<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
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 7841 41-1461110
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3100 WORLD TRADE CENTER, 30 EAST SEVENTH STREET, ST. PAUL, MINNESOTA 55101,
(612) 222-0006
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DANIEL A. POTTER, CHIEF EXECUTIVE OFFICER
VIDEO UPDATE, INC.
3100 WORLD TRADE CENTER
30 EAST SEVENTH STREET
ST. PAUL, MINNESOTA 55101
(612) 222-0006
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LAWRENCE H. GENNARI, ESQ. T. CLARK FITZGERALD III, ESQ.
GADSBY & HANNAH LLP ARNALL GOLDEN & GREGORY, LLP
225 FRANKLIN STREET 2800 ONE ATLANTIC CENTER
BOSTON, MASSACHUSETTS 02110 1201 WEST PEACHTREE STREET
TELEPHONE: (617) 345-7000 ATLANTA, GA 30309
FACSIMILE: (617) 345-7050 TELEPHONE: (404) 873-8500
FACSIMILE: (404) 873-8501
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective and certain
other conditions under the Merger Agreement are met or waived.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE* PRICE FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock $.01 par value.... 9,375,000 shares $2.3125 $21,679,687.50 $6,395.51**
===========================================================================================================
</TABLE>
* Estimated solely for the purpose of determining the registration fee pursuant
to Rule 457(c).
** Paid on December 19, 1997.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ___________________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________________________
------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
[VIDEO UPDATE LOGO]
January , 1998
Dear Stockholder:
Video Update has entered into an agreement to acquire Moovies, Inc.
("Moovies") via a merger of Moovies with a newly formed subsidiary of Video
Update (the "Merger"). At a Special Meeting in Lieu of an Annual Meeting of
Stockholders of Video Update on February __, 1998 (the "Special Meeting"), you
will be asked to consider and approve the issuance of Video Update Class A
Common Stock in the Merger and certain related matters. The accompanying Joint
Proxy Statement/Prospectus presents the details of the Merger.
In the Merger, each share of Moovies Common Stock $.001 par value, will be
converted into the right to receive .75 shares of Video Update Class A Common
Stock, $.01 par value. We estimate that the shares of Video Update Class A
Common Stock to be issued to Moovies stockholders in the Merger will represent
approximately 31.8% of the outstanding common stock of Video Update after the
Merger.
Video Update's Board of Directors has unanimously approved the Merger and
recommends that you vote FOR the Merger proposal and the related proposals and
matters.
Video Update's Board of Directors believes that the Merger represents a
strategic fit between two companies with similar business strategies and
complementary geographical presence and operations. The Board believes that the
Merger should result in significant synergies for the combined company and a
number of other important advantages for Video Update stockholders. For further
information regarding the Merger and the potential benefits of the Merger, I
urge that you read carefully the accompanying Joint Proxy Statement/Prospectus
and, specifically, the section "The Merger -- Reasons for the Merger;
Recommendations of the Boards of Directors."
Even if you plan to attend the Special Meeting in person, please complete,
sign and promptly return the enclosed proxy card in the enclosed postage-prepaid
envelope.
Sincerely,
DANIEL A. POTTER
Chairman and Chief Executive Officer
<PAGE> 3
VIDEO UPDATE, INC.
3100 WORLD TRADE CENTER
30 EAST SEVENTH STREET
ST. PAUL, MINNESOTA 55101
NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
FEBRUARY __, 1998
To the Stockholders of
VIDEO UPDATE, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting in Lieu of Annual Meeting of
Stockholders (the "Video Update Special Meeting") of Video Update, Inc., a
Delaware corporation ("Video Update"), will be held on February __, 1998, at the
offices of the Company, World Trade Center, 30 East Seventh Street, St. Paul,
Minnesota commencing at 9:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of
shares of Class A Common Stock, par value $.01 per share, of Video Update
("Video Update Common Stock"), pursuant to the Agreement and Plan of Merger
dated as of July 9, 1997 and amended as of October 27, 1997 (the "Merger
Agreement") among Video Update, VUI Merger Corp., a Delaware corporation
and a wholly owned subsidiary of Video Update ("Sub"), and Moovies, Inc., a
Delaware corporation ("Moovies"), pursuant to which, among other things (a)
Sub will be merged with and into Moovies (the "Merger"), which will be the
surviving corporation, and Moovies will become a wholly owned subsidiary of
Video Update, (b) each outstanding share of Common Stock, par value $.001
per share, of Moovies ("Moovies Common Stock"), will be converted into the
right to receive .75 shares of Video Update Common Stock (the "Exchange
Ratio"), and (c) each outstanding option or warrant to purchase Moovies
Common Stock, including options under Moovies' 1995 Stock Plan and other
warrants, all as described herein, will be converted to an option to
purchase such number of shares of Video Update Common Stock (rounded down
to the nearest whole number) as is equal to the number of shares of Moovies
Common Stock issuable upon exercise of such options and warrants,
immediately prior to the consummation of the Merger, multiplied by the
Exchange Ratio;
2. To consider and vote upon a proposal to approve the termination
and cancellation upon effectiveness of the Merger of the terms of the
Escrow Agreement, dated July 20, 1994, by and among American Stock Transfer
& Trust Company, Video Update and certain stockholders of Video Update;
3. To elect seven (7) members of the Video Update Board of Directors;
4. To ratify the selection of Ernst & Young LLP as independent
auditors for Video Update for the fiscal year ending April 30, 1998;
5. To consider and vote upon a proposal to approve the Video Update
1998 Stock Option Plan providing for the issuance of up to 1,750,000
shares; and
6. To transact such other business as may properly come before the
Video Update Special Meeting or any adjournment or postponement of the
Video Update Special Meeting.
A copy of the Merger Agreement is attached as Annex A to the accompanying
Joint Proxy Statement/Prospectus. Video Update also is providing to each
stockholder, without charge, a copy of Video Update's annual report, including
the financial statements for Video Update's most recent fiscal year ended April
30, 1997.
Stockholders at the close of business on January 21, 1998 are entitled to
notice of, and to vote at, the Video Update Special Meeting and any adjournment
or postponement of the Video Update Special Meeting.
All stockholders are cordially invited to attend the meeting in person.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO
COMPLETE, SIGN AND
<PAGE> 4
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
By Order of the Board of Directors
DANIEL C. HOWARD
Secretary
St. Paul, Minnesota
January , 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE> 5
[LETTERHEAD OF MOOVIES, INC.]
January , 1998
Dear Stockholder:
Moovies has entered into an agreement to be acquired by Video Update, Inc.
("Video Update") via a merger (the "Merger") with a wholly owned subsidiary of
Video Update. At a Special Meeting of Stockholders of Moovies on February __,
1998, you will be asked to consider and approve the Merger Agreement relating to
the Merger. The accompanying Joint Proxy Statement/Prospectus presents the
details of the Merger.
In the Merger, each share of Moovies common stock will be converted into
the right to receive .75 shares of Video Update Class A Common Stock. We
estimate that the shares of Video Update common stock to be issued to Moovies
stockholders in the Merger will represent approximately 31.8% of the outstanding
common stock of Video Update after the Merger.
Moovies' Board of Directors has unanimously approved the Merger Agreement
and recommends that you vote FOR the approval and adoption of the Merger
Agreement.
Moovies' Board of Directors believes that the Merger represents a strategic
fit between two companies with similar business strategies and complementary
geographical presence and operations. The Board believes that the Merger should
result in significant synergies for the combined company and a number of other
important advantages for Moovies stockholders. For further information regarding
the merger and the potential benefits of the Merger, I urge that you read
carefully the accompanying Joint Proxy Statement/ Prospectus and, specifically,
the section "The Merger -- Reasons for the Merger; Recommendations of the Boards
of Directors."
Even if you plan to attend the Special Meeting in person, please complete,
sign and promptly return the enclosed proxy card in the enclosed postage-prepaid
envelope.
Sincerely,
JOHN L. TAYLOR
Chairman of the Board, President and
Chief
Executive Officer
[MOOVIES LOGO]
<PAGE> 6
MOOVIES, INC.
201 BROOKFIELD PARKWAY
GREENVILLE, SOUTH CAROLINA 29607
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY __, 1998
To the Stockholders of
MOOVIES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Moovies
Special Meeting") of Moovies, Inc., a Delaware corporation ("Moovies"), will be
held on February __, 1998, at the Greenville Hyatt Regency, 220 North Main
Street, Greenville, South Carolina 29601 commencing at 10:00 a.m., local time,
for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of July 9, 1997 and amended as of
October 27, 1997 (the "Merger Agreement"), among Video Update, Inc., a
Delaware corporation ("Video Update"), VUI Merger Corp., a Delaware
corporation and a wholly owned subsidiary of Video Update ("Sub"), and
Moovies (the "Merger"), pursuant to which, among other things (a) Sub will
be merged with and into Moovies, which will be the surviving corporation,
and Moovies will become a wholly owned subsidiary of Video Update and (b)
each outstanding share of Common Stock, par value $.001 per share, of
Moovies ("Moovies Common Stock") will be converted into the right to
receive .75 shares of Class A Common Stock, par value $.01 per share, of
Video Update (the "Exchange Ratio"), and (c) each outstanding option or
warrant to purchase Moovies Common Stock, including options under Moovies'
1995 Stock Plan and other warrants, all as described herein, will be
converted to an option to purchase such number of shares of Video Update
Common Stock (rounded down to the nearest whole number) as is equal to the
number of shares of Moovies Common Stock issuable upon exercise of such
options and warrants, immediately prior to the consummation of the Merger,
multiplied by the Exchange Ratio; and
2. To transact such other business as may properly come before the
Moovies Special Meeting or any adjournment or postponement of the Moovies
Special Meeting.
A copy of the Merger Agreement is attached as Annex A to the accompanying
Joint Proxy Statement/ Prospectus.
Stockholders of record at the close of business on January 21, 1998 are
entitled to notice of, and to vote at, the Moovies Special Meeting and any
adjournment or postponement of the Moovies Special Meeting.
All stockholders are cordially invited to attend the meeting in person.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO
COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE.
By Order of the Board of Directors
JOHN L. TAYLOR
Chairman of the Board, President
and Chief Executive Officer
Greenville, South Carolina
January , 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. DO NOT
SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
<PAGE> 7
SUBJECT TO COMPLETION, DATED JANUARY 23, 1998
PRELIMINARY COPY
VIDEO UPDATE, INC.
AND
MOOVIES, INC.
------------------------
JOINT PROXY STATEMENT
------------------------
VIDEO UPDATE, INC. PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to holders of
Class A Common Stock, par value $.01 per share ("Video Update Common Stock"),
of Video Update, Inc., a Delaware corporation ("Video Update"), in connection
with the solicitation of proxies by the Board of Directors of Video Update for
use at a Special Meeting in Lieu of Annual Meeting of Stockholders of Video
Update (the "Video Update Special Meeting") to be held on February __, 1998, at
the offices of Video Update, World Trade Center, 30 East Seventh Street, St.
Paul, Minnesota 55101, commencing at 9:00 a.m., local time, and at any
adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Common Stock, par value $.001 per share ("Moovies Common Stock"), of Moovies,
Inc., a Delaware corporation ("Moovies"), in connection with the solicitation of
proxies by the Board of Directors of Moovies for use at the Special Meeting of
Stockholders of Moovies (the "Moovies Special Meeting") to be held on February
__, 1998 at the Greenville Hyatt Regency, 220 Main Street, Greenville, South
Carolina 29601, commencing at 10:00 a.m., local time, and at any adjournment or
postponement thereof.
Video Update has filed a Registration Statement on Form S-4 (including the
exhibits and amendments thereto, the "Registration Statement") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering up to
9,375,000 shares of Video Update Common Stock which may be issued pursuant to
the Agreement and Plan of Merger, dated as of July 9, 1997 and amended as of
October 27, 1997 (the "Merger Agreement"), among Video Update, VUI Merger Corp.,
a Delaware corporation and a wholly owned subsidiary of Video Update ("Sub"),
and Moovies in exchange for outstanding shares of Moovies Common Stock,
(including shares that may become outstanding prior to the closing of the Merger
upon the exercise of options and warrants for the purchase of Moovies Common
Stock). This Joint Proxy Statement/Prospectus constitutes the Prospectus of
Video Update comprising a part of the Registration Statement. The Merger
Agreement is attached as Annex A to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference. Pursuant to the Merger Agreement, Sub will be
merged with and into Moovies (the "Merger"), which will be the surviving
corporation in the Merger and become a wholly owned subsidiary of Video Update,
and each outstanding share of Moovies Common Stock will be converted into the
right to receive .75 shares of Video Update Common Stock. Simultaneously with
the closing of the Merger and the satisfaction or waiver by the parties of the
conditions to such Merger, 130,000 of Video Update's 2,000,000 outstanding
shares of Class B Common Stock, $.01 par value ("Video Update Class B Common
Stock") will be cancelled and forfeited; the remaining 1,870,000 shares of Video
Update Class B Common Stock will be converted into an equivalent number of
shares of Video Update Common Stock. Based upon the number of outstanding shares
of Video Update Common Stock and Moovies Common Stock as of January 20, 1998,
the shares of Video Update Common Stock issued to Moovies stockholders in the
Merger would represent approximately 31.8% of the outstanding shares of Video
Update Common Stock immediately following the closing of the Merger. On January
20, 1998, the last reported sale prices of the Video Update Common Stock and
Moovies Common Stock on the Nasdaq National Market were $2.28 per share, and
$1.31 per share, respectively.
All information contained in this Joint Proxy Statement/Prospectus relating
to Video Update has been supplied by Video Update, and all information relating
to Moovies has been supplied by Moovies.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
EITHER VIDEO UPDATE, INC. AT 3100 WORLD TRADE CENTER, 30 EAST SEVENTH STREET,
ST. PAUL, MINNESOTA 55101, ATTENTION: SECRETARY, TELEPHONE (612) 222-0006; OR
MOOVIES, INC., 201 BROOKFIELD PARKWAY, GREENVILLE, SOUTH CAROLINA 29607,
ATTENTION: SECRETARY, TELEPHONE (864) 213-1700. IN ORDER TO ENSURE TIMELY
DELIVERY OF DOCUMENTS, ANY REQUEST SHOULD BE MADE BY FEBRUARY __, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY BOTH VIDEO UPDATE AND MOOVIES STOCKHOLDERS.
------------------------
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 JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Video Update and Moovies on or about
January __, 1998.
The date of this Joint Proxy Statement/Prospectus is January , 1998.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION................................................................. 1
SUMMARY............................................................................... 2
The Companies....................................................................... 2
Date and Place of the Meetings...................................................... 2
Stockholders Entitled to Vote....................................................... 2
Purposes of the Meetings............................................................ 3
Votes Required...................................................................... 3
Effects of the Merger............................................................... 4
Recommendations..................................................................... 5
Opinions of Financial Advisors...................................................... 6
Interests of Certain Persons........................................................ 7
Effective Time of the Merger........................................................ 8
Management and Operations of Video Update Following the Merger...................... 8
Conditions to the Merger............................................................ 8
Termination......................................................................... 9
No Appraisal Rights................................................................. 9
Certain Federal Income Tax Consequences............................................. 9
Accounting Treatment................................................................ 9
Surrender of Certificates........................................................... 9
Certain Effects of the Merger on the Rights of Holders of Moovies Common Stock...... 10
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS............................ 10
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION............ 11
COMPARATIVE PER SHARE DATA............................................................ 14
MARKET PRICE INFORMATION.............................................................. 15
RISK FACTORS.......................................................................... 17
Risks Relating to the Merger and Escrow Proposal.................................... 17
Risks Relating to Operations........................................................ 20
THE VIDEO UPDATE SPECIAL MEETING...................................................... 24
Genera1............................................................................. 24
Matters to be Considered............................................................ 24
Board of Directors' Recommendations................................................. 24
Record Date and Voting.............................................................. 24
Proxies............................................................................. 26
THE MOOVIES SPECIAL MEETING........................................................... 28
General............................................................................. 28
Matters to be Considered............................................................ 28
Board of Directors' Recommendation.................................................. 28
Record Date and Voting.............................................................. 28
Proxies............................................................................. 29
THE MERGER............................................................................ 30
Background of the Merger and Related Agreements..................................... 30
Reasons for the Merger; Recommendations of the Boards of Directors.................. 33
Opinions of Financial Advisors...................................................... 37
Interests of Certain Persons in the Merger.......................................... 44
Management and Operations of Video Update Following the Merger...................... 47
Accounting Treatment................................................................ 48
Certain Federal Income Tax Consequences............................................. 48
</TABLE>
i
<PAGE> 9
<TABLE>
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Regulatory Approvals................................................................ 50
Lender Approvals.................................................................... 50
Federal Securities Law Consequences................................................. 52
Nasdaq Listing...................................................................... 52
No Appraisal Rights................................................................. 52
THE MERGER AGREEMENT.................................................................. 53
General............................................................................. 53
Conversion of Shares................................................................ 53
Representations and Warranties...................................................... 54
Certain Covenants................................................................... 54
Solicitation........................................................................ 55
Management of Video Update Following the Merger..................................... 55
Related Matters After the Merger.................................................... 55
Stock Options, Warrants and Employee Benefits....................................... 55
Stockholders Rights Plans........................................................... 56
Director and Officer Indemnification................................................ 56
Conditions.......................................................................... 57
Termination; Termination Fees and Expenses.......................................... 58
Amendment and Waiver................................................................ 60
VIDEO UPDATE, INC..................................................................... 61
Business............................................................................ 61
Security Ownership of Certain Beneficial Owners and Management...................... 70
Certain Employment Agreements....................................................... 73
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 73
MOOVIES, INC.......................................................................... 84
Business............................................................................ 84
Security Ownership of Certain Beneficial Owners and Management...................... 90
Certain Employment Agreements....................................................... 90
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 92
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.................................... 100
DESCRIPTION OF VIDEO UPDATE CAPITAL STOCK............................................. 109
General............................................................................. 109
Common Stock........................................................................ 109
Warrants............................................................................ 110
Preferred Stock..................................................................... 111
Delaware Law and Certain Charter Provisions......................................... 112
Transfer Agent...................................................................... 112
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 113
PROPOSAL TO TERMINATE AND CANCEL THE ESCROW AGREEMENT................................. 117
Background.......................................................................... 117
Termination of the Escrow Agreement and the Effectiveness of the Undertaking
Agreement........................................................................ 119
PROPOSAL FOR ELECTION OF DIRECTORS.................................................... 124
Background.......................................................................... 124
Section 16(a) Beneficial Ownership Reporting Compliance............................. 126
Committees of the Board; Board Meetings............................................. 126
Director Nominees Upon Consummation of the Merger................................... 127
Board Compensation Committee Report on Executive Compensation....................... 128
Performance Graph................................................................... 129
Summary Compensation Table.......................................................... 131
</TABLE>
ii
<PAGE> 10
<TABLE>
<S> <C>
Option/SAR Grants In Fiscal Year 1997............................................... 132
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.......... 132
Compensation Committee Interlocks and Insider Participation......................... 133
Employment Contracts, Termination of Employment, Officer Loans and Change in Control
Arrangements..................................................................... 133
Compensation of Directors........................................................... 134
Certain Relationships and Related Transactions...................................... 134
PROPOSAL RELATING TO ACCOUNTING MATTERS AND RATIFICATION OF AUDITORS.................. 135
PROPOSAL TO APPROVE VIDEO UPDATE'S 1998 STOCK OPTION PLAN............................. 136
Summary of the Plan................................................................. 136
Federal Income Tax Consequences..................................................... 137
Effect of Stockholder Approval...................................................... 138
LEGAL MATTERS......................................................................... 138
EXPERTS............................................................................... 138
CONSOLIDATED FINANCIAL STATEMENTS..................................................... F-1
ANNEX A -- Agreement and Plan of Merger dated July 9, 1997 and Amendment to Agreement
and Plan of Merger dated October 27, 1997.................................. A-1
ANNEX B -- Opinion of Piper Jaffray, Inc. ............................................ B-1
ANNEX C -- Opinion of Asensio & Company, Inc. ........................................ C-1
ANNEX D -- Opinion of Needham & Company, Inc. ........................................ D-1
ANNEX E -- Amended and Restated Undertaking Agreement................................. E-1
</TABLE>
iii
<PAGE> 11
AVAILABLE INFORMATION
Video Update and Moovies are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Video Update and Moovies with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, Washington, D.C. 20549. In addition, Video Update and Moovies are
each required to file electronic versions of such material with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Each of Video Update Common Stock and Moovies Common Stock is quoted
on the Nasdaq National Market. Reports and other information concerning Video
Update and Moovies can also be inspected at the offices of the National
Association of Securities Dealers, Inc., Market Listing Section, 1735 K Street,
N.W., Washington, D.C. 20006.
Video Update has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the shares of Video Update Common
Stock to be issued pursuant to the Merger Agreement. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. For further information with respect to Video Update,
Moovies and the Video Update Common Stock, reference is hereby made to the
Registration Statement (including the exhibits and amendments thereto).
Statements contained in this Joint Proxy Statement/Prospectus or in any document
incorporated by reference in this Joint Proxy Statement/Prospectus as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document (if any) filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY VIDEO
UPDATE, MOOVIES OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF VIDEO
UPDATE OR MOOVIES SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
"Video Update" is a registered service mark of Video Update. "Moovies" is a
registered service mark of Moovies.
<PAGE> 12
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED, OR
INCORPORATED BY REFERENCE, IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE
ANNEXES HERETO. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS
SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS JOINT
PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS ARE URGED TO READ THIS JOINT PROXY
STATEMENT/ PROSPECTUS AND THE ANNEXES HERETO IN THEIR ENTIRETY.
CERTAIN OF THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS MAY CONSTITUTE FORWARD-LOOKING STATEMENTS, INCLUDING
STATEMENTS AS TO THE BENEFITS AND SYNERGIES EXPECTED TO BE REALIZED AS A RESULT
OF THE MERGER AND AS TO FUTURE FINANCIAL PERFORMANCE AND THE ANALYSES USED BY
THE FINANCIAL ADVISORS TO VIDEO UPDATE AND MOOVIES. SEE "THE MERGER -- REASONS
FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS" AND "-- OPINIONS OF
FINANCIAL ADVISORS." A NUMBER OF IMPORTANT FACTORS COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE THOSE SET FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS UNDER
THE HEADING "RISK FACTORS."
ALL SHARE AND PER SHARE DATA IN THIS JOINT PROXY STATEMENT/PROSPECTUS HAVE
BEEN ADJUSTED TO GIVE EFFECT TO ALL STOCK SPLITS OF VIDEO UPDATE COMMON STOCK
AND MOOVIES COMMON STOCK EFFECTED PRIOR TO THE DATE HEREOF.
THE COMPANIES
Video Update. The principal executive office of Video Update is located at
3100 World Trade Center, 30 East Seventh Street, St. Paul, Minnesota 55101 and
its telephone number is (612) 222-0006. As used in this Joint Proxy
Statement/Prospectus, the term "Video Update" refers to Video Update, Inc. and
its wholly owned subsidiaries, unless the context otherwise specifies. As of
January 20, 1998, Video Update owns and operates 406 video specialty stores in
20 states in the United States and six provinces in Canada and franchises 35
additional stores in five states in the United States and two provinces in
Canada.
Moovies. The principal executive office of Moovies is located at 201
Brookfield Parkway, Greenville, South Carolina 29607 and its telephone number is
(864) 213-1700. As used in this Joint Proxy Statement/ Prospectus, the term
"Moovies" refers to Moovies, Inc. and its wholly owned subsidiaries, unless the
context otherwise specifies. As of January 20, 1998, Moovies owns and operates
267 video specialty stores in 17 states and franchises 39 additional stores in
four states.
DATE AND PLACE OF THE MEETINGS
The Video Update Special Meeting will be held on February __, 1998, at the
offices of Video Update, World Trade Center, 30 East Seventh Street, St. Paul,
Minnesota 55101, commencing at 9:00 a.m., local time.
The Moovies Special Meeting will be held on February __, 1998, at the
Greenville Hyatt Regency, 220 North Main Street, Greenville, South Carolina
29601 commencing at 10:00 a.m., local time.
STOCKHOLDERS ENTITLED TO VOTE
Holders of record of shares of Video Update Common Stock at the close of
business on January 21, 1998, are entitled to notice of and to vote at the Video
Update Special Meeting. At such date 18,104,591 shares of
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Video Update Common Stock and 2,000,000 shares of Video Update Class B Common
Stock, were outstanding. Each share of Video Update Common Stock will be
entitled to one vote on each matter to be acted upon or which may properly come
before the Video Update Special Meeting. Each share of Video Update Class B
Common Stock will be entitled to five votes on each matter to be acted upon or
which may properly come before the meeting, except that the holders of Video
Update Class B Common Stock shall not vote any capital stock of Video Update
held by them in connection with the Escrow Proposal (as defined hereafter).
Holders of record of shares of Moovies Common Stock at the close of
business on January 21, 1998, are entitled to notice of and to vote at the
Moovies Special Meeting. At such date 12,398,352 shares of Moovies Common Stock
were outstanding, each of which will be entitled to one vote on each matter to
be acted upon or which may properly come before the Moovies Special Meeting.
PURPOSES OF THE MEETINGS
Video Update Special Meeting. The purpose of the Video Update Special
Meeting is to consider and vote upon the following proposals: (i) the issuance
of up to 9,375,000 shares of Video Update Common Stock in exchange for shares of
Moovies Common Stock pursuant to the Merger Agreement (the "Merger Proposal");
(ii) the termination and cancellation upon the effectiveness of the Merger of
the terms of the Escrow Agreement, dated July 20, 1994 (the "Escrow Agreement"),
by and among American Stock Transfer & Trust Company, Video Update and certain
stockholders of Video Update, (the "Escrow Proposal"); (iii) the election of
seven (7) members of the Board of Directors; (iv) the ratification of the
selection of Ernst & Young LLP as independent auditors for the Company for the
fiscal year ending April 30, 1998; (v) the establishment of Video Update's 1998
Stock Option Plan providing for the issuance of up to 1,750,000 shares (the
"Plan Proposal"); and (vi) such other matters as may properly be brought before
the Video Update Special Meeting, or any adjournment or postponement thereof.
Moovies Special Meeting. The purpose of the Moovies Special Meeting is to
consider and vote upon (i) a proposal to approve and adopt the Merger Agreement
and (ii) such other matters as may properly be brought before the Moovies
Special Meeting, or any adjournment or postponement thereof.
If any other matters are properly presented for consideration at either of
the special meetings, including, among other things, consideration of a motion
to adjourn a special meeting (including, without limitation, for purposes of
soliciting additional proxies) to another time and/or place, the persons named
in the enclosed forms of proxy and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment.
VOTES REQUIRED
Video Update. The approval of the Merger Proposal will require the
affirmative vote of the holders of shares of Video Update Common Stock and Video
Update Class B Common Stock (voting together as a single class) representing a
majority of the votes cast on the proposal. The approval of the Escrow Proposal
will require the affirmative vote of the holders of a majority of the shares of
Video Update Common Stock outstanding on the record date, excluding any shares
of Video Update Common Stock or Video Update Class B Common Stock held by or
beneficially owned by Daniel A. Potter, Video Update's Chairman and Chief
Executive Officer, John M. Bedard, Video Update's President, and Daniel Howard,
Video Update's Chief Operating Officer, who hold all of the Class B Common
Stock, beneficially or of record. The approval of the Escrow Proposal is a
condition to the approval of the Merger Proposal and the consummation of the
Merger. The election of directors will require votes representing a plurality of
votes cast. The ratification of the selection of Ernst & Young LLP will require
the affirmative vote of the holders of shares of Video Update Common Stock and
Video Update Class B Common Stock (voting together as a single class)
representing a majority of the votes cast on the proposal. The approval of the
Plan Proposal will require the affirmative vote of the holders of shares of
Video Update Common Stock and Video Update Class B Common Stock (voting together
as a single class) representing a majority of shares present, or represented,
and entitled to vote at the Special Meeting. Neither the approval of any of the
Plan Proposal, the election of directors nor the ratification
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<PAGE> 14
of the selection of Ernst & Young LLP, is a condition to consummation of the
Merger. Directors and executive officers and their affiliates hold shares
representing approximately 37.4% of the potential votes on all matters except
the Escrow Proposal, as to which directors and executive officers hold or have
the right to vote approximately 0.4% of the potential votes cast (with Messrs.
Potter, Bedard and Howard abstaining).
Moovies. The approval and adoption of the Merger Agreement will require
the affirmative vote of the holders of a majority of the shares of Moovies
Common Stock outstanding on the record date. Directors and executive officers
and their affiliates hold approximately 16.3% of the outstanding shares entitled
to vote.
Voting Agreement. Each of the Directors and certain officers of Video
Update and Moovies have agreed pursuant to an Amended and Restated Voting
Agreement (the "Voting Agreement") dated October 27, 1997 to vote such person's
shares of Video Update Common Stock or Moovies Common Stock, as the case may be,
in favor of the Merger and the transactions contemplated thereby.
Pursuant to the Voting Agreement, Video Update Common Stock shares
representing an aggregate of approximately 37.4% of potential votes and an
aggregate of 16.3% of the outstanding shares of Moovies Common Stock are subject
to a commitment to vote in favor of the Merger, and shares of Video Update
Common Stock representing an aggregate 0.4% (excluding certain shares that will
not vote) of the potential votes to be cast are subject to the commitment to
vote in favor of the Escrow Proposal.
EFFECTS OF THE MERGER
Upon consummation of the Merger, pursuant to the Merger Agreement, (i) Sub
will be merged with and into Moovies, which will be the surviving corporation in
the Merger (the "Surviving Corporation"), and Moovies will become a wholly owned
subsidiary of Video Update, and (ii) each issued and outstanding share of
Moovies Common Stock will be converted into the right to receive .75 shares of
Video Update Common Stock (the "Exchange Ratio"). Fractional shares of Video
Update Common Stock will not be issuable in connection with the Merger. Moovies
stockholders otherwise entitled to a fractional share will be paid the value of
such fraction in cash determined as described below under "The Merger
Agreement -- Conversion of Shares." Each outstanding share of Video Update
Common Stock will remain outstanding and be unaffected by the Merger.
In addition, Video Update stockholders will be asked to vote upon the
termination and cancellation of the Escrow Agreement. Video Update has 2,000,000
shares of Video Update Class B Common Stock outstanding, each of which carries
five votes per share on all matters upon which stockholders may vote. All of
such shares are held beneficially or of record by Daniel A. Potter, Video
Update's Chairman and Chief Executive Officer, John M. Bedard, Video Update's
President, and Daniel C. Howard, Video Update's Chief Operating Officer. Of
these 2,000,000 shares of Video Update Class B Common Stock, 1,300,000 are held
in escrow ("Escrow Shares") and are subject to forfeiture and cancellation in
accordance with the Escrow Agreement. Pursuant to the Escrow Agreement, the
Escrow Shares may be released only if Video Update achieves certain income
levels initially set in the Escrow Agreement and adjusted after that time for
subsequent stock issuances. All Escrow Shares remaining in escrow on July 31,
1998 will be forfeited and canceled. For all of the Escrow Shares to be released
in accordance with the Escrow Agreement, even before adjusting for income
targets for shares issued in the Merger, (i) Video Update's Minimum Pre-Tax
Income (as defined in the Escrow Agreement) for the fiscal year ending April 30,
1998 would have to increase approximately 500% over its Pre-Tax Income for
fiscal 1997 (which management considers unlikely) or (ii) Video Update would
have to be involved in an acquisition or merger that is accounted for using the
pooling of interests method, which method could allow for the restatement of
earnings for previous years, and possibly the attainment of income targets for
previous fiscal years. Video Update currently has no plans for such an
acquisition or purchase. If the Escrow Proposal is approved, 10% of the Escrow
Shares will be forfeited and cancelled and 90% of the Escrow Shares will be
released to Messrs. Potter, Bedard and Howard and no longer subject to
cancellation or forfeiture based on any agreement between Video Update and
Messrs. Potter, Bedard and Howard even though the income levels required by the
Escrow Agreement to release the Escrow Shares have not been met. See "Proposal
to Terminate and Cancel the Escrow Agreement."
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<PAGE> 15
As a condition to entering into the Merger Agreement, Moovies required the
conversion, at the Effective Time, of all outstanding shares of Video Update
Class B Common Stock (including the 1,300,000 Escrow Shares as well as the
700,000 additional shares of Video Update Class B Common stock not subject to an
escrow or encumbrance of any kind) into Video Update Common Stock on a 1:1 basis
to eliminate the preferential 5:1 voting rights of the Video Update Class B
Common Stock. To accomplish this, negotiations were held among two independent
members of Video Update's Board of Directors, Mr. Kelnberger and Ms. Vaughn (the
"Outside Directors"), and the Class B Common stockholders, Messrs. Potter,
Bedard and Howard. Pursuant to these negotiations, Messrs. Potter, Bedard and
Howard agreed to convert the shares of Video Update Class B Common Stock, and
thereby forfeit their preferential voting rights, only if the Escrow Agreement
were terminated and the Escrow Shares released from escrow. The Outside
Directors agreed to this requirement in the context of the Merger Agreement, but
required that (i) 10%, or 130,000, of the 1,300,000 Escrow Shares be forfeited
and canceled and (ii) that beginning at the Effective Time, neither Video Update
nor any of its subsidiaries will grant or award to any of Messrs. Potter, Bedard
or Howard, until after the eighteen month anniversary of the Effective Time, any
additional options, warrants, or securities convertible into or exchangeable for
any capital stock of Video Update (provided that nothing in this restriction
affects in any way any outstanding options, warrants or existing similar rights
held or accorded to any of such stockholders). These agreements, which were
discussed with D. H. Blair Investment Banking Corp. ("Blair"), the underwriter
of Video Update's initial two public offerings, whose consent was required to
terminate the Escrow Agreement, have been memorialized in an Amended and
Restated Undertaking Agreement (the "Undertaking Agreement") dated October 27,
1997 among Video Update, Moovies, and Messrs. Potter, Bedard and Howard. See
"Proposal to Terminate and Cancel the Escrow Agreement." Also included in the
terms of the Undertaking Agreement, Messrs. Potter, Bedard and Howard have
agreed with Video Update not to sell or transfer any of the 1,170,000 converted
Escrow Shares for a period of two years from the Effective Time, except in
connection with the acquisition of Video Update by a third party, of which no
assurance, representation or warranty is given or suggested.
Upon consummation of the Merger, pursuant to the Merger Agreement, each
outstanding option and warrant to purchase Moovies Common Stock will be
converted into an option or warrant to purchase such number of shares of Video
Update Common Stock (rounded down to the nearest whole number) as is equal to
the number of shares of Moovies Common Stock issuable upon exercise of such
option or warrant immediately prior to the Effective Time (as defined below)
multiplied by the Exchange Ratio. The exercise price per share of each such
option, as so converted, will be equal to the exercise price for the shares of
Moovies Common Stock otherwise purchasable pursuant to such option or warrant
immediately prior to the Effective Time divided by the Exchange Ratio (rounded
up to the nearest whole cent). Upon consummation of the Merger, approximately
1.3 million shares of Video Update Common Stock will be issuable upon exercise
of all of the converted options and warrants; all of which will be immediately
exercisable. The converted options and warrants will have exercise prices in the
range of $0.01 to $19.84 per share, with a weighted average exercise price of
$10.57. See "The Merger Agreement -- Stock Options, Warrants and Employee
Benefits."
RECOMMENDATIONS
The Board of Directors of Video Update (the "Video Update Board") (a) has
unanimously approved (i) the Merger Agreement and the issuance of shares of
Video Update Common Stock pursuant to the Merger Agreement, (ii) the Escrow
Proposal (with Directors Potter, Bedard and Howard abstaining), (iii) the
selection of Ernst & Young LLP as Video Update's independent auditors for the
fiscal year ending April 30, 1998; (iv) the nomination of the Director Nominees
named herein, and (v) the establishment of the 1998 Stock Option Plan providing
for issuance of up to 1,750,000 shares, and (b) unanimously recommends that
holders of Video Update Common Stock vote in favor of the Merger Proposal, the
Escrow Proposal (with Directors Potter, Bedard and Howard abstaining), the
ratification of the selection of Ernst & Young LLP, the election of the Director
Nominees, and the Plan Proposal.
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The Board of Directors of Moovies (the "Moovies Board") has unanimously
approved the Merger Agreement and unanimously recommends that holders of Moovies
Common Stock vote in favor of the approval and adoption of the Merger Agreement.
The Video Update Board and the Moovies Board believe that the Merger
represents a strategic fit between two leading companies with similar business
strategies and complementary geographical presence and operations. Both Boards
of Directors believe that Video Update, after the Merger, will have greater
financial strength, operational efficiencies, earning power and growth potential
than either Video Update or Moovies would have on its own. See "The
Merger -- Reasons for the Merger; Recommendations of the Boards of Directors."
OPINIONS OF FINANCIAL ADVISORS
Video Update. On July 7, 1997 Piper Jaffray, Inc. ("Piper Jaffray")
delivered a written opinion to Video Update regarding the then-current exchange
ratio prior to the amendment of the Merger Agreement in October 1997. On October
23, 1997, Piper Jaffray delivered its oral opinion to the Video Update Board to
the effect that, as of such date, the Exchange Ratio (as amended in October
1997) was fair, from a financial point of view, to holders of Video Update
Common Stock. Piper Jaffray subsequently delivered its written opinion, dated as
of October 23, 1997 and as of the date hereof, to the effect that, as of October
23, 1997 and as of the date hereof, the Exchange Ratio is fair, from a financial
point of view, to the holders of Video Update Common Stock.
The full text of the written opinion of Piper Jaffray, dated the date
hereof, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with its opinion, is attached hereto as
Annex B and is incorporated herein by reference. HOLDERS OF VIDEO UPDATE COMMON
STOCK ARE URGED TO, AND SHOULD, READ THE OPINION OF PIPER JAFFRAY IN ITS
ENTIRETY. See "The Merger -- Opinions of Financial Advisors -- Opinions of
Financial Advisors to Video Update."
Also on July 7, 1997, Asensio & Company, Inc. ("Asensio & Company")
delivered its oral opinion to the Video Update Board to the effect that the
terms of the Undertaking Agreement between Moovies, Video Update and Messrs.
Potter, Bedard and Howard, prior to its amendment and restatement in October
1997 were fair from a financial point of view to the holders of Video Update
Common Stock. Asensio & Company subsequently delivered its written opinion,
dated July 9, 1997, to this same effect. On October 23, 1997, Asensio & Company
delivered an oral opinion that the terms of the Undertaking Agreement (as
amended to reflect the amendment to the Merger Agreement, including the new
Exchange Ratio) were fair from a financial point of view to the holders of Video
Update Common Stock. Asensio & Company subsequently delivered its written
opinion, dated October 27, 1997, to this same effect.
The full text of the written opinion of Asensio & Company, that sets forth
the assumptions made, matters considered and limitations or review undertaken in
connection with its opinion is annexed hereto as Annex C and is incorporated
herein by reference. HOLDERS OF VIDEO UPDATE COMMON STOCK ARE URGED TO, AND
SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "The Merger -- Opinions of
Financial Advisors -- Opinions of Financial Advisors to Video Update."
Moovies. On July 2, 1997, Needham & Company, Inc. ("Needham") consulted
with the Moovies Board and delivered its oral opinion to Moovies regarding the
exchange ratio prior to the amendment of the Merger Agreement in October 1997.
On October 30, 1997, Needham delivered its opinion to the Moovies Board that, as
of such date, the Exchange Ratio (as amended in October 1997) was fair to the
holders of Moovies Common Stock from a financial point of view. Needham
subsequently delivered its written opinion, dated as of October 30, 1997, and as
of the date hereof, that, as of October 30, 1997 and as of the date hereof, the
Exchange Ratio is fair to the holders of Moovies Common Stock from a financial
point of view.
The full text of the written opinion of Needham, dated the date hereof,
which sets forth assumptions made, matters considered and limitations on the
review undertaken, is attached hereto as Annex D and is incorporated herein by
reference. HOLDERS OF MOOVIES COMMON STOCK ARE URGED TO,
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AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "The Merger -- Opinions of
Financial Advisors -- Opinion of Financial Advisor to Moovies."
INTERESTS OF CERTAIN PERSONS
Video Update stockholders will be asked to vote upon the termination and
cancellation of the Escrow Agreement. Upon such termination and cancellation, if
approved, 1,170,000 shares of the 1,300,000 Video Update Class B Common Stock
subject to forfeiture and cancellation in accordance with the Escrow Agreement,
shall be released to Video Update's employee directors, Potter, Bedard and
Howard free and clear of any escrow or encumbrance pursuant to the Undertaking
Agreement. Absent approval of the Escrow Proposal, the 1,300,000 shares will be
subject to forfeiture on July 31, 1998 unless Video Update achieves certain
financial targets for fiscal 1998 (which management considers unlikely) or for
previous years by means of a transaction accounted for under the pooling of
interests method. See "Proposal to Terminate and Cancel the Escrow Agreement."
The Undertaking Agreement provides that all Video Update Class B Common Stock
(including 700,000 shares not subject to the Escrow Agreement) will be converted
automatically at the Effective Time into Video Update Common Stock on a 1:1
basis, without any further action or consent on the part of Messrs. Potter,
Bedard or Howard. However, 10% or 130,000 of the 1,300,000 Escrow Shares will be
canceled, forfeited and of no further force or effect. By converting their Video
Update Class B Common Stock shares into Video Update Class A Common Stock
shares, the Video Update Class B stockholders will effectively surrender their
five-for-one preferential voting rights. The elimination of these rights is a
condition to Moovies' obligation to close the Merger. Additionally, pursuant to
the Undertaking Agreement, Messrs. Potter, Bedard and Howard have agreed that
effective upon and at the Effective Time, neither Video Update nor any of its
subsidiaries will grant or award to any of Messrs. Potter, Bedard or Howard,
until after the eighteen month anniversary of the Effective Time, any additional
options, warrants, or securities convertible into or exchangeable for, any
capital stock of Video Update (provided that nothing in the Undertaking
Agreement will affect in any way any outstanding options, warrants or existing
similar rights held or accorded to any of such stockholders). Pursuant to the
terms of the Undertaking Agreement, Messrs. Potter, Bedard and Howard also have
agreed not to sell or transfer any of the 1,170,000 converted Escrow Shares
(which will represent approximately 4.0% of the outstanding shares of Common
Stock upon consummation of the Merger) for a period of two years from the
Effective Time, except in connection with the acquisition of Video Update by a
third party, of which no assurance, representation or warranty is given or
suggested. See "Proposal to Terminate and Cancel the Escrow Agreement."
All outstanding stock options for the purchase of Moovies Common Stock were
granted pursuant to option agreements that provide that such options shall
become vested and exercisable in full from and after the date of a change in
control of Moovies. The Merger will constitute a change in control of Moovies
within the meaning of such option agreements. In addition, Moovies has amended
the stock option agreements in respect of options to purchase approximately
432,000 shares of Moovies Common Stock to extend the time to exercise such
outstanding options to one year after termination of employment if such employee
continues employment with Moovies through the Effective Time or to one year
after the last date of service as a non-employee director of Moovies if such
non-employee director continues to serve Moovies as such through the Effective
Time, as the case may be. See "The Merger -- Interests of Certain Persons in the
Merger -- Moovies Stock Options and Warrants." See also "The Merger
Agreement -- Stock Options, Warrants and Employee Benefits" and "Moovies,
Inc. -- Security Ownership of Certain Beneficial Owners and Management."
Certain employees of Moovies, including certain executive officers and
directors of Moovies, and one executive officer of Video Update who was
previously an employee of Moovies, will receive severance payments under Change
in Control Agreements upon consummation of the Merger. In addition, the employer
of one director of Moovies will receive a consulting fee upon consummation of
the Merger. See "The Merger -- Interests of Certain Persons in the
Merger -- Employment and Severance Agreements" and "-- Consulting Fee."
An accounting firm in which a director of Video Update is a principal will
receive fees for accounting and tax services in connection with the Merger. See
"The Merger -- Interests of Certain Persons in the Merger -- Accounting Fees."
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Pursuant to the Merger Agreement, Video Update has agreed to indemnify each
present and former director and officer of Moovies against liabilities or
expenses incurred in connection with claims relating to matters prior to the
closing of the Merger for a period of six years following the Merger, and to
maintain in effect directors' and officers' liability insurance for their
benefit for a period of three years following the Merger. See "The Merger
Agreement -- Director and Officer Indemnification."
See "The Merger -- Interests of Certain Persons in the Merger -- Ownership
and Voting of Stock" for a description of the Video Update Common Stock and
Moovies Common Stock owned by Video Update and Moovies directors and officers
and their affiliates.
EFFECTIVE TIME OF THE MERGER
The Merger will be consummated upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware (the time of the filing of
such Certificate of Merger is referred to herein as the "Effective Time"). The
Effective Time will occur as promptly as practicable after the requisite
stockholder approvals have been obtained and all other conditions to the Merger
have been satisfied or waived.
MANAGEMENT AND OPERATIONS OF VIDEO UPDATE FOLLOWING THE MERGER
At the Video Update Special Meeting, Video Update stockholders will be
asked to consider and vote upon the election of seven (7) directors. Each
director of Video Update will be elected for a period of one year and until his
or her successor is duly elected by the stockholders, provided that as soon as
practicable following the Effective Time (assuming the requisite approvals of
the stockholders of Moovies and Video Update), the Board of Directors of Video
Update will be comprised of the following seven persons: Messrs. Potter, Bedard,
Howard, Kelnberger and Patriacca (all of whom are currently directors of Video
Update) and F. Andrew Mitchell and Theodore J. Coburn (each of whom are
currently directors of Moovies, hereinafter referred to as the Moovies
Designees). Mr. Yager and Ms. Vaughn, currently Video Update directors, have
agreed to resign at the Effective Time. The Moovies Designees shall be elected
to the Nominating Committee of the Board of Directors so long as they remain
directors of Video Update. Following the Effective Time, such Nominating
Committee shall be comprised solely of the two Moovies Designees and one
designee of Video Update. The Nominating Committee shall have the right to
nominate two additional members of the Board of Directors which, if necessary,
shall be expanded by the full Board of Directors to nine members to include such
two additional nominees. Vacancies and newly created directorships resulting
from any increase in the number of authorized directors may be filled by a
majority vote of directors then remaining in office. Officers are elected by and
serve at the discretion of the Board of Directors, subject to their employment
agreements.
Upon the closing of the Merger, Daniel A. Potter, who is currently Chairman
and Chief Executive Officer of Video Update, will continue in those positions.
For additional information regarding the senior management of Video Update
following the Merger, see "The Merger -- Management and Operations of Video
Update Following the Merger."
CONDITIONS TO THE MERGER
The obligations of Video Update and Moovies to consummate the Merger are
subject to the satisfaction of certain conditions, including, but not limited
to, obtaining requisite approvals of the stockholders of Video Update and
Moovies, obtaining consents under the respective bank credit agreements of Video
Update and Moovies (which in respect of the Moovies credit agreement requires
payoff of all outstanding borrowed amounts thereunder at the Effective Time),
obtaining adequate financing, the approval of the Escrow Proposal by Video
Update stockholders, obtaining requisite regulatory approvals (including under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act")), the continuing accuracy, in all material respects, as of the Effective
Time of the representations and warranties made by Video Update and Moovies in
the Merger Agreement, and the receipt of a legal opinion with respect to certain
tax matters. On or about November 18, 1997, early termination of the waiting
period under the HSR Act was granted. Each party has the right to waive certain
of the closing conditions referred to above. See "The Merger -- Accounting
Treatment," "The Merger -- Certain Federal Income Tax Consequences," "The
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Merger -- Regulatory Approvals," "The Merger -- Lender Approvals," and "The
Merger Agreement -- Conditions."
TERMINATION
The Merger Agreement is subject to termination (i) by mutual written
consent of Video Update and Moovies, (ii) by either Moovies or Video Update if
the other recommends an alternative acquisition proposal to its respective
stockholders, (iii) at the option of either Video Update or Moovies if the
Merger is not consummated by January 31, 1998 (although either Video Update or
Moovies may extend such date to March 31, 1998 under certain circumstances,
which extension is anticipated) and (iv) prior to such time upon the occurrence
of certain events. Moovies' management intends to extend the date to March 31,
1998. See "The Merger Agreement -- Termination; Termination Fees and Expenses."
Under certain circumstances, either Video Update or Moovies may be required
to pay the other party a termination fee of $800,000 if the Merger Agreement is
terminated. Video Update may be required to pay Moovies a termination fee of
$400,000 in lieu of a termination fee of $800,000 if Video Update Stockholders
do not approve the Escrow Proposal. However, no termination fee will be paid by
either party if either party's stockholders fail to approve the Merger Proposal.
See "The Merger Agreement -- Termination; Termination Fees and Expenses."
NO APPRAISAL RIGHTS
Holders of Moovies Common Stock are not entitled to appraisal rights under
Section 262 of the Delaware General Corporation Law (the "DGCL") in connection
with the Merger because the Moovies Common Stock was listed on the Nasdaq
National Market on the record date for the Moovies Special Meeting and the
shares of Video Update Common Stock to be issued pursuant to the Merger will be
listed on the Nasdaq National Market as of the Effective Time. Holders of Video
Update Common Stock or Video Update Class B Common Stock are not entitled to
appraisal rights under Section 262 of the DGCL in connection with the Merger
because Video Update is not a constituent corporation in the Merger. See "The
Merger -- No Appraisal Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a tax-free reorganization in which no gain or
loss will be recognized by Video Update or Moovies and no gain or loss will be
recognized by Moovies stockholders, except in respect of cash received in lieu
of fractional shares. A condition to the Merger is that Moovies has received an
opinion of Video Update's counsel to the effect that the Merger will constitute
a tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). For a further discussion of the
federal income tax consequences of the Merger, see "The Merger -- Certain
Federal Income Tax Consequences." See also "The Merger Agreement -- Conditions."
ACCOUNTING TREATMENT
The Merger will be recorded under the purchase method of accounting.
Assuming approval of the Escrow Proposal, at the Effective Time, Video Update
will record a one-time, non-cash charge for compensation expense of
approximately $2,667,600 (estimated based on the closing stock price of $2.28 on
January 20, 1998; the actual charge will be based on the closing stock price on
the Effective Date). The compensation expense will be treated as a contribution
to paid-in capital and will not be deductible for tax purposes. See "The
Merger -- Accounting Treatment" and "The Merger Agreement -- Conditions."
SURRENDER OF CERTIFICATES
Following the Effective Time, Video Update will mail a letter of
transmittal to all holders of record of Moovies Common Stock immediately prior
to the Merger containing instructions for surrendering their stock certificates
in exchange for certificates representing shares of Video Update Common Stock
and a cash payment in lieu of fractional shares, if any. CERTIFICATES SHOULD NOT
BE SURRENDERED
9
<PAGE> 20
UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED. See "The Merger
Agreement -- Conversion of Shares."
CERTAIN EFFECTS OF THE MERGER ON THE RIGHTS OF HOLDERS OF MOOVIES COMMON STOCK
Upon consummation of the Merger, holders of Moovies Common Stock will
become holders of Video Update Common Stock. The internal affairs of Video
Update are governed by the DGCL and Video Update's Certificate of Incorporation
and By-Laws. The Merger will result in certain differences in the rights of
holders of Moovies Common Stock. See "Description of Video Update Capital Stock"
and "Comparison of Stockholder Rights."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains forward-looking statements
that are subject to risks and uncertainties. Forward-looking statements include
the information concerning possible or assumed future results of operations of
Moovies and Video Update and those preceded by, followed by or that include the
words "believes," "expects," "anticipates" or similar expressions. For those
statements, Moovies and Video Update claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Stockholders of both companies should understand that the following
important factors, in addition to those discussed elsewhere in this document and
in the documents incorporated by reference herein, could affect the future
results of Moovies and Video Update, and could cause those results to differ
materially from those expressed in any forward-looking statements: materially
adverse changes in economic conditions in the markets served by each company, a
significant delay in the expected closing of the Merger, lack of consumer
acceptance of new release titles, future regulatory actions and conditions in
each company's operating areas, competition in the marketplace, and the
operating results of Video Update following the Merger.
10
<PAGE> 21
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following selected historical financial information of Video Update has
been derived from its respective historical financial statements and should be
read in conjunction with such consolidated financial statements and the notes
thereto included elsewhere in this Joint Proxy Statement/Prospectus. See
"Consolidated Financial Statements." The Video Update historical financial
statement information as of and for the periods presented below has been
prepared on the same basis as the historical information derived from audited
financial statements and, in the opinion of management of the respective
companies, includes all material adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations of the respective companies as of such dates and for
such periods.
The selected historical financial data for Moovies presented under the
captions Income Statement Data and Balance Sheet Data as of and for the years
ended December 31, 1992, 1993 and 1994 have been derived from the financial
statements of Moovies' predecessor, Tonight's Feature Limited Partnership II
(the "Predecessor") which during 1995 was merged into Moovies. The selected
historical financial data of Moovies presented under the captions Income
Statement Data and Balance Sheet Data as of and for the years ended December 31,
1995 and 1996 were derived from the consolidated financial statements of
Moovies. Such financial statements were audited by KPMG Peat Marwick LLP,
independent certified public accountants. The financial statements of Moovies as
of December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996 and the accountants' report thereon are also included
elsewhere in this Joint Proxy/Prospectus. The selected historical financial data
of Moovies presented under the captions Income Statement Data and Balance Sheet
Data as of and for the nine month periods ended September 30, 1996 and 1997 have
been derived from the unaudited financial statements of Moovies included
elsewhere in this Joint Proxy Statement/Prospectus. In the opinion of Moovies,
such unaudited financial statements reflect all adjustments, consisting only of
normal, recurring accrued adjustments, necessary for a fair presentation of the
results of operations and financial condition for such period. The Selected
Historical and Pro Forma Financial Data and the operating data set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto, and "Moovies, Inc. -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Joint
Proxy Statement/Prospectus.
The pro forma combined information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have been achieved if the Merger had been consummated as of
the beginning of the periods presented, nor is it necessarily indicative of the
future operating results or financial position of Video Update/Moovies.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
VIDEO UPDATE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------------------- -------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, OCTOBER 31, OCTOBER 31,
INCOME STATEMENT DATA 1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 3,884 $ 4,989 $ 9,051 $ 50,504 $ 91,799 $38,687 $63,937
Operating income (loss)....... 314 627 623 2,505 8,045 2,000 (150)
Net income (loss)............. 176 301 154 1,628 4,620 1,033 (897)
Fully diluted income (loss)
per share:
Continuing operations....... $ .19 $ .33 $ .10 $ .14 $ .28 $ .08 $ (.05)
Discontinued operations..... -- -- (.03) -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss) per
share.................... $ .19 $ .33 $ .07 $ .14 $ .28 $ .08 $ (.05)
======= ======= ======= ======== ======== ======= =======
Weighted average shares....... 904 904 2,226 11,229 16,271 13,461 18,982
</TABLE>
11
<PAGE> 22
VIDEO UPDATE (CONTINUED)
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, OCTOBER 31,
BALANCE SHEET DATA 1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets................. $ 2,038 $ 3,489 $ 19,450 $ 79,518 $ 133,607 $ 154,554
Notes payable................ $ 565 $ 1,568 $ 1,278 $ 4,859 $ 20,564 $ 32,534
Total liabilities............ $ 1,469 $ 2,614 $ 4,279 $ 18,018 $ 42,615 $ 65,149
Stockholders' equity......... $ 569 $ 875 $ 15,171 $ 61,500 $ 90,992 $ 89,405
</TABLE>
MOOVIES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------------------------------------------------------- --------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPT. 30, SEPT. 30,
INCOME STATEMENT DATA 1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $3,113 $3,889 $4,392 $ 24,658 $ 85,283 $ 59,694 $ 81,570
Operating income
(loss)............... 432 278 382 2,983 5,213 3,918 (20,660)
Net income (loss)...... 397 235 281 1,765 2,267 1,691 (14,312)
Net income (loss) per
share................ N/A N/A N/A $ .52 $ .22 .17 (1.15)
Weighted average
shares............... N/A N/A N/A 3,395 10,455 9,904 12,414
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
BALANCE SHEET DATA 1992 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Total assets........... $1,660 $1,644 $2,098 $ 68,219 $113,786 $ 135,053
Long-term debt, less
current portion...... $ 22 $1,078 $1,309 $ 2,411 $ 101 $ 26,375
Total liabilities...... $ 536 $1,953 $2,502 $ 30,756 $ 51,575 $ 83,605
Stockholders' equity
(deficit)............ $1,124 $ (309) $ (404) $ 37,463 $ 62,211 $ 51,448
</TABLE>
12
<PAGE> 23
VIDEO UPDATE, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
SIX MONTHS ENDED OCTOBER 31, 1997
YEAR ENDED APRIL 30, 1997
AS OF OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 31, 1997
PRO FORMA COMBINED
STATEMENT OF OPERATIONS(1)(3)(4)
---------------------------------
<S> <C>
Revenues........................................................ $ 118,917
Operating loss.................................................. (18,926)
Net loss........................................................ (14,194)
Net loss per share.............................................. $ (.48)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1997
PRO FORMA COMBINED
STATEMENT OF OPERATIONS(1)(3)(4)
---------------------------------
<S> <C>
Revenues........................................................ $ 200,244
Operating income................................................ 20,545
Net income...................................................... 9,558
Net income per share............................................ $ .33
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
PRO FORMA COMBINED
BALANCE SHEET DATA(2)(3)(4)
---------------------------------
<S> <C>
Total assets.................................................... $ 278,634
Notes payable................................................... 103,534
Total liabilities............................................... 157,879
Stockholders' equity............................................ 120,755
</TABLE>
- ---------------
(1) The unaudited pro forma combined statement of operations includes the
statements of operations of the Company and Recent Acquisitions for the year
and six months ended April 30, 1997 and October 31, 1997, respectively, and
the statement of operations of Moovies for the year and six months ended
March 31, 1997 and September 30, 1997, respectively, and gives effect to the
Recent Acquisitions and the Merger treated as purchases for accounting
purposes and was prepared as if the transactions had occurred as of the
beginning of the respective periods.
(2) The unaudited combined pro forma balance sheet includes the balance sheet of
the Company at October 31, 1997 and the balance sheet of Moovies at
September 30, 1997 and was prepared as if the transaction had occurred at
the end of the respective dates.
(3) See Notes to Unaudited Pro Forma Combined Financial Statements.
(4) Excludes a one-time, non-cash, non-tax deductible charge of approximately
$2,667,600 or $.09 per combined pro forma share (based on a closing price of
$2.28 as of January 20, 1998) resulting from the release of the 1,170,000
escrow shares contemplated in this Merger. The 1,170,000 shares are included
in the pro forma weighted average number of shares. See "Unaudited Pro Forma
Combined Financial Information."
13
<PAGE> 24
COMPARATIVE PER SHARE DATA
The following tables set forth certain unaudited historical per share data
of Video Update and Moovies and combined per share data on an unaudited pro
forma basis after giving effect to the Merger (assuming the issuance of .75
shares of Video Update Common Stock in the Merger in exchange for each share of
Moovies Common Stock). This data should be read in conjunction with the selected
financial data and the unaudited pro forma combined financial statements and the
separate historical financial statements of Moovies and Video Update included
elsewhere in this Joint Proxy Statement/Prospectus. The pro forma combined
financial data are not necessarily indicative of the operating results or
financial position that would have been achieved if the Merger had been
consummated as of the beginning of the periods presented, nor are they
necessarily indicative of the future operating results or financial position of
Video Update/Moovies. Neither Video Update nor Moovies has ever paid any cash
dividends on its Common Stock.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
VIDEO UPDATE -- HISTORICAL APRIL 30, 1997 OCTOBER 31, 1997
------------------------------------------ ------------------ -----------------
<S> <C> <C>
Income from Continuing Operations......... $ .28 $ (.05)
Book Value................................ $ 5.01 $ 4.94
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
MOOVIES -- HISTORICAL DECEMBER 31, 1996 1997
------------------------------------------ ------------------ -----------------
<S> <C> <C>
Income from Continuing Operations......... $ .22 $ (1.15)
Book Value................................ $ 5.21 $ 4.16
</TABLE>
<TABLE>
<CAPTION>
VIDEO UPDATE -- PRO FORMA YEAR ENDED SIX MONTHS ENDED
COMBINED(1)(2)(3)(4) APRIL 30, 1997 OCTOBER 31, 1997
------------------------------------------ ------------------ -----------------
<S> <C> <C>
Income from Continuing Operations......... $ .33 $ (.48)
Book Value................................ $ 4.26 $ 4.38
</TABLE>
- ---------------
(1) The unaudited pro forma combined data was derived from the statements of
operations of the Company and Recent Acquisitions for the year and six
months ended April 30, 1997 and October 31, 1997, respectively, and the
statement of operations of Moovies for the year and six months ended March
31, 1997 and September 30, 1997, respectively, and gives effect to the
Recent Acquisitions and the Merger treated as purchases for accounting
purposes and was prepared as if the transactions had occurred as of the
beginning of the respective periods.
(2) The unaudited pro forma combined data was derived from the balance sheet of
the Company at October 31, 1997 and the balance sheet of Moovies at
September 30, 1997 and was prepared as if the transaction has occurred at
the end of the respective dates.
(3) See Notes to Unaudited Pro Forma Combined Financial Statements.
(4) Excludes a one-time, non-cash, non-tax deductible charge of approximately
$2,667,600 or $.09 per combined pro forma share (based on a closing price of
$2.28 as of January 20, 1998) resulting from the release of 1,170,000 of the
Escrow Shares contemplated in this Merger. The 1,170,000 Escrow Shares are
included in the pro forma weighted average number of shares. See "Unaudited
Pro Forma Combined Financial Information."
14
<PAGE> 25
MARKET PRICE INFORMATION
Each of Video Update's and Moovies' Common Stock is quoted on the Nasdaq
National Market. The symbol for Video Update Common Stock is "VUPDA" and the
symbol for Moovies Common Stock is "MOOV."
The table below sets forth, for the fiscal quarters indicated, the reported
high and low sale prices of Video Update Common Stock and Moovies Common Stock
on the Nasdaq Small Cap Market or the Nasdaq National Market, as applicable.
Video Update Common Stock began trading on the Nasdaq National Market on May 8,
1995. (Prior to May 8, 1995, Video Update Common Stock traded on the Nasdaq
SmallCap Market from July 20, 1994 through May 7, 1995). Moovies Common Stock
began trading on the Nasdaq National Market on August 3, 1995. For purposes of
comparison, the Moovies Common Stock price information is presented for the
fiscal periods of Video Update rather than for Moovies' historical fiscal
periods.
<TABLE>
<CAPTION>
VIDEO UPDATE MOOVIES
------------ ------------------
HIGH LOW HIGH LOW
---- --- ----- -----
<S> <C> <C> <C> <C>
FISCAL 1995
Quarter ended July 31, 1994
(July 20, 1994 through July 31, 1994).................... $ 4 3/4 $3 N/A N/A
Quarter ended October 31, 1994............................. 6 1/4 4 3/4 N/A N/A
Quarter ended January 31, 1995............................. 5 3/4 3 3/4 N/A N/A
Quarter ended April 30, 1995............................... 4 1/2 3 5/8 N/A N/A
FISCAL 1996
Quarter ended July 31, 1995................................ $11 7/8 4 1/4 N/A N/A
Quarter ended October 31, 1995(1).......................... 13 7 1/4 $23 1/4 $ 12
Quarter ended January 31, 1996............................. 10 6 19 1/2 10
Quarter ended April 30, 1996............................... 8 3/8 5 1/2 15 1/4 11 3/4
FISCAL 1997
Quarter ended July 31, 1996................................ 9 3/4 6 3/8 12 1/2 7 1/2
Quarter ended October 31, 1996............................. 8 1/2 3 3/4 8 3/4 5
Quarter ended January 31, 1997............................. 4 3/4 3 1/2 7 1/2 4 7/8
Quarter ended April 30, 1997............................... 6 1/8 3 3/4 7 3/16 4 1/4
FISCAL 1998
Quarter ended July 31, 1997................................ 5 5/16 3 3/8 6 1/4 3
Quarter ended October 31, 1997............................. 3 7/8 2 5/8 3 13/16 1 7/8
Quarter ended January 31, 1998 (through January 20,
1998).................................................... 3 1/4 1 11/16 2 1/8 1
</TABLE>
- ---------------
(1) For Moovies Common Stock, for the period from August 3, 1995 through October
31, 1995.
On June 17, 1997 the most recent trading day immediately prior to the
announcement of negotiations regarding the Merger, the last reported sale price,
of Video Update Common Stock and Moovies Common stock on the Nasdaq National
Market were $5 1/4, per share and $5 15/16 per share, respectively. Based on an
Exchange Ratio of .75 shares of Video Update Common Stock for each share of
Moovies Common Stock, the pro forma equivalent per share value of Moovies Common
Stock on January 20, 1998 was $1.71 per share.
On July 8, 1997, the last full trading day prior to the public announcement
of the Merger (prior to the amendment to the Merger Agreement dated as of
October 27, 1997), the last reported sale price of Video Update Common Stock on
the Nasdaq National Market was $4 3/4 per share, and the last reported sale
price of Moovies Common Stock on the Nasdaq National Market was $4 5/8 per
share.
15
<PAGE> 26
On October 30, 1997, the last full trading day prior to the public
announcement of the amendment to the Merger Agreement dated as of October 27,
1997, the last reported sale price of Video Update Common Stock was $3.00 per
share, and the last reported sale price of Moovies Common Stock was $2.00 per
share.
On January 20, 1998, the most recent practicable date prior to the printing
of this Joint Proxy Statement/ Prospectus, the last reported sale price of Video
Update Common Stock on the Nasdaq National Market was $2.28 per share, and the
last reported sale price of Moovies Common Stock on the Nasdaq National Market
was $1.31 per share.
Neither Video Update nor Moovies has paid any dividends. Because the market
price of Video Update Common Stock is subject to fluctuation, the market value
of the shares of Video Update Common Stock that holders of Moovies Common Stock
will receive in the Merger may increase or decrease prior to the Merger. See
"Risk Factors -- Risks Relating to Operations -- Volatility of Stock Price."
VIDEO UPDATE AND MOOVIES STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET
QUOTATION FOR THE VIDEO UPDATE COMMON STOCK AND THE MOOVIES COMMON STOCK.
16
<PAGE> 27
RISK FACTORS
The following risk factors, in addition to the other information contained
or incorporated by reference in this Joint Proxy Statement/Prospectus, should be
considered by holders of Video Update Common Stock in evaluating whether to
approve the Merger Proposal and the Escrow Proposal and by holders of Moovies
Common Stock in evaluating whether to approve and adopt the Merger Agreement and
thereby become holders of Video Update Common Stock. This Joint Proxy
Statement/Prospectus contains forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of Moovies and Video
Update and those preceded by, followed by or that include the words "believes,"
"expects," "anticipates" or similar expressions. For those statements, Moovies
and Video Update claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Stockholders of both companies should understand that the following important
factors, in addition to those discussed elsewhere in this document and in the
documents incorporated by reference herein, could affect the future results of
Moovies and Video Update, and could cause those results to differ materially
from those expressed in any forward-looking statements: materially adverse
changes in economic conditions in the markets served by each company, a
significant delay in the expected closing of the Merger, lack of consumer
acceptance of new release titles, future regulatory actions and conditions in
each companies' operating areas, competition in the marketplace, and the
operating results of Video Update following the Merger.
RISKS RELATING TO THE MERGER AND ESCROW PROPOSAL
Integration of Operations. Video Update, which is headquartered in
Minnesota, operates 406 video specialty stores in various markets across the
United States and Canada as of January 20, 1998. Video Update also is the
franchisor of 35 stores in five states in the United States and two provinces in
Canada. Moovies, which is headquartered in South Carolina, operates 269 video
specialty stores in various markets (most of which are different from those of
Video Update) across the United States, as of January 20, 1998. Moovies also is
the franchisor of 39 stores in four states. Integrating the operations
(including inventory purchasing, distribution of inventory to stores, marketing
plans and activities, employee hiring and training, and expansion strategy) and
management of the two companies will be a time-consuming process and no
assurance can be given that this integration will result in the achievement of
all of the anticipated synergies and other benefits expected to be realized from
the Merger. Moreover, the integration of these organizations will require the
dedication of management resources, which may distract attention from the
day-to-day business of the combined company. The inability of management to
successfully integrate the operations of the two companies could have a material
adverse effect on the business and operating results of Video Update. See "The
Merger -- Reasons for the Merger; Recommendations of the Boards of Directors."
Merger-Related Charges. Video Update and Moovies estimate that, as a
result of the Merger, the combined company will incur merger related costs
currently estimated to be approximately $11 million which are expected to be
amortized over a period of 20 years. The amount of these charges is a
preliminary estimate and is subject to change. Moreover, additional
unanticipated expenses may be incurred in connection with the integration of the
businesses of Video Update and Moovies. Substantial additional expenses may have
an adverse effect on the combined company's results of operations and financial
condition. Although Video Update expects that the elimination of duplicated
expenses as well as other efficiencies related to the integration of the
businesses may offset additional expenses over time, no assurance can be given
that such net benefit will be achieved in the near term, or at all. See
"Selected Historical and Unaudited Pro Forma Combined Financial Information."
Fixed Conversion Ratio Does Not Reflect Changes in Stock Prices. The
number of shares of Video Update Common Stock into which each share of Moovies
Common Stock is to be converted in the Merger is fixed. The market value of
Video Update Common Stock and/or Moovies Common Stock at the Effective Time of
the Merger may vary significantly from the price as of the date of execution of
the Merger Agreement, the date hereof or the date on which stockholders vote on
the Merger due to, among other factors, market perception of the synergies
expected to be achieved by the Merger, changes in the business, operations or
prospects of Video Update or Moovies, market assessments of the likelihood that
the Merger will be
17
<PAGE> 28
consummated and the timing thereof, and general market and economic conditions.
Because the Exchange Ratio will not be adjusted to reflect changes in the market
value of Video Update Common Stock or Moovies Common Stock, the market value of
the Video Update Common Stock issued in the Merger, and the market value of the
Moovies Common Stock surrendered in the Merger, may be higher or lower than the
value of such shares at the time the Merger was negotiated or approved by
stockholders.
Need for Approval of Lenders. The Merger Agreement provides that each of
Moovies and Video Update must obtain the necessary consents and approvals under
their respective bank credit agreements. Moovies has $49,000,000 outstanding as
of December 31, 1997 under its bank credit agreement; Video Update has
$32,000,000 outstanding as of December 31, 1997 under its bank credit agreement
(the "Line of Credit"). The Line of Credit was executed in February 1997 and is
convertible into a two-year term loan if it is not renewed.
Video Update has retained Banque Paribas (the "Bank") to seek credit
approval to underwrite a senior credit facility to be made available by it and
several other lenders (the "Syndicated Lenders") aggregating up to $125,000,000
(a "Senior Facility") of which approximately $100,000,000 will be available as
term loans and approximately $25,000,000 will be available as a capital
expenditure facility and/or line of credit. The arrangement is not a commitment
letter from the Bank and the Bank has not given any assurances, or made any
representations, that any commitment will be obtained or provided. Moreover, if
a commitment is provided, it may not be for the entire Senior Facility and,
under such circumstances, such commitment will be conditioned upon obtaining
commitments from other financial institutions for the remainder of the Senior
Facility. In addition, any such commitment (whether for all or any portion of
the Senior Facility) would be subject to a variety of preconditions, including,
without limitation, no material adverse change in the business, property,
assets, accounting treatment, liabilities, condition (financial or otherwise) or
prospects of Video Update and its subsidiaries taken as a whole or in the
financial, banking or capital markets for senior syndicated debt financings for
leveraged transactions generally. Any commitment would also be subject to the
negotiation, execution and delivery of definitive credit documentation. No
assurances can be given that a commitment letter will be obtained, that all of
the preconditions set forth in the commitment letter will be satisfied, or that
definitive agreements will be executed at the Effective Time. The approval of
each of Video Update's and Moovies' current bank lenders is a condition to
consummation of the Merger Agreement. Such approvals are not likely to be
obtained unless and until the Senior Facility (or a similar facility) becomes
effective. Accordingly, if definitive agreements for the Senior Facility (or a
similar facility), are not executed at or prior to the Effective Time, the
Merger Agreement will not be consummated.
If the Senior Facility becomes effective, Video Update expects that the
proceeds of the Senior Facility will be used to (i) refinance approximately
$34,000,000 of current outstanding indebtedness of Video Update under the Line
of Credit, (ii) refinance approximately $50,000,000 of indebtedness of Moovies
under Moovies' existing bank credit agreement, (iii) pay transaction fees and
expenses relating to the Merger of approximately $11,000,000, (iv) fund new
store openings and/or additional acquisitions following the closing of the
Merger and (v) fund conversion and integration costs of approximately
$10,000,000 following the Merger. If the Senior Facility (or a similar facility)
becomes effective on the terms set forth in the retainer letter with the Bank,
the Senior Facility is expected to bear interest at variable rates based on the
"base rate" (i.e., the higher of the federal funds rate plus 1/2 of 1% or the
prime commercial lending rate) or the interbank Eurodollar rate (approximately
8 1/2%, and 5 1/4% per annum as of January 20, 1998), respectively plus an
applicable margin rate that could range from 2% to 3 3/4%. In addition, the
Senior Facility (or a similar facility) is expected to include negative,
affirmative and financial covenants customarily found in the Syndicated Lenders'
loan agreements for similar financings and others deemed by such lenders to be
appropriate to this transaction, including, but not limited to, minimum pretax
earnings, minimum free cash flow, minimum net worth, maximum indebtedness,
maximum leverage, minimum fixed charge coverage, a prohibition or restriction on
capital expenditures, debt and guarantees, liens and encumbrances on any
property, mergers, consolidations, investments, advances, diversitures, change
of business or conduct of business, joint ventures, partnerships, the creation
of new subsidiaries, dividends, distributions, repurchases or redemptions of
outstanding stock (including options or warrants), the voluntary prepayment,
repurchase redemption or defeasance of debt, and the acquisition, sale or
transfer, lease or sale-leaseback of assets. The Senior Facility
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(or a similar facility) is expected to involve a pledge of substantially all of
Video Update's and its subsidiaries' assets to secure its obligations
thereunder. The closing of the Merger is not specifically contingent on the
expected terms of the Senior Facility, but rather is contingent upon approval of
the present primary lenders to Video Update and Moovies. Accordingly, if such
approvals can be obtained, the Merger may close, even if the funds utilized to
pay the current lenders are available only on somewhat different terms.
If the Senior Facility (or a similar facility) becomes effective and if
Video Update is unable to maintain its current level of operations after the
Effective Time, it will be required to reduce its overall expenditures and
expansion plans to comply with the covenants and requirements of the Senior
Facility (or such similar facility). Additionally, any failure by Video Update
to maintain its level of operations within the covenants and requirements of the
Senior Facility (or similar facility) could cause Video Update to be in default
thereunder, allowing the Syndicated Lenders (or other lenders) to take legal
action against Video Update, including but not limited to, the immediate
acceleration of payment of borrowed funds, which could materially and adversely
affect Video Update's operations. The immediate acceleration of debt thereunder
or the lack of further borrowing capacity, in whole or in part, would have a
material adverse effect on Video Update's operations and financial condition.
Video Update expects that its cash and cash equivalents, when combined with
those of Moovies and funds available under the Senior Facility (or a similar
facility), will be sufficient to fund the planned store openings and other
operating cash needs of Video Update for at least the next twelve months
following the Merger. However, no assurance can be given that Video Update will
not require additional sources of financing prior to such time, as a result of
unanticipated cash needs or opportunities, an expanded growth strategy or
disappointing operating results. No assurance can be given that the additional
funds required, whether within the next twelve months or thereafter, will be
available on satisfactory terms, if at all.
Charge to Income in the Event of Release of Escrow Shares. Stockholders of
Video Update should note that the Commission has adopted a position with respect
to arrangements such as the Escrow Agreement. The position provides that in the
event any shares are released from escrow to Video Update stockholders who are
officers, directors, consultants or employees of the company, a non-cash
compensation expense will be recorded for financial statement purposes.
Therefore, upon the approval of the Escrow Proposal and the release of the
Escrow Shares, Video Update will recognize a substantial one-time, non-cash,
non-tax deductible charge (estimated at approximately $2.7 million based on an
assumed closing price of the stock on the Effective Date ($2.28 on January 20,
1998) for compensation expense that would have the effect of substantially
reducing or eliminating earnings, if any, at the time of such release with an
offset to paid in capital. Although the amount of compensation expense
recognized by Video Update will not affect its total stockholders' equity or
cash flow, it may have an adverse effect on the market price of Video Update's
securities. See "Video Update -- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Effect of Release of Certain Shares From Escrow. Simultaneously with the
Merger (assuming approval of the Escrow Proposal), 130,000 shares of Class B
Common Stock of the 1,300,000 shares held in escrow will be cancelled and
forfeited. The total remaining 1,870,000 shares of Class B Common Stock (which
includes the 1,170,000 shares of Class B Common Stock released from escrow but
not forfeited) will be converted into an equivalent number of shares of Video
Update Common Stock, which will then possess only 1:1 voting rights. Such
1,170,000 shares will no longer be subject to cancellation pursuant to the terms
of the Escrow Agreement. In addition, the conversion of such shares into shares
of Video Update Common Stock on a 1:1 basis may have a dilutive effect on the
current holders of Video Update Common Stock to the extent that such shares are
no longer subject to forfeiture pursuant to the Escrow Agreement. Absent
approval of the Escrow Proposal, the 1,300,000 shares held in escrow would be
subject to forfeiture on July 31, 1998 unless Video Update achieves certain
financial targets for fiscal 1998 (which management considers unlikely) or for
previous years by means of a transaction accounted for under the pooling of
interests method (for which there are currently no plans). See "Proposal to
Terminate and Cancel the Escrow Agreement."
Dilution From Exercise of Moovies Options and Warrants. Pursuant to the
Merger Agreement, each outstanding option or warrant to purchase Moovies Common
Stock will be converted to an option to purchase
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such number of shares of Video Update Common Stock (rounded down to the nearest
whole number) as is equal to the number of shares of Moovies Common Stock
issuable upon exercise of such options and warrants, immediately prior to the
consummation of the Merger, multiplied by the Exchange Ratio (currently
approximately 1.3 million, based on the Exchange Ratio). The conversion of such
options may have a dilutive effect on the current holders of Video Update Common
Stock. Pursuant to the Merger Agreement, Moovies stock options converted into
Video Update stock options will be registered by Video Update by means of a
registration statement or statements on Form S-8 or a similar filing with the
Securities and Exchange Commission.
Solicitation. Pursuant to the Merger Agreement, Moovies may, but shall not
be obligated to, directly or indirectly, through any officer, director,
employee, financial advisor, representative or agent of such party (i) solicit,
initiate, or encourage any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale or transfer of substantial assets,
sale of any shares of capital stock (including without limitation by way of a
tender offer) or similar transaction involving it or any of its Subsidiaries,
other than the transactions contemplated by the Merger Agreement (any of the
foregoing inquiries or proposals being referred to as an "Acquisition
Proposal"), (ii) engage in negotiations or discussions concerning, or provide
any non-public information to any person or entity relating to, any Acquisition
Proposal, or (iii) agree to or recommend any Acquisition Proposal. Moovies may
accept an Acquisition Proposal and recommend such a proposal to its
stockholders, which would prevent the Merger from being consummated. In such
event, Moovies may terminate the Merger Agreement and pay Video Update a
termination fee of $800,000.
RISKS RELATING TO OPERATIONS
Because of the similar nature of the business of Video Update and Moovies,
the risks set forth below apply to the operations of each company individually
as well as to the operations of the combined company following the Merger.
Expansion. Video Update and Moovies each currently intend to focus on
maximizing the operating efficiencies of existing locations and on opening a
very limited number of new stores in selected locations rather than aggressively
expanding new superstores in additional metropolitan areas where it does not
presently have locations. Expansion is and is expected to remain dependent on a
number of factors, including cash flow, the availability of bank and other
financing resources, the ability to hire, train, retain and assimilate competent
management and store-level employees, the ability to identify new markets in
which to successfully compete, to locate suitable superstore sites and negotiate
acceptable lease terms and to adapt purchasing, management information and other
systems to accommodate expanded operations. Expansion is also dependent on the
timely fulfillment by landlords and others of their contractual obligations, the
maintenance of construction schedules and the speed at which local zoning and
construction permits can be obtained. No assurance can be given that Video
Update following the Merger will be able to undertake any substantial near-term
expansion with new superstores or that such expansion, if possible, will be
profitable. Any expansion following the Merger, including growth through
acquisitions, will place increasing pressure on the management controls of Video
Update. No assurance can be given that the new stores of Video Update following
the Merger will achieve sales or profitability comparable to its existing
stores.
Future Cash Needs. Each of Video Update and Moovies has funded operations
to date through cash from operations, the proceeds of prior equity and debt
offerings, borrowings under bank facilities and trade credit and equipment
leases. Video Update currently expects that the cash and cash equivalents of the
combined company, together with the funds available under the proposed new $125
million credit agreement to be entered into by Video Update upon the closing of
the Merger, will be sufficient to fund operating cash needs for at least the
next twelve months following the Merger. However, no assurance can be given that
these funds will be available in accordance with bank covenant requirements
including, but not limited to, minimum trailing cash flow, or that Video Update
will not require additional sources of financing prior to such time, as a result
of unanticipated cash needs or opportunities, store openings or disappointing
operating results. Also no assurance can be given that the additional funds
required, whether within the next twelve months or thereafter, will be available
on satisfactory terms, if at all.
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Competition. Both Video Update and Moovies operate in a highly competitive
marketplace. Each 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 competitors of
Video Update and Moovies (even as a combined company) have significantly greater
financial and market resources and market share. Many of the Video Update and
Moovies company-owned and franchised stores compete with stores operated by the
Blockbuster Entertainment division of Viacom, Inc. ("Blockbuster"), Hollywood
Entertainment Corporation and Movie Gallery, Inc. some of which are in very
close proximity to Video Update and Moovies stores, which could have an adverse
impact on the results of operations of Video Update following the Merger. The
franchise operations of Video Update and Moovies also compete with numerous
franchise operations in many industries that have significantly greater
financial and human resources and more experience in selling franchises than do
Video Update and Moovies. Potential franchisees may believe that these competing
franchisors may offer potential franchisees greater opportunities for success
than Video Update and Moovies.
Possible Adverse Effect of New Technologies on the Video Rental
Business. Video Update and Moovies also currently compete with pay-per-view
cable and other television systems. Recently developed digital compression
technology combined with fiber optics and other technology 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 Video Update following the Merger.
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 financial condition and results of operations for Video
Update following the Merger. 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 Video Update
following the Merger.
Fluctuations in Quarterly Operating Results. Moovies and Video Update have
experienced in the past, and either company (or, following the Merger, Video
Update) may continue to experience in the future, fluctuations in its quarterly
operating results. No assurance can be given that Video Update will have
positive earnings in any quarter, or that earnings in any particular quarter
will not fall short of either a prior fiscal quarter or investors' expectations.
Factors such as the number of new store openings (newer stores generally are
less profitable than mature stores), weather (particularly on weekends and
holidays), the mix of products rented and sold, pricing actions of competitors,
special or unusual events affecting retailers in general, the level of
advertising and promotional expenses, seasonality, and one-time charges
associated with acquisitions or other events could contribute to quarterly
variability in operating results. In addition, both companies' expense levels
are based in part on expectations of future sales levels, and a shortfall in
expected sales could therefore result in a disproportionate decrease in net
income.
Consumer acceptance of new release movie titles. Each of Video Update and
Moovies depends significantly on availability and consumer acceptance of new
release videocassette titles available for rental. To the extent that available
new release titles fail to stimulate consumer interest and retail traffic,
operating results could be materially adversely affected.
Management of Growth. The business of both Video Update and Moovies,
including sales, number of stores and number of employees, has grown
dramatically over the past several years. In addition, each company has
consummated a number of significant acquisitions in the last few years, and may
make additional acquisitions in the future. This internal growth, together with
the acquisitions made, have resulted in integration costs and placed significant
demand on the management and operational systems of both companies. To manage
its growth effectively following the Merger, Video Update will be required to
continue
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to upgrade its operational and financial systems, expand its management team and
increase and manage its employee base.
No assurance can be given that Video Update will successfully integrate
Moovies' operations and personnel into existing Video Update operations. No
assurance can be given that the integration of Moovies' operations will not have
a material adverse effect upon Video Update's operating results, particularly in
the fiscal quarters immediately following the Merger, while the operations of
the Moovies stores are being integrated into Video Update's operations. Once
integrated, acquired operations may not achieve levels of revenues or
profitability comparable to those achieved by Video Update's existing operations
prior to the Merger, or otherwise perform as expected.
Supplier Agreement With Rentrak Corporation. In connection with the
signing of the Merger Agreement, Video Update also has executed an agreement
(the "Rentrak Agreement") with Rentrak Corporation ("Rentrak"), a distributor of
prerecorded videocassettes and other media, which agreement will be effective
only upon the closing of the Merger. Under the Rentrak Agreement, Video Update
will be obligated to obtain a minimum annual dollar amount of new release titles
from Rentrak. The minimum dollar amount is subject to increase or decrease
depending on Video Update's gross revenues from video sales/rentals and the
number of major studios participating in Rentrak.
Under the Rentrak Agreement, Video Update would choose which stores offer a
title from Rentrak, but if a store obtains a copy of a new release title from
Rentrak it would have to obtain all copies of that title from Rentrak. Video
Update believes that Rentrak could be a cost effective source for larger orders
of an individual title. Using Rentrak could enable Video Update to order larger
numbers of copies of a particular title to satisfy customer demand than would be
cost-effective if the copies were purchased for rental. When Video Update
chooses to offer a title under the Rentrak Agreement a minimum number of copies
for each store is often established by Rentrak based on prior experience with
similar titles. Video Update expects to be able to obtain a wide variety of
titles under the Rentrak Agreement because Rentrak has a supplier relationship
with three of the six largest studios.
To obtain the full benefits of the Rentrak Agreement, Video Update must
correctly identify the new release and other titles that it should lease from
Rentrak and the stores that should receive them. To the extent that Video Update
obtains new releases or other video products from Rentrak for too many or the
wrong stores, Video Update's operations and profits could be adversely affected.
No assurances can be given that Video Update will be effective in using Rentrak
as a supplier under the Rentrak Agreement to achieve its intended results. See
"Video Update, Inc. -- Business -- Suppliers."
Franchise Sales. The sale of franchises is regulated by various state laws
as well as by the Federal Trade Commission (the "FTC"). The FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. A number of states require registration or disclosure in
connection with franchise offers and sales. In addition, several states have
"franchise relationship laws" or "business opportunity laws" that limit the
ability of franchisors to terminate franchise agreements or to withhold consent
to the renewal or transfer of these agreements. While the franchising operations
are not materially adversely affected, to date, by such existing regulations,
the management of Video Update and Moovies cannot predict the effect any future
legislation or regulation may have on its business operations or financial
condition.
Retention of Employees. The success of the combined company after the
Merger will depend in part upon the retention of key employees of Video Update
and Moovies. Competition for qualified personnel in the video rental industry is
very intense. Stock options, which generally become exercisable only over a
period of several years of employment, serve as an important incentive for
retaining key employees. The stock options held by most Moovies optionees will
become fully exercisable upon the consummation of the Merger, thus potentially
reducing the retention incentive provided by such options. See "The
Merger -- Interests of Certain Persons in the Merger -- Moovies Stock Options
and Warrants." Although each of Video Update and Moovies is engaged in ongoing
efforts to retain key employees, retaining such employees after the Merger may
be more difficult.
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Volatility of Stock Price. The market prices of Video Update Common Stock
and Moovies Common Stock have been, and the market price for Video Update Common
Stock may continue to be, extremely volatile. In addition, prices of stocks of
companies in the video store industry (including Moovies and Video Update) have
been subject to a generally declining trend for approximately the past 20
months. Factors such as new product announcements by Video Update, Moovies or
the combined company or their respective competitors, quarterly fluctuations in
operating results, challenges associated with integration of business and
general conditions in the data networking market may have a significant impact
on the market price of Video Update Common Stock or Moovies Common Stock. These
conditions, as well as factors which generally affect the market for stocks of
retail companies, could cause the price of Video Update Common Stock or Moovies
Common stock to fluctuate substantially.
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THE VIDEO UPDATE SPECIAL MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of
Video Update Common Stock in connection with the solicitation of proxies by the
Video Update Board of Directors for use at the Video Update Special Meeting to
be held on February __, 1998, at the offices of Video Update, World Trade
Center, 30 East Seventh Street, St. Paul, Minnesota 55101, commencing at 9:00
a.m., local time, and at any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Video Update on or about January ,
1998.
MATTERS TO BE CONSIDERED
At the Video Update Special Meeting, holders of Video Update Common Stock
will be asked to consider and vote upon:
(i) the issuance of shares of Video Update Common Stock in exchange
for shares of Moovies Common Stock including in connection with the
conversion of all outstanding Moovies stock options under the Moovies 1995
Stock Plan, and warrants, pursuant to the Merger Agreement (the "Merger
Proposal");
(ii) the termination and cancellation of the Escrow Agreement, dated
July 20, 1994, by and among American Stock Transfer & Trust Company, Video
Update and certain stockholders of Video Update (the "Escrow Proposal");
(iii) the election of seven (7) members of the Board of Directors;
(iv) the ratification of the selection of Ernst & Young LLP as
independent auditors for the Company for the fiscal year ending April 30,
1998;
(v) to consider and vote upon a proposal to approve the Video Update
1998 Stock Option Plan providing for the issuance of up to 1,750,000
shares; and
(vi) such other matters as may properly be brought before the Video
Update Special Meeting, or any adjournment or postponement thereof.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors of Video Update has unanimously approved the Merger
Proposal, the Escrow Proposal (with Messrs. Potter, Bedard and Howard
abstaining), the ratification of the selection of Ernst & Young LLP and the Plan
Proposal and recommends a vote FOR approval of such proposals. The Board of
Directors recommends a vote FOR the election of each of the following director
nominees ("Director Nominees"): Daniel A. Potter, John M. Bedard, Daniel C.
Howard, Paul M. Kelnberger, Robert Yager, Jana Webster Vaughn and Bernard
Patriacca. If the Merger is consummated, at the Effective Time, the Board of
Directors of Video Update will be comprised of five current members of the Video
Update Board and the two Moovies Designees. Mr. Yager and Ms. Vaughn, currently
Video Update Directors, have agreed to resign at or immediately following the
Effective Time. See "Proposal For Election of Directors."
RECORD DATE AND VOTING
Video Update has fixed January 21, 1998 as the record date for the
determination of the Video Update stockholders entitled to notice of and to vote
at the Video Update Special Meeting. Accordingly, only holders of record of
Video Update Common Stock and Video Update Class B Common Stock on the record
date will be entitled to notice of and to vote at the Video Update Special
Meeting. As of January 21, 1998, there were outstanding and entitled to vote
18,104,591 shares of Video Update Common Stock, which shares were held by
approximately 161 holders of record and 2,000,000 shares of Video Update Class B
Common Stock, which shares were held by 5 holders of record. Each holder of
record of shares of Video Update Common Stock on the record date is entitled to
one vote per share, which may be cast either in person or by properly executed
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proxy, at the Video Update Special Meeting. Each holder of shares of Video
Update Class B Common Stock on the record date is entitled to five votes per
share, which may be cast either in person or by properly executed proxy, at the
Video Update Special Meeting. The presence, in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of Video Update
Common Stock and Video Update Class B Common Stock entitled to vote at the Video
Update Special Meeting is necessary to constitute a quorum at the Video Update
Special Meeting, provided, that the shares present must represent at least one-
third of the votes entitled to be cast. Pursuant to the Escrow Agreement, none
of Daniel A. Potter, Video Update's Chairman and Chief Executive Officer, John
Bedard, Video Update's President nor Daniel Howard, Video Update's Chief
Operating Officer, will vote any of their beneficially owned shares of Video
Update Common Stock or Video Update Class B Common Stock (which include all of
the Class B shares outstanding) on or for the Escrow Proposal.
The approval of the Merger Proposal will require the affirmative vote of
the holders of shares of Video Update Common Stock and Video Update Class B
Common Stock (voting together as a single class) representing a majority of the
votes cast on the proposal. The approval of the Escrow Proposal will require the
affirmative vote of the holders of a majority of the shares of Video Update
Common Stock outstanding on the record date excluding any shares of Video Update
Common Stock or Video Update Class B Common Stock held by Daniel A. Potter, John
M. Bedard and Daniel Howard. The election of directors will require votes
representing a plurality of votes cast. The ratification of the selection of
Ernst & Young LLP will require the affirmative vote of the holders of shares of
Video Update Common Stock and Video Update Class B Common Stock (voting together
as a single class) representing a majority of the votes cast on the proposal.
The approval of the Plan Proposal will require the affirmative vote of the
holders of shares of Video Update Common Stock and Video Update Class B Common
Stock (voting together as a single class) representing a majority of shares
present, or represented, and entitled to vote at the Special Meeting. The
approval of the issuance of shares of Video Update Common Stock pursuant to the
Merger is required by the rules of the National Association of Securities
Dealers, Inc. governing corporations with securities listed on the Nasdaq
National Market. The approval of the Escrow Proposal is a condition to the
approval of the Merger Proposal and the consummation of the Merger. See "The
Merger -- Background of the Merger and Related Agreements." Neither the election
of directors, the ratification of the selection of Ernst & Young LLP nor the
approval of the Plan Proposal is a condition to the consummation of the Merger.
Shares of Video Update Common Stock and Video Update Class B Common Stock
represented in person or by proxy will be counted for the purpose of determining
whether a quorum is present at the Video Update Special Meeting. Shares which
abstain from voting as to a particular matter will be treated as shares that are
present at the Video Update Special Meeting for purposes of determining whether
a quorum exists, but will not be counted as votes cast on such matter provided,
however, that such shares will be counted as shares entitled to vote at the
meeting for purposes of the Plan Proposal. If a broker or nominee holding stock
in "street name" indicates on a proxy that it does not have discretionary
authority to vote as to a particular matter ("broker non-votes"), those shares
will be treated as present at the Video Update Special Meeting for purposes of
determining whether a quorum exists, but will not be counted as votes cast on
such matter and will not be treated as entitled to vote for purposes of the Plan
Proposal. Accordingly, in determining whether the Merger Proposal, the election
of directors, the ratification of the selection of Ernst & Young LLP and the
Plan Proposal have received the requisite number of affirmative votes,
abstentions and broker non-votes will have no effect; and in determining whether
the Escrow Proposal has received the requisite number of affirmative votes,
abstentions and broker non-votes will have the same effect as a vote against the
Escrow Proposal. Pursuant to the Escrow Agreement, no shares held by Messrs.
Potter, Bedard and Howard will be counted in determining whether the Escrow
Proposal receives the requisite number of affirmative votes.
As of January 21, 1998, directors and executive officers of Video Update
and their affiliates hold approximately 2.8% of the outstanding shares of Video
Update Common Stock and 100% of the outstanding shares of Class B Common Stock.
Each of the directors and officers of Video Update has advised Video Update that
he or she intends to vote all of his shares of Video Update Common Stock or
Video Update Class B Common Stock over which he or she has voting control in
favor of the election of directors, the ratification of the selection of Ernst &
Young LLP and the Plan Proposal. Each of the directors and certain
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executive officers of Video Update also has executed a Voting Agreement, dated
October 27, 1997, in which he or she has agreed to vote or direct the vote of
all shares of Video Update Common Stock and Video Update Class B Common Stock
over which he or she has voting control for approval of the Merger Proposal and
the Escrow Proposal, except that none of Daniel A. Potter, Video Update's
Chairman and Chief Executive Officer, John Bedard, Video Update's President nor
Daniel Howard, Video Update's Chief Operating Officer, will vote any shares of
Video Update Common Stock or Video Update Class B Common Stock under his voting
control on or for the Escrow Proposal. See "Video Update, Inc. -- Security
Ownership of Certain Beneficial Owners and Management."
PROXIES
This Joint Proxy Statement/Prospectus is being furnished to Video Update
stockholders in connection with the solicitation of proxies by and on behalf of
the Board of Directors of Video Update for use at the Video Update Special
Meeting, and is accompanied by a form of proxy.
All shares of Video Update Common Stock and Video Update Class B Common
Stock that are entitled to vote and are represented at the Video Update Special
Meeting by properly executed proxies received prior to or at such Meeting, and
not revoked, will be voted at the Meeting in accordance with the instructions
indicated on such proxies. If no instructions are indicated (other than in the
case of broker non-votes), such proxies will be voted for approval of the Merger
Proposal, the Escrow Proposal, the Plan Proposal, the election of the Director
Nominees, and the ratification of the appointment of Ernst & Young LLP as
independent auditors.
If any other matters are properly presented at the Video Update Special
Meeting for consideration, including, among other things, consideration of a
motion to adjourn such Meeting to another time and/or place, the persons named
in the enclosed forms of proxy and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment.
In the event that there are not sufficient votes to approve the issuance of
Video Update Common Stock in the Merger at the time of the Video Update Special
Meeting, such proposal could not be approved unless the Video Update Special
Meeting were adjourned to permit further solicitation of proxies from Video
Update stockholders. Proxies that are being solicited by the Video Update Board
grant the discretionary authority to vote for any such adjournment. If it is
necessary to adjourn the Video Update Special Meeting, and such adjournment is
for a period of less than 30 days, no notice of the time and place of the
adjourned meeting is required to be given to Video Update stockholders other
than the announcement of such time and place at the Video Update Special
Meeting. A majority of the voting power represented and voting at the Video
Update Special Meeting is required to approve such adjournment whether or not a
quorum is present at the Video Update Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Video Update, at or before the taking of the vote at the
Video Update Special Meeting, a written notice of revocation bearing a later
date than the proxy, (ii) duly executing a later dated proxy relating to the
same shares and delivering it to the Secretary of Video Update before the taking
of the vote at the Video Update Special Meeting or (iii) attending the Video
Update Special Meeting and voting in person (although attendance at the Video
Update Special Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent to
Video Update, Inc., 3100 World Trade Center, 30 East Seventh Street, St. Paul,
Minnesota 55101, Attention: Secretary, or hand delivered to the Secretary of
Video Update at or before the taking of the vote at the Video Update Special
Meeting.
All expenses of Video Update's solicitation of proxies, including the cost
of preparing and mailing this Joint Proxy Statement/Prospectus to Video Update
stockholders, will be borne by Video Update. In addition to solicitation by use
of the mails, proxies may be solicited from Video Update stockholders by
directors, officers and employees of Video Update in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Video Update has
retained McCor-
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mick & Pryor, Ltd., a proxy solicitation firm, for assistance in connection with
the solicitation of proxies for the Video Update Special Meeting at a cost of
approximately $6,500 plus reimbursement of reasonable out-of-pocket expenses.
Arrangements will also be made with brokerage houses, custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such brokerage houses, custodians, nominees and
fiduciaries, and Video Update will reimburse such brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in connection
therewith.
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THE MOOVIES SPECIAL MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of
Moovies Common Stock in connection with the solicitation of proxies by the
Moovies Board of Directors for use at the Moovies Special Meeting to be held on
February __, 1998, at the Greenville Hyatt Regency, 220 North Main Street,
Greenville, South Carolina 29601, commencing at 10:00 a.m., local time, and at
any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Moovies on or about January , 1998.
MATTERS TO BE CONSIDERED
At the Moovies Special Meeting, holders of Moovies Common Stock will be
asked to consider and vote upon a proposal to approve and adopt the Merger
Agreement and such other matters as may properly be brought before the Moovies
Special Meeting, or any adjournment or postponement thereof.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors of Moovies has unanimously approved the Merger
Agreement and recommends a vote FOR approval and adoption of the Merger
Agreement.
RECORD DATE AND VOTING
The Moovies Board of Directors has fixed January 21, 1998 as the record
date for the determination of the Moovies stockholders entitled to notice of and
to vote at the Moovies Special Meeting. Accordingly, only holders of record of
shares of Moovies Common Stock at the close of business on the record date will
be entitled to notice of and to vote at the Moovies Special Meeting. As of
January 21, 1998, there were outstanding and entitled to vote 12,398,352 shares
of Moovies Common Stock (constituting all of the voting stock of Moovies), which
shares were held by approximately 295 holders of record. Each holder of record
of shares of Moovies Common Stock on the record date is entitled to one vote per
share, which may be cast either in person or by properly executed proxy, at the
Moovies Special Meeting. The presence, in person or by properly executed proxy,
of the holders of a majority of the outstanding shares of Moovies Common Stock
entitled to vote at the Moovies Special Meeting is necessary to constitute a
quorum at the Moovies Special Meeting.
The approval and adoption of the Merger Agreement will require the
affirmative vote of the holders of a majority of the shares of Moovies Common
Stock outstanding on the record date.
Shares of Moovies Common Stock represented in person or by proxy will be
counted for the purpose of determining whether a quorum is present at the
Moovies Special Meeting. Shares which abstain from voting as to a particular
matter, and shares held by a broker or nominee in "street name" which indicates
on a proxy that it does not have discretionary authority to vote as to a
particular matter, will be treated as shares that are present and entitled to
vote at the Moovies Special Meeting for purposes of determining whether a quorum
exists. Because the Merger Agreement must be approved by the holders of a
majority of the shares of Moovies Common Stock outstanding on the record date,
abstentions and broker non-votes will have the same effect as a vote against the
Merger Agreement.
As of January 20, 1998, directors and executive officers of Moovies and
their affiliates may be deemed to have or share beneficial ownership of
approximately 16.3% of the outstanding shares of Moovies Common Stock. Each of
the directors of Moovies has executed a Voting Agreement, dated October 27,
1997, in which he has agreed to vote or direct the vote of all shares of Moovies
Common Stock over which he or she has or shares voting control for approval and
adoption of the Merger Agreement. See "Moovies, Inc. -- Security Ownership of
Certain Beneficial Owners and Management."
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PROXIES
This Joint Proxy Statement/Prospectus is being furnished to Moovies
stockholders in connection with the solicitation of proxies by and on behalf of
the Board of Directors of Moovies for use at the Moovies Special Meeting, and is
accompanied by a form of proxy.
All shares of Moovies Common Stock which are entitled to vote and are
represented at the Moovies Special Meeting by properly executed proxies received
prior to or at such Meeting, and not revoked, will be voted at the Meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated (other than in the case of broker non-votes), such proxies will be
voted for approval and adoption of the Merger Agreement.
If any other matters are properly presented at the Moovies Special Meeting
for consideration, including, among other things, consideration of a motion to
adjourn such Meeting to another time and/or place, the persons named in the
enclosed forms of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
In the event that there are not sufficient votes to approve and adopt the
Merger Agreement at the time of the Moovies Special Meeting, such proposal could
not be approved unless the Moovies Special Meeting were adjourned in order to
permit further solicitation of proxies from Moovies stockholders. Proxies that
are being solicited by the Moovies Board grant the discretionary authority to
vote for any such adjournment. If it is necessary to adjourn the Moovies Special
Meeting, and such adjournment is for a period of less than 30 days, no notice of
the time and place of the adjourned meeting is required to be given to Moovies
stockholders other than the announcement of such time and place at the Moovies
Special Meeting. A majority of the voting power represented and voting at the
Moovies Special Meeting is required to approve any such adjournment whether or
not a quorum is present at the Moovies Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Moovies, at or before the taking of the vote at the
Moovies Special Meeting, a written notice of revocation bearing a later date
than the proxy, (ii) duly executing a later dated proxy relating to the same
shares and delivering it to the Secretary of Moovies before the taking of the
vote at the Moovies Special Meeting or (iii) attending the Moovies Special
Meeting and voting in person (although attendance at the Meeting will not in and
of itself constitute a revocation of a proxy). Any written notice of revocation
or subsequent proxy should be sent to Moovies, Inc., 201 Brookfield Parkway,
Greenville, South Carolina 29607, Attention: Secretary, or hand delivered to the
Secretary of Moovies at or before the taking of the vote at the Moovies Special
Meeting.
All expenses of Moovies' solicitation of proxies, including the cost of
mailing this Joint Proxy Statement/ Prospectus to Moovies stockholders, will be
borne by Moovies. In addition to solicitation by use of the mails, proxies may
be solicited from Moovies stockholders by directors, officers and employees of
Moovies in person or by telephone, telegram or other means of communication.
Such directors, officers and employees will not be additionally compensated, but
may be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Moovies has retained McCormick & Pryor, Ltd., a proxy solicitation
firm, for assistance in connection with the solicitation of proxies for the
Moovies Special Meeting at a cost of approximately $6,500 plus reimbursement of
reasonable out-of-pocket expenses. Arrangements will also be made with brokerage
houses, custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
brokerage houses, custodians, nominees and fiduciaries, and Moovies will
reimburse such brokerage houses, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection therewith.
MOOVIES STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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THE MERGER
BACKGROUND OF THE MERGER AND RELATED AGREEMENTS
During October 1996 representatives of Moovies and Video Update had
conversations regarding the possibility of a business combination involving the
two companies. These discussions were tentative in nature, did not result in any
agreement between the parties and were terminated within a few weeks.
In April 1997, certain members of Moovies' management contacted Video
Update to explore the possibility of a strategic transaction with Moovies,
including the possible acquisition by Moovies of Video Update and vice versa, as
further described below. In May 1997, Video Update and Moovies entered into a
confidentiality agreement for the purpose of permitting the exchange of certain
information between the parties.
During the first weeks of May 1997, representatives and advisors of Video
Update and representatives and advisors of Moovies had several telephone
conversations to exchange information and to discuss the feasibility of,
structure of and strategic rationale for a business combination involving the
two companies. On May 19, 1997, Video Update retained Piper Jaffray, Inc.
("Piper Jaffray") as financial advisor with respect to this potential
transaction with Moovies. On May 21, 1997, Moovies retained Needham & Company,
Inc. ("Needham") as financial advisor with respect to this potential strategic
transaction with Video Update. In late May 1997, representatives and advisors of
Video Update and Moovies had one meeting to discuss the feasibility and
structure of a potential business combination.
In early June 1997, Video Update made a proposal to Moovies concerning a
strategic merger in which Video Update would be the parent of the surviving
company. During the first half of June, a series of discussions ensued between
financial advisors of the companies regarding the Video Update proposal. On or
about June 3, 1997, Video Update's representatives and advisors and Moovies'
representatives and advisors met to discuss the structure of a possible
strategic merger, a range of possible exchange ratios (the number of shares of
Video Update Common Stock to be issued in the merger in exchange for each share
of Moovies Common Stock) and other terms, including the requirement of Moovies
that all Video Update Class B Common Stock be converted into Video Update Common
Stock, which would carry 1:1 rather than 5:1 voting rights. At the end of this
meeting, management of both Video Update and Moovies determined that it was
advisable to convene meetings of their respective Boards of Directors and
instruct their respective counsel to begin to prepare documentation for a
strategic business combination.
From approximately June 2, 1997 through July 7, 1997, Video Update and
Moovies and their respective advisors proceeded with work on, and held a series
of meetings and discussions regarding, a merger agreement (the "Original Merger
Agreement"), and related documents, the consents or approval of landlords,
suppliers and other third parties, and the financial, legal and accounting "due
diligence" investigation of the respective companies. During this time, Moovies
began a series of discussions with Rentrak Corporation, a supplier of
prerecorded videocassettes and other products ("Rentrak"). Moovies previously
entered into a contract with Rentrak which required, the consent of Rentrak in
connection with the merger of Moovies with any third party. Simultaneously,
Video Update entered into separate negotiations with Rentrak for a supply
contract that would be effective at the Effective Time and supersede any
agreement between Rentrak and Moovies. During this period, representatives and
advisors of Video Update and Moovies also held several meetings to negotiate the
principal business terms of the Merger, including the exchange ratio. On or
about July 1 and 2, 1997, representatives of Moovies and Video Update agreed in
principle on an exchange ratio of 1.1 shares of Video Update Common Stock for
each share of Moovies Common Stock (the "Original Exchange Ratio").
Following the agreement in principle on the Original Exchange Ratio, each
of the directors and certain officers of Video Update and Moovies discussed the
proposed terms of a voting agreement (the "Original Voting Agreement"), under
which such directors and officers would agree to vote their shares of Video
Update Common Stock or Moovies Common Stock, as the case may be, in favor of the
Merger and the transactions contemplated thereby.
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During the first three weeks of June 1997, Video Update's Board of
Directors, through directors Paul Kelnberger and Jana Vaughn and its Chairman
and Chief Executive Officer Daniel A. Potter and its President John M. Bedard
met to discuss the feasibility, structure and rationale for the Escrow Proposal
and an undertaking agreement (the "Original Undertaking Agreement"), which were
developed in response to the requirement imposed by Moovies under the proposed
Original Merger Agreement that all shares of Video Update Class B Common Stock
be converted as of the Effective Time into Video Update Common Stock, which
would carry 1:1 rather than 5:1 voting rights. Pursuant to these discussions,
Messrs. Potter, Bedard and Howard agreed to convert the shares of Video Update
Class B Common Stock, and thereby forfeit their preferential voting rights, only
if the Escrow Agreement were terminated and the Escrow Shares released from
escrow. Video Update's Board of Directors on behalf of Video Update and Messrs.
Potter, Bedard and Howard, as parties to the Escrow Agreement, reached an
agreement in principle on the terms of the Original Undertaking Agreement during
the last week of June 1997, subject to discussions with D.H. Blair Investment
Banking Corp. ("Blair").
During the last week of June 1997, Video Update contacted Blair regarding
its consent to termination and cancellation of the Escrow Agreement, which
consent -- in addition to the approval of the holders of Video Update Common
Stock (excluding any shares held by Messrs. Potter, Bedard or Howard) -- is
required for such termination or cancellation. Blair advised Video Update that
it would provide its consent to the termination and cancellation of the Escrow
Agreement, but that such consent would be effective only upon the effectiveness
of the Original Undertaking Agreement at the Effective Time and the issuance of
a fairness opinion on the Original Undertaking Agreement. Moreover, Blair
advised Video Update that its consent is being provided solely for purposes of
allowing the holders of Video Update Common Stock (excluding any of such shares
held by Messrs. Potter, Bedard or Howard) to vote on the Escrow Proposal and
should not be considered or construed as an approval by Blair or an opinion of
Blair as to the fairness of the Escrow Proposal or the Original Undertaking
Agreement to Video Update or its stockholders.
On or about July 2, 1997, Video Update contacted Asensio & Company, Inc.
("Asensio & Company"), an investment banking firm not affiliated with Video
Update or Moovies or any of their respective directors or officers, to render a
fairness opinion on the Original Undertaking Agreement. Video Update retained
Asensio & Company on July 2, 1997 as its financial advisor as to the fairness of
the Original Undertaking Agreement.
At meetings of the Video Update Board held on May 27, 1997 and June 9, 12,
and 30, 1997 and July 3, 1997, the Video Update directors discussed with Video
Update's management and legal advisors the status of the Merger discussions with
Moovies, as well as the proposed terms of the Merger and the effects of the
Merger on Video Update and the combined companies. See "The Merger -- Reasons
for the Merger; Recommendations of the Boards of Directors." On July 7, 1997,
Video Update and Rentrak reached an agreement in principle on the terms of a
supply/revenue sharing agreement that would be effective at and upon the
Effective Time and supersede previous agreements with Moovies. The Video Update
Board met on the afternoon and later again in the evening of July 7, 1997, at
which meetings the proposed terms of the Original Merger Agreement, including
the Escrow Proposal, were discussed, Video Update management and financial
advisors made presentations concerning the Merger and Piper Jaffray delivered
its oral opinion that, as of such date, the Original Exchange Ratio was fair
from a financial point of view to the holders of Video Update Common Stock.
Asensio & Company, Inc. delivered its oral opinion that, as of such date, the
terms and conditions of the Original Undertaking Agreement relating to the
Escrow Proposal, were fair from a financial point of view to Video Update's
stockholders. The Video Update Board also considered and approved the terms of
the supply/revenue sharing agreement with Rentrak Corporation. At such meetings,
the Video Update Board also unanimously approved the Original Merger Agreement
and the issuance of shares of Video Update Common Stock pursuant to such
Original Merger Agreement (using the Original Exchange Ratio) and unanimously
recommended that the holders of Video Update Common Stock vote in favor of (i)
the Merger Proposal, and (ii) the Escrow Proposal (with Messrs. Potter, Bedard
and Howard abstaining).
At meetings of the Moovies Board held on June 16, and 18, and July 1, 1997,
the Moovies directors discussed with Moovies' management and legal and financial
advisors the status of the Merger discussions with Video Update, as well as the
proposed terms of the Original Merger Agreement and the effects of the Merger on
Moovies and the combined companies. See "The Merger -- Reasons for the Merger;
Recommen-
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dations of the Boards of Directors." The Moovies Board met again on July 2, 1997
at which meeting the proposed terms of the Original Merger Agreement were
discussed, Moovies' management and advisors made presentations concerning the
Merger and Needham delivered its oral opinion that, as of such date and based
upon and subject to the factors and assumptions set forth therein, the Original
Exchange Ratio was fair to the holders of Moovies Common Stock from a financial
point of view. At such meeting, the Moovies Board unanimously approved the
Original Merger Agreement and unanimously recommended that the holders of
Moovies Common Stock vote in favor of the approval and adoption of such Original
Merger Agreement. On or about July 8 or 9, 1997, Moovies reached an agreement in
principle for an amendment to its contract with Rentrak pursuant to which
Rentrak would provide its consent to Moovies' entering into the Original Merger
Agreement.
On July 8 and 9, 1997, following the approval of the Original Merger
Agreement and related matters by the respective Boards of Directors of Video
Update and Moovies, (i) Video Update and Moovies finalized, executed and
delivered the Original Merger Agreement and related documents, (ii) Video
Update, Moovies, and the directors and certain officers of Video Update and
Moovies finalized, executed and delivered the Original Voting Agreement, and
(iii) Video Update, Moovies, and Messrs. Potter, Bedard, and Howard finalized,
executed and delivered the Original Undertaking Agreement. Also on July 8 and 9,
1997 Video Update and Moovies each finalized their respective agreements with
Rentrak Corporation. A joint public announcement of the Merger was made by the
parties on the afternoon of July 9, 1997.
Following the execution of the Original Merger Agreement, during the last
three weeks of July 1997 and the first three weeks of August 1997,
representatives of Video Update and Moovies and their respective legal,
accounting and financial advisors proceeded with work on and held a series of
discussions on the various legal documents and regulatory filings necessary to
consummate the Merger. Representatives from Video Update and Moovies also
requested information from each other as part of their respective continuing
"due diligence" analysis of the other company.
During September 1997 and for the first two weeks of October 1997, after
receiving operating results for both companies that did not meet earlier
projections, representatives and advisors of Video Update and Moovies held a
series of "due diligence" in-person meetings and discussions about their
respective operating results, financial condition and prospects. Following these
discussions during the second week of October 1997, representatives and advisors
of Video Update and Moovies met to discuss and negotiate possible changes to the
principal business terms of the Merger, including the Original Exchange Ratio
and termination or "breakup" fees. On or about October 20 and 21, 1997,
representatives of Moovies and Video Update agreed in principle to the terms of
a proposed amendment to the Original Merger Agreement (hereinafter referred to
as the "Amendment"); (the Amendment, together with the Original Merger
Agreement, is referred to herein as the "Merger Agreement"). As a result of the
changes proposed in the Amendment, the Original Undertaking Agreement and the
Original Voting Agreement were amended and restated to reflect such Amendment.
The Original Voting Agreement was also amended to remove Christopher J. Gondeck,
Chief Financial Officer of Video Update at the time, as a signatory, at his
request. (The Original Undertaking Agreement, as amended, is herein referred to
as the "Undertaking Agreement" and the Original Voting Agreement, as amended, is
herein referred to as the "Voting Agreement.")
During the week of October 20, 1997, Video Update contacted (i) Blair
regarding its consent to the termination and cancellation of the Escrow
Agreement, given the proposed amendments to the Original Undertaking Agreement,
and (ii) Asensio and Company regarding an update of its opinion of July 9, 1997
with respect to the Undertaking Agreement. Blair advised Video Update that it
would renew its consent of July 1997.
At a meeting of the Video Update Board held on October 23, 1997, the Video
Update directors discussed with Video Update's management and legal and
financial advisors the status of and proposed terms for the Amendment. Video
Update management and advisors made presentations concerning the proposed
Amendment and Piper Jaffray delivered its oral opinion that, as of such date,
the Exchange Ratio of .75 was fair from a financial point of view to the holders
of Video Update Common Stock. Asensio & Company delivered its oral opinion that,
as of such date, the terms and conditions of the amended Undertaking Agreement
were fair
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from a financial point of view to Video Update's stockholders. At this meeting,
the Video Update Board unanimously approved the Amendment and recommended that
the holders of Video Update Common Stock vote in favor of (i) the Merger
Proposal and (ii) the Escrow Proposal and the related Undertaking Agreement
(with Messrs. Potter, Bedard and Howard abstaining). Piper Jaffray delivered a
written opinion dated October 23, 1997 that confirmed its oral opinion of that
date and Asensio & Company delivered a written opinion dated as of October 27,
1997 that confirmed its oral opinion of October 23, 1997.
On October 15, 1997, the Moovies Board convened a conference call meeting
and received a report from Mr. Mitchell as to the proposed changes to the
principal business terms of the Merger, including the Original Exchange Ratio
and termination or "breakup" fees. Based on input from the directors who were
present, Mr. Mitchell conveyed to Video Update the Moovies Board's concerns
regarding the proposed changes to the Original Merger Agreement. On October 16,
1997, at the request of Daniel Potter, Video Update's Chairman and Chief
Executive Officer, the Moovies Board convened and met with Mr. Potter to review
the proposed changes to the principal business terms of the Original Merger
Agreement and to allow him to answer questions. Video Update and Moovies then
negotiated additional changes to the Original Merger Agreement. On October 21,
1997, the Moovies Board met and approved in general the terms of the Amendment
by a vote of four to three. Further discussions between representatives of
Moovies and Video Update ensued, and the specific terms of the Amendment were
agreed upon in principle. The Moovies Board met again on October 27, 1997, and
discussed with Moovies management, legal and financial advisors the terms of the
Amendment. Management made presentations concerning the Merger and the due
diligence information exchanged by Moovies and Video Update. Needham
representatives were available to answer questions, but informed the Moovies
Board that they were awaiting further financial information before the fairness
opinion could be finalized. On October 27, 1997, the Moovies Board unanimously
approved the execution of the Amendment, with such approval conditioned upon
receipt of an acceptable fairness opinion from Needham. On October 30, 1997,
Needham delivered its oral opinion, that, as of such date and subject to the
factors and assumptions set forth therein, the Exchange Ratio of .75 was fair to
the holders of Moovies Common Stock from a financial point of view. See "The
Merger -- Opinions of Financial Advisors -- Opinion of Financial Advisor to
Moovies."
From October 23 through October 27, 1997, following approval of the
proposed Amendment and related matters by the respective Boards of Directors of
Video Update and Moovies, (i) Video Update and Moovies finalized and executed
the Amendment and related documents, (ii) Video Update, Moovies, and the
directors and certain officers of Video Update and Moovies finalized, executed
and delivered the Voting Agreement, and (iii) Video Update, Moovies, and Messrs.
Potter, Bedard and Howard finalized, executed and delivered the Undertaking
Agreement. On October 30, 1997, after Needham confirmed its fairness opinion,
Video Update and Moovies delivered the Amendment and related documents. A joint
public announcement of the Amendment was made by the parties after the close of
the market on October 30, 1997.
From October 30, 1997 through the first three weeks of December 1997,
representatives of Video Update and Moovies held several in person meetings and
their respective legal, accounting and financial advisors consulted by telephone
to discuss and to continue the preparation of the legal and regulatory filings
required to consummate the Merger, including this Joint Proxy
Statement/Prospectus and the requisite filings under the HSR Act. Each company
also continued to request and examine information as part of their continuing
"due diligence" investigations.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Video Update Board has unanimously determined that the Merger is in the
best interests of Video Update and its stockholders and recommends that the
stockholders of Video Update vote FOR approval of the Merger Proposal and the
Escrow Proposal for the reasons set forth below.
The Moovies Board has unanimously determined that the Merger is in the best
interests of Moovies and its stockholders and unanimously recommends that the
stockholders of Moovies vote FOR approval and adoption of the Merger Agreement
for the reasons set forth below.
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Joint Reasons for The Merger
The Video Update Board and the Moovies Board believe that the Merger
represents a strategic fit between two companies with similar business
strategies and complementary geographical presence and operations. Both Boards
of Directors believe that Video Update/Moovies, as a combined company, will have
greater financial strength, operating efficiencies, earning power and growth
potential than either Video Update or Moovies would have on its own. The Video
Update Board and the Moovies Board identified a number of potential benefits of
the Merger that they believe will contribute to the success of the combined
company and thus inure to the benefit of stockholders of both companies,
including the following:
- Synergies of the Combined Company. Video Update had approximately
$92,000,000 in revenues for its fiscal year ending April 30, 1997 and
Moovies had revenues of approximately $85,000,000 for its fiscal year
ending December 31, 1996. Video Update/Moovies, as a combined company, is
projected by management to have over $250 million in revenues for its
fiscal 1998 and over 665 video specialty stores in the United States and
Canada, although no assurances can be given concerning the amount of
combined revenues or the number of stores after consummation of the
Merger. Each Board of Directors believes that this should result in a
number of important synergies, including (i) reduced general and
administrative expenses (as a percentage of revenues of the combined
company) due to the opportunity to leverage certain financial and
administrative functions over a larger store and revenue base; and (ii)
reduced inventory costs, as a result of benefits to be derived from the
significant increase in the volume of purchases.
- Combination of Best of Both Companies. The combined company will be able
to take advantage of the best personnel and the best operating systems
and practices currently employed by Video Update and Moovies. For
example, the Board of Directors of Video Update will be expanded to
include directors and officers of both Video Update and Moovies, and the
computer and information systems of the combined company will utilize the
best aspects of the systems (including accounts payable, general ledger,
inventory control, purchasing) currently used by Video Update and Moovies
individually.
- Complementary Geography and Store Operations. Although Video Update and
Moovies are national chains, their store locations are geographically
diverse and complementary. Video Update stores are located predominantly
in the Midwest, Northwest, Southwest and Canada while Moovies stores are
concentrated in the Southeast, Northeast and mid-Atlantic regions of the
U.S. The combined company is expected to have a presence in 33 states and
some of the Nation's largest metropolitan areas as well as in six
provinces in Canada. Moreover, integration of personnel and operations
following the Effective Time should be accelerated given that both
companies use the same point of sale computer information system and
similar store layouts.
Video Update's Reasons for The Merger
In reaching its conclusion to approve the Merger Agreement, the Video
Update Board consulted with management of Video Update, as well as with its
financial and legal advisors, and considered the factors described above under
"-- Joint Reasons for the Merger" and a number of additional factors, including
the following:
(i) The Video Update Board considered the effectiveness of the Merger
in implementing and accelerating Video Update's basic long-term growth
strategy.
(ii) The Video Update Board analyzed the financial performance and
condition, businesses and prospects of Video Update and Moovies, including,
but not limited to, information with respect to their respective recent and
historic stock prices and earnings performance. The Video Update Board
considered the detailed financial analyses presented by Piper Jaffray,
using the pro forma financial information provided by the respective
managements of Video Update and Moovies, as well as the Video Update
Board's own knowledge of Video Update, Moovies and their respective
businesses.
(iii) The Video Update Board considered the oral opinion of Piper
Jaffray subsequently confirmed in writing as of the date thereof and
hereof, that, as of October 23, 1997, the Exchange Ratio was fair to
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Video Update stockholders from a financial point of view. The Video Update
Board considered the opinion of Asensio & Company Inc., that as of October
27, 1997, the terms and conditions of the Undertaking Agreement were fair
to Video Update's stockholders from a financial point of view. See "The
Merger -- Opinions of Financial Advisors -- Opinions of Financial Advisors
to Video Update."
(iv) The Video Update Board considered the terms of the Merger
Agreement. The Video Update Board also considered certain other information
regarding the Merger, including the terms and structure of the Merger and
the proposed arrangements with respect to the Board of Directors and
operations of the combined company following the Merger. See "The
Merger -- Management and Operations of Video Update Following the Merger."
(v) The Video Update Board considered the effect on Video Update
stockholders of Video Update continuing as a stand-alone entity compared to
the effect of Video Update combining with Moovies, in light of the factors
summarized above with respect to the financial condition and prospects of
the two companies on a stand-alone basis and of the combined company, and
the current economic, financial and business environment.
(vi) The Video Update Board considered the likelihood of the Merger
being approved by the appropriate regulatory authorities. See "The
Merger -- Regulatory Approvals."
(vii) The Video Update Board considered the expectation that the
Merger will be a tax-free transaction to Video Update and its stockholders.
See "The Merger -- Certain Federal Income Tax Consequences" and "The
Merger -- Accounting Treatment."
(viii) The Video Update Board considered the effect of the Merger on
Video Update's other constituencies, including its senior management and
other employees, customers and the communities served by Video Update. See
"The Merger -- Interests of Certain Persons in the Merger."
The Video Update Board also considered a number of potential risks relating
to the Merger, including (i) the difficulty and management distraction inherent
in integrating two large and geographically diverse operations and the risk that
the synergies and benefits sought in the Merger would not be fully achieved,
(ii) the risk that the Merger would not be consummated, (iii) the requirement of
approval of the bank lenders of both Video Update and Moovies and the need and
timing for a new or amended bank credit facility for post-merger operations,
(iv) the effect of the public announcement of the Merger on the market price of
Video Update Common Stock and (v) the substantial charges expected to be
incurred by Video Update/ Moovies in connection with the Merger. See "Risk
Factors." The Video Update Board believed that these risks were outweighed by
the potential benefits to be realized from the Merger.
The foregoing discussion of the information and factors considered by the
Video Update Board is not intended to be exhaustive but is believed to include
all material factors considered by the Video Update Board. In view of the wide
variety of information and factors considered, the Video Update Board did not
find it practical to, and did not, assign any relative or specific weights to
the foregoing factors, and individual directors may have given differing weights
to different factors.
Moovies' Reasons for The Merger
In reaching its conclusion to approve the Merger Agreement, the Moovies
Board consulted with management of Moovies, as well as with its financial and
legal advisors, and considered the factors described above under "-- Joint
Reasons for the Merger" and the following additional factors:
(i) An assessment of Moovies' strategic alternatives, which included
remaining a publicly owned independent company. In this regard, the Board
of Directors concluded, following extensive analysis and discussion, that
the terms of the Merger Agreement provide the best means for holders of
Moovies Common Stock to maximize the value of their holdings.
(ii) The belief that the Merger will result in a strong combined
entity with complementary business, corporate goals and management
philosophies.
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(iii) Information relating to the financial performance, prospects and
business operations of each of Moovies and Video Update (which information
included the historical financial information contained in the periodic
public reports of Moovies and Video Update and the descriptions of their
lines of business contained in such reports). The Moovies Board considered
the effectiveness of the Merger in implementing and accelerating Moovies'
basic long-term growth strategy. The Moovies Board concluded that a
combined company would have more bargaining power with lenders,
distributors, other vendors and potential landlords. In addition, the
combined company should be able to reduce its overhead as a percentage of
revenue by eliminating the Moovies headquarters and redundant
administrative functions. The Board concluded that an increase in
bargaining power and a decrease in overhead could result in increased cash
flow and enhanced earnings power.
(iv) The effect on Moovies continuing as a stand-alone entity compared
to the effect of Moovies combining with Video Update, in light of its
financial condition and the prospects of the two companies on a stand-alone
basis (including, as to Moovies, the availability of short-term and
long-term funds under its Banque Paribas line of credit, and alternative
sources financing) and of the combined company, and the current economic,
financial and business environment. The Moovies Board concluded that a
combined company would be in a better position to withstand current
industry competitive factors. The Moovies Board also concluded that the
Merger was a better alternative than funding future growth on a stand-alone
basis.
(v) The presentation of Moovies' financial advisor, Needham, and its
oral opinion to the effect that, as of October 30, 1997, and based upon the
assumptions made, matters considered and limits of review as set forth in
such opinion, the Exchange Ratio was fair to holders of Moovies Common
Stock from a financial point of view (for a summary of Needham's written
opinion, including the assumptions made, matters considered and limits of
review, see "The Merger -- Opinions of Financial Advisors -- Opinion of
Financial Advisor to Moovies"). The Moovies Board accepted Needham's
opinion and concluded that the Exchange Ratio was fair to holders of
Moovies Common Stock.
(vi) The expectation that the Merger will be a tax-free transaction,
and accordingly will have no current tax consequences to the Moovies
stockholders. The Board believes that the "tax-free" nature of the Merger
provides the stockholders of Moovies with an additional benefit. See "The
Merger -- Certain Federal Income Tax Consequences" and "The
Merger -- Accounting Treatment."
(vii) The Moovies Board considered the effect of the Merger on
Moovies' other constituencies, including its senior management and other
employees, customers and the communities served by Moovies. See "The
Merger -- Interests of Certain Persons in the Merger." The Moovies Board
concluded that notwithstanding the reduction in the headquarters staff due
to the elimination of duplicative functions, the overall effect of the
Merger on Moovies' stockholders and customers and most of its employees
would be to provide a better future for Moovies than operating on a
stand-alone basis.
The Moovies Board of Directors believes that each of these factors supports
its recommendation that the Moovies stockholders approve and adopt the Merger
Agreement and approve the terms of the Merger.
The Moovies Board believes that Moovies and the Moovies stockholders will
receive reasonable protection from a change in circumstances relating to Video
Update between the date of the Proxy Statement/ Prospectus and the Effective
Time through the inclusion in the Merger Agreement of a condition to the closing
of the Merger to the effect that since October 27, 1997, no event shall have
occurred which would have a material adverse effect on the business, operations,
assets of financial condition of Video Update or its subsidiaries, taken as a
whole, but not with respect to changes in the video rental industry generally.
The Moovies Board also considered a number of potential risks relating to
the Merger, including (i) the difficulty and management distraction inherent in
integrating two large and geographically diverse operations and the risk that
the synergies and benefits sought in the Merger would not be fully achieved,
(ii) the risk that the Merger would not be consummated (including the risk
related to the financing contingency in the Merger Agreement), (iii) the effects
associated with the amended Rentrak Agreement, and (iv) the substantial charges
expected to be incurred by Video Update and Moovies in connection with the
Merger. See "Risk
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Factors." The Moovies Board considered the potential risks relating to a
decision not to merge, including (i) competitive factors in the video rental
market and (ii) the limited capital resources available to Moovies. The Moovies
Board believed that the risks relating to the Merger were outweighed by the
potential benefits to be realized from the Merger and the potential risks
associated with declining the Merger.
The Moovies Board considered Moovies' capital resources and its existing
line of credit. Moovies believes that cash from operations and borrowing
availability under its line of credit will be sufficient to fund existing
operations through at least March 15, 1998 even if the Merger is not
consummated. For the quarter ended September 30, 1997, cash from operations did
not meet Moovies' expectations and, as a result, the amounts due to certain
vendors are now past due. Moovies is working with these vendors to develop
repayment plans. Moovies has maintained a satisfactory relationship with its
current vendors, including its two primary product vendors. The loss of these
two product vendors could have a material adverse effect on Moovies. Assuming
Moovies is able to reach satisfactory arrangements with these vendors, Moovies
expects that cash from operations will be sufficient to fund future video and
other inventory purchases and other working capital needs even if the Merger is
not consummated, although unanticipated expenses or revenue shortfalls likely
will cause Moovies to require additional financing to fund operations. There can
be no assurance that any such sources of funds will be available or, if
available, that they will be on terms and conditions satisfactory or favorable
to Moovies. See "Moovies, Inc. -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Moovies currently has no alternative financing arrangements.
The foregoing discussion of the information and factors considered by the
Moovies Board is not intended to be exhaustive but is believed to include all
material factors considered by the Moovies Board. In view of the wide variety of
information and factors considered, the Moovies Board did not find it practical
to, and did not, assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors.
OPINIONS OF FINANCIAL ADVISORS
OPINIONS OF FINANCIAL ADVISORS TO VIDEO UPDATE
Piper Jaffray
Video Update retained Piper Jaffray pursuant to an engagement letter dated
May 19, 1997 to render its opinion to the Video Update Board of Directors
regarding the fairness, from a financial point of view, to the holders of Video
Update Class A Common Stock ("Video Update Common Stock") of the Exchange Ratio
and to assist Video Update's management and Board of Directors in analyzing the
proposed Merger and the proposed Exchange Ratio.
Piper Jaffray is an investment banking firm engaged, among other things, in
the valuation of businesses and their securities in connection with mergers and
acquisitions, underwriting and secondary distributions of securities, private
placements and valuations for estate, corporate and other purposes. Piper
Jaffray was selected to prepare a fairness opinion based upon its experience and
expertise in transactions similar to the Merger and its reputation in the
specialty retail, video retail and investment banking industries. Piper Jaffray
has acted as a manager of an underwriting of Video Update Common Stock and has
provided other investment banking services for Video Update in the past and may
do so in the future. In the ordinary course of its business, Piper Jaffray
actively trades Video Update Common Stock for its own account and for the
accounts of its customers, and, therefore, may from time to time hold a long or
short position in such securities. Piper Jaffray also provides research coverage
for Video Update. Piper Jaffray may, in the ordinary course of its business,
trade Moovies Common Stock for the accounts of its customers, and, therefore,
may from time to time hold a long or short position in such securities. Video
Update gave no specific instructions to Piper Jaffray in connection with its
engagement and no limitations were imposed by Video Update on Piper Jaffray with
respect to the investigations made or procedures followed in rendering its
opinion.
Piper Jaffray delivered to the Video Update Board of Directors on October
23, 1997, its oral opinion (subsequently confirmed by written opinion dated as
of the same date) to the effect that, as of the date of the opinion and based on
and subject to the assumptions, factors and limitations as set forth in the
opinion and as described below, the Exchange Ratio is fair, from a financial
point of view, to the shareholders of Video
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Update Common Stock. Piper Jaffray affirmed its opinion in writing as of October
23, 1997 and as of the date hereof. Such opinion, as affirmed, is referred to
herein as the "Piper Opinion."
THE FULL TEXT OF THE PIPER OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS ON ITS REVIEW, IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS ANNEX B. THE SUMMARY OF THE PIPER OPINION SET FORTH
BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE PIPER
OPINION. THE PIPER OPINION CONTAINS A COMPLETE DESCRIPTION OF THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN.
The Piper Opinion, which was delivered for the use of and consideration by
the Video Update Board, is directed only to the fairness, from a financial point
of view, of the Exchange Ratio to holders of Video Update Common Stock, does not
address the value of shares of Video Update Common Stock or the price at which
such shares may trade in the future, does not address Video Update's underlying
business decision to participate in the Merger and does not constitute a
recommendation to any Video Update stockholder as to how such stockholder should
vote with respect to the Merger. Piper Jaffray does not admit that it is an
expert within the meaning of the term "expert" as used in the Securities Act and
the rules and regulations promulgated thereunder, or that its opinions
constitute a report or valuation within the meaning of Section 11 of the Act and
the rules and regulations promulgated thereunder.
In arriving at the Piper Opinion, Piper Jaffray reviewed, analyzed and
relied upon material bearing upon the financial and operating condition and
prospects of Video Update and Moovies and material prepared in connection with
the Merger, and considered such financial and other factors as it deemed
appropriate under the circumstances, including, among other things, the
following: (i) the Merger Agreement; (ii) the Reports on Form 10-K for Moovies
for each of the three fiscal years ended December 31, 1996, December 31, 1995,
and December 31, 1994; (iii) the Reports on Form 10-Q for Moovies for the
quarters ended September 30, 1997, June 30, 1997 and March 31, 1997; (iv) the
Reports on Form 10-K for Video Update for each of the three fiscal years ended
April 30, 1997, April 30, 1996 and April 30, 1995; (v) the Reports on Form 10-Q
for Video Update for the quarters ended October 31, 1997 and July 31, 1997; (vi)
financial forecasts for Video Update, furnished by Video Update's management,
including financial forecasts for the five year period ending April 30, 2002 and
financial forecasts for the five year period ending December 31, 2002; (vii) the
financial forecast for 1997 and five year financial forecasts for Moovies,
including 1998 through 2002 financial forecasts furnished by Moovies management
(the "Moovies Forecasts") and the Moovies Forecasts for calendar years 1998
through 2002 as adjusted by Video Update management (the "Adjusted Moovies
Forecasts"); (viii) the historical pricing and trading activity for Video Update
and Moovies common stock; and (ix) such other studies, analyses and inquiries as
Piper Jaffray deemed appropriate. Piper Jaffray also held discussions with the
senior management of Video Update and Moovies concerning their past and current
business operations, the background and rationale for the proposed Merger, the
financial condition, operating performance, balance sheet characteristics and
prospects of their respective businesses independently and the financial and
operating prospects for the combined company after consummation of the proposed
Merger.
For purposes of the Piper Opinion, Piper Jaffray relied upon and assumed
the accuracy and completeness of the financial and other information provided to
it or publicly available and did not attempt to independently verify the same.
With respect to financial forecasts, Piper Jaffray assumed that such forecasts
were reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the respective managements of Video Update and
Moovies, that such projections and forecasts will be realized in the amounts and
in the time periods currently estimated, and that the Merger would be accounted
for as a purchase under generally accepted accounting principles. Neither Video
Update nor Moovies publicly discloses internal management forecasts of the type
provided to Piper Jaffray in connection with Piper Jaffray's review of the
Merger. Such forecasts were not prepared with a view toward public disclosure.
In addition, such forecasts were based upon numerous variables and assumptions
that are inherently uncertain, including, without limitation, factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such forecasts. Piper Jaffray has
assumed no liability for such forecasts. Piper Jaffray also assumed that there
were no material changes in Video Update's
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or Moovies' assets, financial condition, results of operations, business or
prospects since the respective dates of the last financial statements made
available to Piper Jaffray. Piper Jaffray assumed that the Merger will be
consummated in a manner that complies in all respects with the applicable
provisions of the Securities Act and the Exchange Act and all other applicable
federal and state statutes, rules and regulations. Piper Jaffray assumed the
release from escrow of 1,300,000 shares of Class B Common Stock, $.01 par value
of Video Update ("Video Update Class B Common Stock") beneficially owned by
certain senior managers of Video Update and the conversion of all outstanding
shares of Video Update Class B Common Stock to Video Update Common Stock. The
Piper Opinion did not consider and Piper Jaffray expressed no opinion with
respect to the release from escrow of such shares of Video Update Class B Common
Stock. Piper Jaffray did not perform any appraisals or valuations of specific
assets of Video Update or Moovies and has not expressed any opinion regarding
the liquidation value of Video Update or Moovies.
Piper Jaffray believes that its analyses must be considered as a whole and
that selecting portions of its analyses without considering all factors and
analyses would create an incomplete view of the analyses and process underlying
their opinions. Any estimates contained therein are not necessarily indicative
of actual values, which may be significantly more or less favorable than as set
forth therein. No company or transaction used as a comparison in the analyses is
identical to Video Update or Moovies or to the Merger. Additionally, estimates
of the value of the businesses do not purport to be appraisals or necessarily
reflective of the prices at which the business actually may be sold. Because
such estimates are inherently subject to uncertainty, neither the Video Update
Board, Piper Jaffray nor any other person assumes responsibility for the
accuracy of such estimates.
Piper Jaffray performed certain financial and comparative analyses,
including those summarized below, which it discussed with the Video Update Board
of Directors on October 23, 1997. Piper Jaffray confirmed the appropriateness of
its reliance on the described analyses in connection with the affirmation of its
opinion dated on or about the date of this Joint Proxy Statement/Prospectus by
performing procedures to update certain of such analyses and reviewing the
assumptions on which such analyses were based and the factors considered in
connection therewith. The Piper Opinion is based upon information available to
Piper Jaffray and the facts and circumstances as they existed and were subject
to evaluation at such dates. Events occurring after such dates could materially
affect the assumptions used in preparing the Piper Opinion. The analyses
referred to below were made in connection with rendering the Piper Opinion on
October 23, 1997.
Selected Market Information. Piper Jaffray reviewed certain stock trading
characteristics of Video Update Common Stock and Moovies Common Stock, including
the stock price and volume comparisons for the periods ending October 22, 1997.
Piper Jaffray also analyzed the per share purchase price and aggregate
transaction value based on the Exchange Ratio and other terms set forth in the
Merger Agreement, using the closing price of Video Update Common Stock and
Moovies Common Stock on October 22, 1997.
Pro Forma Dilution Analysis. Piper Jaffray reviewed the pro forma impact
of the Moovies acquisition on Video Update's projected earnings per share,
comparing Video Update's pre-Merger earnings per share to the earnings per-share
following the Merger, reflecting the addition of Moovies' earnings reflected in
the Adjusted Moovies Forecasts and the effect of a base case amount of synergies
estimated by management at $10.3 million in calendar year 1998, together with
the issuance of shares of Video Update Common Stock in exchange for Moovies
shares. Based on this analysis, Piper Jaffray concluded that the Merger would be
accretive to Video Update's earnings per share in calendar 1998 and thereafter.
Discounted Cash Flow Analysis. Piper Jaffray performed a discounted cash
flow analysis on the Adjusted Moovies Forecasts to calculate a range of
theoretical values for Moovies based on (i) the net present value of projected
free cash flows and (ii) a terminal value which estimates the value of Moovies
in the year 2001 by applying certain multiples of earnings before interest and
taxes. Piper Jaffray assumed, among other things, discount rates of 12% to 16%,
which Piper Jaffray deemed appropriate to the risk associated with such
projected cash flows, and terminal value multiples of operating income before
interest and taxes ("EBIT") of 6.0x to 8.0x. The analysis, including the
positive impact of synergies from the Merger, calculated an implied equity
valuation range for Moovies of $33.5 million to $64.6 million ($2.68 to $5.17
per share) and, excluding any positive impact of synergies from the Merger,
calculated an implied equity valuation range for Moovies of
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(-$6.5) million to $7.5 million ((-$.52) to $.60 per share), compared to $32.8
million or $2.63 per share in the Merger.
Premiums Paid Analysis. Piper Jaffray reviewed information relating to
premiums paid over recent trading prices of the securities of Video Update and
Moovies and for two groups of similar transactions. Premiums paid analysis is a
widely used methodology for analyzing mergers and acquisitions, but the results
of such methodology are highly dependent upon the comparability of the value
received or paid in a transaction to the trading price of a company's shares
prior to the announcement of such transaction. After a review of available
information, Piper Jaffray determined that a premiums paid analysis of the
Merger would not be indicative of the fairness of the final Exchange Ratio to
holders of Video Update Common Stock due to, among other things, the effect on
the trading prices of the securities of Video Update and Moovies (and,
therefore, the financial value of the Merger as determined by the final Exchange
Ratio) of the public announcement of the Original Merger Agreement and the
Original Exchange Ratio.
Contribution Analysis. Piper Jaffray reviewed Video Update's and Moovies'
financial projections for the calendar years 1998 through 2001. For these
periods, Piper Jaffray analyzed the contributions to sales, EBIT, net income and
total stores of Video Update and Moovies to the combined company and compared
these contribution figures to the post-Merger ownership percentage of Moovies'
current shareholders of 31.2% based on the Exchange Ratio. These figures include
any anticipated benefits from Merger synergies. Based upon the Adjusted Moovies
Forecasts, the contribution of Moovies to the combined company's sales exceeded
the percentage of equity that Moovies' shareholders would own in the combined
company beginning in calendar year 1998, the contribution of Moovies to the
combined company's EBIT and net income exceeded the percentage of equity that
Moovies' shareholders would own in the combined company beginning in 1998 and
the contribution of Moovies to the combined company's total stores exceeded the
percentage of equity that Moovies' shareholders would own in the combined
company beginning in calendar year 1998.
Comparable Company Analysis. Piper Jaffray analyzed information relating
to four publicly traded companies which operate video specialty stores including
Hollywood Entertainment Corporation, Movie Gallery, Inc., Video Update, Inc.,
and West Coast Entertainment Corporation. Based on its analysis, Piper Jaffray
derived a mean and a median price/earnings ("P/E") multiple for calendar 1997
estimated earnings per share ("1997 EPS") of 13.9x and 14.9x, respectively, and
for calendar 1998 estimated earnings per share ("1998 EPS") of 8.2x and 6.7x,
respectively. Piper Jaffray also derived a mean and median multiple of company
value to latest twelve months revenue ("Company Value/Revenue") of .9x and .8x
respectively, and a mean and median multiple of company value to latest twelve
months operating income before interest, taxes, depreciation and amortization
("EBITDA") ("Company Value/EBITDA") of 2.6x and 2.7x respectively. Based on the
Exchange Ratio and Moovies financial results and forecasts, the Merger multiples
for 1997 P/E estimate, 1998 P/E estimate, Company Value/Revenue and Company
Value/EBITDA multiples were 14.6x, 7.5x, .8x, and 3.3x, respectively.
Comparable Acquisition Analysis. Piper Jaffray analyzed select industry
transactions in two separate categories which were deemed comparable to the
Merger. Search 1 was in the video rental industry for transactions greater than
$10 million in size between January 1, 1992 and October 22, 1997 where at least
50.1% of the target company's outstanding shares were acquired. Search 2 was for
the retail SIC codes 5311-5699 (Retail Trade -- General Merchandise & Apparel),
5712-5736 (Home Furnishings) and 5211-5999 (Miscellaneous Retail Trade) for
transactions greater than $10 million and less than $1 billion in size between
June 1, 1996 and October 22, 1997 where at least 50.1% of the target company's
outstanding shares were acquired. Search 1 yielded 7 and Search 2 yielded 15
completed transactions which Piper Jaffray deemed to be comparable. Based on its
analysis of the comparable transactions in Search 1, Piper Jaffray derived a
mean and median multiple of company value to latest twelve months net sales of
1.6x and 1.4x, respectively (compared to the Merger revenue multiple of .8x), of
company value to operating income before interest, taxes, depreciation and
amortization ("EBITDA") of 5.9x and 5.0x, respectively, (compared to the Merger
EBITDA multiple of 3.3x). Based on its analysis of the comparable transactions
in Search 2, Piper Jaffray derived a mean and median multiple of company value
to latest twelve months net sales of 0.7x and 0.6x, respectively (compared to
the Merger revenue multiple of .8x).
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As compensation for its services, Piper Jaffray is to receive from Video
Update a total fee of $725,000, of which $25,000 was due at the time of the
execution of the engagement letter between Video Update and Piper Jaffray,
$25,000 was due 60 days following the execution of the engagement letter between
Video Update and Piper Jaffray, $75,000 was due upon delivery of the Piper
Opinion on July 7, 1997, $50,000 was due upon the delivery of the Piper Opinion
on October 23, 1997, $50,000 is due upon affirmation of the Piper Opinion as of
the date of this Joint Proxy Statement/Prospectus, and $500,000 is payable upon
the closing of the Merger. Video Update paid $125,000 as a first installment to
Piper Jaffray on August 19, 1997. Video Update has also agreed to reimburse
Piper Jaffray for its reasonable out-of-pocket expenses, including the fees and
disbursements of its counsel and to indemnify Piper Jaffray against certain
liabilities, including liabilities under the federal securities laws.
Asensio & Company
On July 7, 1997, Asensio and Company delivered its oral opinion to the
Board of Directors of Video Update to the effect that, as of such date, the
terms of the Original Undertaking Agreement relating to the Escrow Proposal were
fair to the holders of Video Update Common Stock from a financial point of view.
Such opinion was subsequently confirmed in writing on July 9, 1997. On October
23, 1997, Asensio & Company delivered its oral opinion that as of such date, the
terms of the Undertaking Agreement were fair to the holders of Video Update
Common Stock from a financial point of view. Such opinion was subsequently
confirmed in writing on October 27, 1997. See "Proposal to Terminate and Cancel
the Escrow Agreement."
Opinion of Financial Advisor to Moovies
Moovies retained Needham to act as financial advisor to Moovies in
connection with the proposed transaction with Video Update. In connection with
this engagement, Moovies requested Needham to render an opinion as to whether or
not the Exchange Ratio and the terms of the Merger Agreement were fair to the
stockholders of Moovies from a financial point of view. Needham was not
requested to, and did not, make any recommendation to the Moovies Board as to
the Exchange Ratio to be provided for in the Merger, which Exchange Ratio was
determined through arms-length negotiations between Moovies and Video Update.
On October 30, 1997, Needham delivered its oral opinion (subsequently
confirmed by written opinion dated October 30, 1997) that, as of such date, and
based upon and subject to the factors and assumptions set forth therein, the
Exchange Ratio is fair to the stockholders of Moovies from a financial point of
view. This opinion, as affirmed in writing dated the date hereof, is referred to
herein as the "Needham Opinion." Needham's opinion is directed only to the
financial terms of the Merger Agreement and does not constitute a recommendation
to any stockholder of Moovies as to how such stockholder should vote at the
Moovies Special Meeting.
NEEDHAM IS NOT EXPRESSING ANY OPINION AS TO WHAT THE VALUE OF VIDEO UPDATE
COMMON STOCK WILL BE WHEN ISSUED TO THE STOCKHOLDERS OF MOOVIES PURSUANT TO THE
MERGER OR THE PRICES AT WHICH VIDEO UPDATE COMMON STOCK WILL ACTUALLY TRADE AT
ANY TIME. THE COMPLETE TEXT OF THE NEEDHAM OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
NEEDHAM, IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX D, AND
THE SUMMARY OF THE NEEDHAM OPINION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE NEEDHAM
OPINION. MOOVIES STOCKHOLDERS ARE URGED TO READ THE NEEDHAM OPINION CAREFULLY
AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS
CONSIDERED AND THE ASSUMPTIONS MADE BY NEEDHAM.
In arriving at its opinion, Needham, among other things, (i) reviewed the
Merger Agreement; (ii) reviewed certain other documents relating to the Merger;
(iii) reviewed certain publicly available information concerning Video Update
and Moovies and certain other relevant financial and operating data of Video
Update and Moovies made available from the internal records of Video Update and
Moovies; (iv) reviewed the historical stock prices and trading volumes of Video
Update's and Moovies' common stock; (v) held discussions with members of senior
management of Video Update and Moovies concerning their current and future
business prospects; (vi) reviewed certain financial forecasts and projections
prepared by the respective managements of Video Update and Moovies; (vii)
compared certain publicly available financial
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data of companies whose securities are publicly traded, which Needham deemed
generally comparable to the business of Moovies, to similar data for Moovies;
(viii) reviewed the financial terms of certain other business combinations that
Needham deemed generally relevant; and (ix) performed and/or considered such
other studies, analyses, inquiries and investigations as Needham deemed
appropriate. Needham assumed and relied upon, without independent verification,
the accuracy and completeness of the information it reviewed for purposes of its
opinion. With respect to Video Update's and Moovies' financial forecasts
provided to Needham by their respective managements, Needham assumed that such
forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of such managements, at the time of
preparation, of the separate future operating and financial performances of
Video Update and Moovies, respectively. Needham did not assume any
responsibility for or make or obtain any independent evaluation, appraisal or
physical inspection of the assets or liabilities of Moovies or Video Update.
Needham's opinion states that it was based on economic, monetary and market
conditions existing as of the date of such opinion. Based on this information,
Needham performed a variety of financial analyses of the Merger and the Exchange
Ratio. The following paragraphs summarize the significant quantitative and
qualitative analyses performed by Needham in arriving at its opinion presented
to the Moovies Board on October 30, 1997.
In reaffirming its opinion as of the date of this Joint Proxy
Statement/Prospectus, Needham confirmed the appropriateness of its reliance on
the analyses used to render its October 30, 1997 opinion by performing
procedures to update certain of such analyses and by reviewing the assumptions
on which such analyses were based and the factors considered in connection
therewith.
Contribution Analysis. Needham reviewed and analyzed the pro forma
contribution of each of Video Update and Moovies to pro forma combined
operational and financial information as of and for the twelve months ended June
30, 1997 and July 31, 1997 for Moovies and Video Update respectively. Needham
reviewed, among other things, the pro forma contributions to total revenue,
operating income, earnings before interest, income tax expense, depreciation and
amortization ("EBITDA"), and stockholders' equity. Based on this analysis,
Moovies contributed 49.5% to pro forma combined revenues, 16.1% to pro forma
combined net income, 40.4% to pro forma EBITDA, and 41.3% to pro forma combined
stockholders' equity. Based on the Exchange Ratio, Moovies' stockholders will
own approximately 31.8% of Video Update after the Merger. The results of the
contribution analysis are not necessarily indicative of the contributions that
the respective businesses may have in the future.
Comparable Company Analysis. Needham compared selected historical and
projected operating and stock market data and operating and financial ratios for
Moovies to the corresponding data and ratios of certain publicly traded video
rental retail store companies which it deemed generally comparable to Moovies.
Such data and ratios included total market capitalization to historical and
projected revenue, price per share to historical and projected earnings per
share and market value to historical book value.
Companies deemed to be generally comparable to Moovies included Hollywood
Entertainment Corporation, Movie Gallery, Inc., Video Update, Inc. and West
Coast Entertainment Corporation.
For these companies, the multiples of total market capitalization to last
twelve months ("LTM") revenues ranged from 0.5x to 1.5x with a mean of 0.9x and
a median of 0.8x; the multiples of market capitalization to projected 1997
revenues ranged from 0.5x to 1.1x with a mean of 0.8x and a median of 0.7x; the
LTM price-earnings multiples ranged from 9.4x to 16.2x with a mean of 12.6x and
a median of 12.3x; the projected 1997 price-earnings multiples ranged from 11.3x
to 16.3x with a mean of 13.8x and a median of 10.2x; and the multiples of market
value to historical book value ranged from 0.3x to 1.5x with a mean of 0.7x and
a median of 0.5x.
These ratios were compared with the following ratios for Moovies,
calculated based on the closing price of Video Update Common Stock on the
trading day prior to the announcement of the Amendment to the Merger Agreement
and the Exchange Ratio of 0.75; total market capitalization to LTM revenues of
0.7x; total market capitalization to projected 1997 revenues of 0.7x; LTM
price-earnings multiple of 36.1x; and market value to historical book value
multiple of 0.5x.
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Comparable Transaction Analysis. Needham also analyzed publicly available
financial information for nine selected mergers and acquisitions of public
companies in the retail store industry and ten selected mergers and acquisitions
of private companies in the video retail store industry. In examining these
transactions, Needham analyzed certain income statement and balance sheet
parameters of the acquired companies relative to the consideration offered, such
as one-day and four-week premiums of the consideration offered to the public
target's stock price; aggregate transaction value as multiples of LTM revenues,
earnings before interest and taxes ("EBIT"), and earnings before interest,
taxes, depreciation and amortization ("EBITDA"); and multiples of market value
to LTM net income and historical book value. In certain cases, complete
financial data was not publicly available for these transactions and only
partial information was used in such instances.
Completed public retail store company transactions analyzed by Needham
included: BizMart, Inc./ Intelligent Electronics, Inc.; Nature Food Centers,
Inc./General Nutrition Companies; Perry Drug Stores, Inc./Rite Aid Corporation;
National Convenience Stores/Diamond Shamrock, Inc.; Orchard Supply Hardware
Stores/Sears Roebuck & Co.; Big B, Inc./Revco DS, Inc.; Kash N' Karry Food
Stores, Inc./Food Lion, Inc.; Leslie's Poolmart/Investor Group; and Delchamps,
Inc./Jitney-Jungle Stores of America.
For these transactions the one-day stock price premium ranged from 9.5% to
96.4% with a mean of 34.6% and a median of 25.3%; the four-week stock price
premium ranged from 6.7% to 118.2% with a mean of 45.5% and a median of 46.7%.
The multiples of transaction value to LTM sales ranged from 0.3x to 0.8x with a
mean of 0.5x and a median of 0.5x; the LTM EBIT multiples ranged from 10.4x to
15.3x with a mean of 12.8x and a median of 13.2x; and the LTM EBITDA multiples
ranged from 5.8x to 9.7x with a mean of 7.8x and a median of 8.1x. The multiples
of market value to LTM net income ranged from 21.4x to 48.4x with a mean of
28.7x and a median of 26.9x; and the multiples of market value to book value
ranged from 1.8x to 2.8x with a mean of 2.4x and a median of 2.4x.
Completed private video rental store company transactions analyzed by
Needham included: UI Video Holdings, Inc./Blockbuster Entertainment Corporation;
WJB Video LP/Blockbuster Entertainment Corporation; Super Club Retail
Entertainment Corporation/Blockbuster Entertainment Corporation; Title Wave
Stores, Inc./Hollywood Entertainment Corporation; First Row Video, Inc. and
Video Game Trader, Inc./ Moovies, Inc.; MoveAmerica, Inc./Moovies, Inc.;
Pic-a-Flick Group/Moovies, Inc.; American Video, Inc. and Red Giraffe Video,
Inc/West Coast Entertainment Corporation; Palmer Corporation and affiliates/West
Coast Entertainment Corporation; and Home Vision Entertainment, Inc./Movie
Gallery, Inc.
For these transactions the multiples of transaction value to LTM sales
ranged from 0.5x to 1.7x with a mean of 1.1x and a median of 1.1x; the LTM EBIT
multiples ranged from 15.1x to 36.8x with a mean of 22.0x and a median of 17.6x;
and the LTM EBITDA multiples ranged from 3.0x to 4.8x with a mean of 4.0x and a
median of 4.1x. The multiples of market value to LTM net income ranged from
12.6x to 86.5x with a mean of 39.7x and a median of 34.7x; and the multiples of
market value to book value ranged from 1.9x to 6.9x with a mean of 5.0x and a
median of 6.0x.
These premiums and ratios for the public retail companies and private video
rental store companies were compared with the following for Moovies, calculated
based on the closing price of Video Update Common Stock on the trading day prior
to the announcement of the Amendment to the Merger Agreement and the Exchange
Ratio of 0.75: one-day stock price premium of 19.5%, four-week stock price
premium of 1.9%, LTM sales multiple of 0.8x, LTM EBIT multiple of 54.4x, LTM
EBITDA multiple of 3.2x, and market to book value multiple of 0.5x.
Stock Trading History. Needham examined the history of trading prices and
volumes for Moovies Common Stock and Video Update Common Stock, both separately
and in relation to each other, and the relationship between movements of Moovies
Common Stock and Video Update Common Stock and movements in composite indices
such as the Standard & Poor's 500, Nasdaq Composite and the Dow Jones
Industrials.
No company or transaction used in any comparable analysis as a comparison
is identical in the case of Moovies. Accordingly, these analyses are not
mathematical; rather they involve complex considerations and judgments
concerning differences in the financial and operating characteristics of the
comparable companies
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and other factors that could affect the public trading value of the comparable
companies and transactions to which they are being compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which are
beyond the control of Moovies or Video Update. Any estimates contained in these
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable as set
forth therein. Additionally, analyses relating to the values of business or
assets do not purport to be appraisals or necessarily reflect the prices at
which businesses or assets may actually be sold.
In August 1995, Needham acted as a managing underwriter in Moovies' initial
public offering. In July 1996, Needham acted as a managing underwriter in
Moovies' second public offering. In December 1996, Needham acted as a financial
advisor to Moovies in connection with the implementation of its Stockholder
Rights Plan and received a fee of $25,000. Needham acts as a market maker in
Moovies Common Stock.
Pursuant to the terms of the engagement letter between Needham and Moovies,
Moovies has agreed to pay Needham a fee of $150,000 payable upon the rendering
of the Needham Opinion and an advisory fee upon consummation of the Merger, of
0.60% of the sum of (i) the aggregate consideration received by Moovies and/or
its stockholders in the Merger and (ii) the outstanding long-term debt of
Moovies (approximately $425,000 based on the closing price of Video Update
Common Stock and the number of shares of Moovies Common Stock outstanding on
January 20, 1998). Moovies has also agreed to reimburse Needham for its
reasonable out-of-pocket expenses and to indemnify it against certain
liabilities relating to or arising out of services performed by Needham as
financial advisor to Moovies.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. Needham was retained by the Moovies Board to act
as Moovies' financial advisor in connection with the Merger based on Needham's
experience as a financial advisor in mergers and acquisitions as well as
Needham's familiarity with the video retailing industry. In the normal course of
its business, Needham may actively trade the equity securities of Moovies for
its own account or for the account of its customers and, therefore, may at any
time hold a long or short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Escrow Shares
Video Update has 2,000,000 shares of Video Update Class B Common Stock
outstanding, each of which carries 5 votes per share on all matters upon which
stockholders may vote. All of such shares are held beneficially or of record by
Daniel A. Potter, Video Update's Chairman and Chief Executive Officer, John M.
Bedard, Video Update's President, and Daniel C. Howard, Video Update's Chief
Operating Officer. Of these 2,000,000 shares of Video Update Class B Common
Stock, the 1,300,000 Escrow Shares are held in escrow and are subject to
forfeiture and cancellation in accordance with the Escrow Agreement. Pursuant to
the Escrow Agreement, the Escrow Shares may be released only if Video Update
achieves certain income levels initially set in the Escrow Agreement and
adjusted after that time for subsequent stock issuances. All Escrow Shares
remaining in escrow on July 31, 1998 will be forfeited and canceled. For all of
the Escrow Shares to be released in accordance with the Escrow Agreement, even
before adjusting the income targets for shares issued in the Merger, (i) Video
Update's Minimum Pre-Tax Income (as defined in the Escrow Agreement) for the
fiscal year ended April 30, 1998 would have to increase approximately 500% over
its Pre-Tax Income for fiscal 1997 (which management considers unlikely) or (ii)
Video Update would have to be involved in an
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acquisition or merger that is accounted for using the pooling of interests
method, which method could allow for the restatement of earnings for previous
years, and possibly the attainment of income targets for previous fiscal years
(for which there are currently no plans). If the Escrow Proposal is approved,
the Escrow Shares will be released and no longer subject to cancellation or
forfeiture based on any agreement between Video Update and Messrs. Potter,
Bedard and Howard. See "Proposal to Terminate and Cancel the Escrow Agreement."
As a condition to entering into the Merger Agreement, Moovies required the
conversion, at the Effective Time, of all outstanding shares of Video Update
Class B Common stock (including the 1,300,000 Escrow Shares as well as the
700,000 additional shares of Video Update Class B Common Stock not subject to an
escrow or encumbrance of any kind) into Video Update Common Stock on a 1:1 basis
to eliminate the preferential 5:1 voting rights of the Video Update Class B
Common Stock. To accomplish this, negotiations were held among the Outside
Directors (the two independent members of Video Update's Board of Directors,
being Mr. Kelnberger and Ms. Vaughn), and the Class B Common Stock holders,
Messrs. Potter, Bedard and Howard. Pursuant to these negotiations, Messrs.
Potter, Bedard and Howard agreed to convert the shares of Video Update Class B
Common Stock, and thereby forfeit their preferential voting rights, only if the
Escrow Agreement were terminated and the Escrow Shares released from escrow. The
Outside Directors agreed to this requirement in the context of the Merger
Agreement, but required that (i) 10%, or 130,000, of the 1,300,000 Escrow Shares
be forfeited and canceled and (ii) that beginning at the Effective Time, neither
Video Update nor any of its subsidiaries will grant or award to any of Messrs.
Potter, Bedard of Howard, until after the eighteen month anniversary of the
Effective Time, any additional options, warrants, or securities convertible into
or exchangeable for any capital stock of Video Update (provided that nothing in
this restriction affects in any way any outstanding options, warrants or
existing similar rights held or accorded to any of such stockholders). These
agreements, which were discussed with Blair, whose consent is required to
terminate the Escrow Agreement, have been memorialized in the Undertaking
Agreement dated October 27, 1997 among Video Update, Moovies, and Messrs.
Potter, Bedard and Howard. See "Proposal to Terminate and Cancel the Escrow
Agreement." In addition, pursuant to the terms of the Undertaking Agreement,
Messrs. Potter, Bedard and Howard also have agreed not to sell or transfer any
of the 1,170,000 converted Escrow Shares for a period of two years from the
Effective Time, except in connection with the acquisition of Video Update by a
third party, of which no assurance, representation or warranty is given or
suggested.
Moovies Board Designees
Pursuant to the Merger Agreement, two individuals to be named by Moovies
(the "Moovies Designees") will be nominated to serve on the Video Update Board
following the Effective Time. The Moovies Designees are F. Andrew Mitchell and
Theodore J. Coburn, currently directors of Moovies. See "-- Management and
Operations of Video Update Following the Merger," "Proposal for Election of
Directors -- Director Nominees Upon Consummation of the Merger." The Moovies
designees will receive compensation as Video Update directors, including fees
and stock options, following the consummation of the Merger. See "Proposal for
Election of Directors -- Board Compensation Committee Report on Executive
Compensation."
Moovies Stock Options and Warrants
All outstanding stock options for the purchase of Moovies Common Stock were
granted pursuant to option agreements that provide that such options shall
become vested and exercisable in full from and after the date of a change in
control of Moovies. The Merger will constitute a change in control of Moovies
within the meaning of such option agreements. In addition, Moovies amended the
stock option agreements in respect of options to purchase approximately 432,000
shares of Moovies Common Stock to extend the time to exercise such outstanding
options to one year after termination of employment if such employee continues
employment with Moovies through the Effective Time or to one year after the last
date of service as a non-employee director of Moovies if such non-employee
director continues to serve Moovies as such through the Effective Time, as the
case may be. Pursuant to the Merger Agreement, all outstanding Moovies' stock
options and warrants shall be converted to options and warrants to purchase
Video Update Common Stock, based on the Exchange Ratio. As of January 21, 1998,
there were outstanding options and warrants for the purchase of an
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aggregate of approximately 1.8 million shares of Moovies Common Stock at
exercise prices ranging from $.01 to $14.88. Options and warrants to purchase an
aggregate of 217,500 shares of Moovies Common Stock are held by executive
officers and directors of Moovies. See also "The Merger Agreement -- Stock
Options, Warrants and Employee Benefits" and "Moovies, Inc. -- Security
Ownership of Certain Beneficial Owners and Management."
Employment and Severance Agreements
Moovies has entered into change of control agreements (the "Change of
Control Agreements") with each of its officers, as well as certain other members
of management. Such Agreements provide that if there is a change in control and
such employee resigns his employment or his employment is terminated without
cause within six months after such change of control, such employee shall be
paid in a lump sum within 30 days after the resignation or termination an amount
equal to approximately one, two, two and one-half, or three times (depending on
the employee's particular Change of Control Agreement) the annual average (based
on the past two years) of such employee's compensation prior to such termination
or resignation. The Merger will constitute a "change in control" of Moovies
within the meaning of the Change of Control Agreements, with an aggregate of
approximately $3.5 million in payments expected thereunder. Of this amount
approximately $620,000 will be paid to Mr. Mitchell and approximately $348,000
will be paid to Moovies' former Vice President and Controller, Stephen L.
Reynolds, who as of January 6, 1998 became Video Update's Chief Financial
Officer. In addition, the Change of Control Agreements provide that all options
of Moovies Common Stock held by such individuals shall become exercisable in
full upon a change of control (regardless of such officers' employment or
termination of employment with the surviving corporation). See "Moovies,
Inc. -- Certain Employment Agreements."
Moovies also intends to award stay-on bonuses aggregating approximately
$550,000 to certain employees who are not otherwise entitled to change in
control payments, as an incentive for such employees to continue their
employment through the Effective Time.
Moovies nominees to Video Update's Board of Directors (who are not
employees of Video Update) will 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. Upon their election as a director, non-employee directors receive
options under the Formula Plan to purchase 3,000 shares of Video Update 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 Video Update Common Stock on the date of
grant. Additionally, non-employee directors receive, on an annual basis,
immediately following Video Update's annual meeting of shareholders, options to
purchase 1,500 shares of Video Update 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
Video Update Common Stock on the date of grant.
Accounting Fees
In connection with Merger, Video Update will pay approximately $240,000 for
accounting and tax services to Johnson West & Co., PLC ("Johnson West & Co.") an
accounting firm in which Paul Kelnberger is a member. Mr. Kelnberger is a
director of Video Update and a member of Video Update's executive compensation,
audit and nominating committees.
Indemnity Arrangements
Pursuant to the Merger Agreement, Video Update has agreed to indemnify each
present and former director and officer of Moovies for a period of six years
after the Merger against liabilities or expenses incurred in connection with
claims relating to matters occurring prior to the closing of the Merger, and to
maintain in effect directors' and officers' liability insurance for their
benefit for a period of three years after the Merger. See "The Merger
Agreement -- Director and Officer Indemnification."
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Ownership and Voting of Stock
As of January 21, 1998, directors and executive officers of Video Update
and their affiliates hold approximately 2.8% of the outstanding shares of Video
Update Common Stock and 100% of Video Update Class B Common Stock. Of the
2,000,000 shares of Class B Common stock beneficially owned by Daniel Potter,
John Bedard and Daniel Howard, who are directors and executive officers of Video
Update, 1,300,000 are held in escrow. The escrowed shares are subject to
forfeiture if certain Video Update income performance goals or per share market
price goals are not attained before July 31, 1998. Assuming the Escrow Proposal
and the Merger Proposal are approved, at the Effective Time, 130,000 of such
shares (10% of the escrowed shares) will be canceled, forfeited and of no
further force or effect and the remaining 1,170,000 will be released from escrow
and, together with the 700,000 shares of Class B Common stock owned by Daniel
Potter, John Bedard and Daniel Howard outside of the escrow, will be converted
to Video Update Common Stock. See "Proposal to Terminate and Cancel the Escrow
Arrangement." Each of the directors and officers of Video Update has advised
Video Update that he or she intends to vote his or her shares of Video Update
Common Stock or Video Update Class B Common Stock over which he or she has
voting control in favor of the election of the seven (7) Director Nominees, the
ratification of the selection of Ernst & Young LLP, and the Plan Proposal. Each
of the directors and certain executive officers of Video Update executed a
Voting Agreement, dated October 27, 1997, in which he or she has agreed to vote
or direct the vote of all the outstanding shares of Video Update Common Stock or
Class B Common Stock over which he or she has voting control in favor of the
approval of the Merger Proposal and the Escrow Proposal, however, pursuant to
the Escrow Agreement, none of Daniel A. Potter, Video Update's Chairman and
Chief Executive Officer, John Bedard, Video Update's President, and Daniel
Howard, Video Update's Chief Operating Officer will vote any shares of Video
Update Common Stock or Video Update Class B Common Stock held by them on or in
favor of the Escrow Proposal. See "Video Update, Inc. -- Security Ownership of
Certain Beneficial Owners and Management."
As of January 15, 1998, directors and executive officers of Moovies and
their affiliates may be deemed to have or share beneficial ownership of
approximately 16.3% of the outstanding shares of Moovies Common Stock (excluding
options to purchase such stock). Each of the directors of Moovies has executed a
Voting Agreement dated October 27, 1997, in which he or she has agreed to vote
or direct the vote of all the outstanding shares of Moovies Common Stock over
which he or she has or shares voting control in favor of the approval and
adoption of the Merger Agreement. See "Moovies, Inc. -- Security Ownership of
Certain Beneficial Owners and Management."
As of January 15, 1998, except for Mr. Mitchell who owns 1,000 shares of
Video Update Common Stock, neither Moovies nor its directors and executive
officers and their affiliates beneficially owned any shares of Video Update
Common Stock and, except for Mr. Howard who owns 50 shares of Moovies Common
Stock, and Mr. Reynolds who owns 53,750 Moovies options, neither Video Update
nor its directors and executive officers and their affiliates beneficially owned
any shares of Moovies Common Stock.
Consulting Fee
Brown, Coburn & Co., a company in which Theodore Coburn, a director of
Moovies and a Moovies Designee, is a principal, will receive a consulting fee of
$75,000 in the event the Merger is consummated, in consideration of certain
consulting services provided to Moovies. See "-- Moovies Board Designees." Fifty
percent of the fee will be paid by each of Moovies and Needham.
MANAGEMENT AND OPERATIONS OF VIDEO UPDATE FOLLOWING THE MERGER
At the Video Update Special Meeting, Video Update stockholders will be
asked to consider and vote upon the election of seven (7) directors. Each
director of Video Update will be elected for a period of one year and until his
or her successor is duly elected by the stockholders, provided that as soon as
practicable following the Effective Time (assuming the requisite approvals of
the stockholders of Moovies and Video Update), the Board of Directors of Video
Update will be comprised of the following seven persons: Messrs. Potter, Bedard,
Howard, Kelnberger and Patriacca (all of whom are currently directors of Video
Update) and F. Andrew Mitchell and Theodore J. Coburn (each of whom are
currently directors of Moovies, hereafter referred to as
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the Moovies Designees). Each of Mr. Yager and Ms. Vaughn, currently Video Update
directors, have agreed to resign at the Effective Time. The Moovies Designees
shall be elected to the Nominating Committee of the Board of Directors so long
as they remain directors of Video Update. Following the Effective Time, such
Nominating Committee shall be comprised solely of the Moovies Designees and one
designee of Video Update. The Nominating Committee shall have the right to
nominate two additional members of the Board of Directors, which, if necessary,
shall be expanded by the full Board of Directors to nine members to include such
two additional nominees. Vacancies and newly created Directorships resulting
from any increase in the number of authorized directors may be filled by a
majority vote of directors then remaining in office. Officers are elected by and
serve at the discretion of the Board of Directors, subject to their employment
agreements.
Upon the closing of the Merger, Daniel A. Potter, who is currently Chairman
and Chief Executive Officer of Video Update, will continue in those positions.
It is currently anticipated that the other members of the senior management of
Video Update immediately following the closing of the Merger will be as follows:
<TABLE>
<S> <C>
John M. Bedard.................. President
Daniel C. Howard................ Chief Operating Officer
*Stephen L. Reynolds............. Chief Financial Officer
Richard Bedard.................. Executive Vice President
Bruce D. Carlson................ Vice President of Real Estate
Michael G. Schifsky............. Vice President of Store Development
Robert E. Yager................. Regional Manager of Store Operations
</TABLE>
The corporate headquarters of Video Update will continue to be located in
Minnesota.
* On December 31, 1997, Video Update's Chief Financial Officer, Christopher
Gondeck, resigned to pursue other business endeavors. He was succeeded as
Chief Financial Officer by Stephen L. Reynolds on January 6, 1998. Prior
to such date, Mr. Reynolds had been serving as Vice President and
Controller of Moovies.
ACCOUNTING TREATMENT
The purchase method of accounting will be used to account for the Merger
for financial reporting purposes. In accordance with such treatment, the total
purchase price will be allocated to Moovies' identifiable assets and liabilities
based on estimated fair values with the excess of the cost over the estimated
fair value of Moovies assets acquired currently estimated to be approximately
$46 million expected to be amortized over 20 years on a straight line basis. See
"Unaudited Pro Forma Combined Financial Information." In addition, upon
consummation of the Merger and the release of the Escrow Shares to Messrs.
Potter, Bedard and Howard, Video Update will recognize at the time of such
release a substantial one-time, non-cash, non-tax deductible charge for
compensation expense estimated at approximately $2,667,600 or $.09 per share
(assuming a closing sale price of $2.28 for Video Update Common Stock as of
January 20, 1998). See "Proposal to Terminate and Cancel the Escrow Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material federal income tax
considerations of the Merger that are applicable to holders of Moovies Common
Stock. This discussion reflects the opinion of Gadsby & Hannah LLP, counsel to
Video Update, attached as Exhibit 8.1 to the Registration Statement of which
this Joint Proxy Statement/Prospectus is a part (the "Exhibit Opinion"). The
Exhibit Opinion includes an opinion to the effect that the Merger will
constitute a "reorganization" (a "Reorganization") for federal income tax
purposes within the meaning of Section 368(a) of the Code. The Exhibit Opinion
is based on certain assumptions and representations and is subject to certain
limitations and qualifications as noted in the opinion.
Moovies stockholders should be aware that this section does not deal with
all federal income tax considerations that may be relevant to particular Moovies
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are foreign persons or who acquired their
Moovies Common Stock through stock option or stock purchase programs or in other
compensatory
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transactions. In addition, the following discussion does not address the tax
consequences of transactions effectuated prior to or after the Merger (whether
or not such transactions are in connection with the Merger) including, without
limitation, the exercise of options or rights to purchase Moovies Common Stock
in anticipation of the Merger. Finally, no foreign, state or local tax
considerations are addressed herein. ACCORDINGLY, MOOVIES STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM.
The following discussion is based on the interpretation, by counsel, of the
Code, applicable Treasury Regulations, judicial authority and administrative
rulings and practice, all as of the date hereof. The Internal Revenue Service
(the "IRS") is not bound by such discussion and is not precluded from adopting a
contrary position. In addition, no assurance can be given that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the Merger to Video Update, Moovies and
their respective stockholders.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger qualifying as a Reorganization, Gadsby & Hannah LLP, the
counsel of Video Update is of the opinion that:
(a) No gain or loss will be recognized by the holders of Moovies
Common Stock upon the receipt of Video Update Common Stock solely in
exchange for such Moovies Common Stock in the Merger (except to the extent
of cash received in lieu of fractional shares).
(b) The aggregate tax basis of the Video Update Common Stock so
received by Moovies stockholders in the Merger (including any fractional
share of Video Update Common Stock not actually received) will be the same
as the aggregate tax basis of the Moovies Common Stock surrendered in
exchange therefor.
(c) The holding period of the Video Update Common Stock received by
each Moovies stockholder in the Merger will include the holding period for
the Moovies Common Stock surrendered in exchange therefor, provided that
the Moovies Common Stock so surrendered is held as a capital asset at the
Effective Time.
(d) Cash payments received by holders of Moovies Common Stock in lieu
of a fractional share will be treated as received in redemption of such
fractional shares, subject to the provisions of Section 302 of the Code, as
if such fractional share of Video Update Common Stock had been issued in
the Merger and then redeemed by Video Update.
(e) No gain or loss will be recognized by Video Update, Sub or Moovies
solely as a result of the Merger.
Neither Video Update nor Moovies has requested a ruling from the IRS in
connection with the Merger. However, it is a condition of the respective
obligations of Moovies to consummate the Merger that Moovies receive a tax
opinion from Gadsby & Hannah LLP to the effect that for federal income tax
purposes, the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code. The Exhibit Opinion is not intended to satisfy this
closing condition. This closing opinion, which is referred to herein as the "Tax
Opinion," neither binds the IRS nor precludes the IRS from adopting a contrary
position. As with the Exhibit Opinion, the Tax Opinion will be subject to
certain assumptions and qualifications and will be based on the truth and
accuracy of certain representations of Video Update, Moovies, Sub, and certain
of their respective stockholders, including representations in certain
certificates of the respective managements of Video Update, Moovies and Sub.
A successful IRS challenge to the Reorganization status of the Merger would
result in a Moovies stockholder recognizing gain or loss with respect to each
share of Common Stock of Moovies surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the Effective
Time of the Merger, of the Video Update Common Stock received in exchange
therefor. In such
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event, a stockholder's aggregate basis in the Video Update Common Stock so
received would equal its fair market value, and the stockholder's holding period
for such stock would begin the day after the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
Video Update Common Stock would recognize gain to the extent that such shares
were considered to be received in exchange for services or property (other than
solely Moovies Common Stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that a
Moovies stockholder was treated as receiving (directly or indirectly)
consideration other than Video Update Common Stock in exchange for the
stockholder's Moovies Common Stock.
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and specified waiting period
requirements have been satisfied. Video Update and Moovies filed notification
and report forms under the HSR Act with the FTC and the Antitrust Division on
November 13, 1997, and early termination of the waiting period established by
the HSR Act was granted on or about November 18, 1997. Although management
considers any FTC or Antitrust Division action unlikely, given such
notification, at any time before or after consummation of the Merger, the
Antitrust Division or the FTC could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, including seeking to
enjoin the consummation of the Merger or seeking divestiture of stores or other
assets of Video Update or Moovies. In addition, at any time after the Effective
Time of the Merger, any state could take such action under its antitrust laws as
it deems necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of the Merger or seeking divestiture
of stores or other assets of Video Update or Moovies. Private parties may also
seek to take legal action under the antitrust laws under certain circumstances.
Based on information available to them, Video Update and Moovies believe
that the Merger can be effected in compliance with federal and state antitrust
laws. However, no assurance can be given that a challenge to the consummation of
the Merger on antitrust grounds will not be made or that, if such a challenge
were made, Video Update and Moovies would prevail or would not be required to
accept certain conditions, including the divestiture of stores or other assets
and/or commitments as to future business practices and other matters, in order
to consummate the Merger.
LENDER APPROVALS
The Merger Agreement requires the approval and consent of each of Moovies'
and Video Update's bank lenders under their respective bank credit agreements.
Moovies has $49.0 million outstanding as of December 31, 1997 under its bank
credit agreement and Video Update has $32.0 million outstanding as of December
31, 1997 under its bank credit agreement (the "Line of Credit"). The Line of
Credit was executed in February 1997 and is convertible into a two-year term
loan if it is not renewed.
Video Update has retained Banque Paribas (the "Bank") to seek credit
approval to underwrite a senior credit facility to be made available by it and
several other lenders (the "Syndicated Lenders") aggregating up to $125,000,000
(a "Senior Facility") of which approximately $100,000,000 will be available as
term loans and approximately $25,000,000 will be available as a capital
expenditure facility and/or line of credit. The arrangement is not a commitment
letter from the Bank and the Bank has not given any assurances, or made any
representations, that any commitment will be obtained or provided. Moreover, if
a commitment is provided, it may not be for the entire Senior Facility and,
under such circumstances, such commitment will be conditioned upon obtaining
commitments from other financial institutions for the remainder of the Senior
Facility. In addition, any such commitment (whether for all or any portion of
the Senior Facility) would be subject to a variety of preconditions, including,
without limitation, no material adverse change in the business, property,
assets, accounting treatment, liabilities, condition (financial or otherwise) or
prospects of Video Update and its subsidiaries taken as a whole or in the
financial, banking or capital markets for senior
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syndicated debt financings for leveraged transactions generally. Any commitment
would also be subject to the negotiation, execution and delivery of definitive
credit documentation. No assurances can be given that a commitment letter will
be obtained, that all of the preconditions set forth in the commitment letter
will be satisfied, or that definitive agreements will be executed at the
Effective Time. The approval of each of Video Update's and Moovies' current bank
lenders is a condition to consummation of the Merger Agreement. Such approvals
are not likely to be obtained unless and until the Senior Facility (or a similar
facility) becomes effective. Accordingly, if definitive agreements for the
Senior Facility (or a similar facility), are not executed at or prior to the
Effective Time, the Merger Agreement will not be consummated.
If the Senior Facility becomes effective, Video Update expects that the
proceeds of the Senior Facility will be used to (i) refinance approximately
$34,000,000 of current outstanding indebtedness of Video Update under the Line
of Credit, (ii) refinance approximately $50,000,000 of indebtedness of Moovies
under Moovies' existing bank credit agreement, (iii) pay transaction fees and
expenses relating to the Merger of approximately $11,000,000, (iv) fund new
store openings and/or additional acquisitions following the closing of the
Merger and (v) fund conversion and integration costs of approximately
$10,000,000 following the Merger. If the Senior Facility (or a similar facility)
becomes effective on the terms set forth in the retainer letter with the Bank,
the Senior Facility is expected to bear interest at variable rates based on the
"base rate" (i.e., the higher of the federal funds rate plus 1/2 of 1% or the
prime commercial lending rate) or the interbank Eurodollar rate (approximately
8 1/2%, and 5 1/4% per annum as of January 20, 1998), respectively plus an
applicable margin rate that could range from 2% to 3 3/4%. In addition, the
Senior Facility (or a similar facility) is expected to include negative,
affirmative and financial covenants customarily found in the Syndicated Lenders'
loan agreements for similar financings and others deemed by such lenders to be
appropriate to this transaction, including, but not limited to, minimum pretax
earnings, minimum free cash flow, minimum net worth, maximum indebtedness,
maximum leverage, minimum fixed charge coverage, a prohibition or restriction on
capital expenditures, debt and guarantees, liens and encumbrances on any
property, mergers, consolidations, investments, advances, diversitures, change
of business or conduct of business, joint ventures, partnerships, the creation
of new subsidiaries, dividends, distributions, repurchases or redemptions of
outstanding stock (including options or warrants), the voluntary prepayment,
repurchase redemption or defeasance of debt, and the acquisition, sale or
transfer, lease or sale-leaseback of assets. The Senior Facility (or a similar
facility) is expected to involve a pledge of substantially all of Video Update's
and its subsidiaries' assets to secure its obligations thereunder. The closing
of the Merger is not specifically contingent on the expected terms of the Senior
Facility, but rather is contingent upon approval of the present primary lenders
to Video Update and Moovies. Accordingly, if such approvals can be obtained, the
Merger may close, even if the funds utilized to pay the current lenders are
available only on somewhat different terms.
If the Senior Facility (or a similar facility) becomes effective and if
Video Update is unable to maintain its current level of operations after the
Effective Time, it will be required to reduce its overall expenditures and
expansion plans to comply with the covenants and requirements of the Senior
Facility (or such similar facility). Additionally, any failure by Video Update
to maintain its level of operations within the covenants and requirements of the
Senior Facility (or similar facility) could cause Video Update to be in default
thereunder, allowing the Syndicated Lenders (or other lenders) to take legal
action against Video Update, including but not limited to, the immediate
acceleration of payment of borrowed funds, which could materially and adversely
affect Video Update's operations. The immediate acceleration of debt thereunder
or the lack of further borrowing capacity, in whole or in part, would have a
material adverse effect on Video Update's operations and financial condition.
Video Update expects that its cash and cash equivalents, when combined with
those of Moovies and funds available under the Senior Facility (or a similar
facility), will be sufficient to fund the planned store openings and other
operating cash needs of Video Update for at least the next twelve months
following the Merger. However, no assurance can be given that Video Update will
not require additional sources of financing prior to such time, as a result of
unanticipated cash needs or opportunities, an expanded growth strategy or
disappointing operating results. No assurance can be given that the additional
funds required, whether within the next twelve months or thereafter, will be
available on satisfactory terms, if at all.
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FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Video Update Common Stock received by Moovies stockholders in
the Merger will be freely transferable, except that shares of Video Update
Common Stock received by persons who are deemed to be affiliates of Moovies
prior to the Merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144
in the case of such persons who become affiliates of Video Update) or otherwise
in compliance with (or pursuant to an exemption from) the registration
requirements of the Securities Act. Persons deemed to be affiliates of Moovies
or Video Update are those individuals or entities that control, are controlled
by, or are under common control with, such party and generally include executive
officers and directors of such party as well as certain principal stockholders
of such party. The Merger Agreement requires Moovies to cause each of its
affiliates to execute a written agreement to the effect that such person will
not offer or sell or otherwise dispose of any of the shares of Video Update
Common Stock issued to such person in or pursuant to the Merger except in
compliance with the Securities Act and the rules and regulations promulgated by
the Commission thereunder. This Joint Proxy Statement/Prospectus does not cover
any resales of Video Update Common Stock received by affiliates of Moovies in
the Merger.
NASDAQ LISTING
It is a condition to the Merger that the shares of Video Update Common
Stock to be issued pursuant to the Merger Agreement be approved for listing on
the Nasdaq National Market. An application will be filed for listing the shares
of Video Update Common Stock to be issued in the Merger on the Nasdaq National
Market.
NO APPRAISAL RIGHTS
Holders of Moovies Common Stock are not entitled to appraisal rights under
Section 262 of the DGCL in connection with the Merger because the Moovies Common
Stock was quoted on the Nasdaq National Market on the record date for the
Moovies Special Meeting and the shares of Video Update Common Stock to be issued
pursuant to the Merger will be listed on the Nasdaq National Market at the
Effective Time. Holders of Video Update Common Stock are not entitled to
appraisal rights under Section 262 of the DGCL in connection with the Merger
because Video Update is not a constituent corporation in the Merger.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement. Stockholders of
Video Update and Moovies are urged to read the Merger Agreement in its entirety
for a more complete description of the terms and conditions of the Merger.
GENERAL
The Merger Agreement provides that, following the approval of both the
Merger Proposal and the Escrow Proposal by the stockholders of Video Update, the
approval and adoption of the Merger Agreement by the stockholders of Moovies,
and the satisfaction or waiver of the other conditions to the Merger, Sub will
be merged with and into Moovies, with Moovies continuing as the Surviving
Corporation, which shall be a wholly owned subsidiary of Video Update.
If all conditions to the Merger are satisfied or waived, including the
approval of the Escrow Proposal, the Merger will become effective at the
"Effective Time", which is the time of the filing by Moovies and Sub of a duly
executed Certificate of Merger with the Secretary of State of the State of
Delaware.
CONVERSION OF SHARES
Upon consummation of the Merger, pursuant to the Merger Agreement and the
Exchange Ratio agreed to therein, each issued and outstanding share of Moovies
Common Stock will be converted into the right to receive .75 shares of Video
Update Common Stock. In addition, all holders of Video Update Class B Common
Stock will convert such shares into Video Update Common Stock at the Effective
Time. Simultaneously with the closing of the Merger (and after obtaining
approval of the Escrow Proposal), 130,000 shares of Video Update Class B Common
Stock will be cancelled, forfeited, and of no further force or effect while the
remaining 1,870,000 shares of Video Update Class B Common Stock (which includes
the 1,170,000 shares released from escrow but not canceled) will be converted
into an equivalent number of shares of Video Update Common Stock. Based upon the
number of outstanding shares of Video Update Common Stock and Moovies Common
Stock as of January 21, 1998, the stockholders of Moovies immediately prior to
the consummation of the Merger will own approximately 31.8% of the outstanding
shares of Video Update Common Stock immediately following consummation of the
Merger. If any holder of shares of Moovies Common Stock would be entitled to
receive a number of shares of Video Update Common Stock that includes a
fraction, then, in lieu of a fractional share, such holder will be entitled to
receive cash in an amount equal to such fractional share of Video Update Common
Stock based on the Exchange Ratio at the Effective Time. Each share of Sub
Common Stock issued and outstanding immediately prior to the Effective Time will
be converted into one share of common stock of the Surviving Corporation.
As soon as reasonably practicable after the Effective Time, American Stock
Transfer & Trust Company (the "Exchange Agent") will mail transmittal forms and
exchange instructions to each holder of record of Moovies Common Stock to be
used to surrender and exchange certificates formerly evidencing shares of
Moovies Common Stock for certificates evidencing the shares of Video Update
Common Stock to which such holder has become entitled. After receipt of such
transmittal forms, each holder of certificates formerly representing Moovies
Common Stock will be able to surrender such certificates to the Exchange Agent,
and each such holder will receive in exchange therefor certificates evidencing
the number of whole shares of Video Update Common Stock to which such holder is
entitled and any cash which may be payable in lieu of a fractional share of
Video Update Common Stock. MOOVIES STOCKHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
After the Effective Time, each certificate formerly representing Moovies
Common Stock, until so surrendered and exchanged, shall, for all purposes,
evidence only the right to receive the number of whole shares of Video Update
Common Stock which the holder of such certificate is entitled to receive in the
Merger and any cash payment in lieu of a fractional share of Video Update Common
Stock. The holder of such unexchanged certificate will not be entitled to
receive any dividends or other distributions payable by
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Video Update until the certificate has been exchanged. Subject to applicable
laws, following surrender of such certificates, such dividends and
distributions, together with any cash payment in lieu of a fractional share of
Video Update Common Stock, will be paid without interest.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things, (a) due organization, valid
existence and good standing of each of Video Update, Moovies and each of their
respective subsidiaries and certain similar corporate matters; (b) the capital
structure of each of Video Update and Moovies; (c) the authorization, execution,
delivery and enforceability of the Merger Agreement, the consummation of the
transactions contemplated by the Merger Agreement and related matters; (d)
conflicts under charters or by-laws, required consents or approvals and
violations of any instruments or law; (e) documents and financial statements
filed by each of Video Update and Moovies with the Commission and the accuracy
of information contained therein; (f) undisclosed liabilities; (g) the absence
of certain material adverse events, changes or events; (h) taxes and tax
returns; (i) properties; (j) intellectual property; (k) agreements, contracts
and commitments; (l) litigation; (m) environmental matters and hazardous
materials; (n) compliance with laws; (o) accounting and tax matters relating to
the Merger; (p) the accuracy of information supplied by each of Video Update and
Moovies in connection with the Registration Statement and this Joint Proxy
Statement/Prospectus; (q) labor matters; (r) insurance; and (s) the absence of
existing discussions with other parties. The representations and warranties will
expire on the consummation of the Merger.
CERTAIN COVENANTS
Pursuant to the Merger Agreement, each of Video Update and Moovies has
agreed that, during the period from the date of the Merger Agreement until the
Effective Time, except as otherwise consented to in writing by the other party
or as contemplated by the Merger Agreement, it and each of its respective
subsidiaries will: (a) carry on its business in the ordinary course in
substantially the same manner as previously conducted; (b) pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, and pay
or perform other obligations when due; (c) use reasonable efforts to preserve
intact its present business organization, management team and business
relationships; (d) not amend its Certificate of Incorporation or Bylaws, except
as contemplated by the Merger Agreement; (e) not accelerate, amend or change the
period of exercisability of options or restricted stock granted under any
employee stock plan or authorize cash payments in exchange for any options
granted under any employee stock plan, except as required pursuant to the plan
or any related agreement; (f) not issue or sell, or authorize or propose the
issuance or sale of, any shares of its capital stock or securities convertible
into shares of its capital stock, or any subscriptions, rights, warrants or
options to acquire or other agreements obligating it to issue any such shares or
other convertible securities, subject to certain exceptions (including the
issuance of shares upon the exercise of outstanding stock options, warrants, and
other convertible securities); (g) not declare or pay any dividends on or make
other distributions in respect of any of its capital stock, not effect certain
other changes in its capitalization, and not purchase or otherwise acquire,
directly or indirectly, any shares of its capital stock; (h) not make any
acquisitions; (i) not license, sell, lease, pledge mortgage or otherwise
encumber or otherwise dispose of properties or assets outside the ordinary
course of business; (j) not increase the compensation payable to its officers or
employees, grant additional severance or termination pay or enter into
employment or severance agreements except as contemplated in the Merger
Agreement, enter into any collective bargaining agreement or establish, adopt,
enter into or amend any plan for the benefit of its directors, officers, or
employees; (k) not incur indebtedness for money borrowed other than in the
ordinary course of business; and (l) cooperate with the other party to carry out
the purposes of the Merger Agreement.
Pursuant to the Merger Agreement, Video Update and Moovies each agree to
use their best efforts to (i) take all appropriate action to consummate the
transactions contemplated by the Merger Agreement as promptly as practical, (ii)
obtain any consents, licenses, permits, waivers, approvals, authorizations or
orders from governmental entities or other third parties required in connection
with the transactions contemplated by the Merger Agreement and (iii) make all
necessary filings and submissions with respect to the transactions
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contemplated by the Merger Agreement under federal, state and foreign securities
laws, antitrust laws and other applicable laws. Video Update and Moovies also
agree to use their best efforts to obtain any governmental clearances required
for the closing of the Merger.
SOLICITATION
The Merger Agreement provides that Moovies may, but shall not be obligated
to, directly or indirectly, through any officer, director, employee, financial
advisor, representative or agent, (i) solicit, initiate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, a proposal or offer for a merger, consolidation, business combination, sale
of substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer) or similar transaction involving such party
or any of its subsidiaries, other than the transactions contemplated by the
Merger Agreement (any of the foregoing inquiries or proposals being referred to
as an "Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide any non-public information to any person or entity
relating to, any Acquisition Proposal, or (iii) agree to or recommend any
Acquisition Proposal.
Moovies shall notify Video Update immediately after initiation of or
receipt by Moovies (or its advisors) of any Acquisition Proposal or any request
for nonpublic information in connection with an Acquisition Proposal or for
access to properties, books or records of such party by any person or entity
that informs such party that it is considering making, or has made, an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. Moovies shall continue to keep
Video Update informed, on a current basis, of the status of any such discussions
or negotiations and the terms being discussed or negotiated. Under no
circumstances shall Moovies provide to any party any non-public or confidential
information of or about Video Update.
MANAGEMENT OF VIDEO UPDATE FOLLOWING THE MERGER
The Board of Directors of Video Update will be comprised of the following 7
persons following the Effective Time: Daniel A. Potter, John M. Bedard, Daniel
C. Howard, Paul Kelnberger and Bernard Patriacca (all of whom are currently
directors of Video Update), and F. Andrew Mitchell, and Theodore Coburn (each of
whom are currently directors of Moovies). Mr. Yager and Ms. Vaughn, currently
Video Update directors, have agreed to resign at the Effective Time.
Upon the closing of the Merger, Daniel A. Potter, who is currently Chairman
and Chief Executive Officer of Video Update, will continue in those positions
after the Merger. See also "The Merger -- Management and Operations of Video
Update Following the Merger."
RELATED MATTERS AFTER THE MERGER
At the Effective Time, Sub will be merged with and into Moovies, and
Moovies will be the Surviving Corporation and a wholly owned subsidiary of Video
Update. Each share of Sub Common Stock issued and outstanding immediately prior
to the Effective Time will be converted into and exchanged for one validly
issued, fully paid and nonassessable share of common stock of the Surviving
Corporation.
The Certificate of Incorporation of Sub, as in effect immediately prior to
the Effective Time, shall become the Certificate of Incorporation of the
Surviving Corporation. The Bylaws of Sub, as in effect immediately prior to the
Effective Time, shall become the Bylaws of the Surviving Corporation.
After the Effective Time, all shares of Moovies Common Stock will cease to
be listed on the Nasdaq National Market, and the Surviving Corporation will
terminate the registration of Moovies Common Stock under the Exchange Act.
STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFITS
At the Effective Time, each outstanding option (a "Moovies Stock Option")
or warrant ("Warrant") to purchase shares of Moovies Common Stock shall be
deemed to constitute an option or warrant to acquire, on
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the same terms and conditions as were applicable under such Moovies Stock Option
or Warrant, the number of shares of Video Update Common Stock (rounded down to
the nearest whole number) as the holder of such Moovies Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time. The exercise price per
share of each such option or warrant, as so converted, will be equal to (x) the
exercise price for the shares of Moovies Common Stock otherwise purchasable
pursuant to such Moovies Stock Option or Warrant immediately prior to the
Effective Time divided by (y) the Exchange Ratio (rounded up to the nearest
whole cent). As of January 21, 1998, options to acquire approximately 775,000
shares of Moovies Common Stock and Warrants to purchase approximately 988,000
shares of Moovies Common Stock were outstanding. All outstanding Moovies Stock
Options will become exercisable in full upon the closing of the Merger. In
addition, Moovies has amended the stock option agreements in respect of options
to purchase approximately 432,000 shares of Moovies Common Stock held by
executive officers, officers, directors and other employees to extend the time
to exercise such outstanding options to one year after termination of employment
if such employee continues employment with Moovies through the Effective Time or
to one year after the last date of service as a non-employee director of Moovies
if such non-employee director continues to serve Moovies as such through the
Effective Time, as the case may be.
Video Update agreed to reserve for issuance a sufficient number of shares
of Video Update Common Stock for delivery upon exercise of the Moovies Stock
Options assumed as described above. As soon as practicable after the Effective
Time, Video Update shall file a registration statement on Form S-8 with respect
to the shares of Video Update Common Stock subject to such options.
Moovies has agreed to grant options to purchase no more than 50,000 shares
of Moovies Common Stock (at fair market value of such Moovies Common Stock on
the date of such grant) at or prior to the Effective Time.
Moovies intends to award stay-on bonuses aggregating approximately $550,000
to certain employees who are not otherwise entitled to change in control or
severance payments as an incentive for such employees to continue their
employment through the Effective Time. See "The Merger -- Interests of Certain
Persons in the Merger -- Employment and Severance Agreements."
STOCKHOLDERS RIGHTS PLAN
Moovies entered into a Rights Agreement dated as of December 20, 1996 with
First Union National Bank of North Carolina (the "Moovies Rights Plan"). The
Board of Directors of Moovies has taken action to provide that the transactions
contemplated by the Merger Agreement will not cause the shareholder rights under
the Moovies Rights Plan to become exercisable.
DIRECTOR AND OFFICER INDEMNIFICATION
The Merger Agreement provides that, for a period of six years from and
after the Effective Time, Video Update and the Surviving Corporation shall
indemnify and hold harmless each present and former director and officer of
Moovies against all costs or expenses, judgments, fines, losses, claims,
damages, liabilities or amounts paid in settlement incurred in connection with
any claim, action, suit, proceeding or investigation arising out of or
pertaining to any matter, whether asserted or claimed prior to, or at or after
the Effective Time, to the fullest extent that Moovies would have been permitted
under Delaware law and its Certificate of Incorporation or Bylaws in effect on
the date of the Merger Agreement to indemnify such person. Video Update and the
Surviving Corporation shall also be obligated to advance reasonable fees and
expenses, provided the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
person is not entitled to indemnification. In addition, the Merger Agreement
provides that Video Update shall indemnify and hold harmless certain Moovies
directors and/or officers for any obligations for payment of rent under leases
for Moovies stores for which such officers and/or directors provided personal
guarantees.
For a period of three years after the Effective Time, Video Update shall
cause the Surviving Corporation to maintain (to the extent available in the
market) in effect a directors' and officers' liability insurance policy
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covering those persons who are covered as of the date of the Merger Agreement by
Moovies' directors' and officers' liability insurance policy, with coverage in
an amount and scope at least as favorable as Moovies' existing coverage;
provided that neither Video Update nor the Surviving Corporation shall be
required to expend in excess of 200% of the annual premium paid by Moovies as of
the date of the Merger Agreement for such coverage (the "Current Premium"), and
if the premium would at any time exceed 200% of the Current Premium, the
Surviving Corporation shall maintain insurance policies which provide the
maximum coverage available at an annual premium equal to 200% of the Current
Premium.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
CONDITIONS
The respective obligations of Video Update and Moovies to effect the Merger
are subject to the satisfaction (or waiver) of numerous conditions, including
the following: (a) the Merger Proposal and the Escrow Proposal shall have been
approved by the stockholders of Video Update and the Merger Agreement shall have
been approved and adopted by the stockholders of Moovies; (b) the waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired, terminated or clearance shall have been obtained; (c) the Registration
Statement shall have become effective and shall not be the subject of a stop
order or proceedings seeking a stop order; (d) no order, nor preliminary or
permanent injunction shall be in effect that makes the Merger illegal or
otherwise prohibits the consummation of the Merger; (e) Video Update and Moovies
shall have received all necessary approvals under their respective bank credit
agreements (which in respect to the Moovies credit agreement requires the payoff
at the Effective Time of all amounts due thereunder, and no assurance can be
given that Video Update will, at the Effective Time, have obtained acceptable
financing to do so) (See "The Merger -- Lender Approvals"); and (f) the shares
of Video Update Common Stock to be issued in the Merger shall have been approved
for listing on the Nasdaq National Market.
The obligations of Video Update and Sub to effect the Merger are also
subject to the satisfaction or waiver of the following conditions: (i) the
representations and warranties of Moovies in the Merger Agreement shall be true
and correct as of the date of the Merger Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date (as defined therein) as though made on and as of the Closing Date,
except for changes contemplated by the Merger Agreement and failures to be true
and correct as do not have a material adverse effect on Video Update (the
"Moovies Representation Bringdown Condition"); (ii) Moovies shall have performed
in all material respects all covenants required to be performed by it under the
Merger Agreement at or prior to the Closing Date (the "Moovies Covenant
Condition"); and (iii) except as contemplated by the Merger Agreement, no
material adverse change in the business, financial condition, operations or
prospects of Moovies, as a whole, shall have occurred. In addition, the
obligations of Moovies to effect the Merger are subject to the satisfaction or
waiver of the following conditions: (i) the representations and warranties of
Video Update in the Merger Agreement shall be true and correct as of the date of
the Merger Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made on
and as of the Closing Date, except for failures to be true and correct as do not
have a material adverse effect on Video Update (the "Video Update Representation
Bringdown Condition"); (ii) Video Update shall have performed in all material
respects all covenants required to be performed by it under the Merger Agreement
at or prior to the Closing Date (the "Video Update Covenant Condition"), and
(iii) except as contemplated by the Merger Agreement, no material adverse change
in the business, financial condition, operations or prospects of Video Update,
as a whole, shall have occurred.
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TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of Video Update and Moovies:
(a) by mutual written consent of Video Update and Moovies; or
(b) by either Video Update or Moovies if the Merger shall not have
been consummated by January 31, 1998 provided that (i) either Video Update
or Moovies may extend such date to March 31, 1998 by providing written
notice thereof on or prior to January 31, 1998 (January 31, 1998, or March
31, 1998 if such date is so extended, is referred to as the "Outside Date")
and (ii) the right to terminate or extend the Merger Agreement under this
clause shall not be available to any party whose failure to fulfill any
obligation under the Merger Agreement has been the cause of or resulted in
the failure of the Merger to occur on or before such date (an extension of
the time for consummation of the Merger is expected); or
(c) by either Video Update or Moovies if a court of competent
jurisdiction or other Governmental Entity (as defined in the Merger
Agreement) shall have issued a nonappealable final order, decree or ruling
or taken any other nonappealable final action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; or
(d) by Video Update if, at the Moovies Special Meeting (including any
adjournment or postponement), the requisite vote of the stockholders of
Moovies in favor of the Merger Agreement shall not have been obtained; or
by Moovies if, at the Video Update Special Meeting (including any
adjournment or postponement), the requisite vote of the stockholders of
Video Update in favor of the Merger Proposal or the Escrow Proposal shall
not have been obtained; or
(e) by Video Update, if (i) after receipt by the Board of Directors of
Moovies of an Acquisition Proposal, the Board of Directors of Moovies shall
have withdrawn or modified its recommendation of the Merger Agreement or
the Merger; (ii) after the receipt by Moovies of an Acquisition Proposal,
Video Update requests in writing that the Board of Directors of Moovies
reconfirm its recommendation of the Merger Agreement or the Merger and the
Board of Directors of Moovies fails to do so within 10 business days after
its receipt of Video Update's request; (iii) the Board of Directors of
Moovies shall have recommended to the stockholders of Moovies an
Alternative Transaction (as defined in the Merger Agreement); (iv) a tender
offer or exchange offer for 20% or more of the outstanding shares of
Moovies Common Stock is commenced (other than by Video Update or an
affiliate of Video Update) and the Board of Directors of Moovies recommends
that the stockholders of Moovies tender their shares in such tender or
exchange offer; or (v) for any reason Moovies fails to call and hold the
Moovies Special Meeting at least two business days prior to the Outside
Date; or
(f) by Moovies, if (i) after receipt by the Board of Directors of
Video Update of an Acquisition Proposal, the Board of Directors of Video
Update shall have withdrawn or modified its recommendation of the Merger
Agreement or the Merger; (ii) after the receipt by Video Update of an
Acquisition Proposal, Moovies requests in writing that the Board of
Directors of Video Update reconfirm its recommendation of the Merger
Proposal and the Board of Directors of Video Update fails to do so within
10 business days after its receipt of Moovies' request; (iii) the Board of
Directors of Video Update shall have recommended to the stockholders of
Video Update an Alternative Transaction (as defined in the Merger
Agreement); (iv) a tender offer or exchange offer for 20% or more of the
outstanding shares of Video Update Common Stock is commenced (other than by
Moovies or an affiliate of Moovies) and the Board of Directors of Video
Update recommends that the stockholders of Video Update tender their shares
in such tender or exchange offer; (v) for any reason Video Update fails to
call and hold the Video Update Special Meeting at least two business days
prior to the Outside Date; (vi) after receipt by the Board of Directors of
Moovies of an Acquisition Proposal, the Board of Directors of Moovies shall
have withdrawn or modified its recommendation of the Merger Agreement or
the Merger; (vii) the Board of Directors of Moovies shall have recommended
to the stockholders of Moovies an Alternative Transaction (as defined in
the Merger Agreement); (viii) a tender offer or exchange offer for 20% or
more of the
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outstanding shares of Moovies is commenced (other than by Video Update or
an affiliate of Video Update) and the Board of Directors of Moovies
recommends that the stockholders of Moovies tender their shares in such
tender or exchange offer; or (ix) Video Update has not obtained financing
sufficient to obtain the consent of Moovies' lender to the consummation of
the Merger and otherwise satisfactory to Moovies in its sole good faith
discretion; or
(g) by Video Update or Moovies, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in the Merger Agreement, which breach (i) causes the
Moovies Representation Bringdown Condition or the Moovies Covenant
Condition (in the case of a termination by Video Update) or the Video
Update Representation Bringdown Condition or the Video Update Covenant
Condition (in the case of a termination by Moovies) not to be satisfied and
(ii) shall not have been cured within 10 business days following receipt by
the breaching party of written notice of such breach from the other party
(such a breach shall be referred to herein as a "Section 7.1(f) Breach").
In the event of any termination of the Merger Agreement by either Video
Update or Moovies as provided above, the Merger Agreement will become void and
there will be no liability or obligation (with limited exceptions) on the part
of Video Update, Moovies, Sub or their respective officers, directors,
stockholders or affiliates, except with respect to confidentiality and as
provided below with respect to expense reimbursements and termination fees.
Except as set forth below, whether or not the Merger is consummated, all
fees, costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby shall be paid by the party incurring such
expenses.
Moovies shall pay Video Update a termination fee of $800,000 (the "Video
Update Termination Fee") upon the earliest to occur of the following events: (i)
the termination of the Merger Agreement by Video Update under the circumstances
described in paragraph (e) above; (ii) the termination of the Merger Agreement
by Moovies under the circumstances described in paragraph (f)(vi) through
(f)(viii) above; or (iii) the termination of the Merger Agreement by Video
Update under the circumstances described in paragraph (g) above after a breach
by Moovies of a covenant or agreement in the Merger Agreement or if any
representation or warranty of Moovies was not true and correct in all material
respects on or as of the date made. Moovies' payment of the Video Update
Termination Fee as described in this paragraph shall be the sole and exclusive
remedy of Video Update against Moovies and any of its subsidiaries and their
respective directors, officers, employees, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment;
provided that this liquidated damage provision shall not apply in the event of a
willful breach of the Merger Agreement by Moovies.
Video Update shall pay Moovies a termination fee of $800,000 (the "Moovies
Termination Fee") upon the earliest to occur of the following events: (i) the
termination of the Merger Agreement by Moovies under the circumstances described
in paragraph (f)(i) through (f)(v) above; or (ii) the termination of the Merger
Agreement by Moovies under the circumstances described in paragraph (g) above
after a breach by Video Update of a covenant or agreement in the Merger
Agreement or if any representation or warranty of Video Update was not true and
correct in all material respects on or as of the date made. As an alternative to
the termination fee of $800,000, Video Update shall pay Moovies a termination
fee of $400,000 upon termination of the Agreement by Moovies if the Escrow
Proposal is not approved by Video Update stockholders at the Video Update
Special Meeting and neither of the events described in clauses (i) and (ii) of
the immediately preceding sentence has occurred. Video Update's payment of the
Moovies Termination Fees as described in this paragraph shall be the sole and
exclusive remedy of Moovies against Video Update and any of its subsidiaries and
their respective directors, officers, employees, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment;
provided that this liquidated damage provision shall not apply in the event of a
willful breach of the Merger Agreement by Video Update.
If applicable, any expenses and fees payable as described above shall be
paid within one business day after the first to occur of the relevant
termination events described in paragraph (g) above or by the earlier of
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45 calendar days from termination or the closing of an Alternative Transaction
described in paragraphs (e) and (f) above, as the case may be.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by action taken or
authorized by the respective Boards of Directors of Video Update and Moovies,
but after approval by the stockholders of Video Update or Moovies of the Merger,
no amendment shall be made which by law requires further approval by such
stockholders, without such further approval. Although not set forth specifically
in the Merger Agreement, Video Update and Moovies, by action taken or authorized
by their respective Boards of Directors, may extend the time for performance of
the obligations or other acts of the other parties to the Merger Agreement, may
waive inaccuracies in the representations or warranties contained in the Merger
Agreement and may waive compliance with any agreements or conditions contained
in the Merger Agreement.
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VIDEO UPDATE, INC.
BUSINESS
The information in this section pertains to the business of Video Update as
it is currently and expected to be conducted.
General
As of January 20, 1998, Video Update owns and operates 406 video specialty
stores under the name "Video Update" located in Alaska, Arizona, Arkansas,
California, Colorado, Georgia, Illinois, Indiana, Minnesota, Missouri, Nevada,
New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Washington,
Wisconsin and six provinces in Canada and franchises 35 additional video
specialty stores in the United States and Canada. As of January 20, 1998, 257,
or approximately 96%, of Video Update's stores in the United States, and 94, or
approximately 69% of Video Update's Canadian stores, are superstores which are
defined as retail video stores that carry more than 7,500 rental units. Video
Update 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. Video Update stores in the United States and Canada offer on average
approximately 10,700 and 8,500 rental units, respectively, including multiple
copies of new and popular releases and video games, in a visually appealing and
customer friendly layout.
Video Update franchised its first store in January 1983 and opened its
first company-owned store in September 1989. By July 1994, when Video Update
completed its initial public offering, Video Update had grown to 15
company-owned stores and 30 franchised stores and had developed a cost-effective
superstore format that distinguished Video Update 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 the fiscal year ended April
30, 1997, Video Update grew rapidly in size from 204 to 343 company-owned
stores. During this period, Video Update acquired 74 video stores in 10
transactions, opened 71 new video superstores and closed 6 stores, including
stores closed related to acquisitions. Same store sales during fiscal 1997
increased by approximately 5.3%. As a result of these acquisitions, new
superstore openings and increases in same store sales, Video Update's revenues
and net income increased from approximately $50,504,000 and $1,628,000 in fiscal
1996, to approximately $91,799,000 and $4,620,000 in fiscal 1997, respectively.
Operating Strategy
Video Update's management has substantial experience in the video retailing
industry. Through the management team, Video Update has developed a
cost-effective superstore format that distinguishes Video Update 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 Video
Update's operating strategy, the key elements of which include the following:
Provide Extensive Selection of Videocassettes. At January 20, 1998, 257,
or approximately 96%, of Video Update's stores in the United States and 94, or
approximately 69%, of Video Update's Canadian stores are superstores.
Superstores are video rental stores that have more than 7,500 rental units.
Video Update believes that an extensive selection of videocassettes is a key
determinant that consumers consider in choosing to visit and patronize a
particular video store. Video Update tailors the videocassettes available for
rent in a given store according to the market served by that 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 per square footage of rental space. As a result, Video
Update 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.
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Effectively Manage Inventories. Video Update maintains an integrated point
of sale ("POS") system that provides it with access to and feedback on records
related to, among other things, videocassette rentals, individual title
performance, category rental performance, shrinkage and overdue rentals. Video
Update endeavors to convert the POS systems of acquired stores to that of Video
Update's as quickly as is practicable. Video Update utilizes its POS system to
manage its inventory turns, purchase new inventory, and balance customer demand
and rental trends, all of which Video Update believes maximizes each store's
profitability.
Aggressive Marketing. Video Update utilizes an aggressive marketing
program designed to attract new customers and increase the frequency of rentals
by current customers. Video Update focuses its marketing on individual stores
and the local markets in which they operate. Direct mailings, including
postcards and flyers, are utilized regularly. Additionally, Video Update
promotes extensively with couponing and cross promotions. Video Update's popular
"Two-for-$.99 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. Prior to the Merger, Video Update has continued
developing new superstores and acquiring existing chains of stores in regions
where Video Update has existing operations. Following the Merger, Video Update
will acquire and operate former Moovies locations concentrated in 17 states. For
the remainder of the current fiscal year, Video Update intends to focus on
maximizing the operating efficiencies of these acquired locations and its
existing locations and on completing the build out of new stores in locations
for which Video Update has signed lease commitments, rather than on aggressively
expanding with new superstores in additional metropolitan areas where it does
not presently have locations. Video Update expects that the geographic
concentration of its existing stores together with stores acquired in the Merger
will allow Video Update 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, although no
assurances can be given. Because Video Update operates multiple stores, it is
able to receive relatively large aggregate cooperative advertising credits from
its distributors. Video Update receives cooperative advertising credits for each
store it operates, and by operating multiple stores in a single geographic
market, Video Update can more effectively use cooperative advertising credits to
maximize the impact of its advertising.
Consistency of Image and Operations. Video Update strives to create a
national presence and name recognition. To achieve this objective and to most
efficiently and effectively operate its stores, Video Update 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. Video Update 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. Subject to
permit requirements and other such regulatory controls, Video Update installs
exterior signage as soon as practicable. To expedite the integration of acquired
businesses, Video Update has developed a uniform approach that management
believes minimizes the time necessary to fully assimilate an acquired store's
operations into those of Video Update.
Growth Strategy
In its efforts to continue to increase its national presence, Video Update
intends to emphasize the following key elements in its growth strategy:
Targeted Acquisitions. Video Update believes that acquiring chains of
stores can be the most cost-effective means of entering a new market,
particularly when the stores are in desirable locations. Video Update 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 Video Update to grow further through
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acquisitions. Video Update believes that it will continue to be presented with
attractive acquisition opportunities.
Targeted Superstore Development. Following the Merger, Video Update
intends to focus on maximizing the operating efficiencies of the locations
acquired in the Merger as well as its existing locations and on completing the
build out of new stores in locations for which Video Update has signed lease
commitments, rather than on aggressively expanding with new superstores in
additional metropolitan areas where it does not presently have locations. Video
Update intends to open a limited number of superstores (currently estimated to
be no more than 40 new superstores in the twelve months following the Merger) in
its existing markets and selected new markets where attractive opportunities are
available. Although no assurance can be given, Video Update 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 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. Video
Update estimates that each new superstore currently requires up to 24 months of
operations in order to ramp-up to its expected level of mature operations.
Franchise Operations. Franchised superstores operate under substantially
the same hours and methods of operation as company-owned stores. Video Update
currently intends to franchise stores primarily in areas where Video Update 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 12:00 midnight Friday and Saturday. Video Update'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 5,900 and 4,600 square feet in size and are
expected to be representative of Video Update's superstore prototype going
forward.
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Video Updates 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 location of existing company-owned and franchised
stores as of January 20, 1998:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY-OWNED NUMBER OF
STATE OR PROVINCE STORES FRANCHISED STORES TOTAL OF STORES
------------------------------- ------------- ----------------- ---------------
<S> <C> <C> <C>
Alaska......................... 3 -- 3
Arizona........................ 44 -- 44
Arkansas....................... 2 -- 2
California..................... 1 -- 1
Colorado....................... 2 -- 2
Georgia........................ 1 -- 1
Illinois....................... 22 -- 22
Indiana........................ 27 -- 27
Minnesota...................... 58 10 68
Missouri....................... 12 -- 12
Nevada......................... 7 -- 7
New Hampshire.................. -- 7 7
New Mexico..................... 1 -- 1
Ohio........................... 4 -- 4
Oklahoma....................... 6 -- 6
Oregon......................... 2 -- 2
Pennsylvania................... 13 1 14
Texas.......................... 22 -- 22
Utah........................... 3 -- 3
Virginia....................... -- 12 12
Washington..................... 38 -- 38
Wisconsin...................... 1 1 2
Alberta........................ 65 1 66
British Columbia............... 63 3 66
Manitoba....................... 5 -- 5
Ontario........................ 2 -- 2
Saskatchewan................... 1 -- 1
Yukon.......................... 1 -- 1
--- --- ---
Total................ 406 35 441
=== === ===
</TABLE>
Management Information Systems
Video Update believes the accurate and efficient management of purchasing,
inventory and sales records has been important to Video Update's success. Video
Update 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.
Video Update 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 system also maintains
detailed rental history of each customer and title. This information produces
the reports used by Video Update, including those used in making purchasing
decisions on new releases. All of Video Update's stores use Video Update's POS
system when opened or converted to the Video Update concept, in the case of an
acquired store.
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Products
Videocassette Rental. Video Update'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. Video Update's
stores generally carry approximately 10,700 and 8,500 videos for rent in its
United States and Canadian stores, respectively, representing approximately
8,200 and 6,300 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. Video Update determines its
rental prices for titles and duration of rentals based on the length of time the
title has been available on videocassette. Video Update believes that its rental
prices are competitive to those of other video stores, and its videocassettes
are available for one-day and multiple-day rentals.
Video Games. In addition to videocassette rentals, stores also rent video
games for use with Sony Playstation(TM), Nintendo(TM), Nintendo64(TM) and Sega
Genesis(TM) video game machines.
Additional Products. Video Update rents audio books, which are 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, Video Update also sells blank videocassettes and video
cleaning equipment and rents videocassette and video game players. In addition,
Video Update sells previously viewed videocassettes and new and used video
games.
Franchise Operations
Video Update currently intends to franchise superstores in areas where it
does not expect to pursue new superstore development or acquisitions.
The standard company franchise agreement generally requires the franchisee
to pay Video Update a continuing monthly royalty fee equal to five percent of
the franchisee's gross monthly rental 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 product 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 Video Update's current franchising program, Video Update 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, Video Update provides advice to the franchisee on
promotions, store displays and inventory control as well as a five day
comprehensive training course.
Video Update monitors franchisees' compliance with ongoing obligations on
the basis of monthly revenue reports and inventory reports. The franchise
agreement generally also grants Video Update the right to audit the franchisee's
books, business records, sales reports, financial statements, and tax returns at
any time. The franchise agreement allows Video Update to terminate the franchise
under certain conditions, including without limitation, failure to comply with
Video Update'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, Video Update is not aware of any material problems
relating to the understatement of revenues by franchisees.
Marketing and Advertising
Video Update primarily relies on direct mail advertising to promote its
business and increase the familiarity of potential customers with Video Update.
Video Update's direct mail typically consists of pricing-related promotions such
as two-for-one coupons or a free rental coupon for new customers. Video Update's
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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. Video Update also benefits from the advertising and
marketing of studios and theaters in connection with their efforts to promote
films and increase box office revenues. Video Update generally relies on
referrals from current franchisees and advertising in franchise-oriented
publications in marketing its franchises.
Suppliers
Video Update currently 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, The Shannock Corporation of
Canada, and Ingram Entertainment Incorporated of Nashville, Tennessee.
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, Video Update transfers videocassettes from existing
stores and purchases videocassettes from suppliers.
Video Update currently purchases new release rental videocassettes at an
average cost of approximately $45. Since September 1989, Video Update has
acquired most of its new release inventory from Sight and Sound, and during each
of fiscal 1995 and 1996 Video Update purchased approximately 75% and in 1997
Video Update purchased approximately 57%, of its new release titles from that
supplier. Video Update believes that, if its relationship with Sight and Sound
were terminated, Video Update could obtain videocassettes from other suppliers
at prices and on terms comparable to those available from Sight and Sound.
Suppliers generally provide Video Update with a comprehensive monthly
listing of all new video releases. In addition, movie studios generally provide
Video Update with several copies of a new release video for preview by Video
Update. Video Update's movie selection committee uses listings of new releases,
video previews, knowledge of the popularity of past video releases and Video
Update's computerized information on the past performance of titles rented by
Video Update to select the titles and number of copies of each title to be
acquired for rental in each of its stores. Video Update is permitted to return
unopened or defective videocassettes to its suppliers in certain circumstances.
Video Update purchases video game software from a variety of distributors, based
on price and availability.
In connection with the signing of the Merger Agreement, Video Update also
has executed the "Rentrak Agreement" with Rentrak, a distributor of prerecorded
videocassettes and other media, which agreement would be effective only upon the
closing of the Merger. Under the Rentrak Agreement, Video Update would be
obligated to obtain a minimum annual dollar amount of new release titles from
Rentrak. The minimum dollar amount is subject to increase or decrease depending
on Video Update's gross revenues from video rentals/sales and the number of
major studios participating in Rentrak.
Under the Rentrak Agreement, Video Update would choose which stores offer a
title from Rentrak, but if a store obtains a copy of a new release title from
Rentrak it would have to obtain all copies of that title from Rentrak. Video
Update believes that Rentrak could be a cost effective source for larger orders
of an individual title. Using Rentrak could enable Video Update to order larger
numbers of copies of a particular title to satisfy customer demand than would be
cost-effective if the copies were purchased for rental. When Video Update
chooses to offer a title under the Rentrak Agreement a minimum number of copies
for each store is often established by Rentrak based on prior experience with
similar titles. Video Update expects to be able to obtain a wide variety of
titles under the Rentrak Agreement because Rentrak has a supplier relationship
with three of the six largest studios.
To obtain the full benefits of the Rentrak Agreement, Video Update must
correctly identify the new release and other titles that it should lease from
Rentrak and the stores that should receive them. To the extent that Video Update
obtains new releases or other video products from Rentrak for too many or the
wrong
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stores, Video Update's operations and profits could be adversely affected. No
assurances can be given that Video Update will be effective in using Rentrak as
a supplier under the Rentrak Agreement to achieve its intended results.
Inventory
New release videocassettes are ordered by Video Update 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 Video Update'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 rental industry is highly competitive. Video Update competes with
other video retail stores, including Blockbuster Entertainment division of
Viacom, Inc. ("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,
Video Update competes with other leisure-time activities, especially
entertainment activities such as movie theaters, sporting events, network
television and cable television.
Video Update 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.
Certain of Video Update's larger, better capitalized competitors may seek
to acquire some of the same video specialty stores that Video Update 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 Video Update's
growth.
Video Update'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 Video
Update. Potential franchisees may believe that these franchisers offer greater
opportunities for success than Video Update.
Service Marks
Video Update has a federal registration for its service mark "Video
Update(R)" and logos that include its service mark. Video Update also holds
registrations in Canada for its service marks and logos. Video Update considers
its service marks to be important to its business and intends to actively
protect them.
Government Regulation
Video Update 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. Video
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<PAGE> 78
Update also must comply with various regulations affecting its business,
including state and local licensing, zoning, land use, construction and
environmental regulations.
Video Update 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 Video Update to make material capital expenditures for
compliance.
Video Update 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, Video Update 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. Although no assurance can be given, Video Update maintains a
franchise offering circular intended to comply with all applicable federal and
state franchise sales laws. However, if Video Update is unable to comply with
the franchise sales laws and regulations of any state that regulates the offer
and sales of franchises, Video Update will be unable to offer and sell
franchises in such state.
Video Update 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 Video Update to stop
offering and selling franchises until its franchise offering circular is
updated. No assurance can be given that Video Update'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 Video Update 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.
Video Update 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.
Compliance with federal and state franchise laws is costly and time
consuming, and no assurance can be given that Video Update will not encounter
difficulties or delays in this area or that it will not require significant
capital for franchising activities.
Employees
As of January 16, 1998, Video Update employed 3,929 persons, including
3,650 in company-owned stores and 279 in Video Update's corporate,
administrative and warehousing operations. Of the employees, approximately 606
were full-time and 3,323 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 Video Update's Vice
Presidents of Store Operations, who in turn report to the Chief Operating
Officer. Video Update believes that its employee relations are satisfactory.
Video Update 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.
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<PAGE> 79
Properties
Video Update leases substantially all of the sites (including buildings and
improvements) where its company-owned video stores are located. 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. Video Update is generally
responsible for real estate taxes, insurance and utilities under all leases. The
occupancy expense for these sites for the years ended April 30, 1995, 1996 and
1997 was approximately $1,426,000, $10,304,000 and $20,777,000, respectively.
Video Update expects that most future video superstores will also occupy leased
premises. Video Update owns three locations for company-owned superstores, one
of which is subject to a mortgage.
Video Update'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, Video Update does
not guarantee and is not a party to such leases.
Video Update's corporate headquarters located at 3100 World Trade Center,
30 East Seventh Street, St. Paul, Minnesota 55101, consist of approximately
22,000 square feet of office space. Video Update's central distribution facility
is located at a different location in St. Paul, Minnesota and consists of
approximately 34,000 square feet. Video Update's headquarters and distribution
facilities are leased pursuant to agreements that expire on October 31, 2001 and
August 31, 2001, respectively. In addition, Video Update maintains other
locations for the offices of district and regional managers and for limited
storage purposes. Video Update expects that suitable additional space will be
available in the Twin Cities area, when needed, on commercially reasonable
terms.
Legal Proceedings
In connection with the acquisition of the assets of Videoland, Inc.
("Videoland") in November 1995, Video Update issued 239,163 shares of its Class
A Common Stock (the "Videoland Shares") to the sellers of the assets of
Videoland (the "Videoland Sellers"). With respect to the Videoland Shares, Video
Update agreed to make a deficiency payment in October 1996 to the Videoland
Sellers if the gross proceeds received by such sellers from the sale of the
Videoland Shares during the six months from March 1996 through September 1996 is
not equal to the number of shares of Videoland Shares sold multiplied by $12.00.
The Videoland Sellers were subject to certain "lockup" or sale restrictions as a
condition to any deficiency payment. Although the Videoland Sellers have now
requested a deficiency payment of approximately $1,220,000 in October 1996 based
on a sale of all of the Videoland Shares, Video Update believes that the
Videoland Sellers have violated the contractual lockup and sale restrictions.
Accordingly, Video Update has initiated an action in federal district court in
Minnesota for a declaratory judgment that the Videoland Sellers are not entitled
to any deficiency payment. Discovery in this matter has been completed and
crossmotions for summary judgment are now pending before the court. Although no
assurances can be given as to the outcome of such action, Video Update intends
to vigorously pursue the matter.
On January 23, 1997, the Video Update filed an action (the "Minnesota
Action") for breach of contract, breach of warranty, and negligence against
Kieffer & Co., Inc., a sign manufacturer, ("Kieffer") seeking damages that
resulted from Kieffer's manufacture and installation of signs on Video Update's
stores in several states in the United States. Kieffer filed counterclaims
against Video Update for breach of contract seeking $317,341.76 in damages. On
January 24, 1997, Kieffer commenced a separate action for breach of contract
(the "Wisconsin Action") against Video Update in Sheboygan County (Wisconsin)
Circuit Court seeking the same damages alleged in their counterclaim in the
Minnesota Action. Video Update removed the Wisconsin Action to the United States
District Court for the Eastern District of Wisconsin. That court has stayed the
Wisconsin Action pending the resolution of the Minnesota Action. On December 3,
1997, the parties settled their dispute pursuant to a confidential settlement
agreement containing mutual releases (the "Kieffer Settlement Agreement"). All
steps necessary to consummate the settlement have occurred. The parties are in
the process of executing and filing with the appropriate courts, the
stipulations to dismiss with prejudice the Minnesota Action and Wisconsin
Action. Video Update expects that both actions will be dismissed within the next
45 days.
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<PAGE> 80
Video Update has been in litigation with CHJ Associates ("CHJ"), a
Washington limited partnership, over a lease agreement. The matter has been
resolved by the execution of an executory settlement agreement (the "CHJ
Settlement Agreement"), under which CHJ will develop one or more Video Update
stores for Video Update in Washington state. Although no assurance can be given
as to whether CHJ will comply with the terms of the CHJ Settlement Agreement,
Video Update does not believe that the resolution of the matter will materially
adversely impact Video Update's financial position or results of operations.
Although no assurance can be given as to the outcome of such litigation,
Video Update does not believe that the resolution of any of these matters will
materially adversely impact Video Update's financial position or results of
operations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 21, 1998, 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 Video Update 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) (see, however, note 20) and director, and (iii) all directors and
executive officers of Video Update as a group.+
<TABLE>
<CAPTION>
BEFORE EFFECTIVE TIME
------------------------------------------------------- AFTER EFFECTIVE TIME(18)
NUMBER OF --------------------------
NUMBER OF PERCENTAGE CLASS B PERCENTAGE NUMBER OF PERCENTAGE
CLASS A OF CLASS A SHARES OF CLASS B CLASS A OF CLASS A
SHARES SHARES BENEFICIALLY SHARES SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING OWNED OUTSTANDING BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED(2)(3) (2)(3) (15)(16)(17) (15)(16)(17) OWNED(2)(19) (2)(19)
- ------------------------ ----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter,....... 370,000 2.0% 1,086,759 54.3% 1,386,120 4.7%
Chairman and Chief
Executive
Officer(3)(4)(19)
John M. Bedard,......... 205,000 1.1% 878,117 43.9% 1,026,039 3.5%
President and
Director(3)(5)(19)
Daniel C. Howard,....... 63,406 *% 35,124 1.8% 96,247 *%
Chief Operating
Officer and
Director(6)(19)
Stephen L. Reynolds,.... -- -- -- -- 40,313 *%
Chief Financial
Officer(7)
Richard Bedard,......... 42,000 *% -- -- 42,000 *%
Executive Vice
President(8)
Bruce D. Carlson,....... 63,406 *% -- -- 63,406 *%
Vice President of Real
Estate(9)
Michael G. Schifsky,.... 63,150 *% -- -- 63,150 *%
Vice President of
Store Development(10)
Robert E. Yager,........ 94,500 *% -- -- 94,500 *%
Regional Manager of
Store Operations and
Director(11)
Paul M. Kelnberger,..... 5,250 *% -- -- 5,250 *%
Director(12)
</TABLE>
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<PAGE> 81
<TABLE>
<CAPTION>
BEFORE EFFECTIVE TIME
------------------------------------------------------- AFTER EFFECTIVE TIME(18)
NUMBER OF --------------------------
NUMBER OF PERCENTAGE CLASS B PERCENTAGE NUMBER OF PERCENTAGE
CLASS A OF CLASS A SHARES OF CLASS B CLASS A OF CLASS A
SHARES SHARES BENEFICIALLY SHARES SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING OWNED OUTSTANDING BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED(2)(3) (2)(3) (15)(16)(17) (15)(16)(17) OWNED(2)(19) (2)(19)
- ------------------------ ----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Jana Webster Vaughn,.... 3,750 *% -- -- 3,750 *%
Director(12)
Bernard Patriacca,...... -- -- -- -- -- --
Director(13)
Investment Advisors, 1,956,400 10.8% -- -- 1,956,400 6.7%
Inc.(14a).............
Stein Roe & Farnham,
Incorporated(14b)..... 908,000 5.0% -- -- 908,000 3.1%
All Directors and
executive officers as
a group(20) (11
persons)+............. 910,462 4.9% 2,000,000 100% 2,820,775 9.5%
</TABLE>
- ---------------
+ Mr. Mitchell, currently a director of Moovies and a Moovies Designee, as
discussed herein, holds 1,000 shares of Video Update Class A Common
Stock. After the Effective Time, Mr. Mitchell will beneficially own
167,283 shares of Video Update Class A Common Stock, based upon the
exchange ratio of .75. Mr. Coburn, currently a director of Moovies and a
Moovies Designee, will hold options to purchase 116,250 shares of Video
Update Class A Common Stock, based upon the exchange ratio of .75. In
addition, Mr. Coburn and Mr. Mitchell will each receive 3,000 options to
purchase shares of Class A Common Stock upon appointment as directors of
Video Update.
* Less than one percent (1%) of the outstanding shares of Class A Common
Stock.
(1) The address of Messrs. Potter, John Bedard, Howard, Reynolds, 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
Video Update'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
4,783 shares of Class A Common Stock held by the executive officers of
Video Update through Video Update's 401(k) plan.
(3) Prior to the Effective Time, Messrs. Potter and Bedard will 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 63,406 shares of Class A Common Stock issuable
upon the exercise of various stock options. Excludes an aggregate of
30,094 shares of Class A Common Stock issuable upon the exercise of
various stock options that have not yet vested.
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<PAGE> 82
(7) Includes an aggregate of 40,313 shares of Class A Common Stock issuable
upon exercise of various stock options based upon the Exchange Ratio of
.75. Mr. Reynolds was appointed Chief Financial Officer of Video Update on
January 6, 1998.
(8) Includes an aggregate of 42,000 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 48,000 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(9) Includes an aggregate of 63,406 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 30,094 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(10) Includes an aggregate of 63,150 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 29,850 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(11) Includes an aggregate of 15,750 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 15,750 shares of Class A Common Stock issuable upon the
exercise of stock options that have not vested.
(12) Includes an aggregate of 3,750 shares of Class A Common Stock issuable
upon the exercise of various stock options that have vested. Excludes an
aggregate of 750 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. Each share of Class B
Common Stock is convertible into one share of Class A Common Stock at the
election of the record holder.
(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.
(18) Assumes approval by the stockholders of the Merger and the Escrow
Proposal. Assumes issuance of 9,375,000 shares of Class A Common Stock to
Moovies shareholders pursuant to the Merger. If the Merger and the Escrow
Proposal are approved, the there will be no shares of Class B Common Stock
outstanding after the Effective Time.
(19) After the Effective Time, Messrs. Potter, Bedard, and Howard will hold
1,286,120, 971,039, and 32,841 shares of Class A Common Stock,
respectively.
(20) Does not include shares or options held by Mr. Christopher Gondeck, former
Chief Financial Officer of Video Update, who holds 4,000 shares of Class A
Common Stock and an aggregate of 31,875 shares of Class A Common Stock
issuable upon the exercise of various stock options. Mr. Gondeck resigned
as Chief Financial Officer of Video Update on December 31, 1997.
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<PAGE> 83
CERTAIN EMPLOYMENT AGREEMENTS
In February 1996, Video Update 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 Video
Update. 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 Video Update. Each of Messrs. Potter
and Bedard have agreed to devote their full time and best efforts to fulfill
their duties and responsibilities to Video Update. Each of them will be entitled
to participate in employee benefit plans.
Video Update 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
Video Update, 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 Video Update, 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 Video Update by any
person, certain changes in the composition of the Board of Directors, and an
approval by the stockholders of Video Update of a merger, consolidation,
reorganization, liquidation, dissolution or sale of all or substantially all of
the assets of the company. The Merger will not trigger the ability of Messrs.
Potter and Bedard to terminate their employment and receive severance and fringe
benefits pursuant to such employment agreements.
Each of Messrs. Potter and Bedard has agreed not to disclose any
confidential information of Video Update 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.
In January, 1998, Video Update entered into an employment agreement with
Daniel C. Howard, its Chief Operating Officer and a director and stockholder. As
compensation, Mr. Howard is to receive an annual base salary of $128,400, plus
bonuses and stock options as determined by the Board of Directors. The agreement
is for an initial term of two years, and is automatically renewed for successive
one-year terms, unless terminated by Video Update or Mr. Howard. Upon
termination in accordance with the agreement, Mr. Howard is entitled to receive
severance pay of at least twelve months' base salary and at most twenty-four
months' base salary, less certain amounts provided in the agreement. In the
event Mr. Howard's employment is terminated after a change in control, Mr.
Howard is entitled to receive an amount equal to two times his average total
annual compensation during the two years preceding the termination. A"change in
control" occurs when any person or entity acquires at least 51% of the voting
power of the securities of Video Update, the stockholders of Video Update
approve a plan of liquidation, or Video Update engages in a merger, sale of
assets or other business combination that results in the security holders of
Video Update holding less than a majority of the combined voting power after the
transaction. Mr. Howard has agreed not to disclose any confidential information
of Video Update during his employment and thereafter, and not to compete with
Video Update during his employment and for two years thereafter, including
soliciting customers and employees of Video Update.
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 Video Update's financial
statements and notes thereto appearing elsewhere herein.
Overview
Video Update franchised its first store in January 1983 and opened its
first company-owned store in September 1989. By July 1994, when Video Update
completed its initial public offering, Video Update had grown to 15
company-owned stores and 30 franchised stores. Subsequently, Video Update
substantially accelerated its growth and as of January 20, 1998 operated 406
company-owned stores in 20 states and six provinces in Canada, and has 35
franchised stores predominantly in the United States. The majority of Video
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<PAGE> 84
Update's stores located in the United States are superstores. Superstores are
video specialty stores that carry more than 7,500 rental units.
Video Update 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 Video Update's revenues.
Video Update expects this trend to continue following the Merger, if it is
consummated.
Acquisitions
As a result of the acquisitions completed during fiscal 1995, 1996 and
1997, Video Update anticipates that its results of operations will be reduced by
the amortization of goodwill of approximately $36,612,000, with anticipated
quarterly non-cash charges of approximately $504,000. Video Update anticipates
that future acquisitions will involve the recording of additional significant
amounts of goodwill and deferred charges on its balance sheet.
The purchase method of accounting will be used to account for the Merger
for financial reporting purposes. In accordance with such treatment, the total
purchase price will be allocated to Moovies' identifiable assets and liabilities
based on estimated fair values with the excess of the cost over the estimated
fair value of Moovies assets acquired currently estimated to be approximately
$46 million expected to be amortized over 20 years on a straight line basis. See
"Unaudited Pro Forma Combined Financial Information." In addition, upon
consummation of the Merger and the release of the Escrow Shares to Messrs.
Potter, Bedard and Howard, Video Update will recognize at the time of such
release a substantial one-time, non-cash, non-tax deductible charge for
compensation expense estimated at $2,667,600 (assuming a closing sale price of
$2.28 for Video Update Common Stock as of January 20, 1998). See "Proposal to
Terminate and Cancel the Escrow Agreement."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, OCTOBER 31,
------------------------------ -------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rental revenue............................ $8,364 $46,592 $83,489 $35,628 $56,964
Service fees.............................. 421 491 567 284 343
Product sales............................. 266 3,421 7,743 2,775 6,630
------ ------- ------- ------- -------
Total revenues.......................... $9,051 $50,504 $91,799 $38,687 $63,937
====== ======= ======= ======= =======
</TABLE>
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<PAGE> 85
Operating Results
The table below sets forth the percentage of revenues represented by
certain items included in Video Update's statement of operations for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED APRIL ENDED OCTOBER
30, 31,
------------------------- ---------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenue................................... 92.4% 92.2% 91.0% 92.1% 89.1%
Service fees..................................... 4.7 1.0 0.6 0.7 0.5
Product sales.................................... 2.9 6.8 8.4 7.2 10.4
----- ----- ----- ----- -----
Total revenues..................................... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Store operating expenses......................... 66.1 78.6 75.6 78.3 83.5
Selling, general and administrative.............. 24.6 10.6 9.0 10.4 9.1
Cost of product sales............................ 1.5 3.7 4.9 4.2 6.0
Amortization of goodwill......................... 0.9 2.1 1.7 1.9 1.6
----- ----- ----- ----- -----
Total cost and expenses............................ 93.1 95.0 91.2 94.8 100.2
----- ----- ----- ----- -----
Operating income (loss)............................ 6.9 5.0 8.8 5.2 (0.2)
Other income (expense):
Interest expense................................. (2.1) (0.5) (0.6) (0.8) (1.9)
Amortization of debt costs....................... (1.7) -- -- -- --
Other income..................................... 1.7 1.1 0.5 0.3 0.3
----- ----- ----- ----- -----
Total other income (expense)....................... (2.1) 0.6 (0.1) (0.5) (1.6)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes..................................... 4.8 5.6 8.7 4.7 (1.8)
Income tax expense (benefit)....................... 2.4 2.4 3.7 2.0 (0.4)
----- ----- ----- ----- -----
Income from continuing operations.................. 2.4 3.2 5.0 2.7 (1.4)
Loss from discontinued operations.................. (0.7) -- -- -- --
----- ----- ----- ----- -----
Net income (loss).................................. 1.7% 3.2% 5.0% 2.7% (1.4)%
===== ===== ===== ===== =====
</TABLE>
Six months Ended October 31, 1997 Compared to Six Months Ended October 31,
1996
Rental revenue. Rental revenue was approximately $56,964,000 and
$35,628,000, or 89.1% and 92.1% of total revenues for the six months ended
October 31, 1997 and 1996, respectively. The increase in rental revenue of
$21,336,000 was derived primarily from video stores acquired during fiscal 1997,
from the opening of 79 company-owned stores, net of closings, since the second
quarter of fiscal 1997, and from a 3% increase in same store revenues.
Service fees. Service fees were approximately $343,000 and $284,000, or
0.5% and 0.7% of total revenues for the six months ended October 31, 1997 and
1996, respectively. Continuing service fees and royalties from franchisees
accounted for 91.3% and 89.4% of total service fees, respectively.
Product sales. Product sales were approximately $6,630,000 and $2,775,000,
or 10.4% and 7.2% of total revenues for the six months ended October 31, 1997
and 1996, respectively. The increase in product sales of $3,855,000 was
primarily a result of product sales by the video stores acquired during fiscal
1997, from the opening of 79 company-owned video stores, net of closings, since
the second quarter of fiscal 1997 and from the increase in sales of fixed assets
to franchisees. The increase as a percentage of total revenues was primarily due
to a difference in product mix.
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Store operating expenses. Store operating expenses consist primarily of
compensation and related expenses including regional management expenses,
occupancy expenses, and depreciation and amortization expenses. Operating
expenses were approximately $53,372,000 and $30,286,000, or 83.5% and 78.3% of
total revenues for the six months ended October 31, 1997 and 1996, respectively.
The increase in store operating expenses of $23,086,000 was primarily the result
of video stores acquired during fiscal 1997 and the opening of 79 company-owned
video stores, net of closings, since the second quarter of fiscal 1997.
Compensation and related expenses were approximately $14,817,000 and
$8,935,000, or 23.2% and 23.1% of total revenues for the six months ended
October 31, 1997 and 1996, respectively. The increase of $5,882,000 was
primarily due to video stores acquired during fiscal 1997 and from the opening
of 79 company-owned video stores, net of closings, since the second quarter of
fiscal 1997.
Occupancy expenses were approximately $15,967,000 and $8,917,000, or 25.0%
and 23.0% of total revenues for the six months ended October 31, 1997 and 1996,
respectively. The increase of approximately $7,050,000 was primarily due to
video stores acquired during fiscal 1997 and from the opening of 79
company-owned stores, net of closings, since the second quarter of fiscal 1997.
The increase as a percentage of total revenues was primarily due to revenues of
new and acquired stores not meeting management's expectations due primarily
(management believes) to lack of public acceptance of new release titles and
higher costs associated with the opening of new video stores prior to revenue
reaching maturity during the first two years of operation.
Depreciation and amortization expenses were approximately $17,967,000 and
$10,267,000, or 28.1% and 26.5% of total revenues for the six months ended
October 31, 1997 and 1996, respectively. Depreciation and amortization expense
reflects the depreciation of store equipment and fixtures and the amortization
of videocassettes. The increase of $7,700,000 was primarily attributable to the
addition of new release videocassette inventory for new, existing, and acquired
stores. The increase as a percentage of total revenues was primarily due to
revenues of new and acquired stores not meeting management's expectations due
primarily (management believes) to lack of public acceptance of new release
titles and higher costs associated with the opening of new video stores prior to
revenue reaching maturity during the first two years of operation. Amortization
expense as a percentage of revenues for future periods may vary based on Video
Update's purchase of videocassette inventory, which is subject to change based
on Video Update's rate of expansion, studio release schedules and anticipated
market demand.
Selling, general and administrative. Selling, general and administrative
expenses were approximately $5,841,000 and $4,022,000, or 9.1% and 10.4% of
total revenues for the six months ended October 31, 1997 and 1996, respectively.
The increase of approximately $1,819,000 was primarily due to adding management
personnel and administrative staff to support Video Update's growth and related
expenditures. The decrease as a percentage of total revenues was due to the
increase in total revenues without a proportional increase in corporate
overhead.
Cost of product sales. Cost of product sales was approximately $3,852,000
and $1,636,000, or 6.0% and 4.2% of total revenues for the six months ended
October 31, 1997 and 1996. The cost of product sales as a percentage of total
product sales revenue was approximately 58.1% and 59.0% for fiscal 1997 and
1996, respectively. The decrease in the cost of product sales as a percentage of
total product sales was primarily due to a difference in product mix.
Amortization of goodwill. Amortization of goodwill was approximately
$1,022,000 and $743,000 or 1.6% and 1.9% of total revenues for the six months
ended October 31, 1997 and 1996, respectively. The decrease as a percentage of
total sales was primarily attributable to an increase in sales from new store
openings without a proportional increase in the amortization of certain
intangible assets resulting from the video stores acquired.
Interest expense. Interest expense was approximately $1,176,000 and
$318,000, or 1.9% and 0.8% of total revenues for the six months ended October
31, 1997 and 1996, respectively. The increase of $858,000 was primarily
attributable to interest on increased borrowings under Video Update's bank line
of credit.
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Other income. Other income was approximately $180,000 and $129,000, or
0.3% of total revenues for the six months ended October 31, 1997 and 1996. The
increase of $51,000 was primarily due to an increase in interest on notes
receivable from officers.
Fiscal 1997 Compared to Fiscal 1996
Rental revenue. Rental revenue was approximately $83,489,000 and
$46,592,000, or 91.0% and 92.2% of total revenues for fiscal 1997 and 1996,
respectively. The increase in rental revenue of $36,897,000 was derived
primarily from the 74 video stores acquired during the period, from the opening
of 71 new company-owned stores during fiscal 1997, and from a 5.3% increase in
same store revenues.
Service fees. Service fees were approximately $567,000 and $491,000, or
.6% and 1.0% of total revenues for fiscal 1997 and 1996, respectively.
Continuing service fees and royalties from franchisees accounted for 95% of
total service fees for fiscal 1997 and 1996. 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 $7,743,000 and $3,421,000,
or 8.4% and 6.8% of total revenues for fiscal 1997 and 1996, respectively. The
increase in product sales of $4,322,000 was a result of product sales by the
video stores acquired during the period, the opening of 71 company-owned video
stores, and an increase in 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
which have lower margins.
Store operating expenses. Store operating expenses consist primarily of
compensation and related expenses, occupancy expenses, and depreciation and
amortization expenses. Operating expenses were approximately $69,366,000 and
$39,685,000, or 75.6% and 78.6% of total revenues for fiscal 1997 and 1996,
respectively. The increase in store operating expenses of $29,681,000, was
primarily the result of the 74 video stores acquired during the period and the
opening of 71 company-owned video stores during fiscal 1997. The decrease in
store operating expenses as a percentage of total revenues was primarily due to
improved control of compensation and related benefits expenses.
Compensation and related expenses were approximately $20,278,000 and
$12,601,000, or 22.1% and 25.0% of total revenues for fiscal 1997 and 1996,
respectively. The increase of $7,677,000 was primarily due to the 74 video
stores acquired during the period and the opening of 71 company-owned video
stores. The decrease as a percentage of total revenues was primarily due to
improved control of compensation and related benefits expenses at the stores.
Occupancy expenses were approximately $20,777,000 and $10,304,000, or 22.6%
and 20.4% of total revenues for fiscal 1997 and 1996, respectively. The increase
of $10,473,000, was primarily due to the 74 video stores acquired during the
period, the expansion of several stores in fiscal 1997 and the opening of 71
company-owned stores. The increase as a percentage of total revenues was
primarily due to two factors. The first was higher occupancy costs associated
with the video stores acquired during the period when compared to company-owned
stores. In addition, new video stores experience higher costs as a percentage of
total revenues prior to revenue reaching maturity during the first year of
operations.
Depreciation and amortization expenses were approximately $23,074,000 and
$13,894,000, or 25.1% and 27.5% of total revenues for fiscal 1997 and 1996,
respectively. Depreciation and amortization expense reflects the depreciation of
store equipment and fixtures and the amortization of videocassettes. The
increase of $9,180,000 was primarily attributable to the addition of new release
videocassette inventory for new, existing, and acquired stores. Amortization
expense as a percentage of revenues for future periods may vary based on the
company's purchase of videocassette inventory which is subject to the company's
rate of expansion, studio release schedules and anticipated market demand.
Selling, general and administrative. Selling, general and administrative
expenses were approximately $8,231,000 and $5,362,000, or 9.0% and 10.6% of
total revenues for fiscal 1997 and 1996, respectively. The increase of
approximately $2,869,000 was primarily due to adding management personnel and
administrative
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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 $4,544,000
and $1,880,000, or 4.9% and 3.7% of total revenues for fiscal 1997 and 1996,
respectively. The cost of product sales as a percentage of total product sales
revenue was approximately 58.7% and 55.0% for fiscal 1997 and 1996,
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 which generally provided smaller margins.
Amortization of goodwill. Amortization of goodwill was approximately
$1,613,000 and $1,072,000, or 1.7% and 2.1% of total revenues for fiscal 1997
and 1996, respectively. The increase was primarily attributable to the increase
in goodwill associated with the company's continuing acquisitions of video
stores in the current year and prior periods and the related amortization
thereof.
Interest expense. Interest expense was approximately $544,000 and
$232,000, or .6% and 0.5% of total revenues for fiscal 1997 and 1996,
respectively. The increase of $312,000 was primarily attributable to interest on
borrowings under the company's bank line of credit.
Other income. Other income was approximately $461,000 and $548,000, or .5%
and 1.1% of total revenues for fiscal 1997 and 1996, respectively. The decrease
of $87,000 was primarily due to less funds available for investment.
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, from the opening of 35 new
company-owned stores, 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, 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 which have
lower margins.
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,
higher initial 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 and the opening of 35 company-owned video stores. The
increase as a percentage of total revenues was primarily due to additional
regional management expenses related to
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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, 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 (as a percentage of sales)
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 expense would have been approximately $11,121,000 or 22% 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 income from
continuing operations and net income by $1,604,000 or $.15 per share, for fiscal
1996, after the effect of income taxes $1,169,000.
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 which generally provide smaller margins.
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 increase in
goodwill associated with the continued acquisitions of video stores during
fiscal 1996.
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.
Liquidity and Capital Resources
Video Update has funded its operations to date through cash from
operations, the proceeds of prior equity and debt offerings, borrowings under
bank facilities, trade credit and equipment leases. Video Update's principal
capital requirements are for the opening and build out of new superstores, the
purchase of
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videocassette rental inventory, and the acquisition of existing stores each of
which varies based on market conditions and expansion plans.
At October 31, 1997, Video Update had cash and cash equivalents of
approximately $96,000. Video Update 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 Video Update 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. Video Update
believes that classification of videocassette rental inventories as noncurrent
assets would be misleading because it would not indicate the level of assets
expected to be converted into cash in the next year as a result of rentals or
sales of these videocassettes.
For the six months ended October 31, 1997 net cash provided by operating
activities was approximately $24,570,000. Net cash used in investment activities
was approximately $38,869,000 consisting primarily of approximately $11,343,000
for new and remodeled stores, and conversion costs associated with acquired
stores, and approximately $26,799,000 for the purchase of videocassette
inventory for existing and new stores. Net cash generated from financing
activities was approximately $11,971,000 resulting primarily from proceeds under
Video Update's bank line of credit.
In February 1997, a syndicate led by Bank of America National Trust and
Savings Association (successor by merger to "Bank of America Illinois") extended
a $60 million revolving credit facility (as amended, the "Line of Credit") to
Video Update, with amounts borrowed thereunder bearing interest at variable
rates based on the Federal Funds rate or the Eurodollar rate. The Line of Credit
is convertible into a two-year term loan if it is not renewed or restructured on
or before February 1998. As of October 31, 1997, approximately $32,000,000 was
outstanding under the Line of Credit, bearing interest at 8.4% to 9.3%. During
the term of the Line of Credit and thereafter to the extent any amounts are
outstanding under the Line of Credit, Video Update is subject to various
restrictive covenants, including limitations on further indebtedness, other than
trade credit and capital or operating leases, and requirements that Video Update
obtain written consent for certain acquisitions of new businesses or their
assets (excluding new superstore openings) or entering into business
combinations, including mergers, syndicates or joint ventures. The Line of
Credit also restricts the amount and terms of debt that may be issued to sellers
of acquired businesses and requires that Video Update maintain certain cash flow
ratios as well as certain ratios of total liabilities to tangible net worth.
For the remainder of the current fiscal year, management currently expects
to focus on maximizing the operating efficiencies of its existing and previously
acquired locations and on completing the build out of new stores in locations
for which Video Update has signed lease commitments, rather than on aggressively
expanding with new superstores in additional metropolitan areas where it does
not presently have locations. Video Update expects to fund its short-term
capital needs, including the purchase of videocassette rental inventory and the
build out of new stores, primarily through cash from operations, trade credit,
and borrowings under the Line of Credit, if available (subject to Video Update's
maintenance of certain cash flow and tangible net worth ratios). No assurances
can be given that Video Update will not require additional sources of financing
as a result of store openings or build outs currently in progress, disappointing
operating results, unavailability under or non-renewal of the Line of Credit as
a result of such operating results, or unanticipated cash needs or
opportunities. Moreover, no assurances can be given that such additional funds
will be available on satisfactory terms, if at all. If Video Update is unable to
obtain such additional financing, Video Update may be required to reduce its
overall expenditures and Video Update's ability to maintain or expand its
current level of operations could be materially and adversely affected.
In addition, in July 1997, Video Update announced it had entered into an
agreement to acquire Moovies in the Merger. The Merger is subject to stockholder
approval of both companies, and is anticipated to be completed some time in
early calendar 1998.
In connection with the Merger, Video Update has retained Banque Paribas
(the "Bank") to seek credit approval to underwrite a senior credit facility to
be made available by it and several other lenders (the "Syndicated Lenders")
aggregating up to $125,000,000 (a "Senior Facility") of which approximately
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$100,000,000 will be available as term loans and approximately $25,000,000 will
be available as a capital expenditure facility and/or line of credit. The
arrangement is not a commitment letter from the Bank and the Bank has not given
any assurances, or made any representations, that any commitment will be
obtained or provided. Moreover, if a commitment is provided, it may not be for
the entire Senior Facility and, under such circumstances, such commitment will
be conditioned upon obtaining commitments from other financial institutions for
the remainder of the Senior Facility. In addition, any such commitment (whether
for all or any portion of the Senior Facility) would be subject to a variety of
preconditions, including, without limitation, no material adverse change in the
business, property, assets, accounting treatment, liabilities, condition
(financial or otherwise) or prospects of Video Update and its subsidiaries taken
as a whole or in the financial, banking or capital markets for senior syndicated
debt financings for leveraged transactions generally. Any commitment would also
be subject to the negotiation, execution and delivery of definitive credit
documentation. No assurances can be given that a commitment letter will be
obtained, that all of the preconditions set forth in the commitment letter will
be satisfied, or that definitive agreements will be executed at the Effective
Time. The approval of each of Video Update's and Moovies' current bank lenders
is a condition to consummation of the Merger Agreement. Such approvals are not
likely to be obtained unless and until the Senior Facility (or a similar
facility) becomes effective. Accordingly, if definitive agreements for the
Senior Facility (or a similar facility), are not executed at or prior to the
Effective Time, the Merger Agreement will not be consummated.
If the Senior Facility becomes effective, Video Update expects that the
proceeds of the Senior Facility will be used to (i) refinance approximately
$34,000,000 of current outstanding indebtedness of Video Update under the Line
of Credit, (ii) refinance approximately $50,000,000 of indebtedness of Moovies
under Moovies' existing bank credit agreement, (iii) pay transaction fees and
expenses relating to the Merger of approximately $11,000,000, (iv) fund new
store openings and/or additional acquisitions following the closing of the
Merger and (v) fund conversion and integration costs of approximately
$10,000,000 following the Merger. If the Senior Facility (or a similar facility)
becomes effective on the terms set forth in the retainer letter with the Bank,
the Senior Facility is expected to bear interest at variable rates based on the
"base rate" (i.e., the higher of the federal funds rate plus 1/2 of 1% or the
prime commercial lending rate) or the interbank Eurodollar rate (approximately
8 1/2%, and 5 1/4% per annum as of January 20, 1998), respectively plus an
applicable margin rate that could range from 2% to 3 3/4%. In addition, the
Senior Facility (or a similar facility) is expected to include negative,
affirmative and financial covenants customarily found in the Syndicated Lenders'
loan agreements for similar financings and others deemed by such lenders to be
appropriate to this transaction, including, but not limited to, minimum pretax
earnings, minimum free cash flow, minimum net worth, maximum indebtedness,
maximum leverage, minimum fixed charge coverage, a prohibition or restriction on
capital expenditures, debt and guarantees, liens and encumbrances on any
property, mergers, consolidations, investments, advances, diversitures, change
of business or conduct of business, joint ventures, partnerships, the creation
of new subsidiaries, dividends, distributions, repurchases or redemptions of
outstanding stock (including options or warrants), the voluntary prepayment,
repurchase redemption or defeasance of debt, and the acquisition, sale or
transfer, lease or sale-leaseback of assets. The Senior Facility (or a similar
facility) is expected to involve a pledge of substantially all of Video Update's
and its subsidiaries' assets to secure its obligations thereunder. The closing
of the Merger is not specifically contingent on the expected terms of the Senior
Facility, but rather is contingent upon approval of the present primary lenders
to Video Update and Moovies. Accordingly, if such approvals can be obtained, the
Merger may close, even if the funds utilized to pay the current lenders are
available only on somewhat different terms.
If the Senior Facility (or a similar facility) becomes effective and if
Video Update is unable to maintain its current level of operations after the
Effective Time, it will be required to reduce its overall expenditures and
expansion plans to comply with the covenants and requirements of the Senior
Facility (or such similar facility). Additionally, any failure by Video Update
to maintain its level of operations within the covenants and requirements of the
Senior Facility (or similar facility) could cause Video Update to be in default
thereunder, allowing the Syndicated Lenders (or other lenders) to take legal
action against Video Update, including but not limited to, the immediate
acceleration of payment of borrowed funds, which could materially and adversely
affect Video Update's operations. The immediate acceleration of debt thereunder
or the lack of further borrowing capacity, in whole or in part, would have a
material adverse effect on Video Update's operations and financial condition.
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Video Update expects that its cash and cash equivalents, when combined with
those of Moovies and funds available under the Senior Facility (or a similar
facility), will be sufficient to fund the planned store openings and other
operating cash needs of Video Update for at least the next twelve months
following the Merger. However, no assurance can be given that Video Update will
not require additional sources of financing prior to such time, as a result of
unanticipated cash needs or opportunities, an expanded growth strategy or
disappointing operating results. No assurance can be given that the additional
funds required, whether within the next twelve months or thereafter, will be
available on satisfactory terms, if at all.
In connection with the signing of the Merger Agreement, Video Update also
has executed an agreement (the "Rentrak Agreement") with Rentral Corporation
("Rentrak"), a distributor of prerecorded video-cassettes and other media, which
agreement will be effective only upon the closing of the Merger. Under the
Rentrak Agreement, Video Update will be obligated to obtain a minimum annual
dollar amount of new release titles from Rentrak. The minimum dollar amount is
subject to increase or decrease depending on Video Update's gross revenues from
video sales/rentals and the number of major studios participating in Rentrak.
Under the Rentrak Agreement, Video Update would choose which stores offer a
title from Rentrak, but if a store obtains a copy of a new release title from
Rentrak it would have to obtain all copies of that title from Rentrak. Video
Update believes that Rentrak could be a cost effective source for larger orders
of an individual title. Using Rentrak could enable Video Update to order larger
numbers of copies of a particular title to satisfy customer demand than would be
cost-effective if the copies were purchased for rental. When Video Update
chooses to offer a title under the Rentrak Agreement a minimum number of copies
for each store is often established by Rentrak based on prior experience with
similar titles. Video Update expects to be able to obtain a wide variety of
titles under the Rentrak Agreement because Rentrak has a supplier relationship
with three of the six largest studios.
To obtain the full benefits of the Rentrak Agreement, Video Update must
correctly identify the new release and other titles that it should lease from
Rentrak and the stores that should receive them. To the extent that Video Update
obtains new releases or other video products from Rentrak for too many or the
wrong stores, Video Update's operations and profits could be adversely affected.
No assurances can be given that Video Update will be effective in using Rentrak
as a supplier under the Rentrak Agreement to achieve its intended results. See
"Video Update, Inc. -- Business -- Suppliers."
Video Update has promissory notes (the "Recourse Notes") from Video
Update's Chief Executive Officer and from the President for approximately
$2,004,000 and $1,114,000, respectively, including accrued interest through
October 31, 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 options were granted. The Recourse Notes represent the
total exercise price of such options plus amounts advanced by Video Update 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 Video Update stockholdings, are due and payable in October 1999, and accrue
interest at 8% per annum. In the event that the obligors sell shares of Video
Update's stock, the net proceeds thereof will be applied to payment, in part or
in full, of the Recourse Notes.
In addition, as of October 31, 1997, Video Update has a note receivable
from the President of Video Update for approximately $32,000 which accrues
interest at 8% per annum and is expected to be due November 1998, subject to
board approval. The note represents advances from Video Update to the President
from January 1994 to April 1994, together with accrued interest.
In connection with three acquisitions in which Video Update has issued an
aggregate of 594,506 shares of Class A Common Stock in fiscal 1996 and 1997,
Video Update may be obligated to make deficiency payments to such sellers equal
to the difference between the guaranteed price of $7.00 to $15.00 for each share
issued, and the actual market price obtained for such shares as of specified
dates between July 1996 and October 1998. The remaining deficiency payments are
estimated to be approximately $2,680,000 based on the closing stock price of
$3.125 at October 31, 1997. Video Update has the option of satisfying
approximately $1,220,000 of this liability at October 31, 1997 through the
issuance of additional shares of Class A Common Stock.
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Video Update is currently disputing whether any deficiency payment is due with
respect to 239,163 shares held by a seller in one of the acquisitions; the
seller is claiming a deficiency payment based on proceeds from the sale of Class
A Common Stock during the six month period of March 1996 to September 1996.
Video Update generally does not offer lines of credit or guarantees for the
obligations of its franchisees, although on occasion, Video Update has made
short term loans to current franchisees. Video Update 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 Video
Update's financial condition.
Substantially all company-owned stores are in leased premises, except for
three stores that are located on premises owned by Video Update. Video Update
expects that most future stores will occupy leased premises.
Reference to Private Securities Litigation Reform Act: Statements made by
Video Update that are not historical facts are forward looking statements that
involve risks and uncertainties. Actual results could differ materially from
those expressed or implied in forward looking statements. All such forward
looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Important factors that could cause
financial performance to differ materially from past results and from those
expressed or implied in this document include, without limitation, the risks of
acquisition of businesses (including limited knowledge of the businesses
acquired and misrepresentations by sellers), including the proposed acquisition
of Moovies, changes in business strategy or development plans, new store
openings, availability of products, availability of financing, competition,
management, ability to manage growth, loss of customers, weather (particularly
on weekends and holidays), consumer acceptance of new release videocassette
titles, and a variety of other factors. The obligations of Video Update and
Moovies to consummate the Merger are subject to the satisfaction of certain
conditions, including, but not limited to, obtaining requisite approvals of the
stockholders of Video Update and Moovies, obtaining consents under the
respective bank credit agreements of Video Update and Moovies, obtaining
adequate financing, obtaining requisite regulatory approvals and the continuing
accuracy, in all material respects, as of the effective time of the Merger, of
the representations and warranties made by Video Update and Moovies in the
Merger Agreement. No assurance can be given that these conditions will be
satisfied or waived or that the Merger will be consummated on a timely basis, if
at all.
Inflation
To date, inflation has not had a material effect on Video Update's
business. Video Update anticipates that its business will be affected by general
economic trends. Although Video Update has not operated during a period of high
inflation, it believes that it would generally be able to pass increased costs
resulting from inflation on to customers.
Seasonality and Quarterly Fluctuations
The video rental industry generally experiences revenue declines in April
and May, due in part to the change to Daylight Savings Time and to improved
weather, and in September and October, due in part to school openings and the
introduction of new network and cable television programs.
The company's video rental business may be affected by other factors,
including acquisitions by the company of existing video stores, additional and
existing competition, marketing programs, weather, special or unusual events,
variations in the number of superstore openings, and other factors that may
affect retailers in general.
Video Update depends significantly on availability and consumer acceptance
of new release videocassette titles available for rental. To the extent that
available new release titles fail to stimulate consumer interest and retail
traffic, operating results could be materially adversely affected.
The foregoing discussion of the financial condition and results of
operations should be read in conjunction with the company's financial statements
and notes thereto appearing elsewhere herein.
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MOOVIES, INC.
BUSINESS
The information in this section pertains to the business of Moovies as it
is currently conducted without giving effect to the Merger.
General
As of January 20, 1998, Moovies operated 267 video specialty superstores
and 39 franchised stores located in South Carolina, North Carolina, Georgia,
Tennessee, Virginia, Ohio, New Jersey, New York, Connecticut, Pennsylvania,
Iowa, Colorado, Minnesota, Wisconsin, South Dakota, Nebraska, Michigan, Texas,
Florida, Kentucky and Louisiana. Moovies' stores rent and sell a wide range of
videos and video games, rent video players and video game equipment and sell
video accessories such as blank cassettes, cleaning equipment and a variety of
confectionery items.
Tonight's Feature Limited Partnership II, Moovies' predecessor (the
"Predecessor"), opened its first store in 1989 and in 1992 introduced the
Moovies superstore format. Moovies was incorporated in November 1994 for the
purpose of entering into agreements to acquire video specialty stores and
consummating an initial public offering of stock. In June 1995, Moovies entered
into definitive acquisition agreements with nine selling groups to acquire 76
video specialty stores (the "Initial Acquisitions") located in Georgia,
Virginia, New Jersey, North Carolina, Ohio, New York, Connecticut and
Pennsylvania. Concurrently with the completion of its initial public offering in
August 1995, the Predecessor's corporate general partner was merged into Moovies
and the Initial Acquisitions were consummated. From Moovies' initial public
offering through September 30, 1997, Moovies acquired 99 additional video
specialty stores and 39 franchise stores in ten separate acquisitions (the
"Subsequent Acquisitions") (the Initial Acquisitions and the Subsequent
Acquisitions collectively, the "Acquisitions").
Business and Expansion Strategy
The key elements of Moovies' business and expansion strategy are as
follows:
Superstores. Superstores are defined in publicly available published
reports ("Industry Reports") on the video store industry by independent parties
as stores carrying 7,500 or more rental units. Moovies believes that the
superstore format is generally the most profitable store format. All of
Moovies-owned stores are superstores. The most significant advantages of the
superstore format include the following:
- A broader selection of titles and greater availability of new releases,
which generate increased customer traffic;
- Sufficient floor space to develop categories and themes and to create an
entertaining environment; and
- Reduced labor costs (Moovies' highest operating expense) as a percentage
of revenues.
Moovies management believes these characteristics generally enable
superstores to produce revenues and profit levels sufficient to justify paying
the generally higher lease rates of preferred store locations.
Customer Service. Moovies seeks to provide a high level of customer
service at each of its stores. Moovies offers a broad selection of new releases
and catalog product and is committed to offering more copies of the newest
releases than many of its competitors. In addition, Moovies provides customers
with personalized attention and offers special, customer-oriented programs like
"Reservations Accepted" and "Kids Rent Free." Moovies strives to maintain a fun,
family-oriented environment in all of its stores.
Geographic Concentration. Moovies prefers to concentrate its new store
openings and activities in the areas in which other Moovies stores are located
to maximize operating efficiencies. Moovies believes that a geographic
concentration allows Moovies to more easily monitor store operations through its
area management structure and to achieve operating efficiencies in inventory
management, marketing, distribution, training and store supervision. Moovies
will move to a new geographic area when it sees an opportunity to be a
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top competitor in a particular market. A key benefit to operating multiple
stores in a single geographic market is Moovies' ability to receive relatively
large aggregate cooperative advertising credits from its distributors and use
them more efficiently than smaller competitors. Moovies receives cooperative
advertising credits for each store it operates, and by operating multiple stores
in a single geographic market, Moovies can more effectively use cooperative
advertising credits to maximize the impact of its advertising.
New Store Development. Historically, Moovies' capital expenditures have
focused on opening new stores and relocating or upgrading certain existing
stores. In May 1997, Moovies reassessed its new store development program and
reduced the number of new stores expected to be opened during 1997. Moovies
opened 4 new stores during the third quarter of 1997 and 33 during 1997. Because
of reduced revenues and related cash flows from operations and the recently
announced Merger Agreement, Moovies has further reduced its new store
development plans and currently expects that it will open no additional video
superstores through the first quarter of 1998.
Moovies Stores
The following table provides geographic information about the number of
existing stores in each state as of January 20, 1998. In addition to these
company-owned stores, Moovies also has 39 franchised stores in Kentucky, Texas,
Florida and Louisiana.
<TABLE>
<CAPTION>
STATE NUMBER OF STORES
----------------------------------------------------- ----------------
<S> <C>
North Carolina....................................... 39
South Carolina....................................... 35
Georgia.............................................. 33
Virginia............................................. 27
Ohio................................................. 26
Michigan............................................. 20
Iowa................................................. 20
Pennsylvania......................................... 17
New York............................................. 12
Colorado............................................. 9
New Jersey........................................... 5
Minnesota............................................ 5
South Dakota......................................... 5
Wisconsin............................................ 5
Nebraska............................................. 4
Connecticut.......................................... 3
Tennessee............................................ 2
---
Total........................................... 267
===
</TABLE>
Moovies' management structure is designed to enhance the overall
performance of Moovies' video specialty stores by providing more consistent and
supportive supervision of store operations. Moovies' operations are divided into
seven areas, each of which has an area manager and district managers responsible
for store operations within the region. Each of Moovies' stores is managed by a
full time store director, who typically has one assistant store director.
Management believes that the concentration of Moovies' stores in clusters
enhances Moovies' control of its store operations and enables Moovies to respond
more quickly to changing market conditions. Because Moovies' stores are
geographically concentrated, area managers typically visit stores within their
respective areas at least twice a month. These visits are made to ensure
adherence to Company-specified operating standards and to discern current market
information. In addition, area managers meet on a regular basis with senior
management at Moovies' headquarters to discuss their operations. Moovies
believes that these meetings
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facilitate prompt decision-making and enable Moovies to respond rapidly to
changing market conditions and consumer demand.
In choosing new store sites, Moovies considers such factors as convenience
to residential neighborhoods, visibility, access, traffic volume and consumer
demographics, regardless of the proximity of competing video specialty stores.
Moovies superstores are generally located in trade areas with populations of
more than 15,000, such as suburbs of metropolitan markets. Moovies' stores
generally are located in stand-alone sites or strip shopping centers for
heightened visibility, with a preference for end-cap locations. Moovies' stores
range in size from approximately 2,000 to 13,100 square feet, with an average
size of approximately 5,800 square feet. Most of the stores are leased pursuant
to leases with terms ranging from one to fifteen years and varying renewal
options. Moovies is responsible for taxes, insurance and utilities under most of
these leases. Generally, Moovies' stores are open seven days a week, from 10:00
a.m. to 11:00 p.m.
Acquisitions
Concurrently with the completion of its initial public offering in August
1995, Moovies purchased substantially all of the assets, assumed certain
liabilities and acquired the business of 76 video specialty stores.
Subsequent to the initial public offering, Moovies acquired 48 additional
stores in 1995. These stores were acquired in six separate merger and asset
purchase transactions. Aggregate consideration for the six acquisitions was
approximately $22.1 million, including the issuance of approximately $5.9
million in notes payable and the issuance of approximately 842,000 shares of
common stock.
In March 1996, Moovies acquired the "Showtime Video" chain of five stores
in an asset purchase transaction for aggregate consideration of approximately
$400,000 in cash and a $1.9 million note payable. Moovies paid the cash portion
of the consideration and repaid the note in April 1996 with borrowings under its
line of credit. Showtime operated five stores in northeastern Colorado.
In July 1996, Moovies acquired the "Premiere Video" chain of 23 stores in
an asset purchase transaction for aggregate consideration of approximately $8.9
million in cash and a $2.6 million note payable. Moovies paid the cash portion
of the consideration with proceeds from its public offering of common stock
completed in July 1996. The note was repaid in January 1997 with borrowings
under Moovies' line of credit. Premiere operated stores located in Iowa,
Wisconsin, South Dakota, Minnesota and Nebraska.
In November 1996, Moovies acquired two stores from "Stop & Shop" in an
asset purchase transaction for aggregate consideration of approximately $590,000
in cash which Moovies paid with borrowings under its line of credit. Stop & Shop
operated both stores in Connecticut.
In March 1997, Moovies acquired the "Movie Warehouse" chain of 21 video
specialty stores and 43 franchised stores in an asset purchase transaction for
aggregate consideration of approximately $9.6 million in cash, common stock, and
a note payable. The cash portion of the consideration was paid with borrowings
under Moovies' senior credit facility. The 21 video specialty stores are located
in the greater Detroit, Michigan area and the 43 franchised stores are located
in Kentucky, Florida, Texas and Louisiana.
Merchandising
A typical Company superstore carries a broad selection of new release
titles (videos released in the last 12 months) and approximately 5,000 catalog
titles (generally, videos in release for over 12 months). Each store has a few
special interest titles, covering subjects such as sports, exercise and
education, which are selected by management to appeal to the customer base in
the particular store's market area. Moovies are listed and displayed
alphabetically within each category. In 1996, approximately 85% of Moovies' net
revenues were derived from the rental of videos and video games. In 1996,
approximately 15% of Moovies' net revenues were derived from the sale of videos,
including previously rented videos, video games and other products.
As of January 20, 1998, 248 stores were operated under the Moovies name and
logo which has allowed Moovies to begin developing a brand awareness among its
customers. The Moovies stores feature distinctive signs and colorful awnings on
the store's exterior and interior. The brightly lit interiors prominently
display
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large signs which promote Moovies' signature attributes of "Reservations
Accepted" and "Kids Rent Free." "Moo Releases" (new releases) are displayed
alphabetically along the perimeter of each store for easier selection by
customers. Other features of the stores include television monitors which
preview coming attractions, a customer courtesy phone and large category signs
which direct customers to their preferred titles.
Moovies generally has one night rental for all new releases for the first
90 days after release and a three day, two night rental term for new releases
thereafter and catalog titles, but has been testing a one night rental term and
may change to a one night term in selected markets based upon the results of
these tests. While Moovies is committed to offering more copies of popular new
releases than its competitors, Moovies also believes that these rental terms
tend to keep new releases readily available. In the case of a major box office
hit offered for rental, Moovies typically orders 20 to 40 copies of that title
for each store and may order as many as 150 copies for a single store. For each
superstore, Moovies bases the selection and quantity of videos on demographic
data for the region or neighborhood in which the store is located, as well as
the past or projected performance of that store. Moovies assesses late fees for
videos returned beyond the initial term.
Suppliers
The video inventory in each of Moovies' stores consists of catalog and new
release titles, which it either purchases or rents. Moovies purchases
approximately 80% of its new release videos and all of its catalog videos
directly from video wholesalers. Moovies purchases from such wholesalers rather
than directly from movie studios because Moovies believes that the cost savings
of direct purchases would not offset the expense to Moovies of establishing its
own distribution system. Currently, the typical cost of new release videos
purchased by Moovies is approximately $60 to $67 for titles Moovies will rent
and $12 to $15 for titles acquired for immediate resale as well as for rental.
Catalog titles also typically cost less than $10. Moovies has one primary
supplier, Baker & Taylor Entertainment, a division of Baker & Taylor ("BTE") to
fulfill the majority of its new release titles. Moovies believes that if its
relationships with its primary suppliers are terminated, Moovies could obtain
videos from other suppliers at prices and on terms comparable to those available
from its current suppliers.
Moovies also rents new release titles under revenue sharing arrangements.
Moovies presently spends approximately 20% of its new release budget to obtain
new releases from Rentrak pursuant to a long-term revenue sharing agreement.
Under this agreement, Moovies is obligated to obtain a minimum annual dollar
amount of new release titles from Rentrak. Moovies may choose which stores offer
a title from Rentrak, but if a store obtains a copy of a new release title from
Rentrak it must obtain all copies of that title from Rentrak. Moovies believes
that Rentrak is often a more cost effective source for larger orders of an
individual title and typically chooses to use Rentrak titles in newly opened
stores or stores with significant competition in order to build customer
traffic. Using Rentrak enables Moovies to order larger numbers (often three
times as many) of copies of a particular title to satisfy customer demand than
would be cost-effective if the copies were purchased for rental and allows
Moovies to order a large number of copies for certain stores to meet most of the
heavy initial demand that exists during the first few weekends after a title's
release. When Moovies chooses to offer a title under the Rentrak agreement a
minimum number of copies for each store is often established by Rentrak based on
prior experience with similar titles. Moovies believes that these minimum order
requirements have not been burdensome since it typically orders large numbers of
copies when it chooses a Rentrak title. Moovies is able to obtain a wide variety
of titles under this agreement since Rentrak has a supplier relationship with
three of the six largest studios.
During the revenue sharing period, which is generally one year (but does
not exceed two years) per title, the movie studio retains ownership of the video
and Moovies shares the rental revenue with Rentrak rather than purchasing the
video for a fixed cost. In addition, Moovies must make an initial payment in the
form of a handling charge of from $8 to $10 per video obtained pursuant to this
agreement. At the end of the revenue sharing period for a title, Moovies has the
option to purchase the copies of that title, generally for less than $5 per
copy. Revenue sharing reduces the risk that Moovies will be unable to recover
the acquisition cost of a video through rental revenue before the popularity of
the title declines significantly. In order to obtain the full benefits of the
Rentrak revenue sharing arrangement, Moovies must correctly identify the new
release titles that it should lease from Rentrak and the stores which should
receive them. Because Moovies' percentage
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share of revenue under the Rentrak agreement is fixed, to the extent that
Moovies obtains new release videos from Rentrak for too many or the wrong
stores, Moovies' profits may be adversely affected.
Marketing and Advertising
Moovies markets its stores and merchandise through radio and direct mail
and to a lesser extent through television and newspaper advertising, discount
coupons and promotional materials. Moovies also publishes a proprietary monthly
video guide designed to help customers determine what videos to watch. The cost
of these activities is primarily funded through advertising allowances and
market development funds that Moovies receives from its video wholesale
suppliers. In addition, Moovies benefits from the advertising and marketing of
studios and theaters in connection with their efforts to promote films and
increase box office revenues. Moovies' advertising primarily emphasizes two of
Moovies' signature attributes, "Reservations Accepted" and "Kids Rent Free,"
which are designed to increase customer loyalty and differentiate Moovies from
its competitors. Advertising also promotes the stores' large selection of
videos, customer service and value, as well as Moovies' family orientation.
Inventory
Moovies aggressively manages its store inventory. In each of its markets,
management seeks to maintain the largest selection of new releases and catalog
product that is consistent with longterm store profitability. Buying decisions
are made centrally and are based on the size of the active customer base, new
release dates, box office results, industry newsletters and management's
knowledge of the popularity of certain types of movies in its markets. Moovies
believes that centralized buying allows it to obtain better volume discounts.
Rentals are monitored on a daily basis in each store, enabling Moovies to
reallocate videos and video games among stores to respond to customer demand and
enhance profitability.
Management Information Systems
Moovies has installed a management information system ("MIS") in all of its
company owned stores. The MIS uses a point-of-sale ("POS") computer located at
each store that records all rental and sale information upon customer checkout
using scanned bar code information and updates such information when the videos
and video games are returned. This POS system is tied to a computerized
information system at the corporate offices. Moovies believes data generated by
the MIS helps management monitor store operations and inventory more effectively
and at lower cost than the previous systems. Moovies also believes its ability
to review rental history by title and location assists it in making purchasing
decisions with respect to new releases. The MIS also enables Moovies to perform
its periodic physical inventory using bar code recognition, which is more
efficient, more accurate and less costly than a manual count.
Employees
As of January 20, 1998, Moovies employed 2,994 persons, of whom 760 were
employed on a full-time basis. None of Moovies' employees are represented by a
labor union, and Moovies believes that its relations with its employees are
good.
Intellectual Property
Moovies owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
MOOVIES(R). Moovies considers its intellectual property rights to be an
important part of its business.
Properties
All of Moovies' stores are leased pursuant to leases with terms ranging
from one to fifteen years, with varying option renewal periods and which range
from 2,000 to 13,000 square feet. Moovies anticipates that future stores will
also be located on leased premises.
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Moovies leases its corporate headquarters located at 201 Brookfield
Parkway, Greenville, South Carolina. This facility consists of an aggregate of
approximately 20,000 square feet of office space.
Legal Proceedings
Moovies is not currently involved in legal proceedings that management
believes would be reasonably likely to have a material adverse effect on Moovies
financial condition or results of operations.
Competition and Technological Obsolescence
The video retail industry is highly competitive. Moovies' stores compete
with other video specialty stores, including stores operated by regional and
national chains, such as Blockbuster Entertainment Corporation ("Blockbuster"),
and with other businesses offering videos and video games, such as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations and other retailers. Some of Moovies' competitors, including
Blockbuster, have significantly greater financial and marketing resources,
market share and name recognition than Moovies. In addition, Moovies stores
compete with other leisure-time activities, including movie theaters, network
and cable television, live theater, sporting events and family entertainment
centers. However, many of these have a higher per-person cost than the rental of
a video.
Moovies believes the principal competitive factors among participants in
the video retail industry are store location and visibility, title selection,
the number of copies of each new release available and customer service. While
Moovies does not believe that price is a significant competitive factor among
video retailers, Moovies believes that price is a significant factor relative to
competition with movie theaters and other forms of entertainment. Moovies' goal
is to generally offer a high level of service and more titles and more copies of
new releases than its competitors.
Moovies' stores also compete with Pay-Per-View cable television systems
("Pay-Per-View"), in which home subscribers pay a fee to see a movie selected by
the subscriber. Existing Pay-Per-View services offer a limited number of
channels and movies and are generally available only to households with a
converter to unscramble incoming signals. Recently developed technologies,
however, permit certain cable companies, direct broadcast satellite companies,
telephone companies and other telecommunications companies to transmit a much
greater number of movies to homes in more markets as frequently as every five
minutes, and are referred to as "Near Video-on-Demand." These technologies, by
providing alternatives to home video rentals and purchases, could have a
material adverse effect on Moovies' business. None of these technologies,
however, currently have penetration in the consumer market as high as the 80%
penetration of the VCR nor currently represent as large a percentage of revenue
to the movie studios as video specialty stores. Over the long term, further
improvement in these technologies could lead to the availability of a broad
selection of movies to consumers on demand, referred to as "Video-on-Demand," at
a price which is competitive with the price of video rentals, which could have a
material adverse effect on Moovies' financial condition and results of
operations. Technological advances or changes in the manner in which movies are
marketed, including the earlier release of movie titles to cable television or
other distribution channels, could make these technologies more attractive and
economical, which could have a material adverse effect on the business of
Moovies and on Moovies' financial condition and results of operations.
Franchise Operations
Moovies' franchise operation currently consists of 39 stores ("Franchise
Stores") which operate under the "Movie Warehouse" logo and format. Moovies
acquired the franchisor rights with respect to the Franchise Stores in the Movie
Warehouse acquisition in March 1997. Moovies does not currently intend to
franchise any additional superstores or convert the Franchise Stores to the
Moovies format.
The standard Company franchise agreement in general requires the franchisee
to pay Moovies a continuing monthly royalty fee equal to five percent of the
franchisee's gross monthly rental revenue, as calculated under the terms of the
franchise agreement. The monthly royalty fees are calculated and due from the
date that the franchised superstore opens for business. In addition to the
royalty payments, the franchisees
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generally also are required to pay a monthly advertising fee of up to two
percent of the franchisee's gross monthly revenue for the preceding month.
Fees from the Franchise Stores have represented less than 5% of Moovies'
total revenues since they were acquired. Moovies does not consider the franchise
operations to be a material segment of its overall operations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Moovies Common Stock as of January 19, 1998 by (i) each
stockholder known by Moovies to own beneficially more than 5% of the outstanding
shares of Moovies Common Stock, (ii) each "named executive officer" (as defined
in Item 402 of Regulation S-K under the Securities Act of 1933, as amended) and
director of Moovies, and (iii) all directors and executive officers of Moovies
as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF CLASS
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OUTSTANDING
- ------------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
John L. Taylor............................................... 361,539(2) 2.9%
Chairman of the Board,
President and Chief Executive Officer
F. Andrew Mitchell........................................... 221,711(3) 1.8
Chief Financial Officer, Director
Arthur F. Greeder III,....................................... 351,400(4) 2.8
Director
Charles D. Way............................................... 24,000(5) *
Director
Theodore J. Coburn........................................... 155,000(6) 1.2
Director
Douglas M. Raines............................................ 538,950(7) 4.3
Director
Michael A. Yeargin........................................... 547,454(7) 4.4
Director
All executive officers and directors as a group (8
persons)................................................... 2,238,054(8) 17.7
</TABLE>
- ---------------
* Ownership represents less than 1% of outstanding shares of Moovies Common
Stock.
(1) The address of the persons listed below is c/o Moovies, Inc. 201 Brookfield
Parkway, Suite 200, Greenville, SC 29607.
(2) Includes 7,400 shares held of record by Mr. Taylor as custodian for minor
children.
(3) Includes 2,000 shares held of record by Mr. Mitchell's spouse as custodian
for minor children upon consummation of the Merger.
(4) Includes 165,150 shares held jointly with Mr. Greeder's spouse. Includes
5,000 shares which are issuable upon the exercise of currently exercisable
options.
(5) Includes 10,000 shares which are issuable upon the exercise of currently
exercisable options.
(6) Consists of 155,000 shares which may be purchased upon exercise of a warrant
and options that are currently exercisable.
(7) Includes 5,000 shares which are issuable upon the exercise of options that
are currently exercisable.
(8) Includes 217,500 shares which may be purchased upon exercise of warrants and
options that are currently exercisable. All such options and warrants will
become immediately exercisable upon consummation of the Merger.
CERTAIN EMPLOYMENT AGREEMENTS
Effective September 1994, Moovies entered into a three-year employment
agreement with Mr. Taylor pursuant to which Mr. Taylor serves as President and
Chief Executive Officer at an annual base salary of
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$200,000 and is eligible for an annual bonus at the discretion of the Board of
Directors. The Company also maintains for the benefit of Mr. Taylor a $1.0
million life insurance policy.
Effective March 1995, Moovies entered into a two-year employment agreement
with Mr. Mitchell pursuant to which he serves as Chief Financial Officer at an
annual base salary of $200,000. He also received a guaranteed additional payment
of $2,000 per month through March 1996. The agreement automatically renews on a
year-to-year basis, but it may be terminated at any time by Mr. Mitchell or the
Company upon 90-days prior written notice. Upon the expiration or termination of
the agreement, except for voluntary termination of employment by Mr. Mitchell or
termination for just cause by Moovies, Mr. Mitchell shall be paid severance
compensation equal to twelve months base salary plus an amount equal to the
average of any aggregate annual cash bonuses received by him during the prior
two calendar years of employment (collectively the "Expiration Payment").
Moovies may terminate the agreement without cause if it pays Mr. Mitchell the
Expiration Payment. Moovies also maintains a $1.5 million life insurance policy
for the benefit of Mr. Mitchell.
In August 1995, Moovies entered into two-year employment agreements with
Messrs. Raines and Yeargin, as Executive Vice President -- Real Estate and
Development and as Executive Vice President -- Purchasing, respectively,
pursuant to which each was paid a base salary at the annual rate of $150,000 and
was eligible for an annual bonus granted at the discretion of the Board of
Directors of Moovies. Mr. Raines and Mr. Yeargin each resigned their positions
as Executive Vice Presidents and terminated their respective employment
agreements in March 1996.
Each of the above employment agreements contain covenants not to compete
within a five-mile radius of Moovies' store locations for a period of two years
following termination of employment, except that in the case of Mr. Mitchell
such covenants are for a period of one year following termination of employment.
Each of the above employment agreements contain nondisclosure provisions that
generally provide that the employee will not disclose confidential information
or trade secrets of Moovies during the term of the agreement and for one year
thereafter.
Moovies also has entered into severance agreements with each of its
executive officers that provide for a severance payment of approximately one,
two, two and one-half, or three times (approximately two and one-half times in
the case of Messrs. Taylor and Mitchell) the applicable officer's average annual
compensation (including salary and bonus) for the prior two years in the event
that a "Change in Control" occurs and the officer either resigns or is
terminated without cause by Moovies or the Acquiring Company within six months
after such Change in Control. All such severance agreements define "Change of
Control" as the occurrence of any of the following events:
(a) any person or entity, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, other than
Moovies, a wholly owned subsidiary of Moovies, or any employee benefit plan
of Moovies or its subsidiaries, becomes the beneficial owner of Moovies'
securities having 51 percent or more of the combined voting power of the
then outstanding securities of the Company that may be cast for the
election for directors of Moovies; or
(b) as the result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, less
than a majority of the combined voting power of the then outstanding
securities of Moovies or any successor corporation or entity entitled to
vote generally in the election of directors of Moovies or such other
corporation or entity after such transaction, are held in the aggregate by
holders of Moovies' securities entitled to vote generally in the election
of directors of Moovies immediately prior to such transaction; or
(c) the approval by the stockholders of the Company of a plan of
liquidation.
The approval of the Merger by Video Update and Moovies stockholders will
constitute a "Change in Control" within the meaning of these severance
agreements, with an aggregate of approximately $3.5 million dollars in severance
payments expected thereunder, of which approximately $620,000 will be paid to
Mr. Mitchell and approximately $348,000 will be paid to Mr. Reynolds. See "The
Merger -- Interests of Certain Persons in the Merger -- Employment and Severance
Agreements."
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Moovies also INTENDS TO award stay-on bonuses aggregating approximately
$550,000 to certain employees who are not otherwise entitled to change in
control or severance payments, as an incentive for such employees to continue
their employment through the Effective Time.
In addition, stock option agreements granted to the employees and directors
of Moovies, including Messrs. Raines, Yeargin, Coburn, Way and Greeder provide
for immediate vesting of the options upon a Change of Control as described
above. In July 1997, Moovies amended the option agreements (i) for most options
(including all options held by executive officers) to extend the time to
exercise such options from 90 days to one year following the date of termination
for any reason other than cause, and (ii) for non-employee directors to extend
the time to exercise such options from 30 days to one year following termination
as a non-employee director; provided that each such amendment is effective only
if the applicable employee or non-employee director continues service with
Moovies through the Effective Time (as defined in the Merger Agreement).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Moovies' predecessor, Tonight's Feature Limited Partnership II (the
"Predecessor"), opened its first store in 1989 and in 1992 introduced the
Moovies superstore format. Moovies was incorporated in November 1994 for the
purpose of entering into agreements to acquire video specialty stores and
consummating an initial public offering of stock. In June 1995, Moovies entered
into definitive acquisition agreements with nine selling groups to acquire 76
video specialty stores (the "Initial Acquisitions"). Concurrently with the
completion of its initial public offering in August 1995, the Predecessor's
corporate general partner was merged into Moovies and the Initial Acquisitions
were consummated. From Moovies' initial public offering through September 30,
1997, Moovies acquired 99 additional video specialty stores and 43 franchise
stores in ten separate acquisitions (the "Subsequent Acquisitions") (the Initial
Acquisitions and the Subsequent Acquisitions collectively, the "Acquisitions").
As of January 20, 1998, Moovies owned and operated 267 video specialty
stores, and certain related operations and franchise 39 additional stores.
Moovies' revenues consist of rental revenues and product sales revenues. Rental
revenues include revenue from rentals of videos, video games, video players and
video game machines and extended viewing fees. Product sales revenues are
derived from sales of videos and video games, including excess rental inventory,
and confectionery and other items.
Operating costs and expenses include operating expenses, cost of product
sales, general and administrative expenses and amortization of goodwill.
Operating expenses consist of amortization of videos purchased for rental, fees
and lease expense for leased videos and all store expenses, including occupancy,
payroll, store opening expenses and direct store promotions expenses.
Effective January 1, 1996, Moovies adopted an accelerated method of
amortizing its videocassette rental inventory. Under this new method,
videocassette rental inventory is stated at cost, including the related costs to
prepare such videocassettes for rent, and is amortized over its estimated
economic life of 36 months, to its estimated salvage value ($6 per videocassette
during 1996). All copies of new release videocassettes are amortized on an
accelerated basis during their first four months to an average net book value of
$15 and then on a straight-line basis to their estimated salvage value of $6
over the next 32 months. All copies of new release videocassettes that are
purchased for less than $15 are amortized on a straight-line basis to the
estimated salvage value of $6 over 36 months. After the cost of a videocassette
is amortized to its salvage value, it remains in inventory at that value until
disposed of, at which time the salvage value is recorded as an element of cost
of sales.
The new method of amortization was adopted because Moovies believes
accelerating expense recognition for new release videocassettes during the first
four months more closely matches the typically higher revenue generated
following a title's release, that $15 represents a reasonable average carrying
value for tapes to be rented or sold after four months and that $6 represents a
reasonable salvage value for all tapes after 36 months.
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The new method of amortization has been applied to videocassette rental
inventory that was held in inventory at January 1, 1996. The adoption of the new
method of amortization has been accounted for as a change in accounting estimate
effected by a change in accounting principle and, accordingly, Moovies recorded
$860,000 as a pre-tax charge to operating expense in the first quarter of 1996.
The application of the new method of amortizing videocassette rental inventory,
including the $860,000 or $0.06 per share charge described above, increased
amortization expense for the year ended December 31, 1996 by approximately $2.9
million and reduced net income by approximately $1.7 million and earnings per
share by $0.17.
Prior to 1996, videos purchased by Moovies for rental to its customers were
stated at cost and amortized over their estimated economic lives with no
provision for salvage value. Catalog titles, together with related processing
costs to prepare them for rental, were amortized over 36 months on a
straight-line basis. New release videos were amortized as follows: the first
through third copies of each title per store were amortized as catalog titles;
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.
Moovies presently spends approximately 20% of its new release budget to
obtain new releases from Rentrak. Under its agreement with Rentrak, pursuant to
which Moovies leases videos for rental to its customers, Moovies pays a handling
fee of $8 to $10 for each video. During the revenue sharing period, which is
generally one year (but does not exceed two years) the movie studio that
supplies the video to Rentrak owns the video, and the rental revenues are shared
by Rentrak and Moovies on a predetermined basis. Generally, the percentage of
rental revenue retained by Moovies is fixed for the first sixty days of the
revenue sharing period and is then set at a higher rate for the remainder of the
term. Moovies may also sell excess copies of a video title and share the sale
proceeds with Rentrak on a predetermined basis. At the end of the revenue
sharing period for a video title, Moovies may purchase remaining copies of that
title generally for less than $5 per copy. The handling fee per video is
amortized on a straight-line basis over the revenue sharing period, and revenue
sharing payments are generally expensed when incurred.
Cost of product sales is comprised of cost of videos sold rather than
rented to customers and the cost of confectionery and other products sold in
Moovies' stores. The cost of a video is measured at its amortized basis when
sold, if previously used as a rental video, or at Moovies' cost if purchased for
sell-through, or at a varying basis if a leased product, depending upon when in
the revenue sharing period it is sold.
General and administrative expense is comprised of corporate office
expenses, including office equipment and facilities costs, management salaries
and benefits, professional fees and all other items of corporate expense.
Since the stockholders and owners of each of the video chains acquired
pursuant to the Initial Acquisitions were considered promoters as defined under
Rule 1-02(s) of Regulation S-X and are stockholders who transferred assets and
liabilities to Moovies, Inc. in exchange for Common Stock contemporaneously with
the initial public offering, Moovies, Inc. recorded the assets and liabilities
acquired in the Initial Acquisitions at the historical cost basis of the
transferors in accordance with the provisions of Securities and Exchange
Commission Staff Accounting Bulletin 48. As a result of recording the acquired
assets at their historical cost basis, no goodwill was recorded by Moovies in
connection with the Initial Acquisitions. The assets acquired in the Subsequent
Acquisitions were recorded under the purchase method of accounting, and the
excess of cost over the estimated fair value of the assets acquired of $49.8
million is being amortized over 20 years on a straight-line basis.
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Results of Operations
The following table sets forth for the periods indicated (i) statement of
operations data expressed as a percentage of total revenues and (ii) the number
of stores open at the end of each period.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Rental revenues...................................... 92.7% 82.4% 84.4% 86.7% 84.7%
Product sales........................................ 7.3 17.6 15.6 13.3 15.3
----- ----- ----- ----- -----
Total........................................ 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Operating expenses................................... 71.1 63.2 70.3 71.3 82.6
Cost of product sales................................ 12.1 10.5 8.3 12.1
General and administrative........................... 13.9 12.0 11.1 11.8 8.8
Amortization of goodwill............................. -- 0.6 2.0 2.0 2.2
Merger related costs................................. -- -- -- -- 0.6
Restructuring and other charges...................... -- -- -- -- 19.1
----- ----- ----- ----- -----
Total........................................ 91.3 87.9 93.9 93.4 125.4
----- ----- ----- ----- -----
Operating income (loss)................................ 8.7 12.1 6.1 6.6 (25.4)
Non-operating expenses................................. (2.3) (0.7) (1.6) (1.7) (3.4)
----- ----- ----- ----- -----
Income (loss) before income taxes...................... 6.4% 11.4% 4.5% 4.9 (28.8)
Number of stores open at end of period................. 9 148 223 164 270
</TABLE>
Nine Months Ended September 30, 1997 to Nine Months Ended September 30, 1996
Moovies' results of operations for the three and nine months ended
September 30, 1997 and 1996, reflect the operations of Moovies and include the
results of various acquisitions from and after their acquisition date.
Revenues. Revenues for the three and nine months ended September 30, 1997
were $27,418,000 and $81,570,000, respectively, compared to revenues of
$22,094,000 and $59,694,000 for the same periods in 1996. The increased revenues
were a result of the additional 51 stores opened and 23 stores acquired by
Moovies subsequent to September 30, 1996. Product sales as a percentage of total
revenues were 12.8% and 14.7% for the three and nine months ended September 30,
1997, respectively, compared to 13.4% and 13.3% for the same periods in 1996.
During the third quarter of 1997, same store revenues declined by
approximately 12%. Management believes this decline was principally due to (i) a
lack of consumer acceptance of a weaker selection of new release product during
1997, (ii) an increased number of competitive openings in several of Moovies'
major markets, and (iii) overall industry softness that began in the first
quarter of 1997. Moovies anticipates that its financial results will reflect
that same store revenues continued to decline in the quarter ended December 31,
1997 due to the same factors.
Operating Costs and Expenses. Operating expenses were $26,363,000 and
$67,366,000 for the three and nine months ended September 30, 1997 compared to
$16,242,000 and $42,580,000 for comparable prior year periods. Operating
expenses as a percentage of total revenues were 96.2% and 82.6% for 1997
compared to 73.5% and 71.3% for 1996. The increases primarily reflect the effect
of substantially fixed operating expenses on a per store basis being compared to
revenue levels that were significantly less than the previous year on a per
store basis and higher levels of expenses for new stores as new store revenues
have not ramped up to expected levels. In addition, Moovies incurred additional
operating expenses related to (i) increased advertising costs, including a
direct mail advertising campaign to inactive customers and (ii) increased tape
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amortization and use of leased product. Management believes that operating
expenses as a percentage of revenue improved in the fourth quarter, but that it
was higher than the previous year.
Cost of Product Sales. Cost of product sales increased by $1,584,000 to
$3,375,000 and by $4,898,000 to $9,856,000 for the three and nine months ended
September 30, 1997. These increases are directly related to the increase in
product sales. Cost of product sales as a percentage of product sales were 88.9%
and 78.9% for the three and nine months ended September 30, 1997 compared to
60.3% and 62.5% for 1996. The percentage increases are due to the lower margins
accepted by Moovies on selected sell-through promotions conducted during the
respective periods and the increased sales of previously viewed tapes at
substantially reduced margins, which tapes have historically been used to build
the rental inventory of new stores. Management believes that Moovies continued
to experience margin pressures in the fourth quarter; however, it does expect to
see improvement from the third quarter of 1997 results.
General and Administrative. General and administrative expenses were
$2,181,000 and $7,214,000 for the three and nine months ended September 30,
1997, respectively, compared to $2,409,000 and $7,019,000 for the comparable
prior year periods. General and administrative expenses were 8.0% and 8.8% of
total revenues for the three and nine months ended September 30, 1997,
respectively, as compared to 10.9% and 11.8%, respectively, for the same nine
months period in 1996. These reduced percentages reflect the additional leverage
achieved by Moovies in 1997 as well as the results of the restructuring of
Moovies' operations, which started in May 1997. Management believes that general
and administrative expenses as a percentage of revenue continued to decline in
the fourth quarter.
Restructuring and Other Charges. During the third quarter of 1997, Moovies
began and completed an extensive analysis of its store base performance and
adopted a business restructuring plan to close approximately 20 of its stores
and eliminate future store growth for at least the next twelve months.
Management concluded that certain stores were underperforming, that it was not
prudent to continue to operate these locations and that cash from operations and
the lack of borrowing capacity would not allow for continued cash outlay for
opening additional stores.
This restructuring plan has resulted in Moovies recording an additional
$14.1 million pretax charge for restructuring and other charges in the third
quarter of 1997. The components of the charge include approximately (i) $4.8
million in reserves for future cash outlays for lease terminations,
miscellaneous closing costs and legal and accounting costs, (ii) $2.8 million in
asset write downs associated with the store closings, (iii) $2.9 million in
write down of rental inventory previously expected to be transferred to and used
in new stores that will now be liquidated, (iv) $2.1 million in write off of
store design prototypes and capitalized costs associated with the development of
new sites which will not be developed, (v) $1.1 million in reserves for future
cash outlays under existing contracts for purchases of fixtures and equipment
that were intended to be placed in new stores, and (vi) $400,000 for the closure
of Moovies' product management center for new store inventory.
Interest Expense, net. Interest expense increased to $1,305,000 and
$2,756,000 for the three and nine months ended September 30, 1997 from $296,000
and $997,000 for the comparable prior year periods. The increases are related
primarily to the increased borrowings under Moovies' Senior Facility which were
used to fund acquisitions, additional new store development and operations.
Income Tax Expense. Income tax benefit for the three and nine months ended
September 30, 1997 was $8,394,000 and $9,388,000, respectively, compared to
income tax expense for the three and nine months ended September 30, 1996 of
$353,000 and $1,155,000, respectively, representing an effective income tax rate
of 40% for each period presented.
Year Ended December 31, 1996 to Year Ended December 31, 1995
Moovies' results of operations reflect only the operations of the
Predecessor's 11 stores for the period from January 1, 1995 to August 8, 1995
and include the results of the various Acquisitions from and after their
respective acquisition dates.
Revenues. Revenues increased $60,625,000, or 245.9%, for 1996 to
$85,283,000 compared to revenues of $24,658,000 for 1995. The increased revenues
were primarily a result of the additional 50 stores opened and
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30 stores acquired by Moovies in 1996 and a full year of operations of Moovies
after the Initial Acquisitions. Product sales as a percentage of total revenues
decreased to 15.6% for 1996 compared to 17.6% for 1995. This decrease is the
result of efforts by Moovies to use leased product in the acquired stores and to
use more of its excess rental tapes as inventory in new stores instead of
offering such tapes for sale. Same store revenues for the year were basically
unchanged.
Operating Costs and Expenses. Operating expenses increased $44,335,000 to
$59,928,000 for 1996 compared to $15,593,000 for 1995. Operating expenses as a
percentage of total revenues were 70.3% for 1996 compared to 63.2% for 1995.
This increase was the result of (i) the increase in amortization expense for the
year related to the change in the tape amortization method, as previously
discussed, (ii) the impact of the new stores opened during the year which have
not yet reached mature store revenue levels, (iii) the increased marketing
expenses and (iv) the increased depreciation expense from store renovations, new
signs and computers installed in 1996 to standardize and conform store
operations under the Moovies format.
Cost of product sales increased $5,979,000 to $8,958,000 for 1996 compared
to $2,979,000 for 1995. The increase is directly related to the increases in
product sales. Cost of product sales as a percentage of product sales was 67.3%
for the year ended December 31, 1996 compared to 68.5% for 1995.
General and administrative expenses increased $6,496,000 to $9,451,000 for
1996 compared to $2,955,000 for 1995, again reflecting the additional store
openings and Acquisitions and a full year of operations of Moovies after the
Initial Acquisitions. General and administrative expenses as a percentage of
total revenue were 11.1% and 12.0% for 1996 and 1995, respectively. The
percentage decrease despite the increase in the amount of general and
administrative expenses reflects the effect of spreading these expenses over
significantly greater revenues.
Interest expense, net. Interest expense increased $1,130,000 to $1,327,000
for 1996 from $197,000 for 1995. The increase related primarily to the increased
borrowings under Moovies' line of credit which were used for acquisitions and to
fund the new store development and conversion of acquired stores during 1996.
Income Tax Expense. Income tax expense was approximately $1,531,000 and
$1,046,000 for 1996 and 1995, respectively. Moovies' effective income tax rate
of approximately 40% was consistent during both periods and is expected to be at
that level during 1997.
Extraordinary item. In July 1996, Moovies repaid its subordinated note
payable with proceeds from the public offering of stock. In conjunction with
that repayment, Moovies recorded an extraordinary item -- loss on extinguishment
of debt, net of income taxes, of $64,000.
Year Ended December 31, 1995 to Year Ended December 31, 1994
Moovies' results of operations for the year ended December 31, 1994 reflect
only the operations of the Predecessor's eight stores plus one new store opened
during the year.
Revenues. Revenues increased $20,266,000, or 461.4%, for 1995 to
$24,658,000 compared to revenues of $4,392,000 for 1994. The increased revenues
were primarily a result of the additional stores opened and acquired by Moovies
between August 8 and December 31, 1995. Product sales as a percentage of total
revenues increased to 17.6% for 1995 compared to 7.3% for 1994. This increase is
the result of greater emphasis by certain acquired companies on product sales,
including video game sales.
Operating Costs and Expenses. Operating expenses increased $12,472,000 to
$15,593,000 for 1995 compared to $3,121,000 for 1994. Operating expenses as a
percentage of total revenues were 63.2% for 1995 compared to 71.1% for 1994.
This decrease was the result of the significant effect of the Acquisitions and
their operations on Moovies and improved operating results of the Predecessor
during 1995.
Cost of product sales increased $2,701,000 to $2,979,000 for 1995 compared
to $278,000 for 1994. The increase is directly related to the increases in
product sales. Cost of product sales as a percentage of product sales was 68.5%
for the year ended December 31, 1995 compared to 86.3% for 1994. This decrease
is the result of the Acquisitions' greater emphasis on product sales and
increasing the mix of higher margin items, including video games.
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General and administrative expenses increased $2,344,000 to $2,955,000 for
1995 compared to $611,000 for 1994, again reflecting the Acquisitions and
additional store openings. General and administrative expenses as a percentage
of total revenue were 12.0% and 13.9% for 1995 and 1994, respectively. The
percentage decrease despite the increase in the amount of general and
administrative expenses reflects the effect of spreading these expenses over
significantly greater revenues.
Interest expense, net. Interest expense increased $96,000 to $197,000 for
1995 from $101,000 for 1994. The increase related primarily to the issuance of a
$1.5 million note payable in mid April 1995 which was incurred to provide
financing for the completion of Moovies' initial public offering of Common Stock
and the issuance of promissory notes in connection with one of the Initial
Acquisitions. These expenses were offset by interest income earned on the excess
cash received at the initial public offering, which was invested in short-term
securities from August 8, 1995 through December 31, 1995.
Income Tax Expense. Income tax expense for 1995 was approximately
$1,046,000. Moovies had no income tax expense for 1994 because it was operated
as a limited partnership.
General Economic Trends, Quarterly Results and Seasonality
Moovies' results of operations are affected by economic trends in its
market areas. To date, Moovies has not operated during a period of high
inflation but believes that it would generally be able to pass on increased
costs relating to inflation to its customers.
The video and video game rental portions of Moovies' business are somewhat
seasonal, with revenues in April, May, September and October generally being
lower compared to other months of the year due to the weather in the spring, and
the start of school, the football season and the new television season in the
fall. Future operating results may be affected by many factors, including
variations in the number and timing of store openings, the public acceptance of
new release titles available for rental and sale, the timing of the acquisition
of existing video specialty retail stores, the extent of competition, marketing
programs, weather, special or unusual events and other factors that may affect
retailers in general. Any concentration of new store openings and the related
pre-opening costs in any particular fiscal quarter could have a material adverse
effect on Moovies' operating results for that quarter.
Liquidity and Capital Resources
Historically, Moovies' primary long-term capital needs have been for
opening and acquiring new stores. Moovies expects to fund such needs through
cash flows from operations, borrowing under credit facilities, operating
equipment leases and the net proceeds from the sale of debt and equity
securities.
In December 1995 and January 1996 Moovies borrowed a total of $6.5 million
under an existing revolving credit facility from a bank. The proceeds were used
to fund the cash portion of certain acquisitions. In addition, in January 1996
Moovies borrowed $2.0 million (the "Subordinated Credit Facility"), which was
subordinated to Moovies' revolving credit facility. Moovies repaid its
Subordinated Credit Facility with the proceeds of its second offering.
In March 1996, Moovies signed a revolving credit facility (the "Facility")
for up to $22.5 million to replace its existing credit facilities. In December
1996, Moovies signed an agreement to increase the Facility to $30.0 million and
to extend the maturity to December 31, 1998. The interest rate of the Facility
was variable based on LIBOR and Moovies could repay the Facility at any time
without penalty. As of December 31, 1996, Moovies had outstanding borrowings of
$19.0 million.
On June 28, 1996, Moovies completed a second public offering of 2.8 million
shares of common stock and on July 3, 1996 Moovies received net proceeds of
$19.4 million. On July 30, 1996 the underwriters exercised their over-allotment
option for 420,000 additional shares of common stock and Moovies received
additional net proceeds of $3.1 million.
Concurrently with the closing of the second public offering, Moovies
acquired American Multi-Entertainment, Inc. d/b/a Premiere Video ("Premiere
Video"), a chain of 23 video specialty stores, in
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an asset purchase agreement. Pursuant to the agreement, Moovies paid $8.9
million in cash and issued a $2.6 million note payable which was repaid in
January 1997. In addition, Moovies repaid its $3.5 million Subordinated Credit
Facility and repaid $3.0 million of its line of credit. The remaining proceeds
were temporarily placed in short-term investment securities and were used to
finance new store openings, consistent with Moovies' growth strategy.
During 1996, net cash provided by operating activities was $26.9 million.
Net cash used in investing activities was $56.6 million, consisting primarily of
$11.9 million used to pay the cash portion of certain acquisitions, $22.3
million to acquire rental inventory and $23.1 million used to purchase furniture
and fixtures. Net cash provided by financing activities was $30.4 million. Cash
in-flows consisted of $22.5 million from the second public offering and $28.0
million from borrowings under the line of credit and issuance of long-term debt
while the primary use was $20.1 million to repay selected debt. At December 31,
1996, Moovies had cash of $4.2 million.
In March 1997, Moovies signed a new senior credit facility (the "Moovies
Senior Facility") for up to $75.0 million. The Moovies Senior Facility consists
of (i) a five year $30.0 million long-term note with quarterly repayments
beginning on September 30, 1997; (ii) a $41.0 million capital facilities line
and (iii) a $4.0 million Revolver, and replaced Moovies' then existing credit
facility. Moovies may borrow amounts under the capital facilities line until
March 31, 1999 at which time it will begin repaying any amount outstanding
quarterly over the next three years. The interest rate of the Moovies Senior
Facility is variable based on LIBOR and Moovies may repay the Moovies Senior
Facility at any time without penalty. At September 30, 1997, Moovies had
outstanding borrowings of $49.0 million under the Moovies Senior Facility which
consisted of the $29.0 million long-term note, $16.0 million under the capital
facilities line and $4.0 million under a revolving line of credit. During June
1997 certain covenants of the Moovies Senior Facility were amended. At September
30, 1997, Moovies determined it would not be in compliance with certain
covenants of its Senior Facility and accordingly requested and received a waiver
for certain covenants for the period ended September 30, 1997; Moovies was in
compliance with the remaining covenants. There can be no assurance that future
waivers will be received if needed.
Concurrently with the closing of the Moovies Senior Facility, Moovies
acquired certain assets and business of Movie Warehouse, Inc. and affiliates
("Movie Warehouse") in an asset purchase transaction, including 21 video
specialty stores and the franchisor's interest with respect to an additional 43
specialty stores which will continue to operate under the Movie Warehouse name.
The aggregate consideration for the acquisition was approximately $9.6 million,
consisting of $5.0 million in cash, $2.0 million in promissory notes due in
March 1999, and $2.55 million in common stock (427,672 shares).
For the quarter ended September 30, 1997, cash from operations did not meet
Moovies' expectations and, as a result, the amounts due to certain vendors are
now past due. Moovies is working with these vendors to develop repayment plans.
Moovies has maintained a satisfactory relationship with its current vendors,
including its two primary product vendors. The loss of these two product vendors
could have a material adverse effect on Moovies. Assuming Moovies is able to
reach satisfactory arrangements with these vendors, Moovies expects that cash
from operations will be sufficient to fund future video and other inventory
purchases and other working capital needs even if the Merger is not consummated,
although unanticipated expenses or revenue shortfalls likely will cause Moovies
to require additional financing to fund operations. There can be no assurance
that any such sources of funds will be available or, if available, that they
will be on terms and conditions satisfactory or favorable to Moovies.
Under generally accepted accounting principles, rental inventories are
treated as non-current assets because they are not assets that are reasonably
expected to be completely realized in cash or sold in the normal business cycle.
Although the rental of this inventory generates a substantial portion of
Moovies' revenue, the classification of these assets as noncurrent excludes them
from the computation of working capital. The cost of video inventory purchases,
however, is reported as a current liability until paid, and accordingly, is
included in the computation of working capital. Consequently, Moovies believes
working capital is not an appropriate measure of its liquidity and it operated
with a working capital deficit during 1997.
98
<PAGE> 109
Moovies' capital expenditures during the remainder of 1997 were, and will
continue to be limited in 1998, limited by cash from operations and lack of
additional borrowing capacity under its Senior Facility. In May 1997, Moovies
reassessed its new store development program and reduced the number of new
stores expected to be opened during 1997. Moovies opened four new stores during
the third quarter of 1997 and 33 during the first nine months of 1997. No
additional new stores are presently being contemplated due to cash flow
constraints and the current merger plans. Moovies is in the process of closing
approximately 20 stores. Management does not believe that these store closings
will have a material adverse effect on Moovies' cash flow.
In July 1997, Moovies announced it had entered into the Merger Agreement
with Video Update pursuant to which Video Update would acquire Moovies in the
Merger. Terms of the agreement, as amended, call for each stockholder of Moovies
to receive .75 shares of Video Update Common Stock for each share of Moovies
Common Stock. The transaction is subject to stockholder approval of both
companies, and is anticipated to be completed in the first quarter of 1998.
The obligations of Video Update and Moovies to consummate the Merger are
subject to the satisfaction of certain conditions, including, but not limited
to, obtaining requisite approvals of the stockholders of Video Update and
Moovies, obtaining consents under the respective bank credit agreements of Video
Update and Moovies (which in respect to Moovies Senior Facility agreement
requires payoff of all amounts outstanding at the Effective Time), obtaining
adequate financing, obtaining requisite regulatory approvals (including under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act")), the continuing accuracy, in all material respects, as of the Effective
Time of the representations and warranties made by Video Update and Moovies in
the Merger Agreement, and the receipt of a legal opinion with respect to certain
tax matters. Each party has the right to waive certain of the closing conditions
referred to above. There can be no assurance that these conditions will be met
and that the Merger will be consummated.
Moovies estimates that the net cash required to open a new Moovies
superstore, including store fixtures and equipment, leasehold improvements and
rental and sale inventory, typically ranges from $275,000 to $325,000 per
superstore.
Note regarding Private Securities Litigation Reform Act: Statements made by
Moovies which are not historical facts are forward looking statements that
involve risks and uncertainties. Actual results could differ materially from
those expressed or implied in forward looking statements. All such forward
looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Important factors that could cause
financial performance to differ materially from past results and from those
expressed or implied in this document include, without limitation, the risks of
acquisition of businesses (including limited knowledge of the businesses
acquired and misrepresentations by sellers), changes in business strategy or
development plans, new store openings, availability of financing, competition,
management, ability to manage growth, loss of customers, the availability of
products, the difficulty of managing leased inventory, the effects of store
closings and restructuring on Moovies' operations, lack of customer acceptance
of new video releases and a variety of other factors. The obligations of Video
Update and Moovies to consummate the Merger are subject to the satisfaction of
certain conditions, including, but not limited to, obtaining requisite approvals
of the stockholders of Video Update and Moovies, obtaining consents under the
respective bank credit agreement of Video Update and Moovies (which in respect
to Moovies' Senior Credit Facility agreement requires payoff at of all an
outstanding thereon at the Effective Time), obtaining adequate financing,
obtaining requisite regulatory approvals (including under the HSR Act), the
continuing accuracy, in all material respects, as of the Effective Time of the
representations and warranties made by Video Update and Moovies in the Merger
Agreement, and the receipt of a certain legal opinion with respect to tax
matters. There can be no assurance that these conditions will be met and that
the Merger will be consummated. For further information on these and other
risks, see "Risk Factors" in this Joint Proxy Statement and the "Risk Factors"
section of Item 1 of Moovies' Annual Report on Form 10-K for the year ended
December 31, 1996, as well as Moovies' other filings with the Securities and
Exchange Commission.
99
<PAGE> 110
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1997 AND MARCH 31, 1997
SIX MONTHS ENDED OCTOBER 31, 1997 AND SEPTEMBER 30, 1997
On July 9, 1997, Video Update, Inc. (the "Company") entered into an
Agreement and Plan of Merger (the "Agreement") to acquire Moovies, Inc.
("Moovies") in a stock-for-stock merger transaction (the "Merger"). In October
1997, the Company entered into an Amendment (the "Amendment") to the Agreement
(collectively, the Amendment and the Agreement are referred to as the Merger
Agreement"). The Merger Agreement provides that each stockholder of Moovies will
receive .75 shares of Video Update Class A Common Stock for each share of
Moovies Common Stock, or approximately 9,375,000 shares. The purchase method of
accounting has been used to account for the acquisition.
During the year ended April 30, 1997, the Company completed several
acquisitions (the "Recent Acquisitions") which had been previously reported in
Forms 8-K/A dated June 16, 1997, and March 6, 1997.
The unaudited combined pro forma financial statements reflect the
following: (i) the Recent Acquisitions, (ii) the Merger; (iii) adjustments to
allocate the purchase price based upon the estimated fair value of the assets
acquired and the obligations assumed; and (iv) a provision for income taxes as
if the Recent Acquisitions had been taxed as C corporations (statement of income
only).
The unaudited pro forma combined statement of operations excludes a
one-time, non-cash, non-tax deductible charge which will be based on the stock
price on the Effective Date (approximately $2,667,600, or $.09 per combined pro
forma share, based on a closing price of $2.28 as of January 20, 1998) resulting
from the release of the escrow shares contemplated in this merger. The 1,170,000
shares are included in the pro forma weighted average number of shares.
The unaudited combined pro forma balance sheet includes the balance sheet
of the Company at October 31, 1997 and the balance sheet of Moovies at September
30, 1997.
The unaudited pro forma combined statement of operations includes the
statements of operations of the Company and Recent Acquisitions for the year and
six months ended April 30, 1997 and October 31, 1997, respectively, and the
statement of operations of Moovies for the year and six months ended March 31,
1997 and September 30, 1997, respectively, and gives effect to the Recent
Acquisitions and the Merger treated as purchases for accounting purposes and was
prepared as if the transactions had occurred as of the beginning of the
respective periods.
In the opinion of the Company's management, all adjustments necessary to
present fairly such unaudited pro forma financial statements have been made
based on the terms and structure of the Recent Acquisitions and pending terms
and structure of the Merger. The Company anticipates, however, that changes in
the composition of the assets to be acquired and the liabilities to be assumed
in connection with the Merger will occur due to changes in the ordinary course
of business. The Merger Agreement, however, requires that the operations
continue in the ordinary course of business until the acquisition is
consummated.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the actual
results had the Recent Acquisitions and Merger occurred at the beginning of the
fiscal year ended April 30, 1997 and six months ended October 31, 1997, nor do
they purport to indicate the results of future operations or financial position
of the Company.
The unaudited pro forma combined financial statements should be read in
connection with the audited historical financial statements and notes thereto of
the Company and Moovies for the year ended April 30, 1997 and December 31, 1996,
respectively and the unaudited condensed historical financial statements and
notes thereto of the Company and Moovies Form 10-Q for the quarter ended October
31, 1997 and September 30, 1997, respectively.
Matters discussed in this unaudited pro forma combined financial
information, including any discussion of or impact, expressed or implied, on the
Company's anticipated operating results and future earnings per
100
<PAGE> 111
share contain forward-looking statements that involve risks and uncertainties.
The Company's results may differ significantly from the results indicated by
such forward-looking statements. The Merger is subject to several conditions,
including bank approvals for both companies. No assurances can be given that the
Merger will be completed, on a timely basis, if at all. In addition, if the
Merger is completed, no assurance can be given that the Company will be
successful in timely integrating and managing the operating, purchasing,
marketing and management information systems of the two companies or that the
Company will be able to hire, train, and retrain and assimilate selected
individuals employed at the acquired stores. Additionally, the Company's and
Moovies' operating results may be affected by many factors, including but not
limited to 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 events and other factors that may
affect retailers in general. See "Risk Factors."
101
<PAGE> 112
UNAUDITED PRO FORMA COMBINED BALANCE SHEET(a)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------
VIDEO UPDATE, INC. MOOVIES INC.
OCTOBER 31, SEPTEMBER 30, PRO FORMA
1997 1997 ADJUSTMENTS PRO FORMA
------------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash...................................... $ 96 $ 2,295 $ (1,675)(c) $ 716
Accounts receivable....................... 3,593 1,302 -- 4,895
Notes receivable from related parties..... 1,470 -- -- 1,470
Inventory................................. 9,119 5,220 -- 14,339
Videocassette rental inventory -- net..... 56,785 26,987 -- 83,772
Property and equipment -- net............. 41,750 37,763 -- 79,513
Prepaid expenses.......................... 1,875 3,662 (380)(b) 5,157
Recoverable income taxes.................. 1,502 -- -- 1,502
Goodwill -- net........................... 36,612 46,644 (9,254)(b,c,d) 74,002
Deferred income taxes benefits............ -- 7,978 -- 7,978
Other assets.............................. 1,752 3,202 336 (b,c) 5,290
--------- --------- --------- ---------
Total Assets............................ $ 154,554 $ 135,053 $ (10,973) $ 278,634
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable.............................. $ 32,534 $ 49,875 $ 21,125 (c) $ 103,534
Accounts payable.......................... 21,712 16,605 (6,000)(c) 32,317
Deferred income taxes..................... 3,021 4,599 -- 7,620
Accrued expenses.......................... 2,884 12,526 (6,000)(c) 9,410
Accrued compensation...................... 1,548 -- -- 1,548
Income taxes payable...................... -- -- -- --
Accrued rent expense...................... 3,450 -- -- 3,450
Stockholders' Equity
Preferred Stock......................... -- -- -- --
Common Stock............................ 201 12 82 (d)
(1)(e) 294
Additional paid-in capital.............. 85,585 61,885 (30,629)(d)
2,926 (e) 119,767
Retain earnings......................... 5,909 (10,449) (7,344)(b)
17,793 (d)
(2,925)(e) 2,984
Foreign currency translation............ (610) -- -- (610)
--------- --------- --------- ---------
91,085 51,448 (20,098) 122,435
Notes receivable from officers for
the exercise of options............ (1,680) -- -- (1,680)
--------- --------- --------- ---------
Total stockholders' equity........... 89,405 51,448 (20,098) 120,755
Total Liabilities and Stockholders'
Equity.................................. $ 154,554 $ 135,053 $ (10,973) $ 278,634
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
balance sheet
102
<PAGE> 113
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) See the introductory paragraphs under "Unaudited Pro Forma Combined
Financial Information."
(b) To allocate the estimated purchase price based on the estimated fair value
of the assets acquired.
(c) To record additional borrowings and payments related to the Moovies
acquisition including estimates for severance pay, lease settlements,
reduction of accounts payable, transition costs, and transaction costs.
(d) To record the issue of approximately 9,375,000 shares of Class A Common
Stock of the Company in connection with the acquisition of Moovies and
eliminate the stockholders equity of Moovies as follows:
<TABLE>
<CAPTION>
ELIMINATE
ISSUANCE OF MOOVIES
VIDEO UPDATE INC. STOCKHOLDERS
STOCK EQUITY ADJUSTMENT
------------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Common Stock........................ $ 94 $ (12) $ 82
Additional paid-in-capital.......... 31,256 (61,885) (30,629)
Retained earnings................... -- 17,793 17,793
-------- -------- --------
$ 31,350 $(44,104) $(12,754)
======== ======== ========
</TABLE>
(e) To record the one-time, non-cash, non-tax deductible charge of approximately
$2,667,600 (based on a share price of $2.28 as of January 20, 1998)
resulting from the release of 1,170,000 of the escrow shares contemplated in
this merger.
103
<PAGE> 114
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(a)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
VIDEO UPDATE, INC.
---------------------------------------------------------- MOOVIES, INC.
RECENT -------------
HISTORICAL ACQUISITIONS(b) HISTORICAL
SIX MONTHS ENDED RECENT PRO FORMA SIX MONTHS MOOVIES,
----------------------------- ACQUISITIONS INCLUDING ENDED INC.
OCTOBER 31, OCTOBER 31, PRO FORMA RECENT SEPTEMBER 30, PRO FORMA
1997 1997 ADJUSTMENTS ACQUISITIONS 1997 ADJUSTMENTS
----------- --------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenue.............. $56,964 $ -- $ -- $ 56,964 $ 46,433 $ --
Service fees................ 343 -- -- 343 -- --
Product sales............... 6,630 -- -- 6,630 8,547 --
------- ------- ------- -------- --------- -------
63,937 -- -- 63,937 54,980 --
Costs and expenses:
Store operating expenses.... 53,372 -- -- 53,372 61,944(d) 232(f)
Selling, general and
administrative............ 5,841 -- -- 5,841 6,572 (2,595)(g)
Cost of Product Sales....... 3,852 -- -- 3,852 6,704 --
Amortization of goodwill.... 1,022 -- -- 1,022 1,244 (309)(i)
------- ------- ------- -------- --------- -------
64,087 -- -- 64,087 76,464 (2,672)
------- ------- ------- -------- --------- -------
Operating income.............. (150) -- -- (150) (21,484) 2,672
--
Interest expense.............. (1,176) -- -- (1,176) (2,212) (1,056)(j)
Other income (expense)........ 180 -- -- 180 (109) --
------- ------- ------- -------- --------- -------
(996) -- -- (996) (2,321) (1,056)
------- ------- ------- -------- --------- -------
Loss before income taxes...... (1,146) -- -- (1,146) (23,805) 1,616
Income tax expense (benefit).. (249) -- -- (249) (9,522) 630(l)
------- ------- ------- -------- --------- -------
Net loss...................... $ (897) $ -- $ -- $ (897) $ (14,283) $ 986
======= ======= ======= ======== ========= =======
Net loss per share............ $ (0.05) $ (0.05)
======= ========
Weighted average number of
common and equivalent shares
outstanding................. 18,982 18,982 10,545(m)
<CAPTION>
COMBINED
PRO FORMA
---------
<S> <C>
Revenues:
Rental revenue.............. $ 103,397
Service fees................ 343
Product sales............... 15,177
---------
118,917
Costs and expenses:
Store operating expenses.... 115,548
Selling, general and
administrative............ 9,818
Cost of Product Sales....... 10,556
Amortization of goodwill.... 1,957
---------
137,879
---------
Operating income.............. (18,962)
Interest expense.............. (4,444)
Other income (expense)........ 71
---------
(4,373)
---------
Loss before income taxes...... (23,335)
Income tax expense (benefit).. (9,141)
---------
Net loss...................... $ (14,194)
=========
Net loss per share............ $ (0.48)(a)
=========
Weighted average number of
common and equivalent shares
outstanding................. 29,527
</TABLE>
The accompanying notes are an integral part of the pro forma combined statement
of operations (unaudited).
104
<PAGE> 115
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(a)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
VIDEO UPDATE, INC. MOOVIES, INC.
----------------------------------------------------------- -------------
RECENT
HISTORICAL ACQUISITIONS(b)
---------- ---------------
YEAR ENDED HISTORICAL
--------------------------- RECENT PRO FORMA YEAR ENDED MOOVIES,
ACQUISITIONS INCLUDING ------------- INC.
APRIL 30, APRIL 30, PRO FORMA RECENT MARCH 31, PRO FORMA COMBINED
1997 1997 ADJUSTMENTS ACQUISITIONS 1997 ADJUSTMENTS PRO FORMA
-------- --------------- ------------ ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenue....... $ 83,489 $12,732 $ -- $ 96,221 $77,662 $ -- $173,883
Service fees......... 567 88 -- 655 -- -- 655
Product sales........ 7,743 3,124 (56)(e) 10,811 14,895 -- 25,706
-------- ------- ------- -------- ------- ------- --------
91,799 15,944 (56) 107,687 92,557 -- 200,244
Costs and expenses:
Store operating
expenses........... 69,366 10,075 471(f) 79,912 65,681 836(f) 146,429
Selling, general and
administrative..... 8,231 1,628 (1,557)(g) 8,302 9,735 (6,072)(g) 11,965
Cost of product
sales.............. 4,544 2,241 1(h) 6,786 10,572 -- 17,358
Amortization of
goodwill........... 1,613 -- 465(i) 2,078 1,890 (21)(i) 3,948
-------- ------- ------- -------- ------- ------- --------
83,754 13,944 (620) 97,078 87,878 (5,257) 179,700
-------- ------- ------- -------- ------- ------- --------
Operating income....... 8,045 2,000 564 10,609 4,679 5,257 20,545
Interest expense....... (544) (67) (499)(j) (1,110) (1,497) (2,113)(j) (4,720)
Other income
(expense)............ 461 (127) 127(k) 461 (23) -- 438
-------- ------- ------- -------- ------- ------- --------
(83) (194) (372) (649) (1,520) (2,113) (4,282)
-------- ------- ------- -------- ------- ------- --------
Income before income
taxes................ 7,962 1,806 192 9,960 3,159 3,144 16,263
Income tax expense..... 3,342 389 498(l) 4,229 1,250 1,226(l) 6,705
-------- ------- ------- -------- ------- ------- --------
Net Income............. $ 4,620 $ 1,417 $ (306) $ 5,731 $ 1,909 $ 1,918 $ 9,558
======== ======= ======= ======== ======= ======= ========
Net Income per share... $ 0.28 $ 0.32 $ 0.33 (a)
======== ======== ========
Weighted average number
of common and
equivalent shares
outstanding.......... 16,262 1,857(m) 18,119 10,545(m) 28,664
</TABLE>
The accompanying notes are an integral part of the pro forma combined statement
of operations (unaudited).
105
<PAGE> 116
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) See the introductory paragraphs under "Unaudited Pro Forma Combined
Financing Information." The Unaudited Pro Forma Combined Statement of
Operations excludes a one-time non-cash, non-tax deductible charge of
approximately $2,667,600 or $.09 per combined pro forma share (based on a
closing price of $2.28 as of January 20, 1998) resulting from the release of
1,170,000 escrow shares contemplated in this merger. The 1,170,000 Class A
Common Stock shares to be issued have been included in the pro forma
weighted average number of shares (see note (m)).
(b) The Recent Acquisitions include the operations of 65 of 74 video stores
acquired from unrelated sellers during the year ended April 30, 1997 (see
Forms 8-K/A, dated June 16, 1997 and March 6, 1997), treated as purchases
for accounting purposes. The Recent Acquisitions statement of operations
reflects the results of operations from May 1, 1996 to the date of
acquisition.
(c) The Moovies acquisition includes the operation of 269 company-owned stores
as of October 27, 1997.
(d) During the three months ended September 30, 1997, Moovies' management
developed a restructuring plan that resulted in a pre-tax charge of
approximately $14.1 million. The restructuring charge is included in store
operating expenses of Moovies' historical statement of operations. The
restructuring charge, which amounts to a net loss per share of approximately
$0.29 on a pro forma combined basis, is included in the net loss per share
of $0.48 reflected on the Unaudited Pro Forma Combined Statement of
Operations.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
VIDEO UPDATE VIDEO UPDATE
RECENT MOOVIES RECENT MOOVIES
ACQUISITIONS ACQUISITION ACQUISITIONS ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
(e) Adjustment to eliminate music sales.......... $ (56) $ -- $ -- $ --
========== ======= ======== =======
(f) Adjustments to store operating expenses
consist of the following:
To record decrease in advertising expense
due to incremental savings from acquired
stores located in the Company's existing
market and more efficient use of co-op
funds....................................... $ (78) $ -- $ -- $ --
To reclassify cost of sales recorded as
store operating expenses (see note (h)
below)...................................... (48) -- -- --
To adjust amortization expense to comply
with the Company's amortization policy...... 18 -- -- --
To record additional rent expense related to
locations owned by the seller but not
purchased by the Company (Management of the
Company has entered into lease agreements
for the locations with the sellers)......... 45 -- -- --
To reclassify store operating expenses
recorded as selling, general and
administrative expenses (see note (g)
below)...................................... 534 836 -- 232
---------- ------- -------- -------
$ 471 $ 836 $ -- $ 232
========== ======= ======== =======
</TABLE>
106
<PAGE> 117
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
VIDEO UPDATE VIDEO UPDATE
RECENT MOOVIES RECENT MOOVIES
ACQUISITIONS ACQUISITION ACQUISITIONS ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
---------- ------- -------- -------
<S> <C> <C> <C> <C>
(g) Adjustments to selling, general and
administrative expenses:
To reduce corporate overhead related to
consolidating operations.................... $(1,023.00) $ -- $ -- $ --
To eliminate expenses related to a reduction
in specific personnel including wages,
benefits, travel and other cost............. -- (4,188) -- (1,892)
To reduce costs related to Moovies corporate
headquarters which will be closed........... -- (281) -- (165)
To record occupancy expense increase to
account for additional space needed to
manage the combined companies............... -- 96 -- 48
To eliminate specific professional fees..... -- (863) -- (354)
To reclassify store operating expenses
recorded as selling, general and
administrative expenses (see note (f)
above)...................................... (534) (836) -- (232)
---------- ------- -------- -------
$ (1,557) $(6,072) $ -- $(2,595)
========== ======= ======== =======
(h) Adjustments to cost of sales consist of the
following:
To eliminate cost of sales related to music
sales (see footnote (e) above).............. $ (47) $ -- $ -- $ --
To reclassify cost of sales recorded as
store operating expenses (see note (f)
above)...................................... 48 -- -- --
---------- ------- -------- -------
$ 1 $ -- $ -- $ --
========== ======= ======== =======
(i) To record the amortization of goodwill over
20 years on a straight line basis resulting
from the allocation of the purchase price and
the related acquisition costs to the
estimated fair values of assets acquired..... $ 465 $ (21) $ -- $ (309)
========== ======= ======== =======
(j) Adjustments to interest expense consist of
the following:
To record additional interest expense
related to the Recent Acquisition........... $ (566) $ -- $ -- $ --
To record additional expense related to the
acquisition of Moovies based on a 10%
interest rate................................ -- (2,113) -- (1,056)
To reduce interest expense for a decrease in
sellers debt................................ 67 -- -- --
---------- ------- -------- -------
$ (499) $(2,113) $ -- $(1,056)
========== ======= ======== =======
(k) To eliminate other expenses incurred by the
sellers........................................ $ 127 $ -- $ -- $ --
========== ======= ======== =======
</TABLE>
107
<PAGE> 118
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
VIDEO UPDATE VIDEO UPDATE
RECENT MOOVIES RECENT MOOVIES
ACQUISITIONS ACQUISITION ACQUISITIONS ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
---------- ------- -------- -------
<S> <C> <C> <C> <C>
(l) Adjustments to provision for income taxes
consist of the following:
To record estimated provisions for income
taxes related to operations as if the Recent
Acquisitions had been taxed as a C
Corporation.................................. $ 418 $ -- $ -- $ --
To record the income tax effect of the pro
forma adjustments in (e) through (k)
above........................................ 80 1,226 -- 630
---------- ------- -------- -------
$ 498 $ 1,226 $ -- $ 630
========== ======= ======== =======
(m) Adjustments to the weighted average number of
common and equivalent shares outstanding
consist of the following:
To record the shares offered in connection
with the Recent Acquisitions................ $ 97 $ -- $ -- $ --
To account for the number of shares of Class
A Common Stock issued in the stock offering
in September 1996 related to the cash portion
of the Recent Acquisition.................... 1,760 -- -- --
To record the number of Class A Common Stock
shares issued in exchange for Moovies Common
Stock (i.e. 0.75 shares of the Company's
Stock for each share of Common Stock of
Moovies based on approximately 12,500,000
shares at October 27, 1997).................. -- 9,375 -- 9,375
To record the number of Class A Common Stock
shares issued related to the proposed
release of the escrow shares related to the
merger...................................... -- 1,170 -- 1,170
---------- ------- -------- -------
$ 1,857 $10,545 $ -- $10,545
========== ======= ======== =======
</TABLE>
108
<PAGE> 119
DESCRIPTION OF VIDEO UPDATE CAPITAL STOCK
GENERAL
Video Update's authorized capital stock consists of 60,000,000 shares of
Class A Common Stock, $.01 par value per share ("Video Update Common Stock"), of
which 18,104,591 are issued and outstanding, 2,000,000 shares of Class B Common
Stock, $.01 par value per share ("Video Update Class B Common Stock"), all of
which are issued and outstanding, and 5,000,000 shares of Preferred Stock, $.01
par value per share ("Preferred Stock"), none of which are outstanding.
COMMON STOCK
The Video Update Common Stock and Video Update Class B Common Stock do not
carry preemptive rights and are substantially identical except that holders of
Video Update Common Stock have the right to cast one vote for each share held of
record and holders of Video Update 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 Video Update Common Stock and Video Update
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 Video Update Class B Common Stock are automatically convertible
into an equivalent number of fully paid and non-assessable shares of Video
Update Common Stock upon the sale or transfer of such shares of Video Update
Class B Common Stock by the original record holder thereof or upon the death of
the original record holder. Each share of Video Update Class B Common Stock also
is convertible at any time at the option of the holder into one share of Video
Update Common Stock; once such shares are converted into Video Update Common
Stock, they are retired and unavailable for future reissuance as Video Update
Class B Common Stock.
Holders of Video Update Common Stock and Video Update 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 Video Update
Common Stock or Video Update Class B Common Stock do not have preemptive,
subscription or conversion rights. No redemption or sinking fund provisions
exist for the benefit of the Video Update Common Stock or Video Update Class B
Common Stock. All outstanding shares of Video Update and Video Update Class B
Common Stock are, and those shares of Video Update Common Stock offered hereby,
will be validly issued, fully paid and non-assessable.
The difference in voting rights described above increases the voting power
of the holders of Video Update Class B Common Stock and accordingly has an
anti-takeover effect. The existence of the Video Update Class B Common Stock may
make Video Update 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 Video Update other than the holders of Video
Update Class B Common Stock. 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 Video Update
through a business combination will be compelled to consult first with the
holders of Video Update Class B Common Stock 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
holders of Video Update Class B Common Stock, and if stockholder approval were
required, the approval of the holders of Video Update Class B Common Stock will
be necessary before any such business combination can be consummated.
The Escrow Agreement applies to 1,300,000 of the 2,000,000 shares of Video
Update Class B Common Stock. See "Proposal to Terminate and Cancel the Escrow
Agreement."
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WARRANTS
Class A Warrants. Video Update has reserved 348,050 Class A Warrants that
are issuable upon exercise of options (the "Blair Options") held by Blair, the
underwriter of Video Update's initial public offering (and its designees). 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 July 19, 1999, provided that at such time a current
prospectus relating to the Video Update Common Stock and the Class B Warrants is
then in effect and the Video Update 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. Video Update 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 Video Update 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 Video Update Common Stock is then in effect and the Video Update
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 Video Update 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 Video Update upon 30 days written notice, at a price of
$.05 per Class B Warrant, if the average closing bid price of the Video Update
Stock for any 30 consecutive business days ending within 15 days of the date on
which 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 Video Update 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 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 Video Update'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 Video Update)
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 Video Update Common Stock (or securities convertible, exchangeable
or exercisable into Video Update Common Stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of Video Update's
assets, and for other extraordinary events; provided, however, that no such
adjustment shall be made upon, among other things, (i) the issuance of exercise
of options or other securities under Video Update's stock option plans or other
employee benefit plans or (ii) the sale or exercise of outstanding options or
Warrants.
Video Update is not required to issue fractional shares of Video Update
Common Stock, and in lieu thereof will make a cash payment based upon the
current market value of such fractional shares. The holder of
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the Warrants would not possess any rights as a stockholder of Video Update
unless and until such holder exercises the Warrants.
Solicitation Fee. Video Update has agreed not to solicit Class B Warrant
exercises other than through Blair. Upon any exercise of the Class B Warrants,
Video Update will pay Blair a fee of 5% of the aggregate exercise price (the
"Warrant Fee"), if (i) the market price of Video Update's Class A Common Stock
on the date a Warrant is exercised is greater than the then exercise price of
Warrants; (ii) the warrant holder 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 Video
Update'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
rules promulgated under the Exchange Act.
In 1996 Blair informed Video Update that the Commission was conducting an
investigation concerning various business activities of Blair and D.H. Blair &
Co., Inc. ("Blair & Co."). Video Update was advised that Blair could not predict
whether this investigation will ever result in any type of formal enforcement
action against Blair or Blair & Co. or any of Video Update's securities.
According to published reports, in August 1997, the National Association of
Securities Dealers ("NASD") announced that Blair & Co. agreed to pay a $2
million fine and reimburse customers $2.4 million for overcharging them during
the first few days of trading in 16 initial public offerings, including Video
Update's initial public offering. These reports indicate that Blair & Co.
settled the NASD charges without admitting or denying guilt. Blair has not
indicated whether the Commission has concluded its investigation. Video Update
has not received any notice from the Commission or the NASD regarding the
investigation.
Blair Options. Blair and its designees hold the Blair Options, which were
issued in connection with Blair's services provided in Video Update'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 Video Update 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 Video Update 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 Video Update's 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 Video Update's 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 Video Update, and they may have other
preferences over the holders of the common stock.
Video Update's Board of Directors may issue series of Preferred Stock
without action by the stockholders of Video Update. 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. Video Update has no current plans to
issue any Preferred Stock.
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DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Video Update is subject to the provisions of Section 203 of the DGCL, an
anti-takeover law. Section 203 prevents an "Interested Stockholder" of a
corporation (generally defined to mean any beneficial owner of more than 15% of
the corporation's voting stock) from engaging in any "business combination" (as
defined in Section 203) with the corporation for a period of three years
following the date on which such Interested Stockholder became an Interested
Stockholder, unless: (i) before such person became an Interested Stockholder,
the Board of Directors of the corporation approved either the business
combination in question or the transaction which resulted in the Interested
Stockholder becoming an Interested Stockholder; (ii) upon consummation of the
transaction which resulted in the Interested Stockholder becoming an Interested
Stockholder, the Interested Stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
(for purposes of determining the number of shares outstanding) shares held by
directors who are also officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) following the transaction which resulted in the Interested Stockholder
becoming an Interested Stockholder, the business combination is (x) approved by
the Board of Directors of the corporation and (y) authorized at a meeting of
stockholders by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock of the corporation not owned by the Interested
Stockholder. A "business combination" includes, among others, mergers, asset
sales and other transactions resulting in a financial benefit to the Interested
Stockholder.
The Bylaws of Video Update provide that special meetings of stockholders
may be called only by the Chairman of the Board of Directors or the President.
Video Update has included in its Certificate of Incorporation and Bylaws
provisions to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Section 102(b)(7) of the DGCL and (ii) indemnify its directors and officers
to the fullest extent permitted by Section 145 of the DGCL, including under
circumstances in which indemnification is otherwise discretionary. Video Update
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers.
TRANSFER AGENT
The transfer agent for the Video Update Common Stock is American Stock
Transfer & Trust Company.
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COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain of the material differences between
the rights of holders of Video Update capital stock and the rights of holders of
Moovies Common Stock. Since both Video Update and Moovies are organized under
the laws of the State of Delaware, such differences arise from differences
between various provisions of the Certificate of Incorporation and Bylaws of
Video Update and the Certificate of Incorporation and Bylaws of Moovies.
Number, Classification and Removal of Directors. Moovies' Bylaws provide
that the number of directors of Moovies shall be fixed by the Board of
Directors. The Certificate of Incorporation of Moovies also provides that the
Board of Directors shall be divided into three classes serving staggered
three-year terms and the Bylaws provide that any one or more of the directors of
Moovies may be removed, only with cause, by the holders of at least two-thirds
of the shares then entitled to vote in an election of directors at a meeting
called for that purpose. Video Update's Bylaws provide that the number of
directors shall be fixed by the Board of Directors, do not provide for the
classification of the Board of Directors and provide that any director or the
entire Board of Directors may be removed from office at any time, with or
without cause, by the holders of at least a majority of the shares (voting
together as a single class) then entitled to vote in an election of directors.
Advance Notice of Stockholder Proposals. The Bylaws of Video Update
provide that a stockholder must give advance written notice to the company if
the stockholder intends to bring any business before a meeting of stockholders
or to make nominations for the board of directors. The Bylaws of Video Update
require that for business to be properly brought by a stockholder before an
annual or special meeting, notice must be received by the Secretary of Video
Update not less than 60 days from the date of the immediately preceding annual
or special meeting of stockholders. The Bylaws of Moovies do not contain similar
provisions.
Voting Requirements and Quorums of Stockholder Meetings. The Bylaws of
Moovies provide that at any meeting of stockholders, the holders of a majority
of the outstanding shares of stock then issued, outstanding and entitled to vote
shall constitute a quorum for the transaction of any business. Video Update's
Certificate of Incorporation and Bylaws provide that the presence in person or
by proxy of the holders of a majority of the shares of the capital stock of
Video Update issued and outstanding and entitled to vote shall be necessary to,
and shall constitute a quorum for, the transaction of business, except as
otherwise provided by statute or Video Update's Certificate of Incorporation.
The Delaware General Corporation Law provides for a minimum quorum equal to that
number of shares representing one third of the votes entitled to be cast at the
meeting. Video Update's Bylaws provide that, when a quorum is present, any
election by stockholders shall be by a plurality of votes cast. With respect to
all other matters, the affirmative vote of the holders of shares of stock
representing a majority of the votes cast thereon is required, except when a
different vote is required by express provision of law. Video Update Common
Stock and Video Update Class B Common Stock are substantially identical except
that holders of Video Update Common Stock have the right to cast one vote for
each share held of record and holders of Video Update 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 Video Update Common
Stock and the Video Update 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 Video Update Class B Common Stock are automatically convertible
into an equivalent number of fully paid and non-assessable shares of Video
Update Common Stock upon the sale or transfer of such shares of Video Update
Class B Common Stock by the original record holder thereof or upon the death of
the original record holder. Each share of Video Update Class B Common Stock also
is convertible at any time at the option of the holder into one share of Video
Update Common Stock; once such shares are converted into Video Update Common
Stock, they are retired and unavailable for future reissuance as Video Update
Class B Common Stock.
Moovies' Bylaws provide that when a quorum is present, any election of
directors by stockholders shall be by a plurality of votes cast. With respect to
all other matters, the affirmative vote of the holders of shares of stock
representing a majority of the votes cast thereon is required.
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Video Update's Bylaws do not allow stockholders to take action by written
consent. Moovies' Certificate of Incorporation allows action to be taken by
unanimous written consent of the stockholders.
Transactions With Interested Stockholders. Video Update and Moovies are
subject to Section 203 of the DGCL ("Section 203"). Section 203 prevents an
"Interested Stockholder" of a corporation (generally defined to mean any
beneficial owner of more than 15% of the corporation's voting stock) from
engaging in any "business combination" (as defined in Section 203) with the
corporation for a period of three years following the date on which such
Interested Stockholder became an Interested Stockholder, unless: (i) before such
person became an Interested Stockholder, the Board of Directors of the
corporation approved either the business combination in question or the
transaction which resulted in the Interested Stockholder becoming an Interested
Stockholder; (ii) upon consummation of the transaction which resulted in the
Interested Stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding (for purposes of
determining the number of shares outstanding) shares held by directors who are
also officers and employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) concurrently with
or following the transaction which resulted in the Interested Stockholder
becoming an Interested Stockholder, the business combination is (x) approved by
the Board of Directors of the corporation and (y) authorized at a meeting of
stockholders by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock of the corporation not owned by the Interested
Stockholder. A "business combination" includes, among others, mergers, asset
sales and other transactions resulting in a financial benefit to the Interested
Stockholder.
Approval of Certain Actions. Video Update's Certificate of Incorporation
requires the affirmative two-third's vote of the holders of the Video Update
Common Stock and the Video Update Class B Common Stock voting together as a
single class on all matters on which stockholders may vote, including the
election of directors.
The Certificate of Incorporation of Moovies does not contain comparable
provisions.
Moovies' Rights Agreement. On December 20, 1996 the Moovies' Board of
Directors adopted the Rights Agreement. Under the Rights Agreement, a dividend
of one right ("Rights") to purchase a fraction of a share of a newly created
class of preferred stock ("Participating Preferred Stock") was declared for each
share of Moovies Common Stock outstanding at the close of business on December
31, 1996 (the "Record Time"). The Rights, which expire on December 31, 2006, may
be exercised only if certain conditions are met. Upon announcement that any
person has acquired beneficial ownership of 15% or more of the outstanding
Moovies Common Stock (the "Flip-in Trigger"), then:
(i) Rights owned by the person acquiring such stock (an "Acquiring
Person") or transferee thereof will automatically become void; and
(ii) each other Right will automatically become a right to buy, for
the Exercise Price described below, that number of shares of Moovies Common
Stock or Participating Preferred Stock having a market value of twice the
Exercise Price.
Rights will separate from the Moovies Common Stock and become exercisable
following the earlier of ("Separation Time"); (i) the date of the Flip-in
Trigger or (ii) the tenth business day (or such later day as the Board of
Directors may decide) after any person commences a tender offer that would
result in such person acquiring beneficial ownership of 15% or more of the
Moovies Common Stock. After the Separation Time, each Right will entitle the
holder to purchase, for an exercise price of $30.00 ("Exercise Price"), a
fraction of a share of Participating Preferred Stock designed to have economic
and voting terms similar to those of one share of Moovies Common Stock. After an
Acquiring Person has become such, Moovies may not consolidate or merge with, or
sell 50% or more of its assets or earning power to, any person (a "Flip-Over
Transaction or Event") if at the time of such merger or sale (or agreement to do
any of the foregoing) the Acquiring Person controls the Board of Directors and,
in the case of a merger will receive different treatment than all other
stockholders unless proper provision is made so that each Right would thereafter
become a right to buy, for the Exercise Price, that number of shares of Moovies
Common Stock of such other person having a
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market value of twice the Exercise Price. If any person acquires between 15% and
50% of the outstanding Moovies Common Stock, the Board of Directors may, in lieu
of allowing Rights to be exercised, exchange each outstanding Right for one
share of Moovies Common Stock or a fraction of a share of Participating
Preferred Stock designed to have economic and voting terms similar to those of
one share of Moovies Common Stock.
The Rights Agreement provides that, until the Separation Time (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Moovies Common Stock. Until the Separation Time (or earlier
redemption or expiration of the Rights), new Moovies Common stock certificates
issued after the Record Time upon transfer or new issuance of Moovies Common
Stock will contain a notation incorporating the Rights Agreement by reference.
Until the Separation Time (or earlier redemption or expiration of the Rights),
the surrender for the transfer of any certificates for Moovies Common Stock
outstanding as of the Record Time, even without such notation or a copy of a
summary of rights being attached thereto, will also constitute the transfer of
the Rights associated with the Moovies Common Stock represented by such
certificate. As soon as practicable following the Separation Time, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the Moovies Common Stock as of the close of business on the
Separation Time and such separate Rights Certificates alone will evidence the
Rights.
The Rights will not be exercisable until the Business Day (as defined in
the Rights Agreement) following the Separation Time. The Rights will expire on
the earliest of (i) the Exchange Time (as defined below), (ii) the close of
business on December 31, 2006, (iii) the date on which the Rights are redeemed
as described below and (iv) upon the merger of Moovies into another corporation
pursuant to an agreement entered into when there is no Acquiring Person (in any
such case, the "Expiration Time").
The Exercise Price payable, and the number of preferred shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution in the event of (i) a stock
dividend on, or a subdivision, combination or reclassification of, the Moovies
Common Stock, or (ii) a distribution of securities or assets in respect of, in
lieu of or in exchange for Moovies Common Stock (excluding regular periodic cash
dividends or dividends payable in Moovies Common Stock).
Shares purchasable upon exercise of the Rights will not be redeemable
without the consent of the holders of such shares of Participating Preferred
Stock. Each share of Participating Preferred Stock will be entitled to an
aggregate dividend of 100 times the dividend declared per share of Moovies
Common Stock (other than dividends or distributions paid in Moovies Common
Stock). In the event of liquidation, the holders of the Participating Preferred
Stock will be entitled to be paid an amount per share equal to the aggregate
amount distributable upon such event to a holder of 100 shares of Moovies Common
Stock (each as adjusted for any stock dividend, stock split or combination into
a smaller number of shares). Each share of Participating Preferred Stock shall
have 100 votes (as adjusted for any stock dividend, stock split or combination
into a smaller number of shares) and shall vote as a class with the Moovies
Common Stock voting on such matter. Finally, in the event of any merger,
consolidation or other transaction in which Moovies Common Stock is exchanged,
each share of Participating Preferred Stock will be entitled to receive 100
times the amount received per share of Moovies Common Stock. Because of the
nature of the shares of Participating Preferred Stock, dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a share of
Participating Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Moovies Common Stock.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
Moovies Common Stock, the Board of Directors of Moovies may exchange all (but
not less than all) of the then outstanding Rights (other than Rights owned by
such person or group which will have become void) at an exchange ratio of one
share of Moovies Common Stock, or one one-hundredth of a share of Participating
Preferred Stock, per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date of the Separation
Time (the "Exchange Ratio"). Immediately upon such action by the Board of
Directors (the "Exchange Time"), the right to exercise the Rights will terminate
and each Right will thereafter represent only the right to receive
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a number of shares of Moovies Common Stock or one one-hundredths of a share of
Participating Preferred Stock equal to the Exchange Ratio.
The Board of Directors may amend the Rights Agreement in any respect until
a "Flip-in Trigger" has occurred. Thereafter, the Board of Directors may amend
the Rights Agreement in any respect not materially adverse to Rights holders
generally. The Rights may be redeemed by the Board of Directors, at any time,
until a "Flip-in Trigger" has occurred, at a Redemption Price of $.001 per
Right.
On July 2, 1997 and October 27, 1997 the Moovies Board unanimously voted to
approve the Merger and determined that Video Update was not an Acquiring Person
under the Rights Agreement. The Rights will expire upon the consummation of the
Merger. Video Update's Certificate of Incorporation does not contain a
comparable provision, and Video Update does not have a similar Rights Plan.
The foregoing summary does not purport to be a complete statement of the
rights of holders of Video Update Common Stock and Moovies Common Stock under,
and is qualified in its entirety by reference to, the DGCL, the respective
Certificates of Incorporation and Bylaws of Video Update and Moovies and the
Video Update and Moovies Rights Agreements. See "Description of Video Update
Capital Stock" for a summary of certain other provisions relating to the Video
Update Common Stock.
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PROPOSAL TO TERMINATE AND CANCEL THE ESCROW AGREEMENT
At the Video Update Special Meeting, Video Update stockholders will be
asked to vote upon and approve the Escrow Proposal, which would approve the
termination and cancellation of the Escrow Agreement.
THE APPROVAL OF BOTH (i) THE MERGER PROPOSAL AND (ii) THE ESCROW PROPOSAL
TERMINATING THE ESCROW AGREEMENT, IS A PRECONDITION TO THE OBLIGATIONS OF VIDEO
UPDATE UNDER THE MERGER AGREEMENT AND CONSUMMATION OF THE MERGER. THE CONVERSION
OF THE VIDEO UPDATE CLASS B COMMON STOCK IN ACCORDANCE WITH THE UNDERTAKING
AGREEMENT DESCRIBED BELOW ALSO IS A PRECLOSING CONDITION OF MOOVIES UNDER THE
MERGER AGREEMENT. (THE ESCROW PROPOSAL IS A CONDITION TO MOOVIES' OBLIGATION TO
CLOSE DUE TO MOOVIES' REQUIREMENT THAT ALL VIDEO UPDATE CLASS B COMMON STOCK
PREFERENTIAL VOTING RIGHTS BE EXTINGUISHED THROUGH CONVERSION TO VIDEO UPDATE
COMMON STOCK. NEGOTIATIONS AMONG THE OUTSIDE DIRECTORS AND THE VIDEO UPDATE
CLASS B COMMON STOCK SHAREHOLDERS RESULTED IN THE VIDEO UPDATE CLASS B COMMON
STOCK SHAREHOLDERS AGREEING TO CONVERT THEIR VIDEO UPDATE CLASS B COMMON STOCK
ONLY IF 90% OF THE ESCROW SHARES WERE RELEASED TO THE CURRENT VIDEO UPDATE CLASS
B COMMON STOCK SHAREHOLDERS.) ACCORDINGLY, IF THE ESCROW PROPOSAL IS NOT
APPROVED, THE MERGER WILL NOT BE CONSUMMATED UNLESS THE ESCROW PROPOSAL
CONDITION IS WAIVED BY BOTH MOOVIES AND VIDEO UPDATE, WHICH MANAGEMENT OF VIDEO
UPDATE AND MOOVIES CONSIDERS UNLIKELY GIVEN THE NEGOTIATIONS THAT RESULTED IN
THE EXECUTION OF THE MERGER AGREEMENT. VIDEO UPDATE HAS AGREED TO PAY A
TERMINATION FEE OF $400,000 TO MOOVIES IF THE ESCROW PROPOSAL IS NOT APPROVED BY
VIDEO UPDATE STOCKHOLDERS.
Pursuant to the Escrow Agreement, no shares of Video Update Common Stock or
Video Update Class B Common Stock held by any of Daniel A. Potter, Video
Update's Chairman and Chief Executive Officer, John M. Bedard, Video Update's
President, or Daniel C. Howard, Video Update's Chief Operating Officer, will be
voted on or for the Escrow Proposal.
BACKGROUND
The following description of the Escrow Agreement is qualified in its
entirety by reference to the Escrow Agreement, which is listed as an Exhibit to
the Registration Statement. The following is a summary of the material terms and
does not purport to be a complete statement of the terms and conditions of the
Escrow Agreement. Stockholders of Video Update should read the Escrow Agreement
in its entirety. Copies of the Exhibits to the registration Statement and other
information filed by Video Update and Moovies with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street,
Washington, D.C. 20549. In addition, Video Update and Moovies are each required
to file electronic versions of such material with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Each of
Video Update Common Stock and Moovies Common Stock is quoted on the Nasdaq
National Market. Reports and other information concerning Video Update and
Moovies can also be inspected at the offices of the National Association of
Securities Dealers, Inc., Market Listing Section, 1735 K Street, N.W.,
Washington, D.C. 20006. See "Available Information."
All of Video Update's 2,000,000 authorized and outstanding shares of Video
Update Class B Common Stock are held by Messrs. Potter, Bedard and Howard
(individually or beneficially).
The Escrow Agreement, by and among Video Update, American Stock Transfer &
Trust Company, Daniel A. Potter, Video Update's Chairman and Chief Executive
Officer, John M. Bedard, Video Update's President, and Daniel Howard, Video
Update's Chief Operating Officer, was entered into in July 1994 as a condition
to Video Update's initial public offering, which was underwritten by Blair.
Pursuant to the Escrow Agreement, the Escrow Shares (1,300,000 of the 2,000,000
outstanding shares of Video Update Class B Common Stock) are being held in
escrow and are not assignable or transferable until such time, if ever, as the
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Escrow Shares are released from escrow in accordance with the Escrow Agreement.
The Escrow Shares (Video Update Class B Common Stock) may be voted while in
escrow and carry five votes per share. Video Update Common Stock carries one
vote per share. The Escrow Shares may be released, in two tiers, if Video Update
achieves certain income levels initially set in the Escrow Agreement and
adjusted after that time for subsequent stock issuances. A stockholder's rights
to his Escrow Shares are not affected by any change in his status as an
employee, officer or director of, or his relationship with, Video Update, 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.
The Escrow Shares would be released from escrow if and only if Video
Update's Minimum Pretax Income (as defined below, which definition causes the
adjustments set forth herein) meets or exceeds certain targets described below:
Under the Escrow Agreement, "Minimum Pretax Income" means for any fiscal
year Video Update'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 Video Update's independent auditors. The
Minimum Pretax Income amounts set forth in the Escrow Agreement are subject to
adjustment (proportional increase) for additional shares of Video Update Common
Stock issued (other than in connection with stock dividends, stock splits of
similar events) after the execution of the Escrow Agreement. The Minimum Pretax
Income "Original Targets" set forth below have been adjusted to reflect
subsequent issuances of securities by Video Update (including securities issued
in connection with acquisitions) and are referred to below as "Targets Prior to
the Merger".
Pursuant to the Escrow Agreement, 700,000 of the 1,300,000 Escrow Shares
would be released from escrow if and only if Video Update's Minimum Pretax
Income meets or exceeds the following targets as set forth on the table below:
ESCROW AGREEMENT TARGET FOR RELEASE OF 700,000 ESCROW SHARES(1)
<TABLE>
<CAPTION>
TARGETS
ORIGINAL PRIOR TO
TARGETS THE MERGER
---------- -----------
<S> <C> <C>
Year Ended April 30, 1995.......................... $2,000,000 $ 2,025,211
Year Ended April 30, 1996.......................... 2,700,000 8,722,578
Year Ended April 30, 1997.......................... 4,000,000 20,401,502
Year Ended April 30, 1998.......................... 5,500,000 33,127,751
</TABLE>
All Escrow Shares would be released from escrow if and only if Video
Update's Minimum Pretax Income meets or exceeds the following targets:
ESCROW AGREEMENT TARGET FOR RELEASE OF ALL ESCROW SHARES
<TABLE>
<CAPTION>
TARGETS
ORIGINAL PRIOR TO
TARGETS THE MERGER
---------- -----------
<S> <C> <C>
Year Ended April 30, 1995.......................... $3,300,000 $ 3,341,599
Year Ended April 30, 1996.......................... 3,300,000 10,660,928
Year Ended April 30, 1997.......................... 5,000,000 25,501,877
Year Ended April 30, 1998.......................... 6,700,000 40,355,624
</TABLE>
- ---------------
(1) Alternatively, under the Escrow Agreement, the Escrow Shares could have been
released if certain stock price targets, calculated using averages in excess
of $15.00 and $22.00 per share, for each respective tier (which target was
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 had been achieved. The stock
price targets described in the Escrow Agreement were not attained.
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All Escrow Shares remaining in escrow on July 31, 1998 will be forfeited
and then canceled and contributed to Video Update's capital. Therefore, if Video
Update does not achieve the targets described above for fiscal 1998 (or previous
fiscal years by means of a transaction accounted for under the pooling of
interests method), the Escrow Shares will be forfeited and canceled. As stated
above, until that time, such Escrow Shares can continue to be voted (carrying
five votes per share) on all matters requiring a vote of Video Update
stockholders, including but not limited to, the election of directors and
amendments to Video Update's Certificate of Incorporation and Bylaws. After July
31, 1998, if the Escrow Shares are canceled or forfeited in accordance with the
Escrow Agreement, only the remaining 700,000 shares of Video Update Class B
Common Stock would remain outstanding and could continue to carry five votes per
share, unless converted at the option of the stockholder (in his sole
discretion) or by operation of law in accordance with Video Update's Certificate
of Incorporation.
Video Update's "Minimum Pretax Income" for the years ended April 30, 1995,
1996, and 1997 was $427,000, $2,821,000, and $7,962,000 respectively. These
results are substantially below the targets (as adjusted) set forth in the
Escrow Agreement. The adjusted Targets Prior to the Merger for Minimum Pretax
Income for the year ended April 30, 1998 would be $33,127,751 (for release of
the first tier of 700,000 Escrow Shares) and $40,355,624 (for release of all
Escrow Shares) (or $54,728,623 for release of all Escrow Shares, adjusted for
the Video Update Common Stock issued in connection with the Merger, if the
Escrow Agreement were not terminated and canceled). Therefore, for the Escrow
Shares to be released in accordance with the Escrow Agreement -- even before
adjusting the income targets for shares issued in the Merger -- the Minimum
Pretax Income for the fiscal year ended April 30, 1998 would have to equal
$40,355,624 (which would represent an increase of approximately 500% over
Minimum Pretax Income for fiscal 1997).
The Minimum Pretax Income levels set forth above, which were originally
determined by negotiations between Video Update and Blair prior to Video
Update's initial public offering, could be achieved only through prospective
Video Update earnings in fiscal 1998, or through an acquisition or merger
involving Video Update that is accounted for using the pooling of interests
method of accounting, which accounting method could allow for the restatement of
earnings for previous periods and could allow for the attainment of earnings
targets for previous fiscal years. Video Update currently has no plans for such
an acquisition or purchase.
The Escrow Agreement may not be modified, altered or amended in any
material respect or canceled or terminated except with (i) the prior written
consent of Blair and (ii) the prior consent of the holders of the majority of
the outstanding shares of Video Update Common Stock, other than shares of Video
Update Common Stock or Video Update Class B Common Stock held or beneficially
owned by Messrs. Potter, Bedard or Howard.
Stockholders of Video Update should note that the Securities and Exchange
Commission has adopted a position with respect to arrangements such as the
Escrow Agreement. The position provides that in the event any shares are
released from escrow to Video Update stockholders who are officers, directors,
consultants or employees of Video Update, a non-cash compensation expense will
be recorded for financial statement purposes. Therefore, upon the consummation
of the Merger and the release of the Escrow Shares, Video Update will recognize
at the time of such release a substantial one-time, non-cash, non-tax deductible
charge for compensation expense estimated at 2,667,600 (assuming closing sale
price of $2.28 for Video Update Common Stock as of January 20, 1998) that would
have the effect of substantially reducing or eliminating earnings, if any, at
the time of such release. The compensation will be treated as a contribution to
paid-in-capital. The compensation expense will not be deductible for tax
purposes and will result in a permanent book to tax difference. Although the
amount of compensation expense recognized by Video Update will not affect its
total stockholders' equity or cash flow, it may have a depressive effect on the
market price of Video Update's securities.
TERMINATION OF THE ESCROW AGREEMENT AND THE EFFECTIVENESS OF THE UNDERTAKING
AGREEMENT
The conversion, at the Effective Time, of all outstanding shares of Video
Update Class B Common Stock (including the 1,300,000 Escrow Shares as well as
700,000 additional shares of Video Update Class B Common Stock not subject to an
escrow or encumbrance of any kind) into Video Update Common Stock on a
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1:1 basis is a condition to the obligations of Moovies to consummate the
transaction (the "Moovies Conversion Condition").
In connection with the Moovies Conversion Condition, Moovies, Video Update
and the holders of the Video Update Class B Common Stock have agreed that all
Video Update Class B Common Stock will be converted automatically at the
Effective Time into Video Update Common Stock on a 1:1 basis in accordance with
the Undertaking Agreement by and among Video Update, Moovies, Daniel A. Potter,
Video Update's Chairman and Chief Executive Officer, John M. Bedard, Video
Update's President and Daniel C. Howard, Video Update's Chief Operating Officer,
which agreement would become effective at the Effective Time. The Undertaking
Agreement provides that the Escrow Agreement be terminated and cancelled in
conjunction with the agreement of Messrs. Potter, Bedard and Howard to convert
all Video Update Class B Common Stock held by them (including 700,000 of such
shares not subject to escrow or encumbrance of any kind) and to comply with
certain other conditions described below.
The Undertaking Agreement also provides that all Video Update Class B
Common Stock will be converted automatically at the Effective Time into Video
Update Common Stock on a 1:1 basis, without any further action or consent on the
part of Messrs. Potter, Bedard or Howard. However, 10% or 130,000 of the
1,300,000 Escrow Shares will be canceled, forfeited and of no further force or
effect. Therefore, only an aggregate of 1,870,000 of the 2,000,000 shares of the
Video Update Class B Common Stock will be converted into outstanding shares of
Video Update Common Stock. Additionally, pursuant to the Undertaking Agreement,
Video Update and Messrs. Potter, Bedard and Howard have agreed that effective
upon and at the Effective Time, neither Video Update nor any of its subsidiaries
will grant or award to any of Messrs. Potter, Bedard or Howard, until after the
eighteen month anniversary of the Effective Time, any additional options,
warrants, or securities convertible into or exchangeable for, any capital stock
of Video Update (provided that nothing in the Undertaking Agreement will affect
in any way any outstanding options, warrants or existing similar rights held or
accorded to any of such stockholders). In addition, pursuant to the Undertaking
Agreement, Messrs. Potter, Bedard and Howard also have agreed not to sell or
transfer any of the 1,170,000 converted Escrow Shares for a period of two years
from the Effective Time, except in connection with the acquisition of Video
Update by a third party, of which no assurance, representation or warranty is
given or suggested.
The terms of the Undertaking Agreement were developed in response to the
Moovies Conversion Condition and were determined by negotiations with Messrs.
Potter, Bedard, and Howard and Video Update's Board of Directors and discussions
with Blair. Video Update consulted Blair regarding their consent to the
termination of the Escrow Agreement; and the issuance of a fairness opinion on
the terms of the Undertaking Agreement was required by Blair for such consent.
As indicated above, the Escrow Agreement may not be modified, altered or
amended in any material respect or canceled or terminated except with (i) the
prior written consent of Blair and (ii) the prior consent of the holders of the
majority of the outstanding shares of Video Update Common Stock, other than
shares of Video Update Common Stock or Video Update Class B Common Stock held by
Messrs. Potter, Bedard or Howard. Blair has consented to the termination of the
Escrow Agreement upon the effectiveness of the Undertaking Agreement, which
consent (the "Blair Consent") is annexed to the Undertaking Agreement. Blair has
advised Video Update that its consent is being provided solely for purposes of
allowing the holders of Video Update Common Stock (excluding any of such shares
held by Messrs. Potter, Bedard or Howard) to vote on the Escrow Proposal and
should not be considered or construed as an approval by Blair or an opinion of
Blair as to the fairness of the Escrow Proposal or the Undertaking Agreement to
Video Update or its stockholders. Each of Video Update and Messrs. Potter,
Bedard, and Howard have agreed to indemnify Blair for any damages or liability
arising from the Blair Consent. Video Update also has agreed to reimburse Blair
for its legal fees incurred in connection with the Blair Consent. Blair is
receiving no other fee or consideration for the Blair Consent.
The foregoing description of the Undertaking Agreement is qualified in its
entirety by reference to the Undertaking Agreement, which is attached hereto as
Annex E. The foregoing is a summary and does not
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<PAGE> 131
purport to be a complete statement of the terms and conditions of the
Undertaking Agreement. Stockholders of Video Update should read such agreement
in its entirety.
On October 23, 1997, Asensio & Company delivered its oral opinion to the
Board of Directors of Video Update to the effect that, as of such date, the
terms and conditions of the Undertaking Agreement were fair from a financial
point of view to the holders of Video Update Common Stock. Asensio & Company
confirmed its opinion in writing on October 27, 1997, based upon and subject to
the factors and assumptions set forth therein.
THE FULL TEXT OF THE WRITTEN OPINION OF ASENSIO & COMPANY, DATED OCTOBER
27, 1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH SUCH OPINION, IS
ATTACHED HERETO AS ANNEX C TO THE JOINT PROXY/STATEMENT PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF THE ANALYSES PERFORMED BY ASENSIO & COMPANY AND IS
QUALIFIED BY REFERENCE TO THE WRITTEN OPINION OF ASENSIO & COMPANY SET FORTH AS
ANNEX C HERETO. STOCKHOLDERS OF VIDEO UPDATE ARE URGED TO, AND SHOULD, READ SUCH
OPINION IN ITS ENTIRETY.
In connection with the opinion attached hereto as Annex C, Asensio &
Company reviewed and analyzed among other things, (i) the Undertaking Agreement;
(ii) the Escrow Agreement; (iii) relevant provisions of the Merger Agreement,
(iv) Video Update's Restated Certificate of Incorporation, dated December 31,
1996; (v) Video Update's Quarterly Report on Form 10-Q for the quarters ended
July 31, 1997; (vi) Video Update's Annual Report on Form 10-K for the fiscal
year ended April 30, 1997; (vii) Video Update's Quarterly Report on Form 10-QSB
for the quarter ended January 31, 1997; (viii) Video Update's Proxy Statement,
dated November 13, 1996; (ix) Video Update's (prospectus) Registration Statement
on Form S-3, dated September 27, 1996; (x) the Blair Consent; and (xi) certain
non-public financial forecasts and analyses for Video Update, prepared by Video
Update's management regarding its internal financial projections on a
stand-alone basis, cost savings and net income after the Merger. Video Update
imposed no limitation on the scope of Asensio & Company's studies or analyses.
Asensio & Company relied, without verification, on the accuracy and
completeness of Video Update's financial statements and other information
provided by Video Update. In that regard, Asensio & Company relied on Video
Update's management as to the reasonableness of the information provided.
Asensio & Company was not engaged to, nor did it, provide financial advice or
other service to any of the parties to the Undertaking Agreement or the Merger
Agreement as to any part of the transactions contemplated thereby, including but
not limited to, the number of Escrow Shares to be released following termination
of the Escrow Agreement to Messrs. Potter, Howard, and Bedard. Asensio & Company
reviewed certain non-public financial forecasts and analyses for Video Update,
prepared by Video Update's management regarding its internal financial
projections on a stand-alone basis, cost savings and net income after the
Merger, and considered the likelihood that based on the income targets set forth
in the Escrow Agreement, the Escrow Shares may otherwise have to be forfeited on
July 31, 1998.
The following is a summary of the analyses of certain factors used by
Asensio & Company in connection with providing its oral opinion to the Video
Update Board of Directors on October 23, 1997. Asensio & Company used the same
types of analyses of factors in connection with providing the written opinion
attached hereto as Annex C.
Materiality. Following the Merger, approximately 29.3 million shares of
Video Update Common Stock will be outstanding. The shares of Video Update Class
B Common Stock represent approximately 35.5% of the voting rights of Video
Update's capital stock prior to the Merger. Following the Merger, the Escrow
Shares released upon termination and cancellation of the Escrow Agreement will
represent only approximately 4.0% (1,170,000/29,300,000) of such voting rights.
Therefore, the relative impact of the release of such shares on Video Update's
post-merger book value per share and earnings per share is immaterial in the
opinion of Asensio & Company when compared with the substantial "super" voting
rights extinguished upon conversion
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of such shares. Moreover, the materiality of the Undertaking Agreement, in the
context of the overall transactions contemplated by the Merger Agreement, is not
significant.
Dilution. Investment bankers for each of Moovies and Video Update have
concluded that the Exchange Ratio is fair from a financial point of view, as
more specifically described in their opinions, although neither opinion
addresses the fairness of the terms of the Undertaking Agreement. Given the
materiality considerations described above, in the opinion of Asensio & Company,
if the Exchange Ratio in the Merger Agreement is fair assuming the release of
all Escrow Shares, then the Exchange Ratio also would be fair if 90% of such
Escrow Shares were to be released.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analysis or of the summary set forth above, without considering
Asensio & Company's analysis as a whole, could create an incomplete view of the
premises underlying the opinion of Asensio & Company. In arriving at its
fairness opinion, Asensio & Company considered all of its analyses and did not
assign relative weights to any of the analyses.
The analyses were prepared solely for purposes of Asensio & Company
providing its opinion to Video Update's Board of Directors as to the fairness of
the Undertaking Agreement and do not purport to be an appraisal or to
necessarily reflect the value of the Escrow Shares. Analyses based on forecasts
of future results are not necessarily indicative of future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based on numerous
factors, neither Video Update nor Asensio & Company assumes responsibility if
future results are different from those projected. Asensio & Company's opinion
necessarily was based on the economic market and other conditions as in effect
on, and the information made available to it, as of the date of its opinion. As
described above under the caption "The Merger -- Reasons for the Merger;
Recommendations of the Boards of Directors," Asensio & Company's opinion to the
Video Update Board of Directors was one of many factors taken into account by
the Video Update Board in making its determination to approve the issuance of
Video Update Common Stock in connection with the Merger Agreement, the
recommendation of the Escrow Proposal, and the approval of the Undertaking
Agreement. In addition, the terms of the Undertaking Agreement were determined
by negotiations among Messrs. Potter, Bedard, and Howard on the one hand and
outside members of Video Update's Board of Directors on the other, as approved
by the Video Update Board. Although Asensio & Company advised the Video Update
Board as to the fairness of the terms of the Undertaking Agreement, the decision
to enter into the Undertaking Agreement was solely that of the Video Update
Board.
Asensio & Company is a registered securities dealer engaged, among other
things, in the analysis of merger and acquisition transactions and the valuation
of securities and assets. Video Update selected Asensio & Company as an advisor
because Asensio & Company is a recognized investment banking firm with
substantial experience in merger transactions and agreements similar to the
Undertaking Agreement and the Merger Agreement.
Pursuant to a letter agreement, dated July 2, 1997 (the "Asensio Letter"),
Video Update engaged Asensio & Company to act as an advisor in connection with
the Escrow Proposal and Undertaking Agreement. Under the terms of the Asensio
Letter, Video Update agreed to pay Asensio & Company $10,000 upon signing of
such letter and $10,000 upon delivery of its written opinion. Video Update also
agreed to reimburse Asensio & Company for its reasonable out-of-pocket expenses
and to indemnify Asensio & Company against liabilities arising from its services
provided under the Asensio Letter.
Video Update's Board of Directors believes that the Escrow Proposal is
necessary to facilitate satisfaction of the Moovies Conversion Condition. The
Board also believes that because Messrs. Potter, Bedard and Howard (i) will not
be eligible to receive options or warrants until after the 18 month period
following the Effective Time, and (ii) have agreed not to sell or transfer any
of the 1,170,000 converted Escrow Shares for a two year period, they will have
incentives to work toward the enhancement of value of their existing
shareholdings, thereby aligning the long term interests of the holders of Video
Update Class B Common Stock with those of other stockholders. Furthermore, the
Board of Directors considered that (i) the Escrow Agreement income targets
correspond to an April 30 fiscal year and (ii) cancellation of the Escrow
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Agreement would facilitate changing Video Update's fiscal year end to December
31 or January 31, although no assurances can be given. Substantially all of
Video Update's competitors operate on a December 31 fiscal year end and adoption
of such a year end could facilitate analyst comparisons of such companies and
Video Update. Termination and cancellation of the Escrow Agreement would allow
Video Update to consider such a change in fiscal year end, although no
assurances can be given.
VIDEO UPDATE'S BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE ESCROW
PROPOSAL. MESSRS. POTTER, BEDARD, AND HOWARD, THE HOLDERS OF THE ESCROW SHARES,
HAVE ABSTAINED FROM THE VOTE AND RECOMMENDATION OF THE VIDEO UPDATE BOARD.
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PROPOSAL FOR ELECTION OF DIRECTORS
At the Video Update Special Meeting, Video Update stockholders will be
asked to consider and vote upon the election of seven (7) directors. Each
director of Video Update will be elected for a period of one year and serves
until his or her successor is duly elected by the stockholders, provided, that
if the Merger is consummated, at the Effective Time, the Board of Directors of
Video Update will be comprised of the following seven persons: Messrs. Potter,
Bedard, Howard, Kelnberger and Patriacca (all of whom are currently directors of
Video Update) and F. Andrew Mitchell and Theodore J. Coburn (each of whom are
currently directors of Moovies, hereafter referred to as the "Moovies
Designees.") Each of Mr. Yager and Ms. Vaughn, currently Video Update directors,
have agreed to resign at the Effective Time. The Moovies Designees shall be
elected to the Nominating Committee of the Board of Directors so long as they
remain directors of Video Update. Following the Effective Time, such Nominating
Committee shall be comprised solely of the Moovies Designees and one designee of
Video Update. The Nominating Committee shall have the right to nominate two
additional members of the Board of Directors, which, if necessary, shall be
expanded to nine persons by the full Board of Directors to include such two
additional nominees. Vacancies and newly created Directorships resulting from
any increase in the number of authorized directors may be filled by a majority
vote of directors then remaining in office. Officers are elected by and serve at
the discretion of the Board of Directors, subject to their employment
agreements.
Shares represented by all proxies received by the Board of Directors and
not marked so as to withhold authority to vote for individual directors, or for
all directors, will be voted (unless one or more nominees are unable or
unwilling to serve) for the election of the nominees named below. The Board of
Directors knows of no reason why any such nominee should be unwilling to serve,
but if such should be the case, proxies will be voted for the election of some
other person or for fixing the number of directors at a lesser number.
BACKGROUND
The following table sets forth the year each nominee director was elected a
director and the age, positions and offices currently held by each director:
<TABLE>
<CAPTION>
YEAR NOMINEE
FIRST BECAME
NAME AGE DIRECTOR POSITION
- ----------------------------------------- ---- ------------ --------------------------------------
<S> <C> <C> <C>
Daniel A. Potter......................... 40 1983 Chairman and Chief Executive Officer
John M. Bedard........................... 40 1983 President and Director
Daniel C. Howard......................... 35 1994 Chief Operations Officer and Director
Robert E. Yager.......................... 32 1994 Regional Manager of
Store Operations and Director
Jana Webster Vaughn...................... 33 1994 Director
Paul M. Kelnberger....................... 54 1994 Director
Bernard Patriacca........................ 53 1997 Director
</TABLE>
VIDEO UPDATE'S BOARD OF DIRECTORS RECOMMENDS THE ELECTION OF EACH OF THE
ABOVE NAMED NOMINEE DIRECTORS.
The following is a brief summary of the background of each nominee
director, executive officer, and significant employee of Video Update:
DANIEL A. POTTER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER. Mr. Potter
co-founded Video Update in 1983 and has served as Video Update's Chairman and
Chief Executive Officer since its inception. Mr. Potter devised, initiated, and
structured the franchising strategy implemented by Video Update and is primarily
responsible for Video Update's financial and strategic planning. Mr. Potter is
the brother-in-law of Robert E. Yager, a Regional Manager of Store Operations
and Director of Video Update. Mr. Potter holds a B.A. degree from the University
of Minnesota and a J.D. degree from William Mitchell College of Law.
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JOHN M. BEDARD, PRESIDENT AND DIRECTOR. Mr. Bedard co-founded Video Update
in 1983 with Mr. Potter and has served as Video Update's President and as a
Director since its inception. Mr. Bedard, together with Mr. Potter, devised and
implemented Video Update's real estate development program and operations. Mr.
Bedard is the brother of Richard Bedard, an Executive Vice President of Video
Update.
DANIEL C. HOWARD, CHIEF OPERATIONS OFFICER AND DIRECTOR. Mr. Howard has
served as Video Update's Chief Operations Officer since 1990, has coordinated
Video Update'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.
STEPHEN L. REYNOLDS, CHIEF FINANCIAL OFFICER. Mr. Reynolds has served as
Video Update's Chief Financial Officer since January 6, 1998. From August 1995
to January 5, 1998, Mr. Reynolds served as Vice President and Controller of
Moovies, Inc. From 1987 to 1995, Mr. Reynolds was a Senior Manager with KPMG
Peat Marwick LLP in Greenville, South Carolina. Mr. Reynolds holds a B.A. degree
from Furman University and is a Certified Public Accountant.
RICHARD BEDARD, EXECUTIVE VICE PRESIDENT. Mr. Bedard has served as an
Executive Vice President of Video Update since September 1995. From 1986 to
1995, he served as Video Update's Vice President of Franchise Development. Mr.
Bedard is the brother of John M. Bedard, Video Update's President and a
Director.
BRUCE D. CARLSON, VICE PRESIDENT OF REAL ESTATE. Mr. Carlson has served as
Video Update'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 Video Update in
1990. Mr. Schifsky has also served as a District Manager of Video Update 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, REGIONAL MANAGER OF STORE OPERATIONS AND DIRECTOR. Mr.
Yager has served as a Regional Manager of Store Operations since August 1997 and
as a Director since August 1994. Mr. Yager served as a Vice President of Store
Operations from November 1995 to August 1997 From September 1994 to November
1995, Mr. Yager served as a Regional Manager of Video Update. Prior to that
time, since 1989, Mr. Yager owned and operated two franchised Video Update
superstores in the Twin Cities area, until such store operations were purchased
by Video Update in September 1994. 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, Video Update's Chairman and
Chief Executive Officer. See "Certain Relationships and Related Transactions."
PAUL M. KELNBERGER, DIRECTOR. Mr. Kelnberger has served as a Director
since August 1994. Mr. Kelnberger has been a member of Johnson, West & Co., PLC
("Johnson, West & Co."), a certified public accounting firm with its principal
offices in St. Paul, Minnesota, since 1975. In addition, since November 1995 Mr.
Kelnberger has served as a Director of Leuthold Funds, a publicly held mutual
fund. Johnson, West & Co. performed auditing services for Video Update prior to
the fiscal year ended April 30, 1993. Since that time, Johnson West & Co. has
provided and continues to provide to Video Update accounting services in
connection with Video Update'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 Relationships and Related
Transactions."
JANA WEBSTER VAUGHN, DIRECTOR. Ms. Vaughn has served as a Director since
August 1994. Since September 1997, Ms. Vaughn has served as the Executive
Director of the Metropolitan Public Airport Foundation, a non-profit corporation
handling special projects for airports in the Minneapolis-St. Paul metropolitan
area. From June 1995 to August 1997, Ms. Vaughn was the Director of Marketing
and
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Development of Adoptive Families of America, a non-profit, national education,
legislation and advocacy organization. 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.
BERNARD PATRIACCA, DIRECTOR. Mr. Patriacca has served as a Director since
April 1997. Since November 1997, he has served as the Vice President and
Controller of Summit Technology, Inc., a publicly held developer, manufacturer
and seller of opthalmic laser systems and related products designed to correct
vision disorders. Since 1994, he also 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 Master's
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 Video Update's
Common Stock, to file initial reports of ownership on Form 3 and reports of
changes in ownership on Form 4 with the Securities and Exchange Commission (the
"SEC") and any national securities exchange on which Video Update's securities
are registered. Executive officers, directors and greater than ten percent (10%)
beneficial owners are required by SEC regulations to furnish Video Update with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to Video
Update and written representations from the executive officers and directors
that no other reports were required, Video Update 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.
COMMITTEES OF THE BOARD; BOARD MEETINGS
The Board of Directors established an Audit Committee and an Executive
Compensation Committee in August 1994. Members of the Audit Committee are Daniel
C. Howard, Video Update's Chief Operations Officer, Jana Webster Vaughn and Paul
M. Kelnberger. The purpose of the Audit Committee is to (i) review Video
Update's financial results and recommend the selection of Video Update's
independent auditors; (ii) review the effectiveness of Video Update's accounting
policies and practices, financial reporting and internal controls; and (iii)
review the scope of independent audit coverages, the fees charged by the
independent auditors, any transactions which may involve a potential conflict of
interest, and internal control systems. The Audit Committee met twice during
fiscal 1997.
The Executive Compensation Committee consists of Messrs. Howard and
Kelnberger and Ms. Vaughn. The Executive Compensation Committee has
responsibilities that include, but are not limited to, the following: (i)
reviewing Video Update's executive compensation policy to ensure that the policy
appropriately rewards Video Update's Chief Executive Officer and President for
their contributions; (ii) establishing the total compensation, annual bonus, and
salary range for Video Update's Chief Executive Officer and President, and
appraising the performance of each. During fiscal 1996, Mr. Kelnberger and Ms.
Vaughn were responsible for administering Video Update's 1994 Stock Option Plan
(the "1994 Plan"), and 1995 Stock Option Plan (the "1995 Plan") (the 1994 Plan,
and 1995 Plan together with the 1996 Plan are often collectively referred to
herein as the "Stock Option Plans" or the "Plans"), including the timing,
pricing, and amount of option grant awards under such plans. The Executive
Compensation Committee met once during fiscal 1997. The full Board administered
the Plans and the 1994 Formula Stock Option Plan (the "Formula Plan") for fiscal
year 1997.
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The Board of Directors also established, in August 1994, an Executive
Committee consisting of Messrs. Potter and John Bedard. The Executive Committee
has and exercises all the powers and authority of the Board of Directors in the
management and affairs of Video Update, including, without limitation, the power
to issue stock and declare dividends, all as set forth in Section 141 of
Delaware General Corporation Law, as amended. The Executive Committee did not
formally meet during fiscal 1997. All corporate actions required to be voted on
by the Executive Committee were undertaken by written consents.
The Board of Directors also established, in December 1996, a Nominating
Committee consisting of Mr. Kelnberger and Ms. Vaughn. The Nominating
Committee's responsibilities include (i) recommending to the Board the state of
nominees of directors to be elected to fill new board positions or vacancies and
(ii) the directors to be selected for membership on various board committees.
The Nominating Committee met once during fiscal year 1997. The Moovies Designees
shall be elected to the Nominating Committee of the Board of Directors so long
as they remain directors of Video Update. Following the Effective Time, such
Nominating Committee shall be comprised solely of the Moovies Designees and one
designee of Video Update. The Nominating Committee shall have the right to
nominate two additional members of the Board of Directors, which, if necessary,
shall be expanded by the full Board of Directors to include such two additional
members.
During fiscal 1997, no director attended fewer than 75% of the aggregate
total number of meetings of the Board of Directors and the total number of
meetings held by all committees of the Board on which he or she served; Mr.
Patriacca, who was elected in April 1997 attended all meetings of the Board of
Directors following his election.
DIRECTOR NOMINEES UPON CONSUMMATION OF THE MERGER
If the Merger is consummated, at the Effective Time, the Board of Directors
of Video Update will be comprised of five current members of the Video Update
Board and the two Moovies Designees, as described above. Mr. Yager and Ms.
Vaughn, currently Video Update Directors, have agreed to resign at the Effective
Time. The following two individuals, who are currently directors of Moovies,
will become directors of Video Update following the Effective Time and will be
elected by Video Update's Board of Directors. Video Update stockholders will not
be asked to vote on these nominees.
F. ANDREW MITCHELL. F. Andrew Mitchell has served as Chief Financial
Officer and as a Director of Moovies since March 1995. From 1987 to March 1995
Mr. Mitchell was a partner with KPMG Peat Marwick LLP and was managing partner
of the 70-person Greenville, South Carolina office for the last three and a half
years. During his 20-year career with KPMG he had extensive experience serving
public and privately-held clients in the financial institution, entertainment
and franchise restaurant industries. He graduated in 1975 from the University of
Cincinnati with a B.B.A in accounting.
THEODORE J. COBURN. Theodore J. Coburn became a director of Moovies in
June 1995. Since 1991, Mr. Coburn has been a partner and a director of Brown,
Coburn & Co., an investment banking firm. From 1986 until 1991, he was a
Managing Director of Global Equity Transactions and a member of the Board of
Directors of Prudential Securities. From 1983 to 1986 Mr. Coburn served as
Managing Director of Merrill Lynch Capital Markets. Mr. Coburn received his B.S.
from the University of Virginia in 1975 and an M.B.A. from Columbia University
Graduate School of Business in 1978. Mr. Coburn serves as a director of Sage
Analytics International ("Sage"), Nicholas-Applegate Growth Equity Fund, the
Emerging Germany Fund, and Premiere Radio Networks, Inc. ("Premiere"), serves as
a trustee of Nicholas-Applegate Mutual Funds, and serves on the compensation
committees of Moovies, Sage and Premiere.
Notwithstanding anything to the contrary set forth in any of Video Update's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this proxy statement, in whole or in part, the following Report of the
Video Update Compensation Committee and Performance Graph shall not be
incorporated by reference into any such filings.
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BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Set forth below is the report of Video Update'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 Video
Update's Chief Executive Officer and its President at least annually. The
Executive Compensation Committee believes the actions of the top two executives
of Video Update 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 Video Update's compensation package
for such individuals.
Video Update'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 Video Update to receive acceptable salaries so that Video
Update 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 Video Update, and a subjective
judgment regarding the impact the individual has on Video Update. 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 Video
Update. 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 Video Update'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 Video Update's Chief Executive Officer and its President, and certain other
employees, since Video Update's initial public offering in 1994. Video Update
adopted formal incentive stock option plans in 1994, 1995 and 1996. The
Executive Compensation Committee recommends grants of stock options under Video
Update's option plan for the Chief Executive Officer and the President.
Historically, grants made by Video Update 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 Video Update'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 Video Update. 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.
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In general, the granting of stock-based incentives is considered by the
Committee to be justified when Video Update'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 Video Update's Chief Executive Officer and its
President for their continued outstanding performance and for making substantial
contributions to Video Update's increased revenues. See "Summary Compensation
Table."
Compensation of the Chief Executive Officer
The Compensation Committee has reviewed and approved the annual salary of
Daniel A. Potter, Chief Executive Officer of Video Update, 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 Video Update, reflects the Committee's
subjective opinion that Mr. Potter has provided superlative leadership and
fulfilled the functions of an executive officer of Video Update at the highest
level.
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 Video Update's management team to
produce the best results possible given overall economic conditions and the
difficulty of predicting Video Update's performance in the short term.
<TABLE>
<S> <C>
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
</TABLE>
PERFORMANCE GRAPH
Set forth below is a line-graph presentation comparing the cumulative
stockholder return on Video Update'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 Video Update. The peer group selected
for inclusion in this proxy statement 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 Video Update 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 Video Update's initial public
offering) and ending April 30, 1997.
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[NASDAQ MARKET INDEX GRAPH]
ASSUMES $100 INVESTED ON JULY 20, 1994
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING APR. 30, 1997 - *WEST COAST ENTERTAINMENT
IS INCLUDED IN PEER GROUP COMPARISON ONLY AS OF 04/30/97
VALUE OF $100 INVESTED ON JULY 20, 1994 AT:
<TABLE>
<CAPTION>
7/20/94 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 $161.09
</TABLE>
Total return assumes reinvestment of dividends.
- ---------------
(1) West Coast Entertainment Corp. is included in Peer Group only as of April
30, 1997; West Coast's stock began trading publicly in May 1996.
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SUMMARY COMPENSATION TABLE
Set forth below is a Summary Compensation Table concerning the compensation
of the named executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------
ANNUAL COMPENSATION AWARDS
------------------------------------------------- ---------------
FISCAL SECURITIES
YEAR OTHER ANNUAL UNDERLYING ALL OTHER
ENDED SALARY(1) BONUS COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4)
NAME AND PRINCIPAL POSITION APRIL 30 ($) ($) ($) (#) ($)
(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
Stephen L. Reynolds(6)...... -- -- -- -- -- --
</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 Video Update'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 Video Update's Stock Option Plans. During fiscal years 1995
through 1997, Video Update 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 began employment at Video Update on January 2, 1995. Mr. Gondeck
resigned as Chief Financial Officer of Video Update on December 31, 1997.
(6) Mr. Reynolds was appointed Chief Financial Officer of Video Update on
January 6, 1998.
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OPTION/SAR GRANTS IN FISCAL YEAR 1997
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
------------------------------------------------------------- VALUE AT
NUMBER OF ASSUMED ANNUAL
SECURITIES PERCENT OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS/SARS PRICE APPRECIATION
OPTIONS/SARS GRANTED TO EXERCISE OF FOR OPTION TERM(1)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
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(4)............... 60,000 7.2% $4.00 10/22/2006 $150,935 $ 382,498
Stephen L. Reynolds(5)..... -- -- -- -- -- --
</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 Video
Update Class A Common Stock were granted to employees of Video Update,
including executive officers.
(3) These options are subject to earlier termination upon certain events related
to termination of employment.
(4) Mr. Gondeck resigned as Chief Financial Officer of Video Update on December
31, 1997.
(5) Mr. Reynolds was appointed Chief Financial Officer of Video Update on
January 6, 1998.
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.
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(2)............. 0 0 72,000/59,500 $2,500/$5,000
Stephen L. Reynolds(3)................ -- -- -- --
</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
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Class A Common Stock underlying the options (as determined by the last sale
price quoted on the NASDAQ National Market) was $4.125.
(2) Mr. Gondeck resigned as Chief Financial Officer on December 31, 1997.
(3) Mr. Reynolds was appointed Chief Financial Officer on January 6, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions for Video Update'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 Video Update have served on the Board of
Directors of any other entity that has had any of such entity's officers serve
either on Video Update's Board of Directors or Compensation Committee.
During fiscal 1997, Video Update paid approximately $271,000 to Johnson,
West & Co. for accounting services in connection with Video Update's
acquisitions and for tax return preparation services. Mr. Kelnberger is a member
of Johnson, West & Co. During fiscal year 1996 Video Update incurred fees of
approximately $245,000 for accounting and tax services rendered by Johnson, West
& Co.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, OFFICER LOANS AND CHANGE IN
CONTROL ARRANGEMENTS
In February 1996, Video Update 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 Video
Update. 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 Video Update. Each of Messrs. Potter
and Bedard have agreed to devote their full time and best efforts to fulfill
their duties and responsibilities to Video Update. Each of them will be entitled
to participate in employee benefit plans.
Video Update 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
Video Update, 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 Video Update, 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 Video Update by any
person, certain changes in the composition of the Board of Directors, and an
approval by the stockholders of Video Update of a merger, consolidation,
reorganization, liquidation, dissolution or sale of all or substantially all of
the assets of the Company. The Merger will not trigger the ability of Messrs.
Potter and Bedard to terminate their employment and receive severance and fringe
benefits pursuant to such employment agreements.
Each of Messrs. Potter and Bedard has agreed not to disclose any
confidential information of Video Update 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.
In January, 1998, Video Update entered into an employment agreement with
Daniel C. Howard, its Chief Operating Officer and a director and stockholder. As
compensation, Mr. Howard is to receive an annual base salary of $128,400, plus
bonuses and stock options as determined by the Board of Directors. The agreement
is for an initial term of two years, and is automatically renewed for successive
one-year terms, unless terminated by Video Update or Mr. Howard. Upon
termination in accordance with the agreement, Mr. Howard is entitled to receive
severance pay of at least twelve months' base salary and at most twenty-four
months' base salary, less certain amounts provided in the agreement. In the
event Mr. Howard's employment is terminated after a change in control, Mr.
Howard is entitled to receive an amount equal to two times his average total
annual compensation during the two years preceding the termination. A "change in
control" occurs when any person
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or entity acquires at least 51% of the voting power of the securities of Video
Update, the stockholders of Video Update approve a plan of liquidation, or Video
Update engages in a merger, sale of assets or other business combination that
results in the security holders of Video Update holding less than a majority of
the combined voting power after the transaction. Mr. Howard has agreed not to
disclose any confidential information of Video Update during his employment and
thereafter, and not to compete with Video Update during his employment and for
two years thereafter, including soliciting customers and employees of Video
Update.
Video Update has Recourse Notes from its Chief Executive Officer and from
the President for approximately $2,004,000 and $1,114,000, respectively,
including accrued interest through October 31, 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 Video Update 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 Video Update stockholdings,
are evidenced by promissory notes bearing accrued interest at a rate of 8% per
annum with payment of principal and interest due on October 4, 1999. In the
event that the obligors sell shares of Video Update's stock, the net proceeds
thereof will be applied to payment, in part or in full, of the Recourse Notes.
See "Certain Relationships and Related Transactions."
In addition, as of October 31, 1997, Video Update has a note receivable
from its President for approximately $32,000 which accrues interest at 8% per
annum and is expected to be due November 1998, subject to board approval. The
note represents advances from Video Update to the President from January 1994 to
April, 1994, together with accrued interest.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not employees of Video Update
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 has 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. Directors elected after the Effective Time
will receive such options as described in subparagraph (ii) of this paragraph.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Craig Belisle, the brother-in-law of John Bedard, Video Update'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 fiscal 1995, Video Update entered into an Agreement and Plan of
Merger with Koonrod, Inc. ("KRI") and the stockholders of KRI. Under the
Agreement, Video Update acquired all of the outstanding stock of KRI in exchange
for $75,000 cash and 105,000 shares of Video Update's Class A Common Stock which
were valued at approximately $496,000, and KRI was merged into Video Update. The
two stockholders
134
<PAGE> 145
of KRI who owned all of the outstanding stock of KRI are the father and
brother-in-law of Daniel A. Potter, Video Update's Chairman and Chief Executive
Officer.
Effective August 31, 1995, Video Update entered into a Purchase Agreement
with Bedard Entertainment, Inc. ("BEI"), and the stockholders of BEI. Under the
Purchase Agreement, Video Update 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 Video Update's President and Director, John Bedard.
During the years ended April 30, 1995, 1996 and 1997, Video Update 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 Video Update, is a member of Johnson,
West & Co. Video Update expects to incur expenses for services provided by
Johnson West & Co. of approximately $240,000 for accounting and tax purposes in
connection with the Merger.
Constance Koppenhaver, the daughter of Mr. Kelnberger, owned an interest in
one franchise store as of December 1997. The amount due from that franchisee at
January 20, 1998 was less than $60,000, consisting of amounts due for
construction, fixtures, inventory, signage and initial franchise fees.
Video Update has Recourse Notes from its Chief Executive Officer and from
the President for approximately $2,004,000 and $1,114,000, respectively,
including accrued interest through October 31, 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 Video Update 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 Video Update stockholdings,
are evidenced by promissory notes bearing accrued interest at a rate of 8% per
annum with payment of principal and interest due on October 4, 1999. In the
event that the obligors sell shares of Video Update's stock, the net proceeds
thereof will be applied to payment, in part or in full, of the Recourse Notes.
In addition, as of October 31, 1997, Video Update has a note receivable
from its President for approximately $32,000 which accrues interest at 8% per
annum and is expected to be due November 1998, subject to board approval. The
note represents advances from Video Update to the President from January 1994 to
April, 1994, together with accrued interest.
If the Escrow Proposal is approved, the Escrow Agreement will be cancelled
at the Effective Time and 1,170,000 shares of Video Update Common Stock
(converted on a 1:1 basis from Video Update Class B Common Stock) will be
released to three Video Update employee directors. See "Proposal to Terminate
and Cancel the Escrow Agreement."
See also "--Employment Contracts, Termination of Employment, Officer Loans
and Change in Control Arrangements."
PROPOSAL RELATING TO ACCOUNTING MATTERS AND RATIFICATION OF AUDITORS
At the Video Update Special Meeting, Video Update stockholders will be
asked to vote to ratify the selection of Ernst & Young LLP as independent
auditors for the fiscal year ending April 30, 1998. A representative of Ernst &
Young LLP is expected to be present at the meeting of stockholders, and will
have the opportunity to make a statement and answer questions from stockholders
if he or she so desires.
In July 1993, Video Update, in contemplation of its initial public
offering, changed its independent auditors, Johnson, West & Company and engaged
the services of Ernst & Young LLP as its principal independent accountants. The
decision to engage the services of Ernst & Young LLP was approved by Video
Update's Board of Directors.
During the two most recent fiscal years, the reports prepared by Ernst &
Young LLP on Video Update's financial statements contained no adverse opinions
or disclaimers of opinion, or modifications as to uncertainty, audit scope, or
accounting principles.
135
<PAGE> 146
Further, during the two most recent fiscal years, no disagreements existed
between Video Update and Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Ernst &
Young LLP would have caused it to make a reference to the subject matter of the
disagreements in connection with its reports.
None of the "reportable events" described in Item 304(a)(1)(iv) of
Regulation S-K occurred with respect to Video Update within the two most recent
fiscal years and the subsequent interim period preceding such change.
This proposal is being presented to the stockholders of Video Update as a
separate proposal from the Merger Proposal, and is not a condition to the
approval of the Merger Proposal or the consummation of the Merger.
VIDEO UPDATE'S BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THIS PROPOSAL.
PROPOSAL TO APPROVE VIDEO UPDATE'S 1998 STOCK OPTION PLAN
At the Video Update Special Meeting, Video Update stockholders will be
asked to approve Video Update's 1998 Stock Option Plan. On January 20, 1998 the
Board of Directors proposed and approved the 1998 Stock Option Plan (the "1998
Plan") that provides for the granting to employees, officers, Directors,
consultants and non-employees (including non-employee directors) of Video Update
of options to purchase up to 1,750,000 shares of Video Update Common Stock. The
Board of Directors believes that the shares reserved under the 1998 Plan will be
needed in the foreseeable future in order to attract, keep and motivate key
employees.
SUMMARY OF THE PLAN
Options under the 1998 Plan may be either "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified options. Incentive stock options may be granted only
to employees of Video Update, while non-qualified options may be issued to non-
employee directors, employees, consultants and other non-employees of Video
Update.
The 1998 Plan will be administered by Video Update's Board of Directors.
Their duties involve determining those individuals who shall receive options,
the time period during which the options may be partially or fully exercised,
the number of shares of Video Update Common Stock that may be purchased under
each option, and the option price.
The per share exercise price of the Video Update Common Stock subject to
incentive stock options granted pursuant to the 1998 Plan may not be less than
the fair market value of the Class A Common Stock on the date the option is
granted. The 1998 Plan provides that the aggregate fair market value (determined
as of the date the option is granted) of the Video Update Common Stock that
first becomes exercisable by any employee in any one calendar year pursuant to
the exercise of incentive stock options may not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option to him or her, more than 10% of the total combined voting power of all
classes of stock of Video Update (a "10% Stockholder") shall be eligible to
receive any incentive stock options under the 1998 Plan unless the option price
is at least 110% of the fair market value of the Video Update Common Stock
subject to the option, determined on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, the
option will be exercisable only by him or her. If an incentive stock option
optionee (an "ISO optionee") ceases to be employed by Video Update, other than
by reason of death or disability, the ISO optionee will have three months after
such termination to exercise the option. If an ISO optionee ceases to be
employed by Video Update by reason of death or disability, his or her ISO may be
exercised, to the extent of the number of shares which could have been exercised
by the optionee on the date of his or her death or disability, for one year from
the date of such death or disability.
136
<PAGE> 147
Options under the 1998 Plan must be granted within ten years from the
effective date of the 1998 Plan. The incentive stock options granted under the
1998 Plan cannot be exercised more than ten years from the date of grant except
that incentive stock options issued to a 10% Stockholder are limited to five
year terms.
All options granted under the 1998 Plan provide for the payment of the
exercise price in cash or by delivery to Video Update of shares of Video Update
Common Stock of Video Update already owned by the optionee having a fair market
value equal to the exercise price of the options being exercised, or by a
combination of such methods of payment. Therefore, an optionee may be able to
tender shares of Video Update Common Stock to purchase additional shares of
Video Update Common Stock and may theoretically exercise all of his stock
options with no additional investment other than his or her original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed with Video Update become available once again for
issuance.
FEDERAL INCOME TAX CONSEQUENCES
Under the 1998 Plan, no tax obligation will arise for the optionee or Video
Update upon the granting of incentive stock options, or non-qualified stock
options whose exercise price is equal to or greater than fair market value. Upon
exercise of a non-qualified stock option, an optionee will recognize ordinary
income in an amount equal to the excess, if any, of the fair market value on the
date of exercise of the stock acquired over the exercise price of the option.
Thereupon, Video Update will be entitled to a tax deduction (as a compensation
expense) in an amount equal to the ordinary income recognized by the optionee.
Any additional gain or loss realized by an optionee on disposition of the stock
generally will be capital gain or loss to the optionee and will not result in
any additional tax deduction to Video Update. The taxable event arising from the
exercise of non-qualified stock options by officers of Video Update subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, occurs on the
later of the date on which the option is exercised or the date six months after
the date the option was granted unless the optionee elects, within thirty (30)
days of the date of exercise, to recognize ordinary income as of the date of
exercise. The income recognized at the end of any deferred period will include
any appreciation in the value of the stock during that period and the capital
gain holding period will not begin to run until the completion of such period.
Upon the exercise of an incentive stock option, an optionee recognizes no
immediate taxable income. The tax cost is deferred until the optionee ultimately
sells the shares of stock. If the optionee does not dispose of the option shares
within two years from the date the option was granted and within one year after
the exercise of the option, and the option is exercised no later than three
months after the termination of the optionee's employment, the gain on the sale
will be treated as long-term capital gain. Subject to limitations in the 1998
Plan, certain of these holdings periods and employment requirements may be
liberalized in the event of the optionee's death or disability while employed by
Video Update. Video Update is not entitled to any tax deduction, except that if
the stock is not held for the full term of the holding period outlined above,
the gain on the sale of such stock, being the lesser of (i) the fair market
value of the stock on the date of exercise minus the option price, or (ii) the
amount realized on disposition minus the option price, will be taxed to the
optionee as ordinary income and Video Update will be entitled to a deduction in
the same amount. Any additional gain or loss realized by an optionee upon
disposition of the stock prior to the expiration of the full term of the holding
period outlined above generally will be capital gain or loss to the optionee and
will not result in any additional tax deduction to Video Update. The "spread"
upon exercise of an incentive stock option constitutes a tax preference item
within the computation of the "alternative minimum tax" under the Code. The tax
benefits which might otherwise accrue to an optionee may be affected by the
imposition of the alternative minimum tax if applicable to the optionee's
individual circumstances.
Section 162(m) of the Code places a limit of $1,000,000 on the amount of
compensation that may be deducted for federal income tax purposes by Video
Update in any year with respect to each of Video Update's Chief Executive
Officer and four most highly paid executive officers. Certain payments that
qualify as commissions or as "performance based" compensation are not subject to
the deduction limit. Awards granted under Video Update's stock option plans may
or may not be subject to Section 162(m) of the Code. In order
137
<PAGE> 148
to maintain flexibility in compensating executive officers in a manner designed
to promote varying corporate goals, Video Update has not adopted a policy that
all compensation must be deductible.
EFFECT OF STOCKHOLDER APPROVAL
Pursuant to the terms of the 1998 Plan, all provisions relating to
incentive stock options ("ISOs") are subject to the approval of Video Update's
stockholders within 12 months of the date on which the plan was adopted by the
Board of Directors. If the 1998 Plan is not approved by the stockholders at the
Annual Meeting, all option grants under the 1998 Plan will be of no force or
effect. To date, no options have been granted or are proposed to be granted
under the 1998 Plan.
This proposal is being presented to the stockholders of Video Update as a
separate proposal from the Merger Proposal, and is not a condition to the
approval of the Merger Proposal or the consummation of the Merger.
VIDEO UPDATE'S BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THIS PROPOSAL.
LEGAL MATTERS
The validity of the shares of Video Update Common Stock to be issued in
connection with the Merger will be passed upon for Video Update by Gadsby &
Hannah LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Video Update, Inc. at, and for the
three years in the period ended April 30, 1997 included elsewhere in this Joint
Proxy Statement/Prospectus and Registration Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon included
therein. Such consolidated financial statements are included herein in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
Representatives of Ernst & Young LLP are expected to be present at the
Video Update Special Meeting and will have the opportunity to make a statement
if they desire to do so and will also be available to respond to appropriate
questions from stockholders.
The consolidated financial statements of Moovies, Inc. as of December 31,
1996 and 1995, and for each of the years in the three-year period ended December
1996 have been included in this Joint Proxy Statement/Prospectus in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
138
<PAGE> 149
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors of Video Update........................................ F-2
Consolidated Balance Sheets of Video Update as of April 30, 1996 and April 30, 1997... F-3
Consolidated Statements of Income of Video Update for the years ended April 30, 1995,
1996 and 1997....................................................................... F-4
Consolidated Statement of Stockholders' Equity of Video Update for the years ended
April 30, 1995, 1996 and 1997....................................................... F-5
Consolidated Statements of Cash Flows of Video Update for the years ended April 30,
1995, 1996 and 1997................................................................. F-6
Notes to Consolidated Financial Statements of Video Update for the year ended April
30, 1997............................................................................ F-7
Consolidated Balance Sheets of Video Update as of October 31, 1997.................... F-21
Consolidated Statements of Income of Video Update for the six months ended October 31,
1996 and October 31, 1997........................................................... F-22
Consolidated Statements of Cash Flows of Video Update for the six months ended October
31, 1996 and October 31, 1997....................................................... F-23
Notes to Consolidated Financial Statements of Video Update for the period ended
October 31, 1997.................................................................... F-24
Report of Independent Auditors of Moovies............................................. F-26
Consolidated Balance Sheets of Moovies as of December 31, 1995 and 1996 and as of
September 30, 1997.................................................................. F-27
Consolidated Statements of Operations of Moovies for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1997................ F-28
Consolidated Statements of Stockholders' Equity and Partners' Equity (Deficit) of
Moovies for the years ended December 31, 1993, 1994, 1995 and 1996 and for the nine
months ended September 30, 1997..................................................... F-29
Consolidated Statements of Cash Flows of Moovies for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1997................ F-30
Notes to Consolidated Financial Statements of Moovies................................. F-32
</TABLE>
F-1
<PAGE> 150
VIDEO UPDATE FINANCIAL STATEMENTS
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, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended April 30, 1997. 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. at April 30,
1996 and 1997, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended April 30, 1997 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 26, 1997
F-2
<PAGE> 151
VIDEO UPDATE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 676 $ 2,424
Accounts receivable................................................... 558 3,776
Notes receivable from related parties................................. 1,555 1,394
Inventory............................................................. 4,545 7,318
Videocassette rental inventory -- net................................. 25,701 45,479
Property and equipment -- net......................................... 18,988 33,069
Prepaid expenses...................................................... 682 783
Goodwill -- net....................................................... 25,973 37,716
Other assets.......................................................... 840 1,648
-------- ---------
Total assets.......................................................... $ 79,518 $ 133,607
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable......................................................... $ 4,859 $ 20,564
Accounts payable...................................................... 8,692 12,196
Accrued expenses...................................................... 977 2,415
Accrued rent.......................................................... 722 2,238
Accrued compensation.................................................. 1,334 1,779
Income taxes payable.................................................. 593 1,096
Deferred income taxes................................................. 841 2,327
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 -- 60,000,000
Issued and outstanding shares -- 11,017,735 at April 30, 1996 and
18,170,341 at April 30, 1997..................................... 110 182
Class B Common Stock, par value $.01 per share:
Authorized, issued and outstanding shares -- 2,000,000 at April 30,
1996 and 1997.................................................... 20 20
Additional paid-in capital.......................................... 61,029 86,085
Retained earnings................................................... 2,186 6,806
Foreign currency translation........................................ (34) (421)
-------- ---------
63,311 92,672
Notes receivable from officers for the exercise of options.......... (1,811) (1,680)
-------- ---------
Total stockholders' equity............................................ 61,500 90,992
-------- ---------
Total liabilities and stockholders' equity............................ $ 79,518 $ 133,607
======== =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 152
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------
1995 1996 1997
------ ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Rental revenue............................................. $8,364 $46,592 $83,489
Service fees............................................... 421 491 567
Product sales.............................................. 266 3,421 7,743
------ ------- -------
9,051 50,504 91,799
Costs and expenses:
Store operating expenses................................... 5,986 39,685 69,366
Selling, general and administrative........................ 2,223 5,362 8,231
Cost of product sales...................................... 136 1,880 4,544
Amortization of goodwill................................... 83 1,072 1,613
------ ------- -------
8,428 47,999 83,754
------ ------- -------
Operating income............................................. 623 2,505 8,045
Interest expense............................................. (194) (232) (544)
Amortization of debt costs................................... (157) -- --
Other income................................................. 155 548 461
------ ------- -------
(196) 316 (83)
------ ------- -------
Income from continuing operations before income taxes........ 427 2,821 7,962
Income tax expense........................................... 214 1,193 3,342
------ ------- -------
Income from continuing operations............................ 213 1,628 4,620
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) -- --
------ ------- -------
Loss from discontinued operations.......................... (59) -- --
------ ------- -------
Net income................................................... $ 154 $ 1,628 $ 4,620
====== ======= =======
Primary income (loss) per share:
Income from continuing operations.......................... $ 0.10 $ 0.15 $ 0.28
Discontinued operations.................................... (0.03) -- --
------ ------- -------
Net income................................................. $ 0.07 $ 0.15 $ 0.28
====== ======= =======
Fully diluted income (loss) per share:
Income from continuing operations.......................... $ 0.10 $ 0.14 $ 0.28
Discontinued operations.................................... (0.03) -- --
------ ------- -------
Net income................................................. $ 0.07 $ 0.14 $ 0.28
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 153
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
STOCK STOCK ADDITIONAL RETAINED
------------------- ------------------ PAID-IN CAPITAL EARNINGS
NUMBER OF NUMBER OF --------------- --------
SHARES AMOUNT SHARES AMOUNT AMOUNT AMOUNT
---------- ------ --------- ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
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 the 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
Payment on notes issued by officers for
exercise of options........................ -- -- -- -- -- --
Issuance of shares in connection with the
Subsequent Public Offering net of
registration expenses...................... 7,015,000 70 -- -- 24,962 --
Issuance of shares in connection with the
Company's acquisitions..................... 136,606 2 -- -- 90 --
Issuance of shares related to employee stock
options exercised.......................... 1,000 -- -- -- 4 --
Foreign currency translation................. -- -- -- -- -- --
Net income................................... -- -- -- -- -- 4,620
---------- ---- --------- --- ------- ------
Balance at April 30, 1997.................... 18,170,341 $182 2,000,000 $ 20 $86,085 $6,806
---------- ---- --------- --- ------- ------
<CAPTION>
FOREIGN CURRENCY OFFICERS' NOTES
TRANSLATION RECEIVABLE
---------------- ---------------
AMOUNT AMOUNT TOTAL
---------------- --------------- -------
<S> <C> <C> <C>
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 the 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
Payment on notes issued by officers for
exercise of options........................ -- 131 131
Issuance of shares in connection with the
Subsequent Public Offering net of
registration expenses...................... -- -- 25,032
Issuance of shares in connection with the
Company's acquisitions..................... -- -- 92
Issuance of shares related to employee stock
options exercised.......................... -- -- 4
Foreign currency translation................. (387) -- (387)
Net income................................... -- -- 4,620
----- ------- -------
Balance at April 30, 1997.................... $ (421) $(1,680) $90,992
----- ------- -------
</TABLE>
F-5
<PAGE> 154
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
----------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 154 $ 1,628 $ 4,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 2,212 15,241 25,702
Accrued rent........................................ 129 472 1,516
Deferred income taxes............................... 406 31 1,486
Provision for discontinued operations............... 35 -- --
Changes in operating assets and liabilities, net of
acquisitions of businesses:
Accounts receivable............................... 25 (385) (3,332)
Inventory......................................... (946) (2,563) (2,772)
Other assets...................................... 8 (801) (1,270)
Accounts payable.................................. 92 5,921 3,504
Income taxes payable.............................. (240) 1,130 503
Other liabilities................................. 317 (1,319) 483
-------- -------- --------
Net cash provided by operating activities................ 2,192 19,355 30,440
INVESTING ACTIVITIES
Purchase of videocassette rental inventory............. (3,752) (22,739) (33,434)
Purchase of property and equipment..................... (2,901) (12,301) (14,951)
Investment in businesses, net of cash acquired......... (708) (17,391) (21,340)
Notes receivable from officers......................... -- (1,252) --
Payments on notes receivable from officers............. -- (272) 292
-------- -------- --------
Net cash used in investing activities.................... (7,361) (53,955) (69,433)
FINANCING ACTIVITIES
Proceeds from notes payable............................ 2,171 4,100 26,326
Payments of notes payable.............................. (2,974) (3,838) (10,621)
Proceeds from exercise of employee options............. -- 35 4
Proceeds from exercise of Class A warrants............. -- 28,414 --
Proceeds from issuance of common stock................. 11,494 992 25,032
-------- -------- --------
Net cash provided by financing activities................ 10,691 29,703 40,741
-------- -------- --------
Increase (decrease) in cash and cash equivalents......... 5,522 (4,897) 1,748
Cash and cash equivalents at beginning year.............. 51 5,573 676
-------- -------- --------
Cash and cash equivalents at end of year................. $ 5,573 $ 676 $ 2,424
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 155
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
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 adopted on the basis 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 of 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> 156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
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 estimated economic life of the lease term.
Goodwill
Goodwill, consisting principally of excess cost over net assets from the
acquisitions of businesses, is net of accumulated amortization of approximately
$1,155,000 and $2,768,000 at April 30, 1996 and 1997, 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 implemented the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 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.
Long-Lived Assets
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective May 1,
1996. 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 values of those assets may not be recoverable. In
performing such review for recoverability, the Company compares the expected
future cash flows to the carrying value of long-lived assets and identifiable
intangibles. If the anticipated undiscounted future cash flows are less than the
carrying amount of such assets, the Company's carrying amount will be reduced to
its estimated fair value.
F-8
<PAGE> 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
Fair Value of Financial Instruments
At April 30, 1996 and 1997, 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,
---------------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Primary Earnings Per Share
Net income....................................... $ 154 $ 1,628 $ 4,620
======= ======= =======
Weighted average shares outstanding:
Class A common shares outstanding at year
end......................................... 4,138 11,018 18,170
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................................. (2,612) (2,046) (2,985)
Effect of shares issuable under stock options
and warrants based on the treasury stock
method...................................... -- 991 377
------- ------- -------
Shares used in computing earnings per share.... 2,226 10,663 16,262
======= ======= =======
Net income per common and common equivalent
share, primary................................. $ .07 $ .15 $ .28
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-------------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Fully Diluted Earnings Per Share
Net income.......................................... $ 154 $ 1,628 $ 4,620
======= ======= =======
Weighted average shares outstanding:
Class A common shares outstanding at year end..... 4,138 11,018 18,170
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.................................... (2,612) (2,046) (2,985)
Effect of shares issuable under stock options and
warrants based on the treasury stock method.... -- 1,557 386
------- ------- -------
Shares used in computing earnings per share....... 2,226 11,229 16,271
======= ======= =======
Net income per common and common equivalent share,
fully diluted..................................... $ .07 $ .14 $ .28
======= ======= =======
</TABLE>
F-9
<PAGE> 158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on April 30,
1998. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the fiscal years ended April 30, 1996
and 1997 of $.02 and $.01 per share, respectively. The impact of SFAS 128 on the
calculation of fully diluted earnings per share is not expected to be material.
Reclassification
Certain prior year items have been reclassified to conform with the 1997
presentation.
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 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 retroactive 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 $0.15 per share, for
fiscal 1996, after the effect of income taxes of $1,169,000.
3. VIDEOCASSETTE RENTAL INVENTORY -- NET
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 30,
-------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Videocassette rental inventory......... $41,759 $81,618
Accumulated amortization............... (16,058) (36,139)
-------- --------
$25,701 $45,479
======== ========
</TABLE>
F-10
<PAGE> 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
Amortization expense for videocassette rental inventory, which is included
in store operating expenses, was $1,643,000, $12,532,000 and $20,317,000 for the
years ended April 30, 1995, 1996 and 1997, respectively.
4. PROPERTY AND EQUIPMENT -- NET
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 30,
-------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land................................... $ 473 $ 473
Buildings.............................. 1,300 1,403
Furniture and equipment................ 12,218 22,385
Leasehold improvements................. 7,332 14,369
Accumulated depreciation............... (2,335) (5,561)
------- -------
$18,988 $33,069
======= =======
</TABLE>
Depreciation expense was $299,000, $1,607,000 and $3,307,000 for the years
ended April 30, 1995, 1996 and 1997, respectively.
5. NOTES PAYABLE
The notes payable balance consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 30,
1996 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility with a bank; quarterly payments of
interest at the prime rate plus 1/2% or the Eurodollar rate
(8.5% and 7.56% at April 30, 1997, respectively) maturing in
February 1998 and secured by all assets of the Company........ $4,100 $20,000
Note payable in monthly installments of $6,161 until December
2004, with a balloon payment of approximately $294,000,
interest at the United States government treasury securities
rate plus 4.5% (9.97% at April 30, 1997). The note is secured
by a mortgage and specific assets of the Company.............. 548 529
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 $325
to $2,105 with interest rates of 9.25% to 11% maturing on
various dates from December 1997 to May 1999.................. 100 35
------ -------
$4,859 $20,564
====== =======
</TABLE>
In February 1997, a syndicate led by Bank of America Illinois extended a
$60 million revolving credit facility (the "Line of Credit") to the Company,
with amounts borrowed thereunder bearing interest at variable rates based on the
Federal Funds rate or the Eurodollar rate. This facility replaced the $10
million credit line previously extended solely by Bank of America Illinois. The
Line of Credit is convertible into a two-year term loan if it is not renewed. As
of April 30, 1997, approximately $20,000,000 was outstanding under the Line of
Credit, bearing interest at 7.3% to 8.5%. During the term of the Line of Credit
and thereafter to the extent any amounts are outstanding under the Line of
Credit, the Company is subject to various restrictive covenants, including
limitations on further indebtedness, other than trade credit and capital or
operating leases, and requirements that the Company obtain the written consent
for certain acquisitions of new businesses or their assets (excluding new
superstore openings) or entering into business combinations,
F-11
<PAGE> 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
including mergers, syndicates or joint ventures. The Line of Credit also
restricts the amount and terms of dividends, 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.
The weighted-average interest rate on borrowings outstanding was 10.0%,
8.25% and 7.61% at April 30, 1995, 1996 and 1997, respectively.
The aggregate maturities of the notes payable at April 30, 1997 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998......................................... $ 20,046
1999......................................... 34
2000......................................... 26
2001......................................... 29
2002......................................... 32
Thereafter................................... 397
--------
$ 20,564
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
Family members of stockholders own a majority interest at April 30, 1995,
1996 and 1997 in one, one and two franchise stores, 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 the franchisees at April 30, 1995, 1996 and 1997 approximated
$2,000, $2,500 and $2,850, respectively.
During fiscal 1995, 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, 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. A director of the Company is a member of Johnson, West & Co.
The Company has Recourse Notes from the Company's 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
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 evidenced by promissory
notes bearing interest at a rate of 8% per annum, with payment of principal and
interest due on October 4, 1999. 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.
F-12
<PAGE> 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
In addition, as of January 31, 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 the President from January 1994 to April 1994, together with accrued
interest.
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 2012. The Company also
leases vehicles and computer equipment.
At April 30, 1997, minimum annual rental commitments under non-cancelable
operating leases are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998......................................... $ 20,353
1999......................................... 18,972
2000......................................... 15,922
2001......................................... 13,063
2002......................................... 10,835
Thereafter................................... 45,324
--------
Total minimum lease payments................. $124,469
========
</TABLE>
Rent expense, principally retail and office space, under operating leases
amounted to $1,292,000, $7,675,000 and $13,513,000 for the years ended April 30,
1995, 1996 and 1997, respectively.
8. INCOME TAXES
Income from continuing operations before income taxes in fiscal 1996 and
1997 of $2,821,000 and $7,962,000, respectively, is comprised of $2,412,000 in
the United States and $409,000 in Canada for fiscal 1996 and $5,525,000 in the
United States and $2,437,000 in Canada for fiscal 1997. There were no operations
outside of the United States in fiscal 1995.
F-13
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
Income tax expense is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL
30,
--------------------------
1995 1996 1997
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $(28) $ 833 $1,384
State.......................................... -- 164 422
International.................................. -- 165 50
---- ------ ------
(28) 1,162 1,856
Deferred:
Federal........................................ 164 39 413
State.......................................... 41 (53) (15)
International.................................. -- 45 1,088
---- ------ ------
205 31 1,486
---- ------ ------
Total income tax expense......................... 177 1,193 3,342
Income tax benefit related to discontinued
operations..................................... 37 -- --
---- ------ ------
Income tax expense related to continuing
operations..................................... $214 $1,193 $3,342
==== ====== ======
</TABLE>
Components of the net deferred tax liability, resulting from differences in
book and income tax accounting methods, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 30,
-----------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation and amortization............ $ 780 $2,794
Tax over book merger basis adjustment.................. 337 286
------ ------
1,117 3,080
Deferred income tax assets:
Book over tax rent expense............................. (276) (753)
------ ------
Net deferred income tax liabilities...................... $ 841 $2,327
====== ======
</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,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate..................... 34.0% 34.0% 34.0%
State tax, net of federal benefit................. 10.8 2.6 3.2
International..................................... -- 2.0 3.5
Goodwill.......................................... 7.0 2.0 1.0
Other............................................. 1.7 1.7 0.3
---- ---- ----
53.5% 42.3% 42.0%
==== ==== ====
</TABLE>
F-14
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL
30,
------------------------
1995 1996 1997
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid..................................... $213 $226 $ 390
Income taxes paid................................. $ 41 $ 29 $1,394
</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.
In October 1996, the Company completed its public offering of 7,015,000
shares of Class A Common Stock. The net proceeds from the offering were
approximately $25,032,000.
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 are achieved through April 30, 1998, 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
F-15
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
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, 1997, 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, 1997 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 "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 have been
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
nonmanagement directors of the Company. As of April 30, 1997 options to purchase
12,000 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.
F-16
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
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 stock options.
In fiscal 1997, the Company adopted the disclosure-only provision of
Statement of Financial Accounting Standards No. 123 for Stock-based Compensation
(SFAS 123). SFAS 123 allows companies to continue to account for those plans
using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued
to Employees". The Company has elected to continue to account for stock-based
compensation using APB 25, making pro forma disclosure of net earnings and
earnings per share as if the fair value based method had been applied.
Accordingly, no compensation expense has been recorded for the stock option
plans. Had compensation expense for the stock option plans been determined based
on the fair value at the date of grant for awards in fiscal 1996 and 1997,
consistent with SFAS No. 123, the Company's net earnings and earnings per share
for the fiscal years shown below would have been reported as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C> <C>
Net earnings -- as reported.............................. $1,628 $4,620
Net earnings -- pro forma................................ $1,427 $4,217
Earnings per share -- as reported........................ $ .14 $ .28
Earnings per share -- pro forma.......................... $ .13 $ .26
</TABLE>
The fair market value of each option grant is estimated on the date of the
grant using the Black-Sholes option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Expected dividend yields.................................. 0% 0%
Expected stock price volatility........................... 42.5% 42.5%
Risk free interest rate................................... 5.1% 5.1%
Expected life of options.................................. 5 yrs. 5 yrs.
</TABLE>
The pro forma effect of net income and earnings per share is not
representative of the pro forma earnings in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1996.
The weighted average fair value for options granted during fiscal 1996 and
1997 is $2.26 and $1.89 per share, respectively.
F-17
<PAGE> 166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding at April 30, 1994................... -- $ --
Granted....................................... 169,200 5.34
Exercised..................................... -- --
Canceled...................................... (30,900) 5.50
---------
Outstanding at April 30, 1995................... 138,300 5.30
Granted....................................... 830,000 4.71
Exercised..................................... (427,850) 4.31
Canceled...................................... (6,000) 7.63
---------
Outstanding at April 30, 1996................... 534,450 5.15
Granted....................................... 861,200 4.14
Exercised..................................... (1,000) 4.31
Canceled...................................... (13,700) 5.45
---------
Outstanding at April 30, 1997................... 1,380,950 4.53
=========
Exercisable at April 30, 1995................... 47,355 5.27
Exercisable at April 30, 1996................... 192,005 5.26
Exercisable at April 30, 1997................... 293,480 5.40
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTED EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0 to $5.00 1,100,150 9.13 $ 4.08 163,000 $ 4.32
$5.01 to $7.50 245,800 7.58 5.86 98,980 5.89
$7.51 to $10.50 35,000 4.73 9.34 31,500 9.40
--------- ---- ------ ------- ------
$0 to $10.50 1,380,950 8.74 $ 4.53 293,480 $ 5.40
</TABLE>
12. ACQUISITIONS
During fiscal years 1995, 1996 and 1997, the Company acquired, in 29
transactions, ten video retail stores previously operated by Video Update
franchisees, and 214 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 the Acquisitions 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 (goodwill and deferred charges) is being amortized over
20 years on a straight-line basis.
F-18
<PAGE> 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
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.
During fiscal 1997, the Company acquired, in 10 transactions, 74 retail
stores. The aggregate purchase price of these acquisitions totaling
approximately $22,513,000 included approximately $20,977,000 in cash,
approximately $927,000 in transaction costs, and 136,500 shares of Class A
Common Stock valued at approximately $609,000. The excess of the cost over the
estimated fair value of the assets acquired of approximately $13,367,000
(goodwill) is being amortized over 20 years on a straight-line basis.
In connection with three acquisitions in which the Company has issued an
aggregate of 594,506 shares of Class A Common Stock in fiscal 1996 and 1997, the
Company may be obligated to make deficiency payments to such sellers equal to
the difference between the guaranteed price of $7.00 to $15.00 for each share
issued, and the actual market price obtained for such shares as of specified
dates between July 1996 and October 1998. The remaining deficiency payments are
estimated to be approximately $2,462,000 based on the closing stock price of
$4.125 at April 30, 1997. The Company has the option of satisfying approximately
$1,220,000 (with respect to 239,163 shares) at April 30, 1997 through the
issuance of additional shares of Class A Common Stock. The Company is currently
disputing whether any deficiency payment is due with respect to those 239,163
shares which were issued to a seller in one of the acquisitions; the seller is
claiming a deficiency payment based on proceeds from the sale of Class A Common
Stock during the six month period of March 1996 to September 1996.
During October 1996, a cash deficiency payment was made with regard to one
acquisition in the cash amount of $87,135. During November 1996, a cash
deficiency payment was made with regard to one acquisition in the amount of
$88,547. Also, during November 1996, the Company satisfied a deficiency payment
of $77,951 with regard to one acquisition with 15,106 shares of Class A Common
Stock.
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,
--------------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues................................... $50,177 $78,927 $107,687
Income from continuing operations.......... $ 4,196 $ 4,287 $ 5,731
Primary income per share................... $ .46 $ .31 $ .32
Fully diluted income per share............. $ .46 $ .30 $ .32
</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-19
<PAGE> 168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997
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 fiscal 1996 and 1997. All intercompany revenues and expenses have been
eliminated. There were no operations outside the United States in fiscal 1995.
<TABLE>
<CAPTION>
OPERATING TOTAL
REVENUES INCOME ASSETS
-------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
FISCAL 1996
United States........................ $ 40,372 $2,107 $ 70,582
Canada............................... 10,132 398 8,936
-------- ------ --------
$ 50,504 $2,505 $ 79,518
======== ====== ========
FISCAL 1997
United States........................ $ 71,650 $5,607 $120,923
Canada............................... 20,149 2,438 12,684
-------- ------ --------
$ 91,799 $8,045 $133,607
======== ====== ========
</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. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the
normal course of conducting business. Management believes that the resolution of
these proceedings will not have any material adverse impact on the Company's
financial statements.
F-20
<PAGE> 169
VIDEO UPDATE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1997 1997
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................... $ 2,424 $ 96
Accounts receivable................................................. 3,776 3,593
Notes receivable from related parties............................... 1,394 1,470
Inventory........................................................... 7,318 9,119
Videocassette rental inventory -- net............................... 45,479 56,785
Property and equipment -- net....................................... 33,069 41,750
Prepaid expenses.................................................... 783 1,875
Recoverable income taxes............................................ -- 1,502
Goodwill -- net..................................................... 37,716 36,612
Other assets........................................................ 1,648 1,752
--------- ---------
Total assets........................................................ $ 133,607 $ 154,554
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable....................................................... $ 20,564 $ 32,534
Accounts payable.................................................... 12,196 21,712
Accrued expenses.................................................... 2,415 2,884
Accrued rent........................................................ 2,238 3,450
Accrued compensation................................................ 1,779 1,548
Income taxes payable................................................ 1,096 --
Deferred income taxes............................................... 2,327 3,021
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 -- 60,000,000
Issued and outstanding shares -- 18,170,341 at April 30, 1997 and
18,104,591 at October 31, 1997................................. 182 181
Class B Common Stock, par value $.01 per share:
Authorized, issued and outstanding shares -- 2,000,000 at April
30, 1997 and October 31, 1997.................................. 20 20
Additional paid-in capital........................................ 86,085 85,585
Retained earnings................................................. 6,806 5,909
Foreign currency translation...................................... (421) (610)
--------- ---------
92,672 91,085
Notes receivable from officers for the exercise of options........ (1,680) (1,680)
--------- ---------
Total stockholders' equity.......................................... 90,992 89,405
--------- ---------
Total liabilities and stockholders' equity.......................... $ 133,607 $ 154,554
========= =========
</TABLE>
Note: The balance sheet at April 30, 1997 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
F-21
<PAGE> 170
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue.................................. $18,444 $29,152 $35,628 $56,964
Service fees.................................... 165 193 284 343
Product sales................................... 1,515 3,786 2,775 6,630
------- ------- ------- -------
20,124 33,131 38,687 63,937
Costs and expenses:
Store operating expenses........................ 15,868 27,973 30,286 53,372
Selling, general and administrative............. 2,044 3,167 4,022 5,841
Cost of product sales........................... 956 2,362 1,636 3,852
Amortization of goodwill........................ 371 502 743 1,022
------- ------- ------- -------
19,239 34,004 36,687 64,087
------- ------- ------- -------
Operating income (loss)........................... 885 (873) 2,000 (150)
Interest expense.................................. (152) (670) (318) (1,176)
Other income...................................... 119 74 129 180
------- ------- ------- -------
(33) (596) (189) (996)
------- ------- ------- -------
Income (loss) before income taxes................. 852 (1,469) 1,811 (1,146)
Income tax expense (benefit)...................... 382 (462) 778 (249)
------- ------- ------- -------
Net income (loss)................................. $ 470 $(1,007) $ 1,033 $ (897)
======= ======= ======= =======
Net income (loss) per share....................... $ 0.03 $ (0.05) $ 0.08 $ (0.05)
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 171
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................. $ 1,033 $ (897)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization................................... 11,409 19,670
Accrued rent.................................................... 700 1,212
Deferred income taxes........................................... 131 694
Changes in operating assets and liabilities, net of acquisitions
of businesses:
Accounts receivable........................................... (976) 179
Inventory..................................................... 946 (1,801)
Other assets.................................................. (722) (1,414)
Accounts payable.............................................. 2,643 9,516
Income taxes payable.......................................... (168) (2,598)
Other liabilities............................................. 529 9
-------- --------
Net cash provided by operating activities............................ 15,525 24,570
INVESTING ACTIVITIES
Purchase of videocassette rental inventory......................... (17,169) (26,799)
Purchase of property and equipment................................. (6,329) (11,343)
Investment in businesses, net of cash acquired..................... (166) (610)
Notes receivable from officers..................................... -- (160)
Payments on notes receivable....................................... 420 43
-------- --------
Net cash used in investing activities................................ (23,244) (38,869)
FINANCING ACTIVITIES
Proceeds from notes payable........................................ 5,326 14,000
Payments on notes payable.......................................... (9,525) (2,029)
Proceeds from issuance of common stock, net........................ 25,032 --
-------- --------
Net cash provided by financing activities............................ 20,833 11,971
-------- --------
Increase (decrease) in cash and cash equivalents..................... 13,114 (2,328)
Cash and cash equivalents at beginning of the period................. 676 2,424
-------- --------
Cash and cash equivalents at end of the period....................... $ 13,790 $ 96
======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE> 172
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended October 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending April 30, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended April 30, 1997.
Reclassification
Certain prior year items have been reclassified to conform with the fiscal
1998 presentation.
2. NET INCOME PER COMMON SHARE
Net income (loss) per share under the treasury stock method is computed by
dividing net income (loss) for the year by the weighted average number of shares
of common stock and common stock equivalents, if dilutive, outstanding during
the year. If the number of shares of common stock obtainable on exercise of
outstanding options and warrants in the aggregate exceeds 20% of the number of
common shares outstanding at the end of the period for which the computation is
being made, the treasury stock method shall be modified in determining the
dilutive effect of the options and warrants. The "treasury stock
method -- modified" is presented if it is found to be dilutive. The weighted
average number of shares used in the net income (loss) per share calculation was
reduced by the common shares placed in escrow in connection with the Company's
initial public offering.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
------------------- -------------------
1996 1997 1996 1997
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C>
Earnings Per Share
Net income (loss)......................... $ 470 $(1,007) $ 1,033 $ (897)
======= ======= ======= =======
Weighted average shares outstanding:
Class A common shares outstanding at
quarter end.......................... 18,018 18,105 18,018 18,105
Class B common shares outstanding at
quarter end.......................... 2,000 2,000 2,000 2,000
Less: Class B common shares placed in
escrow in connection with the initial
public offering...................... (1,300) (1,300) (1,300) (1,300)
Effect of using weighted average common
shares outstanding................... (4,465) -- (5,740) --
Effect of shares issuable under stock
options and warrants based on the
treasury stock method................ 348 177 483 177
------- ------- ------- -------
14,601 18,982 13,461 18,982
======= ======= ======= =======
Net income (loss) per common and common
equivalent share........................ $ 0.03 $ (0.05) $ 0.08 $ (0.05)
======= ======= ======= =======
</TABLE>
F-24
<PAGE> 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1997
(UNAUDITED)
In February, 1997 the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on April 30, 1998.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in no change in
primary earnings per share for the three months and six months ended October 31,
1997 and 1996. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
3. DEFICIENCY OBLIGATIONS -- ACQUISITIONS
In connection with three acquisitions in which the Company has issued an
aggregate of 574,506 shares of Class A Common Stock in fiscal 1996 and 1997, the
Company may be obligated to make deficiency payments to such sellers equal to
the difference between the guaranteed price of $7.00 to $15.00 for each share
issued, and the actual market price obtained for such shares as of specified
dates between July 1996 and October 1998. The remaining deficiency payments are
estimated to be approximately $2,680,000 based on the closing stock price of
$3.125 at October 31, 1997. The Company has the option of satisfying
approximately $1,220,000 of this liability at October 31, 1997 through the
issuance of additional shares of Class A Common Stock. The Company is currently
disputing whether any deficiency payment is due with respect to 239,163 shares
held by a seller in one of the acquisitions; the seller is claiming a deficiency
payment based on proceeds from the sale of Class A Common Stock during the six
month period of March 1996 to September 1996.
During October 1997, a cash deficiency payment was made with regard to an
acquisition in the cash amount of $68,562.
4. STOCKHOLDER'S EQUITY
In the first quarter of fiscal 1998, the Company canceled 65,750 shares of
Class A Common Stock issued to a seller (reducing paid in capital and goodwill
by approximately $500,000) as part of a purchase price adjustment related to one
of the Company's Canadian acquisitions.
The Company canceled 65,750 shares of Class A Common Stock issued to a
seller (reducing paid in capital and goodwill by approximately $500,000) as part
of a purchase price adjustment related to one of the Company's Canadian
acquisitions.
F-25
<PAGE> 174
MOOVIES' FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Moovies,
Inc. as of December 31, 1995 and 1996 and the related consolidated statements of
operations, stockholders' equity and partners' equity (deficit), and cash flows
for each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Moovies,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick
Greenville, South Carolina
February 24, 1997
F-26
<PAGE> 175
MOOVIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30
-------------------- --------
1995 1996 1997
------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 3,564 $ 4,196 $ 2,295
Receivables............................................. 2,780 927 1,302
Merchandise inventory................................... 2,617 8,265 5,220
Deferred income tax benefit............................. 984 1,517 7,978
Prepaid rent............................................ 740 116 1,776
Other................................................... 1,244 2,160 1,886
------- -------- --------
Total current assets............................ 11,929 17,181 20,457
Videocassette rental inventory, net....................... 16,728 24,885 26,987
Furnishings and equipment, net............................ 9,859 30,903 37,763
Goodwill, net............................................. 29,081 39,718 46,644
Deposits and other assets................................. 622 1,099 3,202
------- -------- --------
$68,219 $113,786 $135,053
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.......................................... $ 2,500 $ 19,000 $ 19,000
Notes payable........................................... 5,935 2,600 --
Current portion of long-term debt....................... 481 168 4,500
Accounts payable........................................ 10,567 18,864 16,605
Accrued liabilities..................................... 3,066 3,165 12,526
------- -------- --------
Total current liabilities....................... 22,549 43,797 52,631
Long-term debt, less current portion...................... 2,411 101 26,375
Deferred income tax payable............................... 5,796 7,677 4,599
------- -------- --------
30,756 51,575 83,605
Commitments Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding......... -- -- --
Common stock, $.001 par value; 25,000,000 shares
authorized; issued and outstanding 12,359,800 shares
at September 30, 1997; 11,926,620 shares at December
31, 1996 and 8,658,532 at December 31, 1995.......... 9 12 12
Additional paid-in capital.............................. 35,858 58,336 61,885
Retained earnings (deficit)............................. 1,596 3,863 (10,449)
------- -------- --------
Total stockholders' equity...................... 37,463 62,211 51,448
------- -------- --------
$68,219 $113,786 $135,053
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 176
MOOVIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1994 1995 1996 1996 1997
------ ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenues........................... $4,070 $20,309 $71,969 $51,760 $ 69,083
Product sales............................. 322 4,349 13,314 7,934 12,487
------ ------- ------- ------- --------
4,392 24,658 85,283 59,694 81,570
Operating costs and expenses:
Operating expenses........................ 3,121 15,593 59,928 42,580 67,366
Cost of product sales..................... 278 2,979 8,958 4,958 9,856
Selling, general and administrative....... 611 2,955 9,451 7,019 7,214
Amortization of goodwill.................. -- 148 1,733 1,219 1,762
Merger related costs...................... -- -- -- -- 472
Restructuring and other charges........... -- -- -- -- 15,560
------ ------- ------- ------- --------
4,010 21,675 80,070 55,776 102,230
------ ------- ------- ------- --------
Operating income (loss)..................... 382 2,983 5,213 3,918 (20,660)
Interest expense............................ (101) (197) (1,327) (997) (2,756)
Other, net.................................. -- 25 (24) (11) (55)
------ ------- ------- ------- --------
Income (loss) before income taxes and loss
on early extinguishment of debt........... 281 2,811 3,862 2,910 (23,471)
Income tax expense (benefit)................ -- 1,046 1,531 1,155 (9,388)
------ ------- ------- ------- --------
Income (loss) before extraordinary item..... 281 1,765 2,331 1,755 (14,083)
Extraordinary item -- loss on early
extinguishment of debt.................... -- -- (64) (64) (229)
------ ------- ------- ------- --------
Net income (loss)........................... $ 281 $ 1,765 $ 2,267 $ 1,691 $(14,312)
====== ======= ======= ======= ========
Net income (loss) per share:
Income (loss) before extraordinary item... $ N/A $ 0.52 $ 0.23 $ 0.18 $ (1.13)
Extraordinary item -- loss on early
extinguishment of debt................. N/A -- (0.01) (0.01) (0.02)
------ ------- ------- ------- --------
Net income (loss)......................... $ N/A $ 0.52 $ 0.22 $ 0.17 $ (1.15)
------ ------- ------- ------- --------
Weighted average shares outstanding......... N/A 3,395 10,455 9,904 12,414
====== ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 177
MOOVIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED PARTNERS' TOTAL
COMMON PAID-IN EARNINGS EQUITY EQUITY
STOCK CAPITAL (DEFICIT) (DEFICIT) (DEFICIT)
------ ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.............. $ -- $ -- $ -- $(309) $ (309)
Net income.............................. -- -- -- 281 281
Partner withdrawals..................... -- -- -- (376) (376)
---- --------- -------- ----- ---------
Balance at December 31, 1994.............. -- -- -- (404) (404)
Partner withdrawals..................... -- -- -- (228) (228)
Partnership net income, through August
8, 1995.............................. -- -- -- 169 169
Net proceeds from issuance and sale of
3,622,500 shares of common stock, net
of issuance costs of $3,464.......... 4 36,960 -- -- 36,964
Issuance of common stock to companies
acquired............................. 4 9,655 -- -- 9,659
Payment of deemed dividend.............. -- (22,949) -- -- (22,949)
Elimination of partner's deficit........ -- (463) -- 463 --
Issuance of 842,004 shares of common
stock in connection with acquisitions
of video rental chains............... 1 12,655 -- -- 12,656
Net income.............................. -- -- 1,596 -- 1,596
---- --------- -------- ----- ---------
Balance at December 31, 1995.............. 9 35,858 1,596 -- 37,463
Net proceeds from issuance and sale of
3,220,000 shares of common stock, net
of issuance costs of $2,474.......... 3 22,478 -- -- 22,481
Net income.............................. -- -- 2,267 -- 2,267
---- --------- -------- ----- ---------
Balance at December 31, 1996.............. 12 58,336 3,863 -- 62,211
Issuance of 427,672 shares of common
stock in connection with acquisition
of video rental chain (unaudited).... -- 2,299 -- -- 2,299
Issuance of warrant in connection with
Senior Credit Facility (unaudited)... -- 1,250 -- -- 1,250
Net income (loss) (unaudited)........... -- -- (14,312) -- (14,312)
---- --------- -------- ----- ---------
Balance at September 30, 1997
(unaudited)............................. $ 12 $ 61,885 $(10,449) $ -- $ 51,448
==== ========= ======== ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 178
MOOVIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)..................... $ 281 $ 1,765 $ 2,267 $ 1,691 $(14,312)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.... 972 4,643 20,198 14,827 22,218
Restructuring and other
charges....................... -- -- -- -- 14,060
Extraordinary item -- loss on
early extinguishment of
debt.......................... -- -- 64 -- --
Loss on disposal of furnishings
and equipment................. 9 -- -- -- --
Changes in operating assets and
liabilities:
Receivables................... 10 (2,544) 2,107 1,861 (413)
Merchandise inventory......... (3) (847) (5,503) (2,585) 2,323
Other current assets.......... -- (679) (292) (1,495) (1,604)
Deposits and other assets,
net......................... (57) 34 (511) (184) (2,434)
Accounts payable.............. 234 4,721 8,297 2,036 (2,298)
Accrued liabilities........... 32 1,166 (1,115) 512 278
Deferred income taxes......... -- 1,046 1,347 1,100 (9,539)
------- -------- -------- -------- --------
Net cash provided by operating
activities.................. 1,478 9,305 26,859 17,763 8,279
------- -------- -------- -------- --------
Investing activities:
Purchases of videocassette rental
inventory, net..................... (891) (8,283) (22,338) (15,351) (19,457)
Purchases of furnishings and
equipment.......................... (217) (5,885) (23,145) (15,600) (12,850)
Proceeds from the sale of the grocery
division........................... 746 746 --
Business acquisitions................. -- (3,477) (11,912) (11,323) (5,004)
------- -------- -------- -------- --------
Net cash used in investing
activities.................. (1,108) (17,645) (56,649) (41,528) (37,311)
------- -------- -------- -------- --------
Financing activities:
Proceeds from line of credit
borrowings......................... -- 2,500 26,000 11,296 20,000
Proceeds from issuance of long-term
debt............................... 582 4,116 2,000 2,000 30,000
Principal payments on line of credit
borrowings......................... -- -- (9,500) -- (19,000)
Principal payments on long-term
borrowings......................... (363) (9,223) (10,558) (10,370) (3,869)
Capitalized initial public offering
costs.............................. (285) -- -- -- --
Proceeds from issuance of common
stock, net......................... -- 36,963 22,480 22,481 --
Cash paid, in the form of a deemed
dividend, for the purchase of video
chains............................. -- (22,396) -- -- --
Proceeds from the exercise of
warrants........................... -- 2 -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 179
MOOVIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Capital/partner contributions
(withdrawals), net................. (376) (228) -- -- --
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities........ (442) 11,734 30,422 25,407 27,131
------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents........................... (72) 3,394 632 1,642 (1,901)
Cash and cash equivalents at beginning
of year............................... 242 170 3,564 3,564 4,196
------- -------- -------- -------- --------
Cash and cash equivalents at end of
year.................................. $ 170 $ 3,564 $ 4,196 $ 5,206 $ 2,295
======= ======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest................ $ 36 $ 162 $ 1,053 $ 726 $ 2,520
======= ======== ======== ======== ========
Cash paid for income taxes............ $ -- $ -- $ 10 $ -- $ --
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 180
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Moovies, Inc. (the "Company") was incorporated in November 1994 for the
purpose of entering into agreements to acquire video specialty stores,
consummating an initial public offering of stock and operating video specialty
stores. Concurrent with the completion of an initial public offering of stock in
August 1995, the Company acquired ten other video specialty chains, including
Tonight's Feature Limited Partnership II, the Company's predecessor (the
"Predecessor" or "Tonight's Feature"). As of December 31, 1996, the Company
operated 223 video specialty stores located in South Carolina, North Carolina,
Georgia, Tennessee, Iowa, Virginia, Ohio, New Jersey, New York, Connecticut,
Pennsylvania, Colorado, Minnesota, Wisconsin, South Dakota and Nebraska. Prior
to August 1995, Moovies, Inc. had no operations.
Basis of Presentation
The accompanying consolidated financial statements reflect the results of
operations of Tonight's Feature for 1994 and through August 1995. In August
1995, Tonight's Feature was merged into the Company. From August 1995, the
consolidated financial statements reflect the combined operations of the
predecessor and the acquisitions (see note 2).
The consolidated balance sheet as of September 30, 1997 and the
consolidated statements of operations, stockholders' equity and partners' equity
(deficit) and cash flows for the nine months ended September 30, 1996 and 1997
have been prepared by the Company without audit. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of the financial position, results of operations and cash
flows as of September 30, 1997 and for the nine months ended September 30, 1996
and 1997, have been included.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries from and after the date of acquisition of each
such subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Merchandise Inventory
Merchandise inventory, consisting primarily of prerecorded videocassettes,
video games, children's books and confectionery items, is stated at the lower of
cost or market. Cost is determined using the first-in, first-out method of
accounting.
F-32
<PAGE> 181
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Videocassette Rental Inventory
Effective January 1, 1996, the Company adopted an accelerated method of
amortizing its videocassette rental inventory. Under this new method,
videocassette rental inventory is stated at cost, including the related costs to
prepare such videocassettes for rent, and is amortized over its estimated
economic life of 36 months, to its estimated salvage value ($6 per videocassette
during 1996). All copies of new release videocassettes are amortized on an
accelerated basis during their first four months to an average net book value of
$15 and then on a straight-line basis to their estimated salvage value of $6
over the next 32 months. All copies of new release videocassettes that are
purchased for less than $15 are amortized on a straight-line basis to the
estimated salvage value of $6 over 36 months. The number of high and low priced
new release titles purchased by the Company in any given period depends on the
price assigned to each release by the movie studios. Historically, there are
fewer low priced new release titles than high priced. Therefore, the Company has
historically spent less on low priced new release titles. After the book value
is amortized to its salvage value, it remains in inventory at that value until
disposed of, at which time the salvage value is recorded as an element of cost
of sales.
The new method of amortization was adopted because the Company believes
accelerating expense recognition for new release videocassettes during the first
four months more closely matches the typically higher revenue generated
following a title's release, and believes $15 represents a reasonable average
carrying value for tapes to be rented or sold after four months and $6
represents a reasonable salvage value for all tapes after 36 months.
The new method of amortization has been applied to videocassette rental
inventory that was held in inventory at January 1, 1996. The adoption of the new
method of amortization has been accounted for as a change in accounting estimate
effected by a change in accounting principle and, accordingly, the Company
recorded $860,000 as a pre-tax charge to operating expense in the first quarter.
The application of the new method of amortizing videocassette rental inventory,
including the $860,000 or $0.06 per share charge described above, increased
amortization expense for the year ended December 31, 1996 by approximately $2.9
million and reduced net income by approximately $1.7 million and earnings per
share by $0.17.
Prior to January 1996, videocassette rental inventory was stated at cost,
and was amortized over its estimated economic life with no provision for salvage
value. Videocassettes that were considered base stock ("catalog titles"),
together with related costs to prepare them for rent, were amortized over 36
months on a straight-line basis. New release videocassettes were amortized as
follows: the tenth and any succeeding copies of each title per store were
amortized over nine months on a straight-line basis; 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 copies one through three of the titles
per store were amortized as base stock.
Certain videocassettes in the rental inventory are leased under a revenue
sharing agreement with a vendor, as broker for various studios. During the
revenue sharing period, which does not exceed two years, the studios retain
ownership of the videocassette, and the Company shares the rental revenue with
the studios rather than purchasing the videocassette for a fixed cost (typically
$60 to $67). Under this agreement, the percentage of rental revenue retained by
the Company generally increases during the first 90 days of the revenue sharing
period, reaching a fixed percentage at 90 days. The associated handling fee per
leased videocassette is amortized on a straight-line basis over the term of the
lease. Revenue sharing allows the Company to order a substantially larger number
of copies to fill most of the temporarily heavy demand that exists during the
first few weekends of a title's release. Revenue sharing reduces the risk that
the Company will be unable to recover the acquisition cost of a videocassette
through rental revenue before the popularity of the title declines
significantly. At the end of the revenue sharing period for a title, the Company
may purchase the remaining copies of that title for generally less than $5 per
copy. The purchased copies are then accounted for as base stock.
F-33
<PAGE> 182
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Videocassette rental inventory......... $ 38,903 $ 45,563 $ 52,220
Accumulated amortization............... (22,175) (20,678) (25,233)
-------- -------- ---------
$ 16,728 $ 24,885 $ 26,987
======== ======== =========
</TABLE>
Amortization expense related to videocassette rental inventory amounted to
$779,000, $3,988,000 and $15,633,000 for the years ended December 31, 1994, 1995
and 1996, respectively, and $11,818,000 and $15,770,000 for the nine months
ended September 30, 1996 and 1997 (unaudited), respectively. As videocassette
rental inventory is sold or retired, the applicable cost and accumulated
amortization are eliminated from the accounts and any related gain or loss is
recognized.
Furnishings and Equipment
Furnishings and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful lives (5 to 7 years) for furnishings and
equipment and the lesser of the useful lives or lease term (primarily 5 to 10
years) for leased items using the straight-line method.
Videocassette Revenue
Revenue is recognized at the time of rental or sale of the videocassette.
Goodwill
Goodwill consists of the excess of acquisition costs over the fair market
value of assets acquired. Goodwill is amortized over 20 years and is shown net
of $148,000 and $1,881,000 of accumulated amortization at December 31, 1995 and
1996, respectively, and $3,637,000 at September 30, 1997 (unaudited). If facts
and circumstances suggest that the excess of cost over net assets acquired will
not be recoverable, as determined based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, the Company's carrying
value of the excess cost over net assets acquired will be reduced by the
estimated shortfalls of cash flows.
Fair Value of Financial Instruments
At December 31, 1995 and 1996, the carrying value of financial instruments
such as cash and cash equivalents and accounts payable and notes payable
approximated their fair values, based upon the short-term maturities of these
instruments. The fair value of the Company's long-term debt is estimated using
discounted cash flow analysis, based upon the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying value
of such instruments approximated their fair value at December 31, 1995 and 1996
and at September 30, 1997 (unaudited).
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
F-34
<PAGE> 183
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Predecessor operated as a partnership for income tax purposes through
August 1995. Accordingly, income taxes were paid by the Predecessor's general
partners and the Predecessor had no income tax liability.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding. Weighted
average common and common equivalent shares include common shares, stock options
using the treasury stock method and the assumed exercise of the outstanding
warrants to purchase common stock.
(2) STOCK OFFERINGS AND ACQUISITIONS
Stock Offerings
In August 1995, the Company completed its initial public offering of
3,622,500 shares of common stock for $12.00 per share. The net proceeds of the
initial public offering, after deducting applicable issuance costs and expenses,
were approximately $36.9 million. The proceeds were used to pay the cash portion
of the acquisitions of $22.4 million, which together with the issuance of a
$500,000 note payable were considered to be deemed dividends, and to repay
approximately $4.2 million of long-term indebtedness of the acquisitions and
$1.4 million of long-term indebtedness of Tonight's Feature. The remaining
proceeds were used to acquire additional video rental chains and to open new
stores, acquire new sites, and renovate older locations.
In July 1996, the Company completed a second offering of 3,220,000 common
shares. The net proceeds to the Company from the sale of common stock, after
deducting offering expenses, were approximately $22.5 million. The Company used
a portion of the proceeds to fund the Premiere Video acquisition described below
and to repay existing borrowings.
Acquisitions
Concurrently with the initial public offering, the Company purchased
substantially all of the assets, assumed certain liabilities and acquired the
businesses of 76 video specialty stores. As defined under Rule 1-02(s) of
Regulation S-X, the shareholders and owners of these video stores were
considered promoters who transferred assets and liabilities to the Company in
exchange for common stock. As a result, the Company recorded the assets and
liabilities acquired at their historical cost bases and no goodwill was recorded
in the transaction.
During the remainder of 1995, the Company acquired 48 video specialty
stores from six unrelated sellers for approximately $22.1 million and the
issuance of approximately 842,000 shares of common stock.
In July 1996, the Company acquired certain assets and business of American
Multi-Entertainment, Inc. d/b/a Premiere Video ("Premiere Video") in an asset
purchase transaction for aggregate consideration of approximately $11.5 million.
Premiere Video owned and operated 23 stores in Minnesota, Iowa, Wisconsin, South
Dakota and Nebraska.
In addition, during 1996 the Company acquired seven additional video
specialty stores in two separate asset purchase transactions for aggregate
consideration of approximately $3.0 million in cash.
The following unaudited pro forma information presents the results of
operations of the Company as though the aforementioned acquisitions had occurred
as of the beginning of the year in which the acquisition occurred and the
immediately preceding year.
F-35
<PAGE> 184
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Pro forma revenue...................................... $78,959 $91,331
Pro forma net income................................... $ 4,567 $ 3,450
Pro forma net income per share......................... $ 0.39 $ 0.29
Pro forma weighted average shares...................... 11,760 11,809
</TABLE>
(3) FURNISHINGS AND EQUIPMENT
Furnishings and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Building................................... $ 147 $ 147 $ --
Furniture and fixtures..................... 5,381 11,741 16,214
Other equipment............................ 4,825 6,986 8,486
Leasehold improvements..................... 2,667 8,157 18,898
Vehicles................................... 216 169 --
Construction in progress................... 2,190 10,097 4,410
-------- ------- -------
15,426 37,297 48,008
Accumulated depreciation and
amortization............................. (5,567) (6,394) (10,245)
-------- ------- -------
$ 9,859 $ 30,903 $ 37,763
======== ======= =======
</TABLE>
Depreciation and amortization expense on furnishings and equipment was
$128,000, $507,000 and $2,832,000 for the years ended December 31, 1994, 1995
and 1996, respectively, and $1,790,000 and $4,528,000 for the nine months ended
September 30, 1996 and 1997 (unaudited), respectively.
(4) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
---- ---- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to bank, due in monthly installments of
varying amounts through November 2000, with interest
at prime plus 1.5%, secured by all assets of
selected stores. Repaid in full during 1996......... $629 $ -- $ --
Note payable to bank, due in monthly installments of
varying amounts through November 2000, with interest
at 9.75%, secured by certain fixed assets........... 116 109 --
Note payable to investment company, due in monthly
installments through April 2000, with interest at
11%,secured by certain fixed assets. Repaid in full
during 1996......................................... 112 -- --
Unsecured note payable to seller, due in five equal
principal payments with the final payment due in
April 1997, with interest at 8%..................... 469 94 --
</TABLE>
F-36
<PAGE> 185
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------- -------------
1995 1996 1997
------ ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured demand notes payable to seller with
interest at 10.0%................................. $ 66 66 --
Subordinated note payable to investment company, due
in April 2000, with interest at 13.5%, secured by
second lien on assets of selected stores. Repaid
in full during 1996............................... 1,500 -- --
Note payable to bank, due in quarterly installments
of varying amounts through March 2002............. -- -- 30,875
------ ---- -------
2,892 269 30,875
Less current portion................................ (481) (168) (4,500)
------ ---- -------
$2,411 $101 $26,375
====== ==== =======
</TABLE>
The Company is required to comply with certain covenants which limit the
incurrence of additional debt, restrict the payment of dividends and restrict
the disposition of certain assets. At year end, the Company was in compliance
with such covenants.
Scheduled maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997......................................... $168
1998......................................... 12
1999......................................... 16
2000......................................... 73
----
$269
====
</TABLE>
(5) LINE OF CREDIT
In March 1996, the Company signed a new revolving credit facility (the
"Facility") for up to $22.5 million. In December 1996, the Facility was
increased to $30.0 million. The available amount of the Facility will reduce
quarterly with a final maturity of December 31, 1998. The interest rate of the
facility is variable based on LIBOR and the Company may repay the Facility at
any time without penalty. Borrowings are secured by substantially all of the
Company's assets. The more restrictive covenants under the facility require the
Company to maintain certain debt to cash flow ratios and require the Company to
maintain certain minimum cash flow levels. The Company was in compliance with
all such covenants at December 31, 1996. Borrowings under this line of credit
amounted to $19,000,000 at December 31, 1996.
(6) NOTES PAYABLE
In connection with several acquisitions in 1995, the Company issued notes
payable to former owners aggregating $5,935,215 which was repaid during 1996.
In connection with the acquisition of Premiere Video in July 1996 the
Company issued a $2.6 million unsecured note payable to the former owners. The
note was repaid in January 1997.
F-37
<PAGE> 186
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(7) STOCKHOLDER'S EQUITY
Preferred Stock
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock in one or more series, and to fix or alter the designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of such stock, including the
dividend rights, dividend rates, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices and liquidation preferences of the shares constituting any series,
without any further vote or action by the stockholders' of the Company. No
shares of preferred stock have been issued.
Stock Options
In June 1995, the Board of Directors adopted, and the stockholders
approved, the 1995 Stock Option Plan (the "Plan"). The Plan provides for the
award of incentive stock options to officers and employees and the award of
non-qualified stock options and other incentive grants to directors, officers
and employees. Options become exercisable at a rate of 33% each year from the
date of grant and have a maximum life of 10 years. The Company has reserved
1,500,000 shares for issuance under the Plan. At December 31, 1996 there were
684,400 shares available for issuance under the Plan.
A summary of activity in the Plan during the periods indicated is as
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Stock options outstanding:
Balance at December 31, 1994.................. -- $ --
Granted....................................... 700,450 11.32
Exercised..................................... -- --
Terminated.................................... -- --
------- ------
Balance at December 31, 1995.................. 700,450 11.32
Granted....................................... 340,400 9.78
Exercised..................................... -- --
Terminated.................................... 225,250 10.87
------- ------
Balance at December 31, 1996.................. 815,600 $10.80
======= ======
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $8.25 -- 12.63 and 7.8
years, respectively.
At December 31, 1995 and 1996, the number of options exercisable was
155,000 and 366,216, respectively, and the weighted average exercise price of
those options was $12.00 and $11.62, respectively.
The per share weighted-average fair value of stock options granted under
the Plan was $8.30 and $7.75 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1995-expected dividend yield 0%, expected volatility of 56.8%, risk-free
interest rate of 6.0% and an expected life of 10 years; 1996-expected dividend
yield 0%, expected volatility of 60.2%, risk-free interest rate of 6.4% and an
expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Stock Option
Plan and accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for stock options in its Plan
under
F-38
<PAGE> 187
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SFAS No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
------ ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNT)
<S> <C> <C> <C>
Net Income...................... As Reported $1,765 $2,267
Pro forma $1,695 $1,612
Net income per share............ As Reported $ 0.52 $ 0.22
Pro forma $ 0.50 $ 0.15
</TABLE>
Pro forma net income reflects only options granted in 1995 and 1996.
Compensation cost is reflected over the options' vesting period of three years.
No options were granted under the plan prior to 1995.
Warrants
In November 1994, the Company granted to a director a warrant to purchase
150,000 shares of Common Stock of the Company at $1.00 per share. In March 1995,
the Company granted 19 former limited partners of the Predecessor warrants to
purchase an aggregate of 74,352 shares of Common Stock of the Company for $.01
per share. In April 1995, the Company's predecessor granted to Mortco, Inc., in
connection with the Company's note payable to Mortco, a warrant to acquire
40,877 shares of Common Stock at an exercise price equal to the initial public
offering price per share. In April 1995, the Company granted to Sirrom Capital
Corporation a warrant to acquire 156,110 shares of Common Stock at $.01 per
share in connection with a loan from Sirrom to the Predecessor. In July 1995,
the Company agreed to issue to the Underwriters warrants to purchase 236,250
shares of Common Stock at a purchase price per share equal to 120% of the
initial public offering price per share. The warrants will be exercisable during
the four year period commencing one year after the date the warrants are issued.
In January 1996 in connection with issuance of a subordinated note payable the
Company granted to Sirrom a warrant to purchase 20,000 shares of common stock at
an exercise price of $10.80 per share. The warrants will be exercisable during
the four year period commencing one year after the date the warrants are issued.
During 1995 and 1996, warrants for 167,124 and 48,000 shares, respectively
at $.01 per share were exercised. The Company received proceeds of $1,671 and
$480, respectively.
Shareholder Protection Rights Agreement
In December 1996, the Board of Directors adopted a Shareholder Protection
Rights Agreement (the "Plan") and declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock to
shareholders of record on December 31, 1996. Such Rights only become exercisable
upon (i) a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") have acquired beneficial ownership of
15% or more of the outstanding Common stock or (ii) 10 business days after a
person or group commences or publicly announces its intention to make a tender
offer or exchange offer for an amount of the Company's common stock that would
result in the ownership by such person or group of 15% or more of the common
stock.
Each Right entitles the shareholder to purchase from the Company one
one-hundredth of a share of Participating Preferred Stock, $.001 par value per
share (the "Preferred Shares"), at a price of $30, subject to adjustment.
Thereafter, each Preferred Share will be entitled to an aggregate dividend of
100 times the dividend declared per Common Share. In the event of liquidation,
the holders of the Preferred Shares will be entitled to be paid an amount per
share equal to the aggregate amount distributable to a holder of 100 shares of
Common Stock. Each Preferred Share shall have 100 votes and shall vote as a
class with the Common
F-39
<PAGE> 188
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Shares voting on such matter. In the event of any merger, consolidation or other
transaction in which Common Shares are exchanged, each Preferred Share will be
entitled to receive 100 times the amount received per Common Share. Because of
the nature of the Preferred Shares, the value of one one-hundredth interest in a
Preferred Share should approximate the value of one Common Share. The Rights
will expire on December 31, 2006.
(8) COMMITMENTS
The Company leases all of its retail facilities and certain computer
equipment under noncancelable operating leases which contain renewal options and
escalation clauses. Future minimum lease payments required under these leases as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997......................................... $ 17,483
1998......................................... 16,040
1999......................................... 14,243
2000......................................... 10,545
2001......................................... 8,165
--------
$ 66,476
========
</TABLE>
Rental and related expenses amounted to $422,000, $2,901,000 and
$13,610,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and $9,578,000 and $17,227,000 for the nine months ended September 30, 1996 and
1997 (unaudited), respectively.
The Company has a revenue sharing agreement through 2005 whereby it is
obligated to obtain a minimum annual dollar amount of new releases from a
vendor. During the revenue sharing period, which is generally one year (but does
not exceed two years) per title, the movie studio retains ownership of the video
and the Company shares the rental revenue with the vendor.
(9) INCOME TAXES
Income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ------------------
1995 1996 1996 1997
------ ------ ------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal...................................... $ -- $ 174 $ -- $ --
State........................................ -- 10 -- 10
------ ------ ------ -------
Total current................................ -- 184 -- 10
------ ------ ------ -------
Deferred:
Federal...................................... 823 1,104 956 (7,798)
State........................................ 223 243 198 (1,600)
------ ------ ------ -------
Total deferred............................... 1,046 1,347 1,154 (9,398)
------ ------ ------ -------
Total........................................ $1,046 $1,531 $1,154 $(9,388)
====== ====== ====== =======
</TABLE>
F-40
<PAGE> 189
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following :
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax
expense...................... $ 96 $ 956 $ 1,313 $ 989 $(7,980)
Increase (decrease) in income
taxes resulting from:
State and local income taxes,
net of Federal income tax
benefits..................... -- 147 168 131 (1,056)
Goodwill amortization.......... -- -- 111 112 83
Other.......................... -- -- (61) (78) (435)
Income from partnership,
taxable to partners.......... (96) (57) -- -- --
------- ------- ------- ------- -------
Actual tax expense............. $ -- $ 1,046 $ 1,531 $ 1,154 $(9,388)
======= ======= ======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------ ------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 789 $2,191 $ 9,263
Accrued expenses and allowances deductible for
books, but not for tax........................ 993 663 3,835
Expenditures capitalized and amortized for tax... 213 101
------ ------ -------
$1,782 $3,067 $13,199
------ ------ -------
Deferred tax liabilities:
Furnishings and equipment, principally due to
differences in depreciation................... $3,404 $4,960 $ 5,305
Intangibles, principally due to differences in
amortization ................................. 2,745 3,360 3,782
Prepaid expenses deductible for tax.............. -- 674 732
Other............................................ 445 233 --
------ ------ -------
$6,594 $9,227 9,819
------ ------ -------
Net deferred tax liabilities (assets).... $4,812 $6,160 $(3,380)
====== ====== =======
</TABLE>
Management believes that a valuation allowance is not considered necessary
based upon projections of future taxable income and the reversal of taxable
temporary differences over the periods during which the deferred tax assets are
deductible.
F-41
<PAGE> 190
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As of September 30, 1997, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $24,000,000 which expire in
varying amounts commencing in 2010 and are available to offset future taxable
income.
(10) SUBSEQUENT EVENT (UNAUDITED)
Senior Credit Facility. In March 1997, the Company signed a new senior
credit facility (the "Senior Credit Facility") for up to $75.0 million. The
Senior Credit Facility consists of (i) a five year $30.0 million longterm note
with quarterly repayments beginning on September 30, 1997; (ii) a $41.0 million
capital facilities line and (iii) a $4.0 million revolver. The Senior Credit
Facility replaced the Company's existing credit facility. The Company may borrow
amounts under the capital facilities line until March 31, 1999 at which time it
will begin repaying any amount outstanding quarterly over the next three years.
The interest rate of the Senior Credit Facility is variable based on LIBOR and
the Company may repay the Senior Credit Facility at any time without penalty. At
June 30, 1997, the Company had outstanding borrowings of $45.0 million under the
Senior Credit Facility which consisted of a $30.0 million long-term note, $11.0
million under the capital facilities line and $4.0 million under the revolver.
The more restrictive covenants under the facility require the Company to
maintain certain debt to cash flow ratios and require the Company to maintain
certain minimum cash flow levels.
In connection with the Senior Credit Facility, the syndication agent
received a warrant to purchase up to 500,000 shares of common stock of the
Company at an exercise price of $6.35 which is the average stock price over the
30 days prior to signing the commitment. The warrant was valued at $1,250,000
and is included in additional paid-in-capital, with the resulting original issue
discount (OID) on the loan being amortized using a method which approximates the
interest method over the term of the note.
Acquisition. Concurrently with the closing of the Senior Facility, the
Company acquired certain assets and business of Movie Warehouse, Inc. and
affiliates ("Movie Warehouse") in an asset purchase transaction. The Company
acquired 21 video specialty stores and the franchiser's interest with respect to
an additional 43 video specialty stores which will continue to operate under the
Movie Warehouse name. The aggregate consideration for the acquisition was
approximately $9.6 million, consisting of $5.0 million in cash, $2.0 million in
promissory notes due in March 1999 and $2.6 million in common stock (427,672
shares).
Video Update Acquisition. In July 1997 the Company announced it had
entered into an agreement with Video Update, Inc. ("Video Update") pursuant to
which Video Update would acquire Moovies in a stock-for-stock merger
transaction. Terms of the agreement, as amended, call for each stockholder of
Moovies to receive .75 shares of Video Update Class A common stock for each
share of Moovies common stock. The agreement with Video Update is subject to
stockholder approval of both companies, and is anticipated to be completed some
time in the first quarter of 1998.
(11) RESTRUCTURING AND OTHER CHARGES
In May 1997, Moovies announced it would reduce the number of new stores to
be developed in 1997 and as a result of the reduced growth plans it would make
immediate reductions in general and administrative expenses. The cost of
implementing these reductions resulted in a one-time charge of $1.5 million or
$0.07 per share, which was recorded in the second quarter.
During the third quarter of 1997, Moovies began and completed an extensive
analysis of its store base performance and adopted a business restructuring plan
to close approximately 20 of its stores and eliminate future store growth for at
least the next twelve months. Management concluded that certain stores were
under performing, that it was not prudent to continue to operate these locations
and that cash from operations and the lack of borrowing capacity would not allow
for continued cash outlay for opening additional stores.
F-42
<PAGE> 191
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
This restructuring plan has resulted in Moovies recording an additional
$14.1 million pretax charge for restructuring and other charges in the third
quarter of 1997. The components of the charge include approximately (i) $4.8
million in reserves for future cash outlays for lease terminations,
miscellaneous closing costs and legal and accounting costs, (ii) $2.8 million in
asset write downs associated with the store closings, (iii) $2.9 million in
write down of rental inventory previously expected to be transferred to and used
in new stores that will now be liquidated, (iv) $2.1 million in write off of
store design prototypes and capitalized costs associated with the development of
new sites which will not be developed, (v) $1.1 million in reserves for future
cash outlays under existing contracts for purchases of fixtures and equipment
that were intended to be placed in new stores, and (vi) $400,000 for the closure
of Moovies' product management center for new store inventory.
The expected store closings are not concentrated in a particular geographic
area. The principal factors considered in identifying stores for closure
included: (i) whether a store generated sufficient cash flow at the store level
to provide an acceptable return on current investment; (ii) whether the latest
sales trends indicated a likely improvement in the historical store results;
(iii) whether the current or future competitive climate would make sales
improvements less likely; and (iv) whether a store's performance warrants lease
renewal where the lease was scheduled to expire within the next year. In some
situations, the timing of store closures will depend on Moovies' ability to
negotiate reasonable lease termination agreements. The lease commitments
associated with the closing stores will be retired entirely or materially
diminished by one of three methods: (i) through the normal expiration of the
lease within the next year; (ii) through the subletting of the property to
another entity; or (iii) through a negotiated lease buyout with the individual
landlord. The store closures are expected to be completed by the end of the
second quarter of 1998. The stores identified for closure had revenues and store
operating expenses (including amortization of videocassettes and cost of goods
sold) of approximately $3.0 million and $4.2 million, respectively, for the nine
months ended September 30, 1997.
During the first quarter of 1996, Moovies adopted Financial Accounting
Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, issued in March 1995. In
conjunction with the business restructuring in the third quarter of 1997 an
estimated $2.8 million impairment loss was incurred for those stores identified
to close where projected operating performance indicated an impairment. This
impairment loss related primarily to the write-off of leasehold improvements,
fixtures and intangibles and a valuation allowance for videocassette rental
inventory associated with the stores to be closed.
Since its inception, Moovies has experienced rapid growth through new store
openings and acquisitions. To meet this growth expectation, Moovies had built a
strong store development department, opened a new store product management
center, developed store design prototypes, accumulated videocassette tapes to be
used in opening new stores, started the development of a software system capable
of tracking each tape and entered into selected contracts with suppliers for the
purchase of store fixtures. As a result of the elimination of future growth,
these designs, systems, centers and contracts are no longer necessary.
F-43
<PAGE> 192
MOOVIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 31
--------- -------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<S> <C> <C> <C> <C>
1996
Revenues.......................... $19,316 $18,285 $22,094 $25,588
Operating income.................. 1,360 1,371 1,187 1,295
Income before income taxes and
extraordinary item............. 1,038 978 894 952
Extraordinary item-loss on early
extinguishment of debt......... -- -- 64 --
Net income........................ 623 591 477 576
Net income per share.............. $ 0.07 $ 0.07 $ 0.04 $ 0.05
Shares used in computation........ 8,976 8,887 11,850 12,108
1995
Revenues.......................... $ 1,223 $ 1,275 $ 7,028 $15,132
Operating income.................. 74 82 862 1,965
Income before income taxes........ 47 30 756 1,978
Net income........................ 47 30 490 1,198
Net income per share.............. -- -- $ 0.10 $ 0.14
Shares used in computation........ -- -- 5,015 8,565
</TABLE>
F-44
<PAGE> 193
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
VIDEO UPDATE, INC. ("BUYER")
VUI MERGER CORP. ("SUB")
AND
MOOVIES, INC. ("COMPANY")
JULY 9, 1997
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of July 9, 1997 by and between Video Update,
Inc., a Delaware corporation ("BUYER"), VUI Merger Corp., a Delaware corporation
("SUB") and Moovies, Inc., a Delaware corporation ("COMPANY"). BUYER and COMPANY
are referred to individually herein as a "PARTY" and collectively herein as the
"PARTIES."
This Agreement contemplates a merger of SUB, a newly formed, wholly owned
first tier subsidiary of BUYER with and into COMPANY in a reorganization
pursuant to Code Sections 368(a)(1)(A) and 368(a)(2)(E) whereby the COMPANY
Stockholders will receive voting common stock of BUYER in exchange for all of
their capital stock in COMPANY, all pursuant to the plan of reorganization set
forth herein.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"BENEFIT PLANS" has the meaning set forth in Sections 3.11 and 4.13 below.
"BUYER" has the meaning set forth in the preface above.
"BUYER SHARE" means any share of the Class A Common Stock, $.01 par value
per share, of BUYER.
"BUYER'S KNOWLEDGE" means the actual conscious knowledge of any of Daniel
A. Potter, John M. Bedard, or Christopher Gondeck.
"CERTIFICATE" and "CERTIFICATES" have the meanings set forth in Section
2.9(a) below.
"CERTIFICATE OF INCORPORATION" has the meaning set forth in Section 2.4(b)
below.
"CERTIFICATE OF MERGER" has the meaning set forth in Section 2.3 below.
"CLOSING" has the meaning set forth in Section 2.2 below.
"CLOSING AGREEMENT" has the meaning set forth in Section 3.9(s)(iv) below.
"CLOSING DATE" has the meaning set forth in Section 2.2 below.
A-1
<PAGE> 194
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the preface above.
"COMPANY SHARE" means any share of the Common Stock, $.001 par value per
share, of COMPANY.
"COMPANY STOCKHOLDER" means any Person who or which holds any COMPANY
Shares.
"COMPANY's KNOWLEDGE" means the actual conscious knowledge of any of John
L. Taylor, F. Andrew Mitchell, or Ross Miller.
"CONVERSION RATIO" has the meaning set forth in Section 2.5 below.
"DELAWARE GENERAL CORPORATION LAW" means the General Corporation Law of the
State of Delaware, Title 8, Delaware Cod 1953, as amended.
"DISCLOSURE SCHEDULE" has the meaning set forth in Article 3 and 4 below.
"EFFECTIVE TIME" has the meaning set forth in Section 2.4(a) below.
"ENVIRONMENTAL LAWS" has the meaning set forth in Sections 3.12(a) and
4.14(a) below.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE AGENT" has the meaning set forth in Section 2.9(b) below.
"FAIRNESS OPINION" has the meaning set forth in Sections 6.1(j) and 6.2(i)
below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"HART-SCOTT-RODINO ACT" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Sections 3.12(b) and
4.14(b) below.
"INDEMNITEE" has the meaning set forth in Section 5.6(a) below.
"IRS" means the Internal Revenue Service.
"JOINT PROXY STATEMENT" has the meaning set forth in Section 3.17(ii)
below.
"MATERIAL ADVERSE EFFECT" has the meaning set forth in Section 3.1 below.
"MATERIAL SUBSIDIARIES" means Moovies of the Carolinas, Inc., Moovies of
Georgia, Inc., Moovies of Iowa, Inc., Moovies of Michigan, Inc., Movie Warehouse
Franchise Systems, Inc., E.C. 6, Inc., SONI, Inc., PQ3, Inc., SNO, Inc., GBO,
Inc., D-Skippy, Inc., DCO, Inc., PTO, Inc., The Movie Store, Inc., #2, The Movie
Store III, Inc., Alpharetta Media Associates, Inc., Rio Media Associates, Inc.,
Pic-A-Flick of Greenville, Inc.
"MERGER" has the meaning set forth in Section 2.1 below.
"MERGER CONSIDERATION" has the meaning set forth in Section 2.5 below.
"MOST RECENT FISCAL QUARTER END" has the meaning set forth in Sections 3.6
and 4.6 below.
"MULTIEMPLOYER PENSION PLANS" has the meaning set forth in Sections 3.11(c)
and 4.13(c) below.
"OPTION PLANS" has the meaning set forth in Section 2.6 below.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"PARTIES" has the meaning set forth in the preface above.
A-2
<PAGE> 195
"PARTY" has the meaning set forth in the preface above.
"PENSION PLANS" has the meaning set forth in Sections 3.11 and 4.13 below.
"PERSON" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"PROSPECTUS" means the final prospectus relating to the registration of the
BUYER Shares under the Securities Act.
"PUBLIC REPORTS" has the meaning set forth in Sections 3.5 and 4.5 below.
"REGISTRATION STATEMENT" has the meaning set forth in Section 3.17(i)
below.
"REQUISITE BUYER STOCKHOLDER APPROVAL" with respect to BUYER means (i) the
affirmative vote of the holders of a majority of the outstanding shares of BUYER
present or represented at a meeting at which a quorum is present in favor of the
issuance of BUYER shares in connection with this Agreement , and (ii) the
affirmative vote of the holders of the requisite majority of outstanding shares
of BUYER in favor of amendments to BUYER's certificate of incorporation
increasing the number of authorized BUYER Shares to the extent necessary to
consummate the transactions contemplated hereunder and with respect to SUB means
(i) the affirmative vote or consent of the holders of a majority of the
outstanding shares of SUB in favor of this Agreement and the Merger.
"REQUISITE BUYER PROPOSAL APPROVAL" with respect to BUYER means the
affirmative vote of the holders of the requisite majority of outstanding shares
of BUYER in favor of any proposal relating to the elimination of escrow
arrangements governing BUYER's Class B Common Stock, $.01 par value, in
accordance with the requirements of the Escrow Agreement, dated July 20, 1994,
by and among American Stock Transfer & Trust Company, BUYER and certain
stockholders of BUYER.
"REQUISITE COMPANY STOCKHOLDER APPROVAL" means with respect to COMPANY the
affirmative vote of the holders of a majority of the outstanding shares of
COMPANY in favor of this Agreement and the Merger.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, OTHER THAN (a) liens for taxes not yet due and
payable or for taxes that the taxpayer is contesting in good faith through
appropriate proceedings, (b) purchase money liens and liens securing rental
payments under capital lease arrangements, and (c) other liens arising in the
Ordinary Course of Business and not incurred in connection with the borrowing of
money.
"SPECIAL BUYER MEETING" has the meaning set forth in Section 5.8 below.
"SPECIAL COMPANY MEETING" has the meaning set forth in Section 5.7 below.
"STOCK OPTION" has the meaning set forth in Section 2.6 below.
"SUB" has the meaning set forth in the preface above.
"SUB SHARE" means any share of Common Stock, $.01 par value per share, of
SUB.
"SUBSIDIARY" means any corporation or other organization, whether
incorporated or unincorporated, with respect to which a specified Person (or a
Subsidiary thereof) owns a majority of the common stock or has the power to vote
or direct the voting of sufficient securities to elect a majority of the
directors or others performing similar functions.
"SURVIVING CORPORATION" has the meaning set forth in Section 2.1 below.
A-3
<PAGE> 196
"TAXES" has the meaning set forth in Sections 3.9 and 4.11 below.
"TAX RETURN" has the meaning set forth in Sections 3.9 and 4.11 below.
"TAX RULING" has the meaning set forth in Sections 3.9 and 4.11 below.
2. BASIC TRANSACTION.
2.1 THE MERGER. At the Effective Time, on and subject to the terms and
conditions of this Agreement, SUB will merge with and into COMPANY (the
"MERGER"). The separate existence of SUB shall cease, and COMPANY shall be the
corporation surviving the Merger (the "SURVIVING CORPORATION") and shall be
governed by the laws of the State of Delaware.
2.2 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Gadsby & Hannah
LLP, 225 Franklin Street, Boston, Massachusetts, commencing at 9:00 a.m. local
time on the second business day following the satisfaction or waiver of the
conditions set forth in Section 6 (other than conditions with respect to actions
the respective Parties will take at the Closing itself) or such other date as
the Parties may mutually determine (the "CLOSING DATE").
2.3 ACTIONS AT THE CLOSING. At the Closing, (i) COMPANY will deliver to
BUYER and SUB the various certificates, instruments, and documents referred to
in Section 6.1 below, (ii) BUYER and SUB will deliver to COMPANY the various
certificates, instruments, and documents referred to in Section 6.2 below, (iii)
SUB and COMPANY will file with the Secretary of State of the State of Delaware a
Certificate of Merger in such form as required by, and executed and certified in
accordance with, the relevant provisions of the Delaware General Corporation Law
(the "CERTIFICATE OF MERGER"), and (iv) BUYER will deliver to the Exchange Agent
in the manner provided below in this Article 2 the certificate evidencing the
BUYER Shares issued in the Merger.
2.4 EFFECT OF MERGER.
(a) General. The Merger shall become effective at the time SUB and COMPANY
file the Certificate of Merger with the Secretary of State of the State of
Delaware, which filing shall be as early as practicable on the Closing Date (the
"Effective Time"). The Merger shall have the effect set forth in the Delaware
General Corporation Law. The Surviving Corporation may, at any time after the
Effective Time, take any action (including executing and delivering any
document) in the name and on behalf of either SUB or COMPANY in order to carry
out and effectuate the transactions contemplated by this Agreement.
(b) Certificate of Incorporation. The Certificate of Incorporation of SUB
in effect at and as of the Effective Time will be the Certificate of
Incorporation of the Surviving Corporation upon and following the Merger.
(c) Bylaws. The Bylaws of SUB in effect at and as of the Effective Time
will be the Bylaws of the Surviving Corporation upon and following the Merger.
(d) Directors and Officers. The directors and officers of SUB in office at
and as of the Effective Time will be the directors and officers of the Surviving
Corporation upon and following the Merger.
2.5 CONVERSION. At and as of the Effective Time, each COMPANY Share shall
no longer be outstanding and shall be cancelled and retired and shall be
converted into the right to receive 1.10 of one BUYER Share (the ratio of 1.10
BUYER Share to one COMPANY Share is referred to herein as the "CONVERSION RATIO"
and the BUYER Shares so received are referred to as the "MERGER CONSIDERATION").
The Conversion Ratio shall be subject to equitable adjustment in the event of
any stock split, stock dividend, reverse stock split or other recapitalization
of the BUYER's Shares after the date hereof. No COMPANY Share shall be deemed to
be outstanding or to have any rights other than those set forth above in this
Section 2.5 after the Effective Time. From the date of this Agreement to the
Closing Date, COMPANY's Board of Directors shall not adopt any new "poison
pill," stockholder rights plan or other similar plan applicable to the
transactions contemplated by this Agreement. In addition, the COMPANY's Board of
Directors shall take all actions required to ensure that the Rights (as defined
in the Rights Agreement, dated as of December 20, 1996, by and between COMPANY
and First Union National Bank of
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North Carolina) and the Rights Agreement shall be inapplicable to the Merger and
the transactions contemplated by this Agreement.
2.6 STOCK OPTIONS, WARRANTS AND RELATED MATTERS. Prior to the expiration
of ten business days after the date hereof, COMPANY shall deliver to BUYER a
list setting forth each stock option (collectively, "STOCK OPTIONS" and
individually, a "STOCK OPTION") and warrant (collectively, "WARRANTS and
individually, a "WARRANT") issued by the COMPANY outstanding on the date hereof,
whether or not fully exercisable, to purchase COMPANY Shares pursuant to all
Stock Option Plans (collectively, the "OPTION PLANS") or other contract rights
of COMPANY, in each case as amended and in effect as of the date of this
Agreement. Prior to the Effective Time, the COMPANY shall provide for the
amendment and substitution of all Stock Options and Warrants so that, effective
at the Effective Time, COMPANY Shares shall no longer be deliverable upon
exercise thereof and in lieu of COMPANY Shares, such Stock Options and Warrants
shall be exercisable for a number of BUYER Shares equal to the number of COMPANY
Shares subject to such Stock Options and Warrants outstanding multiplied by the
Conversion Ratio. The per share exercise price for each such Stock Option and
Warrant, as the case may be, shall be the exercise price per COMPANY Share
divided by the Conversion Ratio, rounded upward to the nearest whole cent.
Effective as of the Effective Time, BUYER shall assume all obligations of
COMPANY with respect to such Stock Options and Warrants, as so modified.
Promptly following the Effective Time, BUYER shall issue agreements representing
such Stock Options and Warrants, as the case may be, as so modified.
Following the Effective Time, BUYER shall use all efforts to register the
BUYER Shares underlying the Option Plans by means of a registration statement or
statements on Form S-8 or by means of post-effective amendments to any of
BUYER's current effective registration statements, or by means of any similar
filing with the SEC.
After the date hereof, except as set forth on its Disclosure Schedule,
COMPANY shall not grant any additional Warrants or any Stock Options under any
Option Plans or otherwise.
2.7 NO FRACTIONAL SHARES. No fraction of a BUYER Share will be issued,
but in lieu thereof each holder of COMPANY Shares who would otherwise be
entitled to a fraction of a BUYER Share will, upon surrender thereof to the
Exchange Agent, be paid an amount in cash equal to the value of such fraction of
a share based on the Conversion Ratio at the Effective Time. No interest shall
be paid on such amount.
2.8 SUB SHARES. Each SUB Share issued and outstanding at and as of the
Effective Time shall be cancelled and retired and shall be converted into the
right to receive one share of the Surviving Corporation.
2.9 PROCEDURE FOR PAYMENT.
(a) Merger Consideration. Except as set forth herein, from and after the
Effective Time, each holder of a certificate or certificates that immediately
prior to the Effective Time represented outstanding shares of COMPANY stock
("CERTIFICATE" or "CERTIFICATES") shall be entitled to receive in exchange
therefor, upon surrender thereof to the Exchange Agent, the Merger Consideration
for each share of COMPANY stock so represented by the Certificate or
Certificates surrendered by such holder thereof.
(b) Exchange Agent. At or simultaneous with the Closing, (A) BUYER will
furnish to a bank or trust company designated by BUYER and the COMPANY (the
"EXCHANGE AGENT") irrevocable instructions to issue a stock certificate (issued
in the name of the Exchange Agent or its nominee) representing that number of
BUYER Shares equal to the product of (I) the Conversion Ratio TIMES (II) the
number of outstanding COMPANY Shares and (B) BUYER will cause the Exchange Agent
to mail a letter of transmittal (with instructions for its use) to each record
holder of outstanding COMPANY Shares for the holder to use in surrendering the
Certificates that represented his or its COMPANY Shares in exchange for a
Certificate representing the number of BUYER Shares to which he or it is
entitled. Such letter of transmittal shall specify that delivery shall be
effected, and risk of loss and title to the Certificate or Certificates shall
pass, only upon proper delivery of the Certificate or Certificates to the
Exchange Agent, and the Exchange Agent shall advise such holder of the
effectiveness of the Merger and the procedures to be used in effecting the
surrender of the Certificate or Certificates for exchange therefor. Upon
surrender to the Exchange Agent of a Certificate or Certificates, together with
such letter of transmittal duly executed and completed in accordance
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with the instructions thereon, and such other documents as may be reasonably
requested, the Exchange Agent shall, pursuant to the Merger, promptly deliver
the appropriate Merger Consideration to the person entitled to the Merger
Consideration for each share of COMPANY stock so represented by the Certificate
or Certificates surrendered by such holder thereof, and such Certificate or
Certificates shall forthwith be cancelled. At the Effective Time, BUYER will
further provide the Exchange Agent as well as BUYER's stock transfer agent with
irrevocable instructions to provide for the issuance of Certificates for the
number of shares reserved and subject to COMPANY options and warrants to
purchase BUYER Shares in accordance with the Conversion Rate upon exercise of
the same.
(c) Transfer. If delivery of all or part of the Merger Consideration is to
be made to a person other than the person in whose name a surrendered
Certificate is registered, it shall be a condition of such delivery or exchange
that the Certificate so surrendered shall be properly endorsed or shall be
otherwise in proper form for transfer and that the person requesting such
delivery or exchange shall have paid any transfer and other taxes required by
reason of such delivery or exchange in a name other than that of the registered
holder of the Certificate surrendered or shall have established to the
reasonable satisfaction of BUYER that such tax either has been paid or is not
payable.
(d) Right to Merger Consideration. Until surrendered and exchanged in
accordance with this Section 2.9, each such Certificate shall, after the
Effective Time, represent solely the right to receive the Merger Consideration,
multiplied by the number of shares of COMPANY Shares evidenced by such
Certificate, and shall have no ownership or other rights. No interest shall
accrue or be payable on any Merger Consideration. Neither BUYER nor COMPANY
shall be liable to any holder of COMPANY Shares for any Merger Consideration (or
dividends or distributions with respect thereto) delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(e) Dividends on Buyer Shares. From and after the Effective Time, no
holder of a Certificate or Certificates shall be entitled to receive any
dividend or other distribution from BUYER until surrender of such holder of
Certificate or Certificates for a Certificate or Certificates representing BUYER
Shares. Upon such surrender, the holder shall be paid the amount of any
dividends or other distributions (without interest) that theretofore became
payable by BUYER, but were not paid by reason of the foregoing with respect to
the number of whole shares of BUYER Shares represented by the Certificate or
Certificates issued upon such surrender. From and after the Effective Time,
BUYER shall, however, be entitled to treat such Certificate or Certificates that
have not yet been surrendered or exchanged as evidencing the ownership of the
aggregate Merger Consideration into which such BUYER Shares represented by such
Certificate or Certificates shall have been converted, notwithstanding any
failure to surrender such Certificate or Certificates.
(f) Termination of Exchange Agent. BUYER may cause the Exchange Agent to
return any BUYER Shares remaining unclaimed 180 days after the Effective Time,
and thereafter each remaining record holder of outstanding COMPANY Shares shall
be entitled to look to BUYER (subject to abandoned property, escheat, and other
similar laws) as a general creditor thereof with respect to the BUYER Shares and
dividends and distributions thereon to which he or it is entitled upon surrender
of his or its certificates.
(g) Fees of Exchange Agent. BUYER shall pay all charges and expenses of
the Exchange Agent.
(h) Withholding Rights. Each of BUYER and the COMPANY shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of COMPANY Shares such amounts as it is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Surviving Corporation or BUYER, as the case may be, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of COMPANY Shares in respect of which such deduction and
withholding was made by Surviving Corporation or BUYER, as the case may be.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such
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Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of BUYER Common Stock and any cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of BUYER
Common Stock deliverable in respect thereof pursuant to this Agreement.
(j) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any Affiliate (as defined herein) of
the COMPANY shall not be exchanged until BUYER has received an agreement (as
described in Section 5.10) from such Affiliate.
2.10 CLOSING OF TRANSFER RECORDS. As of and after the Effective Time,
transfers of COMPANY Shares outstanding prior to the Effective Time shall not be
made on the stock transfer books of the Surviving Corporation.
2.11 TAKING OF NECESSARY ACTION; FUTURE ACTION. Each of the parties will
take all such reasonable and lawful action as may be necessary or appropriate in
order to effectuate the Merger as promptly as possible subject to the
satisfaction of the closing conditions set forth in Sections 6.1 and 6.2. If, at
any time after the Effective Time, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of both Parties, the officers and
directors of the Surviving Corporation are fully authorized in the name of their
corporation or otherwise to take, and will take, all such lawful and necessary
action.
3. REPRESENTATIONS AND WARRANTIES OF COMPANY.
Except as set forth in the Public Reports (defined herein) and in the
disclosure schedule accompanying this Agreement (the "DISCLOSURE SCHEDULE") for
the COMPANY, which shall be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Article 3, provided that disclosure in
any lettered and numbered paragraph shall qualify other paragraphs to the extent
that it is reasonably apparent from a reading of such disclosure that it also
qualifies or applies to such other paragraphs, COMPANY represents and warrants
to BUYER and SUB that:
3.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. Each of COMPANY and
its Material Subsidiaries is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction of its incorporation. Each
of COMPANY and its Material Subsidiaries is duly authorized to conduct business
and is in good standing under the laws of each jurisdiction where such
qualification is required except for such failures to be so qualified and in
good standing that would not, individually or in the aggregate, have a Material
Adverse Effect on COMPANY. As used in this Agreement, the term "MATERIAL ADVERSE
EFFECT" means with respect to any person, any change or effect that is
materially adverse to the financial condition, business results of operations or
prospects of such person and its subsidiaries, taken as a whole. Except as set
forth in the Disclosure Schedule, neither the COMPANY nor any of its Material
Subsidiaries directly or indirectly owns any equity or similar interest in, or
any interest convertible into or exchangeable or exercisable for, any
corporation, partnership, joint venture, or other business association or
entity. Each of COMPANY and its Subsidiaries has full corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The COMPANY beneficially owns all of the
outstanding capital stock of each of its Subsidiaries.
3.2 CAPITALIZATION. The entire authorized capital stock of COMPANY
consists of 25,000,000 COMPANY Shares and 1,000,000 shares of Preferred Stock,
$.001 par value, of which as of March 31, 1997, 12,354,800 COMPANY Shares are
issued and outstanding; and 1,500,000 shares of COMPANY Shares have been
reserved for issuance under COMPANY's Stock Option Plans. All of the issued and
outstanding COMPANY Shares and all shares of the Material Subsidiaries have been
duly authorized and are validly issued, fully paid, and nonassessable. No
material change in such capitalization has occurred between March 31, 1997 and
the date of this Agreement. Except as set forth in the Disclosure Schedule,
there are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts or
commitments of any kind, character or nature, contingent or otherwise, that
could require COMPANY or any of its Material Subsidiaries to issue, sell, or
otherwise cause to become outstanding any of its capital stock. Except as set
forth in the Disclosure Schedule, there are no outstanding or
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authorized stock appreciation, phantom stock, profit participation, or similar
rights of any kind, character or nature, contingent or otherwise, with respect
to COMPANY or any of its Material Subsidiaries.
3.3 AUTHORIZATION OF TRANSACTION. COMPANY has full corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder subject to receiving the Requisite COMPANY Stockholder Approval. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly approved by the board of
directors of the COMPANY and no other corporate proceedings on the part of the
COMPANY or its shareholders are necessary to authorize this Agreement and to
consummate the transactions so contemplated other than the Requisite COMPANY
Stockholder Approval and the filing of the Certificate of Merger. This Agreement
has been duly executed and delivered and, assuming this Agreement constitutes a
valid and binding obligation of BUYER and SUB, constitutes the valid and legally
binding obligation of COMPANY, enforceable in accordance with its terms and
conditions except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally; and
(ii) the remedy of specific performance and injunctive and other forms of
equitable remedies may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
3.4 NONCONTRAVENTION. Except as set forth on the Disclosure Schedule,
neither the execution and the delivery of this Agreement, nor the consummation
of the transactions contemplated hereby, will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
any of COMPANY and its Subsidiaries is subject or any provision of the charter
or bylaws of any of COMPANY and its Subsidiaries or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license, instrument or
other arrangement to which any of COMPANY and its Subsidiaries is a party or by
which it is bound or to which any of its assets is subject (or result in the
imposition of any Security Interest upon any of its assets) except for such that
would not, individually or in the aggregate, have a Material Adverse Effect on
COMPANY or any of its Subsidiaries. Other than in connection with the provisions
of the Hart-Scott-Rodino Act, the Delaware General Corporation Law, the
Securities Exchange Act, the Securities Act, and the state securities laws, none
of COMPANY and its Subsidiaries needs to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
3.5 FILINGS WITH THE SEC. Except as set forth on the Disclosure Schedule,
COMPANY has made all filings with the SEC that it has been required to make
under the Securities Act and the Securities Exchange Act (collectively, the
"PUBLIC REPORTS"). Each of the Public Reports has complied with the Securities
Act and the Securities Exchange Act in all material respects. None of the Public
Reports, as of their respective dates, contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
3.6 FINANCIAL STATEMENTS. COMPANY has filed a Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997 (the "MOST RECENT FISCAL
QUARTER END"), and an Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. The financial statements included in or incorporated by
reference into these Public Reports (including the related notes and schedules)
have been prepared in accordance with GAAP applied on a consistent basis
throughout the period covered thereby, present fairly the financial condition of
COMPANY and its Subsidiaries as of the indicated dates and the results of
operations of COMPANY and its Subsidiaries for the indicated periods, and are
consistent with the books and records of COMPANY and its Subsidiaries; PROVIDED,
HOWEVER, that the interim statements are subject to normal year-end adjustments
that are not expected to be material in amount.
3.7 UNDISCLOSED LIABILITIES; EVENTS SUBSEQUENT TO MOST RECENT FISCAL
QUARTER END. Except as set forth on the Disclosure Schedule, in the financial
statements included in COMPANY's Quarterly Report on Form 10-Q for its Most
Recent Fiscal Quarter End, and except for liabilities incurred in the Ordinary
Course
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of Business, neither the COMPANY nor any of its Subsidiaries has any
liabilities, either accrued, contingent or otherwise that individually or in the
aggregate are likely to have a Material Adverse Effect. Except as set forth in
the Disclosure Schedule, since the Most Recent Fiscal Quarter End, there has not
been (a) any material adverse change in the business, financial condition,
operations or prospects of COMPANY and its Subsidiaries taken as a whole, (b) in
the case of the COMPANY, any declaration, setting aside or payment of any
dividend or any other distribution with respect to its capital stock, or (c) any
change by the COMPANY in accounting practices, principles or methods.
3.8 LITIGATION. Except as set forth in the Disclosure Schedule, or as
disclosed in the COMPANY Public Reports, there are no claims, actions, suits,
investigations or proceedings pending or, to the knowledge of COMPANY,
threatened against or affecting the COMPANY or any of its Subsidiaries or any of
their respective properties at law or in equity, before or by any federal,
state, municipal or other governmental agency or authority, or before any
arbitration board or panel that individually or in the aggregate are likely to
have a Material Adverse Effect on the COMPANY PROVIDED, HOWEVER, the Disclosure
Schedule lists all pending lawsuits as of the date hereof against the COMPANY or
any of its Subsidiaries except for lawsuits the ad damna of which are fully
covered by insurance maintained by the COMPANY, regardless of whether such
insurance is of a "claims made" or "occurrence" type.
3.9 TAX MATTERS. Except as set forth in the Disclosure Schedule:
(a) Filing of Timely Tax Returns. COMPANY and each of its Subsidiaries
have filed (or there has been filed on their behalf) all material Tax Returns
(as hereinafter defined) required to be filed by each of them under applicable
law. All such Tax Returns were filed on a timely basis. To the extent requested
by BUYER, COMPANY has delivered to BUYER correct and complete copies of all Tax
Returns, examination reports, statements of deficiencies assessed against or
agreed to by any of COMPANY and its Subsidiaries since its incorporation and all
Tax Rulings and Closing Agreements.
(b) Payment of Taxes. COMPANY and each of its Subsidiaries have, within
the time and in the manner prescribed by law, paid all Taxes (as hereinafter
defined) that are currently due and payable except for those contested in good
faith and for which adequate reserves have been taken.
(c) Tax Reserves. COMPANY and its Subsidiaries have established on their
books and records reserves adequate to pay all Taxes and reserves for deferred
income taxes in accordance with GAAP.
(d) Tax Liens. No Tax liens exist upon the assets of COMPANY or any of its
Subsidiaries except liens for Taxes not yet due or being contested in good faith
through appropriate proceedings, and in the latter case, for which adequate
reserves have been established on the COMPANY's books and records.
(e) Withholding Taxes. COMPANY and each of its Subsidiaries have complied
with the provisions of the Code relating to the withholding of Taxes, as well as
similar provisions under any other laws, and have, within the time and in the
manner prescribed by law, withheld from all employees wages and all amounts owed
to any independent contractor, creditor, stockholder, or other third party and
paid over to the proper governmental authorities all amounts so required.
(f) Extensions of Time for Filing Tax Returns. Neither COMPANY nor any of
its Subsidiaries has requested any extension of time within which to file any
Tax Return, which Tax Return has not since been timely filed.
(g) Waivers of Statute of Limitations. Neither COMPANY nor any of its
Subsidiaries has executed any outstanding waivers of comparable consents
regarding the application of the statute of limitations with respect to any
Taxes or Tax Returns.
(h) Expiration of Statute of Limitations. To COMPANY's knowledge, neither
its nor its Subsidiaries Tax Returns have been examined by any taxing
authorities for Tax periods ended before the date hereof, and no deficiency for
any Taxes has been proposed, asserted or assessed against COMPANY or any of its
Subsidiaries that has not been resolved and paid in full.
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(i) Audit, Administrative and Court Proceedings. No audits or other
administrative proceedings or court proceedings are presently pending with
regard to any material Taxes or Tax Returns of COMPANY or any of its
Subsidiaries.
(j) Powers of Attorney. No power of attorney currently in force has been
granted by COMPANY or any of its Subsidiaries concerning any material Tax
matter.
(k) Tax Rulings. Neither COMPANY nor any of its Subsidiaries has received
a Tax Ruling (as hereinafter defined) or entered into a Closing Agreement (as
hereinafter defined) with any taxing authority that would have a continuing
adverse effect after the Closing Date.
(l) Tax Sharing Agreements. Neither COMPANY nor any Subsidiary is a party
to any agreement relating to allocating or sharing of Taxes.
(m) Code Sections 280G and 162(M). Neither COMPANY nor any of its
Subsidiaries is a party to any agreement, contract, or arrangement that could
result, on account of the transactions contemplated hereunder, separately or in
the aggregate, in the payment of any "EXCESS PARACHUTE PAYMENTS" within the
meaning of SECTION 280G of the Code or nondeductible compensation under Code
Section 162(m).
(n) Liability for Others. None of COMPANY or any of its Subsidiaries (A)
has any material liability for Taxes of any person other than COMPANY and its
Subsidiaries (i) under Treasury Regulations SECTION 1.1502-6 (or any similar
provision of state, local or foreign law) as a transferee or successor, (ii) by
contract, or (iii) otherwise.
(o) Continuity of Business Enterprises. COMPANY operates at least one
significant historic business line, or owns at least a significant portion of
its historic business assets, in each case within the meaning of Treasury Reg.
Section 1.368-1(d).
(p) Tax-Free Reorganization. Neither the COMPANY nor any of its
Subsidiaries has through the date of this Agreement taken or agreed to take any
action that would prevent the Merger from qualifying as a reorganization under
the Code. COMPANY and its Subsidiaries will not, at the time of the transaction,
have any outstanding warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock in the COMPANY
that, if exercised or converted, would affect BUYER's acquisition or retention
of "control" of COMPANY within the meaning of Section 368(c) of the Code.
(q) Information. The COMPANY has delivered to the BUYER the following
information, which is materially correct and complete, with respect to each of
the COMPANY and its Subsidiaries as of the most recent practical date (as well
as on an estimated proforma basis as of the Closing giving effect to the
consummation of the transactions contemplated hereby):
(i) The amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax credit, or excess
charitable contribution allocable to the COMPANY or Subsidiary;
and
(ii) The amount of any deferred gain or loss allocable to the COMPANY
or Subsidiary arising out of any deferred intercompany
transaction.
(r) Other. None of the COMPANY and its Subsidiaries has filed a consent
under Code Section 341(f) concerning collapsible corporations. None of the
COMPANY and its Subsidiaries has been a United States real property holding
corporation within the meaning of Code Section 897(c)(2) during the applicable
period specified in Code Section 897(c)(1)(A)(ii).
(s) As used in this Agreement:
(i) "TAXES" means any Federal, state, county, local or foreign
taxes, charges, fees, levies, or other assessments, including all net
income, gross income, sales and use, ad valorem, transfer, gains,
profits, excise, franchise, real and personal property, gross receipts,
capital stock, production, business and occupation, disability,
employment, payroll, license, estimated, stamp, custom duties,
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severance or withholding taxes or charges imposed by any governmental
entity, and includes any interest and penalties (civil or criminal) on
or additions to any such taxes;
(ii) "TAX RETURN" means a report, return or other information
required to be supplied to a governmental entity with respect to Taxes
including, when permitted or required, combined or consolidated returns
for a group of entities;
(iii) "TAX RULING" means a written ruling of a taxing authority
relating to Taxes; and
(iv) "CLOSING AGREEMENT" means a written and legally binding
agreement with a taxing authority relating to Taxes.
3.10 LABOR MATTERS. Except as set forth in Schedule 3.10, there are no
collective bargaining or other labor union agreements to which the COMPANY or
any of its Subsidiaries is a party or by which any of them is bound. Except as
set forth in Schedule 3.10, neither the COMPANY nor any of its Subsidiaries has
encountered any labor union organizing activity, or had any actual or, to
COMPANY's Knowledge, threatened employee strikes, dispute, walkout, work
stoppages, slowdowns or lockouts.
3.11 ERISA COMPLIANCE.
(a) Schedule 3.11 contains a list of all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) (sometimes referred to herein as "PENSION PLANS"),
"employee welfare benefit plans" (as defined in Section 3(1) of ERISA) and all
other bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, Christmas bonus,
hospitalization, medical or other plan, arrangement or understanding (whether or
not legally binding) maintained, or contributed to, by the COMPANY or any of its
Subsidiaries for the benefit of any officers, employees or directors of the
COMPANY or any of its Subsidiaries currently or within the last five years
(collectively, "BENEFIT PLANS"). The COMPANY has delivered or made available to
BUYER true, complete and correct copies of (1) each Benefit Plan (or, in the
case of any unwritten Benefit Plans, descriptions thereof), (2) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with respect
to each Benefit Plan (if any such report was required), (3) the most recent
summary plan description for each Benefit Plan for which such summary plan
description is required, (4) each trust agreement and group annuity contract
relating to any Benefit Plan, and (5) the most recent actuarial report relating
to any Benefit Plan.
(b) Except as disclosed in Schedule 3.11, all Pension Plans have been the
subject of determination letters from the Internal Revenue Service to the effect
that such Pension Plans are qualified and exempt from federal income taxes under
Section 401(a) and 501(a), respectively, of the Code, and no such determination
letter has been revoked nor, to the knowledge of the COMPANY, has revocation
been threatened, nor has any such Pension Plan been amended since the date of
its most recent determination letter or application therefore in any respect
that would adversely affect its qualification or materially increase its costs.
(c) Except as disclosed on Schedule 3.11, no Pension Plan that the COMPANY
or any of its Subsidiaries maintains, or to which the COMPANY or any of its
Subsidiaries is or was previously obligated to contribute, other than any
Pension Plan that is a "multiemployer plan" (as such term is defined in Section
4001(a)(3) of ERISA; collectively, the "MULTIEMPLOYER PENSION PLANS"), had, as
of the respective last annual valuation date for each such Pension Plan, any
"unfunded benefit liabilities" (as such term is defined in Section 4001(a)(18)
of ERISA), based on actuarial assumptions which have been furnished to BUYER.
None of the COMPANY's Pension Plans has an "accumulated funding deficiency" (as
such term is defined in Section 302 of ERISA or Section 412 of the Code),
whether or not waived. To the best knowledge of the COMPANY, none of the
COMPANY, any of its Subsidiaries, any officer of the COMPANY or any of its
Subsidiaries or any of the Benefit Plans that are subject to ERISA, including
the Pension Plans, or any trusts created thereunder, or any trustee or
administrator thereof, has engaged in a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) or any other
breach of fiduciary responsibility that could subject the COMPANY, any of its
Subsidiaries or any officer of the COMPANY or any of its Subsidiaries to the tax
or penalty on prohibited transactions imposed
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by such Section 4975 or to any liability under Section 502(i) or (1) of ERISA.
Except as disclosed on Schedule 3.11, neither any of such Pension Plans nor any
of such trusts have been terminated, nor has there been any "reportable event"
(as that term is defined in Section 4043 of ERISA) with respect to which the
30-day notice requirement has not been waived and the COMPANY is not aware of
any other reportable events with respect thereto during the last five years.
Neither the COMPANY nor any of its Subsidiaries has suffered or otherwise caused
a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in
Section 4203 and Section 4205, respectively, of ERISA) since the effective date
of such Sections 4203 and 4205 with respect to any of the Multiemployer Pension
Plans. Neither the COMPANY nor any of its Subsidiaries is secondarily liable for
any withdrawal liability as a result of the sale of assets within the meaning of
Section 4204 of ERISA. To the knowledge of the COMPANY, in the event a "complete
withdrawal" currently occurred with respect to any of the Multiemployer Pension
Plans, there would be no withdrawal liability assessed against the COMPANY or
any of its Subsidiaries.
(d) With respect to any Benefit Plan that is an employee welfare benefit
plan, except as disclosed in Schedule 3.11, (i) no such Benefit Plan is unfunded
or funded through a welfare benefits fund, as such term is defined in Section
419(e) of the Code, (ii) each such Benefit Plan that is a group health plan, as
such term is defined in Section 5000(b)(1) of the Code, complies in all material
respects with the applicable requirements of Section 4980B(f) of the Code and
Sections 601 through 609 of ERISA (iii) each such Benefit Plan (including any
such Plan covering retirees or other former employees) may be amended or
terminated without material liability to the COMPANY or any of its Subsidiaries
on or at any time after the Effective Time.
(e) Except as disclosed on Schedule 3.11, each Benefit Plan conforms in all
material respects in form and operation to all applicable laws and regulations,
and all reports or information relating to such Benefit Plan required to be
filed with any governmental entity or disclosed to participants have been timely
filed and disclosed. Except as disclosed on Schedule 3.11, no Pension Plan holds
any employer security or employer real property within the meaning of Section
407 of ERISA.
(f) Except as disclosed on Schedule 3.11, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee of the COMPANY or any Subsidiary thereof to severance pay,
unemployment compensation or any other payment or (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due to any such
employee or former employee.
(g) Except as disclosed on Schedule 3.11, neither the COMPANY nor any of
its Subsidiaries has announced a plan to create or a legally binding commitment
to amend any Benefit Plan or to create any new arrangement which would be a
Benefit Plan.
(h) All insurance premiums with respect to any Benefit Plan (including
premiums to the Pension Benefit Guaranty Corporation) have been paid in full.
Except as disclosed on Schedule 3.11, there are no retrospective adjustments
provided for under any insurance contracts maintained pursuant to any Benefit
Plan with regard to policy years or other periods ending on or before the
Effective Time.
(i) No Benefit Plan or the deduction of any contributions thereto by the
COMPANY or any of its Subsidiaries has been the subject of audit by the Internal
Revenue Service or the Department of Labor, and no litigation or asserted claims
exist against the COMPANY or any of its Subsidiaries or any Benefit Plan or
fiduciary with respect thereto (other than such benefit claims as are made in
the normal operation of a Benefit Plan). Except as set forth on the Disclosure
Schedule, to the knowledge of the COMPANY, no facts exist that would give rise
to or could give rise to any action, suit, grievance, arbitration or other
claim.
3.12 ENVIRONMENTAL MATTERS.
(a) Except as set forth on Schedule 3.12, or in the Public Reports of the
COMPANY, to the COMPANY's knowledge, the COMPANY and each of its Subsidiaries
and any other person or entity for whose conduct the COMPANY is legally held
responsible are in material compliance with all applicable federal, state,
regional, local or provincial laws, statutes, ordinances, judgments, rulings and
regulations relating to any matters of pollution, protection of the environment,
health or safety, or environmental regulation or control (collectively,
"ENVIRONMENTAL LAWS"). Neither the COMPANY nor any of its Subsidiaries, nor any
other person or entity for whose conduct the COMPANY is legally responsible has
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received any notice, demand, request for information, or administrative inquiry
relating to (i) any violation of an Environmental Law or (ii) the institution of
any suit, action, claim, or proceedings alleging such violation or investigation
by any Governmental Entity or any third party of any such violation.
(b) Except as disclosed on Schedule 3.12, or in the Public Reports of the
COMPANY, neither the COMPANY nor any of its Subsidiaries and nor any other
person or entity for whose conduct the COMPANY is legally responsible has (i) to
the COMPANY's knowledge, manufactured, generated, treated, stored, handled,
processed, released, transported or disposed of any Hazardous Substances (as
hereinafter defined) on, under, from or at any of the COMPANY's or any of its
Subsidiaries' properties or any other properties, (ii) no knowledge of the
release or disposal of any Hazardous Substances in violation of any applicable
Environmental Law on, under or at any of COMPANY's or any of its Subsidiaries'
properties, or any other property owned or operated by the COMPANY, any of its
Subsidiaries or any other person or entity for whose conduct the COMPANY is or
may be held responsible, or (iii) received any written notice (w) of any
violation of any Environmental Law or any other law, statute, rule or regulation
regarding Hazardous Substances on or under any of the COMPANY's or any of its
Subsidiaries' properties or any other properties owned or operated by the
COMPANY, any of its Subsidiaries for which the COMPANY is legally responsible,
(x) of the institution or pendency of any suit, action, claim, proceeding or
investigation by any Governmental Entity or any third party of any such
violation, (y) of any actual or potential material liability on the part of the
COMPANY for the response to or remediation of Hazardous Substance at or arising
from any of the COMPANY's or any of its Subsidiaries' properties or any other
properties owned or operated by the COMPANY, any of its Subsidiaries or any
other person or entity for whose conduct the COMPANY is legally responsible, or
(z) of any actual or potential liability on the part of the Company for the
costs of response to or remediation of Hazardous Substances at or arising from
any of the COMPANY's or any of its Subsidiaries' properties or any other
properties owned or operated by the COMPANY, any of its Subsidiaries or any
other person or entity for whose conduct the COMPANY is or may be held
responsible. For purposes of this Agreement, the term "HAZARDOUS SUBSTANCE"
shall mean any toxic or hazardous materials or substances, including asbestos,
buried contaminants, chemicals, flammable explosives, radioactive materials,
petroleum and petroleum products and any substances defined as, or included in
the definition of, "hazardous substances", "hazardous wastes", "hazardous
materials" or "toxic substances" under any Environmental Law, provided however,
that "Hazardous Substance" shall not include those Hazardous Substances that are
typically used in the conduct of the COMPANY's business, which substances are
used, stored and disposed of in material compliance with all applicable
Environmental Laws.
(c) To the COMPANY's Knowledge, no Environmental Law imposes any obligation
upon the COMPANY or its Subsidiaries arising out of or as a condition to any
transaction contemplated hereby, including, without limitation, any requirement
to modify or to transfer any permit or license, any requirement to file any
notice or other submission with any Governmental Entity, the placement of any
notice, acknowledgment, or covenant in any land records, or the modification of
or provision of notice under any agreement, consent order, or consent decree. No
lien has been placed upon any of the COMPANY's properties or its Subsidiaries'
properties under any Environmental Law.
3.13 MATERIAL CONTRACTS AND AGREEMENTS.
(a) Listed on Schedule 3.13 are contracts or agreements that are material
to the business, financial condition, properties, assets, liabilities or results
of operations of the COMPANY and its Subsidiaries taken as a whole or that
require payments of any kind, character or nature in an amount exceeding
$100,000 in the aggregate for the balance of such contract, except for such
contracts or agreements that may be terminated on sixty (60) days notice without
penalty.
(b) As of the date hereof and except as disclosed on Schedule 3.13, no
default in performance or failure to perform under, and no anticipatory breach
of, any of the contracts listed on Schedule 3.13 has occurred or is continuing,
and none of the parties to any such contract has alleged that the other has
defaulted in performance or failed to perform, other than (i) a default in
payment that shall not have continued more than 30 days from the date on which
the payment was originally due pursuant to the terms of the applicable
contracts, and (ii) a default or failure that would not individually or in the
aggregate, have a Material Adverse
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Effect on COMPANY. To the COMPANY's knowledge, as of the date hereof and except
as disclosed on Schedule 3.13, no legal, administrative or other proceedings are
threatened, pending or outstanding relating to the performance or status of any
of such contracts. As of the date hereof and except as disclosed on Schedule
3.13, the COMPANY has not received notice of any anticipatory breach, pending
dispute or anticipated litigation arising from or relating to any of such
contracts, or notice that any of such contracts has been or will be canceled,
revoked or otherwise terminated.
(c) Except as listed on Schedule 3.13, neither the COMPANY nor any
Subsidiary is subject to any agreement that restricts competition with any other
person or provides that the COMPANY, any Subsidiary or affiliate may not engage
in any business or sell or distribute any product or service.
3.14 INTELLECTUAL PROPERTY. The COMPANY and its Subsidiaries own, or are
licensed or otherwise have the right to use, all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, service marks,
service mark rights, copyrights and other proprietary intellectual property
rights and computer programs currently used in the business that are material to
the business, financial condition or results of operations of the COMPANY and
its Subsidiaries taken as a whole, all of which are listed on Schedule 3.14 and
copies or descriptions of which have been provided to BUYER. Except as set forth
on Schedule 3.14, no claims are pending or to COMPANY's knowledge, threatened
that the COMPANY is infringing or otherwise adversely affecting the rights of
any person with regard to any patent, license, trademark, trade name, service
mark, copyright or other intellectual property right. To the knowledge of the
COMPANY, no person is infringing the rights of the COMPANY with respect to any
patent, license, trademark, trade name, service mark, copyright or other
intellectual property right.
3.15 CERTAIN FEES. With the exception of the engagement of Needham & Co.
and Brown, Coburn & Co. by COMPANY, none of the COMPANY and its Subsidiaries has
any liability or obligation to pay any fees or commissions to any financial
advisor, broker, finder, or agent with respect to the transactions contemplated
by this Agreement. Prior to the Effective Time, subject to Section 7, the
COMPANY hereby indemnifies the BUYER against and from any claim, liabilities or
actions in respect of fees or expenses of the COMPANY's advisors.
3.16 COMPANY BOARD OF DIRECTORS ACTION. The Board of Directors of COMPANY
(at a meeting duly called and held) has by the requisite vote of all directors
present, based upon the trading price of BUYER's Shares as of the date hereof
and other considerations, (a) determined that the Merger is advisable and in the
best interest of the COMPANY and its shareholders (b) resolved to recommend the
approval of this Agreement and the Merger by the holders of the COMPANY Shares
and directed that the Merger be submitted for consideration by the holders of
the COMPANY Shares at the Meeting and (c) adopted a resolution to elect not to
be subject, to the extent permitted by applicable law, to any state takeover law
that may purport to be applicable to the Merger and the transactions
contemplated by this Agreement.
3.17 REGISTRATION STATEMENT AND PROXY STATEMENT.
None of the information supplied or to be supplied by or on behalf of
COMPANY for inclusion or incorporation by reference in:
(i) the registration statement on Form S-4 to be filed with the SEC by
BUYER in connection with the issuance of BUYER Shares in the Merger (the
"REGISTRATION STATEMENT") will, at the time the Registration Statement is
filed with the SEC and at the time it becomes effective under the
Securities Act, 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 assuming that the information
contained therein is consistent with information provided by the COMPANY;
and
(ii) the joint proxy statement, in definitive form, relating to the
Special BUYER Meeting and the Special COMPANY Meeting (the "JOINT PROXY
STATEMENT") will, at the date(s) mailed to shareholders and at the times of
the meetings of shareholders to be held in connection with the Merger,
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, in light of the circumstances under which they are
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made, not misleading assuming that the information contained therein is
consistent with information provided by the COMPANY;
3.18 PROPERTIES.
(a) The COMPANY has provided to BUYER a true and complete list, which is
annexed as Schedule 3.18, and copies of all leases in respect to real property
leased by the COMPANY or its Subsidiaries pursuant to leases providing for the
right to occupancy (to be provided to BUYER at least five business days prior to
the Effective Time), in each case, of (i) a retail store or (ii) all other
facilities aggregating in excess of 5,000 square feet and the location of the
premises, which are in effect as of June 9, 1997. The COMPANY is not in default
under any of such leases, except where the existence of such defaults,
individually or in the aggregate, is not reasonably likely to have a Material
Adverse Effect.
(b) The COMPANY has provided to BUYER a true and complete list of all real
property that the COMPANY or any of its Subsidiaries owns. With respect to each
such item of real property, except for such matters that, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect: (a) the
COMPANY or the identified Subsidiary has good and clear record and marketable
title to such property, insurable by a recognized national title insurance
company at standard rates, free and clear of any security interests, easement,
covenant or other restriction, except for recorded easements, covenants and
other restrictions that do not materially impair the current uses or occupancy
of such property; and (b) the improvements constructed on such property are in
good condition, and all mechanical and utility systems servicing such
improvements are in good condition, free in each case of material defects.
3.19 TAX FREE REORGANIZATION. To COMPANY's Knowledge there is no fact
pertaining to it that would prevent the Merger from qualifying as a tax-free
reorganization under the Code.
3.20 INSURANCE. Listed on Schedule 3.20 are all material fire and
casualty, general liability, business interruption, product liability, and
sprinkler and water damage insurance policies maintained by the COMPANY or any
of its Subsidiaries, copies of which have been provided to the BUYER. All are
with reputable insurance carriers, provide full and adequate coverage for all
normal risks incident to the business of the COMPANY and its Subsidiaries and
their respective properties and assets, and are in character and amount at least
equivalent to that carried by persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect.
3.21 NO EXISTING DISCUSSION. As of the date hereof, the COMPANY is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal (as defined herein).
3.22 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representations
or warranties contained in Section 3 of this Agreement shall survive the Merger.
4. REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB. Except as set forth
in the Public Reports (as defined herein) and in the disclosure schedule
accompanying this Agreement and (the "DISCLOSURE SCHEDULE") for BUYER and SUB,
which shall be arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this Article 4, provided that disclosure in any lettered
or numbered paragraph shall qualify other paragraphs to the extent that it is
reasonably apparent from a reading of such disclosure that it also qualifies or
applies to such other paragraphs, BUYER represents and warrants to COMPANY that:
4.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. Each of BUYER and
its Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation. Each of BUYER
and its Subsidiaries is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required except for such failures to be so qualified and in good standing that
would not, individually or in the aggregate, have a Material Adverse Effect on
BUYER. Except as set forth in the Disclosure Schedule, neither the BUYER nor any
of its Material Subsidiaries directly or indirectly owns any equity or similar
interest in, or any interest convertible into or
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exchangeable or exercisable for, any corporation, partnership, joint venture, or
other business association or entity. Each of BUYER and its Subsidiaries has
full corporate power and authority to carry on the businesses in which it is
engaged and to own and use the properties owned and used by it. The BUYER
beneficially owns all of the outstanding capital stock of each of its
Subsidiaries.
4.2 CAPITALIZATION. The entire authorized capital stock of BUYER consists
of 60,000,000 BUYER Shares, 2,000,000 shares of BUYER's Class B Common Stock,
$.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par value, of
which as of June 30, 1997, 18,104,591 BUYER Shares and 2,000,000 shares of
BUYER's Class B Common Stock, $.01 par value, are issued and outstanding. All of
the BUYER Shares to be issued in the Merger have been duly authorized and, upon
consummation of the Merger, will be validly issued, fully paid, and
nonassessable. The entire authorized capital stock of SUB consists of 1,000 SUB
Shares, all of which are issued and outstanding. Except as set forth in the
Disclosure Schedule, there are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights, or
other contracts or commitments of any kind, character or nature, contingent or
otherwise, that could require BUYER or any of its Material Subsidiaries to
issue, sell, or otherwise cause to become outstanding any of its capital stock.
Except as set forth in the Disclosure Schedule, there are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or similar
rights of any kind, character or nature, contingent or otherwise, with respect
to BUYER or any of its Subsidiaries.
4.3 AUTHORIZATION OF TRANSACTION. BUYER and SUB have full corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder subject to receiving the Requisite BUYER Stockholder
Approval and the Requisite BUYER Proposal Approval. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly approved by the board of directors of the BUYER and SUB and no
other corporate proceedings on the part of the BUYER or SUB or their respective
shareholders are necessary to authorize this Agreement and to consummate the
transactions so contemplated other than the Requisite BUYER Stockholder Approval
and the Requisite BUYER Proposal Approval and the filing of the Certificate of
Merger. This Agreement has been duly executed and delivered and assuming that
this Agreement constitutes a valid and binding obligation of COMPANY,
constitutes the valid and legally binding obligation of BUYER and SUB,
enforceable in accordance with its terms and conditions except that (i) such
enforcement may be subject to bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect relating
to creditors' rights generally; and (ii) the remedy of specific performance and
injunctive and other forms of equitable remedies may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
4.4 NONCONTRAVENTION. Except as set forth on the Disclosure Schedule,
neither the execution and the delivery of this Agreement, nor the consummation
of the transactions contemplated hereby, will (i) materially violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which BUYER or any of its Subsidiaries is subject or any provision of
the charter or bylaws of BUYER or any of its Subsidiaries or (ii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument
or other arrangement to which BUYER or any of its Subsidiaries is a party or by
which it is bound or to which any of its assets is subject except for such that
would not, individually or in the aggregate, have a Material Adverse Effect on
BUYER or any of its Subsidiaries. Other than in connection with the provisions
of the Hart-Scott-Rodino Act, the Delaware General Corporation Law, the
Securities Exchange Act, the Securities Act, and the state securities laws,
BUYER does not need to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement.
4.5 FILINGS WITH THE SEC. Except as set forth on the Disclosure Schedule,
BUYER has made all filings with the SEC that it has been required to make under
the Securities Act and the Securities Exchange Act (collectively the "PUBLIC
REPORTS"). Each of the Public Reports has complied with the Securities Act and
the Securities Exchange Act in all material respects. None of the Public
Reports, as of their respective dates, contained any untrue statement of a
material fact or omitted to state a material fact necessary
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to make the statements made therein, in light of the circumstances under which
they were made, not misleading.
4.6 FINANCIAL STATEMENTS. BUYER has filed a Annual Report on Form 10-K
for the fiscal year ended April 30, 1997 (the "MOST RECENT FISCAL YEAR END").
The financial statements included in or incorporated by reference into these
Public Reports (including the related notes and schedules) have been prepared in
accordance with GAAP applied on a consistent basis throughout the period covered
thereby, present fairly the financial condition of BUYER and its Subsidiaries as
of the indicated dates and the results of operations of BUYER and its
Subsidiaries for the indicated periods, and are consistent with the books and
records of BUYER and its Subsidiaries.
4.7 UNDISCLOSED LIABILITIES; EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR
END. Except as set forth on the Disclosure Schedule, in the financial
statements included in BUYER's Annual Report on Form 10-K for its Most Recent
Fiscal Year End, and except for liabilities incurred in the Ordinary Course of
Business, neither the BUYER nor any of its Subsidiaries has any liabilities,
either accrued, contingent or otherwise that individually or in the aggregate
are likely to have a Material Adverse Effect. Except as set forth in the
Disclosure Schedule, since the Most Recent Fiscal Year End, there has not been
(a) any material adverse change in the business, financial condition, operations
or results of operations or prospects, of BUYER and its Subsidiaries taken as a
whole, (b) in the case of the BUYER, any declaration, setting aside or payment
of any dividend or any other distribution with respect to its capital stock, or
(c) any material change by the BUYER in accounting principles or methods.
4.8 CERTAIN FEES. With the exception of the engagement of Piper Jaffray
Inc. by BUYER, none of BUYER and its Subsidiaries has any liability or
obligation to pay any fees or commissions to any financial advisor, broker,
finder, or agent with respect to the transactions contemplated by this
Agreement. Subject to Section 7, the BUYER hereby indemnifies the COMPANY
against and from any claim, liabilities or actions in respect of fees or
expenses of the BUYER's advisors.
4.9 CONTINUITY OF BUSINESS ENTERPRISE. The BUYER presently intends to
continue at least one significant historic business line of COMPANY, or to use
at least a significant portion of COMPANY's historic business assets in a
business, in each case within the meaning of Treasury Reg. Section 1.368-1(d).
4.10 LITIGATION. Except as set forth in the Disclosure Schedule, or as
disclosed in the BUYER Public Reports, there are no claims, actions, suits,
investigations or proceedings pending or, to the knowledge of BUYER, threatened
against or affecting the BUYER or any of its Subsidiaries or any of their
respective properties at law or in equity, before or by any federal, state,
municipal or other governmental agency or authority, or before any arbitration
board or panel which individually or in the aggregate are likely to have a
Material Adverse Effect on BUYER.
4.11 TAX MATTERS. Except as set forth in the Disclosure Schedule:
(a) Filing of Timely Tax Returns. BUYER and each of its Subsidiaries have
filed (or there has been filed on their behalf) all material Tax Returns (as
hereinafter defined) required to be filed by each of them under applicable law.
All such Tax Returns were filed on a timely basis. To the extent requested in
writing by COMPANY, BUYER has delivered to COMPANY correct and complete copies
of all Tax Returns, examination reports, statements of deficiencies assessed
against or agreed to by any of COMPANY and its Subsidiaries since July 20, 1994
and all Tax Rulings and Closing Agreements.
(b) Payment of Taxes. BUYER and each of its Subsidiaries have, within the
time and in the manner prescribed by law, paid all Taxes (as hereinafter
defined) that are currently due and payable except for those contested in good
faith and for which adequate reserves have been taken.
(c) Tax Reserves. BUYER and its Subsidiaries have established on their
books and records reserves adequate to pay all Taxes and reserves for deferred
income taxes in accordance with GAAP.
(d) Tax Liens. No Tax liens exist upon the assets of BUYER or any of its
Subsidiaries except liens for Taxes not yet due or being contested in good faith
through appropriate proceedings , and in the latter case, for which adequate
reserves have been established on the BUYER's books and records.
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(e) Tax-free Reorganization. Neither the BUYER nor any of its Subsidiaries
has through the date of this Agreement taken or agreed to take any action that
would prevent the Merger from qualifying as a reorganization under the Code.
(f) Other. None of the COMPANY and its Subsidiaries has filed a consent
under Code Section 341(f) concerning collapsible corporations. None of the
COMPANY and its Subsidiaries has been a United States real property holding
corporation within the meaning of Code Section 897(c)(2) during the applicable
period specified in Code Section 897(c)(1)(A)(ii).
4.12 LABOR MATTERS. Except as set forth in Schedule 4.12, there are no
collective bargaining or other labor union agreements to which the COMPANY or
any of its Subsidiaries is a party or by which any of them is bound. Except as
set forth in Schedule 4.12, neither the COMPANY nor any of its Subsidiaries has
encountered any labor union organizing activity, or had any actual or, to
COMPANY's Knowledge, threatened employee strikes, work stoppages, slowdowns or
lockouts.
4.13 ERISA COMPLIANCE.
(a) Schedule 4.13 contains a list of all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) (sometimes referred to herein as "PENSION PLANS"),
"employee welfare benefit plans" (as defined in Section 3(1) of ERISA) and all
other bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, Christmas bonus,
hospitalization, medical or other plan, arrangement or understanding (whether or
not legally binding) maintained, or contributed to, by the BUYER or any of its
Subsidiaries for the benefit of any officers, employees or directors of the
BUYER or any of its Subsidiaries currently or within the last five years
(collectively, "BENEFIT PLANS").
(b) Except as disclosed in Schedule 4.13, all Pension Plans have been the
subject of determination letters from the Internal Revenue Service to the effect
that such Pension Plans are qualified and exempt from federal income taxes under
Section 401(a) and 501(a), respectively, of the Code, and no such determination
letter has been revoked nor, to the knowledge of the BUYER, has revocation been
threatened, nor has any such Pension Plan been amended since the date of its
most recent determination letter or application therefore in any respect that
would adversely affect its qualification or materially increase its costs.
(c) Except as disclosed on Schedule 4.13, no Pension Plan that the BUYER or
any of its Subsidiaries maintains, or to which the BUYER or any of its
Subsidiaries is or was previously obligated to contribute, other than any
Pension Plan that is a "multiemployer plan" (as such term is defined in Section
4001(a)(3) of ERISA; collectively, the "MULTIEMPLOYER PENSION PLANS"), had, as
of the respective last annual valuation date for each such Pension Plan, any
"unfunded benefit liabilities" (as such term is defined in Section 4001(a)(18)
of ERISA). To the best knowledge of BUYER, none of the BUYER's Pension Plans has
an "accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived. To the best knowledge
of the BUYER, none of the BUYER, any of its Subsidiaries, any officer of the
BUYER or any of its Subsidiaries or any of the Benefit Plans which are subject
to ERISA, including the Pension Plans, or any trusts created thereunder, or any
trustee or administrator thereof, has engaged in a "prohibited transaction" (as
such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any
other breach of fiduciary responsibility that could subject the BUYER, any of
its Subsidiaries or any officer of the BUYER or any of its Subsidiaries to the
tax or penalty on prohibited transactions imposed by such Section 4975 or to any
liability under Section 502(i) or (1) of ERISA. Except as disclosed on Schedule
4.13, neither any of such Pension Plans nor any of such trusts have been
terminated, nor has there been any "reportable event" (as that term is defined
in Section 4043 of ERISA) with respect to which the 30-day notice requirement
has not been waived and the BUYER is not aware of any other reportable events
with respect thereto during the last five years. Neither the BUYER nor any of
its Subsidiaries has suffered or otherwise caused a "complete withdrawal" or a
"partial withdrawal" (as such terms are defined in Section 4203 and Section
4205, respectively, of ERISA) since the effective date of such Sections 4203 and
4205 with respect to any of the Multiemployer Pension Plans. Neither the BUYER
nor any of its Subsidiaries is secondarily liable for any withdrawal liability
as a result of the sale of assets within the
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meaning of Section 4204 of ERISA. To the knowledge of the BUYER, in the event a
"complete withdrawal" currently occurred with respect to any of the
Multiemployer Pension Plans, there would be no withdrawal liability assessed
against the BUYER or any of its Subsidiaries.
(d) With respect to any Benefit Plan that is an employee welfare benefit
plan, except as disclosed in Schedule 4.13, (i) no such Benefit Plan is unfunded
or funded through a welfare benefits fund, as such term is defined in Section
419(e) of the Code, (ii) each such Benefit Plan that is a group health plan, as
such term is defined in Section 5000(b)(1) of the Code, complies in all material
respects with the applicable requirements of Section 4980B(f) of the Code and
Sections 601 through 609 of ERISA and (iii) each such Benefit Plan (including
any such Plan covering retirees or other former employees) may be amended or
terminated without material liability to the BUYER or any of its Subsidiaries on
or at any time after the Effective Time.
(e) Except as disclosed on Schedule 4.13, each Benefit Plan conforms in all
material respects in form and operation to all applicable laws and regulations,
and all reports or information relating to such Benefit Plan required to be
filed with any governmental entity or disclosed to participants have been timely
filed and disclosed. Except as disclosed on Schedule 4.13, no Pension Plan holds
any employer security or employer real property within the meaning of Section
407 of ERISA.
(f) Except as disclosed on Schedule 4.13, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee of the BUYER or any Subsidiary thereof to severance pay,
unemployment compensation or any other payment or (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due to any such
employee or former employee.
(g) Except as disclosed on Schedule 4.13, neither the BUYER nor any of its
Subsidiaries has announced a plan to create or a legally binding commitment to
amend any Benefit Plan or to create any new arrangement which would be a Benefit
Plan.
(h) All insurance premiums with respect to any Benefit Plan (including
premiums to the Pension Benefit Guaranty Corporation) have been paid in full.
Except as disclosed on Schedule 4.13, there are no retrospective adjustments
provided for under any insurance contracts maintained pursuant to any Benefit
Plan with regard to policy years or other periods ending on or before the
Effective Time.
(i) No Benefit Plan or the deduction of any contributions thereto by the
BUYER or any of its Subsidiaries has- been the subject of audit by the Internal
Revenue Service or the Department of Labor, and no litigation or asserted claims
exist against the COMPANY or any of its Subsidiaries or any Benefit Plan or
fiduciary with respect thereto (other than such benefit claims as are made in
the normal operation of a Benefit Plan). Except as set forth on the Disclosure
Schedule, to the knowledge of the BUYER, there are no facts which would give
rise to or could give rise to any action, suit, grievance, arbitration or other
claim.
4.14 ENVIRONMENTAL MATTERS.
(a) Except as set forth on Schedule 4.14 or in the Public Reports of BUYER,
to the BUYER's Knowledge, the BUYER and each of its Subsidiaries and any other
person or entity for whose conduct the BUYER is legally responsible are in
material compliance with all applicable federal, state, regional and local laws,
statutes, ordinances, judgments, rulings and regulations relating to any matters
of pollution, protection of the environment, health or safety, or environmental
regulation or control (collectively, "ENVIRONMENTAL LAWS"). Neither the BUYER
nor any of its Subsidiaries and nor any other person or entity for whose conduct
the BUYER is legally responsible has received any written notice, demand,
request for information, or administrative inquiry relating to (i) any violation
of an Environmental Law or (ii) of the institution of any suit, action, claim,
proceedings or investigation by any Governmental Entity or any third party of
any such violation.
(b) Except as disclosed on Schedule 4.14, to the BUYER's Knowledge, neither
the BUYER nor any of its Subsidiaries and nor any other person or entity for
whose conduct the Company is legally responsible has (i) to BUYER's knowledge,
manufactured, generated, treated, stored, handled, processed, released,
transported or disposed of any Hazardous Substances (as hereinafter defined) on,
under, from or at any of the BUYER's or any of its Subsidiaries' properties or
any other properties, (ii) no knowledge of the release or
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disposal of any Hazardous Substances in violation of any applicable
Environmental Law on, under or at any of BUYER's or any of its Subsidiaries'
properties owned or operated by the BUYER, any of its Subsidiaries or any other
person or entity for whose conduct the BUYER is or may be held responsible, or
(iii) received any written notice (w) of any violation of any Environmental Law
or any other law, statute, rule or regulation regarding Hazardous Substances on
or under any of the BUYER's or any of its Subsidiaries' properties or any other
properties owned or operated by the Company, or any of its Subsidiaries for
which BUYER is legally responsible, (x) of the institution or pendency of any
suit, action, claim, proceeding or investigation by any Governmental Entity or
any third party of any such violation, (y) of any actual or potential material
liability on the part of the COMPANY for the response to or remediation of
Hazardous Substance at or arising from any of the BUYER's or any of its
Subsidiaries' properties or any other properties, or owned or operated by the
BUYER, any of its Subsidiaries or any other person or entity for whose conduct
the BUYER is legally responsible, (z) of any actual or potential liability for
the costs of response to or remediation of Hazardous Substances at or arising
from any of the BUYER's or any of its Subsidiaries' properties or any other
properties owned or operated by the BUYER, any of its Subsidiaries or any other
person or entity for whose conduct the BUYER is or may be held responsible. For
purposes of this Agreement, the terms "HAZARDOUS SUBSTANCE" shall mean any toxic
or hazardous materials or substances, including asbestos, buried contaminants,
chemicals, flammable explosives, radioactive materials, petroleum and petroleum
products and any substances defined as, or included in the definition of,
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" under any Environmental Law, provided however, that "Hazardous
Substances" shall not include those Hazardous Substances that are typically used
in the conduct of the BUYER's business, which substances are used, stored and
disposed of in material compliance with all applicable Environmental Laws.
(c) To the BUYER's Knowledge, no Environmental Law imposes any obligation
upon the BUYER or its Subsidiaries arising out of or as a condition to any
transaction contemplated hereby, including, without limitation, any requirement
to modify or to transfer any permit or license, any requirement to file any
notice or other submission with any Governmental Entity, the placement of any
notice, acknowledgment, or covenant in any land records, or the modification of
or provision of notice under any agreement, consent order, or consent decree. No
lien has been placed upon any of the BUYER's properties or its Subsidiaries'
properties under any Environmental Law.
4.15 MATERIAL CONTRACTS AND AGREEMENTS.
(a) BUYER has filed all material contracts required to be filed by it in
connection with its Public Reports. As of the date hereof and except as
disclosed on Schedule 4.15, no default in performance or failure to perform
under, and no anticipatory breach of, any of BUYER's material contracts filed as
exhibits in its Public Reports has occurred or is continuing, and none of the
parties to any such contract has alleged that the other has defaulted in
performance or failed to perform, other than (i) a default in payment that shall
not have continued more than 30 days from the date on which the payment was
originally due pursuant to the terms of the applicable contracts, and (ii) a
default or failure that would not, individually or in the aggregate, have a
Material Adverse Affect on COMPANY. To BUYER's Knowledge, as of the date hereof
and except as disclosed on Schedule 4.15, no legal, administrative or other
proceedings are threatened, pending or outstanding relating to the performance
or status of any of such contracts. As of the date hereof and except as
disclosed on Schedule 4.15, the BUYER has not received notice of any
anticipatory breach, pending dispute or anticipated litigation arising from or
relating to any of such contracts, or notice that any of such contracts has been
or will be canceled, revoked or otherwise terminated.
(b) Except as listed on Schedule 4.15, neither the BUYER nor any Subsidiary
is subject to any material agreement that restricts competition with any other
person or provides that the BUYER, any Subsidiary or affiliate may not engage in
any business or sell or distribute any product or service.
4.16 INTELLECTUAL PROPERTY. The BUYER and its Subsidiaries own, or are
licensed or otherwise have the right to use, all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, service marks,
service mark rights, copyrights and other proprietary intellectual property
rights and computer programs which are material to the business, financial
condition or results of operations of the BUYER and its
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Subsidiaries taken as a whole. Except as set forth on Schedule 4.16, no claims
are pending or, to the knowledge of the BUYER, threatened that the BUYER is
infringing or otherwise adversely affecting the rights of any person with regard
to any patent, license, trademark, trade name, service mark, copyright or other
intellectual property right. To the knowledge of the BUYER, no person is
infringing the rights of the BUYER with respect to any patent, license,
trademark, trade name, service mark, copyright or other intellectual property
right.
4.17 BUYER BOARD OF DIRECTORS ACTION.
(a) The Board of Directors of BUYER at a meeting duly called and held has
by the requisite vote of all directors present (i) determined that the Merger is
advisable and in the best interests of the BUYER and its shareholders, (ii)
resolved to recommend the approval of the issuance of BUYER Shares in connection
with this Agreement and the Merger by the holders of the BUYER Shares and
directed that such issuance be submitted for consideration by the holders of the
BUYER's Common Stock at the Meeting and (iii) adopted a resolution to elect not
to be subject, to the extent permitted by applicable law, to any state takeover
law that may purport to be applicable to the Merger and the transactions
contemplated by this Agreement.
(b) The Board of Directors of SUB at a meeting duly called and held has by
the requisite vote of all directors present (i) determined that the Merger is
advisable and in the best interests of the SUB and its shareholders, (ii)
resolved to recommend the approval of this Agreement and the Merger and the
issuance of BUYER Shares in connection therewith by the holders of the shares of
SUB and directed that the Merger be submitted for consideration by such holders,
and (iii) adopted a resolution to elect not to be subject, to the extent
permitted by applicable law, to any state takeover law that may purport to be
applicable to the Merger and the transactions contemplated by this Agreement.
4.18 JOINT PROXY STATEMENT. (a) None of the information supplied or to be
supplied by or on behalf of BUYER for inclusion or incorporation by reference in
the Joint Proxy Statement or the Registration Statement, in definitive form,
will, at the time the Registration Statement is filed with the SEC and at the
time it becomes effective under the Securities Act and at the date(s) mailed to
shareholders and at the times of the meetings of shareholders to be held in
connection with the Merger, 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, in light of the circumstances under which they are
made, not misleading.
(b) The Registration Statement and the Joint Proxy Statement will comply as
to form in all material respects with the provisions of the Securities Act and
the Exchange Act, respectively, and the applicable rules and regulations
thereunder.
4.19 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representations
or warranties contained in Section 4 of this Agreement shall survive the Merger.
4.20 NO EXISTING DISCUSSION.
As of the date hereof, the BUYER is not engaged, directly or indirectly, in
any discussions or negotiations with any other party with respect to an
Acquisition Proposal.
5. COVENANTS.
5.1 INTERIM OPERATIONS. During the period from the date of this Agreement
until the earlier of the termination of this Agreement or the Effective Time,
except as disclosed in a Disclosure Schedule or as specifically contemplated by
this Agreement, or as otherwise approved in advance by the other in writing,
which approval shall not be unreasonably withheld or delayed, BUYER and COMPANY
each agrees for itself and its respective Subsidiaries:
(a) Conduct of Business. To carry on its business in the usual,
regular and ordinary course in substantially the same manner as previously
conducted, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform its other obligations
when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, keep available the services of
its present officers and
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key employees and preserve its relationships with customers, suppliers,
distributors, and others having business dealings with it. Each shall
promptly notify the other of any material event or occurrence not in the
ordinary course of its business.
(b) Charter and Bylaws. That it will not (and will not permit any of
its Subsidiaries) to make any change or amendment to their respective
certificates of incorporation or bylaws (or comparable governing
instruments) or permit any "poison pill" or similar rights plan to apply to
or in respect of the Merger.
(c) Capital Stock. That it will not, and will not permit any of its
Subsidiaries to (other than pursuant to Stock Options, which options in the
aggregate shall not exceed the shares authorized to be issued under its
existing Stock Option Plans or pursuant to currently issued and outstanding
Warrants or other convertible securities or as otherwise set forth in a
Disclosure Schedule), issue or sell any shares of capital stock or any
other securities of any of them or issue any securities convertible into or
exchangeable for, or options, warrants to purchase, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating
to, to accelerate, amend or change the period of exercisability of options
or restricted stock granted under any employee stock option plan or
authorize cash payments in exchange for any options granted under any of
such plans, or enter into any contract, understanding or arrangement with
respect to the issuance (or repurchase) of, any shares of capital stock or
any other securities of any of them or purchase or enter into any
arrangement or contract with respect to the purchase or voting of shares of
their capital stock, or adjust, split, combine or reclassify any of their
capital stock or other securities or make any other changes in their
capital structures.
(d) Dividends. That it will not and will not permit any of its
Subsidiaries to declare, set aside, pay or make any dividend or other
distribution or payment (whether in cash, stock or property) with respect
to, or purchase or redeem, any shares of the capital stock of any of them.
(e) Employee Plans, Compensation, Etc. That it will not, and will not
permit any of its Subsidiaries to, amend any Benefit Plan or to adopt any
arrangement which would be a "Benefit Plan," including without limitation,
any collective bargaining agreement, or increase or modify the compensation
arrangements or fringe benefits of any director, officer or employee or pay
any benefit not required by any existing plan or arrangement or take any
action or grant any benefit not required under the terms of any existing
agreements, trusts, plans, funds or other such arrangements or enter into
any contract, agreement, commitment or arrangement to do any of the
foregoing.
(f) Debt. That it will not, (a) assume or incur or agree to assume or
incur any indebtedness, except (i) in the ordinary course of business and
(ii) expenses incurred in connection with the consummation of the Merger,
or (b) except in the ordinary course of business consistent with past
practice, make any loans, advances or capital contributions to, or
investments (other than short-term investments pursuant to its customary
cash management systems) in, any other person other than such of the
foregoing as are made by the BUYER or COMPANY to, in or from a wholly owned
Subsidiary of the COMPANY or the BUYER, as the case may be. Neither BUYER
nor COMPANY nor any of their respective Subsidiaries will enter into any
new credit agreements but may enter into amendments or modifications or
replacements of any existing credit agreements with the advice and consent
of the other.
(g) Representation and Warranty. To advise the other within 36 hours
of any information that becomes known to it or to any Subsidiary that would
make any representation or warranty of itself or its respective
Subsidiaries herein materially not true or not correct.
(h) Acquisitions. That it will not acquire (i) by merging or
consolidating with, or by purchasing a substantial portion of the stock or
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or (ii) any assets, except purchases of inventory items or supplies or
other purchases in the ordinary course of business consistent with past
practice.
(i) Assets Sales. That it will not license, sell, lease, pledge,
mortgage or otherwise encumber or otherwise transfer or dispose of any of
its properties or assets, except sales of inventory and sales of corporate
franchises in the ordinary course of business consistent with past
practice.
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(j) Tax Settlements. That it will not make any material tax election
other than tax elections in the ordinary course and consistent with past
practices or settle or compromise any material income tax or other tax
liability or refund.
(k) Other Settlements. That it will not pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past
practice or in accordance with their terms except for any existing
scheduled litigations.
5.2 ACCESS AND INFORMATION. Upon reasonable notice, BUYER and the COMPANY
shall each (and shall cause each of their respective Subsidiaries to) afford to
the officers, employees, accountants, counsel and other representatives of the
other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, each of BUYER and the COMPANY shall (and shall cause
each of their respective Subsidiaries to) furnish promptly to the other (a) a
copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of federal
securities laws and (b) all other information concerning its business,
properties and personnel as such other party may reasonably request. Unless
otherwise required by law, the parties will hold any such information which is
nonpublic in confidence in accordance with the mutual confidentiality
agreements, dated May 19, 1997 among each of the BUYER and the COMPANY (the
"Confidentiality Agreements"). No information or knowledge obtained in any
investigation pursuant to this Section shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to the
obligations of the parties to consummate the Merger.
5.3 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. Subject to compliance
with applicable law, BUYER and the COMPANY will (a) promptly make their
respective filings, and will thereafter use their best efforts to promptly make
any required submissions, under the Hart-Scott-Rodino Act with respect to the
Merger and the other transactions contemplated by this Agreement, (b) cooperate
with one another (i) in promptly determining whether any filings are required to
be made or consents, approvals, permits or authorizations are required to be
obtained under any other federal, state or foreign law or regulation and (ii) in
promptly making any such filings, furnishing information required in connection
therewith and seeking timely to obtain any such consents, approvals, permits or
authorizations and (c) provide one another with copies of all filings made by
such party with any governmental authority in connection with this Agreement.
5.4 STATE TAKEOVER STATUTES. The COMPANY will take all reasonable steps
to exempt the Merger from the requirements of Delaware General Corporation Law
Section 203 or any other "fair price," "moratorium" or "control acquisition"
statute or regulation, by action of the COMPANY's Board of Directors or
otherwise.
5.5 EMPLOYEE MATTERS. On and after the Effective Time, the Surviving
Corporation and the BUYER will honor (but only in accordance with their terms as
disclosed on the Disclosure Schedule) those employment, indemnification,
severance, termination, consulting and retirement agreements to which the
COMPANY or any of its Subsidiaries is presently a party.
5.6 INDEMNIFICATION AND INSURANCE. (a) From and after the Effective Time,
in the event of any claim, action, suit, proceeding or investigation, whether
civil, criminal or administrative, including, without limitation, any such
claim, action, suit, proceeding or investigation in which any of the present or
former officers or directors (the "Managers") of the COMPANY or any of the
COMPANY's Subsidiaries is, or is threatened to be, made a party by reason of the
fact that he or she served as a Manager of the COMPANY or any of the COMPANY's
Subsidiaries, or is or was serving at the request of the COMPANY or any of the
COMPANY's Subsidiaries as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, whether
before or after the Effective Time, each of the Surviving Corporation and the
BUYER shall indemnify and hold harmless, as and to the fullest extent that
COMPANY would have been permitted under Delaware law and its certificate of
incorporation and bylaws in effect on the date hereof, each such Manager against
any losses, claims, damages, liabilities, costs, expenses (including reasonable
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with any such claim, action, suit, proceeding or investigation, and in the event
of any such claim, action, suit, proceeding or investigation
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(whether arising before or after the Effective Time), and (i) if the BUYER or
the Surviving Corporation (after the Effective Time) have not promptly assumed
the defense of such matter, the Managers may retain counsel satisfactory to
them, and the Surviving Corporation and the BUYER after the Effective Time,
shall advance all reasonable fees and expenses (including attorneys' fees) for
the Managers promptly, as Manager incurs the same and as statements therefor are
received, and (ii) the Surviving Corporation and the BUYER after the Effective
Time, will use their respective best efforts to assist in the vigorous defense
of any such matter; provided that neither the Surviving Corporation nor the
BUYER shall be liable for any settlement effected without its prior written
consent; provided further that the Surviving Corporation and the BUYER shall
have no obligation under the foregoing provisions of this Section 5.6(a) to any
Manager when and if (i) a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and non-appealable,
that indemnification of such Manager in the manner contemplated hereby is
prohibited by applicable law or (ii) the loss, claim, damage, liability, cost,
expense, judgment or fine is based on or arises from a final non-appealable
order of a court of competent jurisdiction or in connection with a settlement,
consent, decree, order or injunction with any governmental agency or authority
finding that the Manager violated Section 16(b) of the Exchange Act, Section
10(b) of the Exchange Act or Rule 10b-5 promulgated thereunder or any federal or
state securities law relating to or governing "insider" trading of securities.
At the Effective Time, each Manager shall confirm in writing that upon the
finality of any such determination that the Surviving Corporation or the BUYER
is not liable for any such indemnification claims, the Manager will immediately
reimburse the BUYER and the Surviving Corporation in full for any fees, expenses
and costs incurred by the BUYER or the Surviving Corporation in connection with
the defense of such claims. Any Manager wishing to claim indemnification under
this Section 5.6, upon learning of any such claim, action, suit, proceeding or
investigation, shall immediately notify the BUYER, thereof (provided that the
failure to give such notice shall not affect any obligations hereunder, except
to the extent that the indemnifying party is actually and materially prejudiced
thereby). The BUYER further covenants not to amend or repeal any provisions of
the Certificate of Incorporation or Bylaws of the BUYER or Surviving Corporation
in any manner that would adversely affect the indemnification or exculpatory
provisions contained herein, except to the extent otherwise required by Delaware
law. The provisions of this Section 5.6 are intended to be for the benefit of,
and shall be enforceable by, each indemnified party and his or her heirs and
representatives, and shall survive the Closing for a period expiring six years
from the Effective Time.
(b) Directors' and Officers' Insurance. For a period of three years from
the Effective Time, the BUYER, the Surviving Corporation shall either, in its
discretion (x) maintain in effect the COMPANY's current directors' and officers'
liability insurance covering those Managers who are currently covered on the
date of this Agreement by the COMPANY's directors' and officers' liability
insurance policy (a copy of which has been heretofore delivered to the BUYER);
provided, however, that the Surviving Corporation may substitute for such
COMPANY policies, policies with at least the same coverage containing terms and
conditions that are no less advantageous to the Managers and provided that said
substitution does not result in any gaps or lapses in coverage with respect to
matters occurring prior to the Effective Time or (y) to the extent applicable,
cause the BUYER's directors' and officers' liability insurance, if any, then in
effect to cover those persons who are covered on the date of this Agreement by
the COMPANY's directors' and officers' liability insurance policy with respect
to those matters covered by the COMPANY's directors' and officers' liability
insurance policy. In no event, however, shall the Surviving Corporation or the
BUYER be required by this Section 5.6(b) to expend a premium for such insurance
in an amount in excess of 200% of the amount currently paid by COMPANY for such
insurance (currently, to the COMPANY's knowledge, $255,000). The provisions of
this Section 5.6(b) are intended to be for the benefit of, and shall be
enforceable by, each Manager and his or her heirs and representatives.
(c) From and after the Effective Time, BUYER and the Surviving Corporation
shall indemnify and hold harmless the individuals listed as providing personal
guarantees for the leases set forth on Schedule 5.6(c).
5.7 SPECIAL COMPANY MEETING. Subject to Section 5.13, the COMPANY shall
take all action necessary, in accordance with applicable law and its certificate
of incorporation and bylaws, to convene a special meeting of the holders of
COMPANY Shares ("SPECIAL COMPANY MEETING") as promptly as practicable for the
purpose of considering and taking action upon this Agreement. The board of
directors of
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the COMPANY will recommend that holders of COMPANY Shares vote in favor of and
approve the Merger and this Agreement at the Special COMPANY Meeting.
5.8 SPECIAL BUYER MEETING. The BUYER shall take all action necessary, in
accordance with applicable law and its certificate of incorporation and bylaws,
to convene a special meeting of the holders of BUYER Shares ("SPECIAL BUYER
MEETING") as promptly as practicable for the purpose of considering and taking
action upon this Agreement and approving the issuance of BUYER Shares as Merger
Consideration to the extent provided herein. The board of directors of BUYER
will recommend that holders of BUYER Shares vote in favor of the issuance of
such BUYER Shares at the Special BUYER Meeting and any other related proposals.
BUYER also may submit additional proposals to its stockholders at the Special
BUYER Meeting as it deems necessary and related to the transactions contemplated
herein (including without limitation, to increase its number of authorized
shares, to establish additional or amend existing stock option plans and to
eliminate any escrow arrangements relating to any capital stock of BUYER held by
any director or officer of BUYER).
5.9 JOINT PROXY STATEMENT; REGISTRATION STATEMENT.
(a) As soon as practicable after the date hereof, BUYER and the COMPANY
shall prepare the Joint Proxy Statement, file it with the SEC, use their best
efforts to respond to comments of the Staff of the SEC and clear the Joint Proxy
Statement with the Staff of the SEC. Promptly after such clearance BUYER and the
COMPANY shall mail the Joint Proxy Statement to all holders of record of BUYER
Shares and COMPANY Shares who are holders on the record date for the respective
meetings of shareholders of BUYER and the COMPANY. BUYER and the COMPANY shall
cooperate with each other in the preparation of the Joint Proxy Statement and
the processing thereof with the SEC.
(b) BUYER shall prepare and file with the SEC as soon as is reasonably
practicable the Registration Statement following receipt of comments from the
Staff of the SEC on the Joint Proxy Statement or advice that such Staff will not
review such filing (or earlier in the discretion of BUYER and COMPANY) and shall
use its best efforts to have the Registration Statement declared effective by
the SEC as promptly as practicable and to maintain the effectiveness of such
Registration Statement until the Effective Time. BUYER shall also use its best
efforts to take any action required to be taken under state blue sky or
securities laws in connection with the issuance of the BUYER Common Stock
pursuant to the Merger, and the COMPANY shall furnish BUYER all information
concerning the COMPANY and the holders of its capital stock and shall take any
action as BUYER may reasonably request in connection with any such action. Each
of BUYER and the COMPANY agrees to continue the quotation respectively of the
BUYER's Shares and the COMPANY's Shares on the NASDAQ National Market during the
term of this Agreement so that appraisal rights will not be available to
stockholders of the COMPANY under Delaware General Corporation Law.
5.10 COMPLIANCE WITH THE SECURITIES ACT; REORGANIZATION.
(a) Prior to the Effective Time, the COMPANY shall cause to be delivered to
BUYER an opinion of the COMPANY's outside counsel, identifying all persons who
are in his opinion, as of the date of the Joint Proxy Statement, "affiliates" of
the COMPANY as that term is used in Paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "AFFILIATES"). The COMPANY shall cause such counsel to
deliver to BUYER at the Closing a second opinion updating such opinion to the
time of the Special Company Meeting.
(b) The COMPANY shall obtain a written agreement from each current
executive officer and director who is identified as a possible Affiliate in the
opinions referred to in clause (a) above, in a form reasonably acceptable to
BUYER, that such person will not offer to sell, sell or otherwise dispose of any
of the BUYER Common Stock issued to such person pursuant to the Merger, except
in compliance with Rule 145 or another exemption from the registration
requirements of the Securities Act. The COMPANY shall deliver such written
agreements to BUYER on or prior to the Closing.
5.11 ADDITIONAL AGREEMENTS. (a) Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its best efforts to
take promptly, or cause to be taken, all actions and to do promptly, or cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations
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to consummate and make effective the transactions contemplated by this
Agreement, including using its best efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
Governmental Entities, effecting all necessary registrations and filings
(including without limitation filings under the Hart-Scott-Rodino Act) and best
efforts to obtain any required contractual consents or assignments of third
parties, including but not limited to, those of landlords of premises leased by
COMPANY or its Subsidiaries. If, at any time after the Effective Time, the
Surviving Corporation considers or is advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Constituent Corporations (as referenced in
Delaware General Corporation Law) acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with the Merger or otherwise to
carry out the purposes of this Agreement, the officers and directors of the
Surviving Corporation will be authorized to execute and deliver, in the name and
on behalf of each of the Constituent Corporations (under Delaware General
Corporation Law) or otherwise, such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of the
Constituent Corporations or otherwise, all such other actions and things as may
be necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the Surviving
Corporation or otherwise to carry out the purposes of this Agreement.
(b) The COMPANY and BUYER shall use their best efforts to file as soon as
reasonably practicable notifications under the HSR Act in connection with the
Merger and the transactions contemplated hereby and to respond as promptly as
practicable to any inquiries received from the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") for additional information or documentation and to respond as
promptly as practicable to all inquiries and requests received from any State
Attorney General or other Governmental Entity in connection with antitrust
matters. The COMPANY and BUYER shall take such actions as are necessary to
overcome any objections that may be raised by the FTC or Antitrust Division.
5.12 Intentionally left blank.
5.13 CERTAIN COVENANTS.
(a) No Solicitation. The COMPANY shall not, directly or indirectly,
through any officer, director, employee, financial advisor, representative or
agent of such party (i) solicit, initiate, or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale or
transfer of substantial assets, sale of any shares of capital stock (including
without limitation by way of a tender offer) or similar transaction involving it
or any of its Subsidiaries, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being referred to in this
Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal, or (iii) agree to or recommend any
Acquisition Proposal; PROVIDED, HOWEVER, that nothing contained in this
Agreement shall prevent the COMPANY or its Board of Directors, from (A)
furnishing non-public information, or entering into discussions or negotiations
with, any person or entity in connection with an unsolicited bona fide written
Acquisition Proposal by such person or entity or recommending an unsolicited
bona fide written Acquisition Proposal to its stockholders, if and only to the
extent that (1) the Board of Directors of the COMPANY believes in good faith
(after consultation with its financial advisor) that such Acquisition Proposal
is reasonably capable of being completed on the terms proposed and, after taking
into account the strategic benefits anticipated to be derived from the Merger
and the long-term prospects of the COMPANY and BUYER as a combined company,
would, if consummated, result in a transaction more favorable over the long term
than the transaction contemplated by this Agreement and the COMPANY's Board of
Directors determines in good faith after consultation with outside legal counsel
that such action is necessary for such Board of Directors to comply with its
fiduciary duties to stockholders under applicable law and (2) prior to
furnishing such non-public information to, or entering into discussions or
negotiations with, such person or entity, such Board of Directors receives from
such person or entity an executed confidentiality agreement with terms no more
favorable to such party than those contained
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in the Confidentiality Agreements; or (B) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal.
(b) The COMPANY shall notify BUYER immediately after receipt by the COMPANY
(or its advisors) of any Acquisition Proposal or any request for nonpublic
information in connection with an Acquisition Proposal or for access to the
properties, books or records of such party by any person or entity that informs
such party that it is considering making, or has made, an Acquisition Proposal.
Such notice shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact. The COMPANY shall continue to keep BUYER informed,
on a current basis, of the status of any such discussions negotiations and the
terms being discussed or negotiated.
(c) Certain Actions. BUYER and COMPANY shall not, nor shall either permit
any of its Subsidiaries to, take or consent to be taken any action, whether
before or after the Effective Date, that would disqualify the Merger as
"reorganization" within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.
(d) Tax Returns. BUYER and COMPANY shall jointly prepare and file on a
timely basis any Tax Return required to be filed by virtue of the transactions
contemplated by this Agreement and BUYER shall pay any Tax due in connection
therewith on behalf of COMPANY and its shareholders.
5.14 BUYER BOARD OF DIRECTORS. The Board of Directors of BUYER shall
enlarge the BUYER's Board of Directors to nine persons and cause four designees
of COMPANY to be elected to BUYER's Board of Directors as soon as practicable
after the Effective Time and BUYER shall nominate such designees for election at
the next subsequent Annual Meeting of BUYER shareholders and shall use its best
efforts to cause such COMPANY representatives to be elected at such meeting.
5.15 BEST EFFORTS TO LIST SHARES. BUYER shall use all of its efforts to
ensure that, prior to the Effective Time, the BUYER Shares that will be issued
in the Merger will be approved for trading on the NASDAQ National Market System
subject to official notice of issuance.
6. CONDITIONS TO OBLIGATION TO CLOSE.
6.1 CONDITIONS TO OBLIGATION OF BUYER AND SUB. The obligation of BUYER
and SUB to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(a) Representations True. Except for changes contemplated by this
Agreement, the representations and warranties set forth in Article 3 above
shall be true and correct as of the Closing Date except for any
representation and warranty made expressly with respect to a specific date
(provided that said representation and warranty was true and correct as of
the relevant specific date) and except for such failures to be true and
correct as do not have a Material Adverse Effect on the COMPANY and its
Subsidiaries, taken as a whole;
(b) Covenants. COMPANY shall have performed and complied with all of
its covenants hereunder in all material respects through the Closing;
(c) No Injunction. No preliminary or permanent injunction or other
order of any federal or state court in the United States that prevents the
consummation of the Merger shall have been issued and remain in effect
(COMPANY and BUYER agreeing to use their reasonable best efforts to have
any such injunction or order lifted).
(d) Stockholder Approvals. This Agreement and the Merger shall have
received the Requisite COMPANY Stockholder Approval, and the Requisite
BUYER Stockholder Approval and Requisite BUYER Proposal Approval shall have
been obtained.
(e) HSR Waiting Period. All applicable waiting periods (and any
extensions thereof) under the Hart-Scott-Rodino Act shall have expired or
otherwise been terminated;
(f) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and not be subject of any stop
order or similar proceedings;
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(g) Legal Opinions. BUYER shall have received from outside counsel to
COMPANY an opinion in substantially the form of Exhibit A;
(h) Bank Approvals. Each of BUYER and COMPANY shall have received all
necessary approvals required under their respective bank credit agreements;
(i) Material Adverse Change. Except as set forth on Schedule 6.1(i),
there shall have been no material adverse change from the date hereof in
the business, financial condition, operations or prospects of COMPANY and
its Subsidiaries, taken as a whole, except changes contemplated, permitted
or required by this Agreement;
(j) Fairness Opinion. The Board of Directors of BUYER shall have
received from Piper Jaffray Inc. a written opinion, dated as of or
immediately before the date of mailing the Joint Proxy Statement, to such
Board and the holders of BUYER Class A Common Stock satisfactory in form
and substance to such board, to the effect that the Conversion Ratio is
fair to the Buyer's Class A Common stockholders from a financial point of
view; and
(k) Officer's Certificate. COMPANY shall have delivered to BUYER a
certificate of one of its executive officers in such person's capacity as
an officer and without personal liability to the effect that each of the
conditions specified in Section 6.1(a)-(d) is satisfied in all respects
(other than with respect to Requisite BUYER Stockholder Approval and
Requisite BUYER Proposal Approval).
6.2 CONDITIONS TO OBLIGATIONS OF COMPANY. The obligation of COMPANY to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(a) Representations True. Except for changes contemplated by this
Agreement, the representations and warranties set forth in Article 4 above
shall be true and correct as of the Closing Date except for any
representation and warranty made expressly with respect to a specific date
(provided that said representation and warranty was true and correct as of
the relevant specific date) and except for such failures to be true and
correct as do not have a Material Adverse Effect on the BUYER and its
Subsidiaries, taken as a whole;
(b) Covenants. BUYER shall have performed and complied with all of
its covenants hereunder in all material respects through the Closing;
(c) No Injunction. No preliminary or permanent injunction or other
order of any federal or state court in the United States that prevents the
consummation of the Merger shall have been issued and remain in effect
(COMPANY and BUYER agreeing to use their reasonable best efforts to have
any such injunction or order lifted);
(d) Stockholder Approvals. This Agreement and the Merger shall have
received Requisite COMPANY Stockholder Approval and the Requisite BUYER
Stockholder Approval, and the Requisite BUYER Proposal Approval shall have
been obtained.
(e) HSR Waiting Period. All applicable waiting periods (and any
extension thereof) under the Hart-Scott-Rodino Act shall have expired or
otherwise been terminated;
(f) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and not be subject to any stop
order or similar proceedings;
(g) Listing of Buyer Shares. The BUYER Shares that will be issued in
the Merger shall have been approved for listing on the NASDAQ National
Market System, subject to official notice of issuance;
(h) Legal Opinion. COMPANY shall have received from counsel to BUYER
an opinion, addressed to COMPANY, in substantially the form of Exhibit B,
and dated as of the Closing Date;
(i) Fairness Opinion. The Board of Directors of COMPANY shall have
received from Needham & Co. a written opinion, dated as of or immediately
before the date of mailing the Joint Proxy
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Statement, to holders of COMPANY Common Stock reasonably satisfactory in
form and substance to such board, to the effect that the terms of the
Merger are fair to the COMPANY Stockholders from a financial point of view;
(j) Officer's Certificate. BUYER shall have delivered to COMPANY a
certificate of one of its executive officers in such person's capacity as
an officer and without personal liability to the effect that each of the
conditions specified above in Section 6.2(a)-(d), (g) has been satisfied in
all respects (other than with respect to Requisite COMPANY Stockholder
Approval);
(k) Tax Opinion. COMPANY shall have received from Gadsby & Hannah LLP
dated as of the Closing Date and based upon certain factual representations
from officers of COMPANY, BUYER and SUB that such counsel may reasonably
request, a written opinion in a form reasonably satisfactory to COMPANY
confirming that the Merger will be treated as a "reorganization" within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, provided
that if Gadsby & Hannah LLP does not render such opinion, this condition
shall nevertheless be deemed satisfied if Arnall Golden & Gregory LLP
renders such an opinion to the COMPANY, based on information reasonably
requested from the COMPANY;
(l) Bank Approvals. Each of BUYER and COMPANY shall have received all
necessary approvals required under their respective bank credit agreements;
(m) Conversion of Class B Common Stock. All of BUYER's shares of
Class B Common Stock, $.01 par value shall have been converted into BUYER
Shares at the Effective Time in accordance with the Undertaking Agreement
of even date herewith among BUYER, SUB, COMPANY and certain BUYER
stockholders.
(n) Material Adverse Change. Except as set forth on Schedule 6.2,
there shall have been no material adverse change from the date hereof in
the business, financial condition, operations or prospects of BUYER and its
Subsidiaries, taken as a whole, except changes contemplated, permitted or
required by this Agreement.
COMPANY may waive any condition specified in this Section 6.2 if it
executes a writing so stating at or prior to the Closing.
7. TERMINATION.
7.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time (with respect to Sections 7.1(b) through 7.1(f), by written
notice by the terminating party to the other party), whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of BUYER or the COMPANY:
(a) by mutual written consent of BUYER and the COMPANY; or
(b) by either BUYER or the COMPANY if the Merger shall not have been
consummated by December 31, 1997 (provided that (i) either BUYER or the COMPANY
may extend such date to March 31, 1998 by providing written notice thereof to
the other party on or prior to December 31, 1997 (December 31, 1997, as it may
be so extended to March 31, 1998, shall be referred to herein as the "Outside
Date") and (ii) the right to terminate or extend this Agreement under this
Section 7.1(b) shall not be available to any party whose failure to fulfill any
covenant under this Agreement has been the cause of or resulted in the failure
of the Merger to occur on or before such date); or
(c) by either BUYER or the COMPANY if a court of competent jurisdiction or
other governmental authority with competent jurisdiction shall have issued a
non-appealable final order, decree or ruling or taken any other non-appealable
final action, in each case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger; or
(d) by BUYER, if (i) at the Special COMPANY Meeting (including any
adjournment or postponement), the Requisite COMPANY Stockholder Approval shall
not have been obtained; (ii) after receipt by the Board of Directors of the
COMPANY of an Acquisition Proposal, the Board of Directors of the
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COMPANY shall have withdrawn or modified its recommendation of this Agreement or
the Merger; (iii) after the receipt by the COMPANY of an Acquisition Proposal,
BUYER requests in writing that the Board of Directors of the COMPANY reconfirm
its recommendation of this Agreement or the Merger and the Board of Directors of
the COMPANY fails to do so within 10 business days after its receipt of BUYER's
request; (iv) the Board of Directors of the COMPANY shall have recommended to
the stockholders of the COMPANY an Alternative Transaction (as defined in
Section 7.3(f)); (v) a tender offer or exchange offer for 20% or more of the
outstanding shares of the COMPANY Shares is commenced (other than by BUYER or an
Affiliate of BUYER) and the Board of Directors of the COMPANY recommends that
the stockholders of the COMPANY tender their shares in such tender or exchange
offer; or (vi) for any reason fails to call and hold the Special COMPANY Meeting
at least two business days prior to the Outside Date.
(e) by COMPANY, if (i) at the Special BUYER Meeting (including any
adjournment or postponement) the Requisite BUYER Proposal Approval shall not
have been obtained; (ii) at the Special BUYER Meeting (including any adjournment
or postponement), the Requisite BUYER Stockholder Approval shall not have been
obtained; (iii) after receipt by the Board of Directors of the BUYER of a
proposal or offer for a merger, consolidation, business combination, sale or
transfer of substantial assets or shares of capital stock (including without
limitation by way of a tender offer) or similar transaction involving BUYER or
its subsidiaries (a "BUYER Acquisition Proposal") the Board of Directors of the
BUYER shall have withdrawn or modified its recommendation with respect to this
Agreement or the Merger; (iv) after the receipt by the BUYER of a BUYER
Acquisition Proposal, COMPANY requests in writing that the Board of Directors of
the BUYER reconfirm its recommendation with respect to this Agreement or the
Merger and the Board of Directors of the BUYER fails to do so within 10 business
days after its receipt of BUYER's request; (v) the Board of Directors of the
BUYER shall have recommended to the Stockholders of the BUYER an Alternative
Transaction (as defined in Section 7.3(f)); (vi) a tender offer or exchange
offer for 20% or more of the outstanding shares of the BUYER Shares is commenced
(other than by COMPANY or an Affiliate of COMPANY) and the Board of Directors of
the BUYER recommends that the stockholders of the BUYER tender their shares in
such tender or exchange offer; or (vii) for any reason fails to call and hold
the Special BUYER Meeting at least two business days prior to the Outside Date.
(f) by the BUYER or the COMPANY, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other set
forth in this Agreement, which breach (1) causes the conditions set forth in
Section 6.1(a) or (b) as to the COMPANY or Section 6.2(a) or (b) as to the BUYER
not to be satisfied, and (2) shall not have been cured within 10 business days
following receipt by the breaching party of written notice of such breach from
the other party.
7.2. EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall immediately become void and
there shall be no liability or obligation on the part of BUYER, SUB, the COMPANY
or their respective officers, directors, stockholders or Affiliates, except as
set forth in Sections 3.15, 4.8, and 7.3; provided that, the provisions of
Sections 3.15, 4.8, and 7.3 of this Agreement, and the Confidentiality
Agreements shall remain in full force and effect and survive any termination of
this Agreement.
7.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated.
(b) The COMPANY shall pay BUYER a termination fee of $3,500,000 upon the
earliest to occur of the following events;
(i) the termination of this Agreement by BUYER pursuant to Section
7.1(d)(ii) through (vi); or.
(ii) the termination of this Agreement by BUYER pursuant to Section 7.1(f)
after a breach by the COMPANY of any representation or warranty that was not
true and correct in all material respects on or as of the date made, or any
covenant or agreement in this Agreement.
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The COMPANY's payment of a termination fee pursuant to this subsection
shall be the sole and exclusive remedy of BUYER and any of its Subsidiaries
against the COMPANY and any of its Subsidiaries and their respective directors,
officers, employees, attorneys, agents, advisors or other representatives with
respect to the occurrences giving rise to such payment; provided that this
limitation shall not apply in the event of a willful breach of this Agreement by
the COMPANY (excluding actions taken by COMPANY's Board of Directors in good
faith belief that such actions were necessary to comply with fiduciary duties
under applicable law).
(c) The BUYER shall pay COMPANY a termination fee of $3,500,000 upon the
earliest to occur of the following events;
(i) the termination of this Agreement by COMPANY pursuant to Section
7.1(e)(iii) through (vii) regardless of whether or not COMPANY also may be
entitled to terminate this Agreement pursuant to Section 7.1(e)(i); or
(ii) the termination of this Agreement by COMPANY pursuant to Section
7.1(f) after a breach by the BUYER of any representation or warranty that was
not true and correct in all material respects on or as of the date made, or any
covenant or agreement in this Agreement.
(d) The BUYER shall pay COMPANY a termination fee of $1,750,000 upon
termination of this Agreement by COMPANY pursuant to Section 7.1(e)(i). In no
event shall COMPANY receive a termination fee under both 7.3(c) and this Section
7.3(d).
The BUYER's payment of any termination fee pursuant to this subsection
shall be the sole and exclusive remedy of COMPANY and any of its Subsidiaries
against the BUYER and SUB and any of their respective Subsidiaries and their
respective directors, officers, employees, attorneys, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment;
provided, that this limitation shall not apply in the event of a willful breach
of this Agreement by the BUYER (excluding actions taken by BUYER or SUB's Board
of Directors in good faith belief that such actions were necessary to comply
with fiduciary duties under applicable law).
(e) The fees, if applicable, payable pursuant to Section 7.3 shall be paid
within one business day after the first to occur of the events described in
Section 7.3(b)(ii) or 7.3(c)(ii) or by the earlier of 45 calendar days from
termination or the closing of an Alternative Transaction or Acquisition Proposal
for the events described in Section 7.3(b)(i) or 7.3(c)(i) or 7.3(d) as the case
may be.
(f) As used in this Agreement, "Alternative Transaction" means either (i) a
transaction pursuant to which any person (or group of persons) other than BUYER
or SUB or COMPANY or their respective affiliates (a "Third Party"), would
acquire more than 20% of the outstanding publicly traded COMPANY Shares or BUYER
Shares, as the case may be, pursuant to a tender offer or exchange offer or
otherwise, (ii) a merger or other business combination involving the COMPANY or
the BUYER, pursuant to which any Third Party acquires more than 20% of the
outstanding shares of the entity surviving such merger or business combination,
as the case may be, (iii) any other transaction pursuant to which any Third
Party acquires control of assets (including for this purpose the outstanding
equity securities of Subsidiaries of the COMPANY or the BUYER, as the case may
be, and the entity surviving any merger or business combination including any of
them) of the COMPANY or the BUYER, as the case may be, having a fair market
value (as determined by the Board of Directors of the BUYER or the COMPANY, as
the case may be, in good faith) equal to more than 20% of the fair market value
of all the assets of, as the case may be and its Subsidiaries, taken as a whole,
immediately prior to such transaction, or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
8. MISCELLANEOUS.
8.1 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior approval of the other Party; PROVIDED, HOWEVER,
each Party agrees not to unreasonably withhold consent to the other
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Party's request to make any public disclosure that the requesting Party believes
in good faith is required by applicable law or any listing or trading agreement
concerning its publicly traded securities.
8.2 NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; PROVIDED, HOWEVER, that (i) the provision in
Article 2 above concerning issuance of the BUYER Shares (and Stock Options and
Warrants convertible into BUYER Shares) and are intended for the benefit of the
COMPANY Stockholders, (ii) the provision in Section 5.6 above concerning
indemnification are for the benefit of the Managers, and (iii) the provisions in
Section 5.13(c) are intended for the benefit of the holders of COMPANY Shares.
8.3 ENTIRE AGREEMENT. No discussions regarding, or exchange of drafts or
comments in connection with, the transactions contemplated herein shall
constitute an agreement among the parties hereto. Any agreement among the
parties shall exist only when the parties have fully executed and delivered this
Agreement. This Agreement (including any other documents referred to herein)
constitutes the entire agreement between the Parties and supersedes any prior
understandings, agreements, or representations by or between the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
8.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
8.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
8.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.7 NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to COMPANY:
Moovies, Inc.
201 Brookfield Parkway, Suite 200
Greenville, South Carolina 29607
Attention: President and Chief Executive Officer
Copy to:
Jonathan Golden, Esquire
Eva P. Cederholm, Esquire
Arnall, Golden & Gregory, LLP
2800 One Atlantic Center
1201 W. Peachtree St.
Atlanta, Georgia 30309
If to BUYER or SUB:
Video Update, Inc.
3300 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
Attention: Chief Executive Officer
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Copy to:
Lawrence H. Gennari, Esquire
Gadsby & Hannah LLP
225 Franklin Street
Boston, Massachusetts 02110
Any Party may send any notice, request, demand, claim or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Party notice in the manner herein set forth.
8.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the applicable of the laws
of any jurisdiction other than the State of Delaware.
8.9 AMENDMENTS AND WAIVERS. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective board of directors; PROVIDED, HOWEVER, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Delaware General Corporation Law. No amendment of
any provision of this Agreement shall be valid unless the same shall be in
writing and signed by both of the Parties. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
effect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
8.10 SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
8.11 EXPENSES. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except as otherwise contemplated by
Section 7 hereof.
8.12 SPECIFIC PERFORMANCE. The parties hereto agree that if for any
reason any party hereto shall have failed to perform its obligations under this
Agreement, then any other party hereto seeking to enforce this Agreement against
such non-performing party shall be entitled to specific performance and
injunctive and other equitable relief, and the parties hereto further agree to
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such injunctive or other equitable relief.
8.13 CONSTRUCTION. Any reference to any federal, state, local, or foreign
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context otherwise requires. The word
"including" shall mean including without limitation.
8.14 INCORPORATION OF SCHEDULES. The Exhibits and Schedules identified in
this Agreement are incorporated herein by reference and made a part hereof.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
MOOVIES, INC.
("COMPANY")
By: /s/ JOHN L. TAYLOR
------------------------------------
Authorized Officer
VIDEO UPDATE, INC. ("BUYER")
By: /s/ DANIEL A. POTTER
------------------------------------
Daniel A. Potter
Chief Executive Officer
VUI MERGER CORP. ("SUB")
By: /s/ DANIEL A. POTTER
------------------------------------
Title: President
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EXHIBIT A
ARNALL, GOLDEN & GREGORY, LLP
, 1997
Video Update, Inc.
3100 World Trade Center
St. Paul, Minnesota 55101
Ladies & Gentlemen:
We have acted as counsel to Moovies, Inc., a Delaware corporation (the
"Company") in connection with the merger of VUI Merger Corp. (the "Merger Sub"),
a wholly owned subsidiary of Video Update, Inc., a Delaware corporation ("Video
Update"), with and into the Company (the "Merger") pursuant to an Agreement and
Plan of Merger among the Company, Merger Sub, and Video Update, dated as of ,
1997, as amended (the "Merger Agreement"). Terms used herein but not otherwise
defined shall have the meanings assigned to them in the Merger Agreement.
We have examined an executed copy of the Merger Agreement (including the
exhibits and schedules thereto), the Certificate of Incorporation of the Company
filed with the Secretary of State of the State of Delaware and such corporation
records, documents and other instruments and have made such other examinations
and inquiries as we have deemed necessary to enable us to express the opinions
set forth herein.
Based upon the foregoing and subject to the qualifications and limitations
stated herein, we are of the opinion that:
1. Each of the Company and its Material Subsidiaries is a corporation
duly organized, validly existing, and in good standing under the laws of
the jurisdiction of its incorporation. Each of the Company and its Material
Subsidiaries is duly authorized to conduct business and is in good standing
under the laws of each jurisdiction where such qualification is required
except or such failures to be so qualified and good standing that would
not, individually or in the aggregate, have a Material Adverse Effect on
the Company. Each of the Company and its Subsidiaries has full corporate
power and authority to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The Company
beneficially owns all of the outstanding capital stock of each of its
Subsidiaries, except as described in the Merger Agreement.
2. The entire authorized capital stock of the Company consists of
25,000,000 Company Shares and 1,000,000 shares of Preferred Stock, $.001
par value, of which as of March 31, 1997, 12,354,800 Company Shares are
issued and outstanding. All of the issued and outstanding Company Shares
and all shares of the Material Subsidiaries have been duly authorized and
are validly issued, fully paid, and nonassessable.
3. The Company has full corporate power and authority to execute and
deliver the Merger Agreement and to perform its obligations thereunder. The
execution and delivery of the Merger Agreement and the consummation of the
transactions contemplated thereby have been duly approved by the board of
directors of the Company and no other corporate proceedings on the part of
the Company or its shareholders are necessary to authorize the Merger
Agreement and to consummate the transactions so contemplated other than the
filing of the Certificate of Merger. The Merger Agreement has been duly
executed and delivered and, assuming it constitutes a valid an binding
obligation of Video Update and the Merger Sub, constitutes the valid and
legally binding obligation of COMPANY, enforceable in accordance with its
terms and conditions except that (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
or other similar laws now or hereafter in effect relating to creditors'
rights generally; and (ii) the remedy of specific performance and
injunctive and other forms of equitable remedies may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor they be brought.
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The opinions set forth herein relate solely to the laws of the State of
Delaware and the federal laws of the United States.
Very truly yours,
ARNALL, GOLDEN & GREGORY, LLP
By:
--------------------------------------
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EXHIBIT B
GADSBY & HANNAH LLP
, 1997
Moovies, Inc.
201 Brookfield Parkway
Greenville, South Carolina 29607
Ladies & Gentlemen:
We have acted as counsel to Video Update, Inc., a Delaware corporation (the
"Company"), in connection with the merger of VUI Merger Corp. (the "Merger
Sub"), a wholly owned subsidiary of the Company, with and into Moovies, Inc., a
Delaware Corporation ("Moovies") (the "Merger") pursuant to an Agreement and
Plan of Merger among the Company, Merger Sub, and Moovies, dated as of
, 1997, as amended (the "Merger Agreement"). Terms used herein but not
otherwise defined shall have the meanings assigned to them in the Merger
Agreement.
We have examined an executed copy of the Certificate of Incorporation of
the Company filed with the Secretary of State of the State of Delaware and such
corporation records, documents and other instruments and have made such other
examinations and inquiries as we have deemed necessary to enable us to express
the opinions set forth herein.
Based upon the foregoing and subject to the qualifications and limitations
stated herein, we are of the opinion that:
1. Each of Video Update, Merger Sub and their Subsidiaries is a
corporation duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its incorporation. Each of Video Update,
Merger Sub and each of its Subsidiaries is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where
such qualification is required except or such failures to be so qualified
and good standing that would not, individually or in the aggregate, have a
Material Adverse Effect on Video Update. Each of Video Update, Merger Sub
and their Subsidiaries has full corporate power and authority to carry on
the businesses in which it is engaged and to own and use the properties
owned and used by it. Video Update beneficially owns all of the outstanding
capital stock of each of its Subsidiaries except as described in the Merger
Agreement.
2. The entire authorized capital stock of Video Update consists of
60,000,000 BUYER Shares, 2,000,000 shares of Video Update's Class B Common
Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par
value, of which as of June 30, 1997, 18,104,591 BUYER Shares and 2,000,000
shares of Video Update's Class B Common Stock, $.01 par value, are issued
and outstanding. All of the BUYER Shares to be issued in the Merger have
been duly authorized and, upon consummation of the Merger, will be validly
issued, fully paid, and nonassessable. The entire authorized capital stock
of Merger Sub consists of 1,000 Merger Sub Shares, all of which are issued
and outstanding.
3. Each of Video Update and Merger Sub has full corporate power and
authority to execute and deliver this Agreement and to perform its
obligations thereunder. The execution and delivery of the Merger Agreement
and the consummation of the transactions contemplated thereby have been
duly approved by the board of directors of Video Update and Merger Sub and
no other corporate proceedings on the part of Video Update or Merger Sub or
their respective shareholders are necessary to authorize the Merger
Agreement, and the issuance of BUYER Shares pursuant to the Merger
Agreement and to consummate the transactions so contemplated other than the
filing of the Certificate of Merger. The Merger Agreement has been duly
executed and delivered and assuming that the Merger Agreement constitutes a
valid and binding obligation of Moovies, constitutes the valid and legally
binding obligation of Video Update and Merger Sub, enforceable in
accordance with its terms and conditions except that
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(i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, fraudulent conveyance moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally; and (ii)
the remedy of specific performance and injunctive and other forms of
equitable remedies may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.
The opinions set forth herein relate solely to the laws of the State of
Delaware and the federal laws of the United States.
Very truly yours,
GADSBY & HANNAH, LLP
By:
------------------------------------
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<PAGE> 231
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
BY AND AMONG
VIDEO UPDATE, INC. ("BUYER")
VUI MERGER CORP.
AND
MOOVIES, INC.
DATED AS OF OCTOBER 27, 1997
This Amendment to the Agreement and Plan of Merger entered into as of July
9, 1997 (the "Agreement") by and between Video Update, Inc., a Delaware
corporation ("BUYER"), VUI Merger Corp., a Delaware corporation ("SUB") and
Moovies, Inc., a Delaware corporation ("COMPANY"), is dated as of October 27,
1997. BUYER and COMPANY are referred to individually herein as a "PARTY" and
collectively herein as the "PARTIES."
WHEREAS, the Agreement contemplates a merger of SUB, a wholly owned first
tier subsidiary of BUYER with and into COMPANY in a reorganization pursuant to
Code Sections 368(a)(1)(A) and 368(a)(2)(E) whereby the COMPANY Stockholders
will receive voting common stock of BUYER in exchange for all of their capital
stock in COMPANY, all pursuant to the plan of reorganization set forth herein;
and
WHEREAS, the Parties wish to amend and modify certain provisions of the
Agreement.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. The definition of "REQUISITE BUYER STOCKHOLDER APPROVAL" is hereby
deleted and replaced in its entirety with the following:
"REQUISITE BUYER STOCKHOLDER APPROVAL" with respect to the BUYER means
the affirmative vote of the holders of the outstanding shares of BUYER
(voting together as a single class) representing a majority of the votes
cast on the proposal in favor of the issuance of BUYER shares in connection
with this Agreement, and with respect to SUB means (i) the affirmative vote
or consent of the holders of a majority of the outstanding shares of SUB in
favor of this Agreement and the Merger.
2. Section 2.5 of the Agreement is hereby deleted and replaced in its
entirety with the following:
2.5 CONVERSION. At and as of the Effective Time, each COMPANY Share
shall no longer be outstanding and shall be cancelled and retired and shall
be converted into the right to receive .75 of one BUYER Share (the ratio of
.75 of one BUYER Share to one COMPANY Share is referred to herein as the
"CONVERSION RATIO" and the BUYER Shares so received are referred to as the
"MERGER CONSIDERATION"). The Conversion Ratio shall be subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock
split or other recapitalization of the BUYER's Shares after the date
hereof. No COMPANY Share shall be deemed to be outstanding or to have any
rights other than those set forth above in this Section 2.5 after the
Effective Time. From the date of this Agreement to the Closing Date,
COMPANY's Board of Directors shall not adopt any new "poison pill,"
stockholder rights plan or other similar plan applicable to the
transactions contemplated by this Agreement. In addition, the COMPANY's
Board of Directors shall take all actions required to ensure that the
Rights (as defined in the Rights Agreement, dated as of December 20, 1996,
by and between COMPANY and First Union National Bank of North Carolina) and
the Rights Agreement shall be inapplicable to the Merger and the
transactions contemplated by this Agreement.
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<PAGE> 232
3. Section 3.6 is hereby deleted and replaced in its entirety with the
following:
3.6 FINANCIAL STATEMENTS. COMPANY has filed a Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997 (the "MOST RECENT
FISCAL QUARTER END"), and an Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. The financial statements included in or
incorporated by reference into these Public Reports (including the related
notes and schedules) have been prepared in accordance with GAAP applied on
a consistent basis throughout the period covered thereby, present fairly
the financial condition of COMPANY and its Subsidiaries as of the indicated
dates and the results of operations of COMPANY and its Subsidiaries for the
indicated periods, and are consistent with the books and records of COMPANY
and its Subsidiaries; PROVIDED, HOWEVER, that the interim statements are
subject to normal year-end adjustments that are not expected to be material
in amount.
4. Section 4.6 is hereby deleted and replaced in its entirety with the
following:
4.6 FINANCIAL STATEMENTS. BUYER has filed a Quarterly Report on Form
10-Q for the fiscal quarter ended July 31, 1997 and an Annual Report on
Form 10-K (as amended) for the fiscal year ended April 30, 1997 (the "MOST
RECENT FISCAL YEAR END"). The financial statements included in or
incorporated by reference into these Public Reports (including the related
notes and schedules) have been prepared in accordance with GAAP applied on
a consistent basis throughout the period covered thereby, present fairly
the financial condition of BUYER and its Subsidiaries as of the indicated
dates and the results of operations of BUYER and its Subsidiaries for the
indicated periods, and are consistent with the books and records of BUYER
and its Subsidiaries; PROVIDED HOWEVER, that the interim statements are
subject to normal year-end adjustments that are not expected to be material
in amount.
5. ACKNOWLEDGEMENT. The parties hereby expressly waive any and all
claims, demands or expenses that they may respectively have against the other
based on any breach of any warranty, representation or covenant contained in or
made pursuant to the Agreement prior to the date hereof.
6. BUYER REPRESENTATIONS. The BUYER and SUB represent and warrant that
except for changes contemplated by this Agreement or as set forth on SCHEDULE 4
annexed hereto, the representations and warranties set forth in Article 4 of the
Agreement are true and correct as qualified as of the date hereof, except for
such failures to be true and correct as do not have a Material Adverse Effect on
the BUYER and its Subsidiaries, taken as a whole.
7. COMPANY REPRESENTATIONS. The COMPANY represents and warrants that
except for changes contemplated by the Agreement or set forth on SCHEDULE 3
annexed hereto, the representations and warranties of the COMPANY set forth in
Article 3 of the Agreement are true and correct as qualified as of the date
hereof, except for such failures to be true and correct as do not have a
Material Adverse Effect on the COMPANY and its Subsidiaries, taken as a whole.
8. Section 4.8 of the Agreement is hereby deleted and replaced in its
entirety with the following:
4.8 CERTAIN FEES. With the exception of the engagement of Piper
Jaffray Inc. and Asensio & Company, Inc. by BUYER, none of BUYER and its
Subsidiaries has any liability or obligation to pay any fees or commissions
to any financial advisors, broker, finder, or agent with respect to the
transactions contemplated by this Agreement. Subject to Section 7, the
BUYER hereby indemnifies the COMPANY against and from any claim,
liabilities or actions in respect of fees or expenses of the BUYER's
advisors.
9. Section 5.6(a) of the Agreement is hereby deleted and replaced in its
entirety with the following:
5.6 INDEMNIFICATION AND INSURANCE. (a) From and after the Effective
Time, in the event of any claim, action, suit, proceeding or investigation,
whether civil, criminal or administrative, including, without limitation,
any such claim, action, suit, proceeding or investigation in which any of
the present or former officers or directors (the "Managers") of the COMPANY
or any of the COMPANY's Subsidiaries is, or is threatened to be, made a
party by reason of the fact that he or she served as a Manager of the
COMPANY or any of the COMPANY's Subsidiaries, or is or was serving at the
request of the COMPANY or any of the COMPANY's Subsidiaries as a director,
officer, employee or agent of
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another corporation (including without limitation, BUYER), partnership,
joint venture, trust or other enterprise, whether before or after the
Effective Time, each of the Surviving Corporation and the BUYER shall
indemnify and hold harmless, as and to the fullest extent that COMPANY
would have been permitted under Delaware law and its certificate of
incorporation and bylaws in effect on the date hereof, each such Manager
against any losses, claims, damages, liabilities, costs, expenses
(including reasonable attorneys' fees), judgments, fines and amounts paid
in settlement in connection with any such claim, action, suit, proceeding
or investigation, and in the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time), and (i) if the BUYER or the Surviving Corporation (after the
Effective Time) have not promptly assumed the defense of such matter, the
Managers may retain counsel satisfactory to them, and the Surviving
Corporation and the BUYER after the Effective Time, shall advance all
reasonable fees and expenses (including attorneys' fees) for the Managers
promptly, as Manager incurs the same and as statements therefor are
received, and (ii) the Surviving Corporation and the BUYER after the
Effective Time, will use their respective best efforts to assist in the
vigorous defense of any such matter; provided that neither the Surviving
Corporation nor the BUYER shall be liable for any settlement effected
without its prior written consent; provided further that the Surviving
Corporation and the BUYER shall have no obligation under the foregoing
provisions of this Section 5.6(a) to any Manager when and if (i) a court of
competent jurisdiction shall ultimately determine, and such determination
shall have become final and non-appealable, that indemnification of such
Manager in the manner contemplated hereby is prohibited by applicable law
or (ii) the loss, claim, damage, liability, cost, expense, judgment or fine
is based on or arises from a final non-appealable order of a court of
competent jurisdiction or in connection with a settlement, consent, decree,
order or injunction with any governmental agency or authority finding that
the Manager violated Section 16(b) of the Exchange Act, Section 10(b) of
the Exchange Act or Rule 10b-5 promulgated thereunder or any federal or
state securities law relating to or governing "insider" trading of
securities. At the Effective Time, each Manager shall confirm in writing
that upon the finality of any such determination that the Surviving
Corporation or the BUYER is not liable for any such indemnification claims,
the Manager will immediately reimburse the BUYER and the Surviving
Corporation in full for any fees, expenses and costs incurred by the BUYER
or the Surviving Corporation in connection with the defense of such claims.
Any Manager wishing to claim indemnification under this Section 5.6, upon
learning of any such claim, action, suit, proceeding or investigation,
shall immediately notify the BUYER, thereof (provided that the failure to
give such notice shall not affect any obligations hereunder, except to the
extent that the indemnifying party is actually and materially prejudiced
thereby). The BUYER further covenants not to amend or repeal any provisions
of the Certificate of Incorporation or Bylaws of the BUYER or Surviving
Corporation in any manner that would adversely affect the indemnification
or exculpatory provisions contained herein, except to the extent otherwise
required by Delaware law. The provisions of this Section 5.6 are intended
to be for the benefit of, and shall be enforceable by, each indemnified
party and his or her heirs and representatives, and shall survive the
Closing for a period expiring six years from the Effective Time.
10. Section 5.13 of the Agreement is hereby deleted and replaced in its
entirety with the following:
5.13 CERTAIN COVENANTS.
(a) Solicitation. The COMPANY may, but shall not be obligated to,
directly or indirectly, through any officer, director, employee, financial
advisor, representative or agent of such party (i) solicit, initiate, or
encourage any inquiries or proposals that constitute, or could reasonably
be expected to lead to, a proposal or offer for a merger, consolidation,
business combination, sale or transfer of substantial assets, sale of any
shares of capital stock (including without limitation by way of a tender
offer) or similar transaction involving it or any of its Subsidiaries,
other than the transactions contemplated by this Agreement (any of the
foregoing inquiries or proposals being referred to in this Agreement as an
"Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide any non-public information to any person or entity
relating to, any Acquisition Proposal, or (iii) agree to or recommend any
Acquisition Proposal.
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(b) The COMPANY shall notify BUYER immediately after initiation of or
receipt by the COMPANY (or its advisors) of any Acquisition Proposal or any
request for nonpublic information in connection with an Acquisition
Proposal or for access to the properties, books or records of such party by
any person or entity that informs such party that it is considering making,
or has made, an Acquisition Proposal. Such notice shall be made orally and
in writing and shall indicate in reasonable detail the identity of the
offeror and the terms and conditions of such proposal, inquiry or contact.
The COMPANY shall continue to keep BUYER informed, on a current basis, of
the status of any such discussions or negotiations and the terms being
discussed or negotiated. Under no circumstances shall COMPANY provide to
any party any non-public or confidential information of or about the BUYER.
(c) Certain Actions. BUYER and COMPANY shall not, nor shall either
permit any of its Subsidiaries to, take or consent to be taken any action,
whether before or after the Effective Date, that would disqualify the
Merger as "reorganization" within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code.
(d) Tax Returns. BUYER and COMPANY shall jointly prepare and file on
a timely basis any Tax Return required to be filed by virtue of the
transactions contemplated by this Agreement and BUYER shall pay any Tax due
in connection therewith on behalf of COMPANY and its shareholders.
11. Section 5.14 of the Agreement is hereby deleted and replaced in its
entirety with the following:
5.14 BUYER BOARD OF DIRECTORS. The Board of Directors of BUYER shall
cause the BUYER's Board of Directors to continue to consist of seven
persons and cause two designees of COMPANY ("COMPANY Designees") to be
elected to BUYER's Board of Directors as soon as practicable after the
Effective Time and BUYER shall nominate such designees for election at the
next subsequent Annual Meeting of BUYER shareholders and shall use its best
efforts to cause such COMPANY Designees to be elected at such meeting. The
COMPANY Designees shall be elected to the Nominating Committee of the Board
of Directors so long as they remain Directors of the BUYER. Following the
Effective Time, such nominating committee shall be comprised solely of the
two Company Designees and one designee of the BUYER. The Nominating
Committee shall have the right to nominate two additional members of the
Board, which, if necessary, shall be expanded by the full Board to nine
members to include such two additional members.
12. Section 7.1(b) of the Agreement is hereby deleted and replaced in its
entirety with the following:
(b) by either BUYER or the COMPANY if the Merger shall not have been
consummated by January 31, 1998 (provided that (i) either BUYER or the
COMPANY may extend such date to March 31, 1998 by providing written notice
thereof to the other party on or prior to January 31, 1998 (January 31,
1998, as it may be so extended to March 31, 1998, shall be referred to
herein as the "Outside Date") and (ii) the right to terminate or extend
this Agreement under this Section 7.1(b) shall not be available to any
party whose failure to fulfill any covenant under this Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date); or
13. Section 7.1(e) of the Agreement is hereby deleted and replaced in its
entirety with the following:
(e) by COMPANY, if (i) at the Special BUYER Meeting (including any
adjournment or postponement) the Requisite BUYER Proposal Approval shall
not have been obtained; (ii) at the Special BUYER Meeting (including any
adjournment or postponement), the Requisite BUYER Stockholder Approval
shall not have been obtained; (iii) after receipt by the Board of Directors
of the BUYER of a proposal or offer for a merger, consolidation, business
combination, sale or transfer of substantial assets or shares of capital
stock (including without limitation by way of a tender offer) or similar
transaction involving BUYER or its subsidiaries (a "BUYER Acquisition
Proposal") the Board of Directors of the BUYER shall have withdrawn or
modified its recommendation with respect to this Agreement or the Merger;
(iv) after the receipt by the BUYER of a BUYER Acquisition Proposal,
COMPANY requests in writing that the Board of Directors of the BUYER
reconfirm its recommendation with respect to this Agreement or the Merger
and the Board of Directors of the BUYER fails to do so within 10 business
days after its receipt of BUYER's request; (v) the Board of Directors of
the
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BUYER shall have recommended to the Stockholders of the BUYER an
Alternative Transaction (as defined in Section 7.3(f)); (vi) a tender offer
or exchange offer for 20% or more of the outstanding shares of the BUYER
Shares is commenced (other than by COMPANY or an Affiliate of COMPANY) and
the Board of Directors of the BUYER recommends that the stockholders of the
BUYER tender their shares in such tender or exchange offer; (vii) for any
reason fails to call and hold the Special BUYER Meeting at least two
business days prior to the Outside Date; (viii) after receipt by the Board
of Directors of the COMPANY of an Acquisition Proposal, the Board of
Directors of the COMPANY shall have withdrawn or modified its
recommendation of this Agreement or the Merger; (ix) the Board of Directors
of the COMPANY shall have recommended to the stockholders of the COMPANY an
Alternative Transaction (as defined in Section 7.3(f)); (x) a tender offer
or exchange offer for 20% or more of the outstanding shares of the COMPANY
Shares is commenced (other than by BUYER or an Affiliate of BUYER) and the
Board of Directors of the COMPANY recommends that the stockholders of the
COMPANY tender their shares in such tender or exchange offer; or (xi) the
BUYER has not obtained financing sufficient to obtain the consent of
COMPANY's lender to the consummation of the Merger and otherwise
satisfactory to the COMPANY in its sole good faith discretion.
14. The introductory sentence to Section 7.3(b) of the Agreement is hereby
deleted and replaced in its entirety with the following:
(b) The COMPANY shall pay BUYER a termination fee of $800,000 upon the
earliest to occur of the following events;
15. Section 7.3(b)(i) is hereby deleted and replaced in its entirety with
the following:
(i) the termination of the Agreement by BUYER pursuant to Section
7.1(d)(ii) through (vi) or by COMPANY pursuant to Section 7.1(e)(viii)
through (x); or
16. The introductory sentence to Section 7.3(c) of the Agreement is hereby
deleted and replaced in its entirety with the following:
(c) The BUYER shall pay COMPANY a termination fee of $800,000 upon the
earliest to occur of the following events;
17. Section 7.3(d) of the Agreement is hereby deleted and replaced in its
entirety with the following:
(d) The BUYER shall pay COMPANY a termination fee of $400,000 upon
termination of this Agreement by COMPANY pursuant to Section 7.1(e)(i). In
no event shall COMPANY receive a termination fee under both 7.3(c) and this
Section 7.3(d)
18. Except as otherwise set forth above, the Agreement is otherwise
ratified and confirmed in all respects.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Parties hereto have executed this Amendment as of
the date first above written.
MOOVIES, INC.
("COMPANY")
By: /s/JOHN L. TAYLOR
------------------------------------
Authorized Officer
VIDEO UPDATE, INC. ("BUYER")
By: /s/DANIEL A. POTTER
------------------------------------
Daniel A. Potter
Chief Executive Officer
VUI MERGER CORP. ("SUB")
By: /s/DANIEL A. POTTER
------------------------------------
Title: President
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<PAGE> 237
ANNEX B
[PIPER JAFFRAY LOGO]
Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, MN 55402-3804
January __, 1998
Board of Directors
Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101-4913
Members of the Board:
This letter relates to the issuance of shares of Class A Common Stock,
$0.01 par value (the "Video Update Common Stock") of Video Update ("Video
Update") in exchange for all of the outstanding shares of Common Stock, $0.001
par value (the "Moovies Common Stock") of Moovies, Inc. ("Moovies") pursuant to
the Agreement and Plan of Merger referred to below (the "Transaction"). The
aggregate consideration to be paid by Video Update in the Merger will be based
on a fixed exchange ratio of .75 shares of Video Update Common Stock for each
share of Moovies Common Stock (the "Exchange Ratio") (plus cash in lieu of
fractional shares.) You have requested our opinion as to the fairness to the
shareholders of Video Update Common Stock, from a financial point of view, of
the Exchange Ratio.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, underwritings and secondary
distributions of securities, private placements, and valuations for estate,
corporate and other purposes. Piper Jaffray makes a market in Video Update
Common Stock and also provides research coverage for Video Update. We acted as
the lead manager of a secondary public equity offering for Video Update in 1996.
For our services in connection with the Transaction, including rendering this
opinion, Video Update will pay us a fee and indemnify us against certain
liabilities.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have:
1. Reviewed the Agreement and Plan of Merger dated July 9, 1997 among
Video Update and Moovies and the Amendment to the Agreement and Plan of
Merger dated October 27, 1997.
2. Reviewed the Reports on Form 10-K for Moovies for each of the three
fiscal years ended December 31, 1996, December 31, 1995 and December 31,
1994.
3. Reviewed the Reports on Form 10-Q for Moovies for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997.
4. Reviewed the Reports on Form 10-K for Video Update for each of the
three fiscal years ended April 30, 1997, April 30, 1996 and April 30, 1995.
5. Reviewed the Reports on Form 10-Q for Video Update for the quarters
ended July 31, 1997 and October 31, 1997.
6. Reviewed financial forecasts for Video Update furnished by Video
Update's management, including financial forecasts for the five year period
ending April 30, 2002 and financial forecasts for the five year period
ending December 31, 2002.
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Video Update
January __, 1998
Page 2
7. Reviewed financial forecasts for Moovies furnished by Moovies
Management and revised by Video Update (the "Adjusted Moovies Forecasts")
for the calendar years ending December 31, 1998 through December 31, 2002.
8. Conducted discussions with members of senior management of Moovies,
including the Chief Executive Officer, the Chief Financial Officer and the
Controller. Topics discussed included, but were not limited to, the
background and rationale of the proposed Transaction, the financial
condition, operating performance, and the balance sheet characteristics of
Moovies and the prospects for the combined company after consummation of
the proposed Transaction.
9. Conducted discussions with members of senior management of Video
Update, including the Chairman and Chief Executive Officer, Chief Financial
Officer and Executive Vice President. Topics discussed included, but were
not limited to, the background and rationale for the proposed Transaction,
the financial condition, operating performance, balance sheet
characteristics and prospects of Video Update's business independently and
the financial and operating prospects for the combined company after
consummation of the proposed Transaction.
10. Reviewed the historical prices and trading activity for Video
Update Common Stock and Moovies Common Stock.
11. Reviewed financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed
relevant.
12. Performed a discounted cash flow analysis on the Adjusted Moovies
Forecasts with and without synergies.
13. Considered the pro forma effect of the proposed Transaction on
Video Update's earnings per share for the fiscal years 1998 through 2000
and on Video Update's earnings per share for the calendar years 1998
through 2001.
14. Compared certain financial and securities data of Moovies with
certain financial and securities data of companies deemed similar to
Moovies or representative of the business sector in which Moovies operates.
15. Analyzed the premiums paid in recent mergers and acquisitions
involving the sale of public companies under the purchase method of
accounting.
16. Calculated the projected contribution of Video Update and Moovies
to the combined company by revenue, earnings before interest and taxes, net
income, stores and ownership for the calendar years 1998 through 2001.
17. Reviewed such other financial data, performed such other analyses
and considered such other information as we deemed necessary and
appropriate under the circumstances.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by Video Update and Moovies
or otherwise made available to us and have not attempted independently to verify
such information. We have further relied upon the assurances of Video Update's
and Moovies' managements that the information provided has been prepared on a
reasonable basis and, with respect to financial planning data, reflects the best
currently available estimates and that they are not aware of any information or
facts that would make the information provided to us incomplete or misleading.
In that regard, we have assumed with your consent that any projections or
forecasts, including without limitation, any projected cost savings and
operating synergies resulting from the Transaction, reflect best currently
available estimates and judgments of the respective managements of Video Update
and Moovies. We have also assumed the release from escrow of 1,300,000 shares of
Class B common stock, $.01 par value of Video
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Video Update
January __, 1998
Page 3
Update (the "Class B Shares") beneficially owned by certain senior managers of
Video Update and the conversion of all outstanding shares of Video Update Class
B common stock to Video Update Common Stock. Furthermore, we have assumed that
neither Video Update nor Moovies is a party to any pending transaction,
including external financings, recapitalizations, acquisitions or merger
discussions, other than the Transaction or in the ordinary course of business.
We have not received advice from legal counsel to Video Update or Moovies
concerning the probable outcome of, or estimated damages which might arise from,
any pending or threatened litigation, possible unasserted claims or other
contingent liabilities, to which either Video Update or Moovies or their
affiliates is a party or may be subject and have undertaken no analysis thereof
independently.
Accordingly, at Video Update's direction and with its consent, our opinion
makes no assumption concerning, and therefore does not consider, the possible
assertion of claims, outcomes or damages arising out of any such matters. An
adverse judgment rendered against Video Update or Moovies could alter the
opinion expressed herein. Our opinion also does not consider and we express no
opinion with respect to the release from escrow of The Class B Shares
beneficially owned by certain senior managers of Video Update.
In arriving at our opinion, we have not performed any appraisals or
valuations of specific assets of Video Update or Moovies and express no opinion
regarding the liquidation value of Video Update or Moovies. Our opinion is
necessarily based upon information available to us, facts and circumstances and
economic, market and other conditions as they exist and are subject to
evaluation on the date hereof; events occurring after the date hereof could
materially affect the assumptions used in preparing this opinion. We express no
opinion herein as to the prices at which shares of Video Update Common Stock may
trade at any future time.
This opinion is directed to the Board of Directors of Video Update and
shall not be published or otherwise used, nor shall any public references to
Piper Jaffray be made without our written consent, except for inclusion in the
full proxy/prospectus to be sent to all shareholders of Video Update and Moovies
and in any filings or disclosures required by law. This opinion is not intended
to be and does not constitute a recommendation to any shareholder as to how a
shareholder should vote with respect to the Transaction.
Based upon and subject to the foregoing and based upon such other factors
as we consider relevant, it is our opinion that the Exchange Ratio is fair, from
a financial point of view, to the shareholders of Video Update Common Stock.
Sincerely,
PIPER JAFFRAY INC.
--------------------------------------
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ANNEX C
[ASENSIO & COMPANY LOGO]
October 27, 1997
Board of Directors
Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101-4913
Gentlemen:
Video Update, Inc. ("Company"), its wholly owned subsidiary VUI Merger
Corp., and Moovies, Inc. ("Moovies") have entered into an Agreement and Plan of
Merger, dated July 9, 1997, and amended October 27, 1997 ("Merger Agreement").
On the Effective Date of the Merger Agreement ("Effective Time") each share of
Moovies' Common Stock, par value $0.001 per share, will be converted into the
right to receive .75 shares ("Exchange Ratio") of the Company's Class A Common
Stock, par value $0.01 per share ("Class A"). As a condition to the Merger
Agreement, the Company is required to convert all its outstanding shares of
Class B Common Stock, par value $0.01 per share ("Class B") to Class A shares
("Conversion Condition"). All of the Company's 2,000,000 Class B shares
outstanding, including 1,300,000 Class B shares held in escrow ("Escrow Shares")
under an Escrow Agreement dated July 20, 1994 ("Escrow Agreement"), are owned or
controlled by certain of the Company's current officers and directors ("Class B
Holders"). In order to comply with the Conversion Condition the parties to the
Merger Agreement and the Class B Holders have entered into an Amended and
Restated Undertaking Agreement dated October 27, 1997 ("Undertaking Agreement")
that terminates the Escrow Agreement, releases certain Escrow Shares, and
converts all Class B shares into Class A. You have requested our opinion as to
the fairness of the Undertaking Agreement, from a financial point of view, to
the Company's Class A shareholders.
Asensio & Company, Inc. ("Asensio") is a registered securities dealer
engaged, among other businesses, in the investment banking industry, including
the analysis of merger and acquisition transactions and the valuation of assets
and securities. The Company has agreed to pay us a fee and to indemnify us
against certain liabilities for our services related to the rendering of this
opinion.
In arriving at our opinion, we have reviewed the opinion of Piper Jaffray
Inc. and assumed the fairness of the Exchange Ratio. We have assumed that the
Board of Directors of Moovies will obtain a satisfactory opinion as to the
fairness of the terms of the Merger Agreement to Moovies shareholders. We have
reviewed and analyzed all of the agreements referred to above, the Company's
Restated Certificate of Incorporation dated December 31, 1996 and the Amended
and Restated Acknowledgment and Consent dated October 27, 1997 ("Consent"). We
have also reviewed the Company's recent filings with the U.S. Securities and
Exchange Commission, including its most recent reports filed on Form 10K, Form
10Q, its proxy statement and prospectus dated September 27, 1996. We reviewed
certain financial forecasts and analyses prepared by the Company's management,
including the Company's internal financial projections on a standalone basis and
projected revenues, cost savings and net income for the combined companies. We
also calculated and reviewed the effect of the Undertaking Agreement on the
combined Company's net income, earnings per share and
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Board of Directors
Video Update
October 27, 1997
Page 2 of 2
voting control. Furthermore, we calculated the Merger Agreement's impact on the
Escrow Agreement's Minimum Pretax Income Target amounts required to release the
Escrow Shares.
We have relied on the accuracy and completeness of the Company's financial
statements and other information provided by the Company and have not
independently confirmed, evaluated or verified such information. We have also
assumed that the information provided to us has been prepared using reasonable
assumptions and reflects all available facts with no known exclusions. We were
not engaged to, and did not, provide financial advice or other service to any of
the parties to the Consent, Undertaking or Merger Agreements as to any part of
this transaction including the number of Escrow Shares that are to be released
to the Class B Holders. Our opinion does not constitute a recommendation as to
how the Company's shareholders should vote with respect to the Merger Agreement.
Subject to all of the above and other factors that we consider relevant, it
is our opinion that the terms of the Undertaking Agreement are fair, from a
financial point of view, to the shareholders of Video Update, Inc.'s Class A
Common Stock, $0.01 par value per share.
Sincerely,
ASENSIO & COMPANY, INC.
/s/ ASENSIO & COMPANY, INC.
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<PAGE> 242
ANNEX D
[NEEDHAM LOGO]
NEEDHAM & COMPANY, INC. 445 Park Avenue, New York, NY 10022-4406 (212) 371-8300
January __, 1998
Board of Directors
Moovies, Inc.
201 Brookfield Parkway
Suite 200
Greenville, SC 29607
Gentlemen:
We understand that Moovies, Inc. ("Moovies"), Video Update, Inc. ("Video
Update") and VUI Merger Corp., a wholly-owned subsidiary of Video Update
("Sub"), have entered into an Agreement and Plan of Merger (the "Merger
Agreement") dated July 9, 1997, and amended as of October 27, 1997, whereby Sub
will be merged with and into Moovies and Moovies will become a wholly-owned
subsidiary of Video Update (the "Merger"). The terms of the Merger are set forth
more fully in the Merger Agreement.
Pursuant to the Merger Agreement, we understand that at the Effective Time
(as defined in the Merger Agreement), each issued and outstanding share of
common stock, par value $.001 per share, of Moovies will be converted into the
right to receive 75/100ths (.75) shares (the "Exchange Ratio") of common stock,
par value $.01 per share, of Video Update (the "VUI Common Stock").
You have asked us to advise you as to the fairness, from a financial point
of view, of the proposed Exchange Ratio to the stockholders of Moovies. Needham
& Company, Inc., as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and valuations. We have acted as financial
advisor to Moovies in connection with the Merger and will receive a fee for our
services that is contingent on the consummation of the Merger. In addition,
Moovies has agreed to indemnify us for certain liabilities arising out of the
rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed the
Merger Agreement; (ii) reviewed certain other documents relating to the Merger,
(iii) reviewed certain publicly available information concerning Video Update
and Moovies and certain other relevant financial and operating data of Video
Update and Moovies made available from the internal records of Video Update and
Moovies; (iv) reviewed the historical stock prices and trading volumes of Video
Update's and Moovies' common stock; (v) held discussions with members of senior
management of Video Update and Moovies concerning their current and future
business prospects; (vi) reviewed certain financial forecasts and projections
prepared by the respective managements of Video Update and Moovies; (vii)
compared certain publicly available financial data of companies whose securities
are publicly traded, which we deemed generally comparable to the business of
Moovies, to similar data for Moovies; (viii) reviewed the financial terms of
certain other business combinations that we deemed generally relevant; (ix)
participated in discussions and negotiations among representatives of Moovies
and Video Update and their financial and legal advisors; and (x) performed
and/or considered such other studies, analyses, inquiries and investigations as
we deemed appropriate.
In connection with our review and arriving at our opinion, we have not
assumed any responsibility to independently verify any of the foregoing
information, have relied on such information, and have assumed that all such
information is complete and accurate in all material respects. In addition, we
have assumed, with your consent, that (i) the Merger will be accounted for under
the purchase method of accounting, (ii) the Merger will constitute a tax-free
reorganization, and (iii) any material liabilities (contingent or otherwise,
known or unknown) of Video Update and Moovies are as set forth in the
consolidated financial statements of Video
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<PAGE> 243
Update and Moovies, respectively. With respect to Video Update's and Moovies'
financial forecasts provided to us by their respective managements, we have
assumed for purposes of our opinion that such forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of such managements, at the time of preparation, of the future
operating and financial performance of Video Update and Moovies. We have not
assumed any responsibility for or made or obtained any independent evaluation,
appraisal or physical inspection of the assets or liabilities of Video Update or
Moovies. Further, our opinion is based on economic, monetary and market
conditions existing as of the date hereof, and in rendering this opinion, we
have relied without independent verification on the accuracy, completeness and
fairness of all historical financial and other information which was either
publicly available or furnished to us by Video Update and Moovies. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
of the Exchange Ratio to the stockholders of Moovies and does not address
Moovies' underlying business decision to engage in the Merger. Our opinion does
not constitute a recommendation to any stockholder of Moovies as to how such
stockholder should vote on the proposed Merger.
We are expressing no opinion as to what the value of Video Update Common
Stock will be when issued to the stockholders of Moovies pursuant to the Merger
or the prices at which Video Update Common Stock will actually trade at any
time; although subsequent developments may affect this opinion, we do not have
any obligation to update revise or reaffirm this opinion.
In the ordinary course of our business, we may actively trade the equity
securities of Moovies or Video Update for our own account or for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, we have previously provided investment banking
services to Moovies on matters unrelated to the Merger.
This letter and the opinion expressed herein are for the benefit of the
Board of Directors of Moovies and may not be quoted or referred to or used for
any purpose without our prior written consent, except that this letter may be
disclosed in connection with any registration statement or proxy statement used
in connection with the Merger so long as this letter is quoted in full in such
registration statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof the Exchange Ratio is fair to the stockholders of Moovies from a
financial point of view.
Very truly yours,
--------------------------------------
Needham & Company, Inc.
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<PAGE> 244
ANNEX E
AMENDED AND RESTATED UNDERTAKING AGREEMENT
This Amended and Restated Undertaking Agreement, dated as of October 27,
1997 (the "Agreement"), among Video Update, Inc. a Delaware corporation
("BUYER"), VUI Merger Corp., a Delaware corporation ("SUB"), Moovies, Inc., a
Delaware corporation ("COMPANY") and the holders of BUYER's Class B Common
Stock, $.01 par value ("Class B Common Stock") as listed on attached Schedule 1
annexed hereto, each with an address as set forth on Schedule 1 (such
individuals being hereinafter referred to individually as "Stockholder" and
collectively as "Stockholders").
WHEREAS, BUYER, SUB, and COMPANY have entered into an Agreement and Plan of
Merger, dated as of July 9, 1997 and an Amendment to the Agreement and Plan of
Merger dated as of the date hereof (the "Amendment"), both of which are
collectively referred to as the "Merger Agreement";
WHEREAS, COMPANY is requiring, as a condition to its obligation to
consummate the transactions contemplated by the Merger Agreement
("Transactions"), that the Stockholders convert all Class B Common Stock held by
them into an equivalent number of BUYER Shares at and effective upon the
Effective Time;
WHEREAS, the arrangements contemplated by the Escrow Agreement, dated July
20, 1994, among the BUYER, the Stockholders and the BUYER's stock transfer agent
(the "Escrow Agreement"), are to be eliminated at the Effective Time in
connection with the conversion of the Class B Common Stock described above;
WHEREAS, BUYER, SUB, COMPANY and Stockholders have entered into an
Undertaking Agreement dated as of July 9, 1997 (the "July 9, 1997 Undertaking
Agreement");
WHEREAS BUYER, SUB, COMPANY and Stockholders, in connection with the
Amendment, wish to amend and replace the July 9, 1997 Undertaking Agreement with
this Amended and Restated Undertaking Agreement dated as of October 27, 1997;
WHEREAS, initially capitalized terms not otherwise defined herein shall
have their respective meanings as set forth in the Merger Agreement, a copy of
which has been provided to each of the Stockholders; and
WHEREAS, each of the Stockholders is familiar with the terms and conditions
of the Merger Agreement and the Transactions.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE 1.
AGREEMENT TO CONVERT
SECTION 1.01. CONVERSION. BUYER, SUB, COMPANY and Stockholders hereby
agree that (a) the July 9, 1997 Undertaking Agreement shall cease to be of any
further force or effect and (b) this Amended and Restated Undertaking Agreement
shall amend and replace the July 9, 1997 Undertaking Agreement. Each Stockholder
agrees that, effective upon and at the Effective Time, all Class B Common Stock
listed opposite his name in Column A on Schedule 1 shall be converted into and
shall become an equivalent number of BUYER Shares, without any further action or
consent on the part of such Stockholder (the "Conversion"). Each Stockholder
will execute any and all consents, certificates, approvals or documents
necessary to evidence and effect the Conversion. BUYER shall instruct its stock
transfer agent immediately to reflect the Conversion on the stock transfer
ledgers and books and records of the BUYER.
SECTION 1.02. ADDITIONAL AGREEMENTS.
(A) The BUYER and each Stockholder agrees that, effective upon and at the
Effective Time (a) all Class B Common Stock listed opposite each Stockholder's
name in Column B of Schedule 1 shall be cancelled and forfeited; and (b) all
Class B Common Stock listed opposite his name in Column A on
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Schedule 1 that has been converted into an equivalent number of BUYER Shares in
accordance with Section 1.01 (referred to herein as "Converted Shares") shall be
released to such Stockholder immediately, free and clear of any encumbrance or
arrangement of the Escrow Agreement or the BUYER to the extent subject to the
same, except as otherwise stated herein. Each of the BUYER and the Stockholder
will execute any and all consents, certificates, approvals or documents
necessary to evidence and effect the termination of the Escrow Agreement, the
reflection of the cancellation and forfeiture of the Class B Common Stock listed
in Column B of Schedule 1, and the release to each Stockholder of all converted
shares listed opposite his name in Column A on Schedule 1. BUYER shall instruct
its stock transfer agent immediately to reflect the foregoing on the stock
transfer ledgers and books and records of the BUYER.
(B) The BUYER and each Stockholder agrees that, effective upon and at the
Effective Time, neither the BUYER nor any of its Subsidiaries shall grant or
award to any Stockholder, until after the eighteen month anniversary of the
Effective Time, any additional options, warrants, or securities convertible into
or exchangeable for, any capital stock of the Company, provided that nothing
herein shall affect in any way any outstanding options, warrants or existing
similar rights held or accorded to such Stockholder.
(C) Each Stockholder agrees that as of and for a period of two years after
the Effective Time, he will not, directly or indirectly, issue, offer, sell,
grant any option for the sale of, acquire any option to dispose of, assign,
transfer, pledge or otherwise encumber or dispose of any Converted Shares or any
other equity securities issued in exchange for or in replacement of the
Converted Shares, without the consent of the board of directors of the BUYER
(with each Stockholder abstaining from such vote), except in connection with the
acquisition of the BUYER by a third party.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each of the Stockholders hereby represents and warrants to BUYER, SUB and
COMPANY as follows:
SECTION 2.01. AUTHORITY RELATIVE TO THIS AGREEMENT. He has all necessary
power and authority to execute and deliver this Agreement to perform his
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by such
Stockholder, constitutes a legal, valid and binding obligation of Stockholder,
enforceable against him in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
SECTION 2.02. NO CONFLICT. The execution and delivery of this Agreement
by the Stockholder does not, and the performance of this Agreement by the
Stockholder will not (i) require any consent, approval, authorization or permit
of, or filing with or notification to any governmental or regulatory authority,
domestic or foreign, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to the Stockholder or by which any property
or asset of the Stockholder is bound or affected, or (iii) result in any breach
of or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or other encumbrance of any nature whatsoever on any property or asset of the
Stockholder or pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit franchise or other instrument or obligation to
which such Stockholder is a party or by which the Stockholder or any property or
asset of the Stockholder is bound or affected.
SECTION 2.03. NO OTHER REPRESENTATIONS OR WARRANTIES. Notwithstanding the
representations and warranties contained in this Section 2, the Stockholders
make none of the representations or warranties contained in the Merger Agreement
with respect to BUYER or COMPANY or with respect to any obligations, property or
assets of BUYER or COMPANY.
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ARTICLE 3.
MISCELLANEOUS
SECTION 3.01. FURTHER ASSURANCE. The parties will execute and deliver all
such further documents and instruments and take all such further action as may
be necessary in order to carry out the intentions of this Agreement.
SECTION 3.02. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 3.03. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, both written and oral,
between or among them with respect to the subject matter hereof.
SECTION 3.04. ASSIGNMENT; PARTIES IN INTEREST. This Agreement shall be
binding upon, inure solely to the benefit of, and be enforceable by, the parties
hereto and their successors and permitted assigns. Nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 3.05. AMENDMENT; WAIVER. This Agreement may not be amended and no
term or condition hereof may be waived except by an instrument in writing
executed by the parties hereto; provided that no amendment or modification of
Sections 1.01 or 1.02 shall be effective without the prior consent of D. H.
Blair Investment Banking Corp.
SECTION 3.06. SEVERABILITY. If a court of competent jurisdiction shall
finally determine that any provision of this Agreement is invalid, illegal or
unenforceable, then all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect and such court shall modify such
invalid, illegal or unenforceable provision to the minimum extent necessary to
make same valid, legal an enforceable.
SECTION 3.07. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be delivered in person,
by telecopy, expedited delivery service (such as Federal Express) or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
If to BUYER or SUB:
Video Update, Inc.
3300 World Trade Center
30 E. Seventh Street
St. Paul, MN 55101
Attention: Chief Executive Officer
with a copy to:
Lawrence H. Gennari, Esquire
Gadsby & Hannah LLP
225 Franklin Street
Boston, MA 02110
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if to any one or more of the Stockholders:
To the address set forth next to such stockholders name.
if to COMPANY:
Moovies, Inc.
201 Brookfield Parkway, Suite 200
Greenville, SC 29607
Attention: President and Chief Executive Officer
with a copy to:
Jonathan Golden, Esquire
Eva P. Cederholm, Esquire
Arnall Golden & Gregory LLP
2800 One Atlantic Center
1201 W. Peachtree Street
Atlanta, GA 30309
Such notice shall be effective on the day following receipt of delivery in
person, by verified telecopy or by expedited delivery service and shall be
effective four days after mailing in accordance the foregoing. The person to
whom notice is to be given, and any address, may be changed from time to time in
the manner set forth above (provided that notice of any change of address shall
be effective only upon receipt thereof).
SECTION 3.08. JURY TRIAL WAIVER. All parties hereto hereby waive trial by
jury in any action, counterclaim or proceeding of any kind arising under or out
of or in connection with this Agreement, the negotiations leading thereto, the
inducements to the parties to enter into this Agreement and to the transactions
it contemplates.
SECTION 3.09. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
SECTION 3.10. HEADINGS. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 3.11. TERMINATION. This Agreement shall have no force or legal
effect unless and until the Effective Time under the Merger Agreement. This
Agreement shall terminate upon any termination of the Merger Agreement.
SECTION 3.12. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, each of BUYER, SUB or COMPANY has caused this Agreement
to be executed by its officer thereunto duly authorized and each of the
Stockholders has duly executed this Agreement as of the date first written
above.
VIDEO UPDATE, INC.
By: /s/ DANIEL A. POTTER
------------------------------------
Name: Daniel A. Potter
Title: Chief Executive Officer
VUI MERGER CORP.
By: /s/ DANIEL A. POTTER
------------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES, INC.
By: /s/ JOHN TAYLOR
------------------------------------
Name: John Taylor
Title: President and Chief Executive
Officer
STOCKHOLDERS:
DANIEL A. POTTER
/s/ DANIEL A. POTTER
--------------------------------------
JOHN M. BEDARD
/s/ JOHN M. BEDARD
--------------------------------------
DANIEL C. HOWARD
/s/ DANIEL C. HOWARD
--------------------------------------
<TABLE>
<S> <C>
Agreed: JOHN M. BEDARD, as Voting Trustee for
Rosemarie J. Bedard
/s/ ROSEMARIE J. BEDARD /s/ JOHN M. BEDARD
- ----------------------------------------- ----------------------------------------------
Rosemarie J. Bedard
DANIEL A. POTTER, as Custodian
/s/ DANIEL A. POTTER
----------------------------------------------
</TABLE>
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<PAGE> 249
SCHEDULE 1
STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS B COMMON STOCK
-----------------------------
NAME ADDRESS COLUMN A COLUMN B
---------------------- -------------------------------- ---------------- ---------
<S> <C> <C> <C> <C>
1. Daniel A. Potter...... 1,016,120 70,639
(including
635,755 subject
to Escrow
Agreement)
2. John M. Bedard........ 821,039 57,078
(including
513,698 subject
to Escrow
Agreement)
3. Daniel C. Howard...... 32,841 2,283
(including
20,547 subject
to Escrow
Agreement)
---------------- ---------
TOTALS................ 1,870,000 130,000
</TABLE>
E-6
<PAGE> 250
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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 or 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
approving a stock repurchase which is deemed illegal or obtaining an improper
personal benefit. Video Update'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
corporation, and, with respect to any criminal action, he had reasonable cause
to believe his conduct was not unlawful. Video Update'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 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 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 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."
Video Update has a directors and officers liability policy that insures
Video Update's officers and directors against certain liabilities.
Pursuant to the Merger Agreement, Video Update has agreed to indemnify each
present and former director and officer of Moovies for a period of six years
after the Merger against liabilities or expenses incurred
II-1
<PAGE> 251
in connection with claims relating to matters occurring prior to the closing of
the Merger, and to maintain in effect directors' and officers' liability
insurance for their benefit for a period of three years after the Merger.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Purchase Agreement by and between Video Update, Piper Jaffray Inc. and
The Robinson Humphrey Company, Inc. (filed as Exhibit 1 to Video Update's
Pre-Effective Amendment No. 2 to its Form S-3 Registration Statement filed
with the Commission on September 27, 1996 and incorporated herein by
reference) (replaced and superseded a corresponding exhibit previously filed
with the Commission).
2.1(1) -- Agreement and Plan of Merger dated as of July 9, 1997, as amended by Amendment
to Agreement and Plan of Merger dated as of October 27, 1997, by and among
Video Update, Inc. ("Video Update"), VUI Merger Corp. and Moovies, Inc.
("Moovies").
2.2 -- Purchase Agreement by and among Video Update Canada Inc., Hill and Cassidy
Retail Corp., Byron Hill, Patricia Hill and Mel Cassidy, dated as of April 1,
1997 (filed as Exhibit 2 to Video Update's Current Report on Form 8-K filed
with the Commission on April 7, 1997 and incorporated herein by reference).
2.3 -- Purchase Agreement by and among Video Update, Cox Video Corporation, and
Robert W. Cox, dated as of February 28, 1997 (filed as Exhibit 2a to Video
Update's Current Report on Form 8-K filed with the Commission on April 4, 1997
and incorporated herein by reference).
2.4 -- Purchase Agreement by and among Video Update, Susan Janae Kingston, and Larry
Peterman, dated as of March 17, 1997 (filed as Exhibit 2b to Video Update's
Current Report on Form 8-K filed with the Commission on April 4, 1997 and
incorporated herein by reference).
2.5 -- Purchase Agreement by and among Video Update, Video Warehouse, Inc., and
Donald and Katherine Cianci, dated as of January 15, 1997 (filed as Exhibit 2
to Video Update's Current Report on Form 8-K filed with the Commission on
January 29, 1997 and incorporated herein by reference).
2.6 -- Purchase Agreement by and among Video Update Canada Inc., Video View Ltd., and
Gordon and Joanne Hillman, dated as of January 1, 1997 (filed as Exhibit 2 to
Video Update's Current Report on Form 8-K filed with the Commission on January
10, 1997 and incorporated herein by reference).
2.7 -- Purchase Agreement by and between Video Update, Videoland, Inc. and the
Stockholder of Videoland, Inc., dated as of November 14, 1995 (filed as
Exhibit 2 to Video Update's Current Report on Form 8-K/A filed with the
Commission on January 26, 1996 and incorporated herein by reference).
2.8 -- Purchase Agreement by and among Video Update, 94 Video West, Inc. and Michael
Bennett and Paul Levens, dated as of October 2, 1995 (filed as Exhibit 2a to
Video Update's Current Report on Form 8-K filed with the Commission on October
13, 1995 and incorporated herein by reference).
2.9 -- Purchase Agreement by and among Video Update, Talerico Enterprises, Inc.
("TEI") and the stockholder of TEI, dated as of October 5, 1995 (filed as
Exhibit 2b to Video Update's Current Report on Form 8-K filed with the
Commission on October 13, 1995 and incorporated herein by reference).
</TABLE>
II-2
<PAGE> 252
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
2.10 -- Purchase Agreement by and between Video Update, and the Stockholders of Indy
Video, Inc., dated as of September 26, 1995 (filed as Exhibit 2 to Video
Update's Current Report on Form 8-K filed with the Commission on September 27,
1995 and incorporated herein by reference).
2.11 -- Stock Purchase and Sale Agreement by and among Video Update, Wilderness Video
Group Ltd., Richard Walton, the Walton Family Trust Alexsay Holdings Ltd.,
Barclays Bank of Canada, Allstate Life Insurance Company of Canada, and
Ontario Municipal Employees Retirement Board, dated as of August 22, 1995
(filed as Exhibit 2a to Video Update's Current Report on Form 8-K filed with
the Commission on August 30, 1995 and incorporated herein by reference).
2.12 -- Stock Purchase and Sale Agreement by and between Video Update and Glenn Forth,
dated August 23, 1995 (filed as Exhibit 2b to Video Update's Current Report on
Form 8-K filed with the Commission on August 30, 1995 and incorporated herein
by reference).
2.13 -- Stock Purchase and Sale Agreement by and between Video Update and Seig Badke,
dated August 23, 1995 (filed as Exhibit 2c to Video Update's Current Report on
Form 8-K filed with the Commission on August 30, 1995 and incorporated herein
by reference).
2.14 -- Stock Purchase and Sale Agreement by and among Video Update, 443972 B.C.,
Ltd., Dale Mounzer and Jim Collen, dated August 22, 1995 (filed as Exhibit 2d
to Video Update's Current Report on Form 8-K filed with the Commission on
August 30, 1995 and incorporated herein by reference).
2.15 -- Purchase Agreement by and between Video Update and the Stockholders of AV
Video, dated as of July 14, 1995 (filed as Exhibit 2 to Video Update's Current
Report on Form 8-K filed with the Commission on July 26, 1995 and incorporated
herein by reference).
2.16 -- Purchase Agreement by and between Video Update and the Proprietors of Video
Powerstore, dated as of June 2, 1995 (filed as Exhibit 2 to Video Update's
Current Report on Form 8-K filed with the Commission on June 29, 1995 and
incorporated herein by reference).
2.17 -- Second Amendment to the Agreement and Plan of Merger by and among Video
Update, Schmidt & Schmidt Limited ("SSL"), and the Stockholders of SSL, dated
February 28, 1995 (filed as Exhibit 2a to Video Update's Form Quarterly Report
on Form 10-QSB for the quarter ended January 31, 1995 filed with the
Commission on March 17, 1995 and incorporated herein by reference).
2.18 -- Agreement and Plan of Merger by and among Video Update, Jarzig Enterprises,
Inc., and the Stockholders of Jarzig Enterprises, Inc., dated October 25, 1994
(filed as Exhibit 2b to Video Update's Quarterly Report on Form 10-QSB for the
quarter ended October 31, 1994, filed with the Commission on December 15, 1994
and incorporated herein by reference).
2.19 -- Agreement and Plan of Merger by and among Video Update, Schmidt & Schmidt
Limited, and the Stockholders of Schmidt & Schmidt Limited, dated September
16, 1994 (filed as Exhibit 2a to Video Update's Current Report on Form 8-K
filed with the Commission on October 3, 1994 and incorporated herein by
reference).
2.20 -- Agreement and Plan of Merger by and among Video Update, Halgrimson
Enterprises, Inc., and the Stockholders of Halgrimson Enterprises, Inc., dated
September 16, 1994 (filed as Exhibit 2b to Video Update's Current Report on
Form 8-K filed with the Commission on October 3, 1994 and incorporated herein
by reference).
2.21 -- Agreement and Plan of Merger by and among Video Update, Koonrod, Inc. and the
Stockholders of Koonrod, Inc., dated September 2, 1994 (filed as Exhibit 2 to
Video Update's Quarterly Report on Form 10-QSB for the quarter ended July 31,
1994, filed with the Commission on September 10, 1994 and incorporated herein
by reference).
</TABLE>
II-3
<PAGE> 253
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation (filed as Exhibit 3 to Video Update's
Current Report on Form 8-K filed with the Commission on January 20, 1997 and
incorporated herein by reference).
3.2 -- Bylaws of Video Update, as amended on July 31, 1997.
4.1 -- Form of Unit Purchase Option (filed as Exhibit 4a to Video Update's
Pre-Effective Amendment No. 1 to its Form SB-2 Registration Statement (No. 33-
89018) originally filed with the Commission on March 31, 1995 and incorporated
herein by reference).
4.2 -- Specimen Class A Common Stock Certificate (filed as Exhibit 4a to Video
Update's Form SB-2 Registration Statement (No. 33-79292-C) declared effective
by the Commission on July 20, 1994 and incorporated herein by reference).
4.3 -- Specimen Class B Common Stock Certificate (filed as Exhibit 4b to Video
Update's Form SB-2 Registration Statement (No. 33-79292-C) declared effective
by the Commission on July 20, 1994 and incorporated herein by reference).
4.4 -- Form of Warrant Agreement, including Form of Class A and Class B Warrant
Certificates (filed as Exhibit 4c to Video Update's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on July 20,
1994 and incorporated herein by reference).
4.5 -- Form of Unit Purchase Option of D.H. Blair Investment Banking Corp. (filed as
Exhibit 4d to Video Update's Form SB-2 Registration Statement (No. 33-79292-C)
declared effective by the Commission on July 20, 1994 and incorporated herein
by reference).
5.1 -- Opinion of Gadsby & Hannah LLP.
8.1 -- Form of Opinion of Gadsby & Hannah LLP as to Tax Matters.
10.1 -- Amended and Restated Voting Agreement, dated October 27, 1997 among Video
Update, Moovies, and directors and certain officers of Video Update and
Moovies (filed as Exhibit 10 to Video Update's Form 10-Q for the fiscal
quarter ended October 31, 1997 and incorporated herein by reference).
10.2(5) -- Amended and Restated Undertaking Agreement, dated October 27, 1997 among Video
Update, Moovies, Daniel A. Potter, John M. Bedard and Daniel C. Howard.
10.3 -- Form of 1998 Stock Option Plan.
10.4(6) -- Rentrak Agreement.
10.5 -- Form of Escrow Agreement between certain stockholders of Video Update, Video
Update and American Stock Transfer & Trust Company (filed as Exhibit 4e to
Video Update's Form SB-2 Registration Statement (No. 33-79292-C) declared
effective by the Commission on July 20, 1994 and incorporated herein by
reference).
10.6 -- Form of Employment Agreement between Video Update and Daniel C. Howard.
10.7 -- Credit Agreement entered into as of February 11, 1997, among Video Update,
Video Update Canada Inc., various financial institutions as lenders, Bank of
America Illinois, as a U.S. Agent, and Bank of America Canada, as Canadian
Agent (filed as Exhibit 10 to Video Update's Current Report on Form 8-K filed
with the Commission on February 14, 1997 and incorporated herein by
reference).
10.8 -- First Amendment to the Credit Agreement entered into as of February 11, 1997,
among Video Update, Video Update Canada Inc., various financial institutions
as lenders, Bank of America Illinois, as a U.S. Agent, and Bank of America
Canada, as Canadian Agent, dated as of December 12, 1997.
10.9 -- 1996 Stock Option Plan (filed as Exhibit 10a to Video Update's Quarterly
Report on Form 10-QSB for the fiscal quarter ended July 31, 1996 and
incorporated herein by reference).
</TABLE>
II-4
<PAGE> 254
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
10.10 -- Form of Franchise Offering Circular (filed as Exhibit 10b to Video Update's
Quarterly Report on Form 10-QSB for the fiscal quarter ended July 31, 1996 and
incorporated herein by reference).
10.11 -- Restated Employment Agreement between Video Update and Daniel A. Potter,
effective as of February 1, 1996 (filed as Exhibit 10a to Video Update's
Current Report on Form 8-K filed with the Commission on March 14, 1996 and
incorporated herein by reference).
10.12 -- Restated Employment Agreement between Video Update and John M. Bedard,
effective as of February 1, 1996 (filed as Exhibit 10b to Video Update's
Current Report on Form 8-K filed with the Commission on March 14, 1996 and
incorporated herein by reference).
10.13 -- Form of Merger and Acquisition Agreement between Video Update and D.H. Blair
Investment Banking Corp (filed as Exhibit 10a to Video Update's Pre-Effective
Amendment No. 1 to its Form SB-2 Registration Statement (No. 33-89018)
originally filed with the Commission on March 31, 1995 and incorporated herein
by reference).
10.14 -- Form of Amendment to Warrant Agreement dated July 20, 1994 between Video
Update, American Stock Transfer & Trust Company and D.H. Blair Investment
Banking Corp (filed as Exhibit 10b to Video Update's Pre-Effective Amendment
No. 1 to its Form SB-2 Registration Statement (No. 33-89018) originally filed
with the Commission on March 31, 1995 and incorporated herein by reference).
10.15 -- Stock Exchange Agreement by and between Video Update and certain stockholders
of Tinseltown Video, Inc. (filed as Exhibit 10a to Video Update's Current
Report on Form 8-K filed with the Commission on February 16, 1995 and
incorporated herein by reference).
10.16 -- Formula Stock Option Plan (filed as Exhibit 10a to Video Update's Form SB-2
Registration Statement (No. 33-89018) filed with the Commission on January 31,
1995 and incorporated herein by reference).
10.17 -- Form of Franchise Agreement between Video Update and Franchisees (filed as
Exhibit 10d to Video Update's Form SB-2 Registration Statement (No.
33-79292-C) declared effective by the Commission on July 20, 1994 and
incorporated herein by reference).
10.18 -- Form of Consulting Agreement between Video Update and D.H. Blair Investment
Banking Corp (filed as Exhibit 10f to Video Update's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on July 20,
1994 and incorporated herein by reference).
10.19 -- Form of Agency Agreement between Video Update and D.H. Blair Investment
Banking Corp (filed as Exhibit 10aa to Video Update's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on July 20,
1994 and incorporated herein by reference).
10.20 -- 1994 Stock Option Plan (filed as Exhibit 10bb to Video Update's Form SB-2
Registration Statement (No. 33-79292-C) declared effective by the Commission
on July 20, 1994 and incorporated herein by reference).
18.1 -- Letter on Change in Accounting Principles (filed as Exhibit 18 to Video
Update's Annual Report on Form 10-KSB for the fiscal year ended April 30, 1996
and incorporated herein by reference).
21.1 -- List of Video Update Subsidiaries
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Gadsby & Hannah LLP (included in Exhibits 5.1 and 8.1).
23.4 -- Consent of Piper Jaffray Inc.
</TABLE>
II-5
<PAGE> 255
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
23.5 -- Consent of Needham, & Company, Inc.
23.6 -- Consent of Asensio & Company, Inc.
23.7 -- Consents of Director Nominees.
24.1 -- Power of Attorney (included in signature page to Registration Statement).
99.1(2) -- Form of Opinion of Piper Jaffray Inc.
99.2(3) -- Opinion of Asensio & Company, Inc.
99.3(4) -- Form of Opinion of Needham & Company, Inc.
99.4 -- Form of Proxy Card of Video Update.
99.5 -- Form of Proxy Card of Moovies.
</TABLE>
- ---------------
(1) Attached as Annex A to the Joint Proxy Statement/Prospectus.
(2) Attached as Annex B to the Joint Proxy Statement/Prospectus.
(3) Attached as Annex C to the Joint Proxy Statement/Prospectus.
(4) Attached as Annex D to the Joint Proxy Statement/Prospectus.
(5) Attached as Annex E to the Joint Proxy Statement/Prospectus.
(6) Certain portions of this exhibit have been omitted based upon a request to
the Commission for confidential treatment. Such omitted portions have been
separately filed with the Commission.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and, therefore, have been omitted.
ITEM 22. UNDERTAKINGS.
(a) Video Update hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended (the "Securities Act"),
each filing of Video Update's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(and where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act), that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Video Update hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), Video Update undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, 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.
II-6
<PAGE> 256
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Video
Update pursuant to the foregoing provisions, or otherwise, Video Update has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Video Update of expenses
incurred or paid by a director, officer or controlling person of Video Update 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, Video Update 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 Securities Act and will be governed by the final
adjudication of such issue.
(d) Video Update hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11, or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this Registration Statement through the date
of responding to the request.
(e) Video Update hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-7
<PAGE> 257
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant 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 the 23rd day of January, 1998.
VIDEO UPDATE, INC.
By: /s/ DANIEL A. POTTER
------------------------------------
Daniel A. Potter
Chairman and Chief Executive Officer
SIGNATURES AND POWERS OF ATTORNEY
Each person whose signature appears below constitutes and appoints Daniel
A. Potter and Lawrence H. Gennari, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
in each of them, for him and in his name, place and stead, and in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement on Form S-4 of Video Update, Inc. and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
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>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- -----------------
<C> <S> <C>
/s/ DANIEL A. POTTER Chairman of the Board January 23, 1998
- ------------------------------------- and Chief Executive Officer
Daniel A. Potter (Principal Executive Officer)
/s/ JOHN M. BEDARD President and Director January 23, 1998
- -------------------------------------
John M. Bedard
/s/ STEPHEN L. REYNOLDS Chief Financial Officer January 23, 1998
- ------------------------------------- (Principal Financial and
Stephen L. Reynolds Accounting Officer)
/s/ DANIEL C. HOWARD Chief Operating Officer January 23, 1998
- ------------------------------------- and Director
Daniel C. Howard
/s/ ROBERT E. YAGER Regional Manager of January 23, 1998
- ------------------------------------- Store Operations and Director
Robert E. Yager
/s/ PAUL M. KELNBERGER Director January 23, 1998
- -------------------------------------
Paul M. Kelnberger
</TABLE>
II-8
<PAGE> 258
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- -----------------
<C> <S> <C>
/s/ JANA WEBSTER VAUGHN Director January 23, 1998
- -------------------------------------
Jana Webster Vaughn
/s/ BERNARD PATRIACCA Director January 23, 1998
- -------------------------------------
Bernard Patriacca
</TABLE>
II-9
<PAGE> 259
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Purchase Agreement by and between Video Update, Piper Jaffray Inc. and
The Robinson Humphrey Company, Inc. (filed as Exhibit 1 to Video Update's
Pre-Effective Amendment No. 2 to its Form S-3 Registration Statement filed
with the Commission on September 27, 1996 and incorporated herein by
reference) (replaced and superseded a corresponding exhibit previously filed
with the Commission).
2.1(1) -- Agreement and Plan of Merger dated as of July 9, 1997, as amended by Amendment
to Agreement and Plan of Merger dated as of October 27, 1997, by and among
Video Update, Inc. ("Video Update"), VUI Merger Corp. and Moovies, Inc.
("Moovies").
2.2 -- Purchase Agreement by and among Video Update Canada Inc., Hill and Cassidy
Retail Corp., Byron Hill, Patricia Hill and Mel Cassidy, dated as of April 1,
1997 (filed as Exhibit 2 to Video Update's Current Report on Form 8-K filed
with the Commission on April 7, 1997 and incorporated herein by reference).
2.3 -- Purchase Agreement by and among Video Update, Cox Video Corporation, and
Robert W. Cox, dated as of February 28, 1997 (filed as Exhibit 2a to Video
Update's Current Report on Form 8-K filed with the Commission on April 4, 1997
and incorporated herein by reference).
2.4 -- Purchase Agreement by and among Video Update, Susan Janae Kingston, and Larry
Peterman, dated as of March 17, 1997 (filed as Exhibit 2b to Video Update's
Current Report on Form 8-K filed with the Commission on April 4, 1997 and
incorporated herein by reference).
2.5 -- Purchase Agreement by and among Video Update, Video Warehouse, Inc., and
Donald and Katherine Cianci, dated as of January 15, 1997 (filed as Exhibit 2
to Video Update's Current Report on Form 8-K filed with the Commission on
January 29, 1997 and incorporated herein by reference).
2.6 -- Purchase Agreement by and among Video Update Canada Inc., Video View Ltd., and
Gordon and Joanne Hillman, dated as of January 1, 1997 (filed as Exhibit 2 to
Video Update's Current Report on Form 8-K filed with the Commission on January
10, 1997 and incorporated herein by reference).
2.7 -- Purchase Agreement by and between Video Update, Videoland, Inc. and the
Stockholder of Videoland, Inc., dated as of November 14, 1995 (filed as
Exhibit 2 to Video Update's Current Report on Form 8-K/A filed with the
Commission on January 26, 1996 and incorporated herein by reference).
2.8 -- Purchase Agreement by and among Video Update, 94 Video West, Inc. and Michael
Bennett and Paul Levens, dated as of October 2, 1995 (filed as Exhibit 2a to
Video Update's Current Report on Form 8-K filed with the Commission on October
13, 1995 and incorporated herein by reference).
2.9 -- Purchase Agreement by and among Video Update, Talerico Enterprises, Inc.
("TEI") and the stockholder of TEI, dated as of October 5, 1995 (filed as
Exhibit 2b to Video Update's Current Report on Form 8-K filed with the
Commission on October 13, 1995 and incorporated herein by reference).
2.10 -- Purchase Agreement by and between Video Update, and the Stockholders of Indy
Video, Inc., dated as of September 26, 1995 (filed as Exhibit 2 to Video
Update's Current Report on Form 8-K filed with the Commission on September 27,
1995 and incorporated herein by reference).
</TABLE>
<PAGE> 260
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
2.11 -- Stock Purchase and Sale Agreement by and among Video Update, Wilderness Video
Group Ltd., Richard Walton, the Walton Family Trust Alexsay Holdings Ltd.,
Barclays Bank of Canada, Allstate Life Insurance Company of Canada, and
Ontario Municipal Employees Retirement Board, dated as of August 22, 1995
(filed as Exhibit 2a to Video Update's Current Report on Form 8-K filed with
the Commission on August 30, 1995 and incorporated herein by reference).
2.12 -- Stock Purchase and Sale Agreement by and between Video Update and Glenn Forth,
dated August 23, 1995 (filed as Exhibit 2b to Video Update's Current Report on
Form 8-K filed with the Commission on August 30, 1995 and incorporated herein
by reference).
2.13 -- Stock Purchase and Sale Agreement by and between Video Update and Seig Badke,
dated August 23, 1995 (filed as Exhibit 2c to Video Update's Current Report on
Form 8-K filed with the Commission on August 30, 1995 and incorporated herein
by reference).
2.14 -- Stock Purchase and Sale Agreement by and among Video Update, 443972 B.C.,
Ltd., Dale Mounzer and Jim Collen, dated August 22, 1995 (filed as Exhibit 2d
to Video Update's Current Report on Form 8-K filed with the Commission on
August 30, 1995 and incorporated herein by reference).
2.15 -- Purchase Agreement by and between Video Update and the Stockholders of AV
Video, dated as of July 14, 1995 (filed as Exhibit 2 to Video Update's Current
Report on Form 8-K filed with the Commission on July 26, 1995 and incorporated
herein by reference).
2.16 -- Purchase Agreement by and between Video Update and the Proprietors of Video
Powerstore, dated as of June 2, 1995 (filed as Exhibit 2 to Video Update's
Current Report on Form 8-K filed with the Commission on June 29, 1995 and
incorporated herein by reference).
2.17 -- Second Amendment to the Agreement and Plan of Merger by and among Video
Update, Schmidt & Schmidt Limited ("SSL"), and the Stockholders of SSL, dated
February 28, 1995 (filed as Exhibit 2a to Video Update's Form Quarterly Report
on Form 10-QSB for the quarter ended January 31, 1995 filed with the
Commission on March 17, 1995 and incorporated herein by reference).
2.18 -- Agreement and Plan of Merger by and among Video Update, Jarzig Enterprises,
Inc., and the Stockholders of Jarzig Enterprises, Inc., dated October 25, 1994
(filed as Exhibit 2b to Video Update's Quarterly Report on Form 10-QSB for the
quarter ended October 31, 1994, filed with the Commission on December 15, 1994
and incorporated herein by reference).
2.19 -- Agreement and Plan of Merger by and among Video Update, Schmidt & Schmidt
Limited, and the Stockholders of Schmidt & Schmidt Limited, dated September
16, 1994 (filed as Exhibit 2a to Video Update's Current Report on Form 8-K
filed with the Commission on October 3, 1994 and incorporated herein by
reference).
2.20 -- Agreement and Plan of Merger by and among Video Update, Halgrimson
Enterprises, Inc., and the Stockholders of Halgrimson Enterprises, Inc., dated
September 16, 1994 (filed as Exhibit 2b to Video Update's Current Report on
Form 8-K filed with the Commission on October 3, 1994 and incorporated herein
by reference).
2.21 -- Agreement and Plan of Merger by and among Video Update, Koonrod, Inc. and the
Stockholders of Koonrod, Inc., dated September 2, 1994 (filed as Exhibit 2 to
Video Update's Quarterly Report on Form 10-QSB for the quarter ended July 31,
1994, filed with the Commission on September 10, 1994 and incorporated herein
by reference).
3.1 -- Restated Certificate of Incorporation (filed as Exhibit 3 to Video Update's
Current Report on Form 8-K filed with the Commission on January 20, 1997 and
incorporated herein by reference).
3.2 -- Bylaws of Video Update, as amended on July 31, 1997.
</TABLE>
<PAGE> 261
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
4.1 -- Form of Unit Purchase Option (filed as Exhibit 4a to Video Update's
Pre-Effective Amendment No. 1 to its Form SB-2 Registration Statement (No. 33-
89018) originally filed with the Commission on March 31, 1995 and incorporated
herein by reference).
4.2 -- Specimen Class A Common Stock Certificate (filed as Exhibit 4a to Video
Update's Form SB-2 Registration Statement (No. 33-79292-C) declared effective
by the Commission on July 20, 1994 and incorporated herein by reference).
4.3 -- Specimen Class B Common Stock Certificate (filed as Exhibit 4b to Video
Update's Form SB-2 Registration Statement (No. 33-79292-C) declared effective
by the Commission on July 20, 1994 and incorporated herein by reference).
4.4 -- Form of Warrant Agreement, including Form of Class A and Class B Warrant
Certificates (filed as Exhibit 4c to Video Update's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on July 20,
1994 and incorporated herein by reference).
4.5 -- Form of Unit Purchase Option of D.H. Blair Investment Banking Corp. (filed as
Exhibit 4d to Video Update's Form SB-2 Registration Statement (No. 33-79292-C)
declared effective by the Commission on July 20, 1994 and incorporated herein
by reference).
5.1 -- Opinion of Gadsby & Hannah LLP.
8.1 -- Form of Opinion of Gadsby & Hannah LLP as to Tax Matters.
10.1 -- Amended and Restated Voting Agreement, dated October 27, 1997 among Video
Update, Moovies, and directors and certain officers of Video Update and
Moovies (filed as Exhibit 10 to Video Update's Form 10-Q for the fiscal
quarter ended October 31, 1997 and incorporated herein by reference).
10.2(5) -- Amended and Restated Undertaking Agreement, dated October 27, 1997 among Video
Update, Moovies, Daniel A. Potter, John M. Bedard and Daniel C. Howard.
10.3 -- Form of 1998 Stock Option Plan.
10.4(6) -- Rentrak Agreement.
10.5 -- Form of Escrow Agreement between certain stockholders of Video Update, Video
Update and American Stock Transfer & Trust Company (filed as Exhibit 4e to
Video Update's Form SB-2 Registration Statement (No. 33-79292-C) declared
effective by the Commission on July 20, 1994 and incorporated herein by
reference).
10.6 -- Form of Employment Agreement between Video Update and Daniel C. Howard.
10.7 -- Credit Agreement entered into as of February 11, 1997, among Video Update,
Video Update Canada Inc., various financial institutions as lenders, Bank of
America Illinois, as a U.S. Agent, and Bank of America Canada, as Canadian
Agent (filed as Exhibit 10 to Video Update's Current Report on Form 8-K filed
with the Commission on February 14, 1997 and incorporated herein by
reference).
10.8 -- First Amendment to the Credit Agreement entered into as of February 11, 1997,
among Video Update, Video Update Canada Inc., various financial institutions
as lenders, Bank of America Illinois, as a U.S. Agent, and Bank of America
Canada, as Canadian Agent, dated as of December 12, 1997.
10.9 -- 1996 Stock Option Plan (filed as Exhibit 10a to Video Update's Quarterly
Report on Form 10-QSB for the fiscal quarter ended July 31, 1996 and
incorporated herein by reference).
10.10 -- Form of Franchise Offering Circular (filed as Exhibit 10b to Video Update's
Quarterly Report on Form 10-QSB for the fiscal quarter ended July 31, 1996 and
incorporated herein by reference).
</TABLE>
<PAGE> 262
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
10.11 -- Restated Employment Agreement between Video Update and Daniel A. Potter,
effective as of February 1, 1996 (filed as Exhibit 10a to Video Update's
Current Report on Form 8-K filed with the Commission on March 14, 1996 and
incorporated herein by reference).
10.12 -- Restated Employment Agreement between Video Update and John M. Bedard,
effective as of February 1, 1996 (filed as Exhibit 10b to Video Update's
Current Report on Form 8-K filed with the Commission on March 14, 1996 and
incorporated herein by reference).
10.13 -- Form of Merger and Acquisition Agreement between Video Update and D.H. Blair
Investment Banking Corp (filed as Exhibit 10a to Video Update's Pre-Effective
Amendment No. 1 to its Form SB-2 Registration Statement (No. 33-89018)
originally filed with the Commission on March 31, 1995 and incorporated herein
by reference).
10.14 -- Form of Amendment to Warrant Agreement dated July 20, 1994 between Video
Update, American Stock Transfer & Trust Company and D.H. Blair Investment
Banking Corp (filed as Exhibit 10b to Video Update's Pre-Effective Amendment
No. 1 to its Form SB-2 Registration Statement (No. 33-89018) originally filed
with the Commission on March 31, 1995 and incorporated herein by reference).
10.15 -- Stock Exchange Agreement by and between Video Update and certain stockholders
of Tinseltown Video, Inc. (filed as Exhibit 10a to Video Update's Current
Report on Form 8-K filed with the Commission on February 16, 1995 and
incorporated herein by reference).
10.16 -- Formula Stock Option Plan (filed as Exhibit 10a to Video Update's Form SB-2
Registration Statement (No. 33-89018) filed with the Commission on January 31,
1995, and incorporated herein by reference).
10.17 -- Form of Franchise Agreement between Video Update and Franchisees (filed as
Exhibit 10d to Video Update's Form SB-2 Registration Statement (No.
33-79292-C) declared effective by the Commission on July 20, 1994 and
incorporated herein by reference).
10.18 -- Form of Consulting Agreement between Video Update and D.H. Blair Investment
Banking Corp (filed as Exhibit 10f to Video Update's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on July 20,
1994 and incorporated herein by reference).
10.19 -- Form of Agency Agreement between Video Update and D.H. Blair Investment
Banking Corp (filed as Exhibit 10aa to Video Update's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on July 20,
1994 and incorporated herein by reference).
10.20 -- 1994 Stock Option Plan (filed as Exhibit 10bb to Video Update's Form SB-2
Registration Statement (No. 33-79292-C) declared effective by the Commission
on July 20, 1994 and incorporated herein by reference).
18.1 -- Letter on Change in Accounting Principles (filed as Exhibit 18 to Video
Update's Annual Report on Form 10-KSB for the fiscal year ended April 30, 1996
and incorporated herein by reference).
21.1 -- List of Video Update Subsidiaries
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Gadsby & Hannah LLP (included in Exhibits 5.1 and 8.1).
23.4 -- Consent of Piper Jaffray Inc.
23.5 -- Consent of Needham, & Company, Inc.
23.6 -- Consent of Asensio & Company, Inc.
23.7 -- Consents of Director Nominees.
</TABLE>
<PAGE> 263
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------------------------
<S> <C> <C>
24.1 -- Power of Attorney (included in signature page to Registration Statement).
99.1(2) -- Form of Opinion of Piper Jaffray Inc.
99.2(3) -- Opinion of Asensio & Company, Inc.
99.3(4) -- Form of Opinion of Needham & Company, Inc.
99.4 -- Form of Proxy Card of Video Update.
99.5 -- Form of Proxy Card of Moovies.
</TABLE>
- ---------------
(1) Attached as Annex A to the Joint Proxy Statement/Prospectus.
(2) Attached as Annex B to the Joint Proxy Statement/Prospectus.
(3) Attached as Annex C to the Joint Proxy Statement/Prospectus.
(4) Attached as Annex D to the Joint Proxy Statement/Prospectus.
(5) Attached as Annex E to the Joint Proxy Statement/Prospectus.
(6) Certain portions of this exhibit have been omitted based upon a request to
the Commission for confidential treatment. Such omitted portions have been
separately filed with the Commission.
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
VIDEO UPDATE, INC.
Article I. Offices.
Section 1. Registered Office. The registered office of the Corporation
shall be at The Corporation Trust Company, 1209 Orange Street, in the City of
Wilmington, County of New Castle, State of Delaware 19801.
Section 2. Additional Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
Article II. Meetings of Stockholders.
Section 1. Time and Place. A meeting of stockholders for any purpose
may be held at such time and place within or without the State of Delaware as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders, commencing
with the year 1996, shall be held on the first Monday in SEPTEMBER if not a
legal holiday, or, if a legal holiday, then on the next secular day following,
at 10:00 a.m., or at such other date and time as shall, from time to time, be
designated by the Board of Directors and stated in the notice of the meeting. At
such annual meetings, the stockholders shall elect a Board of Directors and
transact such other business as may properly be brought before the meetings.
Section 3. Notice of Annual Meeting. Written notice of the annual
meeting, stating the place, date, and time thereof, shall be given to each
stockholder entitled to vote at such meeting not less than ten (unless a longer
period is required by law) nor more than sixty days prior to the meeting.
Section 4. Special Meetings. Special meetings of the stockholders may
be called AT ANY TIME ONLY BY THE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER, IF ANY, OR THE PRESIDENT. Such request shall state the purpose of the
proposed meeting. UPON THE CALL OF A SPECIAL MEETING BY THE CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, IF ANY, OR THE PRESIDENT, WHICH CALL SHALL SET FORTH THE
PURPOSE FOR WHICH THE MEETING IS DESIRED, IT SHALL BE THE DUTY OF THE SECRETARY
TO GIVE PROMPT WRITTEN NOTICE OF SUCH MEETING TO BE HELD AT SUCH TIME AND PLACE
AS STIPULATED BY THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER, IF ANY, OR THE
PRESIDENT IN THE CALL OF THE MEETING.
Section 5. Notice of Special Meeting. Written notice of a special
meeting, stating the place, date, and time thereof and the purpose or purposes
for which the meeting is called, shall be given to each stockholder entitled to
vote at such meeting not less than ten (unless a longer period is required by
law) nor more than sixty days prior to the meeting.
Section 6. List of Stockholders. The transfer agent or the officer in
charge of the stock ledger of the Corporation shall prepare and make, at least
ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and
<PAGE> 2
showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, at a
place within the city where the meeting is to be held, which place, if other
than the place of the meeting, shall be specified in the notice of the meeting.
The list shall also be produced and kept at the place of the meeting during the
whole time thereof and may be inspected by any stockholder who is present in
person thereat.
Section 7. Presiding Officer and Order of Business.
(a) Meetings of stockholders shall be presided over by the Chairman of
the Board. If he is not present or there is none, they shall be presided over by
the President, or, if he is not present or there is none, by a Vice President,
or, if he is not present or there is none, by a person chosen by the Board of
Directors, or, if no such person is present or has been chosen, by a chairman to
be chosen by the stockholders owning a majority of the shares of capital stock
of the Corporation issued and outstanding and entitled to vote at the meeting
and who are present in person or represented by proxy. The Secretary of the
Corporation, or, if he is not present, an Assistant Secretary, or, if he is not
present, a person chosen by the Board of Directors, shall act as Secretary at
meetings of stockholders; if no such person is present or has been chosen, the
stockholders owning a majority of the shares of capital stock of the Corporation
issued and outstanding and entitled to vote at the meeting who are present in
person or represented by proxy shall choose any person present to act as
secretary of the meeting.
(b) The following order of business, unless otherwise determined at the
meeting, shall be observed as far as practicable and consistent with the
purposes of the meeting:
(1) Call of the meeting to order.
(2) Presentation of proof of mailing of the notice of the
meeting and, if the meeting is a special meeting, the
call thereof.
(3) Presentation of proxies.
(4) Announcement that a quorum is present.
(5) Reading and approval of the minutes of the previous
meeting.
(6) Reports, if any, of officers.
(7) Election of directors, if the meeting is an annual
meeting or a meeting called for that purpose.
(8) Consideration of the specific purpose or purposes,
other than the election of directors, for which the
meeting has been called, if the meeting is a special
meeting.
(9) Transaction of such other business as may properly
come before the meeting.
(10) Adjournment.
Section 8. Quorum and Adjournments. The presence in person or
representation by proxy of the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote
shall be necessary to, and shall constitute a quorum for, the transaction of
business at all meetings of the stockholders, except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, a quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat who are present in person or represented by proxy shall
have the power to adjourn the meeting from time to time until a quorum shall be
present or represented. If the time and place of the adjourned meeting are
announced at the meeting at which the adjournment is taken, no further notice of
the adjourned meeting need be given. Even if a quorum shall be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat who are present in person or represented by proxy shall have the
power to adjourn the meeting from time to time for good cause to a date that is
not more than thirty days after the date of the original meeting. Further notice
of the adjourned meeting need not be given if the time and place thereof are
announced at
<PAGE> 3
the meeting at which the adjournment is taken. At any adjourned meeting at which
a quorum is present in person or represented by proxy, any business may be
transacted that might have been transacted at the meeting as originally called.
If the adjournment is for more than thirty days, or if, after the adjournment, a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote thereat.
Section 9. Voting.
(a) At any meeting of the stockholders, every stockholder having the
right to vote shall be entitled to vote in person or by proxy. Except as
otherwise provided by law or the Certificate of Incorporation, each stockholder
of record shall be entitled to one vote for each share of capital stock
registered in his name on the books of the Corporation.
(b) All elections shall be determined by a plurality vote, and, except
as otherwise provided by law or the Certificate of Incorporation, all other
matters shall be determined by a vote of a majority of the shares present in
person or represented by proxy and voting on such other matters.
Section 10. Stockholder Action. Any action required or permitted by law
to be taken by stockholders, including but not limited to, the election of
directors (which election shall be taken only by written ballot), shall be taken
only at a meeting of stockholders duly called and convened in accordance with
these bylaws.
SECTION 11. BUSINESS AT MEETINGS OF STOCKHOLDERS. EXCEPT AS OTHERWISE
PROVIDED BY LAW (INCLUDING BUT NOT LIMITED TO RULE 14a-8 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, OR ANY SUCCESSOR PROVISION THERETO) OR THESE
BYLAWS, THE BUSINESS WHICH SHALL BE CONDUCTED AT ANY MEETING OF THE STOCKHOLDERS
SHALL (a) HAVE BEEN SPECIFIED IN THE WRITTEN NOTICE OF THE MEETING (OR ANY
SUPPLEMENT THERETO) GIVEN BY THE CORPORATION, OR (b) BE BROUGHT BEFORE THE
MEETING AT THE DIRECTION OF THE BOARD OF DIRECTORS, OR (c) BE BROUGHT BEFORE THE
MEETING BY THE PRESIDING OFFICER OF THE MEETING UNLESS A MAJORITY OF THE
DIRECTORS THEN IN OFFICE OBJECT TO SUCH BUSINESS BEING CONDUCTED AT THE MEETING,
OR (d) HAVE BEEN SPECIFIED IN A WRITTEN NOTICE GIVEN TO THE SECRETARY OF THE
CORPORATION, BY OR ON BEHALF OF ANY STOCKHOLDER WHO SHALL HAVE BEEN A
STOCKHOLDER OF RECORD ON THE RECORD DATE FOR SUCH MEETING AND WHO SHALL CONTINUE
TO BE ENTITLED TO VOTE THEREAT (THE "STOCKHOLDER NOTICE"), IN ACCORDANCE WITH
ALL OF THE FOLLOWING REQUIREMENTS:
(1) EACH STOCKHOLDER NOTICE MUST BE DELIVERED TO, OR MAILED AND
RECEIVED AT, THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION WITHIN SIXTY
(60) DAYS FROM THE DATE OF THE IMMEDIATELY PRECEDING ANNUAL OR SPECIAL MEETING
OF STOCKHOLDERS; AND
(2) EACH SUCH STOCKHOLDER NOTICE MUST SET FORTH: (i) THE NAME AND
ADDRESS OF THE STOCKHOLDER, AS SUCH APPEARS ON THE CORPORATION'S BOOKS,
INTENDING TO BRING THE BUSINESS BEFORE THE MEETING; (ii) THE GENERAL NATURE OF
THE BUSINESS WHICH SUCH STOCKHOLDER SEEKS TO BRING BEFORE THE MEETING AND THE
REASONS FOR CONDUCTING SUCH BUSINESS AT THE ANNUAL OR SPECIAL MEETING, AND, IF A
SPECIFIC ACTION IS TO BE PROPOSED, THE TEXT OF THE RESOLUTION OR RESOLUTIONS
WHICH THE PROPOSING STOCKHOLDER PROPOSES THAT THE STOCKHOLDERS ADOPT; (iii) A
REPRESENTATION THAT THE STOCKHOLDER IS A HOLDER OF RECORD OF THE STOCK OF THE
CORPORATION ENTITLED TO VOTE AT SUCH MEETING AND INTENDS TO APPEAR IN PERSON OR
BY PROXY AT THE MEETING TO BRING THE BUSINESS SPECIFIED IN THE NOTICE BEFORE THE
MEETING; (iv) THE CLASS AND NUMBER OF SHARES OF THE CORPORATION THAT ARE
BENEFICIALLY OWNED BY THE SHAREHOLDER; AND (v) ANY MATERIAL INTEREST OF THE
STOCKHOLDER IN THE BUSINESS TO BE BROUGHT BEFORE THE MEETING. NOTWITHSTANDING
ANYTHING IN THE BYLAWS TO THE CONTRARY, NO BUSINESS SHALL BE CONDUCTED AT AN
ANNUAL OR SPECIAL MEETING EXCEPT IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN
THIS SECTION 11. THE CHAIRMAN OF AN ANNUAL MEETING OR SPECIAL MEETING SHALL, IF
THE FACTS WARRANT, DETERMINE AND DECLARE TO THE MEETING THAT BUSINESS WAS NOT
PROPERLY BROUGHT BEFORE THE MEETING
<PAGE> 4
AN/OR WAS NOT IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION. IF HE SHOULD SO
DETERMINE, HE SHALL SO DECLARE TO THE MEETING AND ANY SUCH BUSINESS NOT PROPERLY
BROUGHT BEFORE THE MEETING SHALL NOT BE TRANSACTED.
Article III. Directors.
Section 1. General Powers, Number, and Tenure. The business of the
Corporation shall be managed by its Board of Directors, which may exercise all
powers of the Corporation and perform all lawful acts that are not by law, the
Certificate of Incorporation, or these Bylaws directed or required to be
exercised or performed by the stockholders. The number of directors shall be
determined by the Board of Directors; if no such determination is made, the
number of directors shall be one. The directors shall be elected at the annual
meeting of the stockholders, except as provided in Section 2 of this Article,
and each director elected shall hold office until the next annual meeting and
until his successor is elected and shall qualify. Directors need not be
stockholders.
Section 2. Vacancies. If any vacancies occur in the Board of Directors,
or THERE IS AN INCREASE IN THE AUTHORIZED NUMBER OF DIRECTORS, they may be
filled by a majority of the directors then in office, or by a sole remaining
director. Each director so chosen shall hold office UNTIL SUCH DIRECTOR'S
SUCCESSOR IS ELECTED AND QUALIFIED, OR UNTIL SUCH DIRECTOR'S EARLIER DEATH,
RESIGNATION OR REMOVAL. If there are no directors in office, any officer may
call a special meeting of stockholders in accordance with the provisions of the
Certificate of Incorporation or these Bylaws, at which meeting such vacancies
shall be filled.
Section 3. Removal or Resignation.
(a) except as otherwise provided by law or the Certificate of
Incorporation, any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors.
(b) Any director may resign at any time by giving written notice to the
Board of Directors, the Chairman of the Board, if any, or the President or
Secretary of the Corporation. Unless otherwise specified in such written notice,
a resignation shall take effect on delivery thereof to the Board of Directors or
the designated officer. It shall not be necessary for a resignation to be
accepted before it becomes effective.
(c) NOMINATIONS. NOTWITHSTANDING THE PROVISIONS OF SECTION 11 OF
ARTICLE II OF THESE BYLAWS (DEALING WITH BUSINESS AT MEETINGS OF STOCKHOLDERS),
NOMINATIONS FOR THE ELECTION OF DIRECTORS MAY BE MADE BY THE BOARD OF DIRECTORS
OR A COMMITTEE APPOINTED BY THE BOARD OF DIRECTORS OR BY ANY STOCKHOLDER
ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS GENERALLY. HOWEVER, ANY
STOCKHOLDER ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS GENERALLY MAY NOMINATE
ONE OR MORE PERSONS FOR ELECTION AS A DIRECTOR AT A MEETING ONLY IF WRITTEN
NOTICE OF SUCH STOCKHOLDER'S INTENT TO MAKE SUCH NOMINATION OR NOMINATIONS HAS
BEEN GIVEN, EITHER BY PERSONAL DELIVERY OR BY UNTIED STATES MAIL, POSTAGE
PREPAID, TO THE SECRETARY OF THE CORPORATION WITHIN NINETY (90) DAYS FROM THE
DATE OF THE IMMEDIATELY PRECEDING ANNUAL OR SPECIAL MEETING. EACH SUCH NOTICE
SHALL SET FORTH: (a) THE NAME AND ADDRESS OF THE STOCKHOLDERS WHO INTEND TO MAKE
THE NOMINATION AND OF THE PERSON OR PERSONS TO BE NOMINATED; (b) A
REPRESENTATION THAT THE STOCKHOLDER IS A HOLDER OF RECORD OF STOCK OF THE
CORPORATION ENTITLED TO VOTE AT SUCH MEETING AND INTENDS TO APPEAR IN PERSON OR
BY PROXY AT THE MEETING TO NOMINATE THE PERSON OR PERSONS SPECIFIED IN THE
NOTICE; (c) A DESCRIPTION OF ALL ARRANGEMENTS OR UNDERSTANDINGS BETWEEN THE
STOCKHOLDER AND EACH NOMINEE AND ANY OTHER PERSON OR PERSONS (NAMING SUCH PERSON
OR PERSONS) PURSUANT TO WHICH THE NOMINATION OR NOMINATIONS ARE TO BE MADE BY
THE STOCKHOLDER; (d) SUCH OTHER INFORMATION REGARDING EACH NOMINEE PROPOSED BY
SUCH STOCKHOLDER AS WOULD BE REQUIRED TO BE INCLUDED IN A PROXY STATEMENT FILED
PURSUANT TO THE
<PAGE> 5
PROXY RULES OF THE SECURITIES AND EXCHANGE COMMISSION, HAD THE NOMINEE BEEN
NOMINATED, OR INTENDED TO BE NOMINATED, BY THE BOARD OF DIRECTORS; AND (e) THE
CONSENT OF EACH NOMINEE TO SERVE AS A DIRECTOR OF THE COMPANY IF SO ELECTED. THE
CHAIRMAN OF THE MEETING MAY REFUSE TO ACKNOWLEDGE THE NOMINATION OF ANY PERSON
NOT MADE IN COMPLIANCE WITH THE FOREGOING PROCEDURE.
Section 4. Place of Meetings. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. Annual Meeting. The annual meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders, and no notice of such meeting shall be necessary to the newly
elected directors in order to constitute the meeting legally, provided a quorum
shall be present.
Section 6. Regular Meetings. Additional regular meetings of the Board
of Directors may be held without notice of such time and place as may be
determined from time to time by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President, or by two or more
directors on at least two days' notice to each director, if such notice is
delivered personally or sent by telegram, or on at least three days' notice if
sent by mail. Special meetings shall be called by the Chairman of the Board,
President, Secretary, or two or more directors in like manner and on like notice
on the written request of one-half or more of the number of directors then in
office. Any such notice need not state the purpose or purposes of such meeting,
except as provided in Article XI.
Section 8. Quorum and Adjournments. At all meetings of the Board of
Directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by law or the
Certificate of Incorporation. If a quorum is not present at any meeting of the
Board of Directors, the directors present may adjourn the meeting from time to
time, without notice other than announcement at the meeting at which the
adjournment is taken, until a quorum shall be present.
Section 9. Compensation. Directors shall be entitled to such
compensation for their services as directors and to such reimbursement for any
reasonable expenses incurred in attending directors' meetings as may from time
to time be fixed by the Board of Directors. The compensation of directors may be
on such basis as is determined by the Board of Directors. Any director may waive
compensation for any meeting. Any director receiving compensation under these
provisions shall not be barred from serving the Corporation in any other
capacity and receiving compensation and reimbursement for reasonable expenses
for such other services.
Section 10. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting,
and without prior notice, if a written consent to such action is signed by all
members of the Board of Directors and such written consent is filed with the
minutes of its proceedings.
Section 11. Meetings by Telephone or Similar Communications Equipment.
The Board of Directors may participate in a meeting by conference telephone or
similar communications equipment by means of which all directors participating
in the meeting can hear each other, and participation in such a meeting shall
constitute presence in person by any such director at such meeting.
<PAGE> 6
Article IV. Committees.
Section 1. Executive Committee. The Board of Directors, by resolution
adopted by a majority of the whole Board, may appoint an Executive Committee
consisting of one or more directors, one of whom shall be designated as Chairman
of the Executive Committee. Each member of the Executive Committee shall
continue as a member thereof until the expiration of his term as a director or
his earlier resignation, unless sooner removed as a member or as a director.
Section 2. Powers. The Executive Committee shall have and may exercise
those rights, powers, and authority of the Board of Directors as may from time
to time be granted to it by the Board of Directors to the extent permitted by
law, and may authorize the seal of the Corporation to be affixed to all papers
that may require it.
Section 3. Procedure and Meetings. The Executive Committee shall fix
its own rules of procedure and shall meet at such times and at such place or
places as may be provided by such rules or as the members of the Executive
Committee shall fix. The Executive Committee shall keep regular minutes of its
meetings, which it shall deliver to the Board of Directors from time to time.
The Chairman of the Executive Committee or, in his absence, a member of the
Executive Committee chosen by a majority of the members present, shall preside
at meetings of the Executive Committee; and another member chosen by the
Executive Committee shall act as Secretary of the Executive Committee.
Section 4. Quorum. A majority of the Executive Committee shall
constitute a quorum for the transaction of business, and the affirmative vote of
a majority of the members present at any meeting at which there is a quorum
shall be required for any action of the Executive Committee; provided, however,
that when an Executive Committee of one member is authorized under the
provisions of Section 1 of this Article, that one member shall constitute a
quorum.
Section 5. Other Committees. The Board of Directors, by resolutions
adopted by a majority of the whole Board, may appoint such other committee or
committees as it shall deem advisable and with such rights, power, and authority
as it shall prescribe. Each such committee shall consist of one or more
directors.
Section 6. Committee Changes. The Board of Directors shall have the
power at any time to fill vacancies in, to change the membership of, and to
discharge any committee.
Section 7. Compensation. Members of any committee shall be entitled to
such compensation for their services as members of the committee and to such
reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. Any member
may waive compensation for any meeting. Any committee member receiving
compensation under these provisions shall not be barred from serving the
Corporation in any other capacity and from receiving compensation and
reimbursement of reasonable expenses for such other services.
Section 8. Action by Consent. Any action required or permitted to be
taken at any meeting of any committee of the Board of Directors may be taken
without a meeting if a written consent to such action is signed by all members
of the committee and such written consent is filed with the minutes of its
proceedings.
Section 9. Meetings by Telephone or Similar Communications Equipment.
The members of any committee designated by the Board of Directors may
participate in a meeting of such committee by conference telephone or similar
communications equipment by means of which all persons participating in such
meeting can hear each other, and participation in such a meeting shall
constitute presence in person by any such committee member at such meeting.
<PAGE> 7
Article V. Notices.
Section 1. Form and Delivery. Whenever a provision of any law, the
Certificate of Incorporation, or these Bylaws requires that notice be given to
any director or stockholder, it shall not be construed to require personal
notice unless so specifically provided, but such notice may be given in writing,
by mail addressed to the address of the director or stockholder as it appears on
the records of the Corporation, with postage prepaid. These notices shall be
deemed to be given when they are deposited in the United States mail. Notice to
a director may also be given personally or by telephone or by telegram sent to
his address as it appears on the records of the Corporation.
Section 2. Waiver. Whenever any notice is required to be given under
the provisions of any law, the Certificate of Incorporation, or these Bylaws, a
written waiver thereof signed by the person entitled to said notice, whether
before or after the time stated therein, shall be deemed to be equivalent to
such notice. In addition, any stockholder who attends a meeting of stockholders
in person or is represented at such meeting by proxy, without protesting at the
commencement of the meeting the lack of notice thereof to him, or any director
who attends a meeting of the Board of Directors without protesting at the
commencement of the meeting of the lack of notice, shall be conclusively deemed
to have waived notice of such meeting.
Article VI. Officers.
Section 1. Designations. The officers of the Corporation shall be
chosen by the Board of Directors. The Board of Directors may choose a Chairman
of the Board, a President, a Vice President or Vice Presidents, a Secretary, a
Treasurer, one or more Assistant Secretaries and/or Assistant Treasurers, and
other officers and agents that it shall deem necessary or appropriate. All
officers of the Corporation shall exercise the powers and perform the duties
that shall from time to time be determined by the Board of Directors. Any number
of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws provide otherwise.
Section 2. Term of, and Removal From, Office. At its first regular
meeting after each annual meeting of stockholders, the Board of Directors shall
choose a President, a Secretary, and a Treasurer. It may also choose a Chairman
of the Board, a Vice President or Vice Presidents, one or more Assistant
Secretaries and/or Assistant Treasurers, and such other officers and agents as
it shall deem necessary or appropriate. Each officer of the Corporation shall
hold office until his successor is chosen and shall qualify. Any officer elected
or appointed by the Board of Directors may be removed, with or without cause, at
any time by the affirmative vote of a majority of the directors then in office.
Removal from office, however, shall not prejudice the contract rights, if any,
of the person removed. Any vacancy occurring in any office of the Corporation
may be filled for the unexpired portion of the term by the Board of Directors.
Section 3. Compensation. The salaries of all officers of the
Corporation shall be fixed from time to time by the Board of Directors, and no
officer shall be prevented from receiving a salary because he is also a director
of the Corporation.
Section 4. The Chairman of the Board. The Chairman of the Board will
preside at all meetings of stockholders and of the Board of Directors.
SECTION 4a. CHIEF EXECUTIVE OFFICER. THE CHIEF EXECUTIVE OFFICER,
SUBJECT TO THE DIRECTION OF THE BOARD OF DIRECTORS, SHALL HAVE GENERAL CHARGE OF
THE BUSINESS, AFFAIRS, AND PROPERTY
<PAGE> 8
OF THE CORPORATION AND GENERAL SUPERVISION OVER ITS OTHER OFFICERS AND AGENTS.
Section 5. The President.
(a) The President, if there is no chief executive officer of the
Corporation and, subject to the direction of the Board of Directors, shall have
general charge of the business, affairs, and property of the Corporation and
general supervision over its other officers and agents. In general, he shall
perform all duties incident to the office of President and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
(b) Unless otherwise prescribed by the Board of Directors, the
President shall have full power and authority to attend, act, and vote on behalf
of the Corporation at any meeting of the security holders of other corporations
in which the Corporation may hold securities. At any such meeting, the President
shall possess and may exercise any and all rights and powers incident to the
ownership of such securities that the Corporation might have possessed and
exercised if it had been present. The Board of Directors may from time to time
confer like powers upon any other person or persons.
Section 6. The Vice President. The Vice President, if any, or in the
event there be more than one, the Vice Presidents in the order designated, or in
the absence of any designation, in the order of their election, shall, in the
absence of the President or in the event of his disability, perform the duties
and exercise the powers of the President and shall generally assist the
President and perform such other duties and have such other powers as may from
time to time be prescribed by the Board of Directors.
Section 7. The Secretary. The Secretary shall attend all meetings of
the Board of Directors and the stockholders and record all votes and the
proceedings of the meetings in a book to be kept for that purpose. He shall
perform like duties for the Executive Committee or other committees, if
required. He shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may from time to time be prescribed by the Board of
Directors, the Chairman of the Board, or the President, under whose supervision
he shall act. He shall have custody of the seal of the Corporation, and he, or
an Assistant Secretary, shall have authority to affix it to any instrument
requiring it, and, when so affixed, the seal may be attested by his signature or
by the signature of the Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing thereof by his signature.
Section 8. The Assistant Secretary. The Assistant Secretary, if any, or
in the event there be more than one, the Assistant Secretaries in the order
designated, or in the absence of any designation, in the order of their
election, shall, in the absence of the Secretary or in the event of his
disability, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 9. The Treasurer. The Treasurer shall have custody of the
corporate funds and other valuable effects, including securities, and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may from time
to time be designated by the Board of Directors. He shall disburse the funds of
the Corporation in accord with the orders of the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board, if any, the President, and the Board of Directors, whenever they may
require it or at regular meetings of the Board, an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
Section 10. The Assistant Treasurer. The Assistant Treasurer, if any,
or in the event there shall be more than one, the Assistant Treasurers in the
order designated, or in the absence of any
<PAGE> 9
designation, in the order of their election, shall, in the absence of the
Treasurer or in the event of his disability, perform such other duties and have
such other powers as may from time to time be prescribed by the Board of
Directors.
Article VII. Indemnification.
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 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 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.
Article VIII. Affiliated Transactions and Interested Directors.
Section 1. Affiliated Transactions. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors or committee thereof that authorizes
the contract or transaction or solely because his or their votes are counted for
such purpose if:
(a) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board of Directors or committee in good faith authorizes
the contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by the vote of the stockholders; or
<PAGE> 10
(c) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved, or ratified by the Board of Directors, a
committee thereof, or the stockholders.
Section 2. Determining Quorum. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee thereof which authorizes the contract or
transaction.
Article IX. Stock Certificates.
Section 1. Form and Signatures.
(a) Every holder of stock of the Corporation shall be entitled to a
certificate stating the number and class, and series, if any, of shares owned by
him, signed by the Chairman of the Board, if any, or the President and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation, and bearing the seal of the Corporation. The signatures and
the seal may be facsimiles. A certificate may be signed, manually or by
facsimile, by a transfer agent or registrar other than the Corporation or its
employee. In case any officer who has signed, or whose facsimile signature was
placed on, a certificate shall have ceased to be such officer before the
certificate is issued, it may nevertheless be issued by the Corporation with the
same effect as if he were such officer at the date of its issue.
(b) All stock certificates representing shares of capital stock that
are subject to restrictions on transfer or to other restrictions may have
imprinted thereon any notation to that effect determined by the Board of
Directors.
Section 2. Registration of Transfer. Upon surrender to the Corporation
or any transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment, or
authority to transfer, the Corporation or its transfer agent shall issue a new
certificate to the person entitled thereto, cancel the old certificate, and
record the transaction upon the books of the Corporation.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be
entitled to recognize the exclusive right of a person who is registered on its
books as the owner of shares of its capital stock to receive dividends or other
distributions and to vote or consent as such owner, and to hold liable for calls
and assessments any person who is registered on its books as the owner of shares
of its capital stock. The Corporation shall not be bound to recognize any
equitable or legal claim to, or interest in, such shares on the part of any
other person.
(b) If a stockholder desires that notices and/or dividends shall be
sent to a name or address other than the name or address appearing on the stock
ledger maintained by the Corporation, or its transfer agent or registrar, if
any, the stockholder shall have the duty to notify the Corporation, or its
transfer agent or registrar, if any, in writing of his desire and specify the
alternate name or address to be used.
Section 4. Record Date. In order that the Corporation may determine the
stockholders of record who are entitled to receive notice of, or to vote at, any
meeting of stockholders or any adjournment thereof or to express consent to
corporate action in writing without a meeting, to receive payment of any
dividend or other distribution or allotment of any rights, or to exercise any
rights in respect of any change, conversion, or exchange of stock or for the
purpose of any lawful action, the Board of Directors may, in advance, fix a date
as the record date for any such determination. Such date shall not be more
<PAGE> 11
than sixty nor less than ten days before the date of such meeting, nor more than
sixty days prior to the date of any other action. A determination of
stockholders of record entitled to notice of, or to vote at, a meeting of
stockholders shall apply to any adjournment of the meeting taken pursuant to
Section 8 of Article II; provided, however, that the Board of Directors may fix
a new record date for the adjourned meeting.
Section 5. Lost, Stolen, or Destroyed Certificates. The Board of
Directors may direct that a new certificate be issued to replace any certificate
theretofore issued by the Corporation that, it is claimed, has been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen, or destroyed. When authorizing the
issue of a new certificate, the Board of Directors may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of the lost,
stolen, or destroyed certificate, or his legal representative, to advertise the
same in such manner as it shall require, and/or to give the Corporation a bond
in such sum, or other security in such form, as it may direct as indemnity
against any claims that may be made against the Corporation with respect to the
certificate claimed to have been lost, stolen, or destroyed.
Article X. General Provisions.
Section 1. Dividends. Subject to the provisions of law and the
Certificate of Incorporation, dividends upon the outstanding capital stock of
the Corporation may be declared by the Board of Directors at any regular or
special meeting, and may be paid in cash, in property, or in shares of the
Corporation`s capital stock.
Section 2. Reserves. The Board of Directors shall have full power,
subject to the provisions of law and the Certificate of Incorporation, to
determine whether any, and, if so, what part, of the funds legally available for
the payment of dividends shall be declared as dividends and paid to the
stockholders of the Corporation. The Board of Directors, in its sole discretion,
may fix a sum that may be set aside or reserved over and above the paid-in
capital of the Corporation as a reserve for any proper purpose, and may, from
time to time, increase, diminish, or vary such amount.
Section 3. Fiscal Year. Except as from time to time otherwise provided
by the Board of Directors, the fiscal year of the Corporation shall end on April
30 in each year.
Section 4. Seal. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its incorporation, and the words "Corporate
Seal" and "Delaware".
Article XI. Amendments.
The Board of Directors shall have the power to alter and repeal these
Bylaws and to adopt new Bylaws by an affirmative vote of a 2/3 majority of the
whole Board OF DIRECTORS, provided that notice of the proposal to alter or
repeal these Bylaws or to adopt new Bylaws must be included in the notice of the
meeting of the Board of Directors at which such action takes place.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF GADSBY & HANNAH LLP]
January 23, 1998
Moovies, Inc.
201 Brookfield Parkway
Greenville, South Carolina 29607
Ladies & Gentlemen:
We have acted as counsel to Video Update, Inc., a Delaware corporation
(the "Company"), in connection with the merger of VUI Merger Corp. (the "Merger
Sub"), a wholly owned subsidiary of the Company, with and into Moovies, Inc., a
Delaware Corporation ("Moovies") (the "Merger") pursuant to an Agreement and
Plan of Merger among the Company, Merger Sub, and Moovies, dated as of July 9,
1997, and amended as of October 23, 1997 (the "Merger Agreement"). Terms used
herein but not otherwise defined shall have the meanings assigned to them in the
Merger Agreement.
In our capacity as counsel to Video Update in the Merger, and for
purposes of rendering this opinion, we have examined and relied upon the Merger
Agreement, certain representations from the Company, an executed copy of the
Company's Certificate of Incorporation filed with the Secretary of State of the
State of Delaware, and such other corporation records, instruments and documents
as we considered relevant to our analysis. In our examination of documents, we
have assumed the authenticity of original documents, the accuracy of copies, and
the genuineness of signatures. We have assumed that all parties to the Merger
Agreement and to any other documents examined by us have acted, and will act, in
accordance with the terms of such Agreement or documents, and that the Merger
will be consummated at the Effective Time pursuant to the terms and conditions
set forth in the Merger Agreement without the waiver or modification of any such
terms and conditions. Furthermore, we have assumed that all representations
contained in the Merger Agreement, as well as those representations from the
Company and other documents are, and at the Effective Time will be, true and
complete in all material respects. We have also assumed that all representations
made in any of the documents referred to herein "to the knowledge of", or
similarly qualified, of any person or party are correct without such
qualification. We have also assumed that as to all matters in which a person or
entity making a representation referred to above has represented that such
person or entity either is not a party to,does not have, or is not aware of, any
plan, intention, understanding or other agreement. We have not attempted to
verify independently such representations.
Based upon the foregoing and subject to the qualifications and
limitations stated herein, we are of the opinion that:
1. Each of Video Update and Merger Sub is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.
<PAGE> 2
2. The entire authorized capital stock of Video Update consists of
60,000,000 BUYER Shares, 2,000,000 shares of Video Update's Class B Common
Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par value,
of which as of January 20, 1998, 18,104,591 BUYER Shares and 2,000,000 shares of
Video Update's Class B Common Stock, $.01 par value, are issued and outstanding.
All of the BUYER Shares to be issued in the Merger have been duly authorized
and, upon consummation of the Merger in accordance with the Merger Agreement,
will be validly issued, fully paid, and nonassessable. The entire authorized
capital stock of Merger Sub consists of 1,000 Merger Sub Shares, all of which
are issued and outstanding.
The opinions set forth herein relate solely to the laws of the State of
Delaware and the federal laws of the United States.
We consent to the filing of this opinion as an exhibit to the Company's
Registration Statement on Form S-4 to be filed in connection with the Merger. In
giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended.
Very truly yours,
/s/ GADSBY & HANNAH, LLP
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF GADSBY & HANNAH LLP]
, 1998
Moovies, Inc.
201 Brookfield Parkway
Greenville, South Carolina 29607
Attn: President and Chief Executive Officer
Re: Merger pursuant to Agreement and Plan of Merger among
Video Update, Inc., VUI Merger Corp., and Moovies, Inc.
Ladies & Gentlemen:
This opinion is being delivered to you in connection with the filing of
a registration statement (the "Registration Statement") on Form S-4, which
includes the Joint Proxy Statement/Prospectus relating to the Agreement and Plan
of Merger dated July 9, 1997 as amended by the Amendment to Agreement and Plan
of Merger dated as of October 27, 1997 (the "Agreement"), by and among Video
Update, Inc., a Delaware corporation ("Video Update"), VUI Merger Corp., a
Delaware corporation and wholly owned subsidiary of Video Update ("Sub"), and
Moovies, Inc., a Delaware corporation (the "Company"). Pursuant to such
Agreement, Sub will merge with and into the Company (the "Merger"). Except as
otherwise provided, capitalized terms not defined herein have the meanings set
forth in the Agreement or in the letters delivered to Gadsby & Hannah LLP by
Video Update and the Company containing certain representations of Video Update
and the Company relevant to this opinion (the "Representation Letters"). All
section references, unless otherwise indicated, are to the Internal Revenue Code
of 1986, as amended (the "Code").
In our capacity as counsel to Video Update in the Merger, and for
purposes of rendering this opinion, we have examined and relied upon the
Agreement, the Registration Statement, the Representation Letters, and such
other documents as we considered relevant to our analysis. In our examination of
documents, we have assumed the authenticity of original documents, the accuracy
of copies, and the genuineness of signatures. We have assumed that all parties
to the Agreement and to any other documents examined by us have acted, and will
act, in accordance with the terms of such Agreement or documents, and that the
Merger will be consummated at the Effective Time pursuant to the terms and
conditions set forth in the Agreement without the waiver or modification of any
such terms and conditions. Furthermore, we have assumed that all representations
contained in the Agreement, the Registration Statement, as well as those
representations contained in the Representation Letters and other documents are,
and at the Effective Time will be, true and complete in all material respects.
We have also assumed that all representations made in any of the documents
referred to herein "to the knowledge of", or similarly qualified, of any person
or party are correct without such qualification. We have also assumed that as to
all matters in which a person or entity making a representation referred to
above has represented that such person or entity either is not a party to,does
not have, or is not aware of, any plan, intention, understanding or agreement.
We have not attempted to verify independently such representations.
<PAGE> 2
The conclusions expressed herein represent our judgment as to the
proper treatment of certain aspects of the Merger under the income tax laws of
the United States based upon the Code, Treasury Regulations, case law, and
rulings and other pronouncements of the Internal Revenue Service (the "IRS") as
in effect on the date of this opinion. No assurances can be given that such laws
will not be amended or otherwise changed prior to the Effective Time, or at any
other time, and that such changes will not affect the conclusions expressed
herein. Nevertheless, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the income tax laws of the
United States.
Our opinions represent our best judgment as to how a court would decide
if presented with the issues addressed herein and are not binding upon either
the IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinions will not be challenged by the IRS or rejected by a
court.
This opinion addresses only the specific United States federal income
tax consequences of the Merger set forth below, and does not address any other
federal, state, local or foreign income, estate, gift, transfer, sales, use, or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger). We express
no opinion regarding the tax consequences of the Merger to stockholders of the
Company that are subject to special tax rules, and we express no opinion
regarding the tax consequences of the Merger arising in connection with the
ownership of options or warrants for Company stock.
On the basis of, and subject to the foregoing, and in reliance upon the
representations and assumptions described above, we are of the opinion that:
1. The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code.
2. No gain or loss will be recognized by the holders of Company Common
Stock upon the receipt of Video Update Common Stock solely in exchange
for Company Common Stock in the Merger (except to the extent of cash
received in lieu of fractional shares);
3. The aggregate tax basis of the Video Update Common Stock to be received
by the Company stockholders in the Merger (including any fractional
share of Video Update Common Stock not actually received) will be the
same as the aggregate tax basis of the Company Common Stock surrendered
in exchange therefor;
4. The holding period of the Video Update Common Stock received by each
Company stockholder in the Merger (including any fractional share of
Video Update Common Stock actually received) will include the period
during which the Company Common Stock surrendered in exchange therefor
was held, provided that the Company Common Stock so surrendered is held
as a capital asset at the Effective Time;
5. Cash payments received by Company stockholders in lieu of receipt of
fractional shares of Video Update Common Stock will be treated as
received in redemption of such fractional shares, subject to the
provisions of Section 302, as if such fractional shares had been issued
in the Merger and then redeemed by Video Update for cash; and
6. No gain or loss will be recognized by Video Update, Sub or Company as a
result of the Merger.
No opinion is expressed as to any federal income tax consequence of the
Merger except as specifically set forth herein, and this opinion may not be
relied upon except with respect to the consequences specifically discussed
herein.
<PAGE> 3
This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement in
connection with references to this opinion and the tax consequences of the
merger. In giving this consent, however, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
GADSBY & HANNAH LLP
__________________________
<PAGE> 1
EXHIBIT 10.3
VIDEO UPDATE, INC.
1998 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF THE PLAN
The purpose of this Plan is to encourage and enable employees,
consultants, directors and others who are in a position to make significant
contributions to the success of VIDEO UPDATE, INC. and of its affiliated
corporations upon whose judgment, initiative and efforts the Corporation depends
for the successful conduct of its business, to acquire a closer identification
of their interests with those of the Corporation by providing them with
opportunities to purchase stock in the Corporation pursuant to options granted
hereunder, thereby stimulating their efforts on behalf of the Corporation and
strengthening their desire to remain involved with the Corporation. Any
employee, consultant or advisor designated to participate in the Plan is
referred to as a "Participant."
ARTICLE II
DEFINITIONS
2.1 "Affiliated Corporation" means any stock corporation of which a
majority of the voting common or capital stock is owned directly or indirectly
by the Corporation.
2.2 "Award" means an Option granted under Article V.
2.3 "Board" means the Board of Directors of the Corporation or, if one
(1) or more has been appointed, a Committee of the Board of Directors of the
Corporation.
2.4 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
2.5 "Committee" means a Committee of not less than two (2) members of
the Board appointed by the Board to administer the Plan, in whole or in part.
2.6 "Corporation" means VIDEO UPDATE, INC., a Delaware corporation, or
its successor.
<PAGE> 2
2.7 "Employee" means any person who is a regular full-time or part-time
employee of the Corporation or an Affiliated Corporation on or after January,
1998.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
2.9 "Incentive Stock Option" ("ISO") means an option that qualifies as
an incentive stock option as defined in Section 422 of the Code, as amended.
2.10 "Non-Qualified Option" means any option not intended to qualify as
an Incentive Stock Option.
2.11 "Option" means an Incentive Stock Option or Non-Qualified Option
granted by the Board under Article V of this Plan in the form of a right to
purchase Stock evidenced by an instrument containing such provisions as the
Board may establish. Except as otherwise expressly provided with respect to an
Option grant, no Option granted pursuant to the Plan shall be an Incentive Stock
Option.
2.12 "Participant" means a person selected by the Committee to receive
an award under the Plan.
2.13 "Plan" means this 1998 Stock Option Plan.
2.14 "Reporting Person" means a person subject to Section 16 of the
Exchange Act or any successor provision.
2.15 "Restricted Period" means the period of time selected by the
Committee during which an award may be forfeited by the person.
2.16 "Stock" means the Common Stock, $.01 par value, of the Corporation
or any successor, including any adjustments in the event of changes in capital
structure of the type described in Article XI.
ARTICLE III
ADMINISTRATION OF THE PLAN
3.1 Administration by Board. This Plan shall be administered by the
Board of Directors of the Corporation. The Board may, from time to time,
delegate any of its functions under this Plan to one or more Committees. All
references in this Plan to the Board shall also include the Committee or
Committees, if one or more have been appointed by the Board. From
<PAGE> 3
time to time the Board may increase the size of the Committee or committees and
appoint additional members thereto, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee or committees and thereafter directly
administer the Plan. No member of the Board or a committee shall be liable for
any action or determination made in good faith with respect to the Plan or any
options granted under the Plan.
If a Committee is appointed by the Board, a majority of the members of
the Committee shall constitute a quorum, and all determinations of the Committee
under the Plan may be made without notice or meeting of the Committee by a
writing signed by a majority of Committee members. The Board may in its
discretion delegate the power to select directors and officers to receive Awards
under the Plan, and the timing, pricing and amount of such Awards to a
Committee, all members of which shall be "non-employee directors" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
3.2 Powers. The Board of Directors and/or any committee appointed by
the Board shall have full and final authority to operate, manage and administer
the Plan on behalf of the Corporation. This authority includes, but is not
limited to:
(a) The power to grant Awards conditionally or unconditionally,
(b) The power to prescribe the form or forms of any instruments
evidencing Awards granted under this Plan,
(c) The power to interpret the Plan,
(d) The power to provide regulations for the operation of the
incentive features of the Plan, and otherwise to prescribe and
rescind regulations for interpretation, management and
administration of the Plan,
(e) The power to delegate responsibility for Plan operation,
management and administration on such terms, consistent with
the Plan, as the Board may establish,
(f) The power to delegate to other persons the responsibility of
performing ministerial acts in furtherance of the Plan's
purpose, and
<PAGE> 4
(g) The power to engage the services of persons, companies, or
organizations in furtherance of the Plan's purpose, including
but not limited to, banks, insurance companies, brokerage
firms and consultants.
3.3 Additional Powers. In addition, as to each Option to buy Stock of
the Corporation, the Board shall have full and final authority in its
discretion: (a) to determine the number of shares of Stock subject to each
Option; (b) to determine the time or times at which Options will be granted; (c)
to determine the option price of the shares of Stock subject to each Option,
which price shall be not less than the minimum price specified in Article V of
this Plan; (d) to determine the time or times when each Option shall become
exercisable and the duration of the exercise period (including the acceleration
of any exercise period), which shall not exceed the maximum period specified in
Article V; (e) to determine whether each Option granted shall be an Incentive
Stock Option or a Non-Qualified Option; and (f) to waive compliance by a
Participant with any obligation to be performed by him under an Option, to waive
any condition or provision of an Option, and to amend or cancel any Option (and
if an Option is cancelled, to grant a new Option on such terms as the Board may
specify), except that the Board may not take any action with respect to an
outstanding option that would adversely affect the rights of the Participant
under such Option without such Participant's consent. Nothing in the preceding
sentence shall be construed as limiting the power of the Board to make
adjustments required by Article XI.
In no event may the Corporation grant an Employee any Incentive Stock
Option that is first exercisable during any one calendar year to the extent the
aggregate Fair Market Value of the Stock (determined at the time the Options are
granted) exceeds One Hundred Thousand Dollars ($100,000) (under all stock option
plans of the Corporation and any Affiliated Corporation); provided, however,
that this paragraph shall have no force and effect if its inclusion in the Plan
is not necessary for Incentive Stock Options issued under the Plan to qualify as
such pursuant to Section 422(d)(1) of the Code.
<PAGE> 5
ARTICLE IV
ELIGIBILITY
4.1 Eligible Employees. All Employees (including Directors who are
Employees) are eligible to be granted Incentive Stock Option and Non-Qualified
Option Awards under this Plan.
4.2 Consultants, Directors and other Non-Employees. Any consultant,
Director (whether or not an Employee) and any other non-Employee is eligible to
be granted Non-Qualified Option Awards under the Plan, provided the person has
not irrevocably elected to be ineligible to participate in the Plan.
4.3 Relevant Factors. In selecting individual Employees, Directors,
consultants and other non-Employees to whom Awards shall be granted, the Board
shall weigh such factors as are relevant to accomplish the purpose of the Plan
as stated in Article I. An individual who has been granted an Award may be
granted one or more additional Awards, if the Board so determines. The granting
of an Award to any individual shall neither entitle that individual to, nor
disqualify him or her from, participation in any other grant of Awards.
ARTICLE V
STOCK OPTION AWARDS
5.1 Number of Shares. Subject to the provisions of Article XI of this
Plan, the aggregate number of shares of Stock for which Options may be granted
under this Plan shall not exceed One Million Seven Hundred Fifty Thousand
(1,750,000) shares of Stock. The shares to be delivered upon exercise of Options
under this Plan shall be made available, at the discretion of the Board, either
from authorized but unissued shares or from previously issued and reacquired
shares of Stock held by the Corporation as treasury shares, including shares
purchased on the open market.
Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Board of Directors.
5.2 Effect of Expiration, Termination or Surrender. If an Option under
this Plan shall expire or terminate unexercised as to any shares covered
thereby, or shall cease for any reason to
<PAGE> 6
be exercisable in whole or in part, or if the Corporation shall reacquire any
unvested shares issued pursuant to Options under the Plan, such shares shall
thereafter be available for the granting of other Options under this Plan.
5.3 Term of Options. The full term of each Option granted hereunder
shall be for such period as the Board shall determine. In the case of Incentive
Stock Options granted hereunder, the term shall not exceed ten (10) years from
the date of granting thereof. Each Option shall be subject to earlier
termination as provided in Sections 6.3 and 6.4. Notwithstanding the foregoing,
the term of options intended to qualify as "Incentive Stock Options" shall not
exceed five (5) years from the date of granting thereof if such option is
granted to any employee who at the time such option is granted owns more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Corporation.
5.4 Option Price. The Option price shall be determined by the Board at
the time any Option is granted. In the case of Incentive Stock Options, the
exercise price shall not be less than one hundred percent (l00%) of the Fair
Market Value of the shares covered thereby at the time the Incentive Stock
Option is granted (but in no event less than par value), provided that no
Incentive Stock Option shall be granted hereunder to any Employee if at the time
of grant the Employee, directly or indirectly, owns shares of the Corporation's
stock possessing more than ten percent (10%) of the combined voting power of all
classes of stock of the Corporation and its Affiliated Corporations unless the
Incentive Stock Option price equals not less than one hundred ten percent (110%)
of the Fair Market Value of the shares covered thereby at the time the Incentive
Stock Option is granted. In the case of Non-Qualified Stock Options, the
exercise price shall not be less than par value.
5.5 Fair Market Value. "Fair Market Value" shall be deemed to be the
fair value of the Stock as determined in good faith by the Board after taking
into consideration all factors that it deems appropriate, including without
limitation, recent sale and offer prices of the Stock in private transactions
negotiated at arm's length. If, at the time an Option is granted under the Plan,
the Corporation's Stock is publicly traded, then "Fair Market Value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such Option is granted and
shall mean (i) the average (on that date) of the high
<PAGE> 7
and low prices of the Stock on the principal national securities exchange on
which the Stock is traded, if the Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Stock on
the NASDAQ National Market List, if the Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid prices)
last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Stock is not reported on the NASDAQ National
Market List.
5.6 Non-Transferability of Options. No Option granted under this Plan
shall be transferable by the grantee otherwise than by will or the laws of
descent and distribution, and such Option may be exercised during the grantee's
lifetime only by the grantee.
5.7 Foreign Nationals. Awards may be granted to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.
ARTICLE VI
EXERCISE OF OPTION
6.1 Exercise. Each Option granted under this Plan shall be exercisable
on such date or dates and during such period and for such number of shares as
shall be determined pursuant to the provisions of the instrument evidencing such
Option. The Board shall have the right to accelerate the date of exercise of any
Option, provided that, the Board shall not accelerate the exercise date of any
Incentive Stock Option granted if such acceleration would violate the annual
vesting limitation contained in Section 422(d)(1) of the Code.
6.2 Notice of Exercise. A person electing to exercise an Option shall
give written notice to the Corporation of such election and of the number of
shares he or she has elected to purchase and shall at the time of exercise
tender the full purchase price of the shares he or she has elected to purchase.
The purchase price can be paid partly or completely in shares of the
Corporation's stock valued at Fair Market Value as defined in Section 5.5
hereof, or by any other lawful consideration as the Board may determine. Until
such person has been issued a certificate or certificates for the shares so
purchased, he or she shall possess no rights of a record holder with respect to
any of such shares.
<PAGE> 8
6.3 Option Unaffected by Change in Duties. No Incentive Stock Option
(and, unless otherwise determined by the Board of Directors, no Non-Qualified
Option granted to a person who is, on the date of the grant, an Employee of the
Corporation or an Affiliated Corporation) shall be affected by any change of
duties or position of the optionee (including transfer to or from an Affiliated
Corporation), so long as he or she continues to be an Employee. Employment shall
be considered as continuing uninterrupted during any bona fide leave of absence
(such as those attributable to illness, military obligations or governmental
service) provided that the period of such leave does not exceed ninety (90) days
or, if longer, any period during which such optionee's right to reemployment is
guaranteed by statute. A bona fide leave of absence with the written approval of
the Board shall not be considered an interruption of employment under the Plan,
provided that such written approval contractually obligates the Corporation or
any Affiliated Corporation to continue the employment of the optionee after the
approved period of absence.
If the optionee shall cease to be an Employee for any reason other than
death, such Option shall thereafter be exercisable only to the extent of the
purchase rights, if any, which have accrued as of the date of such cessation;
provided that (i) the Board may provide in the instrument evidencing any Option
that the Board may in its absolute discretion, upon any such cessation of
employment, determine (but be under no obligation to determine) that such
accrued purchase rights shall be deemed to include additional shares covered by
such Option; and (ii) unless the Board shall otherwise provide in the instrument
evidencing any Option, upon any such cessation of employment, such remaining
rights to purchase shall in any event terminate upon the earlier of (A) the
expiration of the original term of the Option; or (B) where such cessation of
employment is on account of disability, the expiration of one (1) year from the
date of such cessation of employment and, otherwise, the expiration of three (3)
months from such date. For purposes of the Plan, the term "disability" shall
mean "permanent and total disability" as defined in Section 22(e)(3) of the
Code.
In the case of a Participant who is not an Employee, provisions
relating to the exercisability of an Option following termination of service
shall be specified in the Award. If
<PAGE> 9
not so specified, all Options held by such Participant shall terminate on
termination of service to the Corporation.
6.4 Death of Optionee. Should an optionee die while in possession of
the legal right to exercise an Option or Options under this Plan, such persons
as shall have acquired, by will or by the laws of descent and distribution, the
right to exercise any Options theretofore granted, may, unless otherwise
provided by the Board in any instrument evidencing any Option, exercise such
Options at any time prior to one (1) year from the date of death; provided, that
such Option or Options shall expire in all events no later than the last day of
the original term of such Option; provided, further, that any such exercise
shall be limited to the purchase rights which have accrued as of the date when
the optionee ceased to be an Employee, whether by death or otherwise, unless the
Board provides in the instrument evidencing such Option that, in the discretion
of the Board, additional shares covered by such Option may become subject to
purchase immediately upon the death of the optionee.
ARTICLE VII
REPORTING PERSON LIMITATIONS
To the extent required to qualify for the exemption provided by Rule
16b-3 under the Exchange Act, and any successor provision, at least six (6)
months must elapse from the date of acquisition of an Option by a Reporting
Person to the date of disposition of such Option (other than upon exercise) or
its underlying Common Stock.
ARTICLE VIII
TERMS AND CONDITIONS OF OPTIONS
Options shall be evidenced by instruments (which need not be identical)
in such forms as the Board may from time to time approve. Such instruments shall
conform to the terms and conditions set forth in Articles V and VI hereof and
may contain such other provisions as the Board deems advisable which are not
inconsistent with the Plan, including restrictions applicable to shares of Stock
issuable upon exercise of Options. In granting any Non-Qualified Option, the
Board may specify that such Non-Qualified Option shall be subject to the
restrictions set forth
<PAGE> 10
herein with respect to Incentive Stock Options, or to such other termination and
cancellation provisions as the Board may determine. The Board may from time to
time confer authority and responsibility on one (1) or more of its own members
and/or one (1) or more officers of the Corporation to execute and deliver such
instruments. The proper officers of the Corporation are authorized and directed
to take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
ARTICLE IX
BENEFIT PLANS
Awards under the Plan are discretionary and are not a part of regular
salary. Awards may not be used in determining the amount of compensation for any
purpose under the benefit plans of the Corporation, or an Affiliated
Corporation, except as the Board may from time to time expressly provide.
Neither the Plan, an Option or any instrument evidencing an Option confers upon
any Participant any right to continue as an Employee of, or consultant or
advisor to, the Corporation or an Affiliated Corporation or affect the right of
the Corporation or any Affiliated Corporation to terminate them at any time.
Except as specifically provided by the Board in any particular case, the loss of
existing or potential profits granted under this Plan shall not constitute an
element of damages in the event of termination of the relationship of a
Participant even if the termination is in violation of an obligation of the
Corporation to the Participant by contract or otherwise.
ARTICLE X
AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
The Board may suspend the Plan or any part thereof at any time or may
terminate the Plan in its entirety. Awards shall not be granted after Plan
termination.
The Board may also amend the Plan from time to time, except that
amendments which affect the following subjects must be approved by stockholders
of the Corporation:
(a) Except as provided in Article XI relative to capital changes,
the number of shares as to which Options may be granted
pursuant to Article V;
<PAGE> 11
(b) The maximum term of Options granted;
(c) The minimum price at which Options may be granted;
(d) The term of the Plan; and
(e) The requirements as to eligibility for participation in the
Plan.
Awards granted prior to suspension or termination of the Plan may not
be cancelled solely because of such suspension or termination, except with the
consent of the grantee of the Award.
ARTICLE XI
CHANGES IN CAPITAL STRUCTURE
The instruments evidencing Options granted hereunder shall be subject
to adjustment in the event of changes in the outstanding Stock of the
Corporation by reason of Stock dividends, Stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges or other
relevant changes in capitalization occurring after the date of an Award to the
same extent as would affect an actual share of Stock issued and outstanding on
the effective date of such change. Such adjustment to outstanding Options shall
be made without change in the total price applicable to the unexercised portion
of such Options, and a corresponding adjustment in the applicable option price
per share shall be made. In the event of any such change, the aggregate number
and classes of shares for which Options may thereafter be granted under Section
5.1 of this Plan may be appropriately adjusted as determined by the Board so as
to reflect such change.
Notwithstanding the foregoing, any adjustments made pursuant to this
Article XI with respect to Incentive Stock Options shall be made only after the
Board, after consulting with counsel for the Corporation, determines whether
such adjustments would constitute a "modification" of such Incentive Stock
Options (as that term is defined in Section 424 of the Code) or would cause any
adverse tax consequences for the holders of such Incentive Stock Options. If the
Board determines that such adjustments made with respect to Incentive Stock
Options would constitute a modification of such Incentive Stock Options, it may
refrain from making such adjustments.
<PAGE> 12
In the event of the proposed dissolution or liquidation of the
Corporation, each Option will terminate immediately prior to the consummation of
such proposed action or at such other time and subject to such other conditions
as shall be determined by the Board.
Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Corporation.
No fractional shares shall be issued under the Plan and the optionee
shall receive from the Corporation cash in lieu of such fractional shares.
ARTICLE XII
EFFECTIVE DATE AND TERM OF THE PLAN
The Plan shall become effective on February __, 1998. The Plan shall
continue until such time as it may be terminated by action of the Board or the
Committee; provided, however, that no Options may be granted under this Plan on
or after the tenth anniversary of the effective date hereof.
ARTICLE XIII
CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS
The Board, at the written request of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's
Incentive Stock Options, that have not been exercised on the date of conversion,
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the optionee is an employee of the
Corporation or an Affiliated Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of such Options. At the time of such conversion, the
Board or the Committee (with the consent of the optionee) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the Board
or the Committee in its discretion may determine, provided that such conditions
shall not be inconsistent with the Plan. Nothing in the Plan shall be deemed to
give any optionee the
<PAGE> 13
right to have such optionee's Incentive Stock Options converted into
Non-Qualified Options, and no such conversion shall occur until and unless the
Board or the Committee takes appropriate action. The Board, with the consent of
the optionee, may also terminate any portion of any Incentive Stock Option that
has not been exercised at the time of such termination.
ARTICLE XIV
APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of shares
pursuant to Options granted under the Plan shall be used for general corporate
purposes.
ARTICLE XV
GOVERNMENTAL REGULATION
The Corporation's obligation to sell and deliver shares of Stock under
this Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
ARTICLE XVI
WITHHOLDING OF ADDITIONAL INCOME TAXES
Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition (as defined in Article XVI) the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includible in such person's gross income. The Board in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.
ARTICLE XVII
NOTICE TO THE CORPORATION OF DISQUALIFYING DISPOSITION
Each employee who receives an Incentive Stock Option must agree to
notify the Corporation in writing immediately after the employee makes a
Disqualifying Disposition of any Stock acquired pursuant to the exercise of an
Incentive Stock Option. A Disqualifying
<PAGE> 14
Disposition is any disposition (including any sale) of such Stock before the
later of (a) two years after the date the employee was granted the Incentive
Stock Option or (b) one year after the date the employee acquired Stock by
exercising the Incentive Stock Option. If the employee has died before such
stock is sold, these holding period requirements do not apply and no
Disqualifying Disposition can occur thereafter.
ARTICLE XVIII
GOVERNING LAW; CONSTRUCTION
The validity and construction of the Plan and the instruments
evidencing Options shall be governed by the laws of the State of Delaware
(without regard to the conflict of law principles thereof). In construing this
Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
<PAGE> 1
EXHIBIT 10.4
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED UPON A REQUEST TO THE
COMMISSION FOR CONFIDENTIAL TREATMENT. SUCH OMITTED PORTIONS HAVE BEEN
SEPARATELY FILED WITH THE COMMISSION.
<PAGE> 2
STORE NUMBER OR COC:
RENTRAK NATIONAL ACCOUNT AGREEMENT
INSTRUCTIONS
All shaded areas of this AGREEMENT must be completed. Processing fees are:
<TABLE>
<CAPTION>
U.S. FEE
----------
<S> <C>
First store:................................... $1,995.00
Multiple stores owned by the same Retailer:
a) Additional stores signed at the same time
as first store..................... $995.00
b) Additional stores signed at a later date $1,995.00
</TABLE>
Retailer's check in the amount of $ is attached.
-------------
AGREEMENT
This AGREEMENT by and between Rentrak Corporation ("Rentrak") and Video
Update, Inc. ("Retailer") is made effective as of the date executed by Rentrak
below.
Retailer operates retail locations. This Agreement shall cover the retail
establishments ("Location(s)") listed on Exhibit A hereto and will also cover
future stores defined in Section 3 P. In addition, Retailer operates the central
office (Office) and/or warehouse facility (Warehouse) listed on Exhibit A.
Rentrak distributes prerecorded videocassettes and other media (hereinafter
referred to as "Cassettes" or "PPT Product") pursuant to a lease arrangement
known as Pay-Per-Transaction(SM) ("PPT(R)" or the PPT(R) System"). Retailer
desires to participate in the PPT System.
In consideration of the mutual promises and agreements contained herein,
the parties agree as follows:
1. THE PARTIES INTEND THAT THIS AGREEMENT CONSTITUTES A TRUE LEASE OF
CASSETTES BETWEEN RETAILER AS LESSEE AND RENTRAK AS LESSOR. OWNERSHIP AND LEGAL
TITLE TO THE CASSETTES SHALL NOT TRANSFER OR OTHERWISE PASS FROM RENTRAK TO
RETAILER DURING OR FOLLOWING THE LEASE TERM UNLESS RETAILER HAS PROPERLY
ACCOUNTED FOR THE PURCHASE OF THE CASSETTES IN ACCORDANCE WITH THE TERMS HEREOF
AND PAID RENTRAK THE APPLICABLE SELL-THROUGH OR END-OF-TERM BUYOUT FEE.
2. In the event Retailer does not meet Rentrak's credit minimum, annual
rental volume and/or automated reporting requirements prior to receiving a
Cassette from Rentrak, the processing fee, if any, will be refunded. In the
event Retailer meets such requirements, Cassettes offered for lease by Rentrak
and ordered by Retailer, subject to any ordering limitations which may be
imposed, will be shipped "FOB Destination" to Retailer's Warehouse or at
Retailer's request, to each Location. Retailer's last order accepted and
confirmed by Rentrak shall be final. Rentrak will use its best efforts to assure
delivery of Cassettes to Retailer on or before the street date. If Retailer's
order or any portion thereof cannot be shipped, Rentrak or Retailer may cancel
the unfilled order upon notice and without further liability to the other.
3. Retailer agrees to:
A) Use Rentrak-approved computer hardware and Point-of-Sale ("POS") system
software. Retailer shall, prior to ordering Cassettes, complete, to Rentrak's
sole satisfaction, a test of Retailer's computer system and communication
ability. Retailer shall also install Rentrak's proprietary Rentrak Profit Maker
Software ("RPM") on its computer system (which inclusive with the hardware, RPM,
and POS system software are collectively referred to as the "POS System"). The
RPM shall, at all times, remain the exclusive property of Rentrak.
B) Timely remit all amounts due Rentrak.
C) Comply with the reporting system established by Rentrak. Rentrak may
modify the reporting system from time to time, and Retailer must comply with
such modification within ninety (90) days of notice from Rentrak. Retailer shall
provide Rentrak with and otherwise permit Rentrak to obtain all reports required
pursuant to this Agreement from each Location's POS System and at Rentrak's
request from Retailer's central computer (meaning the computer to which all
Locations are reporting their rental and sale information, such computer being
hereinafter referred to as the "Host Computer") daily. If Retailer cannot
deliver the required reporting to Rentrak within seven (7) days of the due date,
Rentrak may, at its sole election, cancel orders and refuse to accept additional
orders in process until the required reporting is received.
D) Honor the designated street date for, and all copyrights applicable to,
Cassettes leased.
E) Pay all sale, use, property or other taxes of any kind or nature
assessed or levied by any taxing authority with respect to Cassettes acquired or
leased pursuant hereto, except for income taxes of Rentrak.
F) At the time of ordering, designate the number of Cassettes being ordered
by each individual Location.
G) Within forty-eight (48) hours of receipt at its Warehouse or at its
Locations, whichever occurs first and prior to any rental thereof, bar-code the
Cassettes, enter them into both the designated Location's POS System and the
Host Computer and except as limited by paragraph 3(D), hereof, make them
available for immediate rental. Cassettes retained at Retailer's Warehouse may
not be so retained longer than five (5) days after the street date. Retailer
shall use the identification codes and title spellings provided by Rentrak.
H) Process through the appropriate Location's POS System, at the time of
the transaction, the rental and sale of all Cassettes. Notwithstanding the
foregoing sentence, Retailer may utilize a processing system other than the POS
System for a period not to exceed two (2) business days in the event the
Retailer's POS System is nonfunctioning. Retailer shall immediately give Rentrak
telephone notice if Retailer's POS System is nonfunctioning. All rental and sale
transactions occurring during the nonoperational period will be processed
through Retailer's POS System as soon as it is again operational.
I) Not remove the Cassettes from the Location except pursuant to paragraph
20 or paragraph 21 hereof.
J) Use its best efforts to rent Cassettes at rates it determines
appropriate and prominently display the Cassettes supplied through Rentrak.
Retailer shall not rent the Cassettes for a period of longer than seven (7) days
in any single transaction to any customer or permit the Cassettes to be leased
to or by other video retailers.
K) Not order quantities of Cassettes in excess of those required to meet
anticipated rental demand.
L) Not disassemble, decompile, or in any manner tamper with or alter, copy,
or use any hardware or software provided by Rentrak
<PAGE> 3
except for the specific purpose described in this Agreement and in the Rentrak
Profit Maker Manual, which by this reference is incorporated into this
Agreement. Retailer agrees that it will not divulge or disclose or otherwise
make available to any third party whatsoever, or make any use whatsoever, copy,
or in any way replicate the RPM or allow any third party to do the same. Except
as directed by Rentrak, the POS System, including the RPM, shall not be utilized
to, in any manner, provide information on rental or sale activity of any
Cassettes at the Location, regardless of how the Cassettes were acquired, to any
provider of Cassettes under any form of revenue-sharing plan or leasing system.
M) Maintain the Cassettes in good condition and repair.
N) Not use for any purpose, and not be licensed to use, any names,
trademarks, service marks, logos or commercial symbols that belong to or are
used by Rentrak or by any owner or supplier of Cassettes to Rentrak ("Program
Suppliers") without the express written consent of Rentrak, or the Program
Suppliers.
O) Retain and reveal to Rentrak certain information with respect to its
business. Retailer agrees that the data and other information collected by
Rentrak under the PPT system may be used by Rentrak for the following purposes:
(i) in connection with Retailer audits and other internal purposes at Rentrak;
(ii) in aggregate form with data from other retailers provided that each
retailer is not individually identified; and (iii) for sale or provision to
others as long as such data is provided in aggregate form without disclosing the
identity of the Retailer. Retailer also acknowledges that accurate, verifiable
data as to rentals and sales of the Cassettes is imperative and that inaccurate
or incorrect reporting by Retailer will cause substantial damage to Rentrak.
P) Cause all of the Locations owned, controlled or operated by Retailer as
of the date of this Agreement to participate in the PPT System in accordance
with the terms hereof within six (6) months from receipt of Retailer's first
cassette at its first Location or for all Locations acquired (by ownership,
control or operation) after the date of this Agreement, to participate in the
PPT System within thirty (30) days of opening for business or acquisition.
Retailer understands and agrees that moving cassettes from a store participating
in the PPT System to a store not on the PPT System will constitute a material
breach of this Agreement. Retailer agrees to immediately notify Rentrak in
writing whenever Retailer acquires (by ownership, control or operation) a
Location or ceases ownership, control or operation of a Location.
Q) And hereby does acknowledge that the reporting system established by
Rentrak, including the use of the POS software and compatible hardware;
bar-coding the Cassettes; and processing the rental and sale of all Cassettes
through the POS System, is Rentrak's method of (i) determining the location of
Rentrak's property consisting of Cassettes leased by Retailer pursuant to the
Agreement; and (ii) calculating that portion of the revenue-sharing proceeds
which Retailer shall be holding in trust on Rentrak's behalf. Retailer's failure
to comply with the reporting requirements under this Agreement, without
notifying Rentrak of such noncompliance, shall constitute a knowing,
intentional, deliberate and material breach on the part of Retailer which will
result in substantial injury to Rentrak.
4. With respect to certain titles offered for lease hereunder, unique
credit, pricing terms and/or minimum/maximum ordering requirements may be
established. When ordering Cassettes, Retailer shall comply with such
minimum/maximum requirements. If the Retailer elects to order such a title and
fails to honor the terms. Rentrak, in its sole discretion, shall have the right
to reduce or increase the number of Cassettes ordered by Retailer. Program
Suppliers, in their sole discretion, respectively, shall have the right to
refuse to supply Retailer with PPT Product.
5. The rights granted to Retailer hereunder with respect to the leasing of
Cassettes are dependent upon the rights granted to Rentrak by the Program
Suppliers. In the event that Rentrak's PPT rights in and to certain Cassettes
terminate for any reason, Retailer's rights to certain Cassettes granted
pursuant to this Agreement shall be affected in the following manner. In
consideration of Retailer compensating Program Suppliers directly, or returning
Program Supplier(s)'s property (i.e., the Cassettes) directly to the Program
Supplier(s), which choice Retailer may be given the option of selecting, certain
Program Supplier(s) have agreed to permit Retailer to own some or all of those
Program Supplier(s)'s Cassettes in Retailer's possession after compensating
those Program Supplier(s) in accordance with a "purchase formula" or returning
the Cassettes Retailer elects not to purchase directly to that Program Supplier.
If Rentrak's rights to lease a Program Supplier(s)'s Cassettes terminate,
Retailer may be notified in writing by the Program Supplier and instructed on
the choices and procedures to follow. In such event of termination, Rentrak may
at that time assign all of its rights as the lessor of Cassettes to the Program
Supplier, and Retailer will become a lessee of the Program Supplier.
6. Retailer is under no obligation to lease any Cassette offered hereto and
Rentrak is under no obligation to offer any Cassette to any particular Retailer
even if available to other Retailers. Retailer may order Cassettes of a title
for one or more of the other Locations and not order Cassettes of the same title
for one or more of the other Locations. If a Retailer rents Cassettes to the
public at a store which was designated in Retailer's order as a PPT
participating store with respect to that title and which were obtained by means
other than this Agreement, and are of the same title as Cassettes obtained under
this Agreement, Retailer agrees that rentals of all Cassettes of such title,
regardless of how obtained, shall be reflected, reported and revenue sharing
paid as if the Cassettes were obtained under this Agreement. Notwithstanding the
above, with regard to certain Program Suppliers, Retailer shall be required to
order a given title released by such Program Suppliers for each Location of
similar or larger size if Retailer orders the same title for one Location (i.e.,
if Location A, a store with average monthly revenues of $10,000 from the rental
and sale of Cassettes orders a title from a certain Program Supplier, Retailer
may be required to order the same title for all of Retailer's Locations of
similar or larger size to Location A.). Cassettes shall be obtained by Retailer
in full compliance with any Program Supplier or Rentrak established
minimum/maximum ordering requirements as more fully set forth in paragraph 4 of
this Agreement. With respect to Cassettes leased hereunder, Retailer may not
purchase the Cassette and use it as rental inventory, remove the title from
rental availability except as provided herein, or take any other steps to
deprive Rentrak of all available revenue under the established terms for the
title's lease term except to the extent that, once "used sell-through" is
permitted for a particular title by its terms, Retailer may remove Cassettes no
longer required for rental use to Retailer's Warehouse for subsequent sale by
recording the same as a sale and making the required remittance to Rentrak upon
transfer.
7. With respect to Cassettes which are offered pursuant hereto, Retailer
will be notified of the lease terms which may vary from title to title.
Generally, such terms will require the following:
A) Pay when due a "handling fee" for each Cassette leased, a portion of
which may represent sales, use or excise taxes.
B) Weekly payment of a "transaction fee" which may include a minimum fee
per transaction due regardless of the rental amount received by Retailer.
C) Weekly payment of a "sell-through fee" with respect to any Cassettes
leased pursuant hereto and sold by Retailer to the public.
<PAGE> 4
Rentrak may restrict the sale of any Cassettes leased pursuant hereto, or the
date of such sale. Retailer shall establish its own sales price for the
Cassettes sold pursuant to this Agreement. Retailer may not, however, sell more
than five (5) copies of any title to any one customer within any thirty (30) day
period. In all cases, Retailer must retain, display, and make available for
rental at least one of the Cassettes of a title leased pursuant hereto at each
Location designated as participating with respect to the particular title
throughout the term of the lease.
D) Pay, when due, and pursuant to the terms established, a "buy-out fee"
with respect to the purchase of some or all of the Cassettes leased pursuant
hereto and offered for sale by Rentrak at the end of the lease term, which shall
not exceed two years. Retailer must either purchase such Cassettes pursuant to
the terms provided, if any, or return the Cassettes to Rentrak.
E) Retailer shall have a fiduciary duty to Rentrak to hold and remit
revenue-sharing proceeds to Rentrak and to report to Rentrak in accordance with
the reporting requirements of paragraph 3. Rentrak's percentage of retail
proceeds received by Retailer shall be held by Retailer in trust for Rentrak.
8. Retailer shall pay Rentrak its then current monthly access/users fee.
Such fee is currently $36 per Location. Fees are subject to change without
notice. In the event Retailer elects to communicate for all of its locations
from one central Host Computer, Retailer shall be responsible for paying all
costs incurred to deliver the data to Rentrak on a daily basis in a form
acceptable to Rentrak.
9. Retailer shall maintain property damage or loss insurance on all
Cassettes in an amount at least equal to fifty percent (50%) of each Cassette's
then-current manufacturer's suggested retail price ("Replacement Value"), with
Rentrak Corporation named as the sole loss payee on said insurance policy. The
policy shall further contain a clause requiring the insurer to give Rentrak at
least 20 days prior written notice of any modification in the terms or
cancellation of the policy. Upon demand by Rentrak, Retailer must furnish proof
of insurance coverage for Rentrak's Cassettes, but Rentrak has no duty to
ascertain the existence of coverage, or to advise Retailer if the coverage does
not comply. If insurance proceeds are inadequate to cover the loss, Retailer
shall pay to Rentrak the Replacement Value for all cassettes which are lost,
stolen or destroyed subsequent to delivery to Retailer. The Replacement Value
shall be paid to Rentrak immediately upon the destruction, loss or theft of a
Cassette. Cassettes discovered missing in the ordinary course of business are to
be recorded and paid for when discovered as if they had been sold to the public.
Retailer shall notify Rentrak of any loss, theft or destruction of Cassettes
that occurs outside of the ordinary course of business at the time Retailer
discovers the same.
10. In the event Retailer receives defective Cassettes from Rentrak, it
may, within thirty (30) days of receipt, return them freight prepaid to Rentrak.
Rentrak will, at its election, replace the Cassettes, billing Retailer the
handling fee and/or after determining that the defect was not Retailer or
consumer related, issue credit for the handling fee. In no event will Rentrak be
otherwise liable for such Cassettes or any loss of any nature caused thereby.
Defective Cassettes not delivered to Rentrak within thirty (30) days of receipt
may not be returned for replacement or credit. RENTRAK MAKES NO WARRANTY WITH
RESPECT TO THE CASSETTES, EXPRESS OR IMPLIED, AND RENTRAK EXPRESSLY DISCLAIMS
ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE AND ANY
LIABILITY FOR CONSEQUENTIAL DAMAGES ARISING OUT OF USE OR INABILITY TO USE THE
CASSETTES.
11. Prior to Rentrak's approval of shipments to Retailer, Retailer shall
demonstrate to Rentrak's sole satisfaction that it has in operation a
comprehensive inventory tracking system which is able, on a demand basis
(meaning immediately upon Rentrak's request) to produce reports detailing the
information desired by Rentrak on a per Cassette basis and in a format
acceptable to Rentrak. Retailer agrees that Rentrak and/or any Program Suppliers
may employ shopping services and may, without prior notice to Retailer, conduct
during normal business hours, audits of Retailer's business operation and
records to verify compliance with the terms of this Agreement. Within
twenty-four (24) hours of Rentrak's request, Retailer will deliver to Rentrak at
its principal office (or if requested by Rentrak, to its on-site auditor) a list
of every title leased pursuant to this Agreement, the number of Cassettes of
each leased title, the location of each Cassette, including a list of the
customers to whom Cassettes are then on rental, and the location from which each
Cassette was rented. Retailer agrees to pay the higher of $2,000 multiplied by
the number of Locations or actual costs to conduct an audit in the event that an
audit or shopper's report indicates any breach of this Agreement.
In addition, and not in lieu of any other damages to which Rentrak may be
entitled, consequential or otherwise, Retailer agrees to pay Rentrak all costs
associated with processing, by Rentrak or any Program Supplier, rentals and/or
sales of Cassettes, if any, not properly transmitted or accounted for, together
with liquidated damages in an amount equal to the manufacturer's suggested
retail price published by Program Supplier at the time of distribution to the
Retailer ("Retail Price") for each and every Cassette not at the Location, or
properly rented out or properly sold at the time of the audit. Retailer may not
return Cassettes which were missing at the audit, in satisfaction of the
liquidated damages due under this paragraph. The liquidated damages may be
assessed by Rentrak against the Retailer, if, in Rentrak's or any Program
Supplier's sole discretion, the breach is intentional. This Agreement may be
immediately terminated by Rentrak prior to the Termination Date defined in
accordance with paragraph 17 herein, if any breach of this Agreement is
discovered by Rentrak or any Program Supplier at an audit of the Retail
Location.
12. As between Retailer and Rentrak, Retailer acknowledges that Rentrak
owns the RPM and that the RPM and the information collected is proprietary to
and a valuable asset of Rentrak and that any unauthorized use (as defined
herein) will cause Rentrak irreparable harm and loss. Retailer agrees: A) not to
adapt, duplicate, copy, recreate, and/or assimilate the RPM for use by Retailer
or any third party and B) to exercise the highest degree of care in safeguarding
the RPM against loss, theft, or inadvertent or purposeful transfer or disclosure
of the RPM to any third party. Any acts inconsistent with the above shall
constitute an unauthorized use. In the event of any unauthorized use of the RPM
by Retailer, Rentrak shall have the right of specific performance of Retailer's
obligations pursuant to this paragraph 12 in addition to all other rights and
remedies available to Rentrak in either law or equity.
13. Retailer acknowledges that it is imperative that Program Suppliers,
other customers of Rentrak, the parties to this Agreement, the titles involved,
the reporting system established by Rentrak and any obligations of Retailer
pursuant to the Agreement remain confidential. Retailer agrees that during the
term of this Agreement and all times thereafter, it will not disclose to any
individual or entity (including but not limited to, business associates, friends
or relatives), the participants in PPT, the reporting system, or any obligations
of Retailer pursuant to this Agreement. Notwithstanding the foregoing, Retailer
may reveal this Agreement to professional advisors for purposes of providing
Retailer with advice regarding
<PAGE> 5
execution of the Agreement, Retailer's obligations hereunder, or the performance
of Retailer's obligations pursuant to federal, state or local laws. Retailer
shall inform any such professional advisor of this confidentiality provision and
obtain his or her agreement to be bound by the terms contained herein.
14. "Rentrak", "PPT, "Pay-Per-Transaction", "Ontrak", RPM and "BudgetMaker"
are registered or pending trademarks of Rentrak (hereinafter collectively the
"Trademarks"). Retailer acknowledges and agrees that Rentrak is the exclusive
owner of the Trademarks and all goodwill associated therewith and that Retailer
is not authorized to use any of the Trademarks. Retailer further acknowledges
and agrees that any unauthorized use of the Trademarks is and shall be deemed to
be an infringement of the rights of Rentrak. Without limiting the generality of
the foregoing, Retailer shall not use any of the Trademarks as part of
Retailer's corporate, partnership, trade or other legal name of any corporation,
partnership or other entity in which the Retailer has a direct or indirect
interest, nor shall Retailer hold out or otherwise employ any of the Trademarks
to perform any activity, nor to incur any obligation or indebtedness in such
manner as could reasonably result in making Rentrak liable therefore. Retailer
shall not during the term of this Agreement, and after termination or expiration
of this Agreement for any reason whatsoever, dispute or contest for any reason,
the validity, ownership or enforceability of any of the Trademarks, nor attempt
to dilute the value of the goodwill attached to the Trademarks, nor counsel,
procure or assist anyone else to do any of the foregoing.
15. During the term of this Agreement, Retailer shall obtain all its leased
Cassettes exclusively from Rentrak and for this period and for a period of two
(2) years after the term of this Agreement, Retailer shall not obtain Cassettes
from any other source by lease, consignment, revenue sharing arrangement, or any
other manner which competes with, or is substantially similar to PPT, except
that during the two (2) year period after the Termination Date Retailer may
obtain Cassettes from a revenue sharing business if Retailer presents a
competitive written offer from such revenue sharing company on each title and
Rentrak fails or refuses to meet the terms of such offer. Notwithstanding the
above, Retailer has the absolute right in its sole discretion to purchase
Cassettes from any source.
16. Upon termination of a title's lease period, Retailer shall cause to be
delivered to Rentrak within fifteen (15) days, all Cassettes thereof not validly
purchased or otherwise properly disposed as provided herein. The returned
Cassettes shall be in good condition (normal wear and tear accepted) and shipped
in their original packaging. The term "normal wear and tear" is construed to
allow Retailer to return manufacturer's defectives and customer defectives. The
term "original packaging" shall be construed to include "cutbox" packaging or
with Retailer's labels affixed. Retailer shall ship the Cassettes with all
shipping and postage prepaid.
17. This Agreement shall expire on the last day of the lease term of all
Cassettes ordered by Retailer in its last order submitted to Rentrak on or prior
to December 31, 2011 ("Termination Date"), unless terminated prior thereto as
provided herein.
A) This Agreement may be terminated by Rentrak, prior to the Termination
Date, by notice of termination to the Retailer.
B) Upon a breach by Retailer of any provision of this Agreement, any
addendum to it, or any other agreement between Retailer and Rentrak, Rentrak may
in its sole discretion, in addition and not in lieu of any and all damages it
may otherwise be entitled to under the law, including without limitation
consequential damages: (i) terminate this Agreement and demand return of all
Cassettes leased pursuant hereto; (ii) suspend all Retailer's rights hereunder,
including ordering privileges, until thirty (30) days after such default has
been cured; or (iii) in the event Retailer's breach of this Agreement consists
of ordering quantities of Cassettes in excess of those required to meet
anticipated rental demand (a determination that such breach has occurred being
in Rentrak's sole discretion) then Rentrak may, without notice to Retailer,
reduce Retailer's orders of Cassettes to amounts Rentrak deems appropriate.
C) Retailer may terminate this Agreement if Rentrak has failed to cure, or
begun to cure, an event of default by Rentrak for which Retailer has given
Rentrak thirty (30) days written notice.
D) Upon the occurrence of the Termination Date or upon termination of this
Agreement by Rentrak, Retailer shall within ten (10) days deliver to Rentrak,
freight prepaid, all Cassettes leased hereunder that have not been validly
purchased or otherwise properly disposed prior to termination. The returned
Cassettes shall be in good condition (normal wear and tear accepted) and shipped
in their original packaging. Retailer shall pay the then current manufacturer's
suggested retail price for any Cassettes not returned to Rentrak within the time
allowed herein or any extension of such time granted in writing by Rentrak, and
shall pay all liabilities remaining due to Rentrak within seven (7) days of
termination. Cassettes with no manufacturer's suggested retail price shall be
valued at the wholesale price set by the Program Supplier divided by 0.63. Upon
receipt of the demand for the return of the Cassettes, Retailer shall no longer
be authorized to possess the Cassettes. Retailer's failure to return the
Cassettes to Rentrak within ten (10) days after receipt of the demand for return
of the Cassettes shall constitute a knowing, intentional and deliberate act on
the part of Retailer to retain the Cassettes for its own use, in derogation of
Rentrak's rights to possession. Under no circumstances shall Retailer be
entitled to or receive any refund or credit for any processing or ongoing fees
paid to Rentrak in connection with this Agreement, nor will Rentrak be held
liable for any costs associated with the Agreement incurred by Retailer.
E) If Retailer's breach consists of failure to report rental or sales
transactions, in addition to, and not in lieu of any other damages Rentrak may
be entitled, consequential or otherwise, Retailer agrees to pay liquidated
damages for lost revenue to Rentrak of $.0822 per Cassette multiplied by the
number of days that Retailer fails to report to Rentrak, together with a late
fee equivalent to five percent (5%) of Retailer's average weekly revenues during
the six (6) month period preceding Retailer's failure to report rental or sales
transactions multiplied by the number of weeks, or any part thereof. Retailer
has failed to report.
18. Rentrak has established, and will continue to establish from time to
time, minimum acceptable net worth requirements for Retailers and minimum
acceptable monthly rental revenues. In the event Retailer does not meet
Rentrak's established minimum acceptable net worth requirements, Retailer shall
provide Rentrak with a personal guarantee(s) satisfactory to Rentrak. In the
event Retailer does not meet Rentrak's minimum monthly rental revenue
requirements, Rentrak shall have the right, in its sole discretion, to terminate
this Agreement pursuant to paragraph 17, hereof.
19. Retailer shall not assign, sell, give, lease, sublease, encumber,
delegate or otherwise transfer (hereinafter collectively referred to as
"Transfer"), in whole or in part, directly or indirectly, whether voluntarily,
involuntarily or by operation of law, any rights or obligations under this
Agreement, or the Cassettes leased pursuant hereto, without the prior written
consent of Rentrak, which consent can be withheld in Rentrak's sole and
arbitrary discretion. Any attempted Transfer without Rentrak's prior written
consent shall be null and void and, at the option of Rentrak, will cause
termination of this Agreement. Neither the shareholders or directors of
Retailer, if
<PAGE> 6
Retailer is a corporation, the partners of Retailer, if Retailer is a
partnership, nor the members or managers of Retailer, if Retailer is a limited
liability company, shall authorize or approve any transfer of Retailer's rights
or obligations under this Agreement without Rentrak's prior written consent, or
take any other action that would cause Retailer to be in violation of this
Section 19. The merger or consolidation of Retailer with or into any other
entity, the sale by Retailer of all or substantially all of its property or
assets, or any change in control of Retailer (which shall mean any transfer of a
majority voting interest in the stock of Retailer, if Retailer is a corporation,
or in the partnership interest, or membership interest of Retailer, if Retailer
is a partnership or limited liability company), shall constitute an assignment
of rights in violation of this Section 19. Consent to any Transfer shall be in
Rentrak's sole discretion and shall be subject to such requirements, terms, and
conditions as may be established by Rentrak from time to time. Rentrak may
condition its consent, in its sole discretion, on the transferee executing a
National Account Agreement or other agreement satisfactory to Rentrak and/or
upon Retailer remaining obligated after the transfer. No consent in one instance
shall prevent this provision from applying in a subsequent instance.
20. Retailer may, during the term of this Agreement, desire to conduct
centralized sales of Cassettes leased hereunder. Retailer shall have the right
to move Cassettes from a Location for the purpose of conducting a sale from a
centralized location. Such removal must not last longer than five (5) days and
must be tracked by Retailer's previously approved inventory system on a same day
basis. A Cassette may not be moved for the purpose of a centralized sale more
than five (5) times during the lease term. With respect to any Cassettes sold,
such sales must be processed through the appropriate Location(s)'s POS System
within seventy-two (72) hours of any sale.
21. Retailer may, during the term of this Agreement, desire to relocate one
or more of its Locations. Prior to and during such relocation, Retailer must
comply with all of the following:
A) Retailer must deliver to Rentrak written notice of the intended move at
least fifteen (15) days prior to the Cassettes leased being not available for
rental as a result of such move:
B) The period during which the Cassettes leased are not available for
rental to the public must not exceed ten (10) days, and there may not be more
than one weekend (5PM Friday to the close of business on Sunday or 12:00 a.m.
Sunday, whichever occurs later) during such 10 day period; and
C) Retailer must comply with all other requirements which Rentrak may
impose with respect to the relocation of a Location.
22. All notices, consents and approvals ("Notice") permitted or required to
be given under this Agreement shall be in writing and shall be deemed to be
sufficiently and duly given if set forth in writing and delivered personally or,
in the case of Retailer, if left with an adult person working at Retailer's
business or in the case of either party, if sent by prepaid registered or
certified mail or transmitted by telecopier or other form of recorded
communication tested prior to transmission, if to Rentrak addressed as follows:
Rentrak Corporation, P.O. Box 18888, Portland, Oregon 97218 Attention: Legal
Department and if to Retailer, [enter Retailer's address]
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
Any Notice so given shall be deemed to have been given and
received on the date of delivery or on the third (3rd) business day following
the day of mailing of the same, or on the day of transmission by telecopier or
other form of recorded communication service of the same, as the case may be.
any party from time to time by notice in writing given pursuant to the terms of
this agreement may change its address for the purpose of this agreement. in the
event of actual or threatened disruption of postal service, notice shall be
delivered or sent by telecopier or other form of recorded communication.
23. Retailer acknowledges and agrees that no representation or warranty has
been made by Rentrak, its directors, officers, employees, shareholders, agents
or contractors regarding: the effect upon Retailer's revenues or profits of
participation in PPT; or the Program Suppliers or titles involved, or to be
involved, in PPT. Retailer acknowledges and agrees that:
(A) Rentrak's services under this Agreement are not, in any way or within
any geographical area, exclusive to Retailer;
(B) Retailer has not relied upon any representation or warranty except
those received in writing and contained herein and is relying solely upon his
own investigation and that of his advisors;
(C) PPT was created and promoted by Rentrak, not by any Program Supplier to
Rentrak;
(D) the terms of participation in PPT, to the extent that compliance with
them is required, are prescribed by Rentrak, not by any Program Supplier;
(E) PPT is a system of distribution of Cassettes to Retailer, and not a
marketing plan or system for distribution to the ultimate user;
(F) there is no substantial association between the operation of Retailer's
business and any trademark, service mark, trade name, logotype, advertising or
other commercial symbol designating Rentrak, any Program Supplier or PPT;
(G) to the extent Retailer may use promotional literature that contains a
trademark, service mark, trade name, logotype, advertising or other commercial
symbol of a Program Supplier, such use is merely to advertise the Cassettes
available whether or not acquired by Retailer as part of PPT and does not
designate in any way PPT or the fact that any entity is involved in or related
to PPT;
(H) nothing in this Agreement, the Rentrak Profit Maker Manual, or in PPT
affects how Retailer markets or promotes Cassettes to its customers;
(I) nothing in the reference guide entitled "Strategies for Success with
PPT" which will be provided to each Retailer affects how Retailer markets or
promotes Cassettes to its customers and that ideas therein are suggestions only,
not requirements; and
J) to the extent that this Agreement, or Rentrak through this Agreement,
imposes any requirements on how Retailer conducts its business, such
requirements shall be no broader than necessary, to allow Rentrak in the
exercise of its reasonable judgement to monitor Retailer's obligations under
this Agreement.
24. If any fees or costs are incurred to enforce this Agreement, or if any
suit or action is brought to enforce any provision of this Agreement, or for
damages for the breach of any of the terms of this Agreement, the prevailing
party shall be entitled, at trial and on appeal, if any, to reasonable attorney
fees as awarded by the court. This Agreement is and shall be deemed accepted in
Oregon and interpreted and enforced in accordance with the laws of the State of
Oregon applicable to contracts to be made and to be performed entirely within
this state. The parties hereto agree that any suit, dispute, or action brought
pursuant to this Agreement shall be brought in the Circuit or District Court for
the County of Multnomah, State of Oregon, or the Federal Court for the District
of Oregon.
<PAGE> 7
25. In the event that Retailer brings an action or asserts any claim
against Rentrak for damages arising out of this Agreement or from Retailer
entering into this Agreement with Rentrak, Retailer agrees to limit any damages
claimed to no more than the following percentage of the processing fee, if any,
paid by the Retailer: 1st day through and including the 91st day following date
of Rentrak Agreement - 100%; 92nd day through and including the 183rd day
following date of Rentrak Agreement - 75%; 184th day through and including the
275th day following date of Rentrak Agreement - 50%; 275th day through each and
every day thereafter following date of Rentrak Agreement - 10%.
26. Should any term or provision of this Agreement be held to be
unenforceable as illegal or against public policy, that term shall be considered
severed from the rest of this Agreement and the remaining portions of this
Agreement shall not be affected. The rights and obligations of Retailer and
Rentrak shall be construed and determined, if possible, as if this Agreement did
not contain the provision or term held to be invalid. This Agreement, as
modified from time to time by authorized Rentrak materials, or written addenda,
constitutes the entire Agreement and understanding of the parties with respect
to the subject matter of this Agreement. Nothing in this Agreement creates a
franchise relationship, fiduciary relationship, joint venture, or partnership
relationship.
27. Retailer certifies that the information furnished to Rentrak, including
any financial statements furnished herewith and the "credit information"
attached hereto, is true and correct. Retailer authorizes Rentrak to check
Retailer's credit history and trade and bank references for customary credit
information, to confirm the information contained herein and to release
information to other creditors regarding Applicant's credit experience with
Rentrak. Retailer authorizes any individuals or entities listed in the attached
credit information to provide information regarding Retailer's credit history to
Rentrak.
28. This Agreement will be guaranteed by the Guarantor(s) listed below.
Each Guarantor agrees that if, now or later:
A) Retailer shall be or become insolvent; and
B) Any obligations under this Agreement shall not at all times, until paid
or performed, be fully secured by collateral pledged by Retailer, Guarantor
hereby forever waives and relinquishes in favor of Rentrak and Retailer, and
their respective successors, any claim or right to payment Guarantor may now
have or later have or acquire against Retailer, by subrogation or otherwise, so
that at no time shall Guarantor be or become a "creditor" of Retailer within the
meaning of 11 U.S.C. Section 547(b), or any successor provision of the
Bankruptcy Code.
ALL APPLICANTS MUST SIGN THEIR NAME IN THE APPROPRIATE BLOCK(S) ON THIS PAGE AND
IN SECTION II IN THE FINANCIAL STATEMENT.
SOLE OWNER SIGNATURE BLOCK
(COMPLETE THIS BLOCK IF YOU ARE THE SOLE OWNER OF YOUR BUSINESS AND NOT A
PARTNERSHIP OR CORPORATION.)
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: _____________________________
(Signature)
DATE: ___________________________
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: _____________________________
(Signature)
DATE: ___________________________
DO NOT COMPLETE THE COPY BLOCK BELOW IF YOU ARE A SOLE OWNER
PARTNERSHIP SIGNATURE BLOCK
(COMPLETE IF YOU ARE A PARTNERSHIP.)
_______________________________________________________
(Please Print Name of Partnership)
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: _____________________________
(Please Print Name)
_________________________________
(Signature)
TITLE: __________________________
(General or Limited Partner)
DATE: ___________________________
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: _____________________________
(Please Print Name)
_________________________________
(Signature)
TITLE: __________________________
(General or Limited Partner)
DATE: ___________________________
<PAGE> 8
LIMITED LIABILITY COMPANY SIGNATURE BLOCK
(COMPLETE IF YOU ARE A LIMITED LIABILITY COMPANY.)
___________________________________________________
(Please Print Name of Limited Liability Company)
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: _____________________________
(Please Print Name)
__________________________________
(Manager Signature)
DATE: ____________________________
CORPORATE SIGNATURE BLOCK
(COMPLETE IF YOU ARE CORPORATION.)
Video Update, Inc.
(Please Print Full Name of Corporation)
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: Daniel A. Potter
____________________________
(Please Print Name)
/s/ Daniel A. Potter
_________________________________
(Signature)
TITLE: Chief Executive Officer
______________________________
DATE: July 9, 1997
______________________________
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
- - BY: ________________________________
(Please Print Name)
____________________________________
(Signature)
TITLE: _____________________________
DATE: _____________________________
State of Incorporation: __________ Date of Incorporation: ___________
IF YOU SIGNED EITHER THE PARTNERSHIP, THE LIMITED LIABILITY COMPANY OR THE
CORPORATE SIGNATURE BLOCK, YOU MUST COMPLETE THE GUARANTEE BELOW:
GUARANTEE
The undersigned individuals, I order to induce Rentrak to enter into with
that certain Agreement of even
date herewith do jointly and severally unconditionally and irrevocably guarantee
to Rentrak, its successors and assigns, full and complete payment and
performance by Retailer of all of the provisions, conditions, covenants, and
agreements contained in the Agreement, do jointly and severally agree to the
terms of the Agreement, expressly including the terms set forth in paragraphs 22
and 23, and do waive all notice of default by the said Retailer, notice of the
acceptance of this guarantee by Rentrak and consent to any extension of time
which may be given by Rentrak to Retailer of time for payment or performance of
any of Retailer's obligations hereunder.
GUARANTOR
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
_________________________________________
(Print Guarantor's Name)
- - BY: ________________________________
(Guarantor's Signature)
DATE: ______________________________
GUARANTOR
I have carefully read this Agreement. I sign this Agreement with a complete
understanding of its terms.
_________________________________________
(Print Guarantor's Name)
- - BY: ________________________________
(Guarantor's Signature)
DATE: ______________________________
RENTRAK CORPORATION (Do not complete.)
Agreement accepted by: /s/ Ron Berger
______________________
Title: President Date: 7/9/97
__________________________ __________
<PAGE> 9
FIRST ADDENDUM TO
RENTRAK NATIONAL ACCOUNT AGREEMENT
This ADDENDUM is made as of this 9th day of July, 1997, by and among
Rentrak Corporation, an Oregon corporation ("Rentrak"), and Video Update, Inc.,
a Delaware corporation ("Retailer").
RECITALS
A. Retailer desires to participate in Rentrak's pay-per-transaction
("PPT") system and order video programming on prerecorded
videocassettes and any other media distributed by Rentrak on PPT (the
"Cassettes") pursuant to Rentrak's National Account Agreement, dated
July 9, 1997 (the "National Account Agreement"), a copy of which is
being executed as of the date hereof and the parties wish to modify and
supplement the National Account Agreement with the terms of this
addendum (this "Addendum"). The National Account Agreement and this
Addendum are sometimes referred to herein as this "Agreement." Rentrak,
Retailer and Moovies are also executing a side agreement in connection
herewith of even date.
B. The parties intend that all transactions between them on and after the
Effective Time (as defined herein) shall be governed by and subject to
this Agreement and that this Agreement shall apply to all Locations (as
defined herein) owned, managed, operated or controlled by Retailer and
its Affiliates except that Retailer shall and hereby does assume and
agrees to be obligated to honor and comply with the PPT System and the
lease and payment terms under the Prior PPT Agreement pertaining to the
Cassettes acquired from Moovies, Inc. ("Moovies") in connection with
the Acquisition, provided that no other terms or conditions of the
Prior PPT Agreement with Moovies shall be legally binding on or apply
to the parties hereto or thereto and such agreement as of the Effective
Time shall otherwise be of no further force or effect.
AGREEMENT
Accordingly, in consideration of the mutual promises and agreements
contained in this Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Effectiveness of Agreement. This Agreement is executed in
connection with and subject to Retailer's proposed acquisition
(currently intended to be done by merger ) of Moovies, a
publicly held Delaware corporation (the "Acquisition"), which
corporation is party to a National Account Agreement with
Rentrak dated March 8, 1995 as modified and supplemented by a
First Addendum thereto of even date, a Second Addendum dated
May 18, 1995 and an Amendment to First Addendum, dated June
16, 1995, (the "Prior PPT Agreement"). This Agreement shall be
effective and legally binding on the parties hereto only upon
the Acquisition's date of closing and effectiveness (the
"Effective Time"). Immediately following the Effective Time,
Retailer and Rentrak shall compile and agree upon a list of
Cassettes acquired by Moovies prior to the Effective Time for
purposes of confirming the lease and payment terms of
Cassettes acquired by Retailer in connection with the
Acquisition. Should the
<PAGE> 10
-2-
Acquisition, of which no assurance or undertaking is or can be
given, not be closed and effective on or before March 31,
1998, this Agreement shall be null and void and be of no force
or effect as to either Rentrak or Retailer; and neither party
shall have legal rights of any kind, character or nature as to
the other arising from the transactions contemplated herein.
Rentrak confirms that it is not owed any monies or debts of
any kind, character or nature by Retailer as of the date
hereof, except for payment of legal fees and other expenses
pursuant to the Legal Fees Agreement, dated June 3, 1997.
2. Effect of Addendum. Unless otherwise stated herein, to the
extent any term or provision of this Addendum expressly amends
or is in direct conflict with any term of the National Account
Agreement, this Addendum shall supersede and control any such
provision in the National Account Agreement. All terms and
conditions contained in the National Account Agreement unless
modified by or in direct conflict with this Addendum shall
remain in full force and effect.
3. Definitions. Any capitalized term used herein that is not
otherwise defined herein shall have the meaning set forth in
the National Account Agreement.
4. Amendments to National Account Agreement. The National Account
Agreement shall be amended as follows:
INSTRUCTIONS - Processing fees shall be revised as follows:
All initial processing fees to participate in PPT shall be
waived for all of Retailer's current Locations and all those
new Locations opened or acquired during the term of this
Agreement.
RECITALS - The first paragraph of the recitals section of the
National Account Agreement beginning with the words "Retailer
operates..." is deleted, amended in its entirety and shall
read as follows:
Retailer currently owns and operates a chain of three
hundred and fifty-eight (358) retail stores in the
United States and Canada identified on Exhibit A,
excluding franchised retail stores (the "Stores"). In
addition, Retailer operates the central office (Office)
and/or warehouse facility (Warehouse) listed on Exhibit
A. In connection with the Acquisition, Retailer will
own and operate the additional retail stores of Moovies
(the "Moovies Stores") identified on Exhibit A. This
Agreement shall apply to and be legally binding upon
(i) the Stores, (ii) the Moovies Stores and (iii)
subject to the terms and conditions set forth herein,
all future retail stores owned, operated, managed,
controlled or acquired by Retailer and/or any of
Retailer's Affiliates (as defined below in this
paragraph) that are located in the United States and
its territories and possessions and/or the provinces
and territories of Canada, that offer or otherwise make
available the rental or sale of Cassettes (the
"Locations") provided that this Agreement shall not be
binding on and shall exclude (i) any current or future
retail stores owned and operated by franchisees of
Retailer or franchisees of any of its Affiliates, and
(ii) any future retail stores owned or operated by
Retailer or any of its Affiliates that are located
<PAGE> 11
-3-
outside of the United States, its territories or
possessions or the provinces and territories of Canada
(collectively, the "Locations"). Retailer warrants and
covenants to Rentrak that (i) Retailer's franchise
contracts in effect as of the date hereof do not afford
Retailer control over the videocassette purchasing of
or by any of Retailer's franchisees and (ii) Retailer
will not include contractual provisions relating to the
same in its future franchise contracts. Notwithstanding
that franchisees of Retailer are excluded from the
definition of Location under this Agreement, Retailer
agrees to actively promote the PPT System and PPT
concept to all franchisees of Retailer. Should Retailer
subsequently acquire the business or assets of any
franchisee that becomes a Rentrak customer after the
Effective Time, the terms of this Agreement shall
govern all Cassettes acquired by Retailer for those
acquired locations after such acquisition. An
"Affiliate" shall mean any individual or entity (a)
directly or indirectly controlling, controlled by, or
under common control with, Retailer; (b) directly or
indirectly owning or holding fifty percent (50%) or
more of an equity interest in Retailer; or (c) of which
ten percent (10%) or more of whose voting stock or
other equity interest is directly or indirectly owned
or held by Retailer; provided, however, that
notwithstanding anything to the contrary contained
herein, any third party acquiror of Retailer that is
not an Affiliate of Retailer at any time prior to the
acquisition of Retailer (the "Third Party Acquiror")
that acquires directly or indirectly all or
substantially all of the capital stock or assets of
Retailer (via merger, consolidation or otherwise) shall
not to the extent provided herein be deemed an
Affiliate of Retailer or otherwise be bound by the
terms of this Agreement with respect to the retail
stores owned and operated by the Third Party Acquiror
prior to the acquisition or in the future under the
Third Party Acquiror's then existing tradename or
tradenames provided, however, Retailer agrees to cause
such Third Party Acquiror in connection with the
acquisition of Retailer to expressly assume all
obligations under this Agreement with respect to
Retailer as this Agreement pertains to Locations
including future Locations owned and operated by the
Third Party Acquiror under a tradename other than the
Third Party Acquiror's then existing tradename or
tradenames as though the Third Party Acquiror was the
Retailer pursuant to an assumption agreement, in form
and substance reasonably satisfactory to Rentrak. (For
example, if XYZ Video, an entity not an Affiliate of
Retailer prior to a proposed acquisition of Retailer,
acquires directly or indirectly all or substantially
all of the capital stock or assets of Retailer, XYZ
Video shall be legally bound to honor all of the terms
of this Agreement with respect to Retailer's Locations
existing as of the date of the closing of the
acquisition and any future Locations of Retailer and/or
the Third Party Acquiror that operate under a tradename
other than XYZ Video (or such other tradenames then
used by XYZ Video) pursuant to an assumption agreement,
but XYZ Video would not be subject to this Agreement
with respect to current or new retail stores operated
as XYZ Video (or such other tradename then used by XYZ
Video.) "Affiliates" shall mean more than one
Affiliate. Retailer shall cause its Affiliates to
comply with the terms of this Agreement.
SECTION 2 - Section 2 of the National Account Agreement is
deleted, amended in its entirety and shall read:
<PAGE> 12
-4-
2. Subject to the terms of this Agreement, Rentrak shall ship to
Retailer prerecorded Cassettes in such quantities and at such times as
Program Suppliers (as defined in Section 3(N) in this Agreement) make
available to the PPT System and which Retailer orders consistent with
its purchase obligations under this Agreement. All Cassettes will be
shipped "FOB Destination" to Retailer's Warehouse or at Retailer's
request, to each Retail Location. Subject to Section 6 below,
Retailer's last order accepted and confirmed by Rentrak shall be final.
Rentrak will use its best efforts to deliver Cassettes to Retailer on
or before the street date. If for any reason, Retailer's order cannot
be shipped, Rentrak or Retailer may cancel the unfilled order on notice
and without further liability to the other party.
SECTION 3 - The first line of Section 3 of the National Account
Agreement is deleted, amended in its entirety and shall read:
3. Retailer agrees to participate in the PPT System on the terms and
conditions established by this Agreement, any Rentrak PPT System Manual
delivered to Retailer (including any amendments or modifications
thereto) and any written notices delivered to Retailer by Rentrak from
time to time; provided, however, that this Agreement shall be
controlling to the extent that any term or provision in this Agreement
is inconsistent with any such amendment or modification. Retailer
agrees to:
SECTION 3(A) - Paragraph (A) of Section 3 of the National Account
Agreement is deleted, amended in its entirety and shall read:
3(A) Use Rentrak-approved computer hardware and Point of Sale ("POS")
system software which list of approved computer hardware and POS system
software is published by Rentrak from time to time, provided that
Rentrak hereby acknowledges and approves as a Rentrak approved POS
System the 5.2 UBS version of computer hardware and software when said
software incorporates the Rentrak conversion disk. Retailer shall,
prior to ordering Cassettes, complete, to Rentrak's reasonable
satisfaction a test of Retailer's computer system and communication
ability. Retailer shall also install Rentrak's proprietary Rentrak
Profit Maker Software ("RPM") on its computer system (which inclusive
with the hardware, RPM and POS system software are collectively
referred to as the "POS System"). The RPM shall at times remain the
exclusive property of Rentrak. Retailer shall be responsible for all
costs relating to computer hardware and software used in connection
with the Rentrak PPT System at its Locations. Once approved by Rentrak
as a Rentrak approved POS System, Retailer shall not change, modify or
alter the POS System or use a new version thereof without Rentrak's
prior written consent, in its reasonable discretion. Each Location
listed on Exhibit A shall not be Inactive and shall be in communication
with Rentrak and shall have placed its first order for Cassettes under
the PPT System on or before [ ]* days after the Effective Time,
all in strict compliance with Rentrak's specifications and the terms
and conditions of this Agreement (collectively, the "PPT Requirement").
In the event Retailer fails to satisfy the PPT Requirement with respect
to the Locations listed on Exhibit A, and/or any new Locations after
the applicable Transition Period or permits a Location to become
Inactive (as defined below) on the PPT System, such
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 13
-5-
event shall be deemed to be a breach of this Agreement. In addition to,
and not in lieu of any other damages suffered by Rentrak, the parties
agree that for each [ ]* that any Location fails to satisfy the
PPT Requirement or is or becomes Inactive, the term of this Agreement
and all of the obligations hereunder, including but not limited to all
of the ordering obligations provided in Section 6 hereunder shall be
irrevocably and automatically extended for that number of days equal to
[ ]* times the number of Locations that fail to satisfy the PPT
Requirement or are or become Inactive with respect to the PPT system on
such day (after the time permitted in this Agreement for going on-line
to PPT for newly acquired stores, the "Transition Period"). The term
"Inactive" shall mean (after the Transition Period) that the Location
has (i) failed to place its first order for Cassettes under the PPT
System using the POS Software, (ii) failed to install and/or properly
operate the POS Software, (iii) failed to meet Rentrak's computer
interface specifications or (iv) otherwise failed to comply with the
terms of this Agreement. For example, by way of illustration only, if
[ ]* Locations were Inactive on a given day, the term of this
Agreement, including, but not limited to the purchase obligations in
Section 6 of the Addendum would be automatically extended [ ]* days for
each day these Locations remained Inactive.
SECTION 3(B) - Paragraph (B) of Section 3 of the National Account
Agreement is deleted, amended in its entirety and shall read:
3(B) Timely remit all amounts due Rentrak. Rentrak and Retailer agree
that any "handling fee," "transaction fee," "sell-through fee," "end of
term buy-out fee" or other fees payable with respect to any Cassettes
leased pursuant hereto shall be payable within [ ]* days after the
last day of the month of the date of Rentrak's invoice, whichever is
later, provided, however, that, in the event Retailer does not make
timely remittance of any and all amounts due Rentrak, in addition to
Rentrak's other rights hereunder, under any other agreement between
Rentrak and Retailer and under applicable law, Rentrak may stop
shipment of Cassettes to Retailer or ship Cassettes on a COD basis with
the amount due for such Cassettes to include (i) Rentrak's reasonable
estimate of future payments likely to be due with respect thereto and
(ii) an amount covering a portion, determined in Rentrak's reasonable
discretion, of the amounts past due Rentrak. Retailer shall pay
interest of [ ]* per month on all accounts receivable not paid
pursuant to the terms of this Agreement. Unless (i) required by Program
Suppliers or (ii) Retailer has failed, after [ ]* days written
notice, to pay amounts due Rentrak on a timely basis, in no event will
Rentrak file or have any right to file any financing or other statement
under the uniform commercial code of any jurisdiction with respect to
the transactions described herein.
SECTION 3(O) - Paragraph (0) of Section 3 of the National Account
Agreement is deleted and amended in its entirety to read:
3(O). Retain and reveal to Rentrak certain information with respect to
its business, as is reasonably requested by Rentrak. Retailer and
Rentrak agree that the data and other information collected by Rentrak
under the PPT System may be used by Rentrak only for the following
purposes: (i) in connection with Retailer audits and other internal
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 14
-6-
purposes at Rentrak; provided that Rentrak will exercise commercially
reasonable efforts in the video business to ensure that it and its
employees, agents and representatives observe strict confidentiality
with respect to any and all confidential information revealed by
Retailer (ii) in aggregate form with data from other retailers provided
that each retailer is not individually identified and (iii) for sale or
provision to others so long as such data is provided in aggregate form
with data from other retailers and each retailer is not individually
identified. Rentrak acknowledges that it will be responsible for any
breach of the confidentiality obligations imposed in this Section 3(O)
by itself or any of its current or former employees, agents, and
representatives and that the same may be deemed by Retailer to be a
breach of this Agreement giving rise solely to monetary damages or
equitable remedies to prevent further disclosure and not giving rise to
any right to terminate the Agreement by Retailer. Retailer also
acknowledges that accurate, verifiable data as to rentals and sale of
the Cassettes is imperative and that inaccurate or incorrect reporting
by Retailer will cause substantial damage to Rentrak.
SECTION 3(P) - The first sentence of Paragraph (P) of Section 3 of the
National Account Agreement is deleted and amended in its entirety to
read:
3(P). Cause all of the Locations owned, controlled, managed or operated
by Retailer and its Affiliates to participate in the PPT System in
accordance with the terms hereof and not be Inactive within [ ]*
days from the Effective Time and for all Locations owned, controlled,
managed or operated by Retailer and its Affiliates after the Effective
Time, to participate in the PPT System and not be Inactive within
[ ]* days of opening for business or acquisition, provided that
with respect to any acquisitions by Retailer in Canada, such [ ]*
day period shall be deemed to commence only after such acquisition has
received all necessary Canadian regulatory approvals.
SECTION 6 - Section 6 of the National Account Agreement is deleted and
amended in its entirety and shall read:
6. Subject to being extended as provided herein, for a period of
[ ]* years commencing on the Effective Time, unless otherwise
terminated earlier in accordance with the terms hereof, Retailer
together with its Affiliates and their permitted legal representatives,
successors and assigns shall make aggregate transaction fee and
handling fee payments to Rentrak, for each twelve month period based on
Retailer's fiscal year, as it may be amended from time to time (a
"Fiscal Year"), relating to the leasing of Cassettes under PPT equal to
a minimum of (i) for the period ending on the twelve month anniversary
of the Effective Time, the greater of [ ]* for such period or
$[ ]* and (ii) after the twelve month anniversary of the Effective
Time, and for the remainder of the term of this Agreement, except as
adjusted as provided herein, the greater of [ ]* or $[ ]* (the
"Purchase Requirement") by ordering and obtaining from Rentrak rental
priced Cassettes offered under the PPT System. The Purchase Requirement
shall be prorated for partial Fiscal Years during which the Purchase
Requirement is in effect. Retailer's gross revenues shall be determined
using the Retailer's Fiscal Year end on a
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 15
-7-
consolidated basis in accordance with generally accepted accounting
principles, consistently applied and shall include all revenues from
all sources relating to the video rental/sale business, including
franchise royalty fees, but shall not include revenues for new
businesses (e.g. retail candy stores or movie theaters) unrelated to
the video rental/sale business.. The determination of Retailer's gross
revenues shall be based on audited financial statements certified by a
nationally recognized independent accounting firm. Subject to its
confidentiality obligations hereunder, Rentrak shall have the right,
upon ten business days' advance written notice, to independently audit
at its sole cost and expense, the books and records of Retailer in
order to verify and confirm Retailer's gross revenues. Retailer agrees
to satisfy at least $[ ]* dollars of the Purchase Requirement,
during the [ ]* month period following the Effective Time by
ordering and obtaining from Rentrak [ ]* Cassettes offered under
the PPT System. The term [ ]* shall mean only a video title that
had aggregate U.S. domestic theatrical box office gross receipts of
[ ]* or [ ]* theatrical box office receipts.
[
]* Retailer's
ordering and purchase of Cassettes shall be in
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 16
-8-
full compliance with all terms and conditions contained in this
Agreement and all Program Supplier or Rentrak established minimum and
maximum ordering limitations and/or requirements and monthly
communication charge requirements set forth in this Agreement including
but not limited to this Section 6 and as more fully set forth in
paragraph 4 of the National Account Agreement. "Rental priced"
Cassettes shall mean any and all Cassettes that have a manufacturer's
suggested retail price of $35 or more. With regard to ordering
limitation requirements imposed by certain Program Suppliers, if
Retailer elects to order Cassettes of a particular title in a Location
from Rentrak, Retailer shall be required to comply with such
requirements by ordering all Cassettes of the same title that Retailer
obtains from any source only from Rentrak offering such title for each
Location of similar or larger size (i.e. if Location A, a store with
average monthly revenues of $10,000 from the rental and sale of video
cassettes orders a certain title from a certain Program Supplier from
Rentrak, Retailer shall be required to order all Cassettes of the same
title for all of Retailer's Locations of similar or larger size to
Location A). Notwithstanding anything to the contrary contained herein,
Retailer shall have no obligation to order from Rentrak any Cassette
that is offered to Retailer under PPT that (i) has a revenue sharing
fee that exceeds [ ]* (ii) has a handling fee that exceeds [ ]*
of the manufacturer's suggested retail price or (iii) has a lease term
that exceeds [ ]* years. Rentrak shall have the right to adjust the
terms of any Cassette in order to satisfy the aforementioned
restrictions, in which event Retailer shall be required to order the
Cassette pursuant to the terms of this Agreement.
A. In the event Retailer fails to satisfy the Purchase Requirement in
any given year, Retailer agrees to pay Rentrak the amount equal to the
Purchase Requirement less the aggregate amount of [ ]* fee and
[ ]* fee payments made to Rentrak during the Fiscal Year (the
"Shortfall") along with an additional payment equal to [ ]* of the
Shortfall in any given Fiscal Year. For example, if Retailer had gross
revenues equal to $10,000,000 and Retailer paid Rentrak [ ]* fee
and [ ]* fee payments equal to $5,500,000 for Cassettes obtained
pursuant to this Agreement during a Fiscal Year in which the Purchase
Requirement was the greater of [ ]* of gross revenues or $[ ]*
the Shortfall would be [ ]* and the additional payment would be
[ ]*. The Shortfall and additional payment due, if any, shall be
paid to Rentrak on or before the 90th day after the end of the Fiscal
Year in which the Shortfall occurred.
B. With respect to Cassettes leased hereunder, Retailer may not
purchase the Cassettes or other media of such title and use them as
rental inventory, remove the title from rental availability except as
provided herein, or take any other steps to deprive Rentrak of all
available revenue under the established terms of the title's lease term
except to the extent that, once "used sell-through" is permitted for a
particular title by its terms, Retailer may remove Cassettes no longer
required for rental use to Retailer's Warehouse for subsequent sale by
recording the same as a sale and making the required remittance to
Rentrak upon transfer.
SECTION 7 - Section 7(C) of the National Account Agreement is amended
by deleting the following: "Retailer may not, however, sell more than
five (5) copies of any title to any one customer within any thirty (30)
day period."
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 17
-9-
SECTION 8 - Section 8 of the National Account Agreement is deleted,
amended in its entirety and shall read as follows:
8. Retailer shall pay Rentrak a monthly data processing fee of $36
(U.S.) per individual Location per month, provided that such fee shall
be only $20 (U.S.) per each Location per month for those Locations, if
any, for which Rentrak is provided data by Retailer through Retailer's
central Host Computer on magnetic tape or electronic interface
acceptable to Rentrak in its sole discretion; provided, however, if the
data for a Location at any time during the month (i) has less than a
97% title matched accuracy (e.g. titles are not correctly identified)
or (ii) is delivered to Rentrak after 11:00 a.m. Pacific Standard Time
on the Monday immediately following the weekly reporting period ending
at 12:00 a.m. midnight Pacific Standard Time on the Thursday
immediately preceding such Monday, the data processing fee for such
Location shall be $36.00 (U.S.) for each such Location for that
particular month. For example, for illustration purposes only, the
applicable data processing rates are set forth opposite the described
situation: 10 Locations transmitting data to Rentrak from each Location
and 5 Locations not transmitting any data - $36 rate for the 15
Locations ($540 monthly fee); 15 Locations transmitting data through
Retailer's central Host Computer on magnetic tape and transmission is
timely and at least 97% matched title accurate - $20 rate for the 15
Locations ($300 monthly fee). In the event Retailer elects to
communicate for all of its Retail Locations from one central Host
Computer, Retailer shall be responsible for paying all costs incurred
to deliver the data to Rentrak on a weekly basis in a form acceptable
to Rentrak in its sole discretion. Provided that Rentrak has not
terminated this Agreement, as provided herein, Retailer shall pay the
data processing fees as set forth above whether or not Rentrak is in
the PPT business.
SECTION 9 - Section 9 of the National Account Agreement is hereby
deleted, amended in its entirety and shall read as follows:
9. Retailer shall be responsible for all property damage, theft or loss
stemming from a catastrophe with respect to the Cassettes (the "Loss").
In the event of a Loss, Retailer shall pay Rentrak 50% of each
Cassette's then-current manufacturer's suggested retail price that is
subject to or covered by the Loss within thirty days of such Loss.
Retailer may not substitute Cassettes from another source or Location
for the Cassettes covered by or subject to the Loss. For purposes of
this Agreement, Cassettes discovered missing in the ordinary course of
business are to be recorded and paid for when discovered as if they had
been sold to the public. Retailer shall notify Rentrak of any Loss that
occurs outside the ordinary course of business promptly at the time
Retailer discovers same.
SECTION 13 - Section 13 of the National Account Agreement is deleted,
amended in its entirety and shall read as follows:
13. Retailer acknowledges that it is imperative that Program Suppliers,
other customers of Rentrak, the parties to this Agreement, the titles
involved, the reporting system established by Rentrak, any obligations
of Retailer pursuant to this Agreement, and all other aspects of
execution, delivery and performance of this Agreement,
<PAGE> 18
-10-
including the terms thereof, remain confidential. Retailer agrees that
during the term of this Agreement and for twenty-four (24) months
thereafter, it will not disclose to any individual or entity (including
but not limited to, business associates, friends or relatives), any of
the terms or conditions of this Agreement or any of the participants in
the PPT system, the titles offered pursuant to this Agreement, the
reporting system, or any obligations of Retailer and Rentrak pursuant
to this Agreement, unless such disclosure is required by court order,
federal or state securities laws or franchising laws, or to legal,
accounting and financial advisors for purposes of obtaining advice
regarding execution, delivery and performance of this Agreement, their
obligations hereunder or the performance of their obligations pursuant
to federal, state and local laws. Rentrak agrees that it will not
provide a copy of this Agreement to any third party (except Program
Suppliers or their auditors), unless such disclosure is required by
court order, federal or state securities laws or to legal accounting
and financial advisors for the purposes of obtaining advice regarding
the execution, delivery and performance of this Agreement, its
obligations hereunder or the performance of its obligations pursuant to
federal, state and local laws, provided that Rentrak also may provide a
copy of this Agreement to bona fide investors and its legal counsel and
accountants. Each of the parties shall inform its advisors of this
confidentiality provision and obtain from such professional advisor or
third party an agreement to comply with the terms hereof. With respect
to disclosures made under the securities laws pursuant to any filing
with the Securities and Exchange Commission or any state securities
commission, Retailer agrees to exercise its best efforts to maintain
the confidentiality of this Agreement, including its terms by
cooperating with Rentrak and seeking confidential treatment of the
contemplated disclosures from the SEC or state securities commission,
if requested in writing promptly by the other party. In the event that
Retailer desires to disclose any of the terms or conditions of this
Agreement including the existence of this Agreement, to a prospective
bonafide investor, acquiror, lender or underwriter, such party shall
reduce all of such proposed disclosures to writing and submit them to
the Rentrak for approval. No disclosure shall be made until Rentrak has
given its advance approval in writing, which approval shall not be
unreasonably withheld or delayed, provided, however, that to the extent
the person to whom disclosure is to be made is a present or potential
competitor, customer, vendor or supplier of Rentrak, Rentrak may
withhold its approval in its sole discretion. Retailer agrees that any
approval of a disclosure to a bonafide investor, acquiror, lender or
underwriter, shall be conditioned on such person executing a
confidentiality agreement, in form and substance, reasonably
satisfactory to Rentrak, requiring such investor, acquiror, lender or
underwriter to protect the confidentiality of this Agreement pursuant
to the terms hereof. Retailer agrees (on its own behalf and on behalf
of its officers and directors) to make positive truthful statements
concerning Rentrak and the PPT System and shall not in any way
disparage Rentrak to the press, trade, public, customers, vendors or
Program Suppliers of Rentrak or anyone else, except as may be required
by applicable law. These obligations contained in this Section 13 shall
survive the expiration and termination of this Agreement and continue
thereafter for a period of twenty-four (24) months. Notwithstanding the
foregoing, each party hereby agrees that it (and its officers and
directors) shall confirm the existence of this Agreement. In the event
of any unauthorized disclosure of any of the confidential terms stated
in this Section 13 by
<PAGE> 19
-11-
Retailer, the term of this Agreement may, in Rentrak's sole discretion,
be extended for one year for each violation of this Section 13.
SECTION 17 - Section 17 of the National Account Agreement is hereby
amended and shall read as follows:
17. Subject to being extended as provided in this Agreement, this
Agreement shall expire on the last day of the lease term of all
Cassettes ordered by Retailer in its last order submitted to Rentrak on
or prior to the date that is the [ ]*anniversary of the Effective
Time (the "Termination Date"), unless terminated prior thereto as
provided herein.
(A) This Agreement may be terminated by Rentrak for no reason or any
reason, prior to the Termination Date, upon ten days prior written
notice of termination to Retailer.
(B) Section 17(B) shall be as set forth in the National Account
Agreement.
(C) Retailer may terminate this Agreement if Rentrak (i) intentionally
and willfully breaches this Agreement in any material respect that
substantially impairs the value of this Agreement as a whole, (ii) such
breach is capable of being cured at the time Rentrak receives such
notice of breach from Retailer, and (iii), after receiving written
notice from Retailer specifying the nature of the breach with
reasonable particularity, Rentrak has failed to cure such breach or
commence curative action to cure such breach within thirty (30) days of
such written notice, provided that nothing herein shall give Retailer
the right to terminate solely because Rentrak ceases to distribute
Cassettes through the PPT System. Retailer's termination right pursuant
to this Section 17(C) shall be the exclusive means by which Retailer
may terminate its obligations under this Agreement and shall be in lieu
of any and all other termination rights otherwise available to Retailer
under applicable law, including but not limited to ORS 72A. 508.
(D) Section 17(D) shall be as set forth in the National Account
Agreement.
(E) Section 17 (E) shall be as set forth in the National Account
Agreement.
SECTION 17(F) - The following paragraph shall be added to Section 17 of
the National Account Agreement and shall read as follows:
17(F). Upon expiration or termination of this Agreement and the
Addendum for any reason, Rentrak and Retailer agree that they shall not
make any derogatory, negative or otherwise disparaging remarks of any
nature whatsoever about each other, except as required under federal or
state securities laws in the opinion of counsel.
SECTION 18 -- Section 18 of the National Account Agreement is hereby
deleted in its entirety.
SECTION 19 -- Section 19 of the National Account Agreement is deleted,
amended in its entirety and shall read as follows:
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 20
-12-
Neither party shall assign, sell, give, lease, sublease, encumber,
delegate or otherwise transfer, in whole or in part by operation of law
or otherwise, any of its rights or obligations hereunder (an
"Assignment") without the prior written consent of the other (in such
other party's sole discretion), provided that, subject to any other
provision herein and provided that no such assignment shall be to a
competitor of Rentrak, the direct or indirect Assignment (by merger,
consolidation, asset acquisition or operation of law) of any rights or
obligations hereunder in whole or in part, by a party to any individual
or entity acquiring directly or indirectly all or substantially all of
the capital stock or assets of such party shall not be deemed an
Assignment for purposes of this Section.
SECTION 21(C) -- Section 21(C) of the National Account Agreement is
hereby deleted in its entirety.
SECTION 25 -- Section 25 of the National Account Agreement is hereby
deleted in its entirety.
SECTION 27 -- Section 27 of the National Account Agreement is hereby
deleted in its entirety.
SECTION 28 -- Section 28 of the National Account Agreement is hereby
deleted in its entirety.
5. Additional Terms of National Account Agreement. The following
additional terms shall be added to the National Account Agreement:
SECTION 29 - Recitals as Part of Agreement. The recitals to this
Agreement are hereby incorporated into and made a legally binding part
of the National Account Agreement and Retailer shall take no action,
directly or indirectly, to frustrate the purpose of this Agreement.
SECTION 30 - No Harm to Rentrak's Business. Retailer covenants and
agrees that throughout the entire term of this Agreement, Retailer
shall not, directly or indirectly, acting alone or in concert with
others, through its officers, directors, agents or employees, (i) take
any action intended to undermine or harm Rentrak's business
relationships with Program Suppliers, any motion picture studio,
Rentrak's customers, or vendors or otherwise harm Rentrak's business
(ii) take any action or do anything reasonably calculated to undermine
or harm Rentrak's business relationships with Program Suppliers, any
motion picture studios, Rentrak's customers or vendors or otherwise
harm Rentrak's business.
SECTION 31 - Advertising Credit. Subject to the terms and conditions
provided in this Section, Retailer shall receive a co-op advertising
credit from Rentrak equal to $[ ]*per Cassette ordered and
received by Retailer through the PPT System. Such co-op advertising
shall only be available to the extent that Retailer complies with all
the requirements imposed by the Program Supplier for such credit
including but not limited
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 21
-13-
to providing proof of performance, submission of tear sheets, invoices
and other requests. The Program Supplier's determination as to whether
this co-op advertising credit is available to Retailer shall be final
and binding and Rentrak shall not be obligated to provide any co-op
advertising credit in cases where a Program Supplier has rejected
Retailer's claim for such credit. Rentrak makes no representation,
warranty or assurance as to the availability of co-op advertising
credit and Retailer may not take a credit or deduction for any
advertising claims for which a credit has not been granted by Rentrak.
To the extent co-op advertising credit is not fully utilized by
Retailer within [ ]* months of shipment of the Cassettes for which
the co-op advertising credit was issued on a particular title, such
credit shall expire and no longer be of any value to Retailer. For the
term of this Agreement, and if requested by a Program Supplier, Rentrak
shall confirm Retailer shall be entitled to receive any Co-op monies
available to Retailer ("Co-op Monies") directly from such Program
Suppliers. In the alternative, if Rentrak receives such Co-op Monies
from a Program Supplier directly that the Program Supplier advises
Rentrak are for the account of Retailer, Rentrak shall immediately so
notify Retailer and, upon compliance by Retailer with all of such
Program Supplier's requirements, immediately forward all Co-op Monies
related to Retailer's purchase or order of Cassettes from that Program
Supplier directly to Retailer. The availability of such Co-op Monies,
if any, shall be subject to the same conditions, terms, and limitation
set forth in the preceding sentences of this Section 31.
SECTION 32 - Press Release. Retailer and Rentrak will prepare and
release a press release announcing the transaction contemplated herein
substantially in the form attached hereto as Exhibit B, which Press
Release is in a form mutually acceptable to the parties. Rentrak and
Retailer agree not to release the press release until the signing of
the definitive Merger Agreement pertaining to the Acquisition as
indicated on Exhibit B.
SECTION 33 - Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
SECTION 34 - Cooperation. Retailer agrees to cause either its Chief
Executive Officer or its President to accompany executive officers of
Rentrak to visit [ ]* Motion Picture Studios at a mutually
acceptable time or times but not to exceed the equivalent of two (2)
weeks during the first year term of this Agreement following the
Effective Time and in connection therewith to assist Rentrak in its
efforts to obtain the participation of the [ ]* Motion Picture
Studios on PPT.
SECTION 35 - Sale of a Location or Locations. Subject to the provisions
in the Recitals hereof relating to the sale of all or substantially all
of Retailer's capital stock or assets (via merger, consolidation or
otherwise) to a Third Party Acquiror (which circumstance shall not be
governed by this provision), Retailer agrees not to sell or transfer to
a person or an entity other than Retailer or its Affiliates (the
"Transferee") any Locations through merger, consolidation, sale of
assets, spin-off, or other means unless the Transferee or in the case
of a spin-off the person or entity owning the spun-off assets legally
assumes all obligations of Retailer remaining under this Agreement
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 22
-14-
with respect to such Location or Locations as though such person or
entity was the Retailer pursuant to an Assumption Agreement in form and
substance reasonably satisfactory to Rentrak. Retailer hereby
guarantees the performance by the Transferee of the assumed obligations
and shall remain liable therefor.
SECTION 36 - Acquisition of Business of Rentrak Customers. Should
Retailer or any of its Affiliates wish to acquire a retail video store
or retailer of video cassettes (an "Acquisition") that at the time of
acquisition is a customer of Rentrak, which customer is subject to a
designated purchase requirement with regard to Cassettes leased under
the PPT System (e.g., [ ]* of revenue or all requirements of leased
Cassettes)( the "Rentrak PPT Customer"), Retailer shall provide Rentrak
ten days' prior written notice of such proposed acquisition. Rentrak
shall then promptly provide Retailer a list of all material terms of
such Rentrak PPT Customer's agreement with Rentrak that are then in
effect (the "Terms") and Retailer will not consummate the Acquisition
unless Retailer has (i) assumed the Terms without modification, or (ii)
negotiated modifications to the Terms that are acceptable to Rentrak
(with each of Retailer and Rentrak agreeing to negotiate such
modifications in good faith), provided that this provision shall not
govern Retailer's acquisition of the business or assets of any of its
franchisees who become Rentrak PPT Customers after the Effective Time.
Retailer agrees that it will not directly or indirectly litigate the
validity of the Terms or the modified terms, except as agreed between
Retailer and Rentrak.
6. National Account Agreement. Except as amended and supplemented by this
Addendum, the National Account Agreement is otherwise confirmed in all
respects and shall be given full force and effect.
7. Counterparts. This Addendum may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Addendum to be
executed as of the day and year first written above.
THIS SPACE INTENTIONALLY LEFT BLANK
___________________
* The bracketed information has been omitted from this exhibit and filed
separately with the Securities and Exchange Commission pursuant to Rule
406 under the Securities Act of 1933, as amended.
<PAGE> 23
-15-
RENTRAK CORPORATION
By: /s/ Ron Berger
------------------------------
Ron Berger, President
VIDEO UPDATE, INC.
By: /s/ Daniel Potter
------------------------------
Daniel Potter,
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
TO: Daniel C. Howard As of January ____, 1998
c/o Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
This Agreement is intended to state the terms of your employment with Video
Update, Inc., a Delaware corporation (the "Company"). The Company hereby agrees
with you as follows:
1. POSITION AND RESPONSIBILITIES.
1.1 You shall serve as Chief Operating Officer for the Company
and shall perform the duties customarily associated with such capacity from time
to time and at such place or places as the Company shall designate are
appropriate and necessary in connection with such employment.
1.2 You will, to the best of your ability, devote your full
time (as described in Exhibit A) and best efforts to the performance of your
duties hereunder and the business and affairs of the Company. You agree to
perform such duties as may be assigned to you by or on authority of the
Company's Chief Executive Officer and Board of Directors from time to time.
1.3 You will duly, punctually and faithfully perform and
observe any and all rules and regulations which the Company may now or shall
hereafter establish governing the conduct of its business.
2. TERM OF EMPLOYMENT.
2.1 The term of this Agreement shall be for the period of
years set forth on Exhibit A annexed hereto commencing with the date hereof.
Thereafter, this Agreement shall be automatically renewed for successive periods
of one (1) year, unless (a) you give notice of non-renewal or (b) the Company
shall give you not less than thirty (30) days written notice of non-renewal. In
the event of non-renewal by you or the Company, you shall not be entitled to any
severance pay. Your employment with the Company may be terminated at any time as
provided in Section 2.2 or 2.4 of this Agreement.
2.2 The Company shall have the right, on written notice to
you, to terminate your employment:
(a) immediately at any time for Cause (as hereinafter
defined); or
<PAGE> 2
(b) at any time without Cause provided that if (i)
your termination is without Cause, or (ii) you terminate your
employment because the Company has required your place of work to be
relocated more than 25 miles from its current location at 30 East 7th
Street, St. Paul, Minnesota, the Company shall be obligated to pay you
as severance pay an amount equal to the lesser of twenty-four (24)
months' Base Salary (as defined in Exhibit A hereto) at the then
current level (as set forth on Exhibit A attached hereto) or your
monthly Base Salary for the remaining term of this Agreement, less
applicable taxes and other required withholdings and any amounts you
may owe to the Company ("Severance Pay"), provided that your Severance
Pay shall not be less than twelve (12) months' Base Salary and shall be
reduced (dollar for dollar) by any compensation and benefits you
receive or earn after such initial twelve month period following
termination (the "Severance Period") from any source other than the
Company, including without limitation, salary, employee benefits,
consulting fees and income from self-employment or otherwise, and
provided further that the Company shall continue in full force and
effect all health and insurance benefits that you enjoyed at the time
of your termination for the twenty-four month period following
termination, with a reduction of such benefits following the Severance
Period (dollar for dollar) by any health and insurance benefits you
receive from any source. You shall be entitled to continuation of your
car allowance for 90 days following termination.
2.3 For purposes of Section 2.2, the term "Cause" shall mean:
(a) Your failure or refusal to perform the services
specified herein, or to carry out any reasonable and lawful directions
of the Chief Executive Officer or President of the Company with respect
to the services to be rendered or the manner of rendering such services
by you;
(b) conviction of a felony;
(c) fraud or embezzlement involving the assets of the
Company, its customers, suppliers or affiliates;
(d) gross negligence or willful misconduct;
(e) inability for a continuous period of at least one
hundred eighty (180) days in the aggregate during any 360 day period to
perform duties hereunder due to a physical or mental disability that is
incapable of reasonable accommodation under applicable law, including
but not limited to the Americans with Disabilities Act of 1990, as
amended; or
(f) breach of any term of this Agreement other than
as noted in (a) above.
Further, any dispute, controversy, or claim arising out of, in connection with,
or in relation to this definition of "Cause" shall be settled by arbitration in
St. Paul, Minnesota, pursuant to the Commercial Rules then in effect of the
American Arbitration Association and in no other place.
-2-
<PAGE> 3
Any award or determination shall be final, binding, and conclusive upon the
parties, and a judgment rendered may be entered in any court having jurisdiction
thereof. You and the Company knowingly waive any and all rights to a jury trial
in any form. Each party shall bear its own expenses relating to the arbitration,
unless otherwise determined in arbitration.
2.4 You shall have the right to terminate this Agreement upon
not less than ninety (90) days prior written notice to the Company.
2.5 In the event of a Change in Control (as hereinafter
defined) of the Company where you (i) resign within six (6) months after such
event, or (ii) are terminated without Cause by the Company within six (6) months
after such event, you shall be entitled to receive an amount, payable in a lump
sum within thirty (30) days after the effective date of such resignation or
termination, equal to the product of your average total annual compensation (as
defined in Section 3 herein), during the two (2) years immediately preceding the
termination of your employment (the "Change in Control Payment"). In the event
that any payment to be received by you pursuant to this Section 2.5 or the value
of any acceleration right in any Company stock options you may hold in
connection with the Change in Control of the Company would be subject to an
excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), whether in whole or in part as a result of being an
"excess parachute payment" within the meaning of such term in Section 280G(b) of
the Code, the amount payable under this Section 2.5 shall be reduced so that no
portion of such payment or the value of such acceleration rights is subject to
excise tax pursuant to Section 4999 of the Code. If the amount necessary to
eliminate such excise tax exceeds the amount otherwise payable under this
Section 2.5, no payment shall be made under this paragraph and no further
adjustment shall be made. Notwithstanding the preceding sentence, (a) no portion
of such Change in Control Payment or any acceleration right which tax counsel,
selected by the Company's independent auditors and acceptable to you, determines
not to constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code will be taken into account and (b) no portion of the Change in
Control Payment which tax counsel, selected by the Company's independent
auditors and acceptable to you, determines to be reasonable compensation for
services rendered within the meaning of Section 280G(b)(4) of the Code will be
taken into account.
2.6 For purposes of Section 2.5 the term "Change in Control"
shall mean the occurrence of any of the following:
(a) any person or entity, including a "group" as
defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended, other than the Company, a wholly owned subsidiary of the
Company, or any employee benefit plan of the Company or its
subsidiaries, becomes the beneficial owner of the Company's securities
having fifty-one percent (51%) or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the
election for directors of the Company; or
(b) as the result of, or in connection with, any cash
tender or exchange offer, merger or other business combination, sale of
assets or contested election or any
-3-
<PAGE> 4
combination of the foregoing transactions, less than a majority of the
combined voting power of the then outstanding securities of the Company
or any successor corporation or entity entitled to vote generally in
the election of directors of the Company or such other corporation or
entity after such transaction, are held in the aggregate by holders of
the Company's securities entitled to vote generally in the election of
directors of the company immediately prior to such transaction; or
(c) the approval of the stockholders of the Company
of a plan of liquidation.
3. COMPENSATION. You shall receive the compensation and benefits
set forth on Exhibit A hereto ("Compensation") for all services to be rendered
by you hereunder.
4. OTHER ACTIVITIES DURING EMPLOYMENT.
4.1 You hereby agree that, except as disclosed on Exhibit B
hereto, during your employment hereunder, you will not, directly or indirectly,
engage (a) individually, (b) as an officer, (c) as a director, (d) as an
employee, (e) as a consultant, (f) as an advisor, (g) as an agent (whether a
salesperson or otherwise), (h) as a broker, or (i) as a partner, coventurer,
stockholder or other proprietor owning directly or indirectly more than one
percent (1%) interest in any firm, corporation, partnership, trust, association,
or other organization that is engaged in the rental or sale of videocassettes,
video games or audio books in direct competition with the Company or any other
line of business engaged in or under demonstrable development by the Company
(such firm, corporation, partnership, trust, association, or other organization
being hereinafter referred to as a "Prohibited Enterprise"). Except as may be
shown on Exhibit B hereto, you hereby represent that you are not engaged in any
of the foregoing capacities (a) through (i) in any Prohibited Enterprise.
5. FORMER EMPLOYERS.
5.1 You represent and warrant that your employment by the
Company will not conflict with and will not be constrained by any prior or
current employment, consulting agreement or other relationship whether oral or
written. You represent and warrant that you do not possess confidential
information arising out of any such employment, consulting agreement or
relationship which, in your best judgment, would be utilized in connection with
your employment by the Company.
6. PROPRIETARY INFORMATION AND INVENTIONS. You agree to execute,
deliver and be bound by the provisions of the Proprietary Information and
Inventions Agreement attached hereto as Exhibit C.
7. POST-EMPLOYMENT ACTIVITIES.
-4-
<PAGE> 5
7.1 For a period of two (2) years (or for a lesser period
should the Company so determine) after the termination or expiration, for any
reason, of your employment with the Company hereunder (the "Non-Compete
Period"), absent the Company's prior written approval, you will not directly or
indirectly engage in activities similar or reasonably related to those in which
you shall have engaged hereunder during the two years immediately preceding
termination or expiration for, nor render services similar or reasonably related
to those which you shall have rendered hereunder during such two years to, any
person or entity whether now existing or hereafter established which directly
competes with (or proposes or plans to directly geographically compete with) the
Company ("Direct Competitor") in any line of business engaged in or under
development by the Company. Nor shall you entice, induce or encourage any of the
Company's other employees to engage in any activity which, were it done by you,
would violate any provision of the Proprietary Information and Inventions
Agreement or this Section 7. As used in this Section 7.1, the term "any line of
business engaged in or under development by the Company" shall be applied as at
the date of termination of your employment, or, if later, as at the date of
termination of any post-employment consultation.
7.2 During the Non-Compete Period, you agree that you will
not, directly or indirectly: (i) attempt to contact, recruit or solicit any
customers of the Company; (ii) enter into any agreement with any party to
recruit or solicit such customers; (iii) request any customers of the Company to
curtail or cancel their business with the Company; (iv) to induce any employee
of the Company to leave the Company's employment; (v) assist any other person or
entity in requesting or inducing any such employee of the Company to leave such
employment; (vi) induce or attempt to induce any employee of the Company to join
with you in any capacity, direct or indirect; or (vii) disclose to anyone or
publish or use any names of any customers of the Company or any proprietary,
secret or confidential information of the Company (which, for the purposes
hereof, shall be as defined in the Proprietary Information and Inventions
Agreement).
7.3 No provision of this Agreement shall be construed to
preclude you from performing the same services which the Company hereby retains
you to perform for any person or entity which is not a Direct Competitor of the
Company upon the expiration or termination of your employment (or any
post-employment consultation) so long as you do not thereby violate any term of
the Proprietary Information and Inventions Agreement.
8. REMEDIES. Your obligations under the Proprietary Information
and Inventions Agreement and the provisions of Sections 4, 5, 6 and 7 of this
Agreement (as modified by Section 10, if applicable) shall survive the
expiration or termination of your employment (whether through your resignation
or otherwise) with the Company. You acknowledge that a remedy at law for any
breach or threatened breach by you of the provisions of the Proprietary
Information and Inventions Agreement or Section 7 would be inadequate and you
therefore agree that the Company shall be entitled to injunctive relief in case
of any such breach or threatened breach.
9. ASSIGNMENT. This Agreement and the rights and obligations of
the parties hereto shall bind and inure to the benefit of any successor or
successors of the Company by reorganization, merger or consolidation and any
assignee of all or substantially all of its business
-5-
<PAGE> 6
and properties, but, except as to any such successor or assignee of the Company,
neither this Agreement nor any rights or benefits hereunder may be assigned by
the Company or by you, except by operation of law.
10. INTERPRETATION. IT IS THE INTENT OF THE PARTIES THAT in case
any one or more of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect the other provisions
of this Agreement, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. MOREOVER, IT
IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, such provision shall be
construed by limiting and reducing it as determined by a court of competent
jurisdiction, so as to be enforceable to the extent compatible with applicable
law.
11. NOTICES. Any notice which the Company is required to or may
desire to give you shall be given by personal delivery or registered or
certified mail, return receipt requested, addressed to you at your address of
record with the Company, or at such other place as you may from time to time
designate in writing. Any notice which you are required or may desire to give to
the Company hereunder shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the Company at its
principal office, or at such other office as the Company may from time to time
designate in writing. The date of personal delivery or the date of making any
notice under this Section 11 shall be deemed to be the date of delivery thereof.
12. WAIVERS. If either party should waive any breach of any
provision of this Agreement, such party shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
13. COMPLETE AGREEMENT; AMENDMENTS. The foregoing, including
Exhibits A, B and C attached hereto, is the entire agreement of the parties with
respect to the subject matter hereof, superseding any previous oral or written
communications, representations, understandings, or employment agreements with
the Company or any officer or representative thereof. Any amendment to this
Agreement or waiver by the Company of any right hereunder shall be effective
only if evidenced by a written instrument executed by the parties hereto, upon
authorization of the Company's Board of Directors.
14. HEADINGS. The headings of the Sections hereof are inserted for
convenience and shall not be deemed to constitute a part hereof nor to affect
the meaning of this Agreement in any way.
15. COUNTERPARTS. This Agreement may be signed in two
counterparts, each of which shall be deemed an original and both of which shall
together constitute one agreement.
-6-
<PAGE> 7
16. GOVERNING LAW. This Agreement shall be governed by and
construed under Minnesota law, excluding its conflict of law principles.
17. INDEPENDENT ADVICE. You hereby acknowledge that you have been
advised of the opportunity available to you to seek and obtain the advice of
legal counsel and financial advisors of your own choosing prior to and in
connection with your execution of this Agreement. In addition you hereby affirm
that you have either obtained such advice or knowingly and willingly decided to
forego the opportunity to avail yourself of such advice.
If you are in agreement with the foregoing, please sign your name below
and also at the bottom of the Proprietary Information and Inventions Agreement,
whereupon this Agreement shall become binding in accordance with their terms.
Please then return this Agreement to the Company. (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith).
Very truly yours,
VIDEO UPDATE, INC.
(As authorized by the Board of Directors)
By:_________________________________________
Title: Daniel A. Potter, Chairman
and Chief Executive Officer
Accepted and Agreed:
___________________________________
Daniel C. Howard
-7-
<PAGE> 8
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
DANIEL C. HOWARD
1. TERM. The term of the Agreement to which this Exhibit A is annexed and
incorporated shall be for two (2) years.
2. COMPENSATION.
(A) BASE SALARY. Your Base Salary shall be $128,400 per annum,
payable in accordance with the Company's payroll policies.
(B) BONUSES. You shall be entitled to such bonuses and salary
increases as the Board of Directors may determine.
(C) STOCK OPTIONS. You will be granted incentive stock options
under the Company's stock option plans as determined by the
Company's Board of Directors. Stock options to be granted to
you will vest and be exercisable on termination for any reason
for a period of 90 days following such termination.
3. VACATIONS. You shall be entitled to all legal and religious holidays,
and 4 weeks paid vacation.
4. INSURANCE AND BENEFITS. You shall be eligible for participation in all
health and insurance benefit plans that may be established by the
Company or which the Company is required to maintain by law. You shall
also be entitled to participate in any employee benefit programs which
the Company may establish for its key employees or for its employees
generally, including, but not limited to other insurance policies,
bonuses and stock purchase or option plans.
5. EXPENSES. The Company shall reimburse you for all reasonable and
ordinary business expenses incurred by you in the scope of your
employment hereunder.
6. FULL TIME. To be entitled to the benefits described in the Agreement to
which this Exhibit is annexed and incorporated, you shall devote 100%
of your working time to the Company.
<PAGE> 9
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
DANIEL C. HOWARD
None.
<PAGE> 10
EXHIBIT C
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
As of January ____, 1998
To: Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
The undersigned, in consideration of and as a condition of my services
to you and/or to companies which you own, control, or are affiliated with or
their successors in business (collectively, the "Company"), hereby agrees as
follows (capitalized terms used herein but not otherwise defined shall have the
meanings ascribed to them in the Employment Agreement between myself and the
Company, dated January ____, 1998):
1. CONFIDENTIALITY. I agree to keep confidential, except as the Company
may otherwise consent in writing, and, except for the Company's benefit, not to
disclose or make any use of at any time either during or subsequent to my
employment, any Inventions (as hereinafter defined), trade secrets, confidential
information, knowledge, data or other information of the Company relating to
products, processes, know-how, designs, formulas, test data, customer lists,
business plans, marketing plans and strategies, pricing strategies, or other
subject matter pertaining to any business of the Company or any of its
affiliates, which I may produce, obtain, or otherwise acquire during the course
of my employment, except as herein provided. I further agree not to deliver,
reproduce or in any way allow any such trade secrets, confidential information,
knowledge, data or other information, or any documentation relating thereto, to
be delivered to or used by any third parties without specific direction or
consent of a duly authorized representative of the Company.
2. CONFLICTING EMPLOYMENT; RETURN OF CONFIDENTIAL MATERIAL. I agree
that during my employment with the Company I will not engage in any other
employment, occupation, consulting or other activity relating to the business in
which the Company is now or may hereafter become engaged, or which would
otherwise conflict with my obligations to the Company. In the event my
employment with the Company terminates for any reason whatsoever, I agree to
promptly surrender and deliver to the Company all records, materials, equipment,
drawings, documents and data of which I may obtain or produce during the course
of my employment, and I will not take with me any description containing or
pertaining to any confidential information, knowledge or data of the Company
which I may produce or obtain during the course of my employment.
3. ASSIGNMENT OF INVENTIONS.
3.1 I hereby acknowledge and agree that the Company is the
owner of all Inventions. In order to protect the Company's rights to such
Inventions, by executing this Agreement I hereby irrevocably assign to the
Company all my right, title and interest in and to all Inventions to the
Company.
<PAGE> 11
3.2 For purposes of this Agreement, "Inventions" shall mean
all discoveries, processes, designs, technologies, devices, or improvements in
any of the foregoing or other ideas, whether or not patentable and whether or
not reduced to practice, made or conceived by me (whether solely or jointly with
others) during the period of my employment with the Company which relate in any
manner to the actual or demonstrably anticipated business, work, or research and
development of the Company, or result from or are suggested by any task assigned
to me or any work performed by me for or on behalf of the Company.
3.3 Any discovery, process, design, technology, device, or
improvement in any of the foregoing or other ideas, whether or not patentable
and whether or not reduced to practice, made or conceived by me (whether solely
or jointly with others) which I develop entirely on my own time not using any of
the Company's equipment, supplies, facilities, or trade secret information
("Personal Invention") is excluded from this Agreement provided such Personal
Invention (a) does not relate to the actual or demonstrably anticipated
business, research and development of the Company, and (b) does not result,
directly or indirectly, from any work performed by me for the Company.
4. DISCLOSURE OF INVENTIONS. I agree that in connection with any
Invention, I will promptly disclose such Invention to my immediate superior at
the Company in order to permit the Company to enforce its property rights to
such Invention in accordance with this Agreement. My disclosure shall be
received in confidence by the Company.
5. PATENTS AND COPYRIGHTS; EXECUTION OF DOCUMENTS.
5.1 Upon request, I agree to assist the Company or its nominee
(at its expense) during and at any time subsequent to my employment in every
reasonable way to obtain for its own benefit patents and copyrights for
Inventions in any and all countries. Such patents and copyrights shall be and
remain the sole and exclusive property of the Company or its nominee. I agree to
perform such lawful acts as the Company deems to be necessary to allow it to
exercise all right, title and interest in and to such patents and copyrights.
5.2 In connection with this Agreement, I agree to execute,
acknowledge and deliver to the Company or its nominee upon request and at its
expense all documents, including assignments of title, patent or copyright
applications, assignments of such applications, assignments of patents or
copyrights upon issuance, as the Company may determine necessary or desirable to
protect the Company's or its nominee's interest in Inventions, and/or to use in
obtaining patents or copyrights in any and all countries and to vest title
thereto in the Company or its nominee to any of the foregoing.
6. MAINTENANCE OF RECORDS. I agree to keep and maintain adequate and
current written records of all Inventions made by me (in the form of notes,
sketches, drawings, flowcharts and other records as may be specified by the
Company), which records shall be available to and remain the sole property of
the Company at all times.
7. PRIOR INVENTIONS. It is understood that all Personal Inventions, if
any, whether patented or unpatented, which I made prior to my association with
the Company, are excluded from this Agreement. To preclude any possible
uncertainty, I have set forth on Schedule A
2
<PAGE> 12
attached hereto a complete list of all of my prior Personal Inventions,
including numbers of all patents and patent applications and a brief description
of all unpatented Personal Inventions which are not the property of a previous
employer. I represent and covenant that the list is complete and that, if no
items are on the list, I have no such prior Personal Inventions. I agree to
notify the Company in writing before I make any disclosure or perform any work
on behalf of the Company which appears to threaten or conflict with proprietary
rights I claim in any Personal Invention. In the event of my failure to give
such notice, I agree that I will make no claim against the Company with respect
to any such Personal Invention.
8. OTHER OBLIGATIONS. I acknowledge that the Company from time to time
may have agreements with other persons or with the U.S. Government or agencies
thereof, which impose obligations or restrictions on the Company regarding
Inventions made during the course of work thereunder or regarding the
confidential nature of such work. I agree to be bound by all such obligations
and restrictions and to take all action necessary to discharge the Company's
obligations.
9. TRADE SECRETS OF OTHERS. I represent that my performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep confidential proprietary information, knowledge or
data acquired by me in confidence or in trust prior to my services to the
Company, and I will not disclose to the Company, or induce the Company to use,
any confidential or proprietary information or material belonging to any
previous client, employer or others. I agree not to enter into any agreement
either written or oral in conflict herewith.
10. MODIFICATION. I agree that any subsequent change or changes in my
duties, salary or compensation or, if applicable, in any Employment Agreement
between the Company and me, shall not affect the validity or scope of this
Agreement.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon my
heirs, executors, administrators or other legal representatives and is for the
benefit of the Company, its successors and assigns.
12. INTERPRETATION. IT IS THE INTENT OF THE PARTIES THAT in case any
one or more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect the other provisions of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. MOREOVER, IT IS THE
INTENT OF THE PARTIES THAT in case any one or more of the provisions contained
in this Agreement shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
construed by limiting and reducing it in accordance with a judgment of a court
of competent jurisdiction, so as to be enforceable to the extent compatible with
applicable law.
13. WAIVERS. If either party should waive any breach of any provision
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
3
<PAGE> 13
14. COMPLETE AGREEMENT, AMENDMENTS. I acknowledge receipt of this
Agreement, and agree that with respect to the subject matter thereof it is my
entire agreement with the Company, superseding any previous oral or written
communications, representations, understandings, or agreements with the Company
or any officer or representative thereof. Any amendment to this Agreement or
waiver by either party of any right hereunder shall be effective only if
evidenced by a written instrument executed by the parties hereto, and, in the
case of the Company, upon written authorization of the Company's Board of
Directors.
15. HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning hereof.
16. COUNTERPARTS. This Agreement may be signed in two counterparts,
each of which shall be deemed an original and both of which shall together
constitute one agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Minnesota, excluding its conflict of law
principles.
[THIS SPACE INTENTIONALLY LEFT BLANK]
4
<PAGE> 14
If you are in agreement with the foregoing, please sign both of the
enclosed copies of this Agreement below, whereupon this Agreement shall become
binding in accordance with its terms. Please then return one signed copy of this
Agreement to the Company.
EMPLOYEE
___________________________________
Daniel C. Howard
Accepted and Agreed:
VIDEO UPDATE, INC.
By:________________________________
Daniel A. Potter, Chairman
and Chief Executive Officer
5
<PAGE> 15
SCHEDULE A
None.
<PAGE> 1
EXHIBIT 10.8
FIRST AMENDMENT
Dated as of December 12, 1997
THIS FIRST AMENDMENT dated as of December 12, 1997 (this "Amendment")
amends the Credit Agreement dated as of February 11, 1997 (the "Credit
Agreement") among VIDEO UPDATE, INC. (the "Company"), VIDEO UPDATE CANADA INC.
("VUCI"), various financial institutions (the "Lenders"), BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION (successor by merger to Bank of America
Illinois), as U.S. Agent (the "U.S. Agent"), and BANK OF AMERICA CANADA, as
Canadian Agent (the "Canadian Agent"). Terms not otherwise defined herein shall
have the meanings assigned to such terms in the Credit Agreement.
WHEREAS, the parties hereto have entered into the Credit Agreement which
provides for the Lenders to make Loans to the Company and VUCI from time to
time; and
WHEREAS, the parties hereto desire to amend, and the Required Lenders have
agreed to waive, certain provisions of the Credit Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1 AMENDMENTS. Effective on (and subject to the occurrence of) the
First Amendment Effective Date (as defined below), the Credit Agreement is
amended in accordance with Sections 1.1 through 1.5 below:
1.1 Replacement of Certain Definitions. Section 1.1 is amended by deleting
the existing definitions of "Computation Period" and "Funded Debt Ratio" in
their entirety and substituting the following therefor, respectively:
Computation Period means any period of three consecutive calendar
months ending on the last day of calendar month; provided that for
purposes of calculating the Funded Debt Ratio and the Fixed Charge Ratio,
(i) during the period from February 28, 1998, to October 31, 1998,
"Computation Period" shall mean each period beginning on November 1, 1997
and ending on the last day of a calendar month and (ii) after the period
specified in clause (i), "Computation Period" shall mean any period of 12
consecutive calendar months ending on the last day of a calendar month.
<PAGE> 2
Funded Debt Ratio means, as of any date of calculation, the ratio of
(x) Funded Debt as of such date to (y) the product of (i) the total of (a)
EBITDA for the Computation Period most recently ended minus (b) 26% (or,
for any Computation Period ending after September 30, 1997, 25%) of the
revenues of the Company and its Subsidiaries multiplied by (ii) a
fraction, the numerator of which is the 12 and the denominator of which is
the number of months in such Computation Period.
1.2 Amendment of Section 6.2(d). Section 6.2(d) is amended in its entirety
to read as follows:
(d) Funded Debt Ratio. Unless the Required Lenders otherwise
consent in writing, the Funded Debt Ratio shall not be greater than 1.75
to 1; provided that this condition shall not apply to any Borrowing
pursuant to Section 4.3(b) under any of the Letters of Credit issued by
BAI on January 17, 1997 in favor of (i) Ontario Municipal Employees
Retirement Board, (ii) Allstate Life Insurance Company of Canada or (iii)
BT-TR Realty Holding Inc. so long as the aggregate amount of all such
Borrowings does not exceed $1,500,000.
1.3 Amendment of Section 8.6.2. Section 8.6.2 is amended in its
entirety to read as follows:
8.6.2 Fixed Charge Ratio. Not permit the Fixed Charge Ratio to
be less than (a) 2.20 to 1.00 as of the last day of any month ending on or
before November 30, 1997 and (b) 2.50 to 1.00 as of the last day of any
month thereafter.
1.4 Amendment of Section 8.6.3. Section 8.6.3 is amended in its entirety
to read as follows:
8.6.3 Funded Debt Ratio. Not permit the Funded Debt
Ratio at any time during the periods set forth below to exceed the
applicable ratio set forth below:
<TABLE>
<CAPTION>
Ratio Period
----- ------
<S> <C>
3.00:1 12/31/97 - 06/30/98
2.75:1 07/31/98 and thereafter
</TABLE>
1.5 Amendment to Exhibit C. Exhibit C to the Credit Agreement is deleted
in its entirety and replaced by the Exhibit C attached hereto.
2
<PAGE> 3
SECTION 2 WAIVERS. Effective on (and subject to the occurrence of) the
First Amendment Effective Date, the Required Lenders hereby waive:
(a) the Company's non-compliance with Section 8.6.3 of the Credit
Agreement for the Computation Period ended September 30, 1997.
(b) any non-compliance with Section 8.6.3 of the Credit Agreement for the
Computation Periods ending October 31, 1997 and November 30, 1997, so long as
the remainder of EBITDA minus 25% of the revenues of the Company and its
Subsidiaries is (i) at least $1.25 million for the Computation Period ending
October 31, 1997 and (ii) at least $1.00 million for the Computation Period
ending November 30, 1997; and
(c) any non-compliance with Section 8.6.4 of the Credit Agreement for the
Computation Periods ending October 31, 1997 and November 30, 1997, so long as
the Mature Store Contribution Margin for each such Computation Period is not
less than 0.15 to 1.
SECTION 3 REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to the Agent and the Lenders that each warranty set forth in Article
VII of the Credit Agreement is true and correct as if made on the date hereof,
except (i) for such changes as are specifically permitted under the Credit
Agreement and (ii) to the extent such representations and warranties expressly
refer to an earlier date, in which case they shall be true and correct as of
such earlier date.
SECTION 4 EFFECTIVENESS. The amendments set forth in Section 1 above and
the waivers set forth in Section 2 above shall become effective, as of the day
and year first above written, on such date (herein called the "First Amendment
Effective Date") when the Agent shall have received each of the following
documents, each in form and substance satisfactory to the Agent:
(a) Amendment. Counterparts of this Amendment executed by the parties
hereto.
(b) Resolutions. Certified copies of resolutions of the Board of Directors
of the Company and VUCI, or any authorized committee thereof, authorizing the
execution and delivery of this Amendment and the performance by the Company and
VUCI of their obligations under the Credit Agreement as amended by this
Amendment (the "Amended Credit Agreement").
(c) Opinion. An opinion, addressed to the Agent and all Lenders,
from counsel to the Company in form satisfactory to the Agent.
3
<PAGE> 4
SECTION 5 MISCELLANOUS.
5.1 Continuing Effectiveness, etc. As herein amended, the Credit Agreement
shall remain in full force and effect and is hereby ratified and confirmed in
all respects. After the First Amendment Effective Date, all references in the
Credit Agreement and any Note to "Credit Agreement", "Agreement" or similar
terms shall refer to the Amended Credit Agreement.
5.2 Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original but all such counterparts
shall together constitute one and the same Amendment.
5.3 Governing Law. This Amendment shall be a contract made under
and governed by the internal laws of the State of Illinois.
5.4 Successors and Assigns. This Amendment shall be binding upon the
Company and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Company and the Bank and the successors and assigns
of the Bank.
Delivered at Chicago, Illinois, as of the day and year first above
written.
VIDEO UPDATE, INC.
/s/ Christopher J. Gondeck
By:________________________________________
Chief Financial Officer
Title:_____________________________________
VIDEO UPDATE CANADA INC.
/s/ Daniel C. Howard
By:________________________________________
Chief Operating Officer
Title:_____________________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as
U.S. Agent
/s/ David A. Johnson
By:________________________________________
Vice President
Title:_____________________________________
4
<PAGE> 5
BANK OF AMERICA CANADA,
as Canadian Agent
By: /s/
----------------------------------------
Title: VP
-------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION,
as a Lender
By: /s/
----------------------------------------
Title: Vice President
-------------------------------------
BANK OF AMERICA CANADA, as a Canadian Lender
designated by Bank of America National Trust
and Savings Association
By: /s/
----------------------------------------
Title: VP
-------------------------------------
BANK LEUMI TRUST COMPANY OF
NEW YORK
By: /s/ Gloria Bucher
----------------------------------------
Title: Vice President
-------------------------------------
BANK ONE, CHICAGO, NA
By:
----------------------------------------
Title:
-------------------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/
----------------------------------------
Title: Vice President
-------------------------------------
LASALLE NATIONAL BANK
By: /s/
----------------------------------------
Title: Vice President
-------------------------------------
5
<PAGE> 6
MICHIGAN NATIONAL BANK
a National Banking Association
By: /s/ Charles W. Read III
----------------------------------------
Title: Vice President
-------------------------------------
THE SUMITOMO BANK, LIMITED, CHICAGO
BRANCH
By: /s/ Jeffrey P. Norton
----------------------------------------
Title: Vice President
-------------------------------------
By: /s/ John W. Howard, Jr.
----------------------------------------
Title: Vice President & Manager
-------------------------------------
6
<PAGE> 1
EXHIBIT 21.1
Video Update, Inc. - Subsidiaries
1. Tinseltown Video, Inc., a Washington corporation
2. Video Update Canada Inc., an Ontario corporation (formerly
Wilderness Video Group Ltd., a British Columbia corporation)
3. 24 Hour Entertainment Group Ltd., a British Columbia corporation
(owned by Video Update Canada, Inc. & Video Update, Inc.)
4. 24 Hour Entertainment Leasing Ltd., a British Columbia corporation
(a subsidiary of 24 Hour Entertainment Group, Ltd.)
5. 1137239 Ontario Limited, an Ontario corporation (inactive)
6. Williams Video, Inc., a Minnesota corporation
7. VUI Merger Corp., a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-4) and related Joint Proxy Statement of Video
Update, Inc. and Moovies, Inc. that is made a part of the Registration Statement
and Prospectus of Video Update, Inc. for the registration of 9,375,000 shares of
its common stock, and to the use of our report dated June 26, 1997, with respect
to the consolidated financial statements of Video Update, Inc. included in the
Joint Proxy Statement and Prospectus of Video Update, Inc. and Moovies, Inc.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
January 19, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Moovies, Inc.:
We consent to the use of our report included herein and to the
references to our firm under the headings "Selected Historical and Unaudited
Proforma Combined Financial Information" and "Experts" in the Joint Proxy
Statement/Prospectus.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
January 20, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF PIPER JAFFRAY INC.
We consent to the inclusion of our opinion and to all references to our
firm contained herein.
/s/ Piper Jaffray Inc.
Dated: January 22, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF NEEDHAM & COMPANY, INC.
We consent to the inclusion of our opinion and to all references to our
firm contained herein.
/s/ Needham & Company, Inc.
---------------------------
Needham & Company, Inc.
Dated: January 22, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF ASENSIO & CO., INC.
January 21, 1998
Board of Directors
Video Update, Inc.
3100 World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101-4913
We hereby consent to (a) the inclusion of our opinion letter to the Board of
Directors of Video Update, Inc., dated October 27, 1997, as Annex C to the Joint
Proxy Statement/Prospectus which forms a part of the Registration Statement on
Form S-4 relating to the proposed merger of VUI Merger Corp., a wholly owned
subsidiary of Video Update, Inc., with and into Moovies, Inc. and (b) the
references to such opinion and our firm contained in such Joint Proxy
Statement/Prospectus and Registration Statement.
Sincerely,
ASENSIO & CO., INC.
/s/ Manuel P. Asensio
- -------------------------
Manuel P. Asensio
Chairman, President and
Chief Executive Officer
<PAGE> 1
EXHIBIT 23.7
CONSENT OF DIRECTOR NOMINEE
I hereby consent to be named in this Joint Proxy Statement/Prospectus
as a prospective director of Video Update, Inc. and to all references to me
included in this Joint Proxy Statement/Prospectus and all amendments thereto.
/s/ F. Andrew Mitchell
- ------------------------------
F. Andrew Mitchell
Dated: January 21, 1998
<PAGE> 2
CONSENT OF DIRECTOR NOMINEE
I hereby consent to be named in this Joint Proxy Statement/Prospectus
as a prospective director of Video Update, Inc. and to all references to me
included in this Joint Proxy Statement/Prospectus and all amendments thereto.
/s/ Theodore J. Coburn
- ------------------------------
Theodore J. Coburn
Dated: January 19, 1998
<PAGE> 1
EXHIBIT 99.4
VIDEO UPDATE, INC.
PROXY
PROXY FOR THE SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
ON , 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY
The undersigned, revoking all prior proxies, hereby appoint(s) Daniel
A. Potter and John M. Bedard, or either of them, with full power of
substitution, as proxies to represent and vote, as designated herein, all shares
of Class A Common Stock of Video Update, Inc. (the "Company") which the
undersigned would be entitled to vote if personally present at the Special
Meeting in Lieu of Annual Meeting of Stockholders of the Company to be held at
the offices of the Company, 3100 World Trade Center, 30 East Seventh St., St.
Paul, Minnesota 55101 at 9:00 a.m., local time, and at any adjournment thereof.
THE PROXIES ARE FURTHER AUTHORIZED TO VOTE, IN THEIR DISCRETION, UPON
SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING, INCLUDING ANY
MOTION TO ADJOURN THE MEETING TO A LATER DATE TO PERMIT FURTHER SOLICITATION OF
PROXIES, OR ANY POSTPONEMENTS AND ADJOURNMENTS THEREOF.
This proxy, when property executed, will be voted in the manner
directed by the undersigned stockholder(s). IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5. Attendance of the undersigned at
the meeting or any adjournment thereof will not be deemed to revoke this proxy
unless the undersigned shall revoke this proxy in writing before it is exercised
or affirmatively indicate his intent to vote in person.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
ITEMS 1, 2, 3, 4 AND 5.
1. Proposal to approve the issuance of shares of Class A Common Stock, par
value $.01 per share, of the Company (the "Video Update Common Stock"),
pursuant to the Agreement and Plan of Merger dated as of July 9, 1997
and amended as of October 27, 1997 (the "Merger Agreement") among the
Company, VUI Merger Corp., a Delaware corporation and a wholly owned
subsidiary of the Company ("Sub"), and Moovies, Inc., a Delaware
corporation ("Moovies"), pursuant to which, among other things, (a) Sub
will be merged with and into Moovies, which will be the surviving
corporation, and Moovies will become a wholly-owned subsidiary of the
Company, (b) each outstanding share of Common Stock, par value $.001
per share, of Moovies will be converted into the right to receive .75
shares of Video Update Common Stock and (c) each outstanding option or
warrant to purchase Moovies Common Stock, including options under
Moovies' 1995 Stock Plan and other warrants, will be converted to an
option to purchase such number of shares of Video Update Common Stock
(rounded down to the nearest whole number) as is equal to the number of
shares of Moovies Common Stock issuable upon exercise of such options
and warrants immediately prior to the approval of this proposal,
multiplied by .75 (the "Merger"). Approval of both Proposals 1 and 2
are preconditions to the Company's obligations to consummate the
Merger.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE> 2
2. Proposal to approve the termination and cancellation of the Escrow
Agreement, dated July 20, 1994, by and among the Company, its transfer
agent, and the holders of the Company's Class B Common Stock, $.01 par
value. Approval of both Proposals 1 and 2 are preconditions to the
Company's obligations to consummate the Merger.
/ / FOR / / AGAINST / / ABSTAIN
3. Proposal to elect seven (7) members of the Board of Directors of the
Company, each of whom is currently serving as a Director of the
Company:
Nominees: Daniel A. Potter / / FOR / / AGAINST
John M. Bedard / / FOR / / AGAINST
Daniel C. Howard / / FOR / / AGAINST
Robert E. Yager / / FOR / / AGAINST
Jana Webster Vaughn / / FOR / / AGAINST
Paul M. Kelnberger / / FOR / / AGAINST
and Bernard Patriacca / / FOR / / AGAINST
Except, authority to vote withheld as to the following nominee(s):
4. Proposal to ratify and approve the selection of Ernst & Young LLP as
the Company's independent auditors for the fiscal year ending April 30,
1998.
/ / FOR / / AGAINST / / ABSTAIN
5. Proposal to approve the Company's 1998 Stock Option Plan under which an
aggregate of 1,750,000 shares of Class A Common Stock of the Company
will be reserved for issuance.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE> 3
PLEASE MARK, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears hereon.
Dated , 1998
----------------------
Signature
----------------------
Signature if Held Jointly
----------------------
Printed Name
----------------------
----------------------
Address
Note: When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If the person named on the stock certificate has died, please submit
evidence of your authority. If a corporation, please sign in full corporate name
by the President or authorized officer and indicate the signer's office. If a
partnership, please sign in partnership name by authorized person.
<PAGE> 1
EXHIBIT 99.5
MOOVIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR USE AT THE SPECIAL MEETING ON FEBRUARY __, 1998
The undersigned stockholder hereby appoints JOHN L. TAYLOR and F.
ANDREW MITCHELL, or any of them, with full power of substitution, to act as
proxy for, and to vote the stock of, the undersigned at the special meeting of
stockholders of MOOVIES, INC. (the "Company") to be held on February __, 1998,
and any adjournments thereof.
The undersigned acknowledges receipt of Notice of the Joint Proxy
Statement/Prospectus, each dated January __, 1998, and grants authority to said
proxies, or their substitutes, and ratifies and confirms all that said proxies
may lawfully do in the undersigned's name, place and stead. The undersigned
instructs said proxies to vote as indicated. The proxies are further authorized
to vote, in their discretion, upon such other matters as may properly come
before the meeting, including any motion to adjourn the meeting to a later date
to permit further solicitation of proxies, or any postponements and adjournments
thereof.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1
1. Approval of the merger of VUI Merger Corp., a wholly owned subsidiary
of Video Update, Inc. with and into Moovies, Inc. and approval and
adoption of a related Agreement and Plan of Merger, as amended.
/ / FOR / / AGAINST / / ABSTAIN
(CONTINUED ON THE REVERSE SIDE)
--------------------- (ARROW) FOLD AND DETACH HERE (ARROW) ------------------
<PAGE> 2
2. Upon such other matters as may properly come before the meeting or any
adjournments thereof. THE PROXIES SHALL VOTE AS SPECIFIED ABOVE, OR IF
A CHOICE IS NOT SPECIFIED, THEY SHALL VOTE "FOR" ITEM 1.
MARK HERE FOR CHANGE OF ADDRESS AND PROVIDE AT LEFT / /
Dated _________________________, 1998
____________________________________________
(Print Name)
____________________________________________
(Signature)
(Stockholders should sign exactly as name
appears on stock. Where there is more than
one owner each should sign. Executors,
Administrators, Trustees and others signing
in a representative capacity should so
indicate.)
Please enter your Social Security Number or
Federal Employer Identification Number here:
____________________________________________
