereby appointed
as Franchisee's agent and attorney-in-fact for the purpose of effecting such
transfers, and Franchisee will not make any claims or commence any actions
against any telephone, directory or listing company for complying with this
provision;
c. Modify, at its expense, the interior and exterior decor of the
Franchise Store so that it will be easily distinguished from the standard
appearance of a "VIDEO UPDATE" business. Such modifications must, at a minimum,
include removing any distinctive colors and designs, repainting, removing all
fixtures and decor items distinctive of a "VIDEO UPDATE" business, removing all
signs and other materials bearing the Service Mark, and immediately
discontinuing and thereafter refraining from the use of any items confusingly
similar to any approved or distinctive decor items or decals;
d. Assign to Franchisor, at Franchisor's option, any lease governing
the Franchised Premises. If Franchisor elects not to assume such lease, or
Franchisee owns the Franchised Premises, Franchisee shall make reasonable
alterations and modifications to the interior and exterior decor of the retained
premises to eliminate any identification of the premises as part of Franchiser's
franchise system;
e. Cease doing business under Franchiser's names, Proprietary Marks,
styles, and Method of Operation and refrain from identifying itself as a
franchisee or former franchisee of Franchiser;
f. Abide by all provisions of the covenant not to compete set forth
in Section 29 above; and
g. Pay to Franchisor within seven (7) days all Royalty Fees,
Advertising Fees and other charges owed by Franchisee.
38. FRANCHISOR TO ASSIGN TERRITORY UPON TERMINATION. Upon termination or
expiration of this Agreement, Franchisor may immediately license or franchise
Franchisee's territory. to another person or may operate a video sales, rental,
and service business within the territory.
39. WAIVER. A waiver by either party of any breach of any provision, term,
covenant, or condition of this Agreement will not be deemed a waiver of any
subsequent breach of the same or any other provision, term, covenant, or
condition.
22
<PAGE>
40. INJUNCTIVE RELIEF. It is understood and agreed that the conditions,
restrictions, covenants not to compete, and other limitations imposed by this
Agreement are necessary, equitable, and reasonable for the general benefit of
Franchisee, Franchisor, and others enjoying any lawful economic interest in the
Service Mark, Operations Manual, and Method of Operation. Franchisor will have
the right to enforce by judicial process its right to terminate this Agreement
for the causes enumerated in Section 35 hereof, to prevent or remedy a breach of
this Agreement by the Franchisee if such breach could materially impair the
goodwill associated with Franchisor's names and marks, to collect Continuing
Fees, Advertising Fees, or other amounts due to Franchisor and to enforce the
noncompetition provisions set forth in Section 29 of this Agreement and the
post-termination obligations of Franchisee. Franchisor will be entitled without
bond to the entry of temporary restraining orders, and temporary and permanent
injunctions enforcing the aforementioned provisions. If Franchisor secures any
such injunction, Franchisee will pay Franchisor an amount equal to the aggregate
of Franchisor's costs of obtaining such relief including, without limitation,
reasonable attorney's fees, costs of investigation and proof of facts, court
costs, other litigation expenses, and travel and living expenses.
41. ARBITRATION. Except insofar as the Franchisor elects to enforce the
Franchise Agreement by judicial process and injunction, all disputes and claims
relating to any provision of the Franchise Agreement, to, any specification,
standard, operating procedure, or other obligation of the Franchisor or to the
breach thereof by the parties which has not been corrected subsequent to written
notice of breach provided in accordance with the requirements of this Agreement
(including, without limitation, any claim that the Franchise Agreement, any
provision thereof, any specification, standard, operating procedure, or any
other obligation of the Franchisee or the Franchisor is illegal, unenforceable,
or voidable under any law, ordinance, or ruling) will be settled by arbitration
at the office of the American Arbitration Association located in Minneapolis,
Minnesota, in accordance with the United States Arbitration Act (9 U.S.C.
Section 1 ET SEQ.), if applicable, and the rules of the American Arbitration
Association (relating to the arbitration of disputes arising under Franchise
Agreements, if any; otherwise, the general rules of commercial arbitration). The
arbitrator(s) appointed must have at least five (5) years experience in
franchising or franchise law. Arbitration will resolve individual claims between
Franchisee and Franchisor only and will not be used to determine claims of all
Franchisor's franchisees as a class. Arbitration will not be used to determine
disputes arising out of the payment or nonpayment of monies owed by Franchisee
to Franchisor. Arbitration will be used to resolve all claims of fraud or
misrepresentation. The arbitrator will have power and jurisdiction to decide
such controversy or dispute solely in accordance with the express provisions of
this Agreement. The arbitrator may not alter, amend, delete or add to the
provisions of the Agreement by implication or otherwise. In any arbitration the
parties will be entitled to specific performance of the obligations of the other
under this Agreement. However, the parties to this Agreement expressly waive
their rights to claim or request punitive damages in connection with any
arbitration proceeding and, as a result, the arbitrator will not have the right
or authority to award punitive damages to Franchisor, Franchisee, or
Franchisee's officers, Directors, shareholders or the Personal Guarantors. The
decision of the arbitrator made within his or her power or jurisdiction will be
final, binding and enforceable by judgment in any court of law having
jurisdiction.
23
<PAGE>
All arbitration findings and awards expressly made by the arbitrator will
be final and binding on Franchisor, Franchisee, and Franchisee's officers,
Directors, shareholders and the Personal Guarantors; however, such arbitration
findings and awards may not be used to collaterally estop any party from raising
any like or similar issue in any other or subsequent arbitration, litigation,
court hearing or other proceeding involving third parties or other franchisees.
No party except Franchisor, Franchisee and Franchisee's officers, Directors,
shareholders and the Personal Guarantors will have the right to join in any
arbitration proceeding arising under this Agreement, and therefore, the
arbitrator will not be authorized to permit class actions or to permit any
person or entity that is not a party to this Agreement to be involved in or to
participate in any arbitration hearing conducted pursuant this Agreement.
If, after the Franchisor or the Franchisee institutes an arbitration
proceeding, one or the other asserts a claim, counterclaim, or defense, the
subject matter of which, under statute or current judicial decision is non-
arbitrable for public policy reasons, the party against whom the claim,
counterclaim, or defense is asserted may elect to proceed with the arbitration
of all arbitration of all arbitrable claims, counterclaims, or defenses in a
court having competent jurisdiction.
The prevailing party in any arbitration, suit or action to enforce this
Agreement will be entitled to recover its arbitration and court costs and
reasonable attorney's fees to be set by the arbitration or court, including
costs and attorney's fees on appeal from, any such arbitration, suit, or action.
42. AGREEMENT BINDING ON SUCCESSOR AND ASSIGNS. Except as stated elsewhere
in this Agreement, this Agreement shall inure to and bind the respective heirs,
executors, administrators, successors, and assigns of the parties.
43. TIME IS OF THE ESSENCE. Time is of the essence of this Agreement.
44. NOTICES. All notices required by this Agreement shall be in writing
and shall be sent by certified United States mail, postage prepaid and return
receipt requested, or personally delivered, as appropriate, to Franchisee at the
Franchise Premises, to Franchisor at 287 East Sixth Street, St. Paul, Minnesota
55101-1926, or to such other locations as the parties may specify in writing.
45. CONSTRUCTION. Except to the extent governed by the United States
Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051 ET SEQ.), this
Agreement and the relationship between Franchisor and Franchisee shall be
governed by the laws of the state in which the Franchised Premises are located.
Franchisor and Franchisee each agree to submit to the exclusive jurisdiction of
the state and federal courts of Minnesota with respect to any litigation
pertaining to this Agreement or any aspect of the business relationship between
the parties. Such litigation shall be venued exclusively in Ramsey County,
Minnesota.
This Agreement constitutes the entire agreement between the parties and may
not be modified or amended except by written agreement signed by the parties.
The words "this Agreement" and "this Franchise Agreement" used herein include
any such future modifications unless otherwise indicated
24
<PAGE>
by the context. No salesperson, representative or other person has the authority
to bind or obligate the Franchisor in any way, except the president, chief
executive officer or chief financial officer of the Franchisor at the home
office of the Franchisor by an instrument in writing evidenced by signature with
title.
If any part of this Agreement be declared invalid, such declaration shall
not affect the validity of the remaining portion which will remain in full force
and effect as if this Agreement had been executed with the invalid portion
omitted.
If any valid, applicable law or regulation of a competent governmental
authority, having jurisdiction over this franchise and the parties, will limit
Franchisor's rights of termination, cancellation or renewal or require notice
periods longer than those set forth above, this Agreement will be deemed amended
to conform to the applicable provisions of such laws. Franchisor will not,
however, be precluded from contesting the validity, enforceability or
application of such laws or regulations in any action, arbitration, hearing or
dispute relating to this Agreement or the termination hereof.
46. ACCEPTANCE BY FRANCHISOR. This Agreement shall be binding upon
Franchisee at the time it is signed by Franchisee, and delivered to Franchisor
at St. Paul, Minnesota. This Agreement shall not be binding upon Franchisor
until it is accepted in writing by a principal officer of Franchisor at its home
office in St. Paul, Minnesota
47. APPROVAL BY SHAREHOLDERS OR PARTNERS. If Franchisee is a corporation
or partnership, Franchisor will not be bound unless and until all shareholders
(if required by Franchisor) or partners read and approve this Agreement, agree
to the restrictions on them (including restrictions on the transfer of their
interest in the franchise and the limitation on their ability to compete with
Franchisor) and guarantee the performance of Franchisee under the terms of this
Agreement.
48.PERSONAL GUARANTEE.. ___________________________________________________
___________________________________ hereby personally and unconditionally
assumes and guarantees performance and payment of Franchisee's obligations to
Franchisor under the terms of this Agreement.
49. RECEIPT OF DISCLOSURE DOCUMENTS. Franchisee acknowledges it has
received a Uniform Franchise Offering Circular and a complete and final copy of
this Agreement and applicable exhibits, at least ten (10) business days prior to
the date on which this Agreement was executed by Franchisee.
50. AMENDMENTS, MODIFICATIONS. OR ALTERATIONS. Franchisee shall not amend,
modify or alter this Agreement, or Franchisee's performance hereunder, in any
way without the prior, express written consent of an authorized officer of
Franchisor.
51. DOCUMENTS. The parties agree to execute and deliver any and all
documents that may be necessary or appropriate during the terms of this
Agreement or upon termination to carry out the
25
<PAGE>
purposes and intents of this Agreement. If Franchisee is a partnership, all
partners will sign the documents. If Franchisee is a corporation, all
shareholders of the corporation will be required to personally guarantee the
faithful performance of Franchisee.
52. ATTORNEYS' FEES. If any unpaid balance relating to the payment of
Royalty Fees or Advertising Fees is referred to an attorney for collection,
Franchisee shall pay Franchisor, to the extent permitted by law, reasonable
attorneys fees, all costs and accrued interest.
53. REPRESENTATIONS. NO REPRESENTATIONS, PROMISES, GUARANTEES,
PROJECTIONS, OR WARRANTIES OF ANY KIND HAVE BEEN MADE BY THE FRANCHISOR TO
INDUCE THE EXECUTION OF THIS AGREEMENT OR IN CONNECTION WITH THIS AGREEMENT
EXCEPT AS SPECIFICALLY SET FORTH IN WRITING HEREIN. THIS AGREEMENT REPRESENTS
THE ENTIRE UNDERSTANDING BETWEEN THE PARTIES HERETO AND ALL PRIOR
REPRESENTATIONS ARE MERGED HEREIN. THE FRANCHISEE ACKNOWLEDGES THAT NEITHER THE
FRANCHISOR NOR ANY OTHER PARTY HAS GUARANTEED THE FRANCHISEE'S SUCCESS IN THE
BUSINESS CONTEMPLATED BY THIS AGREEMENT. IN ENTERING THIS AGREEMENT, FRANCHISEE
HAS NOT RECEIVED NOR RELIED UPON ANY PRO FORMA FINANCIAL STATEMENTS OR PROFIT-
LOSS STATEMENTS OF FRANCHISOR. FRANCHISOR HAS NOT AUTHORIZED ITS SALESPERSONS TO
FURNISH ANY ORAL OR WRITTEN INFORMATION CONCERNING THE ACTUAL OR POTENTIAL
SALES, COSTS, INCOME OR PROFIT OF A "VIDEO UPDATE" STORE AND FRANCHISEE
EXPLICITLY ACKNOWLEDGES THAT IT HAS NOT RELIED ON ANY SUCH REPRESENTATION.
FRANCHISEE FURTHER ACKNOWLEDGES THAT IF IT HAD RECEIVED ANY SUCH REPRESENTATIONS
IT WOULD NOT HAVE EXECUTED THIS AGREEMENT.
FRANCHISEE ACKNOWLEDGES THAT THIS AGREEMENT CONSTITUTES A LEGAL DOCUMENT
WHICH GRANTS CERTAIN RIGHTS TO AND IMPOSES CERTAIN OBLIGATIONS UPON FRANCHISEE.
FRANCHISEE HAS BEEN ADVISED BY FRANCHISOR TO CONSULT AN ATTORNEY OR OTHER
ADVISOR PRIOR TO THE EXECUTION OF THIS AGREEMENT TO REVIEW FRANCHISOR'S UNIFORM
FRANCHISE OFFERING CIRCULAR, T0 REVIEW THIS AGREEMENT IN DETAIL, TO REVIEW THE
ECONOMICS, OPERATIONS AND OTHER BUSINESS ASPECTS OF THE "VIDEO UPDATE" BUSINESS,
TO DETERMINE COMPLIANCE WITH FRANCHISING AND OTHER APPLICABLE LAWS, AND T0
ADVISE FRANCHISEE REGARDING ITS ECONOMIC RISKS, LIABILITIES, OBLIGATIONS AND
RIGHTS UNDER THIS AGREEMENT.
The parties hereto have caused this Agreement to be duly executed the day
and year first above written.
FRANCHISOR: VIDEO UPDATE, INC.
26
<PAGE>
By ___________________________________
Title ________________________________
FRANCHISEE: ______________________________________
______________________________________
______________________________________
GUARANTOR(S), PER
PARAGRAPH 48: ______________________________________
______________________________________
______________________________________
27
<PAGE>
EXHIBIT A
SITE SELECTION ADDENDUM
The Franchise Territory area shall have a maximum population of 20,000
inhabitants and in no event extend beyond a radius of one mile from the
Franchise Premises. Franchisee may select any area not previously enfranchised
by Franchisor within the United States of America and within which Franchisor
has the legal right to sell franchises at the time Franchisee makes its
selection.
Subject to the provisions of Sections 9 and 10 of the Franchise Agreement,
Franchisee shall make its territory selection at least one week prior to the
date Franchisee enters into an agreement to lease or purchase a franchise store
location. The Franchisee shall make its selection by submitting to Franchisor a
high resolution map of Franchisee's chosen area with a written request to assign
such territory. Franchisor will assign so much of the requested territory as has
not previously been assigned to other Franchisees or company-owned outlets and
which fits within Franchisor's franchise density projections and franchise
placement plans for the metropolitan area selected by Franchisee. The Franchise
Territory selected by Franchisee and approved by Franchisor shall be delineated
on a high resolution map or otherwise described using existing physical and
political boundaries as appropriate. Franchisor shall be solely responsible for
determining which Franchisee shall be assigned to any particular available
location.
The Franchisee hereby agrees that the Franchisee's exclusive franchise
territory shall be an area having a radius not more than one mile from the
Franchise Premises. Said territories shall be assigned by the Franchisor, upon
the location of a site by the Franchisee and approval of the site by the
Franchisor.
______________________________________
______________________________________
Franchisee
<PAGE>
EXHIBIT B
BASIC MINIMUM INVENTORY AND SUPPLY REQUIREMENTS
Inventory and supply requirements are provided in the Operations Manual.
<PAGE>
EXHIBIT C
ABANDONMENT, RELINQUISHMENT AND TERMINATION
OF ASSUMED OR FICTITIOUS BUSINESS NAME
The undersigned, being a Franchisee of Video Update, Inc., submits the
following to evidence its intent to abandon, relinquish and terminate its right
to use the business name of VIDEO UPDATE:
1. Name of Applicant Who is Using the Assumed or
Fictitious Business Name:
_________________________________________
_________________________________________
a (an) individual/partnership/corporation organized
and doing business under the laws of the
State of __________________________________
2. Date When Original Assumed or Fictitious Business
Name was Filed by Applicant (if any):
_________________________________________
3. Address of Applicant's Registered Office in the
State of __________________________________
_________________________________________
_________________________________________
_________________________________________
4. Please cancel the Applicant's registration to use
the name VIDEO UPDATE.
DATED: _____________________
______________________________________
Applicant
By ___________________________________
Title ________________________________
<PAGE>
STATE OF _______ )
) ss.
COUNTY OF _____ )
The foregoing instrument was acknowledged before me this ____ day of
________, 19____, by _______________ of _____________________________________,
the individual/partnership/corporation named in the foregoing instrument.
______________________________________
Notary Public
<PAGE>
SECOND AMENDMENT
Dated as of August 28, 1996
THIS SECOND AMENDMENT, dated as of August 28, 1996, amends the Credit
Agreement, dated as of April 15, 1996 (herein called the "Credit Agreement"),
between VIDEO UPDATE, INC. (herein called the "Company") and BANK OF AMERICA
ILLINOIS (herein called the "Bank"). Terms defined in the Credit Agreement are,
unless otherwise defined herein or the context otherwise requires, used herein
as defined therein.
WHEREAS, the Company and the Bank have entered into the Credit Agreement
pursuant to which the Bank has made Loans to the Company; and
WHEREAS, the parties hereto desire to amend the Credit Agreement in certain
respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1 AMENDMENTS. Effective on (and subject to the occurrence of) the
Second Amendment Effective Date (as defined below), the Credit Agreement is
hereby amended in accordance with SECTIONS 1.1 through 1.7 below:
SECTION 1.1 NEW DEFINITIONS. Section 1 of the Credit Agreement is amended
by adding the following definitions in appropriate alphabetical order:
ADJUSTED PRE-EXISTING STORE EBITDA means, with respect to any period,
Pre-Existing Store Consolidated Net Income before deducting Pre-Existing
Store Interest Expense, taxes, depreciation and amortization for such
period; IT BEING UNDERSTOOD that until the Canadian Credit Agreement
becomes effective, net income from the Canadian Subsidiaries shall be
excluded from Adjusted Pre-Existing Store EBITDA.
NEW STORES means stores of the Company and its Subsidiaries which are
first acquired by the Company or any of its Subsidiaries, or which begin
operation, after August 31, 1996.
NEW STORE CONSOLIDATED NET INCOME means, with respect to the Company
and its Subsidiaries for any period, the net income (or loss) of the
Company and its Subsidiaries with respect to New Stores for such period
(excluding any extraordinary, unusual or non-recurring items of income);
<PAGE>
PROVIDED that there shall be excluded therefrom the income of any
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary of such income is not at the time
permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Subsidiary.
NEW STORE EBITDA means, with respect to any period, New Store
Consolidated Net Income before deducting New Store Interest Expense, taxes,
depreciation and amortization for such period.
NEW STORE INTEREST EXPENSE means, for any period, the consolidated
interest expense of the Company and its Subsidiaries with respect to New
Stores for such period (including, without limitation, all imputed interest
on Capital Leases).
PRE-EXISTING STORES means stores of the Company and its Subsidiaries
which are owned by the Company or a Subsidiary and are in operation on
August 31, 1996 and such other stores of the Company and its Subsidiaries
as shall be agreed to by the Bank and the Company in writing from time to
time.
PRE-EXISTING STORE CONSOLIDATED NET INCOME means, with respect to the
Company and its Subsidiaries for any period, the net income (or loss) of
the Company and its Subsidiaries with respect to Pre-Existing Stores for
such period (excluding any extraordinary, unusual or non-recurring items of
income); PROVIDED that there shall be excluded therefrom (i) the income of
any Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Subsidiary of such income is not at the
time permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Subsidiary and (ii) any non-cash charges
relating to the release of management stock on the date of this Agreement
held in escrow.
PRE-EXISTING STORE EBITDA means, with respect to any period, Pre-
Existing Store Consolidated Net Income before deducting Pre-Existing Store
Interest Expense, taxes, depreciation and amortization for such period.
PRE-EXISTING STORE INTEREST EXPENSE means, for any period, the
consolidated interest expense of the Company and
2
<PAGE>
its Subsidiaries with respect to Pre-Existing Stores for such period
(including, without limitation, all imputed interest on Capital Leases).
SECTION 1.2 AMENDED DEFINITIONS. Section 1 of the Credit Agreement is
amended by deleting the definition of "Funded Debt Ratio" therein and
substituting the following therefor:
FUNDED DEBT RATIO means, as of any date of calculation, the ratio of
(x) Funded Debt as of such date to (y) the product of (i) the total of (a)
Adjusted Pre-Existing Store EBITDA for the Computation Period most recently
ended MINUS (b) 26% of the revenues of the Company and its Subsidiaries
with respect to Pre-Existing Stores for such Computation Period MULTIPLIED
BY (ii) four; IT BEING UNDERSTOOD that until the Canadian Credit Agreement
becomes effective the revenue of the Canadian Subsidiaries shall be
excluded from CLAUSE (B) above.
SECTION 1.3 SECTION 10.6. Section 10.6 of the Credit Agreement is amended
by adding new Sections 10.6.4 and 10.6.5 which will read as follows:
10.6.4 PRE-EXISTING STORE EBITDA. Not permit Pre-Existing Store
EBITDA for any Computation Period to be less than the amount set forth on
EXHIBIT M with respect to the applicable Computation Period set forth
therein.
10.6.5 NEW STORE EBITDA. Not permit (x) New Store EBITDA for any
Computation Period MINUS (y) 26% of the revenues of the Company and its
Subsidiaries with respect to New Stores for such Computation Period to be
less than $0.
SECTION 1.4 SECTION 10.11. The proviso to Section 10.11 of the Credit
Agreement is amended in its entirety to read as follows:
PROVIDED that any acquisition described in this CLAUSE (C) must satisfy all
of the following conditions: (i) each Person so acquired shall comply with
all of the terms of this Agreement and the other Loan Documents that are
applicable to such Person; (ii) either the required majority of the Board
of Directors (or other equivalent governing body) of the Person so acquired
incumbent at the time such acquisition is proposed has acquiesced to the
acquisition, or the acquisition is otherwise deemed in the reasonable
judgment of the Bank to be a "friendly" acquisition; (iii) no Event of
Default or Unmatured Event of Default shall have occurred and be continuing
at the time of, or
3
<PAGE>
would result from the making of, such acquisition; (iv) the aggregate total
consideration paid by the Company and its Subsidiaries for any one
acquisition or series of substantially contemporaneous related acquisitions
shall not exceed $25,000,000; (v) the aggregate total consideration for all
such acquisitions during the term of this Agreement shall not exceed the
lesser of $55,000,000 and the net proceeds received by the Company from the
equity offering made by the Company pursuant to the Registration Statement
on Form S-3 filed with the Securities and Exchange Commission on July 11,
1996, as amended; (vi) the entity whose stock or assets are so acquired
shall have had positive net income for the fiscal year of such entity most
recently ended and for the period from the last day of such fiscal year
through the last day of the fiscal quarter of such entity most recently
ended; and (vii) simultaneously with any such acquisition, the Company
shall grant, or cause the applicable Person(s) to grant, to the Bank a
first perfected security interest in all of the stock or assets so
acquired, subject to any Liens permitted pursuant to SECTION 10.8(J).
SECTION 1.5 SECTION 11.2.2. Section 11.2.2 of the Credit Agreement is
amended in its entirety to read as follows:
11.2.2 FUNDED DEBT RATIO. The Funded Debt Ratio shall not be greater
than 2.25 to 1.
SECTION 1.6 EXHIBIT E. Exhibit E to the Credit Agreement is amended in
its entirety by substituting EXHIBIT E hereto therefor.
SECTION 1.7 NEW EXHIBIT M. The Credit Agreement is amended by adding a
new Exhibit M following Exhibit L to the Credit Agreement in the form of EXHIBIT
M hereto.
SECTION 2 REPRESENTATIONS AND WARRANTIES. The Company
represents and warrants to the Bank that each warranty set forth in Section 9 of
the Credit Agreement is true and correct as if made on the date hereof, except
for such changes as are specifically permitted under the Credit Agreement.
SECTION 3 EFFECTIVENESS. The amendments set forth in
SECTION 1 above shall become effective, as of the day and year first above
written, on such date (herein called the "Second Amendment Effective Date") when
the Bank shall have received (i) evidence, satisfactory to the Bank, that the
Company has completed an equity offering substantially on the terms set forth in
the Registration Statement on Form S-3 filed with the
4
<PAGE>
Securities and Exchange Commission on July 11, 1996, as amended, and has
received net cash proceeds therefrom in an amount equal to or exceeding
$30,000,000 and (ii) each of the following documents, each in form and substance
satisfactory to the Bank:
SECTION 3.1 SECOND AMENDMENT. Counterparts of this Second Amendment
executed by the parties hereto.
SECTION 3.2 RESOLUTIONS. Certified copies of resolutions of the Board of
Directors of the Company, or any authorized committee thereof, authorizing the
execution and delivery of this Second Amendment and the performance by the
Company of its obligations under the Credit Agreement as amended by this Second
Amendment (herein called the "Amended Credit Agreement").
SECTION 3.3 OPINION. The opinion of O'Connor, Broude & Aronson, counsel
to the Company.
SECTION 3.4 CONFIRMATION. A confirmation of the Guaranty executed by all
of the Guarantors.
SECTION 4 MISCELLANEOUS.
SECTION 4.1 CONTINUING EFFECTIVENESS, ETC. As herein amended, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. After the Second Amendment Effective Date, all
references in the Credit Agreement and the Note to "Credit Agreement",
"Agreement" or similar terms shall refer to the Amended Credit Agreement.
SECTION 4.2 COUNTERPARTS. This Second Amendment may be executed in any
number of counterparts and by the different parties on separate counterparts,
and each such counterpart shall be deemed to be an original but all such
counterparts shall together constitute one and the same Second Amendment.
SECTION 4.3 GOVERNING LAW. This Second Amendment shall be a contract made
under and governed by the internal laws of the State of Illinois.
SECTION 4.4 SUCCESSORS AND ASSIGNS. This Second Amendment shall be
binding upon the Company and the Bank and their respective successors and
assigns, and shall inure to the benefit of the Company and the Bank and the
successors and assigns of the Bank.
5
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above written.
VIDEO UPDATE, INC.
By
---------------------------------
Title
----------------------------
BANK OF AMERICA ILLINOIS
By
---------------------------------
Vice President
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED APRIL 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 1,062
<SECURITIES> 0
<RECEIVABLES> 690
<ALLOWANCES> 0
<INVENTORY> 34,050
<CURRENT-ASSETS> 0<F1>
<PP&E> 24,381
<DEPRECIATION> 3,093
<TOTAL-ASSETS> 86,277
<CURRENT-LIABILITIES> 22,252<F1>
<BONDS> 543
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 86,277
<SALES> 1,260
<TOTAL-REVENUES> 18,563
<CGS> 680
<TOTAL-COSTS> 17,568
<OTHER-EXPENSES> (128)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 958
<INCOME-TAX> 395
<INCOME-CONTINUING> 563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 563
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<FN>
<F1>The Company utilizes an unclassified balance sheet presentation. This format
was followed based on the premise that the videocassette rental inventory
represents assets used by the Company to generate current operating income, and
management believes that to classify all of these costs as noncurrent would be
misleading to the readers of the financial statements because it would not
indicate the level of assets expected to be converted into cash in the next
year as a result of the rentals of the videocassettes.
</FN>
</TABLE>
