SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
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AMENDMENT TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1997
COMMISSION FILE NUMBER 0-19253
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VIDEO UPDATE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-1461110
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(State or other jurisdiction (I.R.S. employer
of incorporation or identification No.)
organization)
3100 WORLD TRADE CENTER 55101
30 EAST SEVENTH STREET -----
ST. PAUL, MINNESOTA (Zip Code)
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(Address of principal
executive offices)
(612) 222-0006
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(Registrant's telephone number, including area code)
AMENDMENT NO. 1
---------------
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report for the fiscal year
ended April 30, 1997 on Form 10-K as set forth in the pages attached hereto:
(List all such items, financial statements,
exhibits or other portions amended.)
1. Part III: Item 10 - Directors and Executive Officers of the
Registrant.
2. Part III: Item 11 - Executive Compensation.
3. Part III: Item 12 - Security Ownership of Certain Beneficial
Owners and Management.
4. Part III: Item 13 - Certain Relationships and Related
Transactions.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter
-----------------------
Daniel A. Potter
Chief Executive Officer
Date: August 27, 1997
2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
BACKGROUND
The Directors and executive officers of the Company, their
positions held in the Company, and their ages are as follows:
NAME AGE POSITION
- ---- --- --------
Daniel A. Potter 39 Chairman and Chief Executive Officer
John M. Bedard 39 President and Director
Daniel C. Howard 36 Chief Operations Officer and Director
Christopher J. Gondeck 42 Chief Financial Officer
Richard Bedard 43 Executive Vice President
Bruce D. Carlson 36 Vice President of Real Estate
Michael G. Schifsky 41 Vice President of Store Development
Robert E. Yager 33 Vice President of Store Operations
and Director
Jana Webster Vaughn 34 Director
Paul M. Kelnberger 53 Director
Bernard Patriacca 53 Director
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.
The following is a brief summary of the background of each Director and
executive officer of the Company:
DANIEL A. POTTER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER. Mr. Potter
co-founded the Company in 1983 and has served as the Company's Chairman and
Chief Executive Officer since its inception. Mr. Potter devised, initiated, and
structured the franchising strategy implemented by the Company and is primarily
responsible for the Company's financial and strategic planning. Mr. Potter is
the brother-in-law of Robert E. Yager, a Vice-President of Store Operations and
Director of the Company. Mr. Potter holds a B.A. degree from the University of
Minnesota and a J.D. degree from William Mitchell College of Law.
JOHN M. BEDARD, PRESIDENT AND DIRECTOR. Mr. Bedard co-founded the
Company in 1983 with Mr. Potter and has served as the Company's President and as
a Director since its inception. Mr. Bedard, together with Mr. Potter, devised
and implemented the Company's real estate development program and operations.
Mr. Bedard is the brother of Richard Bedard, an Executive Vice President of the
Company.
DANIEL C. HOWARD, CHIEF OPERATIONS OFFICER AND DIRECTOR. Mr. Howard has
served as the Company's Chief Operations Officer since 1990, has coordinated the
Company's operations since 1983, and has served as a Director since August 1994.
He holds a B.S. degree from the University of Minnesota School of Management.
Mr. Howard is a member of the audit and executive compensation committees.
3
CHRISTOPHER J. GONDECK, CHIEF FINANCIAL OFFICER. Mr. Gondeck has served
as the Company's Chief Financial Officer since January 1995. From May 1994 to
September 1994, Mr. Gondeck was a financial consultant to Corning-Donahue, Inc.
and Fire Brick Supply, privately held brick and tile businesses. From 1992 to
March 1994, Mr. Gondeck served as Senior Vice President and Chief Financial
Officer for Premier Salons International, Inc. ("Premier"), a privately held
company based in Toronto, Ontario. Prior to December 1993, Premier was known as
MEI Salon Corp. ("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
bankruptcy protection under federal law. Prior to 1992, Mr. Gondeck served in
various financial and management capacities for MEI Diversified. Mr. Gondeck
also has served as a staff accountant with Ernst & Young LLP. Mr. Gondeck holds
a B.S. degree from St. Cloud State University in St. Cloud, Minnesota and is a
certified public accountant.
RICHARD BEDARD, EXECUTIVE VICE PRESIDENT. Mr. Bedard has served as an
Executive Vice President of the Company since September 1995. From 1986 to 1995,
he served as the Company's Vice President of Franchise Development. Mr. Bedard
is the brother of John M. Bedard, the Company's President and a Director.
BRUCE D. CARLSON, VICE PRESIDENT OF REAL ESTATE. Mr. Carlson has served
as the Company's Vice President of Real Estate Operations since 1990. From 1984
to 1990, Mr. Carlson held the positions of Director of Advertising and Regional
Corporate Store Manager.
MICHAEL G. SCHIFSKY, VICE PRESIDENT OF STORE DEVELOPMENT. Mr. Schifsky
has served as Vice President of Store Development since rejoining the Company in
1990. Mr. Schifsky has also served as a District Manager of the Company from
1984 to 1988. From 1988 to 1990, he was the principal stockholder of Bankshot
Investments, Inc., a privately held company engaged in the development of
billiard facilities.
ROBERT E. YAGER, VICE PRESIDENT OF STORE OPERATIONS AND DIRECTOR. Mr.
Yager has served as a Vice President of Store Operations since November 1995 and
as a Director since August 1994. From September 1994 to November 1995, Mr. Yager
served as a Regional Manager of the Company. Prior to that time, since 1989, Mr.
Yager owned and operated two franchised Company superstores in the Twin Cities
area, until such store operations were purchased by the Company in September
1994. From 1984 to 1989, Mr. Yager was a computer programmer for a division of
NCR Corporation. Mr. Yager holds an Associate's degree from Northwestern
Electronic Institute in Minneapolis, Minnesota. Mr. Yager is the brother-in-law
of Daniel A. Potter, the Company's Chairman and Chief Executive Officer.
PAUL M. KELNBERGER, DIRECTOR. Mr. Kelnberger has served as a Director
since August 1994. Mr. Kelnberger has been a member of Johnson, West & Co., PLC
("Johnson, West & Co."), a certified public accounting firm with its principal
offices in St. Paul, Minnesota, since 1975. In addition, since November 1995 Mr.
Kelnberger has served as a Director of Leuthold Funds, a publicly held mutual
fund. Johnson, West & Co. performed auditing services for the Company prior to
the fiscal year ended April 30, 1993. Since that time, Johnson West & Co. has
provided and continues to provide to the Company accounting services in
connection with the Company's acquisitions and for tax return preparation
services. Mr. Kelnberger has significant franchise and retail company accounting
experience. Mr. Kelnberger is a certified public accountant and holds a
Certificate of Accounting from the Academy of Accountancy in Minneapolis,
Minnesota. He chairs the Board's audit committee and is a member of the
executive compensation committee.
JANA WEBSTER VAUGHN, DIRECTOR. Ms. Vaughn has served as a Director
since August 1994. Ms. Vaughn has been the Director of Marketing and Development
of Adoptive Families of America, a non-profit, national education, legislation
and advocacy organization, since June 1995. From May 1992 to July 1995, Ms.
Vaughn was the Executive Director of the Greater Anoka County, Minnesota Humane
Society. From 1989 to 1992, she served as Special Projects Manager for KARE 11
Television, a network television station in Minneapolis, Minnesota. Ms. Vaughn
holds a B.A. degree from the University of Minnesota. Ms. Vaughn is a member of
the audit and executive compensation committees.
4
BERNARD PATRIACCA, DIRECTOR. Mr. Patriacca has served as a Director
since April 1997. Since 1994, he has served as Vice President of Errands Etc.,
Inc., a privately held homeowner's personal service company. From 1973 to 1991,
Mr. Patriacca served in various capacities at Dunkin' Donuts Incorporated,
including Chief Financial Officer and Director. From 1991 to 1994, Mr. Patriacca
held senior financial management positions at several privately held consumer
services companies. He also serves as a director of Smith-Midland Corporation, a
publicly held developer and manufacturer of precast concrete products. Mr.
Patriacca is a certified public accountant and holds Bachelor's and Masters
degrees in finance and accounting from Northeastern University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), requires executive officers and Directors, and
persons who beneficially own more than ten percent (10%) of the Company's Class
A Common Stock, to file initial reports of ownership on Form 3 and reports of
changes in ownership on Form 4 with the Securities and Exchange Commission (the
"SEC") and any national securities exchange on which the Company's securities
are registered. Executive officers, Directors and greater than ten percent (10%)
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and Directors
that no other reports were required, the Company believes that during fiscal
1997, its executive officers, Directors and greater than ten percent (10%)
beneficial owners complied with all applicable Section 16(a) filing
requirements.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
Set forth below is a Summary Compensation Table concerning the
compensation of the named executive officers for the last three completed fiscal
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
AWARDS
------
FISCAL SECURITIES
YEAR OTHER ANNUAL UNDERLYING ALL OTHER
ENDED SALARY (1) BONUS COMPENSATION (2) OPTIONS/SARS(3) COMPENSATION(4)
NAME AND PRINCIPAL POSITION APRIL 30 ($) ($) ($) (#) ($)
(A) (B) (C) (D) (E) (G) (I)
- ---------------------------- --------- --------- ------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter............. 1997 $300,000 $0 $ 0 300,000 $26,307
Chairman and Chief 1996 $248,002 $0 $894,357 270,000 $21,122
Executive Officer 1995 $216,671 $0 $ 0 0 $ 0
John M. Bedard............... 1997 $200,000 $0 $ 0 165,000 $17,952
President and Director 1996 $158,755 $0 $496,875 150,000 $18,081
1995 $125,000 $0 $ 0 0 $19,200
Christopher J. Gondeck(5).... 1997 $125,000 $0 $ 0 60,000 $14,033
Chief Financial Officer 1996 $114,548 $0 $ 0 45,000 $ 2,854
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.
5
(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 1995
through 1997, 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.
OPTION/SAR GRANTS TABLE
Set forth below is an Option/SAR Grants Table concerning individual
grants of stock options and SARs made during the last completed fiscal year to
each of the named executive officers.
OPTION/SAR GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER OF VALUE AT
SECURITIES PERCENT OF TOTAL ASSUMED ANNUAL
UNDERLYING OPTIONS/SARS RATES OF STOCK
OPTIONS/SARS GRANTED TO EXERCISE OF PRICE APPRECIATION
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM(1)
NAME (#) FISCAL YEAR(2) ($/SH) DATE (3) 5% ($) 10% ($)
(A) (B) (C) (D) (E) (F) (G)
------- ------------- ---------------- ----------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter........... 300,000 36.1% $4.00 10/22/2006 $754,674 $1,912,491
John M. Bedard............. 165,000 19.9% $4.00 10/22/2006 $415,070 $1,051,870
Christopher J. Gondeck..... 60,000 7.2% $4.00 10/22/2006 $150,935 $ 382,498
</TABLE>
- ------------
(1) 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.
(2) In fiscal 1997, options to purchase a total of 831,000 shares of the
Company's Class A Common Stock were granted to employees of the Company,
including executive officers.
(3) These options are subject to earlier termination upon certain events
related to termination of employment.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
Set forth below is a table concerning each exercise of stock options (or
tandem SAR's) and freestanding SARs during the last completed fiscal year by
each of the named executive officers and the fiscal year-end value of
unexercised options and SARs.
6
AGGREGATED OPTION/SAR EXERCISES FOR FISCAL YEAR ENDED APRIL 30, 1997
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES VALUE AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE (1)
(A) (B) (C) (D) (E)
- --------------------------- -------------- --------- --------------- -----------------
<S> <C> <C> <C> <C>
Daniel A. Potter........... 0 0 100,000/200,000 $12,500/$25,000
John M. Bedard............. 0 0 55,000/110,000 $6,875/$13,750
Christopher J. Gondeck..... 0 0 72,000/59,500 $2,500/$5,000
</TABLE>
- --------------------------
(1) 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, 1997, 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 $4.125.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not employees of the Company
receive $1,000 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)
all non-employee directors (currently Mr. Patriacca, Mr. Kelnberger and Ms.
Vaughn) each receive options annually 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)
Mr. Patriacca received and 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.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, OFFICER LOANS AND
CHANGE-IN-CONTROL ARRANGEMENTS
In February 1996, the Company entered into employment agreements with
Daniel A. Potter, its Chairman and Chief Executive Officer and John Bedard, its
President, each of whom also is a Director and a principal stockholder of the
Company. The agreements are for three year terms, expiring in February 1999. Mr.
Potter and Mr. Bedard are to receive salaries of $300,000 and $200,000,
respectively. Such compensation may be increased and bonuses may be awarded at
the discretion of the Board of Directors of the Company. Each of Messrs. Potter
and Bedard have agreed to devote their full time and best efforts to fulfill
their duties and responsibilities to the Company. Each of them will be entitled
to participate in employee benefit plans.
The Company has a right to terminate each of the agreements for "cause"
as defined in the agreements or as a result of the employee's disability. Except
in the case of termination for cause, upon early termination of the agreements
of the Company, each of Messrs. Potter and Bedard shall be entitled to receive
their salary plus fringe benefits for 36 months from the date of termination. In
the event of a change of control of the Company, Messrs. Potter and Bedard have
the option to terminate their employment subject to the provisions of the
employment agreements and to receive severance and fringe benefits for 36 months
subject to the provisions of their agreements. A "change 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
7
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 its Chief Executive Officer and
from the President for approximately $1,928,000 and $1,071,000, respectively,
including accrued interest through April 30, 1997. The Recourse Notes were
issued by the executives upon their exercise in August 1995 of 420,000 options
granted to them under the Stock Option Plans in May 1995 at an exercise price of
$4.3125, the fair market value of the stock on the date the options were
granted. The Recourse Notes represent the total exercise price of such options
plus amounts advanced by the Company to such executives to satisfy then
anticipated tax liabilities. The Recourse Notes, which provide for full recourse
against the respective officer's personal assets and Company stockholdings, are
due and payable in October 1999, and accrue interest at 8% per annum. In the
event that the obligors sell shares of the Company's stock, the net proceeds
thereof will be applied to payment, in part or in full, of the Recourse Notes.
In addition, as of April 30, 1997, the Company has a note receivable
from its President for $31,000 which accrues interest at 8% per annum and is due
November 1997. The note represents advances from the Company to the President
from January 1994 to April, 1994, together with accrued interest.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions for the Company's Chief Executive Officer and
President are made by the Executive Compensation Committee, comprised of Messrs.
Kelnberger and Howard and Ms. Vaughn.
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 1997, the Company paid approximately $271,000 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. During fiscal year 1996 the Company incurred fees of approximately
$245,000 for accounting and tax services rendered by Johnson, West & Co.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Set forth below is the report of the Company's Compensation Committee
regarding executive compensation.
REPORT OF THE VIDEO UPDATE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Overview
The Executive Compensation Committee of the Board of Directors of Video
Update, Inc. is composed of two non-employee directors and one employee
director. The Executive Compensation Committee reviews the compensation of the
Company's Chief Executive Officer and its President at least annually. The
Executive Compensation Committee believes the actions of the top two executives
of the Company have a profound impact on the short-term and long-term
profitability of the Company. Therefore, the Executive Compensation Committee
gives significant attention to the design of the Company's compensation package
for such individuals.
8
The Company's compensation package consists of two parts and is
relatively simple in design. The two primary parts are a base salary and
stock-based incentive compensation. No significant perquisites other than
automobile expenses and insurance are provided to the two executive officers.
Base Salary
The Executive Compensation Committee believes it is important for the
two executive officers of the Company to receive acceptable salaries so that the
Company can recruit and retain the talent it needs. In setting salaries, the
Executive Compensation Committee takes into consideration the individual
employee's performance, length of service to the Company, and a subjective
judgment regarding the impact the individual has on the Company. The base salary
for each executive officer set forth in their respective employment agreements
was set on a subjective basis, bearing in mind an overall impression of that
executive's relative skills, experience and contribution to the Company. The
Executive Compensation Committee does not attempt to address the relative weight
assigned to the various factors, which are evaluated on a subjective overall
basis by each individual member of the Executive Compensation Committee.
Salaries of the Company's Chief Executive Officer and its President are reviewed
annually by the Executive Compensation Committee.
Stock-Based Incentives
Stock-based incentives have been a supplemental component of
compensation for the Company's Chief Executive Officer and its President, and
certain other employees, since the Company's initial public offering in 1994.
The Company adopted formal incentive stock option plans in 1994, 1995 and 1996.
The Executive Compensation Committee recommends grants of stock options under
the Company's option plan for the Chief Executive Officer and the President.
Historically, grants made by the Company have generally vested at a
rate of 33% per year beginning one year from the date of grant. These options
also usually expire upon termination of employment or a limited period
thereafter, except in the event of disability or death, in which case the term
of the option may continue for some time thereafter.
The Executive Compensation Committee believes that the Company's stock
option program has been effective in focusing attention on stockholder value
since the gain to be realized by these two executive officers upon exercise of
options will change as the stock price changes. The Executive Compensation
Committee also believes that the long-term nature of the options encourages the
Company's top two executive officers to remain with the Company. The number of
shares to be granted was established utilizing the procedure described above at
"Base Salary." The Executive Compensation Committee subjectively determined the
number of shares to be granted based on its analysis of the number that would
provide an adequate incentive to each of its top two executive officers.
In general, the granting of stock-based incentives is considered by the
Committee to be justified when the Company's revenues and earnings, coupled with
the individual executive's performance, warrant supplemental compensation in
addition to the salary and bonus paid with respect to a given year. Each of
these factors is weighed subjectively by Committee members in determining
whether or not a stock-based incentive should be granted, and such incentives
are not granted routinely. As a result, stock options for shares of Class A
Common Stock were granted to the Company's Chief Executive Officer and its
President for their continued outstanding performance and for making substantial
contributions to the Company's increased revenues.
Compensation Of The Chief Executive Officer
The Compensation Committee has reviewed and approved the annual salary
of Daniel A. Potter, Chief Executive Officer of the Company, which is set at
$300,000. This exhibits the philosophy of the Executive Compensation Committee
as set forth at "Base Salary" above. This salary was reflected in Mr. Potter's
employment agreement entered into in February 1996. Mr. Potter's compensation is
subject to annual review by the Board of Directors. The Board believes the
compensation of Mr. Potter, a founder of the Company, reflects the Committee's
subjective opinion that Mr. Potter has provided superlative leadership and
fulfilled the functions of an executive officer of the Company at the highest
level.
9
Conclusion
The Executive Compensation Committee believes that its mix of a cash
salary and a long-term stock incentive compensation program represents a balance
that has motivated and will continue to motivate the Company's management team
to produce the best results possible given overall economic conditions and the
difficulty of predicting the Company's performance in the short term.
Executive Compensation Committee: Board of Directors:
PAUL M. KELNBERGER DANIEL A. POTTER
JANA WEBSTER VAUGHN JOHN M. BEDARD
DANIEL C. HOWARD DANIEL C. HOWARD
ROBERT E. YAGER
PAUL M. KELNBERGER
JANA WEBSTER VAUGHN
BERNARD PATRIACCA
PERFORMANCE GRAPH
Set forth below is a line-graph presentation comparing the cumulative
stockholder return on the Company's Class A Common Stock, on an indexed basis,
against cumulative total returns of the Nasdaq Stock Market (U.S. Companies) and
a "peer group" selected by Management of the Company. The peer group selected
for inclusion in this report includes Hollywood Entertainment Corporation
("Hollywood"), Movie Gallery, Inc. ("MGI"), Moovies, Inc. ("MOOV") and West
Coast Entertainment Corp. ("West Coast") (collectively, the "Peer Group
Companies"). Hollywood, MGI, MOOV and West Coast have securities traded on the
Nasdaq Stock Market. The Peer Group Companies were selected because they are
frequently utilized as a basis for comparison with the Company in reports by
analysts. Viacom, Inc. ("Viacom"), which operates "Blockbuster" video specialty
stores, is not included in the peer group. Viacom is a large entertainment
conglomerate with only a small portion of its business in the retail videotape
industry, and its stock is traded on the American Stock Exchange. The returns
for the peer group were weighted according to each issuer's market
capitalization. The Performance Graph shows total return on investment for the
period beginning July 20, 1994 (the date of the Company's initial public
offering) and ending April 30, 1997.
[INSERT GRAPH HERE]
VALUE OF $100 INVESTED ON JULY 20, 1994 AT:
<TABLE>
<CAPTION>
7/29/94 4/30/95 4/30/96 4/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
VIDEO UPDATE $100 $ 87.50 $162.50 $ 82.50
PEER GROUP(1) $100 $166.71 $155.91 $117.86
NASDAQ MARKET $100 $108.27 $151.13 $161.09
</TABLE>
Total return assumes reinvestment of dividends.
(1) West Coast Entertainment Corp. is included in the Peer Group only as of
April 30, 1997; West Coast's stock began trading publicly in May 1996.
10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of August 26, 1997, the number and
approximate percentage of shares of Class A Common Stock and Class B Common
Stock beneficially owned by (i) all persons known by the Company to be the
beneficial owner of more than five percent (5%) of the outstanding Class A
Common Stock or Class B Common Stock, (ii) "each named executive officer" (as
defined in Item 402 to Regulation S-K under the Securities Act of 1933, as
amended) and Director, and (iii) all Directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
CLASS A OF CLASS A CLASS B OF CLASS B
SHARES SHARES SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED (2)(3) (2)(3) OWNED (15)(16)(17) (15)(16)(17)
- ------------------- ------------ ------ ------------------ ------------
<S> <C> <C> <C> <C>
Daniel A. Potter, Chairman and Chief
Executive Officer (3)(4) 370,000 2.0% 1,086,759 54.3%
John M. Bedard, President
and Director (3)(5) 205,000 1.1% 878,117 43.9%
Daniel C. Howard, Chief Operating
Officer and Director (6) 61,375 *% 35,124 1.8%
Christopher J. Gondeck,
Chief Financial Officer (7) 76,000 *% - -
Richard Bedard, Executive
Vice President (8) 34,000 *% - -
Bruce D. Carlson, Vice
President of Real Estate (9) 61,375 *% - -
Michael G. Schifsky,
Vice President of Store
Development (10) 61,200 *% - -
Robert E. Yager, Vice President of
Store Operations and Director (11) 93,250 *% - -
Paul M. Kelnberger,
Director (12) 4,500 *% - -
Jana Webster Vaughn,
Director (12) 3,000 *% - -
Bernard Patriacca,
Director (13) - - - -
Investment Advisors, Inc. (14a) 1,956,400 10.8% - -
Stein Roe & Farnham,
Incorporated (14b) 908,000 5.0% - -
All Directors and executive officers
as a group (11 persons) 969,700 5.2% 2,000,000 100%
</TABLE>
11
* Less than one percent (1%) of the outstanding shares of Class A Common Stock.
(1) The address of Messrs. Potter, John Bedard, Howard, Gondeck, Richard
Bedard, Carlson, Schifsky, Yager and Kelnberger and Ms. Vaughn and Mr.
Patriacca is c/o Video Update, Inc. 3100 World Trade Center, 30 East
Seventh Street, St. Paul, Minnesota 55101. The address of Investment
Advisors, Inc. is 3700 First Bank Place, Box 357, Minneapolis,
Minnesota 55440. The address of Stein Roe & Farnham, Inc. is One South
Wacker Drive, 35th Floor, Chicago, Illinois 60606.
(2) For the purposes of this table, shares of Class A Common Stock which,
to the Company's knowledge, an individual or group has a right to
acquire within sixty (60) days upon the exercise of options or
warrants, are deemed outstanding for the purposes of computing the
number and 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
individual or group shown in the table. There are no options or
warrants outstanding for Class B Common Stock. This table does not
include an approximate aggregate amount of 2,600 shares of Class A
Common Stock held by the executive officers of the Company through the
Company's 401(k) plan.
(3) Messrs. Potter and Bedard hold 270,000 and 150,000 shares of Class A
Common Stock, respectively.
(4) Includes an aggregate of 100,000 shares of Class A Common Stock
issuable on exercise of various stock options. Excludes an aggregate of
200,000 shares of Class A Common Stock issuable upon the exercise of
various stock options that have not yet vested. Does not include 26,250
shares of Class A Common Stock owned by Mr. Potter's father, in which
Mr. Potter disclaims beneficial ownership.
(5) Includes an aggregate of 55,000 shares of Class A Common Stock issuable
on exercise of various stock options. Excludes an aggregate of 110,000
shares of Class A Common Stock issuable upon the exercise of stock
options that have not yet vested.
(6) Includes an aggregate of 61,375 shares of Class A Common Stock issuable
upon the exercise of various stock options. Excludes an aggregate of
32,125 shares of Class A Common Stock issuable upon the exercise of
various stock options that have not yet vested.
(7) Includes an aggregate of 72,000 shares of Class A Common Stock issuable
upon the exercise of various stock options. Excludes an aggregate of
59,500 shares of Class A Common Stock issuable upon the exercise of
various stock options that have not yet vested.
(8) Includes an aggregate of 34,000 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 56,000 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(9) Includes an aggregate of 61,375 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 32,125 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(10) Includes an aggregate of 61,200 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 31,800 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(11) Includes an aggregate of 14,500 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 17,000 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
12
(12) Includes an aggregate of 3,000 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes
an aggregate of 1,500 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(13) Excludes an aggregate of 3,000 shares of Class A Common Stock issuable
upon the exercise of stock options that have not vested.
(14a) Includes 1,475,400 shares of Class A Common Stock of which the
beneficial owner has sole voting power and sole dispositive power and
481,000 shares of Class A Common Stock of which the beneficial owner
has shared voting power and shared dispositive power. The information
with respect to the beneficial owner has been taken from the beneficial
owner's Form 13G filed with the Commission on August 8, 1997.
(14b) Includes 908,000 shares of Class A Common Stock of which the beneficial
owner has sole dispositive power. The information with respect to the
beneficial owner has been taken from the beneficial owner's Form 13G
filed with the Commission on February 12, 1997.
(15) Includes the approximately 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, respectively, held in escrow. The
beneficial owner may vote, but not dispose of such shares.
(16) Includes an aggregate of 39,515 shares of Class B Common Stock held in
custodial accounts for Mr. Potter's children.
(17) 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On September 2, 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 Daniel A. Potter, the Company's Chief Executive
Officer and Director.
Effective August 31, 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 and Director, John Bedard.
Craig Belisle, the brother-in-law of John Bedard, the Company's
President and a Director, owned a majority interest in one, one, and two
franchise stores as of April 30, 1995, 1996 and 1997, respectively. The amount
of service fees earned from these franchisees was approximately $18,000, $20,000
and $25,000 for the years ended April 30, 1995, 1996 and 1997, respectively. The
amount due from Mr. Belisle, as a franchisee at April 30, 1995, 1996 and 1997
approximated $2,000, $2,500 and $2,850, respectively.
During the years ended April 30, 1995, 1996 and 1997, the Company
incurred approximately $48,000, $245,000, and $271,000, respectively, in
expenses from Johnson, West & Co., PLC ("Johnson, West & Co.") for accounting
and tax services. Paul Kelnberger, a director of the Company, is a member of
Johnson, West & Co.
13
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 its Chief Executive Officer and
from the President for approximately $1,928,000 and $1,071,000, respectively,
including accrued interest through April 30, 1997. The Recourse Notes were
issued by the executives upon their exercise in August 1995 of 420,000 options
granted to them under the Stock Option Plans in May 1995 at an exercise price of
$4.3125, the fair market value of the stock on the date the options were
granted. The Recourse Notes represent the total exercise price of such options
plus amounts advanced by the Company to such executives to satisfy then
anticipated tax liabilities. The Recourse Notes, which provide for full recourse
against the respective officer's personal assets and Company stockholdings, are
due and payable in October 1999, and accrue interest at 8% per annum. In the
event that the obligors sell shares of the Company's stock, the net proceeds
thereof will be applied to payment, in part or in full, of the Recourse Notes.
In addition, as of April 30, 1997, the Company has a note receivable
from the President of the Company for approximately $31,000 which accrues
interest at 8% per annum and is due November 1997. The note represents advances
from the Company to him from January 1994 to April 1994, together with accrued
interest.
