<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
VIDEO UPDATE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5735 41-1461110
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
DANIEL A. POTTER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
3100 WORLD TRADE CENTER
30 EAST SEVENTH STREET
ST. PAUL, MINNESOTA 55101
(612) 222-0006
FACSIMILE (612) 297-6629
(Address and telephone number of registrant's principal executive
offices and name, address and telephone number of agent for service)
--------------------------
COPIES TO:
BRUCE J. PARKER, Esquire PAUL D. BROUDE, Esquire
JAMES C. MELVILLE, Esquire LAWRENCE H. GENNARI, Esquire
KAPLAN, STRANGIS AND KAPLAN, P.A. O'CONNOR, BROUDE & ARONSON
5500 Norwest Center 950 Winter Street, Suite 2300
90 South Seventh Street Waltham, Massachusetts 02154
Minneapolis, Minnesota 55402 (617) 890-6600
(612) 375-1138 Facsimile (617) 890-9261
Facsimile (612) 375-1143
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1)(2) PER SHARE (3) OFFERING PRICE (3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of Class A Common Stock,
$.01 par value......................... 6,325,000 $9.00 $56,925,000.00 $19,629.31
<FN>
(1) Pursuant to Rule 416 there are also registered hereby such additional
indeterminate number of shares of such Class A Common Stock as may become
issuable by reason of stock splits, stock dividends, and similar
adjustments.
(2) Includes 825,000 shares of Class A Common Stock subject to an option
granted to the Underwriters to cover over-allotments.
(3) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(B)
<TABLE>
<CAPTION>
ITEM NUMBER OF FORM S-3 CAPTION AND SUBCAPTION IN PROSPECTUS
- ---------------------------------------------- ------------------------------------
<C> <S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of Outside Front Cover Page
Prospectus..............................
2. Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover Page; Back Cover
Page
3. Summary Information; Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Outside Front Cover Page;
Underwriting
6. Dilution................................. Not Applicable
7. Selling Security Holders................. Principal and Selling Stockholders
8. Plan of Distribution..................... Outside Front Cover Page;
Underwriting
9. Description of Securities to be Outside Front Cover Page;
Registered.............................. Description of Securities
10. Interest of Named Experts and Counsel.... Legal Matters; Experts
11. Material Changes......................... Recent Developments
12. Incorporation of Certain Information by
Reference............................... Incorporation of Certain Information
by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Management -- Limitation of
Liabilities............................. Officers' and Directors' Liabilities
14. Information with Respect to the
Registrant:
(a) Description of Business............. Business
(b) Description of Property............. Business -- Facilities
(c) Legal Proceedings................... Business -- Litigation
(d) Certain Market Information.......... Dividends; Price Range of Common
Stock
(e) Financial Statements................ Financial Statements
(f) Selected Financial Data............. Selected Financial Data
(g) Supplementary Financial
Information........................ Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(h) Management's Discussion and
Analysis........................... Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i) Disagreement with Accountants....... Not Applicable
(j) Directors and Executive Officers.... Management -- Directors and
Executive Officers
(k) Executive Compensation.............. Management -- Executive Compensation
(l) Security Ownership of Certain
Beneficial Owners and Management... Principal and Selling Stockholders
(m) Interest of Management and Others in
Certain Transactions............... Certain Transactions
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATED JULY 11, 1996
DATED , 1996
5,500,000 SHARES
VIDEO UPDATE, INC.
CLASS A COMMON STOCK
Of the 5,500,000 shares of Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), offered hereby (the "Offering"), 5,080,000 shares are
being sold by Video Update, Inc., a Delaware corporation (the "Company"), and
420,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the net proceeds from the sale of the shares by the
Selling Stockholders, other than the net proceeds used by the Selling
Stockholders to satisfy certain notes receivable outstanding to the Company. See
"Use of Proceeds."
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "VUPDA." On July 9, 1996, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $9.00 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............................... $ $ $ $
Total(3)................................ $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $650,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 825,000 additional shares of Class A Common Stock, solely
to cover over-allotments, if any, at the per share Price to Public less the
Underwriting Discount. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the certificates representing shares of Class A
Common Stock will be made at the offices of Piper Jaffray Inc. in Minneapolis,
Minnesota on or about , 1996.
PIPER JAFFRAY INC. THE ROBINSON-HUMPHREY COMPANY, INC.
<PAGE>
[ARTWORK:
-- Map of United States and Canada, with a small red box with
Video Update logo placed in each state and province indicating the
number of stores located in such state or province.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
[ARTWORK:
- -- Two exterior photos of a Video Update store -- one with a day time backdrop
and one with a night time backdrop, each with store signage and store rental
promotion posters. Interior photos of Video Update store, with videocassette
displays and customers. All photos with a backdrop of videocassette movie box
covers.]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. THE COMPANY UTILIZES A FISCAL YEAR ENDING APRIL 30 AND
EACH YEAR REFERRED TO HEREIN SHALL BE REFERRED TO AS "FISCAL." INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
The Company owns and operates 214 video specialty stores under the name
"Video Update" located in Alaska, Arizona, Illinois, Indiana, Minnesota,
Missouri, Nevada, Pennsylvania, Texas, Washington and Canada and franchises 25
additional video specialty stores predominantly in the United States as of June
30, 1996. All of the Company's stores in the United States, and 32 or
approximately 46% of the Company's Canadian stores, are superstores, which are
defined as retail video stores that carry more than 7,500 rental units. The
Company believes that, as of the end of its most recent fiscal year, it was the
fourth largest video specialty retailer in the United States and the third
largest video specialty retailer in Canada based on the number of stores it
operates and franchises. Video Update stores in the United States and Canada
offer on average approximately 11,000 and 7,700 rental units, respectively,
including multiple copies of new and popular releases and video games, in a
visually appealing and customer friendly layout.
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 and had developed a cost-effective superstore format
that distinguished the Company from other video retailers by providing it with
the flexibility to expand into desirable sites in both small and large markets
without compromising profitability or decreasing the number of viable markets
into which it could expand. During fiscal 1996, the Company grew rapidly in size
from 33 to 204 Company-owned stores. During this period, the Company acquired
136 video stores in 12 transactions and opened 35 new video superstores. Same
store sales during fiscal 1996 increased by approximately 16%. As a result of
these acquisitions, new superstore openings and increases in same store sales,
the Company's revenues and net income increased from approximately $9,051,000
and $154,000 in fiscal 1995, respectively, to approximately $50,504,000 and
$1,628,000 in fiscal 1996, respectively.
The Company's management has substantial experience in the video retailing
industry. The Company's senior management operations team has worked together
for more than ten years. Management's depth of experience in and knowledge of
the industry are reflected in both the Company's operating strategy and growth
strategy. The key elements of the Company's operating strategy are to: (i)
provide an extensive selection of videocassettes tailored to each store's local
market, (ii) effectively manage videocassette inventories within stores
utilizing the Company's integrated point-of-sale ("POS") system, (iii)
aggressively market the Company's stores through couponing, direct mail and
other promotions, (iv) concentrate its stores geographically within markets to
achieve economies of scale, and (v) maintain consistency of image and operations
throughout the Company's network of stores.
The Company's objective is to become a national presence in the video rental
industry. The key elements of the Company's growth strategy are to (i) acquire
chains of stores that present an attractive combination of price, profitability
and location, (ii) open new superstores utilizing its low-cost format in
existing markets and selected new markets, and (iii) franchise superstores,
primarily in areas where the Company does not expect to pursue acquisitions or
new store development. During fiscal 1997 the Company expects that most of its
growth will come from acquisitions and new superstore openings. In addition to
acquired stores, the Company expects to open 60 or more new superstores during
fiscal 1997.
The Company believes that the home video industry is highly fragmented.
According to media entertainment analyst Paul Kagan Associates, Inc. ("Paul
Kagan"), there were an estimated 27,400 video specialty stores in the United
States in 1994, including approximately 6,100 superstores. According to VIDEO
STORE MAGAZINE, only nine multiple store businesses operated in excess of 100
stores in 1995. The Company
3
<PAGE>
also believes that the retail video industry has experienced a recent trend
toward consolidation driven by the recognition by store operators of the
competitive advantages that larger organizations enjoy in terms of access to
working capital, marketing efficiencies and other economies of scale and the
enhanced ability to obtain quality retail locations. The Company believes that
attractive acquisition opportunities will continue to arise as the industry
consolidates.
The Company was incorporated in Minnesota in October 1983 and reincorporated
in Delaware in March 1994. The Company's executive offices are located at 3100
World Trade Center, 30 East 7th Street, St. Paul, Minnesota 55101, and its
telephone number is (612) 222-0006.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered:
By the Company.............. 5,080,000 shares
By the Selling
Stockholders............... 420,000 shares
Total..................... 5,500,000 shares
Common Stock outstanding after
the Offering................. 18,042,735 shares (1)(2)
Use of proceeds............... To provide working capital to make acquisitions,
reduce outstanding debt, open additional
Company-owned superstores, and for other general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market
symbols...................... VUPDA (Class A Common Stock)
VUPDZ (Redeemable Class B Warrants)
</TABLE>
- ------------
(1) As of the date of this Prospectus, includes 1,300,000 shares of Class B
Common Stock, $.01 par value per share (the "Class B Common Stock"), that
have been placed in escrow by the current holders of Class B Common Stock
(the "Escrow Shares") pursuant to a written agreement between the Company
and the holders of the Class B Common Stock (the "Escrow Agreement"), which
Escrow Shares are subject to cancellation and will be contributed to the
capital of the Company if the Company does not attain certain earnings
levels during the period ending April 30, 1998 or if the market price of the
Company's Class A Common Stock does not achieve certain targets during the
period ending July 19, 1997. See "Risk Factors -- Charge to Income in the
Event of Release of Escrow Shares," "Principal and Selling Stockholders --
Escrow Shares" and "Description of Securities -- Escrow Agreement."
(2) Does not include: (i) 1,462,150 shares of Class A Common Stock reserved for
issuance upon exercise of options under the Company's 1996 Stock Option
Plan, 1995 Stock Option Plan, 1994 Stock Option Plan and 1994 Formula Stock
Option Plan, of which options to purchase a total of 1,223,450 shares of
Class A Common Stock at exercise prices ranging from $4.3125 to $10.25 per
share have been granted (including 669,000 shares reserved for issuance
under options to be granted contemporaneously with the closing of this
Offering under the 1996 Plan (the "1996 Option Shares")) and are currently
unexercised; (ii) 8,504,825 shares of Class A Common Stock reserved for
issuance upon exercise of the Company's outstanding redeemable Class B
Warrants at an exercise price of $8.75 per share; (iii) 1,392,200 shares of
Class A Common Stock reserved for issuance upon exercise of the Unit
Purchase Options and the redeemable Class A and Class B Warrants underlying
the Unit Purchase Options issued to D.H. Blair Investment Banking Corp. in
connection with its services as underwriter of the Company's initial and
subsequent public offerings, at exercise prices per unit that would permit
holders to purchase shares of Class A Common Stock at exercise prices
ranging from $4.48 to $8.75 per share; and (iv) any shares of Class A Common
Stock the Company may issue, in lieu of cash payments, to satisfy stock
price guarantees that the Company made to sellers in connection with six of
its acquisitions. Also does not include 55,000 unregistered shares of Class
A Common Stock related to one of the Company's acquisitions in 1996, pending
resolution of a dispute with the sellers (the "Acquisition Shares"). Unless
otherwise indicated, all references in this Prospectus to shares of Class A
Common Stock outstanding shall exclude the Acquisition Shares. See "Risk
Factors -- Risks Associated with Acquisitions -- Deficiency Payments,"
"Description of Securities," "Management -- Stock Option Plans," "Management
-- Formula Stock Option Plan" and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................ $ 2,301 $ 3,884 $ 4,989 $ 9,051 $ 50,504
Operating income................................................ 230 314 627 623 2,505
Net income...................................................... 154 176 301 154 1,628
Net income (loss) per share, fully diluted:
Continuing operations......................................... .22 .19 .33 .10 .14
Discontinued operations(1).................................... .11 - - (.03) -
--------- --------- --------- --------- ---------
Net income(2)................................................. $ .33 $ .19 $ .33 $ .07 $ .14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares(3)...................................... 465 904 904 2,226 11,229
OPERATING DATA:
Increase in same store sales(4)................................. - - 26% 21% 16%
Number of stores open at end of period:
Company-owned................................................. 10 13 15 33 204
Franchised.................................................... 30 30 31 22 25
--------- --------- --------- --------- ---------
Total....................................................... 40 43 46 55 229
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of stores opened by the Company
during the period.............................................. 4 4 2 4 35
Number of stores acquired by the Company
during the period.............................................. - - - 14 136
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
-------------------------
ACTUAL AS ADJUSTED(5)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 676 $ 41,378
Rental inventory................................................ 25,701 25,701
Goodwill -- net................................................. 25,973 25,973
Total assets.................................................... 79,518 118,834
Notes payable................................................... 4,859 759
Total liabilities............................................... 18,018 13,918
Stockholders' equity............................................ 61,500 104,916
</TABLE>
- ------------
(1) Discontinued operations resulted from the disposal of a distribution center
in fiscal 1992 and the closing by the Company of
Gamesters-Registered Trademark-, a video game specialty store, in fiscal
1995. See Note 14 of Notes to Consolidated Financial Statements.
(2) During the fourth quarter of fiscal 1996, the Company adopted a new method
of amortizing videocassette rental inventory. The effect of the change for
recognizing salvage value of base stock and the effect of the application of
the new method of amortizing videocassette copies in excess of the base
stock to May 1, 1995 had the impact, in total, of increasing amortization
expense by $2,773,000 and decreasing net income by $1,604,000, or $.15 per
share, in fiscal 1996. See Note 2 of Notes to Consolidated Financial
Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for calculation of
weighted average shares.
(4) The stores included in same store sales are Company-owned stores that have
been owned and operated by the Company for more than 12 months. Same store
sales information with respect to fiscal 1992 and 1993 is not available.
(5) As adjusted to reflect the sale of 5,080,000 shares of Class A Common Stock
offered by the Company hereby, the application of the estimated net proceeds
therefrom, and the payment of certain notes from the Selling Stockholders to
the Company. See "Use of Proceeds."
INFORMATION CONTAINED IN THIS PROSPECTUS SUMMARY CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. PLEASE SEE "RISK FACTORS" FOR CERTAIN CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
5
<PAGE>
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS IN CONNECTION WITH
AN INVESTMENT IN THE CLASS A COMMON STOCK IN ADDITION TO THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
UNCERTAIN ABILITY TO ACHIEVE AND MANAGE PLANNED EXPANSION
The Company's future success and continued growth will depend on its ability
to acquire, open and franchise new stores and to operate these stores
profitably. The Company grew rapidly during fiscal 1996 from 33 to 204
Company-owned stores. The Company intends to continue its rapid expansion
through future acquisitions and expects to open 60 or more new superstores
during fiscal 1997. The Company's expansion is dependent on a number of factors,
including its ability to hire, train, retain and assimilate competent management
and store-level employees, the adequacy of the Company's financial resources and
the Company's ability to identify new markets in which it can successfully
compete, to locate suitable superstore sites and negotiate acceptable lease
terms and to adapt its purchasing, management information and other systems to
accommodate expanded operations. In addition, the Company is increasingly
entering new markets in which it has no prior operating experience. The
Company's expansion is also dependent on the timely fulfillment by landlords and
others of their contractual obligations to the Company, the maintenance of
construction schedules and the speed at which local zoning and construction
permits can be obtained. No assurance can be given that the Company will be able
to achieve its planned expansion or that expansion will be profitable. The
Company's planned expansion, including growth through acquisitions, will place
increasing pressure on the Company's management controls. A failure to manage
successfully its planned expansion would adversely affect the Company's
business. No assurance can be given that the Company's new stores will achieve
sales and profitability comparable to the Company's existing stores. If the
Company achieves its plans for growth, no Company executive, other than Mr.
Christopher Gondeck, its Chief Financial Officer, will have had significant
experience operating a company as large, in terms of stores or annual sales, as
the Company. See "Business -- Growth Strategy."
RISKS ASSOCIATED WITH ACQUISITIONS
GENERAL. The Company's growth strategy includes acquisitions. During fiscal
1996, the Company acquired, in 12 transactions, 136 video rental stores in
Alaska, Arizona, Indiana, Minnesota, Nevada, Washington and Canada. No assurance
can be given that the Company will successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired operations into its
existing operations or expand into new markets. No assurance can be given that
recent acquisitions or future acquisitions will not have a material adverse
effect upon the Company's operating results, particularly in the fiscal quarters
immediately following the consummation of such transactions, while the
operations of the acquired businesses are being integrated into the Company's
operations. Once integrated, acquired operations may not achieve levels of
revenues or profitability comparable to those achieved by the Company's existing
operations, or otherwise perform as expected.
LIMITED KNOWLEDGE AND OPERATING HISTORY. Notwithstanding its own due
diligence investigation, management has, and will have, limited knowledge about
the specific operating history, trends and customer buying patterns of the video
specialty stores acquired in its recent acquisitions or future acquisitions.
Consequently, no assurance can be given that the Company will be able to make
future acquisitions at favorable prices, that acquired stores will perform as
well as they had performed historically or that the Company will have sufficient
information to analyze accurately the markets in which it elects to make
acquisitions. Failure to pay reasonable prices for acquisitions or to acquire
profitable video specialty stores could have a material adverse effect on the
Company's financial condition and results of operations.
6
<PAGE>
INTEGRATION. Although the Company endeavors to integrate and assimilate the
operations of acquired stores in an effective and timely manner, no assurance
can be given that the Company will be successful in such integration attempts or
that the Company will be able to hire, train, retain and assimilate selected
individuals employed at acquired stores. Further, no assurance can be given that
the Company will successfully integrate its recent acquisitions or any other
future acquired businesses into the Company's purchasing, marketing and
management information systems.
COMPETITION FOR ACQUISITIONS. Certain of the Company's larger, better
capitalized competitors may seek to acquire some of the same video specialty
stores that the Company seeks to acquire. Such competition for acquisitions
would likely increase acquisition prices and related costs and result in fewer
attractive acquisition opportunities, which could have a material adverse effect
on the Company's growth.
SIGNIFICANT FUTURE CHARGES TO EARNINGS ARISING FROM AMORTIZATION OF
GOODWILL. At April 30, 1996, the Company had $25,973,000 of goodwill on its
balance sheet that resulted primarily from the acquisition of video rental
stores, which will be amortized over 20 years. The Company expects that its
operating results for future quarters over the next 20 years will reflect
quarterly, non-cash charges of approximately $372,000 for amortization of
goodwill from these acquisitions. The Company also anticipates that future
acquisitions will involve the recording of a significant amount of goodwill on
its balance sheet, which will be amortized over varying periods of time of up to
20 years. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Notes 1 and 12 of Notes to Consolidated Financial
Statements.
MISREPRESENTATIONS AND BREACHES BY SELLERS. In completing acquisitions, the
Company relies upon certain representations, warranties and indemnities made by
the sellers with respect to each acquisition, as well as its own due diligence
investigation. No assurance can be given that representations and warranties in
any purchase agreement are true and correct or that the Company's due diligence
uncovers all materially adverse facts relating to the operations and financial
condition of acquired businesses. To the extent that the Company is required to
pay for obligations of acquired businesses, or if material misrepresentations
exist, the Company's operating results could be materially adversely affected.
DEFICIENCY PAYMENTS. In six of the Company's prior acquisitions in which an
aggregate of 635,613 shares of Class A Common Stock were issued to sellers, the
Company may be obligated to make deficiency payments (the "Deficiency Payments")
to such sellers (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 (the "Deficiency
Shares") at the option of the Company) equal to (i) the number of issued shares
multiplied by the difference between the guaranteed price for the Class A Common
Stock on a certain date (the "Guaranteed Price") and the average market price on
that date, if such average market price is less than the Guaranteed Price, or
(ii) in one instance with respect to 239,163 shares issued to a seller, the
difference between the Guaranteed Price and the actual price received (in the
aggregate) for the shares in bona fide, arm's length transactions by the seller
during the six month period from March 1996 to September 1996. The Guaranteed
Price ranges from $7.00 per share to $12.00 per share, depending on the
acquisition. Based on the closing sale price of the Class A Common Stock of
$9.00 on July 9, 1996, the aggregate Deficiency Payments that the Company would
be liable for is approximately $1,131,000. To the extent any Deficiency Payments
are required, the Company's cash flow, depending on whether the deficiency is
satisfied by a cash payment or issuance of shares, could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPETITION
The video rental business is highly competitive. The Company competes with
other video retail stores, including other superstores, and with supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations, vending machines and other retailers, as well as with noncommercial
sources such as libraries. Some of the Company's competitors have significantly
greater financial and marketing resources, market share, and name recognition
than the Company. Many of the Company-owned and franchised stores compete with
stores operated by the Blockbuster Entertainment division of Viacom, Inc.
("Blockbuster"), some of which are in very close proximity, which could have an
adverse impact on the Company's results of operations. The Company's franchise
operations also compete with numerous
7
<PAGE>
franchise operations in many industries that have significantly greater
financial and human resources and more experience in selling franchises than
does the Company. Potential franchisees may believe that these franchisors may
offer potential franchisees greater opportunities for success than the Company.
See "Business -- Competition."
POSSIBLE ADVERSE EFFECT OF NEW TECHNOLOGIES ON THE VIDEO RENTAL BUSINESS
The Company also currently competes with pay-per-view cable television
systems. Recently developed digital compression technology combined with fiber
optics and other technology will eventually permit cable companies, direct
broadcast satellite companies and other telecommunications companies to transmit
a much greater selection of movies to homes at scheduled intervals throughout
the day. Ultimately, these technologies could lead to the availability of movies
to the consumer on demand. Certain cable and other telecommunications companies
have tested and are continuing to test movie on demand services in some markets.
Technological advances could have a material adverse effect on the business of
the Company.
CHANGES IN STUDIO DISTRIBUTION AND PRICING
Changes in the manner in which movies are marketed by the studios that
produce them, primarily related to an earlier release of movie titles to
alternative distribution channels, could substantially decrease the demand for
video rentals, which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, changes in the movie
studios' wholesale pricing structure for videos could result in a competitive
disadvantage for all video specialty stores, including those of the Company.
FINANCING GROWTH
Future expansion through acquisitions or new superstore openings will
require significant capital. To date, the Company has financed acquisitions and
superstore openings with cash from operations, the proceeds of prior equity and
debt offerings, borrowings under bank facilities, trade credit and equipment
leases. The Company currently intends to finance future acquisitions and new
superstore openings from the net proceeds of the sale or issuance of debt or
equity securities, including this Offering, with cash from operations, and from
borrowings under credit facilities. If such sources do not provide sufficient
funds, the Company will be unable to pursue its growth strategy, which would
have a material adverse effect on the Company's ability to increase its revenues
and net income. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SEASONALITY AND OTHER FACTORS
The Company's business is somewhat seasonal, with revenues in April, May,
September and October generally lower than in other months of the year. Future
operating results may be affected by many factors, including variations in the
number and timing of store openings and acquisitions, weather (particularly on
weekends and holidays), the public acceptance of new release titles available
for rental, competition, marketing programs, special or unusual events and other
factors that may affect retailers in general. For example, the Company expects
that during the summer Olympic Games scheduled to take place from July 19 to
August 11, revenues may be reduced temporarily as viewers may prefer to watch
the Olympic Games rather than rent videotapes. Also, any concentration of new
superstore openings and the related pre-opening costs in any particular fiscal
quarter could have a material adverse effect on the Company's operating results
for that quarter.
RISKS ASSOCIATED WITH FRANCHISE OPERATIONS
Since its inception, the Company has sold franchises and generated revenue
from franchise fees, royalties and sales of initial inventory to franchisees. No
assurance can be given that the Company can continue to market and sell its
franchises, or operate its franchise program at profitable levels. In addition,
no assurance can be given that all franchisees will operate their superstores in
accordance with the Company's operating guidelines and in compliance with all
material provisions of the franchise agreement. Additionally, the Company is
subject to the Federal Trade Commission's Trade Regulation Rule entitled
"Disclosure Requirements and Prohibitions Concerning Franchising and Business
Opportunity Ventures" and state laws and regulations that govern the offer and
sale of franchises. If the Company is unable to
8
<PAGE>
comply with applicable federal and state franchise sales laws or the regulations
of any state that regulates the offer and sales of franchises, the Company will
be unable to offer and sell franchises. No assurance can be given that the
Company's franchising program will not be adversely affected by its failure to
register or file in certain states. See "Business -- Franchise Operations" and
"Business -- Government Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on the
continued contributions of Daniel A. Potter, the Company's Chairman and Chief
Executive Officer, and John M. Bedard, the Company's President. The loss of the
services of either of these officers could have a material adverse effect on the
Company. The Company's continued growth and profitability also depends on its
ability to attract, motivate, and retain other management personnel, including
qualified store managers. No assurance can be given that the Company will be
successful in attracting, motivating and retaining such personnel. The Company
has no employment agreements with its officers or key personnel other than with
Messrs. Potter and Bedard. See "Management."
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES
The 1,300,000 shares of the Company's Class B Common Stock placed into
escrow by Messrs. Potter, Bedard and Howard in connection with the Company's
initial public offering will be released upon the achievement by the Company of
certain earnings goals or if the Class A Common Stock reaches certain price
goals. The Securities and Exchange Commission (the "Commission") has adopted a
position with respect to arrangements such as the Escrow Agreement. This
position provides that in the event any shares are released from escrow to the
stockholders of the Company who are officers, directors, consultants or
employees of the Company, a non-cash compensation expense will be recorded for
financial reporting purposes. Therefore, if the Company attains any of the
earnings thresholds or the Company's Class A Common Stock meets certain minimum
bid prices required for the release of the Escrow Shares, the release will
require the Company to recognize additional compensation expense. Accordingly,
the Company will, in the event of the release of the Escrow Shares, recognize
during the period in which the earnings thresholds are met or such minimum bid
prices obtained, what could be a substantial non-cash charge that would have the
effect of substantially reducing or eliminating earnings, if any, at such time.
Although the amount of compensation expense recognized by the Company will not
affect the Company's total stockholders' equity or cash flow, it may have a
depressive effect on the market price of the Company's securities. See
"Principal and Selling Stockholders -- Escrow Shares" and "Description of
Securities -- Escrow Agreement."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of this Offering, the Company's founders, Daniel A. Potter
and John M. Bedard, will beneficially own or control 1,964,876 shares of Class B
Common Stock representing approximately 10.9% of the Company's outstanding
capital stock and approximately 37.8% of the total voting power to be
outstanding after the Offering. The Class A Common Stock and Class B Common
Stock are essentially identical, except the Class B Common Stock has five votes
per share and the Class A Common Stock has one vote per share on all matters
upon which stockholders can vote. As a result, Messrs. Potter and Bedard will be
able to substantially influence all matters requiring approval by the
stockholders of the Company, including the election of directors. Furthermore,
the disproportionate vote afforded to the Class B Common Stock could impede or
prevent a change of control of the Company. As a result, potential acquirors may
be discouraged from seeking to acquire control of the Company through the
purchase of Class A Common Stock, which could have a depressive effect on the
price of the Class A Common Stock. See "Principal and Selling Stockholders" and
"Description of Securities."
POSSIBLE DEPRESSIVE EFFECT ON PRICE OF SECURITIES OF FUTURE SALES OF COMMON
STOCK AND EXERCISE OF WARRANTS; ISSUANCE OF ADDITIONAL SHARES
Upon sale of the 5,080,000 shares of Class A Common Stock offered by the
Company hereby, the Company will have outstanding 16,042,735 shares of Class A
Common Stock (or 16,867,735 shares of Class A Common Stock if the Underwriters'
over-allotment option is exercised in full), and 2,000,000 shares of Class B
Common Stock (including the Escrow Shares). All of the 5,500,000 shares of Class
A Common Stock sold in this Offering will be freely tradeable without
restriction under the Securities Act, unless
9
<PAGE>
acquired by "affiliates" of the Company as that term is defined in the
Securities Act. In addition, all of the (i) 8,504,825 shares of Class A Common
Stock issuable upon exercise of outstanding redeemable Class B Warrants (the
"Class B Warrants"), (ii) 117,500 shares of Class A Common Stock issuable upon
exercise of the Unit Purchase Option issued to D.H. Blair Investment Banking
Corp. ("Blair") in connection with its services as underwriter of the Company's
initial pubic offering (the "Initial Option"), (iii) 230,550 shares of Class A
Common Stock issuable upon exercise of the Unit Purchase Option issued to Blair
in connection with its services as underwriter of the Company's subsequent
public offering (the "Subsequent Option") (collectively, the Initial Option and
the Subsequent Option are referred to as the "Blair Options"), (iv) 348,050
shares of Class A Common Stock issuable upon exercise of the Class A Warrants
underlying the Blair Options, (v) 696,100 shares of Class A Common Stock
issuable upon exercise of the Class B Warrants underlying the Blair Options, and
(vi) 1,223,450 shares of Class A Common Stock (including the 669,000 1996 Option
Shares) issuable upon exercise of the options issued under the 1994 Stock Option
Plan (the "1994 Plan"), the 1995 Stock Option Plan (the "1995 Plan"), the 1996
Stock Option Plan (the "1996 Plan") and the 1994 Formula Stock Option Plan (the
"Formula Plan") (collectively the 1994, 1995, 1996 and Formula Plans are
referred to as the "Plans"), will be freely tradeable without restriction under
the Securities Act upon such exercise, unless acquired by affiliates of the
Company. The Company has authorized 50,000,000 shares of Class A Common Stock,
of which the Company's Board of Directors has the authority, without action or
vote of the stockholders, to issue all or part of any authorized but unissued
shares of Class A Common Stock. Any such issuance will dilute the percentage
ownership interest of stockholders and may further dilute the book value of the
Class A Common Stock. Subject to certain exceptions, the Company and all of the
Company's present officers and directors have agreed not to offer, sell,
contract to sell or otherwise dispose of, any shares of Class A Common Stock,
Class B Common Stock or any securities convertible into or exercisable for Class
A Common Stock for a period of 180 days after the date of this Prospectus,
without the prior written consent of Piper Jaffray Inc. See "Description of
Securities" and "Underwriting."
The sale, or availability for sale, of substantial amounts of Class A Common
Stock in the public market could adversely affect the prevailing market prices
of the Company's securities and could impair the Company's ability to raise
additional capital through the sale of its equity securities. In addition, the
existence of the Blair Options, outstanding options, Class B Warrants, and other
options that may be issued under the Stock Option Plans or Formula Plan may
hinder future financing by the Company, and exercise of these securities may
further dilute the interest of the persons purchasing Class A Common Stock.
Further, the holders of such options may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company.
BROAD DISCRETION OVER USE OF PROCEEDS; UNSPECIFIED ACQUISITIONS
A substantial portion of the estimated net proceeds of this Offering is
expected to be used for acquisitions, the repayment of indebtedness and new
superstore openings. Management will have broad discretion in allocating and
applying such net proceeds. Failure to utilize the net proceeds within a
reasonable amount of time following the closing of this Offering could have a
materially adverse impact on the Company's business and results of operations.
See "Use of Proceeds."
UNCLASSIFIED BALANCE SHEET
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 could be classified as noncurrent because they
are not assets that are reasonably expected to be completely realized in cash or
sold within one year. The acquisition cost of these inventories, however, would
be reflected in current liabilities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NO DIVIDENDS
The Company has paid no dividends to its stockholders since its inception
and does not plan to pay dividends in the foreseeable future. In addition, the
terms of a loan agreement relating to the Company's
10
<PAGE>
bank debt prohibit the payment of dividends without the lender's prior written
consent. The Company intends to reinvest earnings, if any, in the development
and expansion of its business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Dividend Policy."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate of Incorporation, as amended, as
authorized under applicable Delaware law, directors of the Company are not
liable for monetary damages for breach of fiduciary duty, except in connection
with a breach of the duty of loyalty, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or for any transaction
in which a director has derived an improper personal benefit. In addition, the
Company's bylaws provide that the Company must indemnify its officers and
directors to the fullest extent permitted by Delaware law for all expenses,
fines and judgements (including reasonable attorneys' fees) incurred in the
defense or settlement of any actions against such persons in connection with
their having served as officers or directors of the Company. See "Management --
Limitation on Officers' and Directors' Liabilities."
ANTITAKEOVER EFFECTS; DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS;
PREFERRED STOCK
The Company's Certificate of Incorporation and Bylaws, as well as Delaware
corporate law, contain certain provisions that could have the effect of
delaying, deferring or preventing a change in control of the Company and could
adversely affect the prevailing market price of the Class A Common Stock.
Certain of such provisions impose various procedural and other requirements that
could make it more difficult for stockholders to effect certain corporate
actions. Other provisions allow the Company to issue, without stockholder
approval, preferred stock having rights senior to those of the Class A Common
Stock. The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock, $.01 par value per share (the "Preferred Stock"), none of which is
currently outstanding. The Preferred Stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions. The issuance of any Preferred Stock could adversely affect the
rights of the holders of Class A Common Stock, and therefore reduce the value of
the Class A Common Stock. In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by its then owners. See "Description of Securities."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
being offered hereby are estimated to be approximately $41,605,000 based upon an
assumed offering price per share of $9.00 (approximately $48,510,000 if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses (including underwriting
and offering expenses of the Selling Stockholders, which will be borne by the
Company). The Company will not receive any proceeds from the sale of shares by
the Selling Stockholders, other than proceeds of approximately $3,238,000 in
payment of outstanding notes receivable due to the Company from the Selling
Stockholders in connection with the exercise of stock options by the Selling
Stockholders in August 1995. See "Certain Transactions."
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 $8,000,000, open additional stores, and to
meet other general corporate purposes. The Company does not currently have any
agreements or understandings for the acquisition of additional stores, and no
assurance can be given that any such acquisitions will be made. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pending use of the net proceeds as described above, the Company intends to
invest the net proceeds from the Offering in short-term investment grade
securities.
PRICE RANGE OF COMMON STOCK
The Class A Common Stock of the Company has been traded under the symbol
"VUPDA" on the Nasdaq National Market since May 8, 1995 and was traded under the
same symbol on the Nasdaq SmallCap Market from July 20, 1994 through May 7,
1995. The following table sets forth the high and low bid prices of the
Company's Class A Common Stock for the periods for which it was traded on the
Nasdaq SmallCap Market and sets forth the high and low sale prices for the
periods for which it has been traded on the Nasdaq National Market. The Nasdaq
SmallCap market bid quotations represent interdealer prices, without retail
mark-ups, mark-downs or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
FISCAL 1995
Quarter ended July 31, 1994 (July 20, 1994 through July
31, 1994)................................................ $ 4 3/4 $3
Quarter ended October 31, 1994............................ 6 1/4 4 3/4
Quarter ended January 31, 1995............................ 6 1/4 3 3/4
Quarter ended April 30, 1995.............................. 4 1/4 3 5/8
FISCAL 1996
Quarter ended July 31, 1995(1)............................ $11 7/8 $4 1/4
Quarter ended October 31, 1995............................ 13 7 1/4
Quarter ended January 31, 1996............................ 10 6
Quarter ended April 30, 1996.............................. 8 3/8 5 1/2
FISCAL 1997
Quarter ended July 31, 1996 (through July 9, 1996)........ $ 9 3/4 $7 1/4
</TABLE>
- ------------
(1) The Company began trading on the Nasdaq National Market on May 8, 1995.
On July 9, 1996, the last sale price of the Class A Common Stock as reported
on the Nasdaq National Market was $9.00. As of July 9, 1996, there were
approximately 91 owners of record of Class A Common Stock.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its operations and expansion
and does not anticipate paying any cash dividends in the foreseeable future. The
terms of the Company's current loan agreement prohibit the payment of dividends
without the lender's prior written consent. The payment of dividends, if any, in
the future will be at the discretion of the Board of Directors and will depend
upon, among other things, future earnings, capital requirements, restrictions
contained in current banking and future financing agreements, the general
financial condition of the Company and general business considerations.
12
<PAGE>
CAPITALIZATION
The table below sets forth the capitalization of the Company as of April 30,
1996, and as adjusted to give effect to the sale by the Company of the 5,080,000
shares of Class A Common Stock offered hereby (at an assumed public offering
price of $9.00 per share), the payment of notes from the Selling Stockholders to
the Company and the application of the estimated net proceeds of the Offering.
The table should be read in conjunction with the Company's financial statements
and notes thereto, and other financial information included elsewhere herein.
See "Use of Proceeds."
<TABLE>
<CAPTION>
APRIL 30, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable within one year.......................................................... $ 4,331 $ 231
--------- -----------
--------- -----------
Notes payable due greater than one year................................................ $ 528 $ 528
Stockholders' equity:
Preferred Stock, par value $.01 per share; 5,000,000 shares authorized; no shares
outstanding actual or adjusted...................................................... - -
Class A Common Stock, par value $.01 per share; 50,000,000 shares authorized;
10,962,735 shares issued and outstanding, actual; 16,042,735 shares issued and
outstanding as adjusted(1)(2)....................................................... 110 160
Class B Common Stock, par value $.01 per share; 2,000,000 shares authorized, issued
and outstanding, actual and as adjusted(1)(3)....................................... 20 20
Additional paid in capital............................................................. 61,029 102,584
Retained earnings...................................................................... 2,186 2,186
Foreign currency translation........................................................... (34) (34)
Notes receivable from officers related to the exercise of options...................... (1,811) -
--------- -----------
Total stockholders' equity......................................................... 61,500 104,916
--------- -----------
Total capitalization............................................................. $ 62,028 $ 105,444
--------- -----------
--------- -----------
</TABLE>
- ------------
(1) The Class A Common Stock and Class B Common Stock are essentially identical,
except that each share of Class A Common Stock is entitled to one vote and
each share of Class B Common Stock is entitled to five votes. Each share of
Class B Common Stock is convertible at any time at the option of its holder
into one share of Class A Common Stock. See "Description of Securities --
Common Stock."
(2) Excludes (i) 572,150 shares of Class A Common Stock reserved for issuance
upon exercise of options under the 1994 and 1995 Plans, of which options to
purchase a total of 528,450 shares of Class A Common Stock at exercise
prices ranging from $4.3125 to $8.375 per share have been granted and are
currently unexercised; (ii) 50,000 shares of Class A Common Stock reserved
for issuance upon exercise of options that may be granted under the Formula
Plan, pursuant to which options to purchase 6,000 shares of Class A Common
Stock at exercise prices of $6.75 and $10.25 per share have been granted and
are currently unexercised; (iii) 8,504,825 shares of Class A Common Stock
reserved for issuance upon exercise of the outstanding Class B Warrants at
an exercise price of $8.75 per share; (iv) 348,050 shares of Class A Common
Stock reserved for issuance upon exercise of the Blair Options; (v) 348,050
shares of Class A Common Stock reserved for issuance upon exercise of the
Class A Warrants issuable upon exercise of the Blair Options; (vi) 696,100
shares of Class A Common Stock issuable upon exercise of the Class B
Warrants underlying the Blair Options; (vii) the Deficiency Shares; and
(viii) the 55,000 Acquisition Shares. See "Risk Factors -- Risks Associated
with Acquisitions -- Deficiency Payments," "Description of Securities,"
"Management -- Stock Option Plans," "Management -- Formula Stock Option
Plan," "Underwriting," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(3) Includes the 1,300,000 Escrow Shares. See "Principal and Selling
Stockholders -- Escrow Shares."
13
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The statements of operations data set forth below for each of the three
years ended April 30, 1994, 1995 and 1996 and the balance sheet data as of April
30, 1995 and 1996 are derived from, and are qualified by reference to, the
audited consolidated financial statements audited by Ernst & Young LLP included
elsewhere in this Prospectus. The statements of operations data for the years
ended April 30, 1992 and 1993 and the balance sheet data as of April 30, 1992,
1993 and 1994 are derived from audited financial statements not included herein.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's financial statements and notes thereto, and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Rental revenue................................................ $ 1,733 $ 3,234 $ 4,180 $ 8,364 $ 46,592
Service fees.................................................. 321 459 472 421 491
Product sales................................................. 247 191 337 266 3,421
--------- --------- --------- --------- ---------
Total revenues............................................ 2,301 3,884 4,989 9,051 50,504
Costs and expenses:
Store operating expenses(1)................................... 1,367 2,485 2,997 5,986 39,685
Selling, general and administrative........................... 536 955 1,179 2,223 5,362
Cost of product sales......................................... 168 130 186 136 1,880
Amortization of goodwill...................................... - - - 83 1,072
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 2,071 3,570 4,362 8,428 47,999
--------- --------- --------- --------- ---------
Operating income................................................ 230 314 627 623 2,505
Other income (expense):
Interest expense.............................................. (63) (69) (143) (194) (232)
Amortization of debt costs.................................... - - - (157) -
Other income (expense)........................................ (12) 36 17 155 548
--------- --------- --------- --------- ---------
Total other income (expense).............................. (75) (33) (126) (196) 316
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes........... 155 281 501 427 2,821
Income tax expense.............................................. 54 105 200 214 1,193
--------- --------- --------- --------- ---------
Income from continuing operations............................... 101 176 301 213 1,628
Discontinued operations:
Loss from discontinued operations net of applicable income tax
benefit...................................................... - - - (24) -
Gain (loss) on disposal of discontinued operations, net of
applicable income tax or tax benefit......................... 53 - - (35) -
--------- --------- --------- --------- ---------
Net income (loss) from discontinued operations(2)............... 53 - - (59) -
--------- --------- --------- --------- ---------
Net income...................................................... $ 154 $ 176 $ 301 $ 154 $ 1,628
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share, fully diluted:
Continuing operations......................................... $ .22 $ .19 $ .33 $ .10 $ .14
Discontinued operations....................................... .11 - - (.03) -
--------- --------- --------- --------- ---------
Net income(1)................................................. $ .33 $ .19 $ .33 $ .07 $ .14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares(3)...................................... 465 904 904 2,226 11,229
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Increase in same store sales(4)................................. - - 26% 21% 16%
Number of stores open at end of period:
Company-owned................................................. 10 13 15 33 204
Franchised.................................................... 30 30 31 22 25
--------- --------- --------- --------- ---------
Total..................................................... 40 43 46 55 229
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of stores opened by the Company
during the period.............................................. 4 4 2 4 35
Number of stores acquired by the Company
during the period.............................................. - - - 14 136
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 1,184 $ 70 $ 51 $ 5,573 $ 676
Rental inventory................................................. 777 1,097 1,749 4,821 25,701
Goodwill -- net.................................................. - - - 2,912 25,973
Total assets..................................................... 1,389 2,038 3,489 19,450 79,518
Notes payable.................................................... 421 565 1,568 1,278 4,859
Total liabilities................................................ 996 1,469 2,614 4,279 18,018
Stockholders' equity............................................. 393 569 875 15,171 61,500
</TABLE>
- ------------
(1) During the fourth quarter of fiscal 1996, the Company adopted a new method
of amortizing videocassette rental inventory. The effect of the change for
recognizing salvage value of base stock and the effect of the application of
the new method of amortizing videocassette copies in excess of the base
stock to May 1, 1995 had the impact, in total, of increasing amortization
expense by $2,773,000 and decreasing net income by $1,604,000, or $.15 per
share, in fiscal 1996. See Note 2 to Notes to Consolidated Financial
Statements.
(2) Discontinued operations resulted from the disposal of a distribution center
in fiscal 1992 and the closing by the Company of
Gamesters-Registered Trademark-, a video game specialty store, in fiscal
1995. See Note 14 of Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for calculation of
weighted average shares.
(4) The stores included in same store sales are Company-owned stores that have
been owned and operated by the Company for more than 12 months. Same store
sales information with respect to fiscal 1992 and 1993 is not available.
15
<PAGE>
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 June 30, 1996, operated 150 acquired and 64 stores opened
by the Company in 10 states and in Canada, and has 25 franchised stores
predominantly in the United States. All of the Company's stores located in the
United States are superstores. Superstores are video specialty stores that carry
more than 7,500 rental units.
During fiscal 1996, the Company acquired, in 12 transactions, 136 video
retail superstores. The acquired assets and liabilities related to all of these
acquisitions are recorded on the Company's balance sheet at their estimated fair
market value at the date of the acquisition. As a result of the acquisitions
completed during fiscal 1995 and fiscal 1996, the Company anticipates that its
results of operations will be reduced by the amortization of goodwill of
approximately $25,973,000, with anticipated quarterly non-cash charges of
approximately $372,000 for goodwill. The Company anticipates that future
acquisitions will involve the recording of additional significant amounts of
goodwill and deferred charges on its balance sheet.
The Company generates revenues primarily from the rental of videocassettes
and video games, from service fees from its franchisees, and from the sale of
products. As reflected in the chart below, rental revenues at Video Update
stores have accounted for the substantial majority of the Company's revenues.
The Company expects that this trend will continue.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Rental revenue............................... $ 4,180 $ 8,364 $ 46,592
Service fees................................. 472 421 491
Product sales................................ 337 266 3,421
--------- --------- ---------
$ 4,989 $ 9,051 $ 50,504
--------- --------- ---------
--------- --------- ---------
</TABLE>
Effective February 1, 1996, videocassettes that are considered base stock
(including copies one through three of new releases) are amortized over 36
months on a straight-line basis to a salvage value of $6.00 per videocassette.
New release videocassettes are amortized as follows: the fourth through ninth
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over 30 months with no salvage value; and the tenth and any succeeding
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over three months with no salvage value. The changes, which represent in
part a change in accounting principle and a change in accounting estimate, have
been reflected in the Company's financial statements in total as a change in an
estimate in the fourth quarter of fiscal 1996.
The effect of the change for recognizing salvage value of base stock and the
effect of the application of the new method of amortizing videocassette copies
in excess of the base stock to May 1, 1995, had the impact, in total, of
increasing amortization expense by $2,773,000 and decreasing net income by
$1,604,000, or $.15 per share, for fiscal 1996, all of which has been recorded
in the fourth quarter.
16
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Rental revenue......................................................... 83.8% 92.4% 92.2%
Service fees........................................................... 9.5 4.7 1.0
Product sales.......................................................... 6.7 2.9 6.8
--------- --------- ---------
Total revenues................................................... 100.0 100.0 100.0
Costs and expenses:
Store operating expenses............................................... 60.1 66.1 78.6
Selling, general and administrative.................................... 23.6 24.6 10.6
Cost of product sales.................................................. 3.7 1.5 3.7
Amortization of goodwill............................................... - 0.9 2.1
--------- --------- ---------
Total costs and expenses......................................... 87.4 93.1 95.0
--------- --------- ---------
Operating income....................................................... 12.6 6.9 5.0
Other income (expense):
Interest expense....................................................... (2.9) (2.1) (0.5)
Amortization of debt costs............................................. - (1.7) -
Other income........................................................... 0.3 1.7 1.1
--------- --------- ---------
Total other income (expense)..................................... (2.6) (2.1) 0.6
--------- --------- ---------
Income from continuing operations before income taxes.................... 10.0 4.8 5.6
Income tax expense....................................................... 4.0 2.4 2.4
--------- --------- ---------
Income from continuing operations........................................ 6.0 2.4 3.2
Discontinued operations:
Loss from discontinued operations,
net of applicable income tax benefit.................................. - (0.3) -
Loss on disposal of discontinued operations,
net of applicable tax benefit......................................... - (0.4) -
--------- --------- ---------
Net loss from discontinued operations.................................... - (0.7) -
--------- --------- ---------
Net income............................................................... 6.0% 1.7% 3.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
RENTAL REVENUE. Rental revenue was approximately $46,592,000 and
$8,364,000, or 92.2% and 92.4% of total revenues for fiscal 1996 and 1995,
respectively. The increase in rental revenue of $38,228,000 was derived from
video stores acquired during the period which accounted for approximately
$28,998,000 or 75.9% of the increase, from the opening of 35 new Company-owned
stores which accounted for approximately $4,735,000 or 12.4% of the increase,
and from a 16% increase in same store revenues.
SERVICE FEES. Service fees were approximately $491,000 and $421,000, or
1.0% and 4.7% of total revenues for fiscal 1996 and 1995, respectively.
Continuing service fees and royalties from franchisees accounted for 95% 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 franchise
stores.
PRODUCT SALES. Product sales were approximately $3,421,000 and $266,000, or
6.8% and 2.9% of total revenues for fiscal 1996 and 1995, respectively. The
increase in product sales of $3,155,000 was a result of product sales by the
video stores acquired during the period which accounted for approximately
$2,505,000 or 79.4% of the increase, the opening of 35 Company-owned video
stores, and sales of inventory and fixtures to franchisees. 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 during the
period and increased sales of inventory and fixtures to franchisees.
17
<PAGE>
STORE OPERATING EXPENSES. Store operating expenses consist primarily of
compensation and related expenses, occupancy expenses, and depreciation and
amortization expenses. Operating expenses were approximately $39,685,000 and
$5,986,000, or 78.6% and 66.1% of total revenues for fiscal 1996 and 1995,
respectively. The increase in store operating expenses of $33,699,000, was
primarily the result of video stores acquired during the period, the opening of
35 Company-owned video stores, a change in accounting method for amortizing
videocassettes, and the expansion and relocation of video stores during fiscal
1996. 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,
and expenses related to new store openings and video stores acquired during the
period.
Compensation and related expenses were approximately $12,601,000 and
$1,922,000, or 25.0% and 21.2% of total revenues for fiscal 1996 and 1995,
respectively. The increase of $10,679,000 was primarily due to video stores
acquired during the period which accounted for approximately $7,254,000 or 67.9%
of the increase and the opening of 35 Company-owned video stores. The increase
as a percentage of total revenues was due to additional regional management
expenses related to developing new markets, higher initial payroll costs
associated with video stores acquired and higher initial payroll costs
associated with the opening of new Company-owned video stores.
Occupancy expenses were approximately $10,304,000 and $1,426,000, or 20.4%
and 15.8% of total revenues for fiscal 1996 and 1995, respectively. The increase
of $8,878,000, was primarily due to video stores acquired during the period,
which accounted for $6,429,000 or 72.4% of the increase, the expansion of
several stores in fiscal 1996 and the opening of 35 Company-owned stores. The
increase as a percentage of total revenues was primarily due to higher costs
associated with the video stores acquired during the period 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 $13,894,000 and
$1,879,000, or 27.5% and 20.8% of total revenues for fiscal 1996 and 1995,
respectively. Depreciation and amortization expense reflects the depreciation of
store equipment and fixtures and the amortization of videocassettes. The
increase of $12,015,000 was primarily attributable to the addition of new
release videocassette inventory for new, existing, and acquired stores and a
change in policy for amortization of videocassettes. Depreciation and
amortization expenses would have been approximately $11,121,000, or 22.0% of
total revenues, had the accounting change in amortization of videocassettes not
been made. The effect of the change for recognizing salvage value of base stock
and the effect of the application of the new method of amortizing videocassette
copies in excess of the base stock to May 1, 1995, had the impact, in total, of
increasing amortization expense by $2,773,000 and decreasing net income by
$1,604,000 or $.15 per share, in fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were approximately $5,362,000 and $2,223,000, or 10.6% and 24.6% of
total revenues for fiscal 1996 and 1995, respectively. The increase of
approximately $3,139,000 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 $1,880,000
and $136,000, or 3.7% and 1.5% of total revenues for fiscal 1996 and 1995,
respectively. The cost of product sales as a percentage of total product sales
revenue was approximately 55.0% and 51.1% for fiscal 1996 and 1995,
respectively. The increase 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 the period and the sale of inventory and fixtures
to franchisees.
AMORTIZATION OF GOODWILL. Amortization of goodwill was approximately
$1,072,000 and $83,000, or 2.1% and 0.9% of total revenues for fiscal 1996 and
1995, respectively. The increase was primarily attributable to the amortization
of certain intangible assets resulting from the video stores acquired during the
period.
18
<PAGE>
INTEREST EXPENSE. Interest expense was approximately $232,000 and $194,000,
or 0.5% and 2.1% of total revenues for fiscal 1996 and 1995, respectively. The
increase of $38,000 was primarily attributable to interest on debt incurred or
assumed from the video stores acquired during the period and interest on
borrowings under the Company's bank line of credit.
OTHER INCOME. Other income was approximately $548,000 and $155,000, or 1.1%
and 1.7% of total revenues for fiscal 1996 and 1995, respectively. The increase
of $393,000 was primarily due to interest earned on approximately $7,200,000 of
net proceeds from the April 7, 1995 public offering, interest earned on
approximately $28,414,000 of net proceeds from the exercise of the Class A
Warrants prior to their use for acquisitions and interest earned on notes
receivable from related parties.
FISCAL 1995 COMPARED TO FISCAL 1994
RENTAL REVENUE. Rental revenue was approximately $8,364,000 and $4,180,000
for fiscal 1995 and 1994, respectively. The increase in rental revenue of
$4,184,000 was the result of revenues derived from video stores acquired during
the period which accounted for approximately $2,702,000, or 64.6% of the
increase, with the balance of the increase resulting from (i) the increase in
same store revenues of 21%, and (ii) the opening of four new Company-owned
superstores.
SERVICE FEES. Service fees were approximately $421,000 and $472,000 for
fiscal 1995 and 1994, respectively, of which continuing service fees and
royalties accounted for 100% and 86%, respectively, of service fee revenues for
these periods.
PRODUCT SALES. Product sales were approximately $266,000 and $337,000 for
fiscal 1995 and 1994, respectively. The decrease in product sales of $71,000,
reflects the sale of less initial catalog videocassette inventory to
franchisees. The decrease was offset in part by an increase in product sales by
video stores acquired during the period, and the opening of four Company-owned
video stores.
STORE OPERATING EXPENSES. Store operating expenses were approximately
$5,986,000 and $2,997,000 for fiscal 1995 and 1994, respectively. The increase
in store operating expenses of $2,989,000, resulted primarily from expenses of
the video stores acquired during the period, the opening of four Company-owned
video superstores, the expansion and relocation of several video superstores
during fiscal 1995, and an increase in the starting hourly wage of store
employees. Store operating expenses as a percentage of rental revenue of
$8,364,000 and $4,180,000 for fiscal 1995 and 1994, were approximately 71.6% and
71.7% respectively.
Compensation and related expenses were approximately $1,922,000 and $892,000
for fiscal 1995 and 1994, respectively. The increase of $1,030,000, was due to
(i) expenses related to video stores acquired during the period which accounted
for $636,000 of the increase, (ii) higher initial costs associated with opening
and relocating Company-owned superstores, (iii) same store expense increases,
(iv) an increase in the starting hourly wages of store employees, and (v) the
hiring of additional store managers due to expansion.
Occupancy expenses were approximately $1,426,000 and $630,000 for fiscal
1995 and 1994, respectively. The increase of $796,000, reflected the expansion
of several stores in fiscal 1995, the opening of four Company-owned video
superstores during fiscal 1995, and the video stores acquired during the period.
Depreciation and amortization expenses were approximately $1,879,000 and
$1,083,000 for fiscal 1995 and 1994, respectively. The increase of $796,000, was
primarily attributable to the additional new release videocassette inventory for
new, existing and acquired stores as part of the Company's marketing plan. In
fiscal 1995, the Company had a change in accounting estimate pertaining to the
amortization method for rental videocassettes, which had the effect of
increasing net income by approximately $251,000.
Other operating expenses, consisting of the balance of the change in
operating expenses (i.e. advertising expenses) changed proportionally with sales
increases.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were approximately $2,223,000 and $1,179,000 for fiscal 1995 and 1994,
respectively. The increase of approximately $1,044,000, was primarily due to the
addition of management personnel and additional administrative staff to support
the Company's planned growth and related expenditures.
19
<PAGE>
COST OF PRODUCT SALES. Cost of product sales were approximately $136,000
and $186,000 for fiscal 1995 and 1994, respectively. The cost of product sales
as a percentage of total product sales revenue was approximately 51.1% and 55.2%
for fiscal 1995 and 1994, respectively. The percentage decrease was primarily
the result of the mix of products sold.
AMORTIZATION OF GOODWILL. Amortization of goodwill was approximately
$83,000 for fiscal 1995 with no corresponding amount for fiscal 1994. The
increase was primarily attributable to the amortization of certain intangible
assets resulting from the acquisitions during the period.
INTEREST EXPENSE. Interest expense was approximately $194,000 and $143,000
for fiscal 1995 and 1994, respectively. The increase of $51,000, was due to the
approximately $620,000 of notes ("Subordinated Notes") issued in the Company's
subordinated note offering in February 1994 and the $1,000,000 of notes ("Bridge
Notes") issued in the Company's bridge financing in May 1994. The Subordinated
Notes and Bridge Notes were paid in full when the Company completed its initial
public offering in July 1994.
AMORTIZATION OF DEBT COSTS. Amortization of debt costs was approximately
$157,000 for fiscal 1995 with no corresponding expense for fiscal 1994. These
debt costs related to the issuance of the Subordinated Notes and the Bridge
Notes, both of which were paid in full in July 1994.
OTHER INCOME. Other income was approximately $155,000 and $17,000 for
fiscal 1995 and 1994, respectively. The increase of $138,000 resulted from a
gain on the sale of securities and an increase in the rent received from a
Company-owned building.
The net loss from discontinued operations and disposal of discontinued
operations was approximately $59,000 (net of tax) for fiscal 1995. The net loss
from discontinued operations and disposal of discontinued operations resulted
from the closing of the Company's Gamesters-Registered Trademark-, a video game
specialty store.
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.
At April 30, 1996, the Company had cash and cash equivalents of
approximately $676,000. 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 year ended April 30, 1996, net cash provided by operating activities
was approximately $19,083,000. Net cash used in investment activities was
approximately $53,683,000, consisting primarily of approximately $17,391,000 for
businesses acquired during the period, approximately $12,301,000 for new and
remodeled stores, and approximately $22,739,000 for the purchase of
videocassette inventory for existing and new stores, and for the conversion of
stores acquired during the period. Net cash generated from financing activities
was approximately $29,703,000, resulting primarily from the exercise of the
Class A Warrants.
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 the date of this Prospectus, approximately $8,000,000
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
20
<PAGE>
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 fiscal 1996, the Company opened 35 new superstores. The Company expects
to open 60 or more new superstores during fiscal 1997. The Company expects that
each superstore opening will require on average initial capital expenditures
estimated at $260,000, including leasehold improvements, inventory, equipment
and costs related to site location, lease negotiations, construction
supervision, and local permits, but excluding a portion of leasehold
improvements that are customarily paid for by the property developer. The
Company expects to finance these new superstore openings with proceeds from this
Offering, cash from operations and amounts available under the Line of Credit.
During fiscal 1996, the Company acquired, in 12 transactions, 136 video
retail stores. The cost of conversion of acquired stores to the Company's
superstore design varies and, unless remodeled, has ranged from approximately
$12,000 to $86,000 per store, which costs were primarily related to the
installation of the Company's POS system, interior and exterior signage, and the
addition of inventory.
In connection with six of the Company's recent acquisitions in which the
Company has issued an aggregate of 635,613 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 $9.00 on
July 9, 1996, the aggregate Deficiency Payments that the Company may be liable
for is approximately $1,131,000 (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).
To the extent that the Company pursues any future acquisitions, the Company
expects to finance such acquisitions from the net proceeds of debt and equity
offerings, including this Offering, with cash from operations, and from
borrowings under credit facilities. See "Use of Proceeds" and "Business --
Growth Strategy."
The Company has amended recourse notes receivables (the "Recourse Notes")
from the Company's Chief Executive Officer and from the President for
approximately $2,055,000 and $1,142,000, respectively, including accrued
interest through April 30, 1996. The Recourse Notes, which provide for full
recourse against the respective officer's personal assets and Company
stockholdings, are payable in ten equal annual installments, the last of which
is due in May 2005, and accrue interest at 6.9% per annum. The Recourse Notes
were issued by the executives upon their exercise in August 1995 of 420,000
options granted to them under the Stock Option Plans in May 1995 at an exercise
price of $4.3125, the fair market value of the stock on the date the options
were granted. The Recourse Notes represent the total exercise price of such
options plus amounts advanced by the Company to such executives to satisfy then
anticipated tax liabilities. The Recourse Notes are expected to be repaid in
full from the net proceeds of the sale of the shares by the Selling
Stockholders, and through other means, if necessary, in connection with this
Offering. See "Use of Proceeds," "Certain Transactions" and "Principal and
Selling Stockholders."
In addition, as of April 30, 1996, the Company has a note receivable from
the President of the Company for $29,000 which accrues interest at 8% per annum
and is due November 1996. The note represents advances from the Company to the
President from January 1994 to April 1994, together with accrued interest.
21
<PAGE>
The Company generally does not offer lines of credit or guarantees for the
obligations of its franchisees, although on occasion, the Company has made short
term loans to current franchisees. The Company intends to evaluate the
possibility of providing loans or limited guarantees for certain franchisee
obligations, which in the aggregate are not expected to be material to the
Company's financial condition.
Substantially all Company-owned stores are in leased premises, except for
three stores that are located on premises owned by the Company. The Company
expects that most future stores will occupy leased premises.
The Company believes that the net proceeds of the Offering, together with
its current cash from operations and borrowing capabilities, will be sufficient
to meet its anticipated cash requirements and planned growth over the next
twelve months.
INFLATION
To date, inflation has not had a material effect on the Company's business.
The Company anticipates that its business will be affected by general economic
trends. Although the Company has not operated during a period of high inflation,
it believes that it would generally be able to pass increased costs resulting
from inflation on to customers.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The following table sets forth certain selected unaudited quarterly
financial information of the Company for the periods indicated and should be
read in conjunction with the Company's financial statements and notes thereto,
and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
-------------------------------------- ------------------------------------
JULY 31, OCT 31, JAN 31, APR 30, JULY 31, OCT 31, JAN 31, APR 30,
1994 1994 1995 1995 1995 1995 1996 1996
-------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................................... $1,231 $1,712 $2,903 $3,205 $5,172 $10,671 $17,076 $17,585
Operating income (loss)........................... 7 127 325 164 507 818 1,944 (764)
Other income (loss)............................... (237) (16) (11) 68 24 47 89 156
Net income (loss)................................. (146) 27 177 96 300 486 1,177 (335)
Net income (loss) per share (1)................... $ (.20) $ .01 $ .07 $ .03 $ .05 $ .05 $ .10 $ (.03)
</TABLE>
- ------------
(1) Includes the effect of the change for recognizing salvage value of base
stock and the effect of the application of the new method of amortizing
videocassette copies in excess of the base stock to May 1, 1995, which had,
in total, the impact of increasing amortization expense by $2,773,000 and
decreasing net income by $1,604,000, or $.15 per share, for fiscal 1996, all
of which has been recorded in the fourth quarter.
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.
INFORMATION CONTAINED IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. PLEASE SEE "RISK FACTORS" FOR CERTAIN CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
22
<PAGE>
BUSINESS
The Company owns and operates 214 video specialty stores under the name
"Video Update" located in Alaska, Arizona, Illinois, Indiana, Minnesota,
Missouri, Nevada, Pennsylvania, Texas, Washington and Canada and franchises 25
additional video specialty stores predominantly in the United States, as of June
30, 1996. All of the Company's stores in the United States, and 32 or
approximately 46% of the Company's Canadian stores, are superstores which are
defined as retail video stores that carry more than 7,500 rental units. The
Company believes that, as of the end of its most recent fiscal year, it is the
fourth largest video specialty retailer in the United States and the third
largest video specialty retailer in Canada based on the number of stores it
operates and franchises. Video Update stores in the United States and Canada
offer on average approximately 11,000 and 7,700 rental units, respectively,
including multiple copies of new and popular releases and video games, in a
visually appealing and customer friendly layout.
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 and had developed a cost-effective superstore format
that distinguished the Company from other video retailers by providing it with
the flexibility to expand into desirable sites in both small and large markets
without compromising profitability or decreasing the number of viable markets
into which it could expand. During fiscal 1996, the Company grew rapidly in size
from 33 to 204 Company-owned stores. During this period, the Company acquired
136 video stores in 12 transactions and opened 35 new video superstores. Same
store sales during fiscal 1996 increased by approximately 16%. As a result of
these acquisitions, new superstore openings and increases in same store sales,
the Company's revenues and net income increased from approximately $9,051,000
and $154,000 in fiscal 1995, respectively, to approximately $50,504,000 and
$1,628,000 in fiscal 1996, respectively.
GENERAL
THE HOME VIDEO INDUSTRY
The home video retail industry has experienced significant growth over the
last several years. According to Paul Kagan's THE STATE OF HOME VIDEO industry
report, gross revenues for the home video industry in the United States have
grown from approximately $2.9 billion for rentals and approximately $656 million
for sales in 1985 to approximately $9.9 billion for rentals and approximately $5
billion for sales in 1995 and are projected to reach approximately $12.7 billion
and approximately $9.1 billion, respectively, by the year 2005. Paul Kagan's
research also indicates that in 1995 over 80% of American households owning
televisions also owned a VCR.
According to Paul Kagan, total United States consumer spending on filmed
entertainment has increased from approximately $4.6 billion in 1980 to
approximately $31 billion in 1994. According to MEDIA GROUP RESEARCH, a video
industry analyst, the home video market was the largest single source of revenue
to movie studios, accounting for approximately 54% of movie studios' total
revenues. Of the many movies produced by major studios and released in the
United States each year, relatively few are profitable for the studios based on
box office revenue alone. In addition to purchasing box office hits, video
specialty stores typically purchase movies on video that were not as successful
at the box office because customers will often rent a video that they might not
view at a theater. The Company believes that the consumer is more likely to view
movies that were not box office hits on a rented video than on any other medium
because video specialty stores provide an inviting opportunity to browse and
make an impulse choice among a very broad selection of movie titles at a
relatively low price. These purchases by the video stores provide the major
movie studios with a reliable source of revenue for the majority of their
movies.
The Company believes that the home video industry is highly fragmented.
According to Paul Kagan, in 1994 an estimated 27,400 video specialty stores
operated in the United States, including approximately 6,100 superstores.
According to VIDEO STORE MAGAZINE, only nine multiple store businesses operated
in excess of 100 stores in 1995. The Company also believes that there has been a
recent trend toward consolidation in the retail video industry driven by the
recognition by store operators of the competitive advantages that larger
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organizations enjoy in terms of access to working capital, marketing
efficiencies and other economies of scale and the enhanced ability to obtain
quality retail locations. The Company believes that attractive acquisition
opportunities will continue to arise as the industry consolidates.
Although the domestic video retail industry includes both rentals and sales,
the consumer market for videos has primarily been a rental market. Movie studios
determine the suggested retail prices of videos and through that pricing
influence the relative levels of video rentals and sales. Videos released at a
relatively high price, generally $60 or more, are generally purchased by video
retailers and made available for rental. Videos released at a relatively low
price, typically between $15 and $25, are generally purchased by video retailers
for both sale and rental and may be purchased by consumers at a variety of
retail locations. The Company believes that movie studios attempt to maximize
total revenue from video releases by maintaining retail prices at a relatively
high level during the first four months to one year after a new video release,
during which time sales are made primarily to video retailers for rental, and
then releasing the video at a lower price to promote sales to consumers. From
time to time, however, certain movies that are believed to have mass appeal or
family appeal, such as BATMAN FOREVER, POCAHONTAS and CASPER, are initially
released for sale at a relatively low price. Video retailers purchase a large
portion of these titles at the same low price, which titles thereafter become
low cost rentals for such retailers. These lower priced releases are more
attractive rentals to the retailers because of the relatively few number of
rentals required to recover their cost and provide a favorable economic return
to such retailers.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. These distribution channels currently include, in
release date order, movie theaters, video specialty stores, pay-per-view, basic
cable television, and foreign, network and syndicated television. The Company
believes that this method of sequential release has allowed movie studios to
increase their total revenue with relatively little adverse effect on the
revenue derived from previously established channels and that movie studios will
continue the practice of sequential release as new distribution channels become
available. According to Paul Kagan, many movie studios have recently agreed to
extend the length of the exclusive window on many new release videos for video
specialty stores from the current practice of 30 days to between 60 and 90 days.
OPERATING STRATEGY
The Company's management has substantial experience in the video retailing
industry. The Company's senior management operations team has worked together
for more than ten years. Through the management team, the Company has developed
a cost-effective superstore format that distinguishes the Company from other
video retailers by providing it with the flexibility to expand into desirable
sites in both small and large markets without compromising profitability or
decreasing the number of viable markets into which it can expand. Management's
depth of experience in and knowledge of the industry are reflected in the
Company's operating strategy, the key elements of which include the following:
PROVIDE EXTENSIVE SELECTION OF VIDEOCASSETTES. All of the Company's stores
in the United States and 32, or approximately 46%, of the Company's Canadian
stores are superstores. Superstores are video rental stores that have more than
7,500 rental units. The Company believes that an extensive selection of
videocassettes is a key determinant that consumers consider in choosing to visit
and patronize a particular video store. The Company tailors the videocassettes
available for rent in a given store according to the market served by the store.
Additionally, catalog videocassettes (those in release for more than one year)
are displayed in a library style (spine-out method) allowing for significantly
more videocassettes to be made available for rent. As a result, the Company
believes that it is able to provide an extensive selection, yet retain greater
flexibility than many of its competitors in terms of store size in which it can
operate. Video Update stores in the United States and Canada offer on average
approximately 11,000 and 7,700 rental units, respectively.
EFFECTIVELY MANAGE INVENTORIES. The Company maintains an integrated POS
system that provides it with immediate access to and feedback on records related
to, among other things, videocassette rentals, individual title performance,
category rental performance, shrinkage and overdue rentals. The Company
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endeavors to convert the POS systems of acquired stores to that of the Company's
as quickly as is practicable. The Company utilizes its POS system to manage its
inventory turns, purchase new inventory, and balance customer demand and rental
trends, all of which the Company believes maximizes each store's profitability.
AGGRESSIVE MARKETING. The Company utilizes an aggressive marketing program
designed to attract new customers and increase the frequency of rentals by
current customers. The Company focuses its marketing on individual stores and
the local markets in which they operate. Direct mailings, including postcards
and flyers, are utilized regularly. Additionally, the Company promotes
extensively with couponing and cross promotions. The Company's popular
"Two-for-Tuesday" rental promotion is used throughout its system and has been
effective in building customer loyalty and increasing revenue on a day of the
week that historically has not been a significant rental volume day.
GEOGRAPHIC CONCENTRATION. The Company intends to continue developing new
superstores and acquiring existing chains of stores in regions where the Company
has existing operations. The Company also intends to expand into additional
metropolitan areas where it determines that sufficient quality locations and/or
acquisition opportunities are available. The Company believes that this
geographic concentration will allow the Company to more easily monitor store
operations through its regional management offices and to achieve operating
efficiencies in inventory management, marketing, distribution, training and
store supervision. Because the Company operates multiple stores, it is able to
receive relatively large aggregate cooperative advertising credits from its
distributors. The Company receives cooperative advertising credits for each
store it operates, and by operating multiple stores in a single geographic
market, the Company can more effectively use cooperative advertising credits to
maximize the impact of its advertising.
CONSISTENCY OF IMAGE AND OPERATIONS. The Company strives to create a
national presence and name recognition. To achieve this objective and to most
efficiently and effectively operate its stores, the Company attempts to maintain
consistency among its Company-owned and franchised stores. This consistency of
operations includes signage, store layout, marketing, management information
systems and customer service. The Company attempts to fully integrate acquired
stores into its overall format as quickly as is practicable. Such integration
typically involves the prompt installation of the management information systems
and interior signage, supplementing the existing base stock of titles,
processing acquired videocassettes, training existing management and sales
personnel, and completing limited build-out of the facilities. Substantially all
of the Company's acquired stores to date have completed these integration items.
Subject to permit requirements and other such regulatory controls, the Company
installs exterior signage as soon as practicable. To expedite the integration of
acquired businesses, the Company has developed a uniform approach that
management believes minimizes the time necessary to fully assimilate an acquired
store's operations into those of the Company.
GROWTH STRATEGY
The Company's objective is to become a national presence in the video rental
industry. The key elements of the Company's growth strategy are the following:
TARGETED ACQUISITIONS. The Company believes that acquiring chains of stores
is often the most cost-effective means of entering a new market, particularly
when the stores are in desirable locations. The Company also believes that the
rental video industry has experienced a recent trend toward consolidation driven
by the recognition by store operators of the competitive advantages that larger
organizations enjoy in terms of access to working capital, marketing
efficiencies and other economies of scale and the enhanced ability to obtain
quality retail locations. This trend has created an opportunity for the Company
to grow further through acquisitions. The Company believes that it will continue
to be presented with attractive acquisition opportunities.
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During fiscal 1996, the Company grew rapidly in size from 33 to 204
Company-owned stores. Approximately 80% of such growth was accomplished through
acquisitions with the balance resulting from new superstore openings.
Altogether, the Company acquired 136 video stores in 12 transactions during
fiscal 1996.
The following table summarizes the 12 acquisitions made by the Company
during fiscal 1996.
<TABLE>
<CAPTION>
DATE OF NUMBER OF LOCATION OF
ACQUIRED BUSINESSES ACQUISITION STORES ACQUIRED STORE(S)
- --------------------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C>
Video Powerstore, Inc. June 1995 22 Arizona/Nevada
Tops N Video June 1995 3 Arizona
Steve Nielsen Corp. July 1995 1 Minnesota
AV Video, Inc. August 1995 14 Washington
Wilderness Video Group Ltd. August 1995 55 Canada
Indy Video, Inc. September 1995 10 Indiana
94 Video West, Inc. October 1995 12 Canada
Mega Movies, Inc. October 1995 2 Alaska
Talerico Enterprises, Inc. October 1995 6 Arizona
B&R Investment, Inc. October 1995 1 Minnesota
Videoland, Inc. November 1995 7 Indiana
Bedard Entertainment, Inc. January 1996 3 Minnesota
---
Total 136
---
---
</TABLE>
NEW SUPERSTORE DEVELOPMENT. The Company intends to continue to expand its
operations through new superstore openings. During fiscal 1996, the Company
opened 35 new video superstores. The Company expects to open 60 or more new
superstores during fiscal 1997, principally in markets with multiple shopping
areas and a sufficient population base to support more than one video specialty
superstore operator. The Company intends to open these superstores in its
existing markets and selected new markets where attractive opportunities are
available. The Company believes that the selection of locations for its
superstores has been and will continue to be critical to the success of its
operations. Important criteria for the selection of a new superstore location
include density of local residential population, traffic count on roads
immediately adjacent to the superstore location, visibility of the superstore to
passing motorists, easy accessibility and ample parking. The Company estimates
that each new superstore currently requires 12 months of operations in order to
ramp-up to its expected level of mature operations.
FRANCHISE OPERATIONS. The Company intends to increase its franchise
marketing and to expand its franchise operations. Franchised superstores operate
under substantially the same hours and methods of operation as Company-owned
superstores. The Company currently intends to franchise superstores primarily in
areas where the Company does not expect to pursue new superstore development or
acquisitions.
STORE OPERATIONS AND LOCATIONS
Each Video Update store operates under substantially the same plan of
operation. Company-owned stores are open 365 days a year with daily hours
generally from 10:00 a.m. to 11:00 p.m. Sunday through Thursday and from 10:00
a.m. to 12 midnight Friday and Saturday. The Company's stores use a self-service
system, whereby customers select products from the shelves and proceed to the
checkout counter. Video Update stores in the United States and Canada average
approximately 5,700 and 3,500 square feet in size, respectively. Superstores
developed in fiscal 1996 averaged approximately 6,700 square feet in size and
are representative of the Company's superstore prototype going forward.
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The Company seeks to locate its stores in geographic areas that will enable
it to achieve operating efficiencies in inventory management, advertising,
marketing, distribution, training and store supervision. The following table
sets forth the locations of existing Company-owned and franchised stores as of
June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL
STATE OR PROVINCE COMPANY-OWNED STORES FRANCHISED STORES STORES
- --------------------------------- ------------------------- --------------------- -----------
<S> <C> <C> <C>
Alaska 2 - 2
Arizona 35 - 35
Illinois 8 - 8
Indiana 20 - 20
Minnesota 42 9 51
Missouri 3 - 3
Nevada 4 - 4
New Hampshire - 4 4
Pennsylvania 5 1 6
South Carolina - 1 1
Texas 1 - 1
Virginia - 8 8
Washington 25 - 25
Wisconsin - 1 1
Alberta 23 - 23
British Columbia 45 1 46
Saskatchewan 1 - 1
--
--- ---
Total 214 25 239
--
--
--- ---
--- ---
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
The Company believes the accurate and efficient management of purchasing,
inventory and sales records has been important to the Company's success. The
Company maintains information, updated daily, regarding revenue, current and
historical sales and rental activity, demographics of store membership and
videocassette rental patterns. This information can be organized by store, by
region or for all operations.
The Company maintains a national POS system and a corporate information
system. All rental and sales transactions are recorded by the POS system when
scanned at the time of customer checkout. Nightly, the POS system transmits each
store's data from operations into the corporate information system. The systems
track all rental and sales products from the videocassette distribution center
to each store using scanned bar code information. The systems also maintain
detailed rental history of each customer and title. This information produces
the reports used by the Company, including those used in making purchasing
decisions on new releases. All of the Company's stores, including all of the
acquired stores, use the Company's POS system.
PRODUCTS
VIDEOCASSETTE RENTAL. The Company's primary source of revenue is the rental
of videocassettes. Video rental prices per night generally range from $2.49 to
$3.49 for new releases to $1.99 for catalog titles. Videocassettes are available
for one-night, two-night or multiple night rental. The Company's stores
generally carry approximately 11,000 and 7,700 videos for rent in its U.S. and
Canadian stores, respectively, representing approximately 7,900 and 5,500
titles, respectively. Movie titles are classified into at least 23 categories,
such as "Action," "Drama," "Family," and "Children" and are displayed
alphabetically within those categories. The Company determines its rental prices
for titles and duration of rentals based on the length of time the title has
been available on videocassette. The Company believes that its rental prices are
competitive with those of other video stores, and its videocassettes are
available for one-day and multiple-day rentals.
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VIDEO GAMES. In addition to videocassette rentals, stores also rent video
games for use with Sony Playstation-TM-, Nintendo-TM- and Sega Genesis-TM- video
game machines.
ADDITIONAL PRODUCTS. The Company recently began renting audio books, which
are now available in a majority of its stores. The selection of audio books
includes fiction and non-fiction classics, and educational materials and books.
For the convenience of its customers, the Company also sells blank
videocassettes and video cleaning equipment and rents videocassette and video
game players. In addition, the Company sells previously viewed videocassettes
and new and used video games.
FRANCHISE OPERATIONS
To maximize its ability to expand rapidly in the home video business, the
Company has employed a strategy of developing Video Update superstores through a
combination of Company-owned and franchised superstores. The balance between
Company and franchise development in a given market is determined by evaluating
a number of different criteria, including the availability of acquisition or
store development opportunities and resources.
The standard Company franchise agreement generally requires the franchisee
to pay the Company a continuing monthly royalty fee equal to five percent of the
franchisee's gross monthly revenue, as calculated under the terms of the
franchise agreement. The franchisee is also generally obligated to pay a
continuing monthly royalty fee of one percent of gross monthly revenues derived
specifically from the sale of certain video products. The monthly royalty fees
are calculated and due from the date that the franchised superstore opens for
business. In addition to the royalty payments, franchisees generally also are
required to pay a monthly advertising fee equal to one percent of the
franchisee's gross monthly revenue for the preceding month.
Under the Company's current franchising program, the Company will grant to a
franchise owner the right to develop one or a specified number of Video Update
superstores at an approved location or future locations (within specific
geographic areas) pursuant to the terms of a franchise agreement. The
exclusivity accorded to a franchisee is individually negotiated but generally
does not extend beyond a radius of one mile from the franchised location. Prior
to the actual store opening, the Company provides advice to the franchisee on
promotions, store displays and inventory control as well as a five day
comprehensive training course.
The Company monitors franchisees' compliance with ongoing obligations on the
basis of monthly revenue reports and ordered inventory reports. The franchise
agreement generally also grants the Company the right to audit the franchisee's
books, business records, sales reports, financial statements, and tax returns at
any time. The franchise agreement allows the Company to terminate the franchise
under certain conditions, including without limitation, failure to comply with
the Company's operating guidelines, failure to obtain and maintain the necessary
retail licenses and permits, operation of a competitive venture, and
understatement of gross monthly revenues for any two operating periods by more
than two percent. To date, the Company has experienced no material problems
relating to the understatement of revenues by franchisees.
MARKETING AND ADVERTISING
The Company primarily relies on direct mail advertising to promote its
business and increase the familiarity of potential customers with the Company.
The Company's direct mail typically consists of pricing-related promotions such
as two-for-one coupons or a free rental coupon for new customers. The Company's
general practice of opening several Company-owned or franchised stores within a
geographic region enables it to maximize the effectiveness of its advertising
expenditures. The cost of these activities is generally funded by cooperative
movie advertising promotions made available by studios or suppliers to promote
certain videocassettes. The Company also benefits from the advertising and
marketing of studios and theaters in connection with their efforts to promote
films and increase box office revenues.
The Company relies on referrals from current franchisees and advertising in
franchise-oriented publications in marketing its franchises.
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SUPPLIERS
The Company acquires its inventory of videocassettes and video games and
accessories from several videocassette suppliers, including local divisions of
Sight and Sound Distributors of St. Louis, Missouri ("Sight and Sound"), Baker &
Taylor, Inc. of Chicago, Illinois, Ingram Entertainment Incorporated of
Nashville, Tennessee, and Midwest Multimedia & Games of Chicago, Illinois.
The videocassette inventory in each Company-owned and franchised store
consists of catalog titles and new release titles. To develop its inventory of
titles for store openings, the Company transfers videocassettes from existing
stores and purchases videocassettes from suppliers.
The Company currently purchases new release rental videocassettes at an
average cost of approximately $40 to $45. Since September 1989, the Company has
acquired most of its new release inventory from Sight and Sound, and during each
of fiscal 1995 and 1996 the Company purchased approximately 75% of its new
release titles from that supplier. The Company believes that, if its
relationship with Sight and Sound were terminated, the Company could obtain
videocassettes from other suppliers at prices and on terms comparable to those
available from Sight and Sound.
Suppliers generally provide the Company with a comprehensive monthly listing
of all new video releases. In addition, movie studios generally provide the
Company with several copies of a new release video for preview by the Company.
The Company's movie selection committee uses listings of new releases, video
previews, knowledge of the popularity of past video releases and the Company's
computerized information on the past performance of titles rented by the Company
to select the titles and number of copies of each title to be acquired for
rental in each of its stores. The Company is permitted to return unopened or
defective videocassettes to its suppliers in certain circumstances. The Company
purchases video game software from a variety of distributors, based on price and
availability.
INVENTORY
New release videocassettes are ordered by the Company and delivered directly
to stores where they are offered for rental or sale on the studio release date
for the title. Previously viewed inventory for existing and new stores is
received, processed and stored in the Company's approximately 34,000 square foot
central distribution facility located in St. Paul, Minnesota. New release and
previously viewed videocassettes and games are processed for rental according to
uniform Company-wide standards. Each videocassette is removed from its original
carton and placed in a standard Video Update rental case with a magnetic
security device. Bar codes are then affixed to each videocassette and video
game. For previously viewed videocassettes, the artwork from the original carton
is cut out and inserted into clear pockets on the standard Video Update rental
case for shelf display. For new release videocassettes, the original carton is
displayed separately in front of the standard Video Update rental case
containing the videocassette.
COMPETITION
The video retail industry is highly competitive. The Company competes with
other video retail stores, including Blockbuster and other superstores, and with
supermarkets, pharmacies, convenience stores, bookstores, mass merchants, mail
order operations, vending machines and other retailers, as well as with
noncommercial sources such as libraries. In addition to competing with other
video retailers, the Company competes with other leisure-time activities,
especially entertainment activities such as movie theaters, sporting events,
network television and cable television.
The Company also competes with other distribution channels for studio
movies, including pay-per-view television on basic cable service, which
currently offer only a limited number of channels and monthly movie selections.
Recently developed digital compression technology combined with fiber optics and
other technology will eventually permit cable companies, direct broadcast
satellite companies and other telecommunications companies to transmit a much
greater number of movies to homes at scheduled intervals throughout the day.
Ultimately, these technologies could lead to the availability of movies to the
consumer on demand. Certain cable and other telecommunications companies have
tested and are continuing to test movie on demand services in some markets.
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<PAGE>
Certain of the Company's larger, better capitalized competitors may seek to
acquire some of the same video specialty stores that the Company seeks to
acquire. Such competition for acquisitions would likely increase acquisition
prices and related costs and result in fewer attractive acquisition
opportunities, which could have a material adverse effect on the Company's
growth.
The Company's franchise operations compete with numerous franchise
operations in many industries that have significantly greater financial and
human resources and more experience in selling franchises than does the Company.
Potential franchisees may believe that these franchisors offer greater
opportunities for success than the Company.
TRADEMARKS
The Company has a federal registration for its trademark "Video
Update-Registered Trademark-" and a logo that includes its trademark. The
Company considers its service marks and trademarks to be important to its
business and intends to actively protect them.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws, including
the Federal Videotape Privacy Protection Act and similar state laws that govern
the disclosure and destruction of video rental records. The Company also must
comply with various regulations affecting its business, including state and
local licensing, zoning, land use, construction and environmental regulations.
The Company has not made, nor does it anticipate making, any material
capital expenditures in order to comply with environmental regulations. No
assurance can be given, however, that new environmental regulations will not be
adopted that will require the Company to make material capital expenditures for
compliance.
The Company also is subject to the Federal Trade Commission's Trade
Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures" (the "FTC Franchise Rule") and
state laws and regulations that govern the offer and sale of franchises. To
offer and sell franchises, the Company is required by the FTC Franchise Rule to
furnish each prospective franchisee a current franchise offering circular prior
to the sale of a franchise. In addition, a number of states require a franchisor
to comply with registration or filing requirements prior to offering a franchise
in the state and to provide a prospective franchisee with a current franchise
offering circular complying with the state's laws, prior to the sale of the
franchise. The Company intends to maintain a franchise offering circular that
complies with all applicable federal and state franchise sales laws. However, if
the Company is unable to comply with the franchise sales laws and regulations of
any state that regulates the offer and sales of franchises, the Company will be
unable to offer and sell franchises in such state.
The Company is required to update its franchise offering circular to reflect
material changes, under applicable law, regarding its franchise offering and to
comply with changes in disclosure requirements. The occurrence of any such
material changes may, from time to time, require the Company to stop offering
and selling franchises until its franchise offering circular is updated. No
assurance can be given that the Company's franchising program will not be
adversely affected by its failure to register or file in certain states
consistent with its expansion plans, or because compliance with applicable law
necessitates that the Company cease offering and selling franchises in certain
states until its franchise offering circular is updated or because of its
inability to comply with existing or future franchise laws.
The Company also is subject to a number of state laws and regulations that
regulate certain substantive aspects of the franchisor-franchisee relationship,
including those governing the termination, or nonrenewal of a franchise
agreement (such as requirements that "good cause" exist as a basis for such
termination and that a franchisee be given advance notice of, and a right to
cure, a default prior to termination), requirements that the franchisor deal
with its franchisees in good faith, prohibitions against interference with the
right of free association among franchisees and those regulating discrimination
among franchisees in charges, royalties or fees.
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<PAGE>
Compliance with federal and state franchise laws is costly and time
consuming, and no assurance can be given that the Company will not encounter
difficulties or delays in this area or that it will not require significant
capital, in addition to the portion of the net proceeds of this Offering, for
franchising activities.
THIS PROSPECTUS DOES NOT CONSTITUTE, AND SHALL NOT BE CONSTRUED AS, AN OFFER
TO SELL A VIDEO UPDATE FRANCHISE. SUCH OFFERS MAY BE MADE ONLY BY AN OFFERING
CIRCULAR IN COMPLIANCE WITH STATE LAWS AND THE FEDERAL TRADE COMMISSION
DISCLOSURE RULE. THE DESCRIPTION OF THE FRANCHISES SET FORTH IN THIS PROSPECTUS
IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF A VIDEO UPDATE FRANCHISE
BUSINESS.
LITIGATION
In connection with the acquisition of the assets of Talerico Enterprises,
Inc. ("TEI") in October 1995, the Company has advised TEI of what it believes to
be various breaches of representations and warranties made by TEI in its asset
purchase agreement with the Company. Accordingly, the Company has withheld a
portion of the purchase price, including the 55,000 Acquisition Shares. In
December 1995, TEI filed an action against the Company in Arizona state court
for breach of contract. The Company intends to vigorously defend this action,
and it has asserted counterclaims in the action. Although no assurance can be
given as to the outcome of such litigation, the Company does not believe that
the resolution of such action will materially adversely impact the Company's
operations.
The Company has been notified of a potential claim by the owner/landlord of
a retail location previously occupied by the Company in Kent, Washington for
breach of a lease contract and back rent. The landlord has advised the Company
that it may seek in excess of $50,000 in damages. The Company intends to
vigorously defend this action. Although no assurance can be given as to the
outcome of such litigation, the Company does not believe that resolution of the
matter will materially adversely impact the Company's operations.
EMPLOYEES
As of June 15, 1996, Video Update employed 2,460 persons, including 2,241 in
Company-owned stores and 219 in the Company's corporate, administrative and
warehousing operations. Of the employees, approximately 637 were full-time and
1,823 were part-time. The typical required staffing for a Video Update store is
8 to 12 employees, including a store manager. Store managers are supervised by
district managers who in turn are supervised by regional managers. Regional
managers report directly to either the Company's Vice President of Store
Operations or Chief Operations Officer. The Company believes that its employee
relations are satisfactory.
The Company has an incentive bonus plan under which store managers are
eligible for monthly bonuses. The performance of each manager is evaluated on a
variety of criteria, including store revenue, payroll, cash overages and
shortages, and inventory control.
FACILITIES
The Company leases substantially all of the sites (including buildings and
improvements) where its Company-owned video stores are located. The occupancy
expense for these sites for the years ended April 30, 1995 and 1996 was
approximately $1,426,000 and $10,304,000, respectively. These leases generally
have a term of three to ten years and provide options to renew for periods
ranging from three to five additional years. The Company is generally
responsible for real estate taxes, insurance and utilities under all leases. See
Note 7 of Notes to Consolidated Financial Statements. The Company expects that
most future video superstores will also occupy leased premises. The Company owns
three locations for Company-owned superstores, one of which is subject to a
mortgage. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Company's franchisees enter into leases individually for their
respective superstore locations. These leases are on terms substantially similar
to the terms for Company-owned superstore leases. Generally, the Company does
not guarantee and is not a party to such leases.
The Company's corporate headquarters are located at 3100 World Trade Center,
30 East Seventh Street, St. Paul, Minnesota 55101 and consists of approximately
14,500 square feet of office space. The Company's central distribution facility
is located at a different location in St. Paul, Minnesota and consists of
31
<PAGE>
approximately 34,000 square feet. The Company's headquarters and distribution
facilities are leased pursuant to agreements that expire on October 31, 2001 and
August 31, 2001, respectively. In addition, the Company maintains other
locations for the offices of district and regional managers and for limited
storage purposes. The Company expects that suitable additional space will be
available in the Twin Cities area, when needed, on commercially reasonable
terms.
INFORMATION CONTAINED IN THIS "BUSINESS" SECTION CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "WOULD," "COULD," "INTEND," "PLAN," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. PLEASE SEE "RISK FACTORS" FOR CERTAIN CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES RELATING TO THE OPENING OR
ACQUISITION OF SUPERSTORES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
32
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company, their positions held in
the Company, and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
Daniel A. Potter 38 Chairman and Chief Executive Officer
John M. Bedard 38 President and Director
Daniel C. Howard 35 Chief Operations Officer and Director
Christopher J. Gondeck 40 Chief Financial Officer
Richard Bedard 42 Executive Vice President
Bruce D. Carlson 35 Vice President of Real Estate
Michael G. Schifsky 40 Vice President of Store Development
Robert E. Yager 31 Vice President of Store Operations and Director
Jana Webster Vaughn 33 Director
Paul M. Kelnberger 52 Director
</TABLE>
Each Director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until his successor is duly elected by the
stockholders. Vacancies and newly created directorships resulting from any
increase in the number of authorized Directors may be filled by a majority vote
of Directors then remaining in office. The Company expects to appoint two
additional Directors to its Board within the 90 day period following the closing
of this Offering, although the Company has not yet identified the individuals to
be so appointed. In addition, D.H. Blair has a right at its option to designate
a Director to the Board of Directors until April 2000. D.H. Blair has not yet
designated its nominee. Officers are elected by and serve at the pleasure of the
Board of Directors. The Board of Directors has established audit and executive
compensation committees, each consisting of Messrs. Howard, Kelnberger and Ms.
Vaughn.
DANIEL A. POTTER co-founded the Company in 1983 and has served as the
Company's Chairman and Chief Executive Officer since its inception. Mr. Potter
devised, initiated, and structured the franchising strategy implemented by the
Company and is primarily responsible for the Company's financial and strategic
planning. Mr. Potter is the brother-in-law of Robert E. Yager, a Vice President
of Store Operations and a Director of the Company.
JOHN M. BEDARD co-founded the Company in 1983 with Mr. Potter and has served
as the Company's President and as a Director since its inception. Mr. Bedard,
together with Mr. Potter, devised and implemented the Company's real estate
development program and operations. Mr. Bedard is the brother of Richard Bedard,
an Executive Vice President of the Company.
DANIEL C. HOWARD has served as Chief Operations Officer for the Company
since 1990, has coordinated the Company's operations since 1983 and has served
as a Director since August 1994. Mr. Howard is a member of the audit and
executive compensation committees.
CHRISTOPHER J. GONDECK has served as the Company's Chief Financial Officer
since January 1995. From May 1994 to September 1994, Mr. Gondeck was a financial
consultant to Corning-Donahue, Inc. and Fire Brick Supply, privately held brick
and tile businesses. From 1992 to March 1994, Mr. Gondeck served as Senior Vice
President and Chief Financial Officer for Premier Salons International, Inc.
("Premier"), a privately held company based in Toronto, Ontario. Prior to
December 1993, Premier was known as MEI Salon Corp. ("MEI Salon"), a wholly
owned subsidiary of MEI Diversified, Inc. ("MEI Diversified"), which operated
over 1,000 hair care salon locations throughout the United States and Canada.
While Mr. Gondeck was Chief Financial Officer of MEI Salon, in February 1993,
MEI Salon and MEI Diversified filed for
33
<PAGE>
bankruptcy protection under federal law. Prior to 1992, Mr. Gondeck served in
various financial and management capacities for MEI Diversified. Mr. Gondeck
also has served as a staff accountant with Ernst & Young LLP. Mr. Gondeck is a
certified public accountant.
RICHARD BEDARD has served as an Executive Vice President of the Company
since September 1995. From 1986 to 1995, Mr. Bedard served as the Company's Vice
President of Franchise Development. Mr. Bedard is the brother of John M. Bedard,
the Company's President and a Director.
BRUCE D. CARLSON has served as the Company's Vice President of Real Estate
Operations since 1990. From 1984 to 1990, Mr. Carlson held the positions of
Director of Advertising and Regional Corporate Store Manager.
MICHAEL G. SCHIFSKY has served as the Vice President of Store Development
since rejoining the Company in 1990. Mr. Schifsky also served as District
Manager of the Company from 1984 to 1988. From 1988 to 1990 he was the principal
stockholder of Bankshot Investments, Inc., a privately held company engaged in
the development of billiard facilities.
ROBERT E. YAGER has served as a Vice President of Store Operations since
November 1995 and as a Director since August 1994. From September 1994 to
November 1995, Mr. Yager served as a Regional Manager of the Company. Prior to
that time, since 1989, Mr. Yager owned and operated two franchised Video Update
superstores in the Twin Cities area, until such store operations were purchased
by the Company in September 1994. From 1984 to 1989, Mr. Yager was a computer
programmer for a division of NCR Corporation. Mr. Yager is the brother-in-law of
Daniel A. Potter, the Company's Chairman and Chief Executive Officer. See
"Certain Transactions."
PAUL M. KELNBERGER has served as a Director since August 1994. Mr.
Kelnberger has been a member of Johnson, West & Co., PLC ("Johnson, West &
Co."), a certified public accounting firm with its principal offices in St.
Paul, Minnesota, since 1975. In addition, since November 1995 Mr. Kelnberger has
served as a Director of Leuthold Funds, a publicly held mutual fund. Johnson,
West & Co. performed auditing services for the Company prior to the fiscal year
ended April 30, 1993. Since that time, Johnson, West & Co. has provided and
continues to provide to the Company accounting services in connection with the
Company's acquisitions and for tax return preparation services. Mr. Kelnberger
has significant franchise and retail company accounting experience. Mr.
Kelnberger is a certified public accountant and holds a Certificate of
Accounting from the Academy of Accountancy in Minneapolis, Minnesota. He chairs
the Board's audit committee and is a member of the executive compensation
committee. See "Certain Transactions."
JANA WEBSTER VAUGHN has served as a Director since August 1994. Ms. Vaughn
has been the Director of Marketing and Development of Adoptive Families of
America, a non-profit, national education, legislation and advocacy
organization, since June 1995. From May 1992 to July 1995, Ms. Vaughn was the
Executive Director of the Greater Anoka County, Minnesota Humane Society. From
1989 to 1992, she served as Special Projects Manager for KARE 11 Television, a
network television station in Minneapolis, Minnesota. Ms. Vaughn is a member of
the audit and executive compensation committees.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITIES
In accordance with Delaware law, the Company's Certificate of Incorporation
and Bylaws, as amended, eliminate in certain circumstances the liability of
directors of the Company for monetary damages for breach of their fiduciary duty
as directors. This provision does not eliminate the liability of a director (i)
for a breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for a
willful or negligent declaration of an unlawful dividend, stock purchase or
redemption or (iv) for transactions from which the director derived an improper
personal benefit.
In addition, the Company's Bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts paid in defense or settlement in connection with threatened, pending or
completed suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, except in relation
to matters with respect to which such persons shall be determined not to have
acted in good faith, lawfully or in the best interests of the Company. With
respect to matters as to which the Company's officers and directors and others
are determined to be liable for misconduct or negligence in the performance of
their duties, the Company's Bylaws provide for
34
<PAGE>
indemnification only to the extent that the Company determines that such person
acted in good faith and in a manner not opposed to the best interests of the
Company and had no reasonable cause to believe that his conduct was unlawful.
Insofar as limitation of, or indemnification for, liabilities arising under
the Securities Act may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing, the Company has been informed
that, in the opinion of the Commission, such limitation or indemnification is
against public policy as expressed in the Securities Act, and is therefore,
unenforceable.
DIRECTORS' COMPENSATION
Members of the Board of Directors who are not employees of the Company
receive $750 for each meeting of the Board of Directors and for each committee
meeting of the Board of Directors attended by such Director, in addition to
reimbursement of reasonable expenses incurred in attending such meetings, and
receive $2,000 for each quarter of service as a Director. Additionally,
non-employee Directors receive options under the Formula Plan, as follows: (i)
Mr. Kelnberger and Ms. Vaughn each receive options annually in September to
purchase 1,500 shares of Class A Common Stock, which vest in two equal annual
installments on the first two anniversaries of the date of grant and which are
exercisable at a price equal to the fair market value of the Class A Common
Stock on the date of grant, provided that each of them is a Director on the date
of the grant and each of them has attended at least 75% of the meetings he or
she was eligible to attend, and (ii) any non-employee Directors appointed in the
future will receive on the date of such appointment, options to purchase 3,000
shares of Class A Common Stock, which will vest in three equal annual
installments on the first three anniversaries of the date of grant and which
will be exercisable at a price equal to the fair market value of the Class A
Common Stock on the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Company's
officers with respect to services rendered to the Company during the fiscal
years ended April 30, 1996, 1995 and 1994. There were no other executive
officers whose total salary and bonus exceeded $100,000 during the fiscal year
ended April 30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION ---------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY(1) BONUS COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
(A) (B) (C) (D) (E) (G) (I)
- ------------------------------------------ --------- ---------- ----------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter.......................... 1996 $ 248,002 $ 0 $ 894,357 270,000 $ 21,122
Chairman of the Board 1995 $ 216,671 $ 0 $ 0 0 $ 0
and Chief Executive Officer 1994 $ 288,520 $ 0 $ 0 0 $ 0
John M. Bedard............................ 1996 $ 158,755 $ 0 $ 496,875 150,000 $ 18,081
President and Director 1995 $ 125,000 $ 0 $ 0 0 $ 19,200
1994 $ 43,906 $ 0 $ 0 0 $ 19,200
Christopher J. Gondeck(5)................. 1996 $ 114,548 $ 0 $ 0 45,000 $ 2,854
Chief Financial Officer 1995 $ 34,000 $ 0 $ 0 30,000 $ 0
</TABLE>
- -------------
(1) Amounts shown indicate cash compensation earned and received by executive
officers; no amounts were earned but deferred at the election of those
officers. Executive officers participate in the Company's group health
insurance plan.
(2) Amounts shown reflect the difference between the aggregate exercise price of
the options exercised by Messrs. Potter and Bedard during the period, and
the aggregate fair market value of the shares of Class A Common Stock issued
to Messrs. Potter and Bedard upon such exercises, as of the date of
issuance.
(3) Amounts shown reflect grants of options to purchase Class A Common Stock
pursuant to the Company's Stock Option Plans. During fiscal years 1994
through 1996, the Company made no awards of restricted stock and did not
have a long-term incentive plan.
(4) Amounts shown reflect payment for automobile expenses and insurance.
(5) Mr. Gondeck has been employed by the Company since January 2, 1995.
35
<PAGE>
OPTION/SAR GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
- ------------------------------------------------------------------------------------------------------ ASSUMED ANNUAL RATES
NUMBER OF OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS/SARS OPTION
OPTIONS/SARS GRANTED TO EXERCISE OF TERM(1)(2)
GRANTED(1) EMPLOYEES IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME (#) YEAR(3) ($/SH) DATE(4) 5% ($) 10% ($)
(A) (B) (C) (D) (E) (F) (G)
- --------------------------------- ------------- ------------------------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter................. 270,000 33.7% $ 4.3125 05/02/2005 0 0
John M. Bedard................... 150,000 18.7% $ 4.3125 05/02/2005 0 0
Christopher J. Gondeck........... 45,000 5.6% $ 4.3125 05/02/2005 $ 122,045 $ 309,286
</TABLE>
- -------------
(1) Mr. Potter and Mr. Bedard exercised all outstanding options held by them
during fiscal 1996. Mr. Gondeck did not exercise any options granted during
fiscal 1996.
(2) The dollar gains under these columns result from calculations assuming
hypothetical growth rates as set by the Commission and are not intended to
forecast future price appreciation of the Class A Common Stock.
(3) In fiscal 1996, options to purchase a total of 801,000 shares of Class A
Common Stock were granted to employees of the Company, including executive
officers.
(4) These options are subject to earlier termination upon certain events related
to termination of employment.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
AT FISCAL OPTIONS/SARS
YEAR-END AT FISCAL YEAR-
SHARES VALUE (#) END($)
ACQUIRED ON REALIZED(1) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE(2) UNEXERCISABLE(3)
(A) (B) (C) (D) (E)
- ------------------------------------------------------ ------------ ----------- ----------------- -------------------
<S> <C> <C> <C> <C>
Daniel A. Potter...................................... 270,000 $ 894,375 0/0 0/0
John M. Bedard........................................ 150,000 $ 496,875 0/0 0/0
Christopher J. Gondeck................................ 3,500 $ 10,938 22,000/49,500 $ 82,563/$185,063
</TABLE>
- -------------
(1) The options exercised by Mr. Potter and Mr. Bedard carried an exercise price
of $4.3125. The options exercised by Mr. Gondeck carried an exercise price
of $4.50. The last reported sale price for one share of Class A Common Stock
on August 23, 1995, the date on which all options were exercised, was
$7.625.
(2) Mr. Gondeck holds 45,000 options to purchase Class A Common Stock at an
exercise price of $4.3125 per share, of which 15,000 were exercisable at the
end of fiscal 1996, and 26,500 options to purchase Class A Common Stock at
an exercise price of $4.50 per share, of which 7,000 were exercisable at the
end of fiscal 1996.
(3) In-the-Money options are those options for which the fair market value of
the underlying Common Stock is greater than the exercise price of the
option. On April 30, 1996, the last day of fiscal 1996, the fair market
value of the Company's Class A Common Stock underlying the options (as
determined by the last sale price quoted on the Nasdaq National Market) was
$8.125.
36
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, OFFICER LOANS AND CHANGE IN
CONTROL ARRANGEMENTS
In February 1996, the Company entered into employment agreements with Daniel
A. Potter, its Chairman and Chief Executive Officer and John Bedard, its
President, each of whom also is a director and a principal stockholder of the
Company. The agreements are for three year terms, expiring in February 1999. Mr.
Potter and Mr. Bedard are to receive salaries of $300,000 and $200,000,
respectively. Such compensation may be increased and bonuses may be awarded at
the discretion of the Board of Directors of the Company. Each of Messrs. Potter
and Bedard have agreed to devote their full time and best efforts to fulfill
their duties and responsibilities to the Company. Each of them will be entitled
to participate in employee benefit plans.
The Company has a right to terminate each of the agreements for "cause" as
defined in the agreements or as a result of the employee's disability. Except in
the case of termination for cause, upon early termination of the agreements by
the Company, each of Messrs. Potter and Bedard shall be entitled to receive
their salary plus fringe benefits for 36 months from the date of termination. In
the event of a change of control of the Company, Messrs. Potter and Bedard have
the option to terminate their employment subject to the provisions of the
employment agreements and to receive severance and fringe benefits for 36 months
subject to the provisions of their agreements. A "change in control" includes an
acquisition of 15% of the voting power of the securities of the Company by any
person, certain changes in the composition of the Board of Directors, and an
approval by the stockholders of the Company of a merger, consolidation,
reorganization, liquidation, dissolution or sale of all or substantially all of
the assets of the Company.
Each of Messrs. Potter and Bedard has agreed not to disclose any
confidential information of the Company during the term of his employment or to
compete with the Company during the term of his employment or for a period of
one year following termination of his employment except in accordance with the
employment agreement.
The Company has Recourse Notes from the Company's Chief Executive Officer
and from the President for approximately $2,055,000 and $1,142,000,
respectively, including accrued interest through April 30, 1996. The Recourse
Notes, which provide for full recourse against the respective officer's personal
assets and Company stockholdings, are payable in ten equal annual installments,
the last of which is due in May 2005, and accrue interest at 6.9% per annum. The
Recourse Notes were issued by the executives upon their exercise in August 1995
of 420,000 options granted to them under the Stock Option Plans in May 1995 at
an exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to satisfy
then anticipated tax liabilities. The Recourse Notes are expected to be repaid
in full from the net proceeds of the sale of the shares by the Selling
Stockholders, and through other means, if necessary, in connection with this
Offering. See "Use of Proceeds" and "Principal and Selling Stockholders." In
addition, as of April 30, 1996, the Company has a note receivable from the
President of the Company for $29,000 which accrues interest at 8% per annum and
is due November 1996. The note represents advances from the Company to the
President from January 1994 to April 1994, together with accrued interest.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee. The members of
the Audit Committee are Daniel C. Howard, the Company's Chief Operations
Officer, Paul Kelnberger and Jana Webster Vaughn. The purpose of the Audit
Committee is to (i) review the Company's financial results and recommend the
selection of the Company's independent auditors; (ii) review the effectiveness
of the Company's accounting policies and practices, financial report and
internal controls; and (iii) review the scope of independent audit coverages,
the fees charged by the independent auditors, any transactions which may involve
a potential conflict of interest, and internal control systems.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has established a Compensation Committee. Members of
the Compensation Committee are Paul Kelnberger and Jana Webster Vaughn, the two
outside directors of the Company, and
37
<PAGE>
Daniel C. Howard. None of the executive officers of the Company have served on
the Board of Directors of any other entity that has had any of such entity's
officers serve either on the Company's Board of Directors or Compensation
Committee.
During fiscal 1996, the Company paid approximately $245,000 to Johnson, West
& Co. for accounting services in connection with the Company's acquisitions and
for tax return preparation services. Mr. Kelnberger is a member of Johnson, West
& Co.
STOCK OPTION PLANS
The Company's Board of Directors and stockholders have adopted the 1994 and
1995 Plans and the Company's Board of Directors has adopted the 1996 Plan, all
of which provide for the grant to employees, officers, Directors, and
consultants of the Company options to purchase up to an aggregate of 1,820,000
shares of Class A Common Stock. The 1996 Plan has not yet been approved by the
Company's stockholders and all options granted thereunder are subject to such
approval. The 1994, 1995 and 1996 Plans allow for the issuance of options to
purchase up to 150,000, 850,000 and 820,000 shares of Class A Common Stock,
respectively.
As of April 30, 1996, options to purchase 956,300 shares of Class A Common
Stock have been granted under the 1994, 1995 and 1996 Plans (collectively, the
1994, 1995 and 1996 Plan are referred to as the "Qualified Plans"). To date,
427,850 of these options have been exercised. Subsequent to April 30, 1996, the
Company's Board of Directors has approved the granting of options to purchase up
to 669,000 shares of Class A Common Stock under the 1996 Plan contemporaneous
with the closing of this Offering. When issued, such options, which are subject
to stockholder approval of the 1996 Plan, will vest in equal annual installments
over three years commencing one year from the date of issuance.
Options under the Qualified Plans may be either "incentive stock options"
within the meaning of Section 422 of the United States Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified options. Incentive stock options
may be granted only to employees of the Company, while non-qualified options may
be issued to non-employee directors, employees and consultants of the Company.
The Qualified Plans are administered by disinterested members (as defined by
Section 16b-3 of the Exchange Act) of the Board. Currently, Mr. Kelnberger and
Ms. Vaughn serve as administrators of the Stock Option Plans. These
disinterested members of the Board determine those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Class A Common Stock that may be purchased
under each option and the option price.
The per share exercise price of the Class A Common Stock subject to
incentive stock options granted pursuant to the Qualified Plans may not be less
than the fair market value of the Class A Common Stock on the date the option is
granted. Under the Qualified Plans, the aggregate fair market value (determined
as of the date the option is granted) of the Class A Common Stock that first
became exercisable by any employee in any one calendar year pursuant to the
exercise of incentive stock options may not exceed $100,000. No person who owns,
directly or indirectly, at the time of the granting of an incentive stock option
to him, 10% or more of the total combined voting power of all classes of stock
of the Company (a "10% Stockholder"), shall be eligible to receive any incentive
stock options under the Qualified Plans unless the option price is at least 110%
of the fair market value of the Class A Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to these
limitations.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by the optionee. Pursuant to the
terms of the Qualified Plans, unless otherwise provided in any option grant, in
the event of termination of employment, other than by death or permanent total
disability, the optionee will have three months after such termination to
exercise the option. The Qualified Plans provide that upon termination of
employment of an optionee by reason of death or permanent, total disability, an
option remains exercisable, to the extent it was exercisable on the date of such
termination, until the earlier of the expiration of the original term of the
option or for one year after such termination of employment.
38
<PAGE>
Options under the Qualified Plans must be granted within 10 years from the
effective date thereof. Incentive stock options granted under the Qualified
Plans cannot be exercised more than 10 years from the date of grant, except that
incentive stock options issued to a 10% Stockholder are limited to five year
terms. Any unexercised options under the Qualified Plans that expire or that
terminate upon an employee's ceasing to be employed with the Company become
available once again for issuance.
All options granted under the Qualified Plans provide for the payment of the
exercise price by delivery to the Company of shares of Class A Common Stock
already owned by the optionee having fair market value equal to the exercise
price of the options being exercised, or in such other lawful consideration as
the Board of Directors may determine, or by a combination of such methods of
payment. Therefore, an optionee may be able to tender shares of Class A Common
Stock to purchase additional shares of Class A Common Stock and may
theoretically exercise all of his or her stock options with no additional
investment other than his or her original shares.
FORMULA STOCK OPTION PLAN
On September 25, 1994 the Board of Directors approved the Formula Plan which
provides for the grant to non-management Directors of the Company options to
purchase up to 50,000 shares of Class A Common Stock. The current non-management
Directors participating in the Formula Plan are Paul M. Kelnberger and Jana
Webster Vaughn.
Under the Formula Plan, options will be granted pursuant to a formula that
determines the timing, pricing and amount of the option awards using only
objective criteria, without discretion on the part of the administrators of the
Formula Plan. The Formula Plan provides that its provisions may not be amended
more than once every six months, other than to comply with changes in the Code,
the Employee Retirement Income Security Act, or the rules thereunder. Also any
provision for forfeiture or termination of an option award will be specific and
objective, rather than general, subjective or discretionary.
Options were and shall be granted under the Formula Plan to non-employee
Directors as follows:
(a) Commencing September 1, 1994, and continuing annually thereafter on the
day immediately following the Company's annual meeting of shareholders,
the Company granted and will grant, to Mr. Kelnberger and Ms. Vaughn,
options to purchase a total of 1,500 shares of Class A Common Stock. The
exercise price of each option granted is equal to the fair market value
of the shares of Class A Common Stock on the date of the grant and each
option vests in two equal installments on the first and second
anniversary of the grant. Future options shall be granted to Mr.
Kelnberger and Ms. Vaughn only if each of them is a Director on the date
of the grant and has attended, during the Company's fiscal year
immediately preceding the grant, at least 75% of the meetings he or she
was eligible to attend of the Board of Directors and the Committees on
which the Director has served.
(b) Each non-employee Director appointed in the future will receive, on the
date he or she first becomes a Director, options to purchase a total of
3,000 shares of Class A Common Stock. The exercise price of such options
will be the fair market value of the shares of Class A Common Stock on
the date of the grant and said options shall vest and be exercisable in
three equal installments on the first, second and third anniversary of
the date of the grant, subject to the Director's continued service as a
Director of the Company on such dates.
As of the date of this Prospectus, options to purchase 6,000 shares of Class
A Common Stock have been granted under the Formula Plan, of which 3,000 carry an
exercise price of $6.75 per share and 3,000 carry an exercise price of $10.25.
To date, none of these options have been exercised. The following options have
been granted under the Formula Plan to non-management directors of the Company:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
DIRECTOR SHARES PRICE FULL VESTING DATE
- --------------------------------------------------------- ----------- ----------- ----------------------
<S> <C> <C> <C>
Paul M. Kelnberger....................................... 1,500 $ 6.75 September 1, 1996
Jana Webster Vaughn...................................... 1,500 $ 6.75 September 1, 1996
Paul M. Kelnberger....................................... 1,500 $ 10.25 September 18, 1997
Jana Webster Vaughn...................................... 1,500 $ 10.25 September 18, 1997
</TABLE>
39
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of July 9, 1996 the number and percentage
of shares of Class A Common Stock and Class B Common Stock beneficially owned by
(i) all persons known by the Company to be the beneficial owner of more than
five percent (5%) of the outstanding shares of Class A Common Stock or Class B
Common Stock, (ii) each named executive officer and director, and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES TO BE
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER THE VOTING CONTROL(4)
THE OFFERING(2) SHARES OFFERING(2)(3) ----------------------------
----------------- BEING ----------------- BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT OFFERING OFFERING
- -------------------------------------------------- --------- ------- --------- --------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel A. Potter, Chief Executive Officer and
Chairman(3)(5)................................... 1,356,759 10.5% 270,000 1,086,759 6.0% 27.2% 20.9%
John M. Bedard, President and Director(3)(6)...... 1,028,117 7.9% 150,000 878,117 4.9% 21.7% 16.9%
Daniel C. Howard, Chief Operations Officer and
Director(3)(7)................................... 69,499 * - 69,499 * 1.0% *
Christopher J. Gondeck, Chief Financial
Officer(8)....................................... 41,000 * - 41,000 * * *
Richard Bedard, Executive Vice President(9)....... 20,000 * - 20,000 * * *
Bruce Carlson, Vice President of Real
Estate(10)....................................... 34,375 * - 34,375 * * *
Michael Schifsky, Vice President of Franchise
Development(11).................................. 34,200 * - 34,200 * * *
Robert E. Yager, Vice President of Store
Operations and Director(12)...................... 85,250 * - 85,250 * * *
Paul M. Kelnberger, Director(13).................. 750 * - 750 * * *
Jana Webster Vaughn, Director(13)................. 750 * - 750 * * *
All directors and executive officers as a group
(10 persons)
(2)(5)(6)(7)(7)(8)(9)(10)(11)(12)(13)............ 2,670,700 20.3% 420,000 2,250,700 12.3% 50.5% 39.1%
</TABLE>
- ------------
* Indicates ownership of less than one percent (1%).
(1)The address of Messrs. Potter, John Bedard, Howard, Gondeck, Richard Bedard,
Carlson, Schifsky, Yager, and Kelnberger and Ms. Vaughn is c/o Video Update,
Inc., 3100 World Trade Center, 30 East Seventh Street, St. Paul, Minnesota
55101.
(2)Shares of common stock which an individual or group has a right to acquire
within 60 days upon the exercise of options or warrants are deemed
outstanding for the purposes of computing the percentage of shares
beneficially owned by such individual or group. Such shares are not deemed
to be outstanding for the purpose of computing the percentage of shares
beneficially owned by any other person shown in the table.
(3)As discussed herein, in connection with the Escrow Agreement, approximately
sixty-five percent (65%) of the shares of Class B Common Stock beneficially
owned by Messrs. Potter, Bedard and Howard or 706,394, 570,776 and 22,830
shares of Class B Common Stock, respectively (1,300,000 shares of Class B
Common Stock in the aggregate), are being held in escrow. So long as such
shares are in escrow, the beneficial owner may vote but not dispose of such
shares. See "Principal and Selling Stockholders -- Escrow Shares" and
"Description of Securities -- Escrow Agreement."
(4)Holders of Class A Common Stock have the right to cast one vote for each
share held of record and holders of Class B Common Stock have the right to
case five votes for each share held of record on all matters submitted to a
vote of the holders of Common Stock. See "Description of Securities --
Common Stock."
(5)Includes an aggregate of 39,515 shares of Class B Common Stock held in
custodial accounts for Mr. Potter's children. Does not include 26,250 shares
of Class A Common Stock owned by Mr. Potter's father, in which Mr. Potter
disclaims beneficial ownership.
(6)Includes 39,515 shares of Class B Common Stock held by Mr. Bedard's mother,
but subject to a voting trust of which Mr. Bedard is the voting trustee.
40
<PAGE>
(7)Includes an aggregate of 34,375 shares of Class A Common Stock issuable upon
the exercise of various stock options. Excludes an aggregate of 23,125
shares of Class A Common Stock issuable upon the exercise of various stock
options that have not and will not vest within 60 days of the date of this
Prospectus.
(8) Includes an aggregate of 37,000 shares of Class A Common Stock issuable on
exercise of various stock options. Excludes an aggregate of 34,500 shares of
Class A Common Stock issuable on the exercise of various stock options that
have not and will not vest within 60 days of the date of this Prospectus.
(9) Consists of an aggregate of 20,000 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 34,000 shares of Class A Common Stock issuable upon the
exercise of stock options that have not and will not vest within 60 days of
the date of this Prospectus.
(10) Consists of an aggregate of 34,375 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 23,125 shares of Class A Common Stock issuable upon the
exercise of stock options that have not and will not vest within 60 days of
the date of this Prospectus.
(11) Consists of an aggregate of 34,200 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 22,800 shares of Class A Common Stock issuable upon the
exercise of stock options that have not and will not vest within 60 days of
the date of this Prospectus.
(12) Includes 6,500 shares of Class A Common Stock issuable upon the exercise of
stock options that have vested. Excludes 7,000 shares of Class A Common
Stock issuable upon the exercise of stock options that have not and will not
vest within 60 days of the date of this Prospectus.
(13) Comprised of 750 shares of Class A Common Stock issuable upon the exercise
of stock options that have vested. Excludes 2,250 shares of Class A Common
Stock issuable upon the exercise of various stock options that have not and
will not vest within 60 days of the date of this Prospectus.
ESCROW SHARES
The Escrow Shares placed into escrow by Messrs. Potter, Bedard and Howard in
connection with the Company's initial public offering will be released upon the
achievement by the Company of certain earnings goals or if the Class A Common
Stock reaches certain price goals. See "Description of Securities -- Escrow
Agreement." The Commission has adopted a position with respect to arrangements
such as the Escrow Agreement. This position provides that in the event any
shares are released from escrow to the stockholders of the Company who are
officers, directors, consultants or employees of the Company, a non-cash
compensation expense will be recorded for financial reporting purposes.
Therefore, if the Company attains any of the earnings thresholds or the
Company's Class A Common Stock meets certain minimum bid prices required for the
release of the Escrow Shares, the release will require the Company to recognize
additional compensation expense. Accordingly, the Company will, in the event of
the release of the Escrow Shares, recognize during the period in which the
earnings thresholds are met or such minimum bid prices obtained, what could be a
substantial non-cash charge that would have the effect of substantially
increasing the Company's loss or reducing or eliminating earnings, if any, at
such time. Although the amount of compensation expense recognized by the Company
will not affect the Company's total stockholders' equity or cash flow, it may
have a depressive effect on the market price of the Company's securities. See
"Risk Factors -- Charge to Income in the Event of Release of Escrow Shares."
41
<PAGE>
CERTAIN TRANSACTIONS
Effective August 31, 1995, the Company entered into a Purchase Agreement
with Bedard Entertainment, Inc. ("BEI"), a privately held Minnesota corporation
that owned and operated three video superstores, and the stockholders of BEI.
Under the Purchase Agreement, the Company acquired substantially all of the
assets of BEI in exchange for 15,000 shares of Class A Common Stock and the
assumption of indebtedness of BEI of approximately $275,000. The stockholders of
BEI are Glenn and Deborah Bedard, the brother and sister-in-law of John M.
Bedard, the Company's President and a Director.
On September 2, 1994 the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Koonrod, Inc. ("KRI"), a privately held
Minnesota corporation that owned and operated two of the Company's franchised
superstores, and the stockholders of KRI. Under the Agreement, the Company
acquired all of the outstanding capital stock of KRI in exchange for $75,000 in
cash and 105,000 shares of Class A Common Stock, and KRI was merged with and
into the Company. All of the outstanding stock of KRI was owned by Donald
Potter, the father of Daniel Potter, the Company's Chief Executive Officer and
Chairman, and Robert Yager, a Director of the Company, the brother-in-law of
Daniel Potter, and the son-in-law of Donald Potter. In exchange for their shares
of the capital stock of KRI, Donald Potter received 26,250 shares of Class A
Common Stock and $19,200 in cash, and Robert Yager received 78,750 shares of
Class A Common Stock and $55,800 in cash.
Craig Belisle entered into the Company's standard ten-year franchise
agreement in February 1984 for the operation of a superstore in the Twin Cities
area. Mr. Belisle recently entered into another standard ten-year franchise
agreement that expires in June 2005. Mr. Belisle is the brother-in-law of John
M. Bedard, the Company's President and a Director.
During fiscal 1996, the Company paid approximately $245,000 to Johnson, West
& Co. for accounting services in connection with the Company's acquisitions and
for tax preparation services. Mr. Kelnberger, a Director of the Company, is a
member of Johnson, West & Co.
The Company believes that the above arrangements were on terms at least as
favorable as could be obtained from unaffiliated parties.
The Company has Recourse Notes from the Company's Chief Executive Officer
and from the President for approximately $2,055,000 and $1,142,000,
respectively, including accrued interest through April 30, 1996. The Recourse
Notes, which provide for full recourse against the respective officer's personal
assets and Company stockholdings, are payable in ten equal annual installments,
the last of which is due in May 2005, and accrue interest at 6.9% per annum. The
Recourse Notes were issued by the executives upon their exercise in August 1995
of 420,000 options granted to them under the Stock Option Plans in May 1995 at
an exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to satisfy
then anticipated tax liabilities. The Recourse Notes are expected to be repaid
in full from the net proceeds of the sale of the shares by the Selling
Stockholders, and through other means, if necessary, in connection with this
Offering. See "Use of Proceeds" and "Principal and Selling Stockholders."
In addition, as of April 30, 1996, the Company has a note receivable from
the President of the Company for $29,000 which accrues interest at 8% per annum
and is due November 1996. The note represents advances from the Company to the
President from January 1994 to April 1994, together with accrued interest.
42
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
On the date of this Prospectus, the Company's authorized capital stock
consists of 50,000,000 shares of Class A Common Stock, $.01 par value per share,
of which 10,962,735 are issued and outstanding, 2,000,000 shares of Class B
Common Stock, $.01 par value per share (including the Escrow Shares), all of
which are issued and outstanding, and 5,000,000 shares of Preferred Stock, $.01
par value per share, none of which are outstanding.
COMMON STOCK
The Class A Common Stock and Class B Common Stock do not carry preemptive
rights and are substantially identical except that holders of Class A Common
Stock have the right to cast one vote for each share held of record and holders
of Class B Common Stock have the right to cast five votes for each share held of
record on all matters submitted to a vote of the holders of Common Stock. The
Class A Common Stock and Class B Common Stock vote together as a single class on
all matters on which stockholders may vote, including the election of directors,
except when class voting is required by applicable law.
Shares of Class B Common Stock are automatically convertible into an
equivalent number of fully paid and non-assessable shares of Class A Common
Stock upon the sale or transfer of such shares of Class B Common Stock by the
original record holder thereof or upon the death of the original record holder.
Each share of Class B Common Stock also is convertible at any time at the option
of the holder into one share of Class A Common Stock; once such shares are
converted into Class A Common Stock, they are retired and unavailable for future
reissuance as Class B Common Stock.
Holders of the Class A Common Stock and Class B Common Stock have equal
ratable rights to dividends from funds legally available therefor, when, as and
if declared by the Board of Directors and are entitled to share ratably, as a
single class, in all of the assets of the Company available for distribution to
holders of shares of Common Stock upon the liquidation, dissolution or winding
up of the affairs of the Company. Holders of Class A Common Stock or Class B
Common Stock do not have preemptive, subscription or conversion rights. No
redemption or sinking fund provisions exist for the benefit of the Class A
Common Stock or Class B Common Stock. All outstanding shares of Class A and
Class B Common Stock are, and those shares of Class A Common Stock offered
hereby, will be validly issued, fully paid and non-assessable. Following the
completion of this Offering, the existing Class B Common stockholders will have
significant influence over control of the Company, despite any accumulation of
Class A Common Stock by third parties.
The difference in voting rights described above increases the voting power
of the Class B Common stockholders and accordingly has an anti-takeover effect.
The existence of the Class B Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an unfriendly tender offer, a proxy contest, or the removal of
incumbent management, even if such transactions were favored by the stockholders
of the Company other than the Class B Common stockholders. Thus, the
stockholders may be deprived of an opportunity to sell their shares at a premium
over prevailing market prices in the event of a hostile takeover bid. Those
seeking to acquire the Company through a business combination will be compelled
to consult first with the Class B Common stockholders in order to negotiate the
terms of such business combination. Any such proposed business combination will
have to be approved by the Board of Directors, which may be under the control of
the Class B Common stockholders, and if stockholder approval were required, the
approval of the Class B Common stockholders will be necessary before any such
business combination can be consummated.
WARRANTS
CLASS A WARRANTS. On the date of this Prospectus, the Company had reserved
348,050 Class A Warrants that are issuable upon exercise of the Blair Options.
The holder of each Class A Warrant is entitled, upon payment of the exercise
price of $6.50, to purchase one share of Class A Common Stock and one Class B
Warrant. Unless previously redeemed, the Class A Warrants are exercisable at any
time after issuance until
43
<PAGE>
July 19, 1999, provided that at such time a current prospectus relating to the
Class A Common Stock and the Class B Warrants is then in effect and the Class A
Common Stock and the Class B Warrants are qualified for sale or exempt from
qualification under applicable state securities laws. The Class A Warrants are
subject to redemption, as described below.
CLASS B WARRANTS. On the date of this Prospectus, the Company has
outstanding 8,504,825 Class B Warrants, and had reserved 696,100 Class B
Warrants that are issuable upon exercise of the Blair Options. The holder of
each Class B Warrant is entitled to purchase one share of Class A Common Stock
at an exercise price of $8.75. Unless previously redeemed, the Class B Warrants
are exercisable at any time after issuance until July 19, 1999, provided that at
such time a current prospectus relating to the Class A Common Stock is then in
effect and the Class A Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws. The Class B Warrants are
subject to redemption, as described below (collectively, the Class A and Class B
Warrants are referred to as the "Warrants").
REDEMPTION. Upon issuance, the Class A Warrants are subject to redemption
by the Company upon 30 days written notice, at a price of $.05 per Class A
Warrant, if the average last reported sale price of the Class A Common Stock for
any 30 consecutive business days ending within 15 days of the date on which the
notice of redemption is given exceeds $9.10 per share. The Class B Warrants are
subject to redemption by the Company upon 30 days written notice, at a price of
$.05 per Class B Warrant, if the average closing bid price of the Class A Common
Stock for any 30 consecutive business days ending within 15 days of the date on
which the notice of redemption is given exceeds $12.25 per share. Holders of
Warrants called for redemption will automatically forfeit their rights to
purchase the shares of Class A Common Stock, and Class B Warrants in the case of
the Class A Warrants, issuable upon exercise of such Warrants unless the
Warrants are exercised before the close of business on the business day
immediately prior to the date set for redemption. All of the outstanding
Warrants must be redeemed if any are redeemed. A notice of redemption shall be
mailed to each of the registered holders of the Warrants by first class mail,
postage prepaid, upon 30 days' notice before the date fixed for redemption. The
notice of redemption shall specify the redemption price, the date fixed for
redemption, the place where the Warrant certificates shall be delivered and the
redemption price to be paid, and that the right to exercise the Warrants shall
terminate at 5:00 p.m. (New York City time) on the business day immediately
preceding the date fixed for redemption.
GENERAL. The Warrants may be exercised upon surrender of the certificate(s)
therefor on or prior to the expiration or the redemption date (as explained
above) at the offices of the Company's warrant agent (the "Warrant Agent") with
the form of "Election to Purchase" on the reverse side of the certificate(s)
completed and executed as indicated, accompanied by payment (in the form of
certified or cashier's check payable to the order of the Company) of the full
exercise price for the number of Warrants being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
issuances of Class A Common Stock (or securities convertible, exchangeable or
exercisable into Class A Common Stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events; provided, however, that no such
adjustment shall be made upon, among other things, (i) the issuance or exercise
of options or other securities under the Company's Stock Option Plans or Formula
Plan or other employee benefit plans or (ii) the sale or exercise of outstanding
options or Warrants.
The Company is not required to issue fractional shares of Class A Common
Stock, and in lieu thereof will make a cash payment based upon the current
market value of such fractional shares. The holder of the Warrants will not
possess any rights as a stockholder of the Company unless and until such holder
exercises the Warrants.
SOLICITATION FEE. The Company has agreed not to solicit Class B Warrant
exercises other than through D.H. Blair. Upon any exercise of the Class B
Warrants, the Company will pay D.H. Blair a fee of 5% of the aggregate exercise
price (the "Warrant Fee"), if (i) the market price of the Company's Class A
Common Stock on the date the Warrant is exercised is greater than the then
exercise price of the Warrants; (ii) the
44
<PAGE>
warrantholder designates in writing that the exercise of the Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.;
(iii) the Warrant is not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the Company's initial
public offering and at the time of exercise of the Warrants; and (v) the
solicitation of exercise of the Warrant was not in violation of Rule 10b-6
promulgated under the Exchange Act.
D.H. Blair has informed the Company that the Commission is conducting an
investigation concerning various business activities of D.H. Blair and D.H.
Blair & Co., Inc. ("Blair & Co."). The Company has been advised that D.H. Blair
cannot predict whether this investigation will ever result in any type of formal
enforcement action against D.H. Blair or Blair & Co. or, if so, whether any such
action might have an adverse effect on D.H. Blair or Blair & Co. or any of the
Company's securities.
BLAIR OPTIONS. D.H. Blair and its designees hold the Blair Options, which
were issued in connection with D.H. Blair's services provided in the Company's
initial public offering in July 1994 and subsequent public offering in April
1995. Under the Blair Options, the holders may purchase up to (i) 117,500 units
at $6.25 per unit, each unit consisting of one share of Class A Common Stock,
one Class A Warrant, and one Class B Warrant, and (ii) 795 units at $1,300 per
unit, each unit consisting of 290 shares of Class A Common Stock, 290 Class A
Warrants and 290 Class B Warrants. The Warrants underlying the Blair Options are
not subject to redemption until issued. The Blair Options and the underlying
securities may not be sold, assigned or otherwise transferred for three years
from the date of issuance.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of the series of Preferred Stock.
The holders of any series of Preferred Stock, when and if issued, are expected
to have priority claims to dividends and to any distributions upon liquidation
of the Company, and they may have other preferences over the holders of the
Common Stock.
The Board of Directors may issue series of Preferred Stock without action by
the stockholders of the Company. Accordingly, the issuance of Preferred Stock
may adversely affect the rights of the holders of the Common Stock. In addition,
the issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders. Issuance of Preferred Stock may
dilute the voting power of holders of Common Stock (such as by issuing Preferred
Stock with super-voting rights) and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interest. The Company has no current plans to issue any Preferred Stock.
ESCROW AGREEMENT
Of the 12,962,735 shares of Common Stock outstanding prior to this Offering,
1,300,000 shares of Class B Common Stock are held in escrow and will not be
assignable or transferable (but may be voted) until such time, if ever, as the
Escrow Shares are released from escrow in accordance with the Escrow Agreement.
Each holder of Class B Common Stock contributed pro rata to the number of Escrow
Shares. All Escrow Shares remaining in escrow on July 31, 1998 will be forfeited
and then canceled and contributed to the Company's capital.
A stockholder's rights to his shares in escrow are not affected by any
change in his status as an employee, officer or director of, or his relationship
with, the Company, and, in the event of such stockholder's death, the terms of
the Escrow Agreement will be binding on such stockholder's executor,
administrator, estate and legatees.
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<PAGE>
Pursuant to the Escrow Agreement, 700,000 of the Escrow Shares will be
released from escrow if and only if the Company's Minimum Pretax Income (as
defined below, which definition causes the adjustments set forth herein) meets
or exceeds the following targets:
<TABLE>
<CAPTION>
TARGETS
PRIOR TO ADJUSTED
ORIGINAL THIS TARGETS FOR
TARGETS OFFERING THIS OFFERING
------------ ------------ -------------
<S> <C> <C> <C>
Year Ended April 30, 1995......................... $ 2,000,000 $ 2,025,211 $ 2,025,211
Year Ended April 30, 1996......................... 2,700,000 8,722,578 8,722,578
Year Ending April 30, 1997........................ 4,000,000 15,537,767 20,085,323
Year Ending April 30, 1998........................ 5,500,000 21,364,429 29,701,617
</TABLE>
All Escrow Shares will be released from escrow if the Company's Minimum
Pretax Income meets or exceeds the following targets:
<TABLE>
<CAPTION>
TARGETS
PRIOR TO ADJUSTED
ORIGINAL THIS TARGETS FOR
TARGETS OFFERING THIS OFFERING
------------ ------------ -------------
<S> <C> <C> <C>
Year Ended April 30, 1995......................... $ 3,300,000 $ 3,341,599 $ 3,341,599
Year Ended April 30, 1996......................... 3,300,000 10,660,928 10,660,928
Year Ending April 30, 1997........................ 5,000,000 19,422,208 25,106,654
Year Ending April 30, 1998........................ 6,700,000 26,025,759 36,181,969
</TABLE>
Alternatively, 700,000 Escrow Shares will be released from escrow if the
closing Bid Price of the Class A Common Stock averages in excess of $15.00 per
share (subject to adjustment in the event of any stock split, dividend or
distribution, reverse stock split or other similar event) for 20 consecutive
trading days at any time prior to July 19, 1997.
In addition, all of the Escrow Shares will be released from escrow if the
closing Bid Price of the Class A Common Stock averages in excess of $22.00 per
share (subject to adjustment in the event of any stock split, dividend or
distribution, reverse stock split or similar event) for 20 consecutive trading
days at any time prior to July 19, 1997.
"Minimum Pretax Income" means for any fiscal year the Company's net income
before provision for income taxes and exclusive of any extraordinary earnings or
charges that would result from the release of the Escrow Shares, all as audited
by the Company's independent auditors. The Minimum Pretax Income amounts set
forth in the Escrow Agreement were subject to adjustment (proportional increase)
if after the execution of the Escrow Agreement additional shares of Class A
Common Stock were issued (other than in connection with stock dividends, stock
splits or similar events). The original Minimum Pretax Income targets set forth
above have been adjusted to reflect subsequent issuances of securities by the
Company (including securities issued in connection with acquisitions) and
assuming completion of this Offering.
The Minimum Pretax Income levels set forth above could be achieved through
prospective Company earnings or through an acquisition or merger involving the
Company that is accounted for using the pooling of interests method of
accounting, which could allow for the attainment of earnings targets for
previous fiscal years. However, the earnings levels and the share prices set
forth above were determined by negotiation between the Company and Blair prior
to the Company's initial public offering and should not be construed to imply or
predict any future earnings by the Company or any increase in the market price
of its securities.
TRANSFER AND WARRANT AGENT
The Company has appointed American Stock Transfer & Trust Company, New York,
New York, as Transfer Agent for its Common Stock and Warrant Agent for the
Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
16,042,735 shares of Class A Common Stock and 2,000,000 shares of Class B Common
Stock (including the Escrow Shares). All of the 5,080,000 shares of Class A
Common Stock to be sold by the Company in this Offering will be freely
46
<PAGE>
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by any person who is or thereafter becomes an
"affiliate" of the Company, which shares will be subject to the resale
limitations contained in Rule 144 promulgated under the Securities Act as
described below.
Holders of the Class B Warrants will be entitled to purchase an aggregate of
8,504,825 additional shares of Class A Common Stock upon exercise of the Class B
Warrants at an exercise price of $8.75 per share, at any time until July 19,
1999, provided that the Company satisfies certain securities registration
requirements with respect to the securities underlying the Warrants. Any and all
shares of Class A Common Stock purchased upon exercise of the Warrants will be
freely tradeable, provided such registration requirements are met.
All of the shares of Class B Common Stock currently outstanding (and the
shares of Class A Common Stock into which they are convertible) and the 330,343
shares of Class A Common Stock (excluding the 55,000 Acquisition Shares) issued
in connection with certain of the Company's acquisitions (the "Acquisition
Shares") are "restricted securities" within the meaning of Rule 144 under the
Securities Act and, in general, if held for at least two years, will be eligible
for sale through conversion into an equal number of shares of Class A Common
Stock in the public market in reliance upon and subject to the limitations of
Rule 144. In general under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three month period, the number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) one percent of the number of the then outstanding shares of Class A Common
Stock, or (ii) the average weekly trading volume of the Class A Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. Furthermore, a
person who is not deemed to have been an affiliate of the Company during the
ninety days preceding a sale by such person and who has beneficially owned such
shares for at least three years is entitled to sell such shares without regard
to the volume, manner of sale or notice requirement.
In addition, the Company has granted demand registration rights with respect
to 330,343 shares of Class A Common Stock (excluding the 55,000 Acquisition
Shares) issued in connection with two acquisitions completed by the Company
during fiscal 1996. Commencing in July 1996, holders of the demand registration
rights will have the right to require the Company to register their shares under
the Securities Act on one occasion, but, with respect to 315,343 of such shares,
only to the extent that such shares may not be sold pursuant to an exemption
from registration under the Securities Act.
The Company's directors, executive officers and holders of all outstanding
shares of the Class B Common Stock have agreed not to offer, sell, assign or
transfer any securities of the Company for a period of 180 days from the closing
of this Offering without the prior written consent of Piper Jaffray Inc. The
sale, or availability for sale, of substantial amounts of Class A Common Stock
in the public market subsequent to this Offering could adversely affect the
prevailing market prices of the Company's securities and could impair the
Company's ability to raise additional capital through the sale of its equity
securities.
Following this Offering, no predictions can be made of the effect, if any,
of future public sales of restricted shares or the availability of restricted
shares for sale in the public market. Moreover, the Company cannot predict the
number of shares of Class A Common Stock that may be sold in the future pursuant
to Rule 144 or Rule 701 of the Securities Act because such sales will depend on,
among other factors, the market price of the Class A Common Stock and the
individual circumstances of the holders thereof. The availability for sale of
substantial amounts of Class A Common Stock acquired through the exercise of the
Class B Warrants, other outstanding options or the Blair Options could adversely
affect prevailing market prices for the Class A Common Stock.
The Company has filed a registration statement on Form S-8 under the
Securities Act to register shares of Class A Common Stock that have been issued,
or are reserved for future issuance, to current employees, directors or
consultants of the Company pursuant to the exercise of stock options or purchase
rights granted under the Company's 1994 and 1995 Plans. See "Management -- Stock
Option Plans" and "Management -- Formula Stock Option Plan." Shares issued under
the 1994 and 1995 Plans will be available for immediate resale in the public
market.
47
<PAGE>
UNDERWRITING
The Company and the Selling Stockholders have entered into a Purchase
Agreement (the "Purchase Agreement") with the underwriters listed in the table
below (the "Underwriters"), for whom Piper Jaffray Inc. and The
Robinson-Humphrey Company, Inc. are acting as representatives (the
"Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company and the Selling Stockholders have agreed to sell
5,500,000 shares of Class A Common Stock to the Underwriters, and each of the
Underwriters has severally agreed to purchase the number of shares of Class A
Common Stock set forth opposite each Underwriter's name in the table below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Piper Jaffray Inc.........................................................................
The Robinson-Humphrey Company, Inc........................................................
------------
Total................................................................................... 5,500,000
------------
------------
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Class A Common Stock being sold
pursuant to the Purchase Agreement if any is purchased (excluding shares covered
by the over-allotment option granted therein). In the event of a default by any
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriters may be increased or
decreased or the Purchase Agreement may be terminated.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the Class A Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession of not
more than $ per share. Additionally, the Underwriters may allow, and such
dealers may allow, a concession not in excess of $ per share to certain other
dealers. After the Offering, the public offering price and other selling terms
may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable by Piper
Jaffray Inc. within 30 days after the date of this Prospectus, to purchase up to
825,000 additional shares of Class A Common Stock at the same price per share to
be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the Class A
Common Stock offered hereby.
The Company, its executive officers and Directors have agreed that they will
not sell, offer to sell, issue, distribute or otherwise dispose of any shares of
Class A Common Stock or any options, rights or warrants with respect to any
shares of Class A Common Stock or register any shares of Class A Common Stock
for sale under the Securities Act, for a period of 180 days after the date of
this Prospectus (the "Lock-Up Period") without the prior written consent of
Piper Jaffray Inc., except that the Company may issue shares of (i) Class A
Common Stock pursuant to the over-allotment option, (ii) Class A Common Stock or
options to purchase Class A Common Stock under the Plans, (iii) Class A Common
Stock upon the exercise of presently outstanding warrants, and (iv) Class A
Common Stock in connection with the Company's expansion strategy of growth
through acquisitions, provided that such Class A Common Stock is restricted and
is
48
<PAGE>
not tradeable prior to the expiration of the Lock-Up Period. See "Risk Factors
- -- Possible Depressive Effect on Price of Securities of Future Sales of Common
Stock and Exercise of Warrants; Issuance of Additional Shares."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority in excess of 5% of the number of shares of
Class A Common Stock offered hereby.
The Offering price was determined by negotiation between the Company and the
Representatives. Among the factors considered in determining this price were
prevailing market and economic conditions, the Company's revenues and earnings,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, an assessment of the Company's
management, and the consideration of the above factors in relation to the market
valuation of companies in related businesses.
The Company and each Selling Stockholder have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
In connection with this Offering, the Underwriters may engage in passive
market making transactions in the Class A Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this Offering, in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as
amended. Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of market makers not connected with
this Offering and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the Class A Common Stock during a specified period prior to
the filing of this Prospectus with the Commission and must be discontinued when
such limit is reached. Passive market making may stabilize the market price of
the Class A Common Stock at a level above that which might otherwise prevail,
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
O'Connor, Broude & Aronson, Bay Colony Corporate Center, 950 Winter Street,
Suite 2300, Waltham, Massachusetts 02154 will pass upon the legality of the
securities offered hereby for the Company. Certain attorneys at O'Connor, Broude
& Aronson hold options to purchase up to 60,000 shares of Common Stock. Certain
legal matters will be passed on for the Underwriters by Kaplan, Strangis and
Kaplan, P.A., 5500 Norwest Center, 90 South Seventh Street, Minneapolis,
Minnesota 55402.
EXPERTS
The consolidated financial statements of Video Update, Inc. as of April 30,
1995 and 1996, and for each of the three years in the period ended April 30,
1996, included in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") in accordance with the provisions of the
Securities Act, with respect to the securities offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement and
the exhibits thereto. For further information, reference is made to the
Registration Statement and to the exhibits filed therewith. Statements herein
contained concerning the provisions of any document are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement. The Registration Statement and the
exhibits may be inspected without charge at the offices of the Commission and,
upon payment to the Commission of prescribed fees and rates, copies of all
49
<PAGE>
or any part thereof may be obtained from the Commission's principal office at
the Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington D.C. 20549, or certain of the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 or 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment to the
Commission of prescribed fees and rates. Reports, and other information
concerning the Company may also be inspected at the offices of the Nasdaq Stock
Market, Inc., located at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have been previously filed by the Company
with the Commission under the Exchange Act, are incorporated by reference in
this Prospectus:
(1) Annual Report on Form 10-KSB for fiscal 1996; and
(2) Description of the Company's Common Stock in the Company's Form 8-A
Registration Statement, declared effective on July 20, 1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the completion of the Offering described herein shall be deemed to be
incorporated by reference into this Prospectus from the respective dates those
documents are filed.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of the Registration Statement and this Prospectus to the extent
that a statement contained herein or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents which have been incorporated
herein by reference, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference). Requests should be directed in
writing to Daniel A. Potter, Chairman and Chief Executive Officer, Video Update,
Inc., 3100 World Trade Center, 30 East Seventh Street, St. Paul, Minnesota
55101, or by telephone at (612) 222-0006.
RECENT DEVELOPMENTS
No material changes in the Company's affairs have occurred since the end of
fiscal 1996, which have not been described in an Annual Report on Form 10-KSB, a
Quarterly Report on Form 10-QSB or a Current Report on Form 8-K filed by the
Company under the Exchange Act.
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of April 30, 1995 and 1996............... F-3
Consolidated Statements of Income for the years ended April 30, 1994,
1995 and 1996.......................................................... F-4
Consolidated Statement of Stockholders' Equity for the years ended
April 30, 1994, 1995 and 1996.......................................... F-5
Consolidated Statements of Cash Flows for the years ended April 30,
1994, 1995 and 1996.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Video Update, Inc.
We have audited the accompanying consolidated balance sheets of Video
Update, Inc. and subsidiaries as of April 30, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended April 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the consolidated financial position of Video Update, Inc. and
subsidiaries at April 30, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1996 the
Company changed its method of accounting for the amortization of its
videocassette rental inventory.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 12, 1996
F-2
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................... $ 5,573 $ 676
Accounts receivable............................... 91 558
Notes receivable from related parties............. 30 1,555
Inventory......................................... 1,239 4,545
Videocassette rental inventory -- net............. 4,821 25,701
Property and equipment -- net..................... 4,594 18,988
Prepaid expenses.................................. 135 682
Goodwill -- net................................... 2,912 25,973
Other assets...................................... 55 840
------------ ------------
Total assets...................................... $ 19,450 $ 79,518
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable..................................... $ 1,278 $ 4,859
Accounts payable.................................. 1,194 8,692
Accrued compensation.............................. 255 1,334
Accrued expenses.................................. 735 977
Accrued rent expense.............................. 157 228
Income taxes payable.............................. - 593
Deferred income taxes............................. 566 841
Other liabilities................................. 94 494
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 -- 4,138,366 at
April 30, 1995
and 11,017,735 at April 30, 1996............. 41 110
Class B Common Stock, par value $.01 per share:
Authorized, issued and outstanding shares --
2,000,000 at
April 30, 1995 and 1996...................... 20 20
Additional paid-in capital...................... 14,552 61,029
Retained earnings............................... 558 2,186
Foreign currency translation.................... - (34)
------------ ------------
15,171 63,311
Notes receivable from officers for the exercise
of options..................................... - (1,811)
------------ ------------
Total stockholders' equity........................ 15,171 61,500
------------ ------------
Total liabilities and stockholders' equity........ $ 19,450 $ 79,518
------------ ------------
------------ ------------
</TABLE>
See accompanying notes
F-3
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Rental revenue................................................................. $ 4,180 $ 8,364 $ 46,592
Service fees................................................................... 472 421 491
Product sales.................................................................. 337 266 3,421
--------- --------- ---------
4,989 9,051 50,504
Costs and expenses:
Store operating expenses....................................................... 2,997 5,986 39,685
Selling, general and administrative............................................ 1,179 2,223 5,362
Cost of product sales.......................................................... 186 136 1,880
Amortization of goodwill....................................................... - 83 1,072
--------- --------- ---------
4,362 8,428 47,999
--------- --------- ---------
Operating income................................................................. 627 623 2,505
Interest expense................................................................. (143) (194) (232)
Amortization of debt costs....................................................... - (157) -
Other income..................................................................... 17 155 548
--------- --------- ---------
(126) (196) 316
--------- --------- ---------
Income from continuing operations before income taxes............................ 501 427 2,821
Income tax expense............................................................... 200 214 1,193
--------- --------- ---------
Income from continuing operations................................................ 301 213 1,628
Discontinued operations:
Loss from discontinued operations, net of applicable income tax benefit........ - (24) -
Loss on disposal of discontinued operations, net of applicable income tax
benefit....................................................................... - (35) -
--------- --------- ---------
Net loss from discontinued operations............................................ - (59) -
--------- --------- ---------
Net income....................................................................... $ 301 $ 154 $ 1,628
--------- --------- ---------
--------- --------- ---------
Primary income (loss) per share:
Income from continuing operations.............................................. $ .33 $ .10 $ .15
Discontinued operations........................................................ - (.03) -
--------- --------- ---------
Net income..................................................................... $ .33 $ .07 $ .15
--------- --------- ---------
--------- --------- ---------
Fully diluted income (loss) per share:
Income from continuing operations.............................................. $ .33 $ .10 $ .14
Discontinued operations........................................................ - (.03) -
--------- --------- ---------
Net income..................................................................... $ .33 $ .07 $ .14
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes
F-4
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMON STOCK COMMON STOCK PAID-IN RETAINED
------------------------ ------------------------ CAPITAL EARNINGS
NUMBER OF NUMBER OF ----------- -----------
SHARES AMOUNT SHARES AMOUNT AMOUNT AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1993................. - $ - 455,520 $ 5 $ 461 $ 103
Issuance of additional shares and
transfer to adjust common stock to
authorized par value as a result of
2.1953-for-1 stock split............... - - 544,480 5 (5) -
Issuance of additional shares and
transfer to adjust common stock to
authorized par value as a result of
2-for-1 stock split.................... - - 1,000,000 10 (10) -
Warrants issued in connection with
subordinated equity notes.............. - - - - 5 -
Net income.............................. - - - - - 301
----------- ----- ----------- --- ----------- -----------
Balance at April 30, 1994................. - - 2,000,000 20 451 404
Issuance of shares in connection with
the Initial Public Offering net of
registration expenses.................. 1,351,250 13 - - 5,280 -
Issuance of shares in connection with
the Company's acquisitions............. 481,616 5 - - 2,643 -
Issuance of shares in connection with
the Subsequent Public Offering net of
registration expenses.................. 2,305,500 23 - - 6,178 -
Net income.............................. - - - - - 154
----------- ----- ----------- --- ----------- -----------
Balance at April 30, 1995................. 4,138,366 41 2,000,000 20 14,552 558
Issuance of shares in connection with
the overallotment option related to the
Subsequent Public Offering............. 345,970 3 - - 989 -
Issuance of shares in connection with
the Company's acquisitions............. 1,603,444 17 - - 14,746 -
Issuance of shares in connection with
the redemption of the Class A
Warrants............................... 4,502,105 45 - - 28,369 -
Issuance of shares related to employee
stock options exercised................ 427,850 4 - - 1,842 -
Notes issued by officers for the
exercise of stock options.............. - - - - - -
Tax benefit resulting from the exercise
of non-qualified stock options......... - - - - 531 -
Foreign currency translation............ - - - - - -
Net income.............................. - - - - - 1,628
----------- ----- ----------- --- ----------- -----------
Balance at April 30, 1996................. 11,017,735 $ 110 2,000,000 $ 20 $ 61,029 $ 2,186
----------- ----- ----------- --- ----------- -----------
----------- ----- ----------- --- ----------- -----------
<CAPTION>
FOREIGN OFFICERS'
CURRENCY NOTES
TRANSLATION RECEIVABLE
--------------- -----------
AMOUNT AMOUNT TOTAL
--------------- ----------- ---------
<S> <C> <C> <C>
Balance at April 30, 1993................. $ - $ - $ 569
Issuance of additional shares and
transfer to adjust common stock to
authorized par value as a result of
2.1953-for-1 stock split............... - - -
Issuance of additional shares and
transfer to adjust common stock to
authorized par value as a result of
2-for-1 stock split.................... - - -
Warrants issued in connection with
subordinated equity notes.............. - - 5
Net income.............................. - - 301
--- ----------- ---------
Balance at April 30, 1994................. - - 875
Issuance of shares in connection with
the Initial Public Offering net of
registration expenses.................. - - 5,293
Issuance of shares in connection with
the Company's acquisitions............. - - 2,648
Issuance of shares in connection with
the Subsequent Public Offering net of
registration expenses.................. - - 6,201
Net income.............................. - - 154
--- ----------- ---------
Balance at April 30, 1995................. - - 15,171
Issuance of shares in connection with
the overallotment option related to the
Subsequent Public Offering............. - - 992
Issuance of shares in connection with
the Company's acquisitions............. - - 14,763
Issuance of shares in connection with
the redemption of the Class A
Warrants............................... - - 28,414
Issuance of shares related to employee
stock options exercised................ - - 1,846
Notes issued by officers for the
exercise of stock options.............. - (1,811) (1,811)
Tax benefit resulting from the exercise
of non-qualified stock options......... - - 531
Foreign currency translation............ (34) - (34)
Net income.............................. - - 1,628
--- ----------- ---------
Balance at April 30, 1996................. $ (34) $ (1,811) $ 61,500
--- ----------- ---------
--- ----------- ---------
</TABLE>
See accompanying notes
F-5
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
--------------------------------
1994 1995 1996
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 301 $ 154 $ 1,628
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 1,149 2,212 15,241
Deferred rent and other liabilities........................................... - 129 472
Deferred income taxes......................................................... - 406 31
Provision for discontinued operations......................................... - 35 -
Changes in operating assets and liabilities, net of acquisitions of
businesses:
Accounts receivable......................................................... (39) 24 (385)
Notes receivable............................................................ (14) 1 (272)
Inventory................................................................... (124) (946) (2,563)
Other assets................................................................ (141) 8 (801)
Accounts payable............................................................ 143 92 5,921
Income taxes payable........................................................ - (240) 1,130
Other liabilities........................................................... - 317 (1,319)
--------- --------- ----------
Net cash provided by operating activities....................................... 1,275 2,192 19,083
INVESTING ACTIVITIES
Purchase of videocassette rental inventory...................................... (1,606) (3,752) (22,739)
Purchase of property and equipment.............................................. (400) (2,901) (12,301)
Investment in businesses, net of cash acquired.................................. - (708) (17,391)
Notes receivable from officers.................................................. - - (1,252)
--------- --------- ----------
Net cash used in investing activities........................................... (2,006) (7,361) (53,683)
FINANCING ACTIVITIES
Proceeds from bank line of credit............................................... - - 4,100
Proceeds from notes payable..................................................... 900 2,171 -
Payments on notes payable....................................................... (164) (2,829) (3,838)
Payments of loan costs.......................................................... (24) (145) -
Proceeds from exercise of employee options...................................... - - 35
Proceeds from exercise of Class A warrants...................................... - - 28,414
Proceeds from issuance of common stock.......................................... - 11,494 992
--------- --------- ----------
Net cash provided by financing activities....................................... 712 10,691 29,703
--------- --------- ----------
Increase (decrease) in cash and cash equivalents................................ (19) 5,522 (4,897)
Cash and cash equivalents at beginning of year.................................. 70 51 5,573
--------- --------- ----------
Cash and cash equivalents at end of year........................................ $ 51 $ 5,573 $ 676
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes
F-6
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Video Update, Inc. and subsidiaries (the "Company") own and operate retail
video stores and sell and support retail video franchises. Company-owned stores
are located in the United States and Canada with franchises located principally
in the United States.
CONSOLIDATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of the Company. All intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The most significant estimates and
assumptions relate to the amortization methods and useful lives of videocassette
rental inventory and goodwill. These estimates and assumptions could change and
actual results could differ from these estimates.
BASIS OF PRESENTATION
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.
SERVICE FEES
The Company receives continuing monthly royalty and other fee revenue from
its franchisees based on a percentage of the franchisees' gross monthly revenue.
Royalty fee and other fee revenues will continue for the initial terms of the
franchise agreements, after which the revenues will be based upon renewed
franchise agreements. Origination franchise fees collected are deferred and not
recorded as revenue in the statement of income until the franchisee has executed
a lease or a letter of intent for a franchised store location.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market. Inventory consists of
videocassettes held as base stock for the opening of new stores, videocassettes
held for sale and supplies available for sale to franchisees.
F-7
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIDEOCASSETTE RENTAL INVENTORY
Videocassette rental inventory is stated at cost, and is amortized over the
estimated economic life as follows:
<TABLE>
<CAPTION>
NUMBER OF COPIES
OF TITLE PER STORE AMORTIZATION POLICY
- ------------------- ------------------------------------------------------------
<S> <C>
One through three Straight-line over 36 months to a salvage value of $6.00 per
videocassette.
Four through nine Straight-line over 6 months to a book value of $6.00 and
then straight-line over 30 months.
Ten and over Straight-line over 6 months to a book value of $6.00 and
then straight-line over 3 months.
</TABLE>
PROPERTY AND EQUIPMENT
Furniture and equipment are recorded at cost and depreciated using the
straight-line method over the estimated economic life of the asset of five to
ten years. Leasehold improvements are recorded at cost and depreciated using the
straight-line method over the lesser of the estimated economic life of ten years
or the lease term.
GOODWILL
Goodwill, consisting principally of excess cost over net assets from the
acquisitions of businesses, is net of accumulated amortization of $83,000 and
$1,155,000 at April 30, 1995 and 1996, respectively, and is being amortized on a
straight-line basis over twenty years. If facts and circumstances suggest that
the goodwill will not be recoverable, as determined based on the undiscounted
cash flows of the assets acquired over the remaining amortization period, the
Company's carrying value of goodwill will be reduced by the estimated shortfalls
of cash flows.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method.
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax and financial reporting bases of assets and
liabilities.
STOCK-BASED COMPENSATION
The Company plans to implement the disclosure provisions of Statement of
Financial Accounting Standards Number 123 (SFAS 123), "Accounting for
Stock-Based Compensation", in fiscal 1997. SFAS 123 was issued by the Financial
Accounting Standards Board in October 1995, and allows companies to choose
whether to account for stock-based compensation under the current method as
prescribed in Accounting Principles Board Opinion Number 25 (APB 25) or use the
fair value method described in SFAS 123. The Company plans to continue to follow
the accounting measurement provisions of APB 25. Therefore, management believes
the impact of implementing the disclosure provisions of SFAS 123 will not have a
significant effect on the Company's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 121 (SFAS 121) "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 121 prescribes the accounting treatment for long-lived assets, identifiable
intangibles and goodwill related to those assets when there are indications that
the carrying
F-8
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
values of those assets may not be recoverable. Management believes that the
adoption of SFAS 121 in fiscal 1997 will not have a material adverse effect on
the Company's results of operations or its financial condition taken as a whole.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At April 30, 1995 and 1996, the carrying value of financial instruments such
as cash and cash equivalents, accounts payable and notes payable approximated
their fair values.
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL
30,
-------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income............................................................ $ 301 $ 154 $ 1,628
------- ------- -------
------- ------- -------
Weighted average shares outstanding:
Class A common shares outstanding at year end....................... - 4,138 11,018
Class B common shares outstanding at year end....................... 2,000 2,000 2,000
Less: Class B common shares placed in escrow in connection with the
initial public offering............................................ (1,300) (1,300) (1,300)
Effect of using weighted average common shares outstanding.......... 204 (2,612) (2,046)
Effect of shares issuable under stock options and warrants based on
the treasury stock method.......................................... - - 991
------- ------- -------
Shares used in computing net income per share..................... 904 2,226 10,663
------- ------- -------
------- ------- -------
Net income per common and common equivalent share, primary............ $ .33 $ .07 $ .15
------- ------- -------
------- ------- -------
FULLY DILUTED NET INCOME PER SHARE
Net income............................................................ $ 301 $ 154 $ 1,628
------- ------- -------
------- ------- -------
Weighted average shares outstanding:
Class A common shares outstanding at year end....................... - 4,138 11,018
Class B common shares outstanding at year end....................... 2,000 2,000 2,000
Less: Class B common shares placed in escrow in connection with the
initial public offering............................................ (1,300) (1,300) (1,300)
Effect of using weighted average common shares outstanding.......... 204 (2,612) (2,046)
Effect of shares issuable under stock options and warrants based on
the treasury stock method.......................................... - - 1,557
------- ------- -------
Shares used in computing net income per share..................... 904 2,226 11,229
------- ------- -------
------- ------- -------
Net income per common and common equivalent share, fully diluted...... $ .33 $ .07 $ .14
------- ------- -------
------- ------- -------
</TABLE>
RECLASSIFICATION
Certain prior year items have been reclassified to conform with the fiscal
1996 presentation.
F-9
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
2. CHANGE IN AMORTIZATION METHOD FOR VIDEOCASSETTE RENTAL INVENTORY
Effective February 1, 1996, videocassettes that are considered base stock
(including copies one through three of new releases) are amortized over 36
months on a straight-line basis to a salvage value of $6.00 per videocassette.
New release videocassettes are amortized as follows: the fourth through ninth
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over 30 months with no salvage value; and the tenth and any succeeding
copies of each title per store are amortized on a straight-line basis during
their first six months to a net book value of $6.00 and then on a straight-line
basis over three months with no salvage value. The changes, which represent in
part a change in accounting principle and a change in accounting estimate, have
been reflected in the accompanying 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 change for recognizing salvage value of base stock and the
effect of the application of the new method of amortizing videocassette copies
in excess of the base stock to May 1, 1995, had the impact, in total, of
increasing amortization expense by $2,773,000 and decreasing income from
continuing operations and net income by $1,604,000, or $.15 per share, for
fiscal 1996, after the effect of income taxes of $1,169,000, all of which has
been recorded in the fourth quarter.
3. VIDEOCASSETTE RENTAL INVENTORY -- NET
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1995 1996
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Videocassette rental inventory........................................ $ 8,387 $ 41,759
Accumulated amortization.............................................. (3,566) (16,058)
--------- ----------
$ 4,821 $ 25,701
--------- ----------
--------- ----------
</TABLE>
Amortization expense for videocassette rental inventory, which is included
in store operating expenses, was $975,000, $1,643,000 and $12,532,000 for the
years ended April 30, 1994, 1995 and 1996, respectively.
F-10
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
4. PROPERTY AND EQUIPMENT -- NET
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1995 1996
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land................................................................... $ 458 $ 473
Buildings.............................................................. 1,085 1,300
Furniture and equipment................................................ 3,074 12,218
Leasehold improvements................................................. 651 7,332
Accumulated depreciation............................................... (674) (2,335)
----------- ---------
$ 4,594 $ 18,988
----------- ---------
----------- ---------
</TABLE>
Depreciation expense was $134,000, $299,000 and $1,607,000 for the years
ended April 30, 1994, 1995 and 1996, respectively.
5. NOTES PAYABLE
The notes payable balance consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1995 1996
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility with a bank; quarterly payments of interest at the
prime rate (8.25% at April 30, 1996) maturing in April 1997 and secured by all
assets of the Company.......................................................... $ - $ 4,100
Note payable, interest at the United States government treasury securities rate
plus 4.5% (10.26% at April 30, 1996). The note is secured by a mortgage and
specific assets of the Company................................................. 567 548
Note payable in monthly installments of $14,329 which includes interest at 7.5%
until December 1996............................................................ - 111
Other notes payable with monthly installments ranging from $1,305 to $2,105 with
interest rates of 9.25% to 11%................................................. 136 100
Note payable to a bank, monthly installments of $15,036, which included interest
at the bank's base rate plus 3% (12.00% at April 30, 1995). The note was paid
in full in April 1996.......................................................... 423 -
Contract for deed payable, monthly installments of $2,296 which included
interest at 12%. The contract for deed was paid in full in 1996................ 152 -
--------- ----------
$ 1,278 $ 4,859
--------- ----------
--------- ----------
</TABLE>
In April 1996, the Company entered into a one-year revolving credit facility
("Line of Credit") under which the Company may borrow up to $10,000,000
($4,100,000 outstanding at April 30, 1996), with amounts borrowed thereunder
bearing interest at variable rates based on the federal funds rate, prime rate
or the interbank Eurodollar rate. The Line of Credit is convertible into a
two-year term loan if it is not renewed. During the term of the Line of Credit
and thereafter to the extent any amounts are outstanding under the Line of
Credit, the Company is subject to various restrictive covenants. The Line of
Credit also requires that the Company maintain certain cash flow ratios as well
as certain ratios of total liabilities to tangible net worth.
F-11
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
5. NOTES PAYABLE (CONTINUED)
The weighted-average interest rate on borrowings outstanding was 10.0% and
8.25% at April 30, 1995 and 1996, respectively.
The aggregate maturities of the notes payable at April 30, 1996 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997...................................................... $ 4,331
1998...................................................... 22
1999...................................................... 24
2000...................................................... 26
2001...................................................... 34
2002 and thereafter....................................... 422
------
$ 4,859
------
------
</TABLE>
6. RELATED PARTY TRANSACTIONS
Family members of stockholders own a majority interest at April 30, 1994,
1995 and 1996 in two, one and one franchise stores, respectively. The amount of
service fees earned from these franchisees was $30,000, $18,000 and $20,000 for
the years ended April 30, 1994, 1995 and 1996, respectively. The amount due from
the franchisees at April 30, 1995 and 1996 amounted to $2,000, for each year.
In 1994, the Company entered into an Agreement and Plan of Merger with
Koonrod, Inc. ("KRI") and the stockholders of KRI. Under the Agreement, the
Company acquired all of the outstanding stock of KRI in exchange for $75,000
cash and 105,000 shares of the Company's Class A Common Stock which were valued
at approximately $496,000, and KRI was merged into the Company. The two
stockholders of KRI who owned all of the outstanding stock of KRI are the father
and brother-in-law of the Company's Chief Executive Officer ("CEO").
In 1995, the Company entered into a Purchase Agreement with Bedard
Entertainment, Inc. ("BEI"), and the stockholders of BEI. Under the Purchase
Agreement, the Company acquired substantially all of the assets of BEI in
exchange for 15,000 shares of Class A Common Stock and the assumption of
indebtedness of BEI in the amount of approximately $275,000. The two
stockholders of BEI who owned all of the outstanding stock of BEI are the
brother and sister-in-law of the Company's President.
During the years ended April 30, 1994, 1995 and 1996, the Company incurred
approximately $19,000, $48,000, and $245,000, respectively, in expenses from
Johnson, West & Co., PLC ("Johnson, West & Co.") for accounting and tax
services. A director of the Company is a member of Johnson, West & Co.
In fiscal 1996, the Company advanced to its CEO and its President under
notes receivable, as amended, $1,164,000 and $647,000, respectively, to enable
them to exercise options to purchase a total of 420,000 shares of the Company's
Class A Common Stock at an exercise price of $4.3125, the fair market value of
the stock on the date the options were granted, with such amounts reflected as a
reduction of stockholders' equity at April 30, 1996. Additionally, the Company
advanced these officers under similar arrangements an additional $1,252,000 to
satisfy the then anticipated tax liabilities. The notes receivable as amended
are full recourse loans payable in ten equal installments due in August of each
of the first nine years with the final payment due in May of 2005 and accrues
interest at 6.9%. At April 30, 1996 the total due the Company under the notes
including interest was approximately $3,197,000.
As of April 30, 1995 and 1996, the Company has a note receivable from the
President for $26,000 and $29,000, respectively, which bears interest at 8% and
is due November 1996.
F-12
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
7. LEASE AGREEMENTS
The Company leases office and retail space under operating leases with terms
of 6 to 144 months. These leases generally have a term of three to ten years and
provide options to renew for periods ranging from three to five additional
years. Under the leasing agreements, the Company is generally responsible for
the real estate taxes, insurance, and other expenses related to the property.
The leases expire at varying dates through 2008. The Company also leases
vehicles and computer equipment.
At April 30, 1996, minimum annual rental commitments under non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997...................................................... $ 11,074
1998...................................................... 10,338
1999...................................................... 8,972
2000...................................................... 6,569
2001...................................................... 4,737
2002 and thereafter....................................... 13,739
-------
Total minimum lease payments.............................. $ 55,429
-------
-------
</TABLE>
Rent expense, principally retail and office space, under operating leases
amounted to $630,000, $1,292,000 and $7,675,000 for the years ended April 30,
1994, 1995 and 1996, respectively.
8. INCOME TAXES
Income from continuing operations before income taxes in fiscal 1996 of
$2,821,000 is comprised of $2,412,000 in the United States and $409,000 in
Canada. There were no operations outside of the United States in prior years.
Income tax expense is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ 92 $ (28) $ 833
State..................................................... 33 - 164
International............................................. - - 165
----- ----- -----------
125 (28) 1,162
Deferred:
Federal................................................... 57 164 39
State..................................................... 18 41 (53)
International............................................. - - 45
----- ----- -----------
75 205 31
----- ----- -----------
Total income tax expense.................................... 200 177 1,193
Income tax benefit related to
discontinued operations.................................... - 37 -
----- ----- -----------
Income tax expense related to continuing operations......... $ 200 $ 214 $ 1,193
----- ----- -----------
----- ----- -----------
</TABLE>
F-13
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
8. INCOME TAXES (CONTINUED)
Components of the net deferred tax liability, resulting from differences in
book and income tax accounting methods, are as follows:
<TABLE>
<CAPTION>
APRIL APRIL
30, 30,
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation and amortization............... $ 420 $ 780
Tax over book merger basis adjustment..................... 248 337
-------- --------
668 1,117
Deferred income tax assets:
Book over tax rent expense................................ (102) (276)
-------- --------
Net deferred income tax liabilities....................... $ 566 $ 841
-------- --------
-------- --------
</TABLE>
The reconciliation of the federal statutory rate (34%) to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal tax at statutory rate............................... 34.0% 34.0% 34.0%
State tax, net of federal benefit........................... 6.7 10.8 2.6
International............................................... - - 2.0
Goodwill.................................................... - 7.0 2.0
Other....................................................... (.8) 1.7 1.7
--- --- ---
39.9% 53.5% 42.3%
--- --- ---
--- --- ---
</TABLE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid............................................... $ 93 $ 213 $ 226
Income taxes paid........................................... $ 120 $ 41 $ 29
</TABLE>
10. STOCKHOLDERS' EQUITY
In July and August 1994, the Company completed its initial public offering
("IPO") of 1,351,250 Units, each Unit consisting of one share of Class A Common
Stock, one Class A Warrant and one Class B Warrant, including 176,350 Units
subject to the underwriter's over-allotment. Proceeds to the Company, net of
registration expenses, were approximately $5,300,000.
In February 1995, the Company increased the number of authorized shares of
Class A Common Stock from 18,000,000 shares to 50,000,000 shares.
In April and May 1995, the Company completed a subsequent public offering of
2,305,500 Units and 345,970 Units for the underwriter's overallotment, each
consisting of one share of Class A Common Stock, one Class A Warrant and one
Class B Warrant. Proceeds to the Company, net of registration expenses, were
approximately $7,200,000.
The number of outstanding shares of Class A Common Stock at April 30, 1996
includes 55,000 unregistered shares related to one of the Company's 1996
acquisitions pending resolution of a dispute with the sellers.
F-14
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
10. STOCKHOLDERS' EQUITY (CONTINUED)
CLASS A COMMON STOCK -- CLASS B COMMON STOCK
The rights of the holders of the Class A Common Stock and the Class B Common
Stock are essentially identical and, except as expressly required by law, are
treated as a single class of stock in all respects, except that the holders of
the Class A Common Stock are entitled to one vote per share, and the holders of
the Class B Common Stock are entitled to five votes per share, and each share of
Class B Common Stock is convertible into one share of Class A Common Stock at
any time and automatically converts into one share of Class A Common Stock in
the event of any sale or transfer, and upon the death of the original holder.
In connection with the Company's IPO, all of the holders of the Company's
Class B Common Stock have placed, on a pro rata basis, an aggregate of 1,300,000
shares (the "Escrow Shares") into escrow. The Escrow Shares will be released to
the stockholders on a pro rata basis, in the event specified levels of pretax
income of the Company for the years ending April 30, 1995 to April 30, 1998 are
achieved, or the market price of the Company's Class A Common Stock attains
specified targets during a 36 month period commencing from the effective date of
the registration statement relating to the Company's IPO. Any shares remaining
in escrow on July 31, 1998 will be forfeited, which shares will then be
contributed to the Company's capital.
In the event that the foregoing earnings or market price levels are attained
and the Escrow Shares released, the Securities and Exchange Commission has
adopted the position that the release of Escrow Shares to officers, directors,
employees and consultants of the Company will be compensatory and, accordingly,
a non-cash compensation expense would be recorded with an increase to paid-in
capital for financial reporting purposes. As such, stockholder's equity in total
would not change. The expense would equal the fair market value of the Escrow
Shares on the date of release and could result in a material charge to earnings.
WARRANTS -- CLASS A AND B
Each of the units sold in connection with the Company's public offerings
consisted of one share of Class A Common Stock of the Company, one Class A
Warrant and one Class B Warrant. The components of the units were separately
transferable immediately. When issued, each Class A Warrant, upon its exercise,
entitled the holder to purchase one share of the Company's Class A Common Stock
and one Class B Warrant. The Class A Warrant exercise price was $6.50 per share
subject to certain adjustments. In August 1995, the Company called for
redemption all of its outstanding Class A Warrants. The redemption date set
forth in the Notice of Redemption was September 7, 1995. Approximately 4,502,000
Class A Warrants were exercised resulting in net proceeds to the Company of
approximately $28,414,000. At April 30, 1996, the Company has Class B Warrants
outstanding enabling the holders the ability to purchase approximately 8,005,000
shares of Class A Common Stock at $8.75 per share. Such warrants expire in July
1999. In addition, there are 500,000 Class B Warrants outstanding that were
issued by the Company in a 1994 bridge financing. These warrants provide the
holders the ability to purchase the underlying Class A Common Stock of the
Company at $8.75 per share and expire July 1999.
BLAIR OPTIONS
At April 30, 1996 the Company has 117,500 shares of Class A Common Stock
reserved for issuance upon exercise of the Unit Purchase Option (the "Initial
Option") at an aggregate exercise price of $734,375, issued to D.H. Blair
Investment Banking Corp. ("Blair") in connection with its services as
underwriter of the Company's initial public offering; 230,550 shares of Class A
Common Stock reserved for issuance upon exercise of the Unit Purchase Option
(the "Subsequent Option") at an aggregate exercise price of $1,033,500, issued
to Blair or its' affiliates in connection with its services as underwriter of
the Company's subsequent public offering (collectively, the Initial Option and
the Subsequent Option are referred to as the
F-15
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
10. STOCKHOLDERS' EQUITY (CONTINUED)
"Blair Options"); 348,050 shares of Class A Common Stock reserved for issuance
upon exercise of the redeemable Class A Warrants (the "Class A Warrants")
underlying the Blair Options, at an exercise price of $6.50 per share; 696,100
shares of Class A Common Stock issuable upon exercise of the Class B Warrants
underlying the Blair Options, at an exercise price of $8.75 per share.
11. STOCK OPTION PLANS
In April 1994, the Company established an incentive stock option plan (the
"1994 Stock Plan") whereby 150,000 shares of Class A Common Stock were reserved.
The options can be either incentive stock options or non-qualified options, as
defined by Section 422 of the Internal Revenue Code ("Section 422") to be
granted to eligible individuals. The exercise price for the incentive stock
options granted under the 1994 Stock Plan may not be less than the fair market
value of the Class A Common Stock on the date the option is granted.
In May 1995, the Company established an additional stock option plan (the
"1995 Plan") whereby 850,000 shares were reserved for grant to eligible
individuals to purchase Class A Common Stock of the Company. Options under the
1995 Plan may be incentive stock options or non-qualified options. The exercise
price for the incentive stock options granted under the 1995 Plan may not be
less than fair market value of the Class A Common Stock on the date the option
is granted. In August 1995, 420,000 options were exercised by the CEO and
President of the Company.
The remaining options granted to employees under the stock plans vest over a
three year period from the date of issue, or vest according to income and share
price targets set forth in the escrow share agreement of the Class B Common
shares.
In September 1994, the Board of Directors approved the Formula Stock Option
Plan (the "Formula Plan") whereby 50,000 shares of Class A Common Stock have
been reserved. The Formula Plan provides for the granting of options to
non-management directors of the Company. As of April 30, 1996 options to
purchase 6,000 shares of Class A Common Stock were granted. The exercise price
for the incentive stock options granted under the plan may not be less than the
fair market value of the Class A Common Stock on the date the option is granted.
To date, none of these options have been exercised.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
1994 AND
SHARES 1995 PLAN FORMULA EXERCISE
AVAILABLE OPTIONS PLAN OPTIONS PRICE
FOR GRANT OUTSTANDING OUTSTANDING EXERCISABLE PER SHARE
---------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1994................... 150,000 - - - -
Establishment of the Formula Plan......... 50,000 - - - -
Granted................................... (169,200) 166,200 3,000 - $4.50 - 6.75
Became exercisable........................ - - - 61,170 4.50 - 5.50
Canceled.................................. 30,900 (30,900) - (10,815) 5.00
---------- ----------- ----- -----------
Balance at April 30, 1995................... 61,700 135,300 3,000 50,355 4.50 - 6.75
Establishment of the 1995 Plan............ 850,000 - - - -
Granted................................... (830,000) 827,000 3,000 - 4.31 - 10.25
Became exercisable........................ - - - 576,000 4.31 - 7.63
Exercised................................. - (427,850) - (427,850) 4.31 - 4.50
Canceled.................................. 6,000 (6,000) - (2,000) 7.63
---------- ----------- ----- -----------
Balance at April 30, 1996................... 87,700 528,450 6,000 196,505 $4.31 - 10.25
---------- ----------- ----- -----------
---------- ----------- ----- -----------
</TABLE>
F-16
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
12. ACQUISITIONS
During fiscal years 1995 and 1996, the Company acquired, in 19 transactions,
nine video retail stores previously operated by Video Update franchisees, and
141 video retail stores operated by unaffiliated third party operators (the
"Acquisitions"). The purchase method of accounting has been used to account for
each of the Acquisitions and are included in the Company's consolidated
financial statements from the date of acquisition.
During fiscal year 1995, the Company acquired, in seven transactions, nine
video retail stores previously operated by Video Update franchisees and five
retail stores operated by unaffiliated third party operators. The aggregate
purchase price of these acquisitions totaling approximately $3,510,000, included
$862,000 in cash, and 481,616 shares of Class A Common Stock valued at
$2,648,000. The excess of the cost over the estimated fair value of the assets
acquired of $2,775,000 is being amortized over 20 years on a straight-line
basis.
During fiscal 1996, the Company acquired, in 12 transactions, 136 retail
stores. The aggregate purchase price of these acquisitions totaling
approximately $40,114,000, included $17,391,000 in cash, $3,319,000 in
promissory notes, $4,641,000 in assumed indebtedness and transaction costs, and
1,603,444 shares of Class A Common Stock valued at $14,763,000 and an option to
purchase 20,000 shares of Class A Common Stock at a price equal to the fair
market value at the date of issuance. The excess of the cost over the estimated
fair value of the assets acquired of $24,352,000 (goodwill and deferred charges)
is being amortized over 20 years on a straight-line basis.
In connection with six acquisitions in which the Company has issued an
aggregate of 635,613 shares of Class A Common Stock, 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 April 30, 1996 the deficiency payments are estimated to be
approximately equal to $1,180,000. In two of these acquisitions, the Company has
the option of satisfying approximately $1,105,000 of this liability at April 30,
1996 through the issuance of approximately 136,000 additional shares of Class A
Common Stock (based on the April 30, 1996 stock price).
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the Acquisitions had been completed
at the beginning of the year in which the acquisition occurred and the
immediately preceding year. In the opinion of the Company's management, all
adjustments necessary to present fairly such pro forma summary have been made
based on the terms and structure of the transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues................................................ $ 8,650 $ 50,177 $ 62,949
Income from continuing operations....................... $ 520 $ 4,196 $ 3,037
Primary income per share................................ $ .35 $ .46 $ .26
Fully diluted income per share.......................... $ .35 $ .46 $ .25
</TABLE>
This unaudited pro forma financial summary does not necessarily indicate the
actual results had the Acquisitions occurred at the beginning of the respective
periods, nor do they purport to indicate the results of future operations of the
Company.
F-17
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1996
13. GEOGRAPHIC BUSINESS OPERATIONS
The Company owns and operates retail video stores in the United States and
in Canada. A summary of the Company's operations by geographic area is presented
for 1996. There were no operations outside of the United States in prior years.
All intercompany revenues and expenses have been eliminated.
<TABLE>
<CAPTION>
OPERATING TOTAL
REVENUES INCOME ASSETS
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................ $ 40,372 $ 2,107 $ 70,582
Canada................................................... 10,132 398 8,936
--------- ----------- ---------
$ 50,504 $ 2,505 $ 79,518
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
14. DISCONTINUED OPERATIONS
Effective October 31, 1994, the Company adopted a plan to dispose of
Gamesters, a video game specialty store. Accordingly, Gamesters was reported as
a discontinued operation at October 31, 1994, and the financial statements have
been reclassified to report separately the operating results of the business.
The provision for losses on the disposal of Gamesters was $35,000 net of
taxes of $25,000, consisting of an estimated loss on disposal of the business of
$12,000 and a provision of $48,000 for anticipated losses until disposal. In
addition, the summary operating results of the discontinued operation for the
year ended April 30, 1995 were as follows:
<TABLE>
<S> <C>
Product sales..................................................... $ 31,000
Cost and expenses................................................. 67,000
---------
(Loss) before income taxes........................................ (36,000)
Income tax benefit................................................ 12,000
---------
Net (loss)........................................................ $ (24,000)
---------
---------
</TABLE>
15. SUBSEQUENT EVENTS
The Company and the Selling Stockholders (the Company's CEO and President)
expect to file 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. 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 officers from the sale of their shares
will first be used to pay in full the notes receivable and interest therein
totaling $3,197,000 discussed in Note 6. Additionally, net proceeds will be used
to retire outstanding notes payable of $4,100,000 as of April 30, 1996. The
effect on supplemental net income and net income per share as a result of the
use of proceeds to reduce outstanding debt is not material.
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.
F-18
<PAGE>
[ARTWORK:
- -- Two exterior photos of a Video Update store -- one with a day time backdrop
and one with a night time backdrop, each with store signage and store rental
promotion posters. Interior photos of Video Update store, with videocassette
displays and customers. All photos with a backdrop of videocassette movie box
covers.]
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offering herein contained, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or an Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such an
offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
any of the dates as of which information is furnished herein or since the date
hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Use of Proceeds............................................. 12
Price Range of Common Stock................................. 12
Dividend Policy............................................. 12
Capitalization.............................................. 13
Selected Historical Financial Data.......................... 14
Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................. 16
Business.................................................... 23
Management.................................................. 33
Principal and Selling Stockholders.......................... 40
Certain Transactions........................................ 42
Description of Securities................................... 43
Underwriting................................................ 48
Legal Matters............................................... 49
Experts..................................................... 49
Additional Information...................................... 49
Incorporation of Certain Information by Reference........... 50
Recent Developments......................................... 50
Financial Statements........................................ F-1
</TABLE>
5,500,000 SHARES
VIDEO UPDATE, INC.
CLASS A
COMMON STOCK
--------------------
P R O S P E C T U S
--------------------
PIPER JAFFRAY INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) (items marked with an asterisk (*) represent estimated expenses)
incurred or expected to be incurred by the Company in connection with this
Registration Statement:
<TABLE>
<S> <C>
Registration Fee -- SEC..................................... $19,629.31
Registration Fee -- NASD.................................... 6,192.50
Printing Costs*............................................. 135,000.00
Legal Fees*................................................. 250,000.00
Accounting Fees*............................................ 200,000.00
Miscellaneous*.............................................. 39,178.19
----------
Total*.................................................. $650,000.00
----------
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation or an amendment thereto validly
approved by stockholders to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination of limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, engaging in
intentional misconduct or knowingly violating a law, paying a dividend or
obtaining an improper personal benefit. The Company's Certificate of
Incorporation includes the following provision:
"To the maximum extent permitted by Section 102(b)(7) of the General
Corporation Law of Delaware, a director of this corporation shall not be
personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the directors' duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, he had reasonable cause to believe his
conduct was not unlawful. The Company's Bylaws include the following provision:
"Reference is made to Section 145 and any other relevant provisions of
the General Corporation Law of the State of Delaware. Particular reference
is made to the class of persons, hereinafter called "Indemnitees," who may
be indemnified by a Delaware corporation pursuant to the provisions of such
Section 145, namely, any person or the heirs, executors, or administrators
of such person, who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact
that such person is or was a director, officer, employee, or agent of such
corporation or is or was serving at the request of such corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise. The Corporation shall, and is
hereby obligated to, indemnify the Indemnitees, and each of them, in each
and every situation where the Corporation is obligated to make such
indemnification pursuant to the aforesaid statutory provisions. The
Corporation shall indemnify the Indemnitees, and each of them, in each and
every situation, where, under the aforesaid statutory provisions, the
Corporation is not obligated, but is nevertheless permitted or empowered, to
make such indemnification, it being understood that, before making such
indemnification with respect to any situation covered under this sentence,
(i) the Corporation shall promptly make
II-1
<PAGE>
or cause to be made, by any of the methods referred to in Subsection (d) of
such Section 145, a determination as to whether each Indemnitee acted in
good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, in the case of any criminal
action or proceeding, had no reasonable cause to believe that his conduct
was unlawful, and (ii) that no such indemnification shall be made unless it
is determined that such Indemnitee acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, in the case of any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful."
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
1 Form of Purchase Agreement by and between the Company, the
Selling Stockholders, Piper Jaffray Inc. and The
Robinson-Humphrey Company, Inc.
5 Opinion letter of O'Connor, Broude & Aronson as to legality
of shares being registered.
23a Consent of O'Connor, Broude & Aronson (contained in Opinion
filed as Exhibit 5).
23b Consent of Ernst & Young LLP.
</TABLE>
(b) The following exhibit was filed as part of the Company's Annual Report
on Form 10-KSB for the fiscal year ended April 30, 1996, and is incorporated
herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
3 Restated Certificate of Incorporation.
</TABLE>
(c) The following exhibit was filed as part of the Company's Current Report
on Form 8-K filed with the Commission on March 14, 1996, and is incorporated
herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
3 Bylaws, as amended.
</TABLE>
(d) The following exhibits were filed as part of the Company's Form SB-2
Registration Statement (No. 33-89018) declared effective by the Commission on
April 7, 1995, and are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
4a Form of Unit Purchase Option.
10c Form of Amendment to Warrant Agreement dated July 20, 1994
between the Company, American Stock Transfer & Trust
Company and D.H. Blair Investment Banking Corp.
</TABLE>
(e) The following exhibits were filed as part of the Company's Form SB-2
Registration Statement (No. 33-79292-C) declared effective by the Commission on
July 20, 1994, and are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
4a Specimen Class A Common Stock Certificate.
4b Specimen Class B Common Stock Certificate.
4c Form of Warrant Agreement, including Form of Class A and
Class B Warrant Certificates.
4d Form of Unit Purchase Option of D.H. Blair Investment
Banking Corp.
4e Form of Escrow Agreement between certain Stockholders of the
Company, the Company and American Stock Transfer & Trust
Company.
</TABLE>
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(5) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(7) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Paul, State of Minnesota, on July 11, 1996.
VIDEO UPDATE, INC.
By: /s/ DANIEL A. POTTER
-------------------------------------------
Daniel A. Potter
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- ------------------------------------ ------------------------- --------------
<C> <S> <C>
Chairman of the Board,
/s/ DANIEL A. POTTER and Chief Executive
- ------------------------------------ Officer (principal July 11, 1996
Daniel A. Potter executive officer)
/s/ JOHN M. BEDARD
- ------------------------------------ President and Director July 11, 1996
John M. Bedard
/s/ DANIEL C. HOWARD Chief Operations Officer
- ------------------------------------ and Director July 11, 1996
Daniel C. Howard
Chief Financial Officer
/s/ CHRISTOPHER J. GONDECK (principal
- ------------------------------------ financial and accounting July 11, 1996
Christopher J. Gondeck officer)
/s/ ROBERT E. YAGER Vice President of Store
- ------------------------------------ Operations July 11, 1996
Robert E. Yager and Director
/s/ PAUL M. KELNBERGER
- ------------------------------------ Director July 11, 1996
Paul M. Kelnberger
/s/ JANA WEBSTER VAUGHN
- ------------------------------------ Director July 11, 1996
Jana Webster Vaughn
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED PAGE
NO. TITLE NUMBER
- -------- ------------------------------------------------------------ --------------
<C> <S> <C>
1 Form of Purchase Agreement by and between the Company, the
Selling Stockholders, Piper Jaffray Inc. and The
Robinson-Humphrey Company, Inc.............................
5 Opinion letter of O'Connor, Broude & Aronson as to legality
of shares being registered.................................
23a Consent of O'Connor, Broude & Aronson (contained in Opinion
filed as Exhibit 5)........................................
23b Consent of Ernst & Young LLP................................
</TABLE>
II-5
<PAGE>
5,500,000 SHARES(1)
VIDEO UPDATE, INC.
CLASS A COMMON STOCK
PURCHASE AGREEMENT
________, 1996
PIPER JAFFRAY INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the several
Underwriters named in Schedule II hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Video Update, Inc., a Delaware corporation (the "Company"), and the
stockholders of the Company listed on Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the several Underwriters named in
Schedule II hereto (the "Underwriters") an aggregate of [5,500,000] shares (the
"Firm Shares") of Class A Common Stock, $.01 par value per share (the "Common
Stock"), of the Company. The Firm Shares consist of [5,080,000] authorized but
unissued shares of Common Stock to be issued and sold by the Company and
[420,000] outstanding shares of Common Stock to be sold by the Selling
Stockholders. The Company has also granted to the several Underwriters an
option to purchase up to [825,000] additional shares of Common Stock, on the
terms and for the purposes set forth in Section 3 hereof (the "Option Shares").
The Firm Shares and any Option Shares purchased pursuant to this Purchase
Agreement are herein collectively called the "Securities."
The Company and the Selling Stockholders hereby confirm their agreement
with respect to the sale of the Securities to the several Underwriters, for whom
you are acting as Representatives (the "Representatives"):
- ----------------------
(1) Plus an option to purchase up to [825,000] additional shares to cover
over-allotments.
<PAGE>
1. REGISTRATION STATEMENT. A registration statement on Form S-3 (File
No. 333- ) with respect to the Securities, including a preliminary form of
prospectus, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations ("Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder and has been filed with the Commission; one or
more amendments to such registration statement have also been so prepared and
have been, or will be, so filed. Copies of such registration statement and
amendments and each related preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
statement as amended at the time it is or was declared effective by the
Commission, together with (a) any registration statement filed by the Company
pursuant to Rule 462(b) under the Act and (b) the documents incorporated by
reference in the Prospectus contained in the Registration Statement at the time
such Registration Statement became effective, and, in the event of any amendment
thereto after the effective date and prior to the First Closing Date (as
hereinafter defined), such registration statement as so amended (but only from
and after the effectiveness of such amendment), including the information deemed
to be part of the registration statement at the time of effectiveness pursuant
to Rule 430A(b), if applicable, is hereinafter called the "Registration
Statement." The prospectus included in the Registration Statement at the time
it is or was declared effective by the Commission is hereinafter called the
"Prospectus," except that if any prospectus filed by the Company with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or any other
prospectus provided to the Underwriters by the Company for use in connection
with the offering of the Securities (whether or not required to be filed by the
Company with the Commission pursuant to Rule 424(b) of the Rules and
Regulations) differs from the prospectus on file at the time the Registration
Statement is or was declared effective by the Commission, the term "Prospectus"
shall refer to such differing prospectus from and after the time such prospectus
is filed with the Commission or transmitted to the Commission for filing
pursuant to such Rule 424(b) or from and after the time it is first provided to
the Underwriters by the Company for such use. The term "Prospectus" may refer,
if applicable, to the term sheet or abbreviated term sheet filed by the Company
with the Commission pursuant to Rule 424(b)(7) together with the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act from
and after the time it is first provided to the Underwriters by the Company for
delivery to purchasers of the Securities. The term "Preliminary Prospectus" as
used herein means any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective under the Act and any
prospectus subject to completion as described in Rule 430A of the Rules and
Regulations. Any reference herein to any Preliminary Prospectus or Prospectus
shall be deemed to refer to and include the documents
2
<PAGE>
incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act,
as of the date of the Preliminary Prospectus or Prospectus, as the case may be;
any reference to any amendment or supplement to any Preliminary Prospectus or
Prospectus shall be deemed to refer to and include any documents filed after the
date of such Preliminary Prospectus or Prospectus, as the case may be, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
incorporated by reference in such Preliminary Prospectus or Prospectus, as the
case may be; and any reference to any amendment to the Registration Statement
shall be deemed to refer to and include any annual report of the Company filed
pursuant to Section 13(a) or 15 (d) of the Exchange Act after the effective date
of the Registration Statement that is incorporated by reference in the
Registration Statement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission and each Preliminary
Prospectus, at the time of filing thereof, did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; except
that the foregoing shall not apply to statements in or omissions from any
Preliminary Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by you, or by any Underwriter through
you, specifically for use in the preparation thereof.
(ii) The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case may
be, conformed in all material respects to the requirements of the Act or
the Exchange Act, as applicable, and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and any further documents so filed and incorporated by
reference in the Prospectus or any further amendment or supplement thereto,
when such documents become effective or are filed with the Commission, as
the case may be, will conform in all material respects to the requirements
of the Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through you expressly for use therein.
3
<PAGE>
(iii) As of the time the Registration Statement (or any
post-effective amendment thereto) is or was declared effective by the
Commission, upon the filing or first delivery to the Underwriters of the
Prospectus (or any supplement to the Prospectus) and at the First Closing
Date and Second Closing Date (as hereinafter defined), (A) the Registration
Statement and Prospectus (in each case, as so amended and/or supplemented)
will conform or conformed in all material respects to the requirements of
the Act and the Rules and Regulations, (B) the Registration Statement (as
so amended) will not or did not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) the
Prospectus (as so supplemented) will not or did not include an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances in which they are or were made, not misleading; except
that the foregoing shall not apply to statements in or omissions from any
such document in reliance upon, and in conformity with, written information
furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof. If the Registration
Statement has been declared effective by the Commission, no stop order
suspending the effectiveness of the Registration Statement has been issued,
and no proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission.
(iv) The financial statements of the Company, together with the notes
thereto, set forth in the Registration Statement and Prospectus comply in
all material respects with the requirements of the Act and fairly present
the financial condition of the Company as of the dates indicated and the
results of operations and changes in cash flows for the periods therein
specified in conformity with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise
stated therein); and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. No
other financial statements or schedules are required to be included in the
Registration Statement or Prospectus. Ernst & Young, LLP, which has
expressed its opinion with respect to the financial statements and
schedules filed as a part of the Registration Statement and included in the
Registration Statement and Prospectus, are independent public accountants
as required by the Act and the Rules and Regulations.
(v) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and its subsidiaries
has full corporate power and authority to own its properties and conduct
its business as currently being carried on and as described in the
Registration Statement and Prospectus, and is duly qualified to do business
as a foreign corporation in good standing in each jurisdiction in which it
owns or leases real property or in which the conduct of its business makes
4
<PAGE>
such qualification necessary and in which the failure to so qualify would
have a material adverse effect upon its business, condition (financial or
otherwise) or properties, taken as a whole.
(vi) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct
or contingent, or entered into any material transactions, or declared or
paid any dividends or made any distribution of any kind with respect to its
capital stock; and there has not been any change in the capital stock
(other than a change in the number of outstanding shares of Common Stock
due to the issuance of shares upon the exercise of outstanding options or
warrants), or any material change in the short-term or long-term debt, or
any issuance of options, warrants, convertible securities or other rights
to purchase the capital stock, of the Company or any of its subsidiaries
other than pursuant to stock option plans referred to in the Registration
Statement, or any material adverse change, or any development involving a
prospective material adverse change, in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects, net
worth or results of operations of the Company and its subsidiaries, taken
as a whole.
(vii) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company or any of its subsidiaries is a
party before or by any court or governmental agency, authority or body, or
any arbitrator, which might result in any material adverse change in the
condition (financial or otherwise), business, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a
whole.
(viii) There are no contracts or documents of the Company or any of
its subsidiaries that are required to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have
not been so filed.
(ix) This Agreement has been duly authorized, executed and delivered
by the Company, and constitutes a valid, legal and binding obligation of
the Company, enforceable in accordance with its terms, except as rights to
indemnity hereunder may be limited by federal or state securities laws and
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally
and subject to general principles of equity. The execution, delivery and
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute, any
agreement or instrument to which the Company is a party or by which it is
bound or to which any of its property is subject, the Company's charter or
by-laws, or any order, rule, regulation or decree of any court or
governmental agency or body having jurisdiction
5
<PAGE>
over the Company or any of its properties; no consent, approval,
authorization or order of, or filing with, any court or governmental agency
or body is required for the execution, delivery and performance of this
Agreement or for the consummation of the transactions contemplated hereby,
including the issuance or sale of the Securities by the Company, except
such as may be required under the Act or state securities or blue sky laws;
and the Company has full power and authority to enter into this Agreement
and to authorize, issue and sell the Securities as contemplated by this
Agreement.
(x) All of the issued and outstanding shares of capital stock of the
Company, including the outstanding shares of Common Stock, are duly
authorized and validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights
to subscribe for or purchase securities, and the holders thereof are not
subject to personal liability by reason of being such holders; the
Securities which may be sold hereunder by the Company have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms hereof, will have been validly issued and will be fully paid and
nonassessable, and the holders thereof will not be subject to personal
liability by reason of being such holders; and the capital stock of the
Company, including the Common Stock, conforms to the description thereof in
the Registration Statement and Prospectus. Except as otherwise stated in
the Registration Statement and Prospectus, there are no preemptive rights
or other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument to which
the Company is a party or by which the Company is bound. Neither the
filing of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any rights for
or relating to the registration of any shares of Common Stock or other
securities of the Company, except for such rights as have been waived. All
of the issued and outstanding shares of capital stock of each of the
Company's subsidiaries have been duly and validly authorized and issued and
are fully paid and nonassessable, and, except as otherwise described in the
Registration Statement and Prospectus and except for any directors'
qualifying shares, the Company owns of record and beneficially, free and
clear of any security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of such stock.
Except as described in the Registration Statement and the Prospectus, there
are no options, warrants, agreements, contracts or other rights in
existence to purchase or acquire from the Company or any subsidiary of the
Company any shares of the capital stock of the Company or any subsidiary of
the Company. The Company has an authorized and outstanding capitalization
as set forth in the Registration Statement and the Prospectus.
(xi) The Company and each of its subsidiaries holds, and is operating
in compliance in all material respects with, all franchises, grants,
authorizations,
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licenses, permits, easements, consents, certificates and orders of any
governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid and in
full force and effect; and the Company and each of its subsidiaries
is in compliance in all material respects with all applicable federal,
state, local and foreign laws, regulations, orders and decrees.
(xii) The Company and its subsidiaries have good and marketable title
to all property described in the Registration Statement and Prospectus as
being owned by them, in each case free and clear of all liens, claims,
security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus and such as do not materially
interfere with the use made or proposed to be made of such property by the
Company or its subsidiaries; the property held under lease by the Company
and its subsidiaries is held by them under valid, subsisting and
enforceable leases with only such exceptions with respect to any particular
lease as do not interfere in any material respect with the conduct of the
business of the Company or its subsidiaries; the Company and each of its
subsidiaries owns or possesses all patents, patent applications,
trademarks, service marks, tradenames, trademark registrations, service
mark registrations, copyrights, licenses, inventions, trade secrets and
rights necessary for the conduct of the business of the Company and its
subsidiaries as currently carried on and as described in the Registration
Statement and Prospectus; except as stated in the Registration Statement
and Prospectus, no name which the Company or any of its subsidiaries uses
and no other aspect of the business of the Company or any of its
subsidiaries will involve or give rise to any infringement of, or license
or similar fees for, any patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets or other similar rights of
others material to the business or prospects of the Company and neither the
Company nor any of its subsidiaries has received any notice alleging any
such infringement or fee.
(xiii) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in breach of or otherwise
in default in the performance of any material obligation, agreement or
condition contained in any bond, debenture, note, indenture, loan agreement
or any other material contract, lease or other instrument to which it is
subject or by which any of them may be bound, or to which any of the
material property or assets of the Company or any of its subsidiaries is
subject, except as disclosed in the Registration Statement and the
Prospectus.
(xiv) The Company and its subsidiaries have filed all federal, state,
local and foreign income and franchise tax returns required to be filed and
are not in default in the payment of any taxes which were payable pursuant
to said returns or any
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<PAGE>
assessments with respect thereto, other than any which the Company or any
of its subsidiaries is contesting in good faith.
(xv) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by the
Company.
(xvi) The Securities have been approved for designation upon notice
of issuance on the Nasdaq National Market Tier of the Nasdaq Stock Market
under the symbol "VUPDA".
(xvii) Other than the subsidiaries of the Company listed in
Exhibit 2(a) hereto, the Company owns no capital stock or other equity or
ownership or proprietary interest in any corporation, partnership,
association, trust or other entity.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xix) Other than as contemplated by this Agreement, the Company has
not incurred any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(xx) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
(xxi) Neither the Company nor any of its subsidiaries or affiliates
is presently doing business with the government of Cuba or with any person
or affiliate located in Cuba.
(b) Each Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters as follows:
(i) Such Selling Stockholder is the record and beneficial owner
of, and is, and on the First Closing Date will be the sole record
owner of the
8
<PAGE>
Securities to be sold by such Selling Stockholder, free of any adverse
claim, any lien in favor of the Company and any restrictions on
transfer imposed by the Company (other than pursuant to federal and
state securities laws); and upon delivery of and payment for such
Securities hereunder, the several Underwriters will acquire all rights
of such Selling Stockholder in such Securities, free of any adverse
claim, any lien in favor of the Company and any restrictions on
transfer imposed by the Company. Such Selling Stockholder is selling
the Securities to be sold by such Selling Stockholder for such Selling
Stockholder's own account and is not selling such Securities, directly
or indirectly, for the benefit of the Company, and no part of the
proceeds of such sale received by such Selling Stockholder will inure,
either directly or indirectly, to the benefit of the Company other
than as described in the Registration Statement and Prospectus.
(ii) Such Selling Stockholder has duly authorized, executed and
delivered a Letter of Transmittal and Custody Agreement ("Custody
Agreement"), which Custody Agreement is a valid and binding obligation
of such Selling Stockholder, to O'Connor, Broude & Aronson, as
Custodian (the "Custodian"); pursuant to the Custody Agreement the
Selling Stockholder has placed in custody with the Custodian, for
delivery under this Agreement, the certificates representing the
Securities to be sold by such Selling Stockholder; such certificates
represent validly issued, outstanding, fully paid and nonassessable
shares of Common Stock; and such certificates were duly and properly
endorsed in blank for transfer, or were accompanied by all documents
duly and properly executed that are necessary to validate the transfer
to you of all rights of the Selling Stockholder in such Securities,
free of any adverse claim, any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
(iii) Such Selling Stockholder has the power and
authority to enter into this Agreement and to sell, transfer and
deliver the Securities to be sold by such Selling Stockholder; and
such Selling Stockholder has duly authorized, executed and delivered
to Lawrence H. Gennari and Paul D. Broude, as attorneys-in-fact (the
"Attorneys-in-fact"), an irrevocable power of attorney (a "Power of
Attorney") authorizing and directing the Attorneys-in-Fact, or either
of them, to effect the sale and delivery of Securities to be sold by
such Selling Stockholder, to enter into this Agreement and to take all
such acts as may be necessary hereunder.
(iv) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly executed and delivered by or on behalf of
such Selling Stockholder and each constitutes a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnity hereunder or thereunder may
be limited by federal or
9
<PAGE>
state securities laws and except as such enforceability may be limited
by bankruptcy, insolvency, reorganization or laws affecting the rights
of creditors generally and subject to general principles of equity.
The execution and delivery of this Agreement, the Custody Agreement
and the Power of Attorney and the performance of the terms hereof and
thereof and the consummation of the transactions herein and therein
contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any agreement
or instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder is bound, or any law, regulation, order or
decree applicable to such Selling Stockholder; no consent, approval,
authorization or order of, or filing with, any court or governmental
agency or body is required for the execution, delivery and performance
of this Agreement, the Custody Agreement and the Power of Attorney or
for the consummation of the transactions contemplated hereby and
thereby, including the sale of the Securities being sold by such
Selling Stockholder, except such as may be required under the Act or
state securities laws or blue sky laws.
(v) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection
with the offering and sale of the Securities other than any
Preliminary Prospectus or the Prospectus or other materials permitted
by the Act to be distributed by such Selling Stockholder.
(vi) Such Selling Stockholder has reviewed the Registration
Statement and the Prospectus and to the best knowledge of such Selling
Stockholder neither the Registration Statement nor the Prospectus
contains any untrue statement of a material fact or omits to state any
material fact required to be stated herein or necessary to make the
statements therein not misleading regarding such Selling Stockholder,
the other Selling Stockholders, the Company or otherwise.
(vii) To the best knowledge of such Selling Stockholder, the
representations and warranties of the Company contained in
paragraph (a) of this Section 2 are true and correct.
(c) Any certificate signed by an officer of the Company and delivered
to you or to counsel for the Underwriters shall be deemed a representation
and warranty by the Company to each Underwriter as to the matters covered
thereby; any certificate signed by or on behalf of any Selling Stockholder
as such and delivered to you or to counsel for the Underwriters shall be
deemed a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
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<PAGE>
3. PURCHASE, SALE AND DELIVERY OF SECURITIES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell [5,080,000] Firm Shares, and each Selling
Stockholder agrees, severally and not jointly, to sell the number of Firm Shares
set forth opposite the name of such Selling Stockholder in Schedule I hereto, to
the several Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholders the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto. The purchase price for each Firm Share shall be [______] per share.
The obligations of each Underwriter to the Company and the Selling Stockholders
shall be to purchase from the Company and the Selling Stockholders that number
of Firm Shares (to be adjusted by the Representatives to avoid fractional
shares) which represents the same proportion of the number of Firm Shares to be
sold by each of the Company and the Selling Stockholders pursuant to this
Agreement as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule II hereto represents to the total number of Firm Shares
to be purchased by all Underwriters pursuant to this Agreement. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraph (c) of this Section 3 and in Section 8 hereof, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified in Schedule II.
The Firm Shares will be delivered by the Company and the Custodian to
you for the accounts of the several Underwriters against payment of the purchase
price therefor by certified or official bank check or other next day funds
payable to the order of the Company or the Custodian, as appropriate, at the
offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable, at
9:00 a.m., Minneapolis time, on the fourth full business day following the date
hereof, or at such other time as you and the Company determine, such time and
date of delivery being herein referred to as the "First Closing Date." The Firm
Shares, in definitive form and in such denominations and registered in such
names as you may request upon at least two business days' prior notice to the
Company and the Custodian, will be made available for checking and packaging at
the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable, at
least one business day prior to the First Closing Date.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters an option to purchase all or
any portion of the Option Shares at the same purchase price as the Firm Shares,
for use solely in covering any over-allotments made by the Underwriters in the
sale and distribution of the Firm Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days after the
effective date of this Agreement upon notice (confirmed in writing) by the
Representatives to the Company and to the Attorneys-in-Fact setting forth the
aggregate number of Option Shares as to which the several Underwriters are
exercising the option, the
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<PAGE>
names and denominations in which the certificates for the Option Shares are to
be registered and the date and time, as determined by you, when the Option
Shares are to be delivered, such time and date being herein referred to as the
"Second Closing" and "Second Closing Date", respectively; provided, however,
that the Second Closing Date shall not be earlier than the First Closing Date
nor earlier than the second business day after the date on which the option
shall have been exercised. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage of the total number of Option Shares to
be purchased by the several Underwriters as the number of Firm Shares to be
purchased by such Underwriter is of the total number of Firm Shares to be
purchased by the several Underwriters, as adjusted by the Representatives in
such manner as the Representatives deem advisable to avoid fractional shares.
No Option Shares shall be sold and delivered unless the Firm Shares previously
have been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company as appropriate to
you for the accounts of the several Underwriters against payment of the purchase
price therefor by certified or official bank check or other next day funds
payable to the order of the Company, as appropriate, at the offices of Piper
Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable at 9:00 a.m.,
Minneapolis time, on the Second Closing Date. The Option Shares in definitive
form and in such denominations and registered in such names as you have set
forth in your notice of option exercise, will be made available for checking and
packaging at the office of Piper Jaffray Inc., Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually
acceptable, at least one business day prior to the Second Closing Date.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company or the Selling Stockholders, on behalf of any
Underwriter for the Securities to be purchased by such Underwriter. Any such
payment by you shall not relieve any such Underwriter of any of its obligations
hereunder. Nothing herein contained shall constitute any of the Underwriters an
unincorporated association or partner with the Company or any Selling
Stockholders.
4. COVENANTS.
(a) The Company covenants and agrees with the several Underwriters as
follows:
(i) If the Registration Statement has not already been declared
effective by the Commission, the Company will use its best efforts to cause
the Registration Statement and any post-effective amendments thereto to
become effective as promptly as possible; the Company will notify you
promptly of the time when the Registration Statement or any post-effective
amendment to the Registration
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<PAGE>
Statement has become effective or any supplement to the Prospectus has been
filed and of any request by the Commission for any amendment or supplement
to the Registration Statement or Prospectus or additional information; if
the Company has elected to rely on Rule 430A of the Rules and Regulations,
the Company will file a Prospectus containing the information omitted
therefrom pursuant to such Rule 430A with the Commission within the time
period required by, and otherwise in accordance with the provisions of,
Rules 424(b) and 430A of the Rules and Regulations; the Company will
prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or Prospectus that,
in your opinion, may be necessary or advisable in connection with the
distribution of the Securities by the Underwriters; and the Company will
not file any amendment or supplement to the Registration Statement or
Prospectus to which you shall reasonably object by notice to the Company
after having been furnished a copy a reasonable time prior to the filing.
The Company will file promptly all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering or
sale of the Securities.
(ii) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement,
of the suspension of the qualification of the Securities for offering or
sale in any jurisdiction, or of the initiation or threatening of any
proceeding for any such purpose; and the Company will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such a stop order should be issued.
(iii) Within the time during which a prospectus relating to the
Securities is required to be delivered under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Securities as contemplated by the provisions
hereof and the Prospectus. If during such period any event occurs as a
result of which the Prospectus would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act,
the Company will promptly notify you and will amend the Registration
Statement or supplement the Prospectus (at the expense of the Company) so
as to correct such statement or omission or effect such compliance.
(iv) The Company will use its best efforts to qualify the Securities
for sale under the securities laws of such jurisdictions as you reasonably
designate and to continue such qualifications in effect so long as required
for the distribution of the
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<PAGE>
Securities, except that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute a general
consent to service of process in any state.
(v) The Company will furnish to the Underwriters copies of the
Registration Statement (three of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments
and supplements to such documents, in each case as soon as available and in
such quantities as you may from time to time reasonably request.
(vi) During a period of five years commencing with the date hereof,
the Company will furnish to the Representatives, and to each Underwriter
who may so request in writing, copies of all periodic and special reports
furnished to the stockholders of the Company and all information, documents
and reports filed with the Commission, the National Association of
Securities Dealers, Inc. (the "NASD"), Nasdaq or any securities exchange.
(vii) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months
after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month period beginning
after the effective date of the Registration Statement that shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
(viii) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming
effective under the provisions of Section 9(a) hereof or is terminated,
will pay or cause to be paid (A) all expenses (including transfer taxes
allocated to the respective transferees) incurred in connection with the
delivery to the Underwriters of the Securities, (B) all expenses and fees
(including, without limitation, fees and expenses of the Company's
accountants and counsel but, except as otherwise provided below, not
including fees of the Underwriters' counsel) in connection with the
preparation, printing, filing, delivery, and shipping of the Registration
Statement (including the financial statements therein and all amendments,
schedules, and exhibits thereto), the Securities, each Preliminary
Prospectus, the Prospectus, and any amendment thereof or supplement
thereto, and the printing, delivery, and shipping of this Agreement and
other underwriting documents, including Blue Sky Memoranda, (C) all filing
fees and fees and disbursements of the Underwriters' counsel incurred in
connection with the qualification of the Securities for offering and sale
by the Underwriters or by dealers under the securities or blue sky laws of
the states and other jurisdictions which you shall designate in accordance
with Section 4(d) hereof, (D) the fees and expenses of any transfer agent
or registrar, (E) the filing fees incident to any required review by the
NASD of the terms of the sale of the Securities, (F) listing fees, if any,
and (G) all other costs and expenses incident to the performance of its
obligations hereunder
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<PAGE>
that are not otherwise specifically provided for herein. If the sale of
the Securities provided for herein is not consummated by reason of action
by the Company pursuant to Section 9(a) hereof which prevents this
Agreement from becoming effective, or by reason of any failure, refusal or
inability on the part of the Company or the Selling Stockholders to perform
any agreement on its or their part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be
fulfilled by the Company or the Selling Stockholders is not fulfilled, the
Company will reimburse the several Underwriters for all out-of-pocket
disbursements (including fees and disbursements of counsel) incurred by the
Underwriters in connection with their investigation, preparing to market
and marketing the Securities or in contemplation of performing their
obligations hereunder up to a maximum of $100,000. The Company shall not
in any event be liable to any of the Underwriters for loss of anticipated
profits from the transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of the
Securities to be sold by it hereunder for the purposes set forth in the
Prospectus.
(x) The Company will not, without your prior written consent, offer
for sale, sell, contract to sell, grant any option for the sale of or
otherwise issue or dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or rights to purchase
or acquire, Common Stock, except to the Underwriters pursuant to this
Agreement and pursuant to employee stock option plans and options
outstanding on the date of this Agreement, for a period of 180 days after
the commencement of the public offering of the Securities by the
Underwriters (the "Lockup Period); provided that the Company may issue
shares of Common Stock upon the exercise of presently outstanding Class B
Warrants and may issue shares of Common Stock in connection with
acquisitions provided that such Common Stock is restricted and not
tradeable prior to the expiration of the Lockup Period.
(xi) The Company either has caused to be delivered to you or will
cause to be delivered to you prior to the effective date of the
Registration Statement a letter from each of the Company's directors,
officers, the Selling Stockholders and all holders of the Company's Class B
Common Stock, $.01 par value per share ("Class B Common Stock"), stating
that such person agrees that he, she or it will not, without your prior
written consent, offer for sale, sell, contract to sell or otherwise
dispose of any shares of Common Stock or Class B Common Stock or rights to
purchase Common Stock or Class B Common Stock, except to the Underwriters
pursuant to this Agreement, for a period of 180 days after commencement of
the public offering of the Securities by the Underwriters.
(xii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security
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<PAGE>
of the Company to facilitate the sale or resale of the Securities, and has
not effected any sales of Common Stock which are required to be disclosed
in response to Item 701 of Regulation S-K under the Act which have not been
so disclosed in the Registration Statement.
(xiii) The Company will not incur any liability for any finder's or
broker's fee or agent's commission in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xiv) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriters if it commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba.
Such information will be provided within 90 days after the commencement
thereof or after the change occurs with respect to previously reported
information.
(xv) The Company will use its best efforts to maintain the
designation of the Common Stock on the Nasdaq National Market Tier of the
Nasdaq Stock Market.
(b) Each Selling Stockholder covenants and agrees with the several
Underwriters as follows:
(i) Except as otherwise agreed to by the Company and the Selling
Stockholder, such Selling Stockholder will pay all taxes, if any, on the
transfer and sale, respectively, of the Securities being sold by such
Selling Stockholder, the fees of such Selling Stockholder's counsel and
such Selling Stockholder's proportionate share (based upon the number of
Securities being offered by such Selling Stockholder pursuant to the
Registration Statement) of all costs and expenses (except for legal and
accounting expenses and fees of the registrar and transfer agent) incurred
by the Company pursuant to the provisions of Section 4(a)(viii) of this
Agreement; provided, however, that each Selling Stockholder severally
agrees to reimburse the Company for any reimbursement made by the Company
to the Underwriters pursuant to Section 4(a)(viii) hereof to the extent
such reimbursement resulted from the failure or refusal on the part of such
Selling Stockholder to comply under the terms or fulfill any of the
conditions of this Agreement.
(ii) If this Agreement shall be terminated by the Underwriters because
of any failure, refusal or inability on the part of such Selling
Stockholder to perform any agreement on such Selling Stockholder's part to
be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by such Selling Stockholder
is not fulfilled, such Selling Stockholder agrees to reimburse the several
Underwriters for all out-of-pocket disbursements (including fees and
disbursements of counsel for the Underwriters) incurred by the Underwriters
in connection with their investigation, preparing to market and marketing
the Securities
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<PAGE>
or in contemplation of performing their obligations hereunder. The Selling
Stockholder shall not in any event be liable to any of the Underwriters for
loss of anticipated profits from the transactions covered by this
Agreement.
(iii) The Securities to be sold by such Selling Stockholder,
represented by the Certificates on deposit with the Custodian pursuant to
the Custody Agreement of such Selling Stockholder, are subject to the
interest of the several Underwriters and the other Selling Stockholder; the
arrangements made for such custody are, except as specifically provided in
the Custody Agreement, irrevocable; and the obligations of such Selling
Stockholder hereunder shall not be terminated, except as provided in this
Agreement or in the Custody Agreement, by any act of such Selling
Stockholder, by operation of law, whether by the liquidation, dissolution
or merger of such Selling Stockholder, by the death of such Selling
Stockholder, or by the occurrence of any other event.
(iv) Such Selling Stockholder will not, without the prior written
consent of Piper Jaffray Inc., offer for sale, sell, contract to sell,
grant any option for the sale of or otherwise dispose of any Common Stock
or any securities convertible into or exchangeable for, or any options or
rights to purchase or acquire, Common Stock, except to the Underwriters
pursuant to this Agreement, for a period of 180 days after the commencement
of the public offering of the Securities by the Underwriters.
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities.
(vi) Such Selling Stockholder shall immediately notify you if any
event occurs, or of any change in information relating to such Selling
Stockholder or the Company or any new information relating to the Company
or relating to any matter stated in the Prospectus or any supplement
thereto, which results in the Prospectus (as supplemented) including an
untrue statement of a material fact or omitting to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(vii) Such Selling Stockholder will apply the net proceeds from
the sale of the Securities to be sold by him to the repayment of the
notes from such Selling Stockholder to the Company as described in the
Prospectus.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company and the
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Selling Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Minneapolis time, on the date of this Agreement, or such later
time and date as you, as Representatives of the several Underwriters, shall
approve and all filings required by Rule 424 and Rule 430A of the Rules and
Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) No Underwriter shall have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto, contains an untrue statement of fact which, in your opinion, is
material, or omits to state a fact which, in your opinion, is material and is
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions, or declared or paid any dividends or
made any distribution of any kind with respect to its capital stock; and there
shall not have been any change in the capital stock (other than a change in the
number of outstanding shares of Common Stock due to the issuance of shares upon
the exercise of outstanding options or warrants), or any material change in the
short-term or long-term debt of the Company, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital stock
of the Company or any of its subsidiaries, or any material adverse change or any
development involving a prospective material adverse change (whether or not
arising in the ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects, net
worth or results of operations of the Company and its subsidiaries, taken as a
whole, that, in your judgment, makes it impractical or inadvisable to offer or
deliver the Securities on the terms and in the manner contemplated in the
Prospectus.
(d) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of O'Connor, Broude &
Aronson, counsel for the Company, dated such Closing Date and addressed to you,
to the effect that:
(i) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and its
subsidiaries has full corporate power and authority to own its properties
and conduct its business as currently being carried
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on and as described in the Registration Statement and Prospectus, and is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which it owns or leases real property or
in which the conduct of its business makes such qualification necessary and
in which the failure to so qualify would have a material adverse effect
upon the business, condition (financial or otherwise) or properties of the
Company and its subsidiaries, taken as a whole.
(ii) The capital stock of the Company conforms as to legal matters to
the description thereof contained in the Prospectus under the caption
"Description of Securities." All of the issued and outstanding shares of
the capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and the holders thereof are
not subject to personal liability by reason of being such holders. The
Securities to be issued and sold by the Company hereunder have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms of this Agreement, will have been validly issued and will be fully
paid and nonassessable, and the holders thereof will not be subject to
personal liability by reason of being such holders. Except as otherwise
stated in the Registration Statement and Prospectus, there are no
preemptive rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock
pursuant to the Company's charter, by-laws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound. To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering or sale
of the Securities as contemplated by this Agreement gives rise to any
rights for or relating to the registration of any shares of Common Stock or
other securities of the Company, except for such rights as have been
complied with or waived.
(iii) All of the issued and outstanding shares of capital stock of
each of the Company's subsidiaries have been duly and validly authorized
and issued and are fully paid and nonassessable, and, to the best of such
counsel's knowledge, except as otherwise described in the Registration
Statement and Prospectus and the Company owns of record and beneficially,
free and clear of any adverse claim, all of the issued and outstanding
shares of such stock. To the best of such counsel's knowledge, except as
described in the Registration Statement and Prospectus, there are no
options, warrants, agreements, contracts or other rights in existence to
purchase or acquire from the Company or any subsidiary any shares of the
capital stock of the Company or any subsidiary of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or, to the knowledge of
such counsel, threatened by the Commission.
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(v) The descriptions in the Registration Statement and Prospectus of
statutes, legal and governmental proceedings, contracts and other documents
are accurate and fairly present the information required to be shown; and
such counsel does not know of any statutes or legal or governmental
proceedings required to be described in the Prospectus that are not
described as required, or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus or
included as exhibits to the Registration Statement that are not described
or included as required.
(vi) The Company has full corporate power and authority to enter into
this Agreement, and this Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid, legal and binding
obligation of the Company enforceable in accordance with its terms (except
as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity); the
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, rule or regulation, any agreement or instrument known
to such counsel to which the Company is a party or by which it is bound or
to which any of its property is subject, the Company's charter or by-laws,
or any order or decree known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
respective properties; and no consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is required for
the execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby, including the
issuance or sale of the Securities by the Company, except such as may be
required under the Act, state securities laws or the rules of the NASD.
(vii) To the best of such counsel's knowledge, the Company and each
of its subsidiaries holds, and is operating in compliance in all material
respects with, all material franchises, grants, authorizations, licenses,
permits, easements, consents, certificates and orders of any governmental
or self-regulatory body required for the conduct of its business and all
such franchises, grants, authorizations, licenses, permits, easements,
consents, certifications and orders are valid and in full force and effect.
(viii) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries is in violation of its respective charter or
by-laws. To the best of such counsel's knowledge, neither the Company nor
any of its subsidiaries is in breach of or otherwise in default in the
performance of any material obligation, agreement or condition contained in
any bond, debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is
20
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subject or by which any of them may be bound, or to which any of the
material property or assets of the Company or any of its subsidiaries is
subject.
(ix) The Registration Statement and the Prospectus, and any amendment
thereof or supplement thereto, comply as to form in all material respects
with the requirements of the Act and the Rules and Regulations; and on the
basis of conferences with officers of the Company, examination of documents
referred to in the Registration Statement and Prospectus and such other
procedures as such counsel deemed appropriate, nothing has come to the
attention of such counsel that causes such counsel to believe that the
Registration Statement or any amendment thereof, at the time the
Registration Statement became effective and as of such Closing Date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (as of its date
and as of such Closing Date), as amended or supplemented, includes any
untrue statement of material fact or omits to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; it being understood that such
counsel need express no opinion as to the financial statements, the notes
thereto or other financial or statistical data included in any of the
documents mentioned in this clause.
(x) The documents incorporated by reference in the Prospectus or any
further amendment or supplement thereto made by the Company prior to the
First Closing Date or the Second Closing Date, as the case may be, (other
than the financial statements and related notes and schedules therein, as
to which such counsel need express no opinion), when they became effective
or were filed with the Commission, as the case may be, complied as to form
in all material respects with the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder; such counsel has no reason to believe that any of such
documents, when such documents became effective or were so filed, as the
case may be, contained, in the case of a registration statement which
became effective under the Act, an untrue statement of a material fact, or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or, in the case of other
documents which were filed under the Exchange Act with the Commission, an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made when such documents were so filed,
not misleading.
(xi) Such other matters as you may reasonably request.
In rendering such opinion such counsel may rely (i) as to matters of
law other than Massachusetts and federal law, upon the opinion or opinions of
local counsel provided that the extent of such reliance is specified in such
opinion and that such counsel shall state
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that such opinion or opinions of local counsel are satisfactory to them and that
they believe they and you are justified in relying thereon and (ii) as to
matters of fact, to the extent such counsel deems reasonable upon certificates
of officers of the Company and its subsidiaries provided that the extent of such
reliance is specified in such opinion.
(e) On each Closing Date, there shall have been furnished to you the
opinion of O'Connor, Broude & Aronson, counsel for the Selling Stockholders,
dated such Closing Date and addressed to you, to the effect that:
(i) Each of the Selling Stockholders is the sole record and
beneficial owner of the Securities to be sold by such Selling Stockholder.
Upon delivery of such Securities hereunder and payment of the purchase
price therefor as herein contemplated, and assuming that you purchased such
Securities in good faith and without notice of any adverse claim, you will
acquire all rights of such Selling Shareholder in such Securities free of
any adverse claim, any lien in favor of the Company and any restriction on
transfer imposed by the Company.
(ii) Each of the Selling Stockholders has the power and authority to
enter into the Custody Agreement and this Agreement and to perform and
discharge such Selling Stockholder's obligations thereunder and hereunder;
and this Agreement, the Custody Agreement and the Power of Attorney have
been duly and validly authorized, executed and delivered by the Selling
Stockholders and are valid and binding agreements of the Selling
Stockholders, enforceable in accordance with their respective terms (except
as rights to indemnity hereunder or thereunder may be limited by federal or
state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and subject to general principles of equity).
(iii) The execution and delivery of this Agreement and the Custody
Agreement and the performance of the terms hereof and thereof and the
consummation of the transactions herein and therein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, rule or regulation, or any
agreement or instrument known to such counsel to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound or to
which any of his property is subject or any order or decree known to such
counsel of any court or government agency or body having jurisdiction over
such Selling Stockholder or any of its respective properties; and no
consent, approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Custody Agreement and the Power of
Attorney or for the consummation of the transactions contemplated hereby
and thereby, including the sale of the Securities being sold by such
Selling Stockholder, except such as may be required under the Act or state
securities laws or blue sky laws.
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In rendering such opinion such counsel may rely (i) as to matters of law
other than Massachusetts and federal law, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of the Selling Stockholders provided that the
extent of such reliance is specified in such opinion.
(f) On each Closing Date, there shall have been furnished to you the
opinion of Richard L. Muske, franchise counsel to the Company, dated such
Closing Date and addressed to you, to the effect that:
(i) To the best of such counsel's knowledge, at all times during
which the Company has offered for sale franchises for the operation of
video retail stores, the Company has been in compliance with all material
requirements of all laws, rules and regulations applicable to the offer for
sale or sale of franchises in all jurisdictions in which the Company has
offered for sale or sold franchises for the operation of video retail
stores.
(ii) To the best of such counsel's knowledge, no litigation,
arbitration or other proceeding (formal or informal) or investigation is
pending, threatened or in prospect (or any basis therefor known to such
counsel) against the Company related to the offer for sale or the sale of
franchises for the operation of video retail stores, except such as
individually or in the aggregate do not have and are not expected to have a
material adverse effect upon the operations, business, property, assets or
condition (financial or otherwise) of the Company and its subsidiaries,
taken as a whole.
(iii) To the best of such counsel's knowledge, except for
liabilities and obligations incurred in the ordinary course of business,
and except as disclosed in the Registration Statement and Prospectus or
such as individually or in the aggregate do not have and are not expected
to have a material adverse effect upon the operations, business, property,
assets or condition (financial or otherwise) of the Company and its
subsidiaries taken as a whole, there are no claims (absolute, accrued,
contingent or otherwise) against the Company related to the offer for sale
or the sale of franchises for the operation of a video retail store and the
Company has not been charged with any violation of any state or other
applicable law or administrative regulation in respect to the offer for
sale or sale of such franchises.
(iv) To the best of such counsel's knowledge, the statements in the
Registration Statement under the captions "Risk Factors - Risks Associated
with Franchise Operations" and "Business - Franchise Operations" insofar as
such statements constitute statements of law, descriptions of statutes,
rules or regulations or conclusions of law applicable to the offering and
sale of franchises by the
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Company, such statements fairly represent the information called for
and are accurate and complete in all material respects.
(g) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, such opinion or opinions from
Kaplan, Strangis & Kaplan, P.A., counsel for the several Underwriters, dated
such Closing Date and addressed to you, with respect to the formation of the
Company, the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as you reasonably may request, and such
counsel shall have received such papers and information as they request to
enable them to pass upon such matters.
(h) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of Ernst & Young, LLP, dated such
Closing Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under
Rule 2-01 of Regulation S-X of the Commission, and stating, as of the date of
such letter (or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the letter
so to be delivered on such Closing Date shall be to confirm the conclusions and
findings set forth in such prior letter.
(i) On each Closing Date, there shall have been furnished to you, as
Representatives of the Underwriters, a certificate, dated such Closing Date and
addressed to you, signed by the Chief Executive Officer, by the President and by
the Chief Financial Officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made at and
as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the effectiveness of the
Registration Statement or any amendment thereof or the qualification of the
Securities for offering or sale has been issued, and no proceeding for that
purpose has been instituted or, to the best of their knowledge, is
contemplated by the Commission or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined the
Registration Statement and the Prospectus, and any amendments thereof or
supplements thereto, and (A) such documents contain all statements and
information required to be included therein, the Registration Statement, or
any amendment thereof, does not
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contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented, does not include any untrue statement of material fact or
omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, (B)
since the effective date of the Registration Statement there has occurred
no event required to be set forth in an amended or supplemented prospectus
which has not been so set forth, (C) subsequent to the respective dates as
of which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has incurred
any material liabilities or obligations, direct or contingent, or entered
into any material transactions, not in the ordinary course of business, or
declared or paid any dividends or made any distribution of any kind with
respect to its capital stock, and except as disclosed in the Prospectus,
there has not been any change in the capital stock (other than a change in
the number of outstanding shares of Common Stock due to the issuance of
shares upon the exercise of outstanding options or warrants), or any
material change in the short-term or long-term debt, or any issuance of
options, warrants, convertible securities or other rights to purchase the
capital stock, of the Company, or any of its subsidiaries, or any material
adverse change or any development involving a prospective material adverse
change (whether or not arising in the ordinary course of business), in the
general affairs, condition (financial or otherwise), business, key
personnel, property, prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, and (D) except as stated in
the Registration Statement and the Prospectus, there is not pending, or, to
the knowledge of the Company, threatened or contemplated, any action, suit
or proceeding to which the Company or any of its subsidiaries is a party
before or by any court or governmental agency, authority or body, or any
arbitrator, which might result in any material adverse change in the
condition (financial or otherwise), business, prospects or results of
operations of the Company and its subsidiaries, taken as a whole.
(j) On each Closing Date, there shall have been furnished to you a
certificate or certificates, dated such Closing Date and addressed to you,
signed by each of the Selling Stockholders to the effect that the
representations and warranties of such Selling Stockholder contained in this
Agreement are true and correct as if made at and as of such Closing Date, and
that such Selling Stockholder has complied with all the agreements and satisfied
all the conditions on such Selling Stockholder's part to be performed or
satisfied at or prior to such Closing Date.
(k) The Securities to be sold by the Company and the Selling
Stockholders shall have been approved for designation subject to notice of
issuance, on the Nasdaq National Market Tier of the Nasdaq Stock Market.
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(l) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or they
may have reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you and counsel for the Underwriters. The Company will furnish
you with such conformed copies of such opinions, certificates, letters and other
documents as you shall reasonably request.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and each Selling Stockholder, jointly and severally,
agree to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including the information deemed to be a part of the Registration Statement at
the time of effectiveness pursuant to Rule 430A, if applicable, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or any
document incorporated by reference in any of the foregoing, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending against
such loss, claim, damage, liability or action; provided, however, that neither
the Company nor any Selling Stockholder shall be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by you, or by any
Underwriter through you, specifically for use in the preparation thereof; and
further provided, however, that in no event shall any Selling Stockholder be
liable under the provisions of this Section 6 for any amount in excess of the
aggregate amount of proceeds such Selling Stockholder received from the sale of
the Securities pursuant to this Agreement.
In addition to its other obligations under this Section 6(a), the
Company and each Selling Stockholder, jointly and severally, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 6(a), they will
reimburse each Underwriter on a monthly basis for all reasonable legal fees or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a
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judicial determination as to the propriety and enforceability of the Company's
and/or the Selling Stockholder's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriter
that received such payment shall promptly return it to the Company, together
with interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
announced from time to time by Norwest Bank Minnesota, N.A. (the "Prime Rate").
Any such interim reimbursement payments which are not made to an Underwriter
within 30 days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities which the Company or the Selling Stockholders may
otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against losses, claims, damages or liabilities to which
the Company and the Selling Stockholders may become subject, under the Act or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by you, or by such Underwriter through you,
specifically for use in the preparation thereof, and will reimburse the Company
and any such Selling Stockholder for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending against
any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that it may have to any indemnified party. In case any such action shall be
brought against any indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified
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party under such subsection for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that if, in the sole
judgment of the Representatives, it is advisable for the Underwriters to be
represented as a group by separate counsel, the Representatives shall have the
right to employ a single counsel to represent the Representatives and all
Underwriters who may be subject to liability arising from any claim in respect
of which indemnity may be sought by the Underwriters under subsection (a) of
this Section 6, in which event the reasonable fees and expenses of such separate
counsel shall be borne by the indemnifying party or parties and reimbursed to
the Underwriters as incurred (in accordance with the provisions of the second
paragraph in subsection (a) above). An indemnifying party shall not be
obligated under any settlement agreement relating to any action under this
Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above,
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders or the Underwriters and the parties' relevant
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
subsection (d) were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this subsection (d). The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending against any action or claim
which is the subject of this subsection (d). Notwithstanding the provisions of
this
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<PAGE>
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company and the Selling Stockholders may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 6 shall be in addition to
any liability that the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each director of the Company
(including any person who, with his consent, is named in the Registration
Statement as about to become a director of the Company), to each officer of the
Company who has signed the Registration Statement and to each person, if any,
who controls the Company within the meaning of the Act.
7. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company and the Selling
Stockholders herein or in certificates delivered pursuant hereto, and the
agreements of the several Underwriters, the Company and the Selling Stockholders
contained in Section 6 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person thereof, or the Company or any of its officers,
directors, or controlling persons or any Selling Stockholders, and shall survive
delivery of, and payment for, the Securities to and by the Underwriters
hereunder.
8. SUBSTITUTION OF UNDERWRITERS.
(a) If any Underwriter or Underwriters shall fail to take up and pay
for the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule II
hereto, the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule II hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up and pay
for the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased
29
<PAGE>
hereunder, upon tender of such Firm Shares in accordance with the terms hereof,
and the amount of Firm Shares not purchased aggregates more than 10% of the
total amount of Firm Shares set forth in Schedule II hereto, and arrangements
satisfactory to you for the purchase of such Firm Shares by other persons are
not made within 36 hours thereafter, this Agreement shall terminate. In the
event of any such termination the Company shall not be under any liability to
any Underwriter (except to the extent provided in Section 4(a)(viii), Section
4(b)(ii) and Section 6 hereof) nor shall any Underwriter (other than an
Underwriter who shall have failed, otherwise than for some reason permitted
under this Agreement, to purchase the amount of Firm Shares agreed by such
Underwriter to be purchased hereunder) be under any liability to the Company or
the Selling Stockholders (except to the extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by the
non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 10:00 a.m., Minneapolis
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you, as Representatives of the
several Underwriters, or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time at or prior to the First Closing Date, and the option referred to in
Section 3(b), if exercised, may be cancelled at any time prior to the Second
Closing Date, if (i) the Company shall have failed, refused or been unable, at
or prior to such Closing Date, to perform any agreement on its part to be
performed hereunder, (ii) any other condition of the Underwriters'
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<PAGE>
obligations hereunder is not fulfilled, (iii) trading on the New York Stock
Exchange or the American Stock Exchange or in the National Market system or
over-the-counter market by the NASD shall have been wholly suspended,
(iv) minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required, on the New York Stock
Exchange or the American Stock Exchange or in the national market system or
over-the-counter market by the NASD by such exchange or by order of the
Commission or any other governmental authority having jurisdiction, (v) a
banking moratorium shall have been declared by Federal, New York or Minnesota
authorities, or (vi) there has occurred any material adverse change in the
financial markets in the United States or an outbreak of major hostilities (or
an escalation thereof) in which the United States is involved, a declaration of
war by Congress, any other substantial national or international calamity or any
other event or occurrence of a similar character shall have occurred since the
execution of this Agreement that, in your judgment, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(a)(viii), Section (4)(b)(ii)
and Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company and the
Selling Stockholders shall be notified promptly by you by telephone or telegram,
confirmed by letter. If the Company elects to prevent this Agreement from
becoming effective you and the Selling Stockholders shall be notified by the
Company by telephone or telegram, confirmed by letter.
10. DEFAULT BY ONE OR MORE OF THE SELLING STOCKHOLDERS OR THE COMPANY. If
one or both of the Selling Stockholders shall fail at the First Closing Date to
sell and deliver the number of Securities which such Selling Stockholder or
Selling Stockholders are obligated to sell hereunder then the Underwriters may
at your option, by notice from you to the Company and the non-defaulting Selling
Stockholder, either (a) terminate this Agreement without any liability on the
part of any non-defaulting party or (b) elect to purchase the Securities which
the Company and the non-defaulting Selling Stockholder have agreed to sell
hereunder.
In the event of a default by any Selling Stockholder as referred to in this
Section, either you or the Company or, the non-defaulting Selling Stockholder
shall have the right to postpone the First Closing Date for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements.
If the Company shall fail at the First Closing Date to sell and deliver the
number of Securities which it is obligated to sell hereunder, then this
Agreement shall terminate without any liability on the part of any non-
defaulting party.
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<PAGE>
No action taken pursuant to this Section shall relieve the Company or any
Selling Stockholders so defaulting from liability, if any, in respect of such
default.
11. INFORMATION FURNISHED BY UNDERWRITERS. The statements set forth in
the last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.
12. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to the Representatives c/o Piper Jaffray
Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402
(except that notices given to an Underwriter pursuant to Section 6 hereof shall
be sent to such Underwriter at the address stated in the Underwriters'
Questionnaire furnished by such Underwriter in connection with this offering),
with a copy to Kaplan, Strangis and Kaplan, P.A., 5500 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota 55402, Attention: James C. Melville; if
to the Company, shall be mailed, telegraphed or delivered to it at Video Update,
Inc., 3100 World Trade Center, 30 East 7th Street, St. Paul, Minnesota 55101-
4913 Attention: Daniel A. Potter with a copy to O'Connor, Broude & Aronson, 950
Winter Street, Suite 2300, Waltham, Massachusetts 02154, Attention: Lawrence H.
Gennari, if to any Selling Stockholder, at the address set forth above for the
Company or in each case to such other address as the person to be notified may
have requested in writing. All notices given by telegram shall be promptly
confirmed by letter. Any party to this Agreement may change such address for
notices by sending to the parties to this Agreement written notice of a new
address for such purpose.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
successors and assigns and the controlling persons, officers and directors
referred to in Section 6. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
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<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the
Company, the and the several Underwriters in accordance with its terms.
Very truly yours,
VIDEO UPDATE, INC.
By:
---------------------------------------
Daniel A. Potter
Its Chairman and Chief
Executive Officer
SELLING STOCKHOLDERS
--------------------------------------
Daniel A. Potter
--------------------------------------
John M. Bedard
Confirmed as of the date first
above mentioned, on behalf of
themselves and the other several
Underwriters named in Schedule
II hereto.
PIPER JAFFRAY INC.
By
-----------------------------------
THE ROBINSON-HUMPHREY COMPANY, INC.
By
------------------------------------
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SCHEDULE I
Selling Stockholders
Number of
Firm Shares
Name to be Sold
- ---- -------------
Daniel A. Potter 270,000
John M. Bedard 150,000
------------
420,000
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<PAGE>
SCHEDULE II
Number of
Underwriter Firm Shares (1)
- ----------- ---------------
---------------
Total. . . . . . . . . . . . . . .
---------------
---------------
- ----------------
(1) The Underwriters may purchase up to an additional Option Shares, to
the extent the option described in Section 3 of the Agreement is exercised,
in the proportions and in the manner described in the Agreement.
35
<PAGE>
O'CONNOR, BROUDE & ARONSON
ATTORNEYS AT LAW
THE BAY COLONY CORPORATE CENTER
ROUTE 128 AND WINTER STREET,
950 WINTER STREET, SUITE 2300
WALTHAM, MASSACHUSETTS 02154
FACSIMILE:617-890-9261
____
617-890-6600
July 11, 1996
Board of Directors
Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
Re: VIDEO UPDATE, INC.
Ladies and Gentlemen:
This firm has acted as corporate counsel to Video Update, Inc., a Delaware
corporation (hereinafter called the "Company"), in connection with the proposed
public offering described below.
In our capacity as corporate counsel to the Company, we are familiar with
the Certificate of Incorporation, as amended and restated, of the Company and
the Bylaws, as amended, of the Company. We are also familiar with the
corporate proceedings taken by the Company in connection with the preparation
and filing of a Registration Statement on Form S-3 (the "Registration
Statement") covering (1) a public offering by the Company through Piper
Jaffray Inc. and The Robinson-Humphrey Company, Inc. (the "Underwriters") of
5,500,000 shares of Class A Common Stock, $.01 par value per share (the
"Class A Common Stock") and (2) 825,000 shares of Class A Common Stock, which
may be sold by the Underwriters to cover over-allotments.
On the basis of the foregoing, we are of the opinion that the shares of
Class A Common Stock to be sold by the Underwriters have been duly authorized,
and upon the sale thereof as described in the Registration Statement, such
securities will be legally issued, fully paid and non-assessable.
This opinion is provided solely for the benefit of the addressee hereof and
is not to be relied upon by any other person or party. Nevertheless, we hereby
consent to the use of this opinion and to all references to our firm in or made
part of the Registration Statement and any amendments thereto.
Very truly yours,
O'CONNOR, BROUDE & ARONSON
By: /s/ Lawrence H. Gennari
---------------------------
Lawrence H. Gennari
LHG:jac
c: Daniel A. Potter, Chief Executive Officer
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated June 12,
1996, with respect to the consolidated financial statements of Video Update,
Inc. included in the Registration Statement (Form S-3) and related Prospectus
of Video Update, Inc. for the registration of 6,325,000 shares of its common
stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 10, 1996
