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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the fiscal year ended April 30, 1999, or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to
Commission file number 0-24346
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VIDEO UPDATE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 41-1461110
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
3100 World Trade Center 55101
30 East Seventh Street (Zip Code)
St. Paul, Minnesota
(Address of principal executive offices)
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(651) 312-2222
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of registrant's voting stock held by non-affiliates
as of July 29, 1999: Class A Common Stock, $.01 par value: $18,484,758 based
on a closing price of $0.6875 per share.
Number of shares outstanding of each of the registrant's classes of common
stock, as of July 29, 1999: Class A Common Stock, $.01 par value: 29,278,457
shares.
Disclosure Regarding Forward Looking Statements:
Note: The discussions in this Form 10-K contain forward looking statements
that are subject to risks and uncertainties. The actual results of Video
Update, Inc. and subsidiaries (the "Company") could differ significantly from
those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Form 10-K. Statements
contained in this Form 10-K that are not historical facts are forward looking
statements that are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. A number of important factors could
cause the Company's actual results for fiscal 2000 and beyond to differ
materially from those expressed or implied in any forward looking statements
made by, or on behalf of, the Company.
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PART I
Item 1. Business
General
Video Update, Inc. ("Video Update" or the "Company") owns and operates video
specialty stores throughout North America. As of April 30, 1999, the Company
owned and operated 652 stores located in 31 states and five provinces in
Canada and franchised 55 additional video specialty stores predominantly in
the United States. As of April 30, 1999, 485, or approximately 92%, of the
Company's stores in the United States, and 124, or approximately 98% of the
Company's Canadian stores, were superstores, defined as retail video stores
that carry more than 7,500 rental units. The Company believes that, as of the
end of its most recent fiscal year, it is the third largest video specialty
retailer in the United States and the third largest video specialty retailer
in Canada based on the number of superstores it operates. Video Update stores
in the United States and Canada offer on average approximately 11,500 and
9,300 rental units, respectively, including multiple copies of new and popular
movie releases and video games, in a visually appealing and customer friendly
layout.
The Company franchised its first store in January 1983 and opened its first
Company-owned store in September 1989. By July 1994, when the Company
completed its initial public offering, the Company had grown to 15 Company-
owned stores and 30 franchised stores and had developed a cost-effective
superstore format that distinguished the Company from other video retailers by
providing it with the flexibility to expand into desirable sites in both small
and large markets without compromising profitability, or decreasing the number
of viable markets into which it could expand. During fiscal 1998, the Company
rapidly grew in size from 343 to 681 Company-owned stores. During this period,
the Company acquired 267 video stores in its acquisition of Moovies, Inc.,
("Moovies") opened 84 new video superstores and closed 13 stores, including
stores closed related to acquisitions. During fiscal 1999, the Company opened
16 new video superstores and closed 45 stores (see Notes to the Consolidated
Financial Statements: Note 3 "Moovies, Inc. Acquisition" and Note 4 "Provision
for Store Closings and Other Charges" for discussions on 41 planned store
closings as of April 30, 1998). Same store sales during fiscal 1999 increased
by approximately 2%. As a result of the Moovies acquisition, new superstore
openings and increases in same store sales, the Company's revenues increased
from approximately $156,154,000 in fiscal 1998 to approximately $254,096,000
in fiscal 1999.
The Home Video Industry
The home video retail industry has experienced significant growth over the
last several years. According to industry reports, gross rental revenues for
the home video industry in the United States have grown from approximately
$2.6 billion for rentals in 1985 to approximately $8.0 billion for rentals in
1998. Industry reports also show that over 83% of the approximately 99 million
American households owning televisions also owned a VCR and that nearly one
quarter of all Americans make a trip each week to their video store. Industry
reports project that U.S. video rentals will grow to $9.7 billion in 2002 and
that VCR penetration of U.S. television households will exceed 87%. In 1998 a
record number of approximately 18.8 million VCR's were sold in the United
States. Convenience, limited out-of-pocket expense and reliability are all
factors that make video rentals the preferred medium of entertainment for
millions of customers.
According to industry reports, the home video market remains the largest
single source of revenue to movie studios, accounting for approximately 50% of
movie studios' total revenues. Of the many movies produced by major studios
and released in the United States each year, relatively few are profitable for
the studios based on box office revenue alone. In addition to purchasing box
office hits, video specialty stores typically purchase movies on video that
were not as successful at the box office because customers will often rent a
video that they might not view at a theater. The Company believes that the
consumer is more likely to view movies that were not box office hits on a
rented video than on any other medium because video specialty stores provide
an inviting opportunity to browse and make an impulse choice among a very
broad selection of movie titles at a relatively low price. These purchases by
the video stores provide the major movie studios with a reliable source of
revenue for the majority of their movies. In addition, many of the major
studios have entered into revenue-sharing
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arrangements with a few of the larger national chains, such as Video Update.
The Company expects that such revenue-sharing arrangements will allow
retailers to offer a greater quantity of titles to meet consumer demand,
enhancing the interdependent relationship between the studios and the larger
national chains.
The Company believes that the home video industry remains highly fragmented.
The industry has been characterized by significant consolidation and store
closings, with larger regional and national chains of superstores acquiring
smaller chains. In addition, as the regional and national chains grow through
acquisition and new store openings, they gain market share and single store
operators are forced to close. Larger superstore chains easily fill the void
of fewer stores by providing a wider breadth and depth of videos for rent or
sale, superior locations, and cost effective advertising programs along with
promotions to drive consumer traffic. The Company believes this consolidation
trend will continue based on recognition by store operators because of the
competitive advantages that larger organizations enjoy. These advantages
include access to working capital, marketing efficiencies, revenue sharing and
direct purchasing programs with movie studios, other economies of scale and
the enhanced ability to obtain quality retail locations.
The video retail industry historically includes both rentals and sales of
VHS movie cassettes. The consumer market for video movies has primarily been a
rental market and the Company's core business. Movie studios determine the
suggested retail prices of videos and through their pricing decisions,
influence the relative levels of video rentals versus video sales. Videos
released at relatively high prices, typically $60 or more, are generally low
to middle dollar grossing theatrical box office performers, (one million to
$40 million dollars) or direct-to-video productions with no theatrical
release. These releases make up the majority of new product and are purchased
by video retailers, then made available exclusively through video rentals.
Exceptions to the high price rule exist primarily in the genres of children
and family product where the mass appeal acceptance of content make it
attractive for mass merchants to purchase this product, therefore enticing the
movie studios to release it at a lower price (i.e. "A Bugs Life" and "The
Rugrats Movie"). Videos released at relatively low prices, typically $15 to
$30, are generally high grossing theatrical box office performers (over $40
million dollars). These releases are purchased by video retailers for both
sale and rental and may be purchased by consumers at a variety of retail
stores including video retailers, mass merchants, electronic superstores,
grocery and convenience stores. Low priced releases are attractive rentals to
the video retailer because of the relatively few number of rentals required to
recover their cost and provide a favorable return despite the extra sales
competition from other retail channels. Exceptions to the low price rule exist
when content is rated PG-13 or R and mass merchants notify the studios that
they will not purchase the title. This exception is more frequent since a
majority of high grossing theatrical releases are often of the comedy, drama,
action and horror genres that include content of a mature adult theme, making
them unacceptable for sale in the mass merchant environment (i.e. "There's
Something About Mary" and "Saving Private Ryan"). These exceptions are very
favorable to video retailers since the high box office performers initially
are only available for rent.
The Company has recently negotiated direct relationships with several
studios to maximize its rental title depth, while reducing its initial
inventory investment. Revenue sharing partnerships have been established with
several major studios to achieve this objective. Revenue sharing lowers the
initial cost of high priced rental product and shares the revenue of each new
release rented over an approximate six-month period. This process compensates
the studios with a comparable cost per new release copy but only as the
Company generates revenues to offset its initial investment. Low priced rental
and sale products are purchased outright and are not part of the revenue
sharing process. In addition, the Company believes that studios not
participating in revenue sharing programs have reduced initial costs of high
priced new releases to remain competitive and ensure representation on new
release shelves. The Company believes that direct revenue sharing programs are
exclusive to the Company and other major national chains, providing it with a
distinct purchasing advantage over small chains and single storeowners. The
Company believes that small chains and single storeowners do not have
information reporting systems or distribution facilities necessary to
economically participate in direct studio relationships.
The Company believes that its direct relationships with movie studios have
also strengthened its "movies for sale" category. The ability to purchase low
price "for sale" titles direct from the studios at a reduced cost, has allowed
the Company to competitively price product with the mass merchants and
electronic superstores who
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have dominated the sell-through market. The Company believes our increased
"movies for sale" program will increase revenue during the 1999 holiday season
when most movie sales are made for gift giving. In addition, revenue sharing
programs that provide extra copy depth on most new release rentals have added
significant opportunities for the sale of "previously viewed" movies.
Previously viewed movies offer customers the opportunity to purchase their
favorite rental movie at a reduced price and often before it is available at
other stores for sale. Typically, previously viewed movies are an authorized
part of revenue sharing after a specified "no sale" period. Selling previously
viewed movies also assists the Company in recouping the initial investment
made in each revenue sharing agreement. Previously viewed movies had provided
additional revenue in the past, but the Company expects that the added depth
of product purchased through revenue sharing programs will add additional
revenues.
The relatively new technology of DVD movies and a growing interest in video
game technology has presented new opportunities for revenue growth. The
Company expects to expand the presentation of DVD rental sections to over 50%
of the stores by the 1999 holiday quarter. The Company also expects to add a
"DVD's for sale" section to top performing DVD rental locations. The video
game industry is experiencing significant growth and the Company expects that
its stores will increase title depth of best renting video games to support
this trend. Top performing game rental stores are also expected to add a
"games for sale" and "game accessories" section to maximize revenue potential.
The Company intends to support the introduction of the new "Sega Dreamcast"
128 bit game format with rentals of both game hardware and software in
September 1999. The Company also expects the current game industry leading
manufacturers of "Sony Playstation" and "Nintendo 64" (64 bit game formats) to
reduce the cost of their hardware game units to boost consumer interest in
their product through the 1999 holiday season. Both Sony and Nintendo plan to
introduce 128+ bit game hardware and software in the year 2000. The new game
hardware technologies are exciting and provide graphics equal to, or superior
to, arcade games. The Company strongly believes that these new product
introductions will strengthen consumer interest and provide revenue growth
opportunities.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. These distribution channels currently include, in
release date order, movie theaters, video specialty stores, pay-per-view,
basic cable television, and foreign, network and syndicated television. The
Company believes that this method of sequential release has allowed movie
studios to increase their total revenue with relatively little adverse effect
on the revenue derived from previously established channels and that movie
studios will continue the practice of sequential release as new distribution
channels become available. According to industry experts, many movie studios
have recently agreed to extend the length of the exclusive window on many new
release videos for video specialty stores from the prior practice of 30 days
to between 60 and 90 days and longer. According to industry experts, this
window increased an average of five days from 1997 to 1998. The Company
believes that the length of time between the movie theater release date and
the release date to video specialty stores is getting shorter. The Company
believes that studios are also starting to bypass the movie theaters by
releasing high quality and popular movie sequels directly to video specialty
stores.
Operating Strategy
The Company's management has substantial experience in the video retailing
industry. The Company has developed a cost-effective superstore format that
distinguishes the Company from other video retailers by providing it with the
flexibility to expand into desirable sites in both small and large markets
without compromising profitability or decreasing the number of viable markets
into which it can expand. Management's depth of experience in and knowledge of
the industry are reflected in the Company's operating strategy, the key
elements of which include the following:
Provide Extensive Selection of Videocassette Movies and Games. At April 30,
1999, 485, or approximately 92%, of the Company's stores in the United States
and 124, or approximately 98%, of the Company's Canadian stores were
superstores. Superstores are video rental stores that have more than 7,500
rental units. The Company
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believes that an extensive selection of rentals is a key determinant that
consumers consider in choosing to visit and patronize a particular video
store. The Company tailors the movies and games available for rent in a given
store according to the market served by that store. Additionally, catalog
videocassette movies (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, in part
because of its direct revenue sharing relationships with movie studios, the
Company believes that it is able to provide an extensive selection, yet retain
greater flexibility than many of its competitors in terms of store size in
which it can operate.
Effectively Manage Inventories. The Company maintains an integrated point of
sale ("POS") system that provides it with immediate access to and feedback on
records related to, among other things, videocassette movie rentals,
individual title performance, category rental performance, shrinkage and
overdue rentals. The Company endeavors to convert the POS systems of acquired
stores to that of the Company's as quickly as is practicable. The Company
utilizes its POS system to manage its inventory turns, purchase new inventory,
and balance customer demand and rental trends, all of which the Company
believes maximizes each store's profitability.
Aggressive Marketing. The Company uses aggressive marketing programs to
attract new customers and increase the frequency of rentals by current
customers. The Company's long-time 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. In fiscal 1999, the Company
introduced a "new" 7-day rental promotion that has helped bring in new
customers by offering extended viewing periods on slower turning new releases.
Seven-day rentals are available on a majority of the videos in our new release
section. The 7-day rental new releases are determined by copy turns after
approximately a 60-day window of one-day rentals. Another successful program
is the 47-cent catalog rental. This catalog promotion creates multiple
transactions in select stores and is used periodically to promote interest in
catalog movie rentals. "Bundle of Savings" is a holiday package designed to
enhance holiday quarter (November to January) sales. The bundle includes candy
and beverage concessions, new releases, gift certificates and a coupon booklet
with value savings on rentals and products for sale. Gift certificates are
sold year-round with a significant push in the third fiscal quarter.
Geographic Concentration. The Company has locations in 31 states and five
provinces in Canada. For fiscal year 2000, the Company intends to focus on
maximizing the operating efficiencies of these locations and on completing the
build out of new stores in locations for which the Company has signed lease
commitments, rather than on aggressively expanding with new superstores in
additional metropolitan areas where it does not presently have locations. The
Company expects that the geographic concentration of its existing stores
together with acquired stores will allow the Company to more easily monitor
store operations through its regional management offices and to achieve
operating efficiencies in inventory management, marketing, distribution,
training and store supervision. Because the Company operates multiple stores,
it is able to receive relatively large aggregate cooperative advertising
credits from its distributors and direct suppliers. The Company receives
cooperative advertising credits for each store it operates, and by operating
multiple stores in a single geographic market, it can more effectively use
cooperative advertising credits to maximize the impact of its advertising.
Consistency of Image and Operations. The Company strives to create a
national presence and name recognition. To achieve this objective and to most
efficiently and effectively operate its stores, the Company attempts to
maintain consistency among its Company-owned and franchised stores. This
consistency of operations includes signage, store layout, marketing,
management information systems and customer service. The Company attempts to
fully integrate acquired stores into its overall format as quickly as is
practicable. Such integration typically involves the prompt installation of
the management information systems and interior signage, supplementing the
existing base stock of titles, processing acquired videocassettes, training
existing management and sales personnel, and completing limited build-out of
the facilities. Subject to permit requirements and other such regulatory
controls, the Company installs exterior signage as soon as practicable. To
expedite the integration of acquired businesses, the Company has developed a
uniform approach that management believes minimizes the time necessary to
fully assimilate an acquired store's operations into those of the Company.
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Business Strategy
During fiscal 1998, the Company grew in size from 343 to 681 Company-owned
stores, including the acquisition of 267 stores from Moovies, Inc. in March
1998. As of the end of fiscal 1999, the Company owned and operated 652 stores,
including 55 franchised stores. As a result of acquisitions and the previous
rapid growth rate, for fiscal 2000 the Company intends to focus on maximizing
the operating efficiencies of the acquired locations as well as its existing
locations. The key elements of the Company's business strategy include the
following:
Capitalize on revenue-sharing. Revenue-sharing will permit the Company to
cost-effectively stock more copies of new releases than previously. The
Company has initiated marketing programs designed to communicate to consumers
in its trade areas, and especially to members who have exhibited declining
rental frequency, that it is now stocking numerous copies of new releases,
thereby minimizing the likelihood that consumers will not be able to rent
desired new titles. Initial data indicates that implementation of revenue-
sharing and corresponding copy depth improves the likelihood of a consumer
finding an in-stock copy of a desired new release from 35% to over 85%.
Close underperforming stores. The Company has identified approximately 70
underperforming stores that it plans to close during the next 12 months (see
Note 4 of the Notes to Consolidated Financial Statements for more information
on the planned closings).
Increase prices. The Company is instituting rental price increases of new
releases in line with moves by major competitors. The Company believes that
the new pricing structure still provides an excellent value to consumers
considering the increased copy depth and extended day rental programs.
Leverage studio marketing dollars. The sale and rental of home videos
currently provides studios with approximately 50% of their revenues generated
by motion picture entertainment. Following the implementation of revenue-
sharing, studios have a further incentive to encourage video rentals. As a
result, studios are now spending more advertising dollars to promote their
videos by directing customers to visit their local video stores for specific
titles, and are rewarding advertising co-op and market development funds to
chains with revenue-sharing agreements.
Targeted Superstore Development. During fiscal 1999, the Company opened 16
new video superstores and closed 45 stores, including stores closed related to
acquisitions and the business restructuring plan announced in fiscal 1998. The
Company intends to open a limited number of superstores (currently estimated
to be no more than 10 new superstores) in fiscal 2000 in its existing markets
and selected new markets where attractive opportunities are available. The
Company believes that the selection of locations for its superstores has been
and will continue to be important 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. The Company 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.
Targeted Acquisitions. The Company believes that acquiring chains of stores
is often the most cost-effective means of entering a new market, particularly
when the stores are in desirable locations. The Company also believes that the
video rental industry has experienced a recent trend toward consolidation
driven by the recognition by store operators of the competitive advantages
that larger organizations enjoy in terms of access to working capital,
marketing efficiencies and other economies of scale and the enhanced ability
to obtain quality retail locations. This trend has created an opportunity for
the Company to grow further through acquisitions. The Company believes that it
will continue to be presented with attractive acquisition opportunities. The
Company's ability to resume an acquisition growth strategy is dependent upon
its ability to generate cash flow from operations and to raise additional
capital.
Franchise Operations. Franchised superstores operate under substantially the
same hours and methods of operation as Company-owned stores. The Company
currently intends to franchise stores primarily in areas where the Company
does not expect to pursue new superstore development or acquisitions.
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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. The Company's stores use a self-
service system, whereby customers select products from the shelves and proceed
to the checkout counter. Video Update stores in the United States and Canada
average approximately 6,000 and 4,800 square feet in size, respectively.
The Company seeks to locate its stores in geographic areas that will enable
it to achieve operating efficiencies in inventory management, advertising,
marketing, distribution, training and store supervision. The following table
sets forth the locations of existing Company-owned and franchised stores as of
April 30, 1999:
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Number of Number of Total
Company-Owned Franchised Number of
Stores Stores Stores
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<S> <C> <C> <C>
Alaska.................................... 3 -- 3
Arizona................................... 43 -- 43
Colorado.................................. 12 -- 12
Connecticut............................... 3 -- 3
Georgia................................... 36 -- 36
Illinois.................................. 25 -- 25
Indiana................................... 25 -- 25
Iowa...................................... 21 -- 21
Kentucky.................................. -- 20 20
Michigan.................................. 15 -- 15
Minnesota................................. 56 9 65
Missouri.................................. 14 -- 14
Nebraska.................................. 4 -- 4
Nevada.................................... 7 -- 7
New Hampshire............................. -- 8 8
New Jersey................................ 6 -- 6
New Mexico................................ 1 -- 1
New York.................................. 11 -- 11
North Carolina............................ 35 -- 35
Ohio...................................... 30 -- 30
Oklahoma.................................. 7 -- 7
Oregon.................................... 1 -- 1
Pennsylvania.............................. 31 1 32
South Carolina............................ 33 -- 33
South Dakota.............................. 5 -- 5
Tennessee................................. 2 -- 2
Texas..................................... 23 -- 23
Utah...................................... 3 -- 3
Virginia.................................. 27 13 40
Washington................................ 40 -- 40
Wisconsin................................. 6 1 7
Alberta................................... 60 -- 60
British Columbia.......................... 59 3 62
Manitoba.................................. 5 -- 5
Ontario................................... 2 -- 2
Yukon..................................... 1 -- 1
--- --- ---
Total................................... 652 55 707
=== === ===
</TABLE>
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Management Information Systems
The Company believes the accurate and efficient management of purchasing,
inventory and sales records has been important to the Company's success. The
Company maintains information, updated daily, regarding revenue, current and
historical sales and rental activity, demographics of store membership and
videocassette rental patterns. This information can be organized by store, by
region or for all operations.
The Company maintains a national POS system and a corporate information
system. All rental and sales transactions are recorded by the POS system when
scanned at the time of customer checkout. Nightly, the POS system transmits
each store's data from operations into the corporate information system. The
systems track all rental and sales products from the videocassette
distribution center to each store using scanned bar code information. The
systems also maintains the detailed rental history of each customer and title.
This information produces the reports used by the Company, including those
used in making purchasing decisions on new releases. All of the Company's
stores use the Company's POS system when opened or converted to the Video
Update concept, in the case of an acquired store.
Products
Videocassette Rental. The core of the Company's revenue is driven by the
rental of videocassettes. New release one-day video prices generally range
from $2.49-$3.49. New release seven-day prices range from $3.49-$3.99 and
catalog movies rent for $1.49. The Company consistently completes market-
pricing evaluations to maximize transaction revenue. Aggressive price
competition from regional or national competitor chains may reduce new release
prices to $1.99 in some markets and reduce catalog videocassettes to as low as
47 cents. The Company believes that its rental prices are competitive with
those of other video stores, and its videocassettes are available for one-day
and multiple-day rentals to satisfy the shopping habits of all rental
consumers.
The Company's stores generally carry approximately 11,500 and 9,300 videos
for rent in its United States and Canadian stores, respectively, representing
approximately 8,700 and 6,800 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. These
categories are also easily identified by our in-store mask graphic elements.
Each category mask graphic depicts a theatrical expression or element that
bonds the graphic to the category. These graphic elements are used in
promotional and advertising elements and create a unique brand identity for
the Company's stores.
Video Games. In addition to the videocassette rentals, stores also rent
video games for use with "Sony Playstation" and "Nintendo 64". A new line,
"Sega Dreamcast," will be introduced in September 1999. A "game store" within
the store itself is being developed as a test to further develop and maximize
the growing game market. The concept is expected to include an expanded
selection of games for rent and sale, game decks, game accessories, and a used
"Buy, Sell and Trade" program.
Additional Products. DVD for rental and sell-through is expected to be
represented in over 50% of our stores by the end of 1999. Candy, popcorn and
beverage concessions are sold internationally and prominently displayed by the
service counter with impulse messaging. Concession add-on sales are assisting
the Company to increase our average dollars per customer transaction. Test
programs on magazines and related accessories items are ongoing. Once the test
proves effective, the programs are then rolled out on a national level backed
with advertising.
Franchise Operations
The Company 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 the Company a continuing monthly royalty fee equal to five percent of
the franchisee's gross monthly rental revenue, as
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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 are also required to pay a monthly advertising
fee equal to one percent of the franchisee's gross monthly revenue for the
preceding month.
Under the Company's current franchising program, the Company will grant to a
franchise owner the right to develop one or a specified number of Video Update
superstores at an approved location or future locations (within specific
geographic areas) pursuant to the terms of a franchise agreement. The
exclusivity accorded to a franchisee is individually negotiated but generally
does not extend beyond a radius of one mile from the franchised location.
Prior to the actual store opening, the Company provides advice to the
franchisee on promotions, store displays and inventory control as well as a
comprehensive five day training course.
The Company monitors franchisees' compliance with ongoing obligations on the
basis of monthly revenue reports and inventory reports. The franchise
agreement generally also grants the Company the right to audit the
franchisee's books, business records, sales reports, financial statements, and
tax returns at any time. The franchise agreement allows the Company to
terminate the franchise under certain conditions, including without
limitation, failure to comply with the Company's operating guidelines, failure
to obtain and maintain the necessary retail licenses and permits, operation of
a competitive venture, and understatement of gross monthly revenues for any
two operating periods by more than two percent. To date, the Company has
experienced no material problems it is aware of relating to the understatement
of revenues by franchisees.
Marketing and Advertising
The Company promotes new titles and promotions primarily through the use of
radio, TV and direct mail. Radio campaigns are enhanced by on-air, store
location or cross-promotions. A loyalty/reward direct mail campaign is used to
solidify our customer base. During the holiday quarter (November to January)
TV advertising enhances the business for both rental and sell-through.
Cooperative movie advertising made available by studios or suppliers to
promote certain videocassettes generally funds the cost of these campaigns.
The in-house magazine, Entertainment Magazine, is published monthly. The
magazine identifies the upcoming new releases, new games, sell-through titles
and current marketing programs. This newly enhanced glossy magazine ties in
the new store graphic elements, reinforcing the Company's identity. The in-
store trailer tape played on several monitors reinforces the Company's
quarterly promotions between professionally produced movie trailers.
Suppliers
The Company acquires its inventory of videocassettes and video games and
accessories from several videocassette studios and distribution divisions of
Ingram Entertainment Inc. ("Ingram") and Video One Canada Ltd. ("Video One").
The videocassette inventory in each Company-owned and franchised store
consists of catalog titles and new release titles. To develop its inventory of
titles for store openings, the Company transfers videocassettes from existing
stores and purchases videocassettes from suppliers.
The Company currently purchases new release rental videocassettes at an
average cost of approximately $45. The Company believes that, if its
relationship with Ingram or Video One were terminated, the Company could
obtain videocassettes direct from most suppliers at prices and terms
comparable to those available from such entities.
Suppliers generally provide the Company with a comprehensive monthly listing
of all new video releases. In addition, movie studios generally provide the
Company with several copies of a new release video for preview by the Company.
The Company's movie selection committee uses listings of new releases, video
previews,
8
<PAGE>
knowledge of the popularity of past video releases and the Company's
computerized information on the past performance of titles rented by the
Company to select the titles and number of copies of each title to be acquired
for rental in each of its stores. The Company is permitted to return unopened
or defective videocassettes to its suppliers in certain circumstances. The
Company purchases video game software from a variety of distributors, based on
price and availability.
In addition to traditional inventory purchasing, in fiscal 1999, the Company
entered into direct license revenue-sharing agreements with several major
motion picture studios. Under the terms of the agreements, the Company will
share the greater of an agreed-upon percentage of the rental revenue or dollar
amount per rental transaction, which percentage declines over a period of
weeks following the release of the title for video rental. Some agreements
include a nominal up front fee for units purchased or a specified guarantee
amount. The Company is aggressively pursuing additional direct licensing
revenue-sharing agreements with other studios, although no assurances can be
given that such agreements will be obtained.
The Company believes that such revenue-sharing agreements will be a cost-
effective source for larger orders of an individual title, particularly new
release titles. Such agreements will enable the Company to order larger
quantities, two to five times the normal order, of copies of a particular
title to satisfy customer demand than could be cost-effective if the copies
were purchased for rental. To obtain the full benefits of such revenue sharing
agreements, the Company must correctly identify the new release and other
titles that it should offer on this basis. No assurances can be given that the
Company will be able to use such revenue sharing agreements to obtain the
intended results.
The Company also is a party to an agreement with Rentrak Corporation (the
"Rentrak Agreement"), a distributor of prerecorded videocassettes and other
media, which agreement superseded in all substantial respects a previous
agreement between Rentrak and recently acquired Moovies, Inc. The Rentrak
Agreement includes a requirement that the Company obtain a minimum annual
dollar amount of new release titles from Rentrak. The minimum dollar amount is
subject to increase or decrease depending on the Company's gross revenues from
video rental/sales and the number of major studios participating in Rentrak.
In addition, under the Rentrak Agreement the Company is allowed to 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.
In August 1998, the Company filed suit in federal court in Delaware against
Rentrak, alleging that the Rentrak Agreement is in conflict with federal
antitrust law, given Rentrak's position in the market and its exercise of
monopoly power. Although the Company's claim is not pursuant to or arising
from the Rentrak Agreement, a resolution of the action may affect some or all
of the provisions of the agreement as well as similar agreements in the video
industry or may leave the agreement unaffected. The Company has not ordered
any titles from Rentrak under the agreement or otherwise. Further, the court
in the action may determine that some or all of any monies paid to Rentrak
under the Rentrak Agreement are subject to offset or recoupment (see "Item 3-
Legal Proceedings").
Inventory
New release videocassettes are ordered by the Company and delivered directly
to stores where they are offered for rental or sale on the studio release date
for the title. Previously viewed inventory for existing and new stores is
received, processed and stored in the Company's approximately 34,000 square
foot central distribution facility located in St. Paul, Minnesota. New release
and previously viewed videocassettes and games are processed for rental
according to uniform companywide 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.
9
<PAGE>
Competition
The video rental industry is highly competitive. The Company competes with
other video retail stores, including Blockbuster, Inc., a subsidiary 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, the Company competes with other leisure-time activities,
especially entertainment activities such as movie theaters, sporting events,
network television and cable television.
The Company also competes with other distribution channels for studio
movies, including pay-per-view television on basic cable service, which
currently offer only a limited number of channels and monthly movie
selections. Recently developed digital compression technology combined with
fiber optics and other technology will eventually permit cable companies,
direct broadcast satellite companies and other telecommunications companies to
transmit a much greater number of movies to homes at scheduled intervals
throughout the day. Ultimately, these technologies could lead to the
availability of movies on demand to the consumer. Certain cable and other
telecommunications companies have tested and are continuing to test movie-on-
demand services in some markets.
The Company and its larger competitors, including Blockbuster, have entered
into direct revenue-sharing arrangements with several major motion picture
studios. Such arrangements could allow these competitors to order and stock a
greater number of new release and other titles, thus increasing competition in
those areas in which each of the Company and its competitors have retail
locations and diminishing the potential benefits of similar revenue sharing
arrangements entered into by the Company, which could have a material adverse
effect on operations. In addition, certain of the Company's larger, better
capitalized competitors may seek to acquire some of the same video specialty
stores that the Company seeks to acquire. Such competition for acquisitions
would likely increase acquisition prices and related costs and result in fewer
attractive acquisition opportunities, which could have a material adverse
effect on the Company's growth.
The Company's franchise operations compete with numerous franchise
operations in many industries that have significantly greater financial and
human resources and more experience in selling franchises than does the
Company. Potential franchisees may believe that these franchisers offer
greater opportunities for success than the Company.
Service Marks
The Company has a federal registration for its service mark "Video
Update(R)" and logos that include its service mark. The Company also holds
registrations in Canada for its service marks and logos. The Company considers
its service marks to be important to its business and intends to actively
protect them.
Government Regulation
The Company is subject to various federal, state and local laws, including
the Federal Videotape Privacy Protection Act and similar state laws that
govern the disclosure and destruction of video rental records. The Company
also must comply with various regulations affecting its business, including
state and local licensing, zoning, land use, construction and environmental
regulations.
The Company has not made, nor does it anticipate making, any material
capital expenditures in order to comply with environmental regulations. No
assurance can be given, however, that new environmental regulations will not
be adopted that will require the Company to make material capital expenditures
for compliance.
The Company also is subject to the Federal Trade Commission's Trade
Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures" (the "FTC Franchise Rule") and
state laws and regulations that govern the offer and sale of franchises. To
offer and sell franchises, the Company is required by the FTC Franchise Rule
to furnish each prospective franchisee a
10
<PAGE>
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, the Company intends to maintain a franchise
offering circular that complies with all applicable federal and state
franchise sales laws. However, if the Company is unable to comply with the
franchise sales laws and regulations of any state that regulates the offer and
sales of franchises, the Company will be unable to offer and sell franchises
in such state.
The Company is required to update its franchise offering circular to reflect
material changes, under applicable law, regarding its franchise offering and
to comply with changes in disclosure requirements. The occurrence of any such
material changes may, from time to time, require the Company to stop offering
and selling franchises until its franchise offering circular is updated. No
assurance can be given that the Company's franchising program will not be
adversely affected by its failure to register or file in certain states
consistent with its expansion plans, or because compliance with applicable law
necessitates that the Company cease offering and selling franchises in certain
states until its franchise offering circular is updated, or because of its
inability to comply with existing or future franchise laws.
The Company also is subject to a number of state laws and regulations that
regulate certain substantive aspects of the franchisor-franchisee
relationship, including those governing the termination or nonrenewal of a
franchise agreement (such as requirements that "good cause" exist as a basis
for such termination and that a franchisee be given advance notice of, and a
right to cure, a default prior to termination), requirements that the
franchisor deal with its franchisees in good faith, prohibitions against
interference with the right of free association among franchisees and those
regulating discrimination among franchisees in charges, royalties or fees.
Compliance with federal and state franchise laws is costly and time
consuming, and no assurance can be given that the Company will not encounter
difficulties or delays in this area or that it will not require significant
capital for franchising activities.
Employees
As of April 30, 1999, the Company employed 6,671 persons, including 6,487 in
Company-owned stores and 184 in the Company's corporate, administrative and
warehousing operations. Of the employees, approximately 986 were full-time and
5,685 were part-time. The typical required staffing for a Video Update store
is 9 to 11 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 the Company's Vice Presidents of Store Operations
who in turn report to the Executive Vice President of Store Operations or the
Chief Operations Officer. The Company believes that its employee relations are
satisfactory.
The Company has an incentive bonus plan under which store managers are
eligible for monthly bonuses. The performance of each manager is evaluated on
a variety of criteria, including store revenue, payroll, cash overages and
shortages and inventory control.
Item 2. Properties
The Company leases substantially all of the sites (including buildings and
improvements) where its Company-owned video stores are located. The occupancy
expense for these sites for the years ended April 30, 1997, 1998 and 1999 was
approximately $20,777,000, $39,156,000 and $65,434,000, respectively. These
leases generally have a term of three to ten years and provide options to
renew for periods ranging from three to five additional years. The Company is
generally responsible for real estate taxes, insurance and utilities under all
leases (see Note 9 of the Notes to Consolidated Financial Statements "Lease
Agreements"). The Company expects that most future video superstores will also
occupy leased premises. The Company owns three locations
11
<PAGE>
for Company-owned superstores, one of which is subject to a mortgage, (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources").
The Company's franchisees enter into leases individually for their
respective superstore locations. These leases are on terms substantially
similar to the terms for Company-owned superstore leases. Generally, the
Company does not guarantee and is not a party to such leases.
The Company's corporate headquarters are located at 3100 World Trade Center,
30 East Seventh Street, St. Paul, Minnesota 55101 and consist of approximately
38,000 square feet of office space. The Company's central distribution
facility is located at a different location in St. Paul, Minnesota and
consists of approximately 34,000 square feet. The Company's headquarters and
distribution facilities are leased pursuant to agreements that expire on
October 31, 2001 and August 31, 2001, respectively. In addition, the Company
maintains other locations for the offices of district and regional managers
and for limited storage purposes. The Company expects that suitable additional
space will be available in the Twin Cities area, when needed, on commercially
reasonable terms.
Item 3. Legal Proceedings
In connection with the acquisition of the assets of Videoland, Inc.
("Videoland") in November 1995, the Company issued 239,163 shares of its Class
A Common Stock (the "Videoland Shares") to the sellers of the assets of
Videoland (the "Videoland Sellers"). With respect to the Videoland Shares, the
Company agreed to make a deficiency payment in October 1996 to the Videoland
Sellers if the gross proceeds received by such sellers from the sale of the
Videoland Shares during the six months from March 1996 through September 1996
are 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. The Company initiated
an action in federal district court in Minnesota for a declaratory judgment
that the Videoland Sellers are not entitled to any deficiency payment in light
of the failure by such sellers to comply with the lockup or sale restrictions.
In January 1998, the court entered a judgment against Video Update in the
amount of $1,220,403 plus interest from October 1996, and attorney's fees. The
Eighth Circuit recently denied the Company's appeal. The Company is exploring
further avenues of relief. The foregoing description is qualified in its
entirety by reference to the full text of the complaint and papers on file in
the action (Case No. 3-96 735).
In May 1998, Rousnam Video, Inc., a Michigan corporation and Hani (Al)
Monsour (collectively "Monsour") filed a lawsuit in state court (Macomb
County, Michigan) claiming amounts due pursuant to post-closing adjustments
contemplated in connection with an Asset Purchase Agreement among Monsour and
Moovies, Inc. dated as of March 14, 1997, and the alleged default on a
Promissory Note among Monsour and Moovies, Inc. in the amount of $2,000,000
which is currently reflected in notes payable. The trial court has ruled in
favor of the plaintiffs on a motion for summary judgment, and a judgment for
$2,370,195 has been entered against the Company. The Company believes it has
meritorious grounds for its appeal which is currently pending, although
assurances cannot be given as to the outcome of such action. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action (Case No. 98-1998-CK).
In May 1998, four stockholders filed suit in the US District Court for the
Central District of California. The plaintiff stockholders allege that Mr.
Potter and the Company made false and misleading statements or omitted
material information about the Company and the video industry during the
period April 1995 to September 1996, the date of its subsequent public
offering. Plaintiffs are seeking "at least the sum of $967,967," plus
interest, additional damages and attorneys' fees. The Company and Mr. Potter
believe that the claims are unsubstantiated, without merit and they intend to
defend the matter vigorously. A motion to dismiss the First Amended Complaint
was granted, but the court allowed Plaintiffs to re-file. At present, the
Second Amended Complaint has been filed. The Company is in the process of
discovery, which is not scheduled to close until December 1999. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action (Case No. SACV 98-415 GLT-ANx).
12
<PAGE>
In August 1998, the Company filed suit in federal court in Oregon against
Rentrak Corporation, an Oregon Corporation. The Company alleges that Rentrak
has violated the federal antitrust law, given Rentrak's position in the market
and its exercise of monopoly power. Rentrak has counter-claimed for amounts it
alleges were owed by Moovies, Inc. prior to the acquisition of Moovies, Inc.
by the Company; the Company has denied that any sums are due. Discovery in the
matter is now scheduled to be completed in December 1999. The Company intends
to pursue its claims aggressively, although assurances cannot be given as to
the outcome of this matter. The foregoing description is qualified in its
entirety by reference to the full text of the complaint and papers on file in
the action (Case No. CV 98-1013-HA).
On June 20, 1999, Allen Industries, Inc., a North Carolina corporation,
filed a lawsuit against the Company claiming approximately $3 million in
unpaid invoices arising out of the conversion of various Moovies stores. The
Company has asserted that Allen Industries breached its contract and performed
defective work. The Company believes that the claims of Allen Industries are
unsubstantiated and without merit. The Company intends to defend the matter
vigorously. The foregoing description is qualified in its entirety by
reference to the full text of the complaint and papers on file in the action
(Case No. 1:99CV640).
On April 12, 1999, Sight and Sound Distributors, Inc., a Delaware
corporation, filed a lawsuit in state court (St. Louis County, Missouri)
alleging that the Company owes approximately $7.7 million for goods and
services purchased from Sight & Sound. The Company filed its answer denying
liability and alleging entitlements to off-sets. The Company is in the process
of discovery. A required settlement conference has been scheduled for December
20, 1999. The foregoing description is qualified in its entirety by reference
to the full text of the complaint and papers on file in the action (Case No.
99CC-001222).
In addition to the above, 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") on April
26, 1999, at the offices of the Company, 3100 World Trade Center, 30 East
Seventh Street, St. Paul, Minnesota to consider and vote upon the following
proposals, each of which is more particularly described in the Company's Proxy
Statement filed with the Commission on March 31, 1999.
1. The election of six (6) members of the Company's Board of Directors (the
"Board of Directors Proposal"); and
2. The ratification of the selection of Deloitte & Touche LLP as independent
auditors for the Company for the fiscal year ending April 30, 1999 (the
"Auditors Proposal").
The results of the voting for each of the foregoing proposals at the Meeting
were as follows:
1.The Board of Directors Proposal:
Daniel A. Potter
23,231,393 VOTES FOR
797,281 WITHELD AUTHORITY
John M. Bedard
23,249,345 VOTES FOR
779,329 WITHELD AUTHORITY
13
<PAGE>
Daniel C. Howard
23,250,270 VOTES FOR
778,404 WITHELD AUTHORITY
Paul M. Kelnberger
23,249,570 VOTES FOR
779,104 WITHELD AUTHORITY
Bernard R. Patriacca
23,249,770 VOTES FOR
778,904 WITHELD AUTHORITY
Theodore J. Coburn
23,250,170 VOTES FOR
778,504 WITHELD AUTHORITY
Accordingly, each of the above-referenced six persons was elected as a member
of the Board of Directors.
2.The Auditors Proposal:
23,860,016 VOTES FOR
109,933 VOTES AGAINST 58,725 ABSTAINING
Accordingly, approval was given for this proposal.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Matters
From May 1, 1995 until May 7, 1995, the Company's Class A Common Stock was
traded on the NASDAQ Small Cap Market. From May 8, 1995 to date, the Company's
Class A Common Stock has traded on the NASDAQ National Market System under the
symbol "VUPDA." The Company's Class A Common Stock began trading on NASDAQ on
July 20, 1994. On April 30, 1999, the closing price for the Class A Common
Stock as reported by NASDAQ was $0.7188 per share.
The Company has been notified by the NASDAQ National Market that its Class A
Common Stock is subject to delisting based on the Company's failure to meet
certain maintenance criteria including minimum bid price requirements. The
Company has provided information to NASDAQ as it makes its decision in this
matter. For continued listing, the Company will have to demonstrate to the
satisfaction of NASDAQ that it can regain compliance with these particular
deficiencies and maintain long term compliance with all applicable maintenance
criteria. The Company presented its plan for continued compliance, which
includes provisions for a possible reverse stock split of the Company's Class
A Common Stock. The NASDAQ decision on delisting will be rendered after
consideration of the entire record presented by the Company. Their decision
may be entered and effected immediately. No assurances can be given that there
will be a favorable NASDAQ ruling, nor that the Company will be in compliance
with other NASDAQ National Listing requirements or that its Class A Common
Stock will continue to be listed on NASDAQ National Market. In the event of
any delisting, the Company expects that its Class A Common Stock would
immediately be eligible to trade on NASDAQ's OTCBB ("Over-the-Counter Bulletin
Board").
For the period indicated, the following table sets forth the range of high
and low sale prices for the Class A Common Stock as reported on the NASDAQ
National Market System.
Class A Common Stock
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
Fiscal 1998
Quarter ended July 31, 1997.............................. $5 5/16 $3 3/8
Quarter ended October 31, 1997........................... 3 7/8 2 5/8
Quarter ended January 31, 1998........................... 3 1/4 1 11/16
Quarter ended April 30, 1998............................. 3 5/8 2 1/16
Fiscal 1999
Quarter ended July 31, 1998.............................. 2 31/32 1 3/32
Quarter ended October 31, 1998........................... 1 3/8 5/8
Quarter ended January 31, 1999........................... 1 31/32 1/2
Quarter ended April 30, 1999............................. 1 11/16 17/32
</TABLE>
As of April 30, 1999, there were 341 stockholders of record of the Company's
Class A Common Stock.
During the fiscal year ended April 30, 1999, the Company did not pay any
dividends on its Common Stock and management does not anticipate the payment
of any dividends to its stockholders in the foreseeable future. The Company
currently intends to reinvest earnings, if any, in the development and
expansion of its business. The declaration of dividends in the future will be
at the discretion of the Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, general economic
conditions and other pertinent factors, including covenants relating to bank
indebtedness.
15
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
------------------------------------------------------------------
1994 1995 1996(1) 1997 1998(2) 1999(3)
------- --------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 4,989 $ 9,051 $ 50,504 $ 91,799 $ 156,154 $ 254,096
Income (loss) from
continuing
operations............. $ 301 $ 213 $ 1,628 $ 4,620 $ (14,480) $ (110,371)
Income (loss) per share
from continuing
operations, diluted.... $ 0.33 $ 0.10 $ 0.15 $ 0.28 $ (0.71) $ (3.77)
Weighted average
shares(4).............. 904,000 2,226,000 10,663,000 16,262,000 20,412,000 29,278,000
Operating Data:
Increase in same store
sales(5)............... 26% 21% 16% 5% 2% 2%
Number of stores open at
end of period:
Company-owned......... 15 33 204 343 681 652
Franchised............ 31 22 25 30 72 55
------- --------- ---------- ---------- ---------- ----------
46 55 229 373 753 707
======= ========= ========== ========== ========== ==========
Number of Company-owned
stores:
Opened during the
period............... 2 4 35 65 84 16
Acquired during the
period............... -- 14 136 74 267 --
Closed during the
period............... -- -- -- -- 13 45
Balance Sheet Data:
Total assets............ $ 3,489 $ 19,450 $ 79,518 $ 133,607 $ 278,431 $ 207,208
Notes payable........... $ 1,568 $ 1,278 $ 4,859 $ 20,564 $ 104,488 $ 116,014
Total liabilities....... $ 2,614 $ 4,279 $ 18,018 $ 42,615 $ 169,132 $ 210,303
Stockholders' equity.... $ 875 $ 15,171 $ 61,500 $ 90,992 $ 109,299 $ (3,095)
</TABLE>
- --------
(1) During the fourth quarter of fiscal 1996, the Company adopted a new method
of amortizing videocassette rental inventory. The effect of the change for
recognizing salvage value of base stock and the effect of the application
of the new method of amortizing videocassette copies in excess of the base
stock to May 1, 1995 had the impact, in total, of increasing amortization
expense by $2,773,000 and decreasing net income by $1,604,000, or $.15 per
share, in fiscal 1996. See Note 2 of the Notes to Consolidated Financial
Statements.
(2) During the fourth quarter of fiscal 1998, the Company took significant
one-time charges of approximately $17 million. Exclusive of the one-time
charges, the net loss would have been $2,701,000 or $0.11 per share.
(3) During the fourth quarter of fiscal 1999, the Company took significant
one-time charges of approximately $16 million (see Note 4 of the Notes to
the Consolidated Financial Statements) related to additional store
closings and $51 million (see Note 2 of the Notes to Consolidated
Financial Statements) related to a change in amortization method for Video
and Game Rental Inventory. Exclusive of the one-time charges, the net loss
would have been $43,607,000 or $1.49 per share.
(4) See Note 1 of the Notes to Consolidated Financial Statements for
calculation of weighted average shares for fiscal 1997, 1998 and 1999.
(5) The stores included in same store sales are Company-owned stores that have
been owned and operated by the Company for more than 12 months.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere
herein.
Overview
The Company franchised its first store in January 1983 and opened its first
company-owned store in September 1989. By July 1994, when the Company
completed its initial public offering, the Company had grown to 15 Company-
owned stores and 30 franchised stores. Subsequently, the Company accelerated
its growth and as of April 30, 1999, operates 652 Company-owned stores in 31
states and five provinces in Canada, and has 55 franchised stores
predominantly in the United States.
In March 1998, The Company acquired Moovies, Inc., and its 267 video retail
stores. As a result of the acquisition, the results of operations for the year
ended April 30, 1999 were reduced by an increase in amortization of goodwill
of approximately $2,118,000 (see "Significant Future Charges to Earnings
Arising from Amortization of Goodwill" following "Liquidity and Capital
Resources" in Item 7 hereof). The Company anticipates that future acquisitions
could involve the recording of additional significant amounts of goodwill and
deferred charges on its balance sheet.
In December 1998, the Company's Board of Directors approved a resolution
changing the Company's fiscal year-end from April 30 to January 31, effective
January 31, 2000.
The Company generates revenues primarily from the rental of videocassettes
and video games, from the sale of products, and from service fees from its
franchisees. As reflected in the chart below, rental revenues at Video Update
stores have accounted for the substantial majority of the Company's revenues.
The Company expects that this trend will continue.
<TABLE>
<CAPTION>
Fiscal Year Ended April
30,
-------------------------
1997 1998 1999
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenues:
Rental revenue................................... $83,489 $138,279 $221,238
Product sales.................................... 7,743 17,075 31,915
Service fees..................................... 567 800 943
------- -------- --------
Total revenues................................. $91,799 $156,154 $254,096
======= ======== ========
</TABLE>
Overall revenues, including same store sales, did not meet management's
expectations for fiscal 1999, due in significant part to certain factors,
including: (i) Moovies locations not performing to management's expectations
for the year, being due in large part to a drop in customer traffic as Moovies
locations were converted to the Video Update format; and (ii) the timing
advantage afforded by direct studio revenue sharing arrangements obtained by
some of the Company's largest competitors, including Blockbuster.
Management is continuing several actions intended to enhance prospects for
profitable revenue growth for fiscal 2000. The Company successfully converted
all Moovies stores by November 30, 1998. During the 12 months ending April 30,
1999, the Company opened 16 new stores, closed 45 under-performing stores and
performed significant conversions on several other stores. During the fourth
quarter of 1999, the Company began and completed an extensive analysis of each
store's performance and adopted a business restructuring plan to close
approximately 70 of its stores. The Company is now obtaining inventory under
several revenue sharing arrangements with motion picture studios and is
pursuing additional direct revenue sharing arrangements with other studios.
17
<PAGE>
Operating Results
The table below sets forth the percentage of revenues represented by certain
items included in the Company's statement of operations for the periods
indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
--------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Rental revenue.......................... 91.0% 88.6% 87.1%
Product sales........................... 8.4 10.9 12.6
Service fees............................ 0.6 0.5 0.3
--------- --------- ---------
Total revenues........................ 100.0 100.0 100.0
--------- --------- ---------
Costs and expenses:
Store operating expenses................ 76.5 83.2 91.4
Selling, general and administrative..... 8.6 16.2 10.3
Cost of product sales................... 4.0 6.3 8.0
Store closing charge.................... -- 3.2 5.8
Inventory valuation charge.............. -- -- 19.9
Amortization of goodwill................ 1.8 1.5 1.8
--------- --------- ---------
Total costs and expenses.............. 90.9 110.4 137.2
--------- --------- ---------
Operating income (loss)................... 9.1 (10.4) (37.2)
Other income (expense)
Interest expense........................ (0.9) (2.8) (5.4)
Other income............................ 0.5 0.0 0.3
--------- --------- ---------
Total other expense................... (0.4) (2.8) (5.1)
--------- --------- ---------
Income (loss) before income taxes......... 8.7 (13.2) (42.3)
Income tax expense (benefit).............. 3.7 (3.9) 1.1
--------- --------- ---------
Net income (loss)......................... 5.0% (9.3)% (43.4)%
========= ========= =========
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Rental revenue. Rental revenue was approximately $221,238,000 and
$138,279,000, or 87.1% and 88.6% of total revenues for fiscal 1999 and 1998,
respectively. The increase in rental revenue of $82,959,000 was derived
primarily from the 267 video stores acquired from Moovies in March 1998 and a
2% increase in same store revenues at the Video Update locations. Rental
revenues did not meet management's expectations for the 12 months ended April
30, 1999, primarily due to the conversion of the Moovies locations in several
significant markets, which was completed during the third fiscal quarter, as
well as the simultaneous impact during the period of revenue sharing
arrangements and copy title depth obtained by competitors in markets where the
Company's stores are located. Management expects that future results will be
positively impacted by the operation of all of the now fully converted Moovies
locations. In addition, the Company is now obtaining additional videocassette
product under several direct revenue sharing arrangements with motion picture
studios, allowing it to better compete with larger competitors at a time when
all of its Company-owned locations are now operating under the Video Update
name and operating system.
Product sales. Product sales were approximately $31,915,000 and $17,075,000,
or 12.6% and 10.9% of total revenues for fiscal 1999 and 1998, respectively.
The increase in product sales of $14,840,000 was primarily a result of product
sales by the Moovies video stores acquired in March 1998 and from the sale of
videocassettes of the movie "Titanic." The increase as a percentage of total
revenues was primarily due to a difference in product mix and high Titanic
video sales.
18
<PAGE>
Service fees. Service fees were approximately $943,000 and $800,000, or 0.3%
and 0.5% of total revenues for fiscal 1999 and 1998, respectively. Continuing
service fees and royalties from franchisees account for 95% of total service
fees from fiscal 1999 and 1998. The increase in service fees of $143,000 was
primarily a result of franchises acquired with the Moovies acquisition in
March 1998.
Store operating expenses. Store operating expenses consist primarily of
compensation and related expenses, occupancy expenses, and the cost of rental
tapes and video games. Operating expenses were approximately $232,287,000 and
$129,920,000, or 91.4% and 83.2% of total revenues for fiscal 1999 and 1998,
respectively. Store operating expenses do not include a one-time charge to
change the amortization policy for rental inventory (see Note 2 "Change in
Amortization Method for Video and Game Rental Inventory" to the Consolidated
Financial Statements). The increase in store operating expenses of
$102,367,000 was primarily the result of the Moovies video stores acquired in
March 1998. The increase in store operating expenses as a percentage of total
revenues was primarily due to: (i) a sales shortfall arising from the timing
advantage of revenue sharing arrangements and copy title depth obtained by
competitors in the markets where the Company's stores were located; (ii)
revenues of a significant number of acquired Moovies locations not performing
to management's expectations; and (iii) corresponding higher costs of new
video stores prior to revenue reaching maturity during the first two years of
operations. Store operating expenses consist of the following (in 000's):
<TABLE>
<CAPTION>
Twelve Months Ended April 30, Percent of Revenue
------------------------------- ----------------------
1997 1998 1999 1997 1998 1999
--------- ---------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cost of rental revenue.. $ 20,317 $ 38,689 $ 76,044 22.1% 24.8% 29.9%
Occupancy expenses...... 22,355 41,596 71,436 24.4% 26.6% 28.1%
Compensation and related
benefits............... 20,278 38,424 60,055 22.1% 24.6% 23.6%
Furniture, fixtures, and
equipment expenses..... 3,960 6,313 13,777 4.3% 4.1% 5.5%
Other store operating
expenses............... 3,295 4,898 10,975 3.6% 3.1% 4.3%
--------- ---------- ---------- ------ ------ ------
Total store operating
expenses............. $ 70,205 $ 129,920 $ 232,287 76.5% 83.2% 91.4%
========= ========== ========== ====== ====== ======
</TABLE>
Cost of rental revenue was approximately $76,044,000 and $38,689,000, or
29.9% and 24.8% of total revenues for fiscal 1999 and 1998, respectively. Cost
of rental revenue reflects the amortization of videocassettes and video games,
revenue sharing expenses, and fees paid to videocassette and video game
suppliers. The increase of $37,355,000 was primarily attributable to the
addition of new release videocassette inventory for new, existing, and the
acquired Moovies locations. Cost of rental revenue as a percentage of revenues
for future periods may vary based on the Company's purchase of videocassette
inventory and revenue sharing arrangements. These costs are subject to change
based on the Company's rate of expansion, studio pricing, minimum buy
requirements, studio release schedules and market demand.
Occupancy expenses were approximately $71,436,000 and $41,596,000, or 28.1%
and 26.6% of total revenues for fiscal 1999 and 1998, respectively. The
increase of approximately $29,840,000 was primarily due to the Moovies
locations acquired in March 1998. The increase as a percentage of total
revenues was primarily due to revenues of a significant number of acquired
Moovies locations not performing to management's expectations.
Compensation and related benefits were approximately $60,055,000 and
$38,424,000, or 23.6% and 24.6% of total revenues for fiscal 1999 and 1998,
respectively. The increase of approximately $21,631,000 was primarily due to
the Moovies locations acquired in March 1998.
Selling, general and administrative. Selling, general and administrative
expenses were approximately $26,179,000 and $25,223,000, or 10.3% and 16.2% of
total revenues for fiscal 1999 and 1998, respectively. During the fourth
quarter of fiscal 1998, the Company recorded the following: (i) a $3,546,000
non-cash, non-tax deductible charge to compensation expense related to the
release of 1,170,000 shares of Class B common stock from escrow (see Note 12
"Stockholders' Equity" of the Notes to Consolidated Financial Statements);
(ii) a $7,161,000 charge consisting of a $3,236,000 non-cash charge relating
to the restated employment agreements
19
<PAGE>
for the Company's Chief Executive Officer and its President, representing
amounts to be applied to their existing stock option related loan obligations,
and $3,925,000 to be used by the executives primarily to pay income taxes
arising from the stock option related transaction; and (iii) $700,000 for
previously capitalized bank fees related to the Company's previous Revolving
Credit Facility which was repaid prior to its maturity. After giving
consideration to these items, expenses were $26,179,000 and $13,816,000, or
10.3% and 8.8% of total revenues for fiscal 1999 and 1998, respectively. The
increase of $12,363,000 was primarily due to (i) additional finance and
information systems personnel and related expenses to support the Company's
growth; (ii) outside legal and accounting fees; (iii) upgraded computer and
phone systems; and (iv) bank service fees related to additional locations. The
increase in selling, general and administrative expenses as a percent of total
revenue was primarily due to (i) higher than expected costs incurred to
integrate the Moovies locations; and (ii) sales shortfalls at Moovies
locations as they were converted to the Video Update format.
Cost of product sales. Cost of product sales was approximately $20,257,000
and $9,809,000, or 8.0% and 6.3% of total revenues for fiscal 1999 and 1998,
respectively. The cost of product sales as a percentage of total product sales
revenue was approximately 63.5% and 57.4% for fiscal 1999 and 1998,
respectively. The increase in the cost of product sales as a percentage of
product sales was primarily due to the sale of the "Titanic" video which was
sold at a low margin due to industry competition.
Store Closing Charge. During the fourth quarter of 1999, the Company began
and completed an extensive analysis of its base store performance and adopted
a business restructuring plan to close approximately 70 under- performing
stores. This analysis resulted in the Company recording a pretax charge of
approximately $16,135,000 to cover lease termination charges, closing costs
and asset write-downs for those stores. During the fourth quarter of fiscal
1998, the Company recorded a store closing reserve of approximately $5,082,000
of which approximately $1,337,000 was reversed in fiscal 1999 due to
successful negotiation of lease terminations (see Note 4 of the Notes to
Consolidated Financial Statements).
Amortization of goodwill. Amortization of goodwill was approximately
$4,471,000 and $2,353,000 for fiscal 1999 and 1998, respectively. The increase
was primarily attributable to the acquisition of Moovies in March 1998.
Interest expense. Interest expense was approximately $13,695,000 and
$4,292,000 or 5.4% and 2.8% of total revenues for fiscal 1999 and 1998,
respectively. The increase of $9,403,000 was primarily attributable to
interest on increased borrowings under the Company's Senior Facility (as
defined below).
Other income (expense). Other income (expense) was approximately $677,000
and $(71,000) for fiscal 1999 and 1998, respectively.
Fiscal 1998 Compared to Fiscal 1997
Rental revenue. Rental revenue was approximately $138,279,000 and
$83,489,000, or 88.6% and 91.0% of total revenues for fiscal 1998 and 1997,
respectively. The increase in rental revenues of $54,790,000 was derived
primarily from the 267 video stores acquired during the period, from the
opening of 71 company-owned stores, net of closings, during fiscal 1998, and
from a 2% increase in same store revenues.
Product sales. Product sales were approximately $17,075,000 and $7,743,000,
or 10.9% and 8.4% of total revenues for fiscal 1998 and 1997, respectively.
The increase in product sales of $9,332,000 was a result of product sales by
the video stores acquired during the period, the opening of 71 Company-owned
video stores, net of closings, and an increase in sales of inventory and
fixtures to franchisees. The increase as a percentage of total revenues was
primarily due to: (i) an increased demand for the purchase of video games,
especially in Canada; (ii) the introduction of confection items in selected
markets; and (iii) increased sales of holiday videocassettes.
20
<PAGE>
Service fees. Service fees were approximately $800,000 and $567,000, or .5%
and .6% of total revenues of fiscal 1998 and 1997, respectively. Continuing
service fees and royalties from franchisees account for 95% of total service
fees from fiscal 1998 and 1997. 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, until 42 franchise stores were acquired in the March 1998 Moovies
transaction.
Store operating expenses. Store operating expenses consist primarily of
compensation and related expenses, occupancy expenses, and the cost of rental
videos and games. Operating expenses were approximately $129,920,000 and
$70,205,000, or 83.2% and 76.5% of total revenues for fiscal 1998 and 1997,
respectively. The increase in store operating expenses of $59,715,000 was
primarily the result of video stores acquired during the period and the
opening of 71 Company-owned video stores, net of closings, during fiscal 1998.
The increase in store operating expenses as a percentage of total revenues was
primarily due to revenues of new stores not meeting management's expectations
due primarily (management believes) to new release titles not generating
consumer interest or rental traffic and corresponding higher costs associated
with the opening of new video stores prior to revenue reaching maturity during
the first two years of operations.
Compensation and related expenses were approximately $38,424,000 and
$20,278,000, or 24.6% and 22.1% of total revenues for fiscal 1998 and 1997,
respectively. The increase of $18,146,000 was primarily the result of the
video stores acquired during the period and the opening of 71 Company-owned
video stores, net of closings, during fiscal 1998.
Occupancy expenses were approximately $41,596,000 and $22,355,000, or 26.6%
and 24.4% of total revenues for fiscal 1998 and 1997, respectively. The
increase of $19,241,000 was primarily the result of the video stores acquired
during the period and the opening of 71 Company-owned video stores, net of
closings, during fiscal 1998.
Cost of rental revenue were approximately $38,689,000 and $20,317,000, or
24.8% and 22.1% of total revenues for fiscal 1998 and 1997, respectively. Cost
of rental revenue reflects the amortization of videocassettes and video games,
revenue sharing expenses, and fees paid to videocassette and video game
suppliers. The increase of $18,372,000 was primarily the result of video
stores acquired during the period and the opening of 71 Company-owned video
stores net of closings during fiscal 1998.
Selling, general and administrative. Selling, general and administrative
expenses were approximately $25,223,000 and $7,883,000, or 16.2% and 8.6% of
total revenues for fiscal 1998 and 1997, respectively. The increase of
$17,340,000 was primarily due to the following significant charges the Company
recorded during the fourth quarter of 1998: (i) a $3,546,000 non-cash, non-tax
deductible charge to compensation expense related to the release of 1,170,000
shares of Class B common stock from escrow (see Note 12 "Stockholders' Equity"
of the Notes to Consolidated Financial Statements); (ii) a $7,161,000 charge
consisting of a $3,236,000 non-cash charge relating to the restated employment
agreements for the Company's Chief Executive Officer and its President,
representing amounts to be applied to their existing stock option related loan
obligations and $3,925,000 to be used by the executives primarily to pay
income taxes arising from the stock option related transaction; and (iii)
$700,000 for previously capitalized bank fees related to the Company's
previous Revolving Credit Facility which was repaid prior to its maturity.
Cost of product sales. Cost of product sales was approximately $9,809,000
and $3,705,000, or 6.3% and 4.0% of total revenues for fiscal 1998 and 1997,
respectively. The cost of product sales as a percentage of total product sales
revenue was approximately 57.4% and 47.8% for fiscal 1998 and 1997,
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 and
lower rebates from concession vendors.
Amortization of goodwill. Amortization of goodwill was approximately
$2,353,000 and $1,613,000, or 1.5% and 1.8% of total revenues for fiscal 1998
and 1997, respectively. The increase of $740,000 was primarily
21
<PAGE>
attributable to the increase in goodwill associated with the Company's
continuing acquisitions of video stores in the 1998 fiscal year and prior
periods and the related amortization thereof.
Interest expense. Interest expense was approximately $4,292,000 and
$892,000, or 2.8% and 0.9% of total revenues for fiscal 1998 and 1997,
respectively. The increase of $3,400,000 was primarily attributable to
interest on borrowings under the Company's bank line of credit.
Other income (expense). Other income (expense) was approximately $(71,000)
and $461,000, or (0.0)% and 0.5% of total revenues for fiscal 1998 and 1997,
respectively. The expense increase of $532,000 was primarily attributable to
Moovies acquisition expenses and lower interest income.
Liquidity and Capital Resources
The Company has funded its operations through cash from operations, the
proceeds of prior equity and debt offerings, borrowings under bank facilities,
trade credit and equipment leases. The Company's principal capital
requirements are for the purchase of rental inventory, payments related to
approximately 70 store closings, payments related to aged accounts payable,
payments of interest and principal related to the Senior Facility (as herein
defined) and the Ingram Note (as herein defined).
At April 30, 1999, the Company had cash and cash equivalents of
approximately $1,235,000. The Company uses an unclassified balance sheet in
its financial statements, and as a result, does not classify its assets or
liabilities as current or non-current. If the Company were to use a classified
balance sheet, a portion of videocassette rental inventories would be
classified as non-current because they are not assets that are reasonably
expected to be completely realized in cash or sold in one year. The
acquisition cost of these inventories, however, would be reflected in current
liabilities. The Company believes that classification of videocassette rental
inventories as non-current assets would be misleading because it would not
indicate the level of assets expected to be converted into cash in the next
year as a result of rentals or sales of these videocassettes.
For the year ended April 30, 1999, net cash provided by operating activities
was approximately $60,555,000. Net cash used in investing activities was
approximately $71,263,000, consisting primarily of approximately $12,962,000
for new and remodeled stores as well as the conversion of the Moovies stores,
and approximately $63,060,000 for the purchase of video and game rental
inventory for existing, new stores, and additional Moovies rental inventory.
Net cash generated from financing activities was approximately $11,264,000.
In March 1998 the Company completed the acquisition of Moovies, Inc. The
Company issued approximately 9.3 million shares of Class A Common Stock in
exchange for Moovies common stock. The transaction was treated as a tax-free
exchange for federal income tax purposes and recorded under the purchase
method of accounting.
Simultaneous with the closing of the Moovies transaction, the Company
announced that a syndicate led by Banque Paribas had extended it a $120
million senior credit facility (the "Senior Facility"). This Senior Facility
replaced the Company's previous line of credit. The Senior Facility consisted
of the following: (i) two term loans totaling $95 million; (ii) a $15 million
capital expenditure line; and, (iii) a $10 million revolving line. The Company
borrowed the $95 million of the two term loans in conjunction with the closing
of the merger and the proceeds were used to: (i) refinance approximately
$35,000,000 of outstanding indebtedness including accrued interest under the
Company's previous line of credit; (ii) refinance approximately $50,000,000 of
indebtedness of Moovies under Moovies' previous credit agreement; and (iii)
pay transaction fees and expenses relating to the Merger of approximately
$10,000,000, (including legal fees, accounting fees, and registration fees).
The capital expenditure line was primarily available to fund the conversion of
the acquired Moovies stores and integration costs, the opening of new stores
and selected acquisitions.
During the second quarter of fiscal 1999, the Company and the bank syndicate
amended the terms of the Senior Facility to, among other things: (i) reduce
the Senior Facility from $120 million to $115 million; (ii) revise
22
<PAGE>
certain financial covenants; (iii) modify the terms of the capital expenditure
line to allow usage for working capital needs; (iv) increase the overall
interest rate by 0.5%; (v) add consent fees of $600,000 payable August 12,
1998 and $575,000 payable on August 12, 1999; and (vi) reprice warrants held
by the bank syndicate to a more current market price. During the third quarter
of fiscal 1999, the Company and the bank syndicate amended the terms of the
Senior Facility to, among other things; (i) permit a sale-leaseback
transaction; (ii) defer the January 31, 1999 principal payments to March 12,
1999; and (iii) increase the overall interest rate by 0.25%. During the fourth
quarter of fiscal 1999, the Company and the bank syndicate amended the terms
of the Senior Facility to, among other things; (i) defer the March 12, 1999
principal payments to May 31, 1999; (ii) revise certain financial covenants;
and (iii) add a consent fee of $57,500 due on April 30, 1999 and May 15, 1999.
As of April 30, 1999, the Company had $15 million outstanding under the
capital expenditure line and $5 million outstanding under the revolving line
both of which are available to fund working capital needs. As of April 30,
1999 the Company had no further borrowing capacity available under its Senior
Facility.
Effective May 28, 1999, the Company and the bank syndicate amended the terms
of the Senior Facility to, among other things; (i) increase the overall Senior
Facility with a new tranche of C Term loans in the aggregate amount of $10.5
million maturing June 2006, and bearing 12% interest; (ii) revise certain
financial covenants; (iii) revise and defer certain principal payments; (iv)
increase the overall interest rate by 0.75%; and (v) reflect the issuance of
7,481,250 warrants at $0.8719 per share expiring June 2006. The Company is
using proceeds of the new C Term loans for, among other things, the purchase
of rental inventory, payments related to expected store closings, trade
payables, and debt service. The Company believes that its relationship with
the Senior Facility lenders is satisfactory and that it would be able to
obtain any necessary waivers, amendments or modifications to the Senior
Facility if the Company's operating performance causes it to fall short of
certain financial covenants in the Senior Facility, although no assurances can
be given. If the Company is unable to maintain such a level of operations, it
will be required to reduce its overall expenditures and expansion plans to
comply with the covenants and requirements of the Senior Facility.
Additionally, any failure by the Company to maintain its level of operations
within the covenants and requirements of the Senior Facility could cause the
Company to be in default thereunder, allowing the lenders to take legal action
against the Company, including but not limited to, the immediate acceleration
of payment of borrowed funds, which could materially and adversely affect the
Company'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 the Company's operations and financial condition.
Amounts borrowed under the Senior Facility 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 inter-bank Eurodollar rate
(approximately 7.75% and 4.99% per annum, respectively as of April 30, 1999)
plus an applicable margin rate that could range from .5% to 4.50%. Amounts
currently outstanding at April 30, 1999 had a weighted average rate of 9.33%.
The Senior Facility includes negative, affirmative and financial covenants
including, but not limited to, minimum free cash flow, consolidated
indebtedness to consolidated free cash flow, 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, divestitures, 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 is secured by
substantially all of the Company's assets as well as by pledges of its stock
in its subsidiaries, which subsidiaries also have provided guarantees of the
Company's obligations.
Also in May 1999, the Company issued Ingram Entertainment Inc., a supplier
of rental inventory ("Ingram"), a $14,000,000 subordinated promissory note in
respect of outstanding trade payable amounts from the Company. The note (the
"Ingram Note") bears interest at a rate of 12% per annum with principal and
interest payable monthly over three years. Simultaneous with the issuance of
the Ingram Note, the Company issued
23
<PAGE>
Ingram warrants to purchase 1,000,000 shares of Class A Common Stock, at the
then market price of $0.81 per share, which warrants expire May 2004.
In November 1998, the Company entered into a sale/leaseback arrangement with
respect to certain of its furniture, fixtures, equipment and signage used in
selected retail locations. Under the arrangement the Company obtained
approximately $5 million.
During fiscal 2000, the Company is proceeding with actions intended to
enhance prospects for revenue growth and profitability including the closing
of approximately 70 identified under-performing locations; and the continued
pursuit of additional direct revenue sharing arrangements with motion picture
studios. The Company continues to evaluate opportunities to reduce costs and
improve revenues. The Company has maintained a longstanding and satisfactory
relationship with its primary product vendors and has negotiated extended
payment terms with several of these vendors. The loss of its primary product
vendors could have a material adverse effect on the Company. The Company will
continue to focus on reducing the aged accounts payable with payments, the
extension of terms, and negotiated settlements. If the Company is unable to
reduce the aged accounts payable to the satisfaction of the trade creditors,
it could have a material adverse effect on the Company. Assuming the Company
is able to maintain a satisfactory relationship with its selected vendors, its
bank lenders, and its trade creditors, the Company expects that cash from
operations, trade credits, equipment leases, available revenue sharing
arrangements, and available borrowings under the Senior Facility will be
sufficient to fund future inventory purchases and other working capital needs
for the next twelve months, although no assurances can be given that the
Company will not require additional sources of financing as a result of
disappointing 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 the Company is unable to obtain
such additional financing, the Company may be required to reduce its overall
expenditures and the Company's ability to maintain or expand its current level
of operations could be materially and adversely affected.
Each of Messrs. Potter and Bedard have issued notes to the Company (the
"Recourse Notes") in connection with stock option exercises, for approximately
$2,080,147 and $1,155,637, respectively, including accrued interest through
April 30, 1998. In fiscal 1999, the Recourse Notes accrued additional interest
of $147,097 and $81,721 for a total Recourse Note balance of $2,227,244 and
$1,237,358 for Messrs. Potter and Bedard, respectively. The Recourse Notes
were issued by the executives upon their exercise in August 1995 of 420,000
options granted to them under the Stock Option Plans in May 1995 at an
exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to
satisfy then anticipated tax liabilities. The Recourse Notes, which provide
for full recourse against the respective officer's personal assets and Company
stockholdings, are 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 the Company's stock, the
net proceeds thereof will be applied to payment, in part or in full, of the
Recourse Notes.
In connection with the restated employment agreements for Mr. Potter and Mr.
Bedard, the Board has approved an accrual of bonuses that will be directed
primarily to satisfying obligations arising from the Recourse Notes. For
fiscal year 1998, bonus payments aggregating $816,580 were awarded as
reimbursement of previous payments of principal and interest on the Recourse
Notes and accompanying tax liability to the recipients. In addition, the Board
has approved the subsequent payment of additional aggregate bonuses of
approximately $6,345,000 to be used primarily to satisfy the Recourse Notes,
as well as the anticipated income tax liabilities to the executives subject to
any required approvals. In fiscal 1999, the Company accrued an additional
bonus of $458,000 to be used to satisfy the fiscal 1999 accrued interest
related to the Recourse Notes as well as the anticipated income tax
liabilities to the executives subject to any required approvals. If such
bonuses are not effected, the Recourse Notes will remain outstanding.
The Company generally does not offer lines of credit or guarantees for the
obligations of its franchisees, although on occasion, the Company has made
short-term loans to current franchisees. The Company intends to
24
<PAGE>
evaluate the possibility of providing loans or limited guarantees for certain
franchisee obligations, which in the aggregate are not expected to be material
to the Company's financial condition.
Substantially all Company-owned stores are in leased premises, except for
three stores that are located on premises owned by the Company. The Company
expects that most future stores will occupy leased premises.
This Annual Report on Form 10-K contains a number of forward looking
statements. Any statements contained herein (including without limitation
statements to the effect that the Company or its management "believes,"
"expects," "anticipates," "plans" and similar expressions) that are not
statements of historical fact should be considered forward looking statements.
There are a number of important factors that could cause the Company's results
to differ materially from those indicated by such forward looking statements.
These factors include, without limitation, the following:
Cash Requirements
As a result of the one-time charges recorded by the Company and its
operating results for the prior quarters, the Company was not in compliance
with certain of the financial covenants of its Senior Facility. Although the
Company has obtained previous waivers, no assurances can be given that future
waivers or amendments will be obtained if the Company is unable to maintain a
level of operations necessary to meet the covenants and requirements of the
Senior Facility. If the Company is unable to maintain such a level of
operations, it will be required to reduce its overall expenditures and
expansion plans to comply with the covenants and requirements of the Senior
Facility. Additionally, any failure by the Company to maintain its level of
operations within the covenants and requirements of the Senior Facility could
cause the Company to be in default thereunder, allowing the lenders to take
legal action against the Company, including, but not limited to, the immediate
acceleration of payment of borrowed funds, which could materially and
adversely affect the Company'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 the Company's operations and financial
condition.
During fiscal 2000, the Company is proceeding with actions intended to
enhance prospects for revenue growth and profitability including the closing
of approximately 70 under-performing locations; and the continued pursuit of
additional direct revenue sharing arrangements with motion picture studios,
which arrangements allow the Company to provide additional copies of rental
titles. The Company continues to evaluate opportunities to reduce costs and
improve revenues. The Company has maintained a longstanding and satisfactory
relationship with its primary product vendors and has negotiated extended
payment terms with several of these vendors. The loss of its primary product
vendors could have a material adverse effect on the Company. The Company will
continue to focus on reducing the aged accounts payable with payments, the
extension of terms, and negotiated settlements. If the Company is unable to
reduce the aged accounts payable to the satisfaction of the trade creditors,
it could have a material adverse effect on the Company. The Company's
principal capital requirements are for the purchase of rental inventory,
payments related to approximately 70 store closings, payments related to aged
accounts payable, payments of interest and principal related to the
credit/term loan facility (the "Senior Facility") and the Ingram Entertainment
Inc. note, and potential acquisitions that fit its growth strategies. Assuming
the Company is able to maintain a satisfactory relationship with its selected
vendors, its bank lenders, and its trade creditors, the Company expects that
cash from operations, trade credits, equipment leases, available revenue
sharing arrangements, and available borrowings under the Senior Facility will
be sufficient to fund future inventory purchases and other working capital
needs for the next 12 months, although no assurances can be given that the
Company will not require additional sources of financing as a result of
disappointing 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 the Company is unable to obtain
such additional financing, the Company may be required to reduce its overall
expenditures and the Company's ability to maintain or expand its current level
of operations could be materially and adversely affected.
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<PAGE>
Fluctuations in Quarterly Operating Results
The Company has experienced in the past, and may continue to experience in
the future, fluctuations in its quarterly operating results. No assurance can
be given that the Company 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), public acceptance and interest in new release titles, 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, the
Company's 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.
Significant Future Charges to Earnings Arising from Amortization of Goodwill
At April 30, 1999, the Company had approximately $77,715,000 of goodwill on
its balance sheet that resulted primarily from the acquisition of video rental
stores, which will be amortized over 20 years. The Company expects that its
operating results for future quarters over the next 20 years will reflect
quarterly, non-cash charges of approximately $1,068,000 for amortization of
goodwill from these acquisitions. The Company also anticipates that future
acquisitions will involve the recording of a significant amount of goodwill on
its balance sheet, which will be amortized over varying periods of time of up
to 20 years.
Competition
The video rental industry is highly competitive. The Company competes with
other video retail stores, including Blockbuster and other superstores, and
with supermarkets, pharmacies, convenience stores, bookstores, mass merchants,
mail order operations, vending machines and other retailers, as well as with
noncommercial sources such as libraries. In addition to competing with other
video retailers, the Company competes with other leisure-time activities,
especially entertainment activities such as movie theaters, sporting events,
network television and cable television.
The Company also competes with other distribution channels for studio
movies, including pay-per-view television on basic cable service, which
currently offer only a limited number of channels and monthly movie
selections. Recently developed digital compression technology combined with
fiber optics and other technology will eventually permit cable companies,
direct broadcast satellite companies and other telecommunications companies to
transmit a much greater number of movies to homes at scheduled intervals
throughout the day. Ultimately, these technologies could lead to the
availability of movies to the consumer on demand. Certain cable and other
telecommunications companies have tested and are continuing to test movie-on-
demand services in some markets.
The Company and its larger competitors, including Blockbuster, have entered
into direct revenue-sharing arrangements with the major motion picture
studios. Such arrangements could allow these competitors to order and stock a
greater number of new release and other titles, thus increasing competition in
those areas in which each of the Company and its competitors have retail
locations and diminishing the potential benefits of similar revenue sharing
arrangements entered into by the Company, which could have a material adverse
effect on operations. In addition, certain of the Company's larger, better
capitalized competitors may seek to acquire some of the same video specialty
stores that the Company seeks to acquire. Such competition for acquisitions
would likely increase acquisition prices and related costs and result in fewer
attractive acquisition opportunities, which could have a material adverse
effect on the Company's growth.
The Company's franchise operations compete with numerous franchise
operations in many industries that have significantly greater financial and
human resources and more experience in selling franchises than does the
Company. Potential franchisees may believe that these franchisers offer
greater opportunities for success than the Company.
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Expansion
The Company currently intends 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 it can successfully compete, to locate suitable superstore sites and
negotiate acceptable lease terms and to adapt its purchasing, management
information and other systems to accommodate expanded operations. 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 the Company will be able to undertake any
substantial near-term expansion with new superstores or that such expansion,
if possible, will be profitable. Any expansion, including growth through
acquisitions, will place increasing pressure on the management controls of the
Company. No assurance can be given that the Company's new stores will achieve
sales or profitability comparable to its existing stores.
Possible Adverse Effect of New Technologies on the Video Rental Business
The Company also currently competes with pay-per-view cable television
systems. Recently developed digital compression technology combined with fiber
optics and other technology will eventually permit cable companies, direct
broadcast satellite companies and other telecommunications companies to
transmit a much greater selection of movies to homes at scheduled intervals
throughout the day. Ultimately, these technologies could lead to the
availability of movies-on-demand to the consumer. Certain cable and other
telecommunications companies have tested and are continuing to test movie on
demand services in some markets. Technological advances could have a material
adverse effect on the business of the Company.
Changes in Studio Distribution and Pricing
Changes in the manner in which movies are marketed by the studios that
produce them, primarily related to an earlier release of movie titles to
alternative distribution channels, could substantially decrease the demand for
video rentals, which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, changes in the
movie studios' wholesale pricing structure for videos could result in a
competitive disadvantage for all video specialty stores, including those of
the Company.
Supply Relationships
In addition to traditional inventory purchasing, the Company has entered
into direct license revenue-sharing agreements with major motion picture
studios. Under the terms of the agreements, the Company can choose titles that
it wants and may obtain them directly from the studios, although the Company
remains able to obtain the titles through regular distribution channels on a
title by title basis. For each title obtained, the Company will share the
greater of an agreed-upon percentage of the rental revenue or dollar amount
per rental transaction, which percentage declines over a period of weeks
following the release of the title for video rental. The Company was obtaining
titles under these agreements during fiscal 1999 and is aggressively pursuing
additional direct licensing revenue-sharing agreements with other studios,
although no assurances can be given that such agreements will be obtained.
The Company believes that such revenue-sharing agreements could be a cost-
effective source for larger orders of an individual title, particularly new
release titles. Such agreements enable The Company to order larger quantities,
two to five times the normal order, of copies of a particular title to satisfy
customer demand than could be cost-effective if the copies were purchased for
rental. To obtain the full benefits of such revenue sharing agreements, the
Company must correctly identify the new release and other titles that it
should offer in each location on this basis. No assurances can be given that
the Company will be able to use such revenue sharing agreements to obtain its
intended results.
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Consumer Acceptance of New Release Movie Titles
The Company depends significantly on availability and consumer acceptance of
new release video 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 Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition,
the 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 Company's management and
operational systems. To manage its growth effectively, the Company will be
required to continue to upgrade its operational and financial systems, expand
its management team and increase and manage its employee base.
Seasonality and Other Factors
The Company's business is somewhat seasonal, with revenues in April, May,
September and October generally lower than in other months of the year. Future
operating results may be affected by many factors, including variations in the
number and timing of store openings and acquisitions, weather (particularly on
weekends and holidays), the public acceptance of new release titles available
for rental, competition, marketing programs, special or unusual events and
other factors that may affect retailers in general. Revenues may be reduced
temporarily if viewers prefer to watch such events rather than rent
videocassettes. Also, any concentration of new superstore openings and the
related pre-opening costs in any particular fiscal quarter could have a
material adverse effect on the Company's operating results for that quarter.
Year 2000 Compliance
The year 2000 ("Y2K") issue is the result of computer programs that were
written using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. To the extent that
the Company's (and its vendors' and suppliers') software applications contain
source code that is unable to interpret appropriately the upcoming calendar
year 2000 and beyond, some level of modification or replacement of such
applications will be necessary to avoid system failures and the temporary
inability to process transactions or engage in other normal business
activities.
The Company's information services group has been coordinating the Company's
internal Y2K compliance efforts and has identified all computer-based systems
and applications (including embedded systems) the Company uses in its
operations that might not be Y2K compliant. The Company is determining what
modifications or replacements will be necessary to achieve compliance;
implementing any necessary modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and
transitioning the compliant systems into the regular operations of the
Company. The Company estimates that these actions with respect to systems that
it believes would have a material effect on the business are approximately 80%
complete. The Company estimates that all critical systems and applications
will be Y2K ready by September 1999.
The Company is also examining its relationship with certain key outside
vendors, suppliers, and others with whom the Company has significant business
relationships to determine, to the extent practical, the degree of such
outside parties' Y2K compliance. The Company has been contacting such outside
parties and attempting to seek assurances that such parties will be Y2K
compliant. The Company does not believe that its relationship with any single
third party is material to the Company's operations and, therefore, does not
believe that the failure of any single third party to be Y2K compliant would
have a material adverse effect on the Company. The Company believes that if
it, or any third party with whom the Company has a significant business
relationship, has a Y2K
28
<PAGE>
related systems failure, the most significant impact would likely be the
inability, with respect to a store or group of stores, to conduct operations
due to a power failure, to deliver inventory in a timely fashion, to receive
certain products from vendors or to process electronically customer sales at
the store level. The Company does not anticipate that any such impact would be
material to the Company's liquidity or results of operations.
The Company is establishing and implementing a contingency plan to provide
for viable alternatives to ensure that the Company's core business operations
are able to continue in the event of a Y2K related systems failure. The
Company expects to have a comprehensive contingency plan established by
October 1999. If the Company's systems are not sufficiently Y2K ready by the
end of calendar year 1999 or if the Company does not have an appropriate
contingency plan in place at that time, the Company's business, financial
condition and results of operations may be materially and adversely affected.
Such adverse effects may include, but may not be limited to, the ability to
manage store operations, collect revenues from customers, supply stores with
inventory, make payments to vendors and suppliers, remit wages to employees,
and conduct other essential business-related activities.
Through April 30, 1999, the Company has expended approximately $1,386,600 to
address Y2K compliance issues. The Company estimates that it will incur an
additional $1,269,000 for a total of approximately $2,655,600 to address Y2K
issues, which includes the estimated costs of all modifications, testing and
consultant fees. Y2K costs will be funded through cash from operations and
available borrowings under the Senior Facility.
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 disclosures 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. Although the
franchising operations are not materially adversely affected, to date, by such
existing regulations, the management of the Company cannot predict the effect
any future legislation or regulation may have on its business operations or
financial condition.
Dependence on Key Personnel
The Company's future success depends to a significant extent on the
continued contributions of Daniel A. Potter, the Company's Chairman and Chief
Executive Officer, and John M. Bedard, the Company's President. The loss of
the services of either of these officers could have a material adverse effect
on the Company. The Company's continued growth and profitability also depends
on its ability to attract, motivate, and retain other management personnel,
including qualified store managers. No assurance can be given that the Company
will be successful in attracting, motivating and retaining such personnel.
Retention of Employees
The success of the Company will depend in part upon the retention of key
employees. 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. Although the Company is engaged in ongoing efforts to
retain key employees, retaining such employees may be more difficult in the
future.
Anti-takeover Effects; Shareholders' Rights Plan; Delaware Law and Certain
Charter and Bylaw Provisions; Preferred Stock
The Company's Board of Directors has the authority to issue up to five
million shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action
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by the stockholders. The rights of the holders of Class A Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
shares of Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring or preventing a change of control of the Company.
In addition, certain provisions in the Company's Certificate of Incorporation
and Bylaws containing restrictions on calling special meetings of stockholders
and restrictions on amendments to the Bylaws may discourage or make more
difficult any attempt by a person or group of persons to obtain control of the
Company.
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, the statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock.
In addition, options issued pursuant to the Company's stock option plans
generally will vest immediately upon a change in control as described in the
option grant letters.
In April 1998, the Company's Board of Directors adopted a Rights Agreement
(the "Rights Agreement"). Under the Rights Agreement, a dividend of one right
("Right") to purchase a fraction of a share of newly created series of
preferred stock, was declared for each share of Class A Common Stock and each
Class B Warrant outstanding at the close of business on April 24, 1998. The
Rights, which expire on April 24, 2008, may be exercised only if certain
conditions are met, such as the acquisition (or the announcement of a tender
offer the consummation of which would result in the acquisition) of a
beneficial ownership of 15 percent or more of the Class A Common Stock by a
person or affiliated group. The Rights, if exercised, would cause substantial
dilution to a person or group of persons that attempts to acquire the Company
without the prior approval of the Board of Directors. The Board of Directors
may cause the Company to redeem the Rights for nominal consideration. The
Rights Agreement may discourage or make more difficult any attempt by a person
or group of persons to obtain control of the Company.
Volatility of Stock Price
The market price of the Company's Class A Common Stock has been, and may
continue to be, extremely volatile. In addition, prices of stocks of most
companies in the video store industry (including Video Update) have been
subject to a generally declining trend for approximately the past 36 months.
Factors such as new product announcements by the Company or its respective
competitors, new digital technologies such as near-video-on-demand and video-
on-demand, quarterly fluctuations in operating results, challenges associated
with integration of businesses, and general conditions in the data networking
market may have a significant impact on the market price of Video Update Class
A 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 Class A Common Stock to fluctuate substantially.
The Company has been notified by the NASDAQ National Market that its Class A
Common Stock is subject to delisting based on the Company's failure to meet
certain maintenance criteria including minimum bid price requirements. The
Company has provided information to NASDAQ as it makes its decision in this
matter. For continued listing, the Company will have to demonstrate to the
satisfaction of NASDAQ that it can regain compliance with these particular
deficiencies and maintain long term compliance with all applicable maintenance
criteria. The Company presented its plan for continued compliance, which
includes provisions for a possible reverse stock split of the Company's Class
A Common Stock. The NASDAQ decision on delisting will be rendered after
consideration of the entire record presented by the Company. Their decision
may be entered and
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effected immediately. No assurances can be given that there will be a
favorable NASDAQ ruling, nor that the Company will be in compliance with other
NASDAQ National Listing requirements or that its Class A Common Stock will
continue to be listed on NASDAQ National Market. In the event of any
delisting, the Company expects that its Class A Common Stock would immediately
be eligible to trade on NASDAQ's OTCBB ("Over-the-Counter Bulletin Board").
Inflation
To date, inflation has not had a material effect on the Company's business.
The Company anticipates that its business will be affected by general economic
trends. Although the Company has not operated during a period of high
inflation, it believes that it would generally be able to pass increased costs
resulting from inflation on to customers.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which was adopted by the Company beginning May 1, 1998. SFAS 130
requires the reporting of comprehensive income and its components in the
general-purpose financial statements. This Statement also requires that an
entity classify items of other comprehensive income by their nature in the
annual financial statement. The Company has disclosed this information in its
Consolidated Financial Statement of Shareholders' Equity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
was adopted by Video Update in fiscal 1999. SFAS 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The Company has
concluded that the current reportable segments are consistent with the
"management approach" methodology outlined in SFAS 131.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for the Company in fiscal year 2001. SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivatives and
whether it qualifies for hedge accounting. Video Update is currently reviewing
the standard and its effect on the financial statements.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" which is effective for fiscal
years beginning after December 15, 1998. Management believes the adoption of
SOP 98-1 will not have a material effect on the Company's financial
statements.
In 1998, the American Institute of Certified Public Accountants issued SOP
98-5, "Reporting on the Costs of Start-up Activities" which is effective for
fiscal years beginning after December 15, 1998. This SOP requires that
companies expense start-up costs and organizational costs as they are
incurred. Management believes the adoption of SOP 98-5 will not have a
material effect on the Company's financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk associated with its debt
instruments. The market risk inherent in the Company's debt instruments
represents the increased interest costs arising from adverse changes in
interest rates (primarily LIBOR and prime bank rates). The Company is party to
financial instruments with off-balance-sheet risk which are entered into in
the normal course of business to meet its financing needs and to manage its
exposure to fluctuations in market rates. These financial instruments include
swap agreements and interest rate caps. The instruments involve, to a varying
degree, elements of credit and market risk in addition to amounts recognized
in the financial statements. The Company does not hold or issue financial
instruments for trading purposes (see Note 16 of the Notes to Consolidated
Financial Statements).
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The Company operates internationally in Canada, and thus is subject to
potentially adverse movements in foreign exchange currency rate changes. The
Company does not enter into foreign exchange forward contracts to reduce its
exposure to foreign currency rate changes on inter-company foreign currency
denominated balance sheet positions. Historically, the effect of movements in
the exchange rates have been immaterial to the consolidated operating results
of the Company.
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors....................................... F2
Consolidated Balance Sheets as of April 30, 1998 and 1999............. F4
Consolidated Statements of Operations for the years ended April 30,
1997, 1998 and 1999.................................................. F5
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1997, 1998 and 1999........................................ F6
Consolidated Statements of Cash Flows for the years ended April 30,
1997, 1998 and 1999.................................................. F7
Notes to Consolidated Financial Statements............................ F8
</TABLE>
Item 9. Changes in Registrant's Certifying Accountant
Effective January 28, 1999, the Company retained Deloitte & Touche LLP as
its independent public accountants. On that same date, the Company terminated
the engagement of Ernst & Young LLP as its independent public accountants. The
engagement of Deloitte & Touche LLP was recommended by the audit committee of
the Company's Board of Directors and approved by the Board of Directors (the
"Board").
The audit reports of Ernst & Young LLP on the Company's financial statements
for each of the past two fiscal years ended April 30, 1997 and 1998 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended April 30, 1997 and 1998, and in the subsequent
interim period, there were no disagreements between the Company and Ernst &
Young LLP on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved
to the satisfaction of Ernst & Young LLP, would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports on the audited financial statements.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended April 30, 1997 and 1998, and in the subsequent
interim period, there were no reportable events (as defined in Item 304 of
Regulation S-K) with Ernst & Young LLP. During such periods the Company has
not consulted Deloitte & Touche LLP regarding either (i) the application of
accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements or (ii) any matter that was either the subject of a
disagreement or a reportable event (each as defined in Item 304 of Regulation
S-K).
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Background
The Directors and executive officers of the Company, their positions held in
the Company, and their ages are as follows:
<TABLE>
<CAPTION>
Age Position
Name --- --------
<S> <C> <C>
Daniel A. Potter................... 41 Chairman and Chief Executive Officer
John M. Bedard..................... 41 President and Director
Daniel C. Howard................... 38 Chief Operations Officer and Director
Dale E. Lauwagie................... 40 Chief Financial Officer
Richard Bedard..................... 45 Executive Vice President
Michael G. Schifsky................ 43 Senior Vice President
Theodore Coburn.................... 46 Director
Paul M. Kelnberger................. 55 Director
Bernard R. Patriacca............... 55 Director
</TABLE>
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until his successor is duly elected by the
stockholders.
The following is a brief summary of the background of each director,
executive officer, and significant employee of the Company:
Daniel A. Potter, Chairman and Chief Executive Officer. Mr. Potter co-
founded the Company in 1983 and has served as the Company's Chairman and Chief
Executive Officer since its inception. Mr. Potter holds a B.A. degree from the
University of Minnesota and a J.D. degree from William Mitchell College of
Law. Mr. Potter is a member of the nominating committee.
John M. Bedard, President and Director. Mr. Bedard co-founded the Company in
1983 with Mr. Potter and has served as the Company's President and as a
Director since its inception. Mr. Bedard, together with Mr. Potter, devised
and implemented the Company's real estate development program and operations.
Mr. Bedard is the brother of Richard Bedard, an Executive Vice President of
the Company.
Daniel C. Howard, Chief Operations Officer and Director. Mr. Howard has
served as the Company's Chief Operations Officer since 1990, has coordinated
the Company's operations since 1983, and has served as a Director since August
1994. He holds a B.S. degree from the University of Minnesota School of
Management. Mr. Howard is a member of the executive compensation committee.
Dale E. Lauwagie, Chief Financial Officer. Mr. Lauwagie has served as the
Company's Chief Financial Officer since November 1998. From February 1997 to
November 1998, Mr. Lauwagie served as Vice President of Finance for Mycogen
Corporation ("Mycogen"), a publicly held agricultural and biotechnology
company acquired by Dow Chemical Company in October 1998. From July 1994 to
January 1997, he served as controller of Mycogen. Mr. Lauwagie also served in
various finance related positions from 1986 to 1994 for Burlington Northern,
Inc., a publicly held company involved in railroads, oil and gas, real estate
and minerals. From 1981 to 1986 he was with KPMG Peat Marwick in Minneapolis,
Minnesota, attaining the level of Audit Supervisor. Mr. Lauwagie is a
certified public accountant and holds a B.S. degree in accounting from St.
Cloud State University, Minnesota, and an M.B.A. in finance from the
University of St. Thomas, Minnesota.
Richard Bedard, Executive Vice President. Mr. Bedard has served as an
Executive Vice President of the Company since September 1995. From 1986 to
1995, he served as the Company's Vice President of Franchise Development. Mr.
Bedard is the brother of John M. Bedard, the Company's President and a
Director.
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Michael G. Schifsky, Senior Vice President. Mr. Schifsky has served as
Senior Vice President since 1998. Mr. Schifsky served as Vice President of
Store Development since rejoining the Company in 1990 until 1998. Mr. Schifsky
has also served as a District Manager of the Company from 1984 to 1988.
Paul M. Kelnberger, Director. Mr. Kelnberger has served as a Director since
August 1994. Mr. Kelnberger has been a member of Johnson, West & Co., PLC
("Johnson, West & Co."), a certified public accounting firm with its principal
offices in St. Paul, Minnesota, since 1975. In addition, since November 1995
Mr. Kelnberger has served as a Director of Leuthold Funds, a publicly held
mutual fund. Johnson, West & Co. performed auditing services for the Company
prior to the fiscal year ended April 30, 1993. Since that time, Johnson West &
Co. has provided and continues to provide to the Company accounting services
in connection with the Company's acquisitions and sales and use tax planning.
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."
Bernard R. 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. Mr. Patriacca is a certified
public accountant and holds Bachelor's and Master's degrees in finance and
accounting from Northeastern University. Mr. Patriacca is a member of the
audit committee and executive compensation committee.
Theodore J. Coburn, Director. Theodore J. Coburn has been a director of the
Company since March 1998. Mr. Coburn served as a director of Moovies, Inc.
from June 1995 to March 1998. 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 Group 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 serves as a director of Measurement Specialties, Inc., a publicly held
company and as a director of Ariel Corporation, a publicly held company. Mr.
Coburn also serves as a director of the Nicholas-Applegate Fund, Inc. He also
serves as a director of the Emerging Germany Fund. 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 and holds master's degrees from
Harvard University Graduate School of Education and its Divinity School. Mr.
Coburn is a member of the nominating committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires executive officers and directors, and
persons who beneficially own more than ten percent (10%) of the Company's
Common Stock, to file initial reports of ownership on Form 3 and reports of
changes in ownership on Form 4 with the Securities and Exchange Commission
(the "SEC") and any national securities exchange on which the Company's
securities are registered. Executive officers, directors and greater than ten
percent (10%) beneficial owners are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors
that no other reports were required, the Company believes that during fiscal
1998, its executive officers, directors and greater than ten percent (10%)
beneficial owners complied with all applicable Section 16(a) filing
requirements, except that Mr. Schifsky filed an untimely report on Form 4 on
January 28, 1999 with respect to a purchase of shares, and F. Andrew Mitchell,
a former director of the Company, filed an untimely report on Form 4 on
February 1, 1999 with respect to a sale of shares.
34
<PAGE>
Item 11. Executive Compensation.
Summary Compensation Table
Set forth below is a Summary Compensation Table concerning the compensation
of the named executive officers for the last three completed fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
-------------------------------- ------------
Awards
------------
Securities
Fiscal Year Other Annual Underlying All Other
Ended Salary Bonus Compensation Options/SARs Compensation
Name and Principal April 30 (1)($) (2)($) (3)($) (4)(#) (5)($)
Position (A) (B) (C) (D) (E) (G) (I)
------------------ ----------- -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter........ 1999 $360,000 $ 294,195 $ -- -- $28,443
Chairman and Chief 1998 $300,000 $4,603,665 $1,926,973 -- $26,195
Executive Officer 1997 $300,000 $ -- $ -- 300,000 $26,307
John M. Bedard.......... 1999 $240,000 $ 163,442 $ -- -- $23,168
President and Director 1998 $200,000 $2,557,590 $1,557,019 -- $27,934
1997 $200,000 $ -- $ -- 165,000 $17,952
Daniel C. Howard........ 1999 $128,400 $ -- $ -- -- $13,841
Chief Operations 1998 $ 87,890 $ -- $ 62,278 -- $12,673
Officer 1997 $ 78,000 $ -- $ -- 36,000 $ 8,113
Dale E. Lauwagie........ 1999 $ 80,208 $ -- $ -- 90,000 $ 8,183
Chief Financial
Officer(6)
Stephen L. Reynolds..... 1999 $102,083 $ -- $ 313,200 -- $18,082
Chief Financial 1998 $ 56,539 $ -- $ 34,800 40,000 $14,259
Officer(7)
</TABLE>
- --------
(1) Amounts shown indicate cash compensation earned and received by executive
officers; no amounts were earned but deferred at the election of those
officers. Executive officers participate in the Company's group health
insurance plan.
(2) Amounts shown in 1998 reflect the bonus amounts accrued by the Company in
conjunction with Messrs. Potter and Bedard's restated employment
agreements. Amounts totaling $524,945 and $291,635 were paid to Messrs.
Potter and Bedard respectively in fiscal 1998 as reimbursement of previous
payments of principal and interest on their recourse notes to the Company
and accompanying tax liabilities. In 1999, the Company accrued bonus
amounts for Messrs. Potter and Bedard intended to cover their respective
obligations related to Recourse Notes. See Note 8 of Notes to Consolidated
Financial Statements.
(3) Amounts for fiscal 1998 reflect the release of 635,755, 513,698 and 20,547
shares of Class A Common Stock from escrow to Messrs. Potter, Bedard and
Howard respectively, at the market price on the date of release. The
amounts shown in fiscal 1998 and fiscal 1999 for Mr. Reynolds represent
change of control payments as a result of the Moovies acquisition.
(4) Amounts shown reflect grants of options to purchase Class A Common Stock
pursuant to the Company's Stock Option Plans. During fiscal years 1997
through 1999, the Company made no awards of restricted stock and did not
have a long-term incentive plan.
(5) Amounts shown reflect payment for automobile, insurance and other
expenses. For Mr. Reynolds, the Company was providing housing for fiscal
1999 and fiscal 1998.
(6) Mr. Lauwagie was appointed Chief Financial Officer of the Company on
November 16, 1998. Mr. Lauwagie's base salary was set at $175,000. The
amount of $80,208 represents salary earned through April 30, 1999.
(7) Mr. Reynolds was appointed Chief Financial Officer of the Company on
January 6, 1998. Mr. Reynolds' base salary was set at $175,000. Mr.
Reynolds' resigned as Chief Financial Officer of the Company on November
13, 1998.
35
<PAGE>
Option/SAR Grants in Fiscal Year 1999
Set forth below is an Option/SAR Grants table concerning individual grants
of stock options and SARs made during the last completed fiscal year to each
of the named executive officers.
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Annual Rates of
Stock Price
Appreciation For
Individual Grants Option Term(1)
--------------------------------------------------------------- --------------------
Percent of Total
Options/SARs
Number of Securities Granted to Exercise of
Underlying Options/SARs Employees in Base Price Expiration
Granted (#) Fiscal Year(2) ($/Sh) Date(3) 5%($) 10%($)
Name (A) (B) (C) (D) (E) (F) (G)
-------- ----------------------- ---------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Potter........ -- -- -- -- -- --
John M. Bedard.......... -- -- -- -- -- --
Daniel C. Howard........ -- -- -- -- -- --
Dale E. Lauwagie (4).... 90,000 5.2% $1.063 11/23/08 60,166 152,473
Stephen L. Reynolds(5).. -- -- -- -- -- --
</TABLE>
Option/SAR Grants in Fiscal Year 1999
- --------
(1) The dollar gains under these columns result from calculations assuming
hypothetical growth rates as set by the Commission and are not intended to
forecast future price appreciation of the Class A Common Stock.
(2) In fiscal 1999, options to purchase a total of 174,000 shares of the
Company's Class A Common Stock were granted to employees of the Company,
including executive officers.
(3) These options are subject to earlier termination upon certain events
related to termination of employment.
(4) Mr. Lauwagie was appointed Chief Financial Officer of the Company on
November 16, 1998.
(5) Mr. Reynolds resigned as Chief Financial Officer of the Company on
November 13, 1998.
Aggregated Option/SAR Exercises And Fiscal Year-End Option/SAR Value Table
Set forth below is a table concerning each exercise of stock options (or
tandem SAR's) and freestanding SARs during the last completed fiscal year by
each of the named executive officers and the fiscal year-end value of
unexercised options and SARs.
Aggregated Option/SAR Exercises for Fiscal Year Ended April 30, 1999
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
Shares at Fiscal Year-End at Fiscal Year-End
Acquired on Value (#) Exercisable/ ($) Exercisable/
Exercise (#) Realized ($) Unexercisable Unexercisable(1)
Name (A) (B) (C) (D) (E)
-------- ------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Daniel A. Potter........ -- -- 200,000/100,000 --
John M. Bedard.......... -- -- 110,000/55,000 --
Daniel C. Howard........ -- -- 77,437/16,063 --
Dale E. Lauwagie(2)..... -- -- 0/90,000 --
Stephen L. Reynolds(3).. -- -- 32,813/0 --
</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, 1999, the fair market value of the Company's Class A
Common Stock underlying the options (as determined by the last sale price
quoted on the NASDAQ National Market) was $0.719. None of the options
listed under column D were in-the-money at Fiscal Year End.
(2) Mr. Lauwagie was appointed Chief Financial Officer of the Company on
November 16, 1998.
(3) Mr. Reynolds resigned as Chief Financial Officer of the Company on
November 13, 1998.
36
<PAGE>
Compensation Committee Interlocks and Insider Participation
Compensation decisions for the Company's Chief Executive Officer and
President are made by the Executive Compensation Committee, comprised of
Messrs. Kelnberger, Howard and Patriacca.
None of the executive officers of the Company have served on the Board of
Directors or compensation committee of any other entity that has had any of
such entity's executive officers serve either on the Company's Board of
Directors or compensation committee.
During fiscal 1999, the Company paid approximately $270,000 to Johnson, West
& Co. for accounting services in connection with the Company's acquisitions
and for tax return preparation services. Mr. Kelnberger is a member of
Johnson, West & Co.
Employment Contracts, Termination of Employment, Officer Loans and Change in
Control Arrangements
In April 1998, the Company entered into restated employment agreements (the
"Employment Agreements") with Daniel A. Potter, its Chairman and Chief
Executive Officer and John Bedard, its President, each of whom also is a
director through April 2001. Mr. Potter and Mr. Bedard are to receive salaries
of $360,000 and $240,000, respectively. Such compensation may be increased and
bonuses may be awarded at the discretion of the Board of Directors of the
Company. Each of Messrs. Potter and Bedard have agreed to devote their full
time and best efforts to fulfill their duties and responsibilities to the
Company. Each of them will be entitled to participate in employee benefit
plans.
Each of Messrs. Potter and Bedard have issued notes to the Company (the
"Recourse Notes") in connection with stock option exercises, for approximately
$2,080,147 and $1,155,637, respectively, including accrued interest through
April 30, 1998. In fiscal 1999, the Recourse Notes accrued additional interest
of $147,097 and $81,721 for a total Recourse Note balance of $2,227,244 and
$1,237,358 for Messrs. Potter and Bedard, respectively. The Recourse Notes
were issued by the executives upon their exercise in August 1995 of 420,000
options granted to them under the Stock Option Plans in May 1995 at an
exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to
satisfy then anticipated tax liabilities. The Recourse Notes, which provide
for full recourse against the respective officer's personal assets and Company
stockholdings, are 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 the Company's stock, the
net proceeds thereof will be applied to payment, in part or in full, of the
Recourse Notes.
In connection with the restated employment agreements for Mr. Potter and Mr.
Bedard, the Board has approved an accrual of bonuses that will be directed
primarily to satisfying obligations arising from the Recourse Notes. For
fiscal year 1998, bonus payments aggregating $816,580 were awarded as
reimbursement of previous payments of principal and interest on the Recourse
Notes and accompanying tax liability to the recipients. In addition, the Board
has approved the subsequent payment of additional aggregate bonuses of
approximately $6,345,000 to be used primarily to satisfy the Recourse Notes,
as well as the anticipated income tax liabilities to the executives subject to
any required approvals. In fiscal 1999, the Company accrued an additional
bonus of approximately $458,000 to be used to satisfy the fiscal 1999 accrued
interest related to the Recourse Notes as well as the anticipated income tax
liabilities of the executives subject to any required approvals. If such
bonuses are not effected, the Recourse Notes will remain outstanding.
Under the Employment Agreements, the Company has a right to terminate each
of the agreements for "cause" as defined in the agreements or as a result of
the employee's disability. Except in the case of termination for cause, upon
early termination of the agreements of the Company, each of Messrs. Potter and
Bedard shall be entitled to receive their salary plus fringe benefits for 36
months from the date of termination. In addition, the Employment Agreements
provide that any amount owed by Messrs. Potter or Bedard to the Company will
be
37
<PAGE>
forgiven (with any necessary payment to cover any resulting tax liability
incurred by such executive) if such executive leaves the Company while his
Recourse Note remains outstanding. In the event of a change of control of the
Company, Messrs. Potter and Bedard have the option to terminate their
employment subject to the provisions of the employment agreements and to
receive severance and fringe benefits for 36 months subject to the provisions
of their agreements. A "change in control" includes an acquisition of 15% of
the voting power of the securities of the Company by any person, certain
changes in the composition of the Board of Directors, and an approval by the
stockholders of the Company of a merger, consolidation, reorganization,
liquidation, dissolution or sale of all or substantially all of the assets of
the Company.
Each of Messrs. Potter and Bedard has agreed not to disclose any
confidential information of the Company during the term of his employment or
to compete with the Company during the term of his employment or for a period
of three years following termination of his employment except in accordance
with the employment agreement.
In January 1998, the Company 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 the Company or Mr. Howard.
Upon termination in accordance with the agreement, Mr. Howard is entitled to
receive severance pay of at least 12 months' base salary and at most 24
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 the Company, the stockholders of the
Company approve a plan of liquidation, or the Company engages in a merger,
sale of assets or other business combination that results in the security
holders of the Company holding less than a majority of the combined voting
power after the transaction. Mr. Howard has agreed not to disclose any
confidential information of the Company during his employment and thereafter,
and not to compete with the Company during his employment and for two years
thereafter, including soliciting customers and employees of the Company.
In April 1999, the Company entered into employment agreements with Michael
G. Schifsky, Senior Vice President, and Richard Bedard, Executive Vice
President. As compensation, Mr. Schifsky and Mr. Bedard are to receive annual
base salaries of $119,700 and $98,600, respectively, plus bonuses and stock
options as determined by the Board of Directors. The agreements are
substantially similar to the employment agreement of Mr. Howard, as described
above.
In connection with the acquisition of Moovies, Inc., the Company was
obligated to make certain "change of control" payments to F. Andrew Mitchell,
one of the Company's former directors, and to Stephen L. Reynolds, the
Company's former Chief Financial Officer, both of whom were formerly employed
by Moovies. Mr. Mitchell resigned as a director of the Company on January 25,
1999. Mr. Reynolds resigned as Chief Financial Officer on November 13, 1998.
During fiscal 1999, Messrs. Mitchell and Reynolds received $558,000 and
$313,200 respectively, the remaining amounts of the "change of control"
payments that were due.
Mr. Potter's brother-in-law Robert Yager, formerly a director of the
Company, is employed as a Company vice president of franchise development. Mr.
John Bedard is the brother of Richard Bedard and Glenn Bedard, Company
executive vice presidents and Paul Bedard, a Company vice president. Each of
the non-executive employees receives an annual compensation ranging from
$69,800 to $98,700.
Compensation of Directors
Members of the Board of Directors who are not employees of the Company
receive $1,000 for each meeting of the Board of Directors and for each
committee meeting of the Board of Directors attended by such director, in
addition to reimbursement of reasonable expenses incurred in attending such
meetings, and receive $2,000 for
38
<PAGE>
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 Messrs. Patriacca, Kelnberger, and Coburn) 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) 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of July 29, 1999, the number and
approximate percentage of shares of Class A Common Stock beneficially owned
by: (i) all persons known by the Company to be the beneficial owner of more
than five percent (5%) of the outstanding Class A Common Stock; (ii) each
"named executive officer" (as defined in Item 402 to Regulation S-K under the
Securities Act of 1933, as amended) and director; and (iii) all directors and
executive officers of the Company individually and as a group.
<TABLE>
<CAPTION>
Number of
Class A
Shares Percentage of
Beneficially Class A Shares
Name and Address of Beneficial Owner(1)(2) Owned(3) Outstanding(3)
------------------------------------------ ------------ --------------
<S> <C> <C>
Daniel A. Potter.................................. 1,526,120 5.2%
Chairman and Chief Executive Officer(4)
John M. Bedard.................................... 1,111,039 3.8%
President and Director(5)
Daniel C. Howard.................................. 110,315 *%
Chief Operating Officer and Director(6)
Dale E. Lauwagie.................................. 25,000 *%
Chief Financial Officer(7)
Richard Bedard.................................... 75,000 *%
Executive Vice President(8)
Michael G. Schifsky............................... 95,100 *%
Senior Vice President(9)
Paul M. Kelnberger................................ 6,750 *%
Director(10)
Theodore J. Coburn................................ 117,250 *%
Director(11)
Bernard R. Patriacca.............................. 2,750 *%
Director(12)
Wellington Management Company, LLP(13)............ 2,560,800 8.8%
All Directors and Executive officers as a group
(9 persons)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12).. 3,069,324 10.5%
</TABLE>
- --------
* Less than one percent (1%) of the outstanding shares of Class A Common
Stock.
(1) The address of Messrs. Potter, John Bedard, Howard, Lauwagie, Richard
Bedard, Schifsky, Kelnberger, Coburn and Patriacca is c/o Video Update,
Inc. 3100 World Trade Center, 30 East Seventh Street, St. Paul, Minnesota
55101. The address of Wellington Management Company, LLP is 75 State
Street, Boston, MA 02109.
(2) Does not include (a) Stephen L. Reynolds, who resigned from the position
of Chief Financial Officer of the Company on November 13, 1998 or (b) F.
Andrew Mitchell, who resigned from his position as a
39
<PAGE>
director of the Company on January 25, 1999. As of July 29, 1999, Does not
include 1,048,000 shares beneficially owned by Farnam Street Partners,
L.P., representing 3.6% of the Company's Common Stock, as reported in a
Schedule 13G/A filed with the Commission on June 9, 1999.
(3) For the purposes of this table, shares of Common Stock which, to the
Company's knowledge, an individual or group has a right to acquire within
sixty (60) days upon the exercise of options or warrants, are deemed
outstanding for the purposes of computing the number and percentage of
shares beneficially owned by such individual or group. Such shares are
not deemed to be outstanding for the purpose of computing the percentage
of shares beneficially owned by any other individual or group shown in
the table. This table does not include an approximate aggregate amount of
32,580 shares of Common Stock held by the executive officers of the
Company through the Company's 401(k) plan.
(4) Includes an aggregate of 200,000 shares of Common Stock issuable on
exercise of various stock options. Includes an aggregate of 36,947 shares
of Common Stock held in custodial accounts for Mr. Potter's children.
Excludes an aggregate of 100,000 shares of Common Stock issuable upon the
exercise of various stock options that have not yet vested. Does not
include 26,250 shares of Common Stock owned by Mr. Potter's father, in
which Mr. Potter disclaims beneficial ownership.
(5) Includes an aggregate of 110,000 shares of Common Stock issuable on
exercise of various stock options. Includes 39,515 shares of Common Stock
held by Mr. Bedard's mother, but subject to a voting trust of which Mr.
Bedard is a trustee. Excludes an aggregate of 55,000 shares of Common
Stock issuable upon the exercise of stock options that have not yet
vested.
(6) Includes an aggregate of 77,437 shares of Common Stock issuable upon the
exercise of various stock options. Excludes an aggregate of 16,063 shares
of Common Stock issuable upon the exercise of various stock options that
have not yet vested.
(7) Excludes an aggregate of 90,000 shares of Common Stock issuable upon the
exercise of stock options that have not vested.
(8) Includes an aggregate of 63,000 shares of Common Stock issuable upon the
exercise of various stock options that have vested. Excludes an aggregate
of 54,000 shares of Common Stock issuable upon the exercise of stock
options that have not vested.
(9) Includes an aggregate of 90,100 shares of Common Stock issuable upon the
exercise of various stock options that have vested. Excludes an aggregate
of 41,900 shares of Common Stock issuable upon the exercise of stock
options that have not vested.
(10) Includes an aggregate of 6,750 shares of Common Stock issuable upon the
exercise of various stock options that have vested. Excludes an aggregate
of 2,250 shares of Common Stock issuable upon the exercise of stock
options that have not vested.
(11) Includes an aggregate of 117,250 shares of Common Stock issuable upon the
exercise of various stock options and warrants that have vested. Excludes
an aggregate of 3,500 shares of Common Stock issuable upon the exercise
of stock options that have not vested.
(12) Includes an aggregate of 2,750 shares of Common Stock issuable upon the
exercise of various stock options that have vested. Excludes an aggregate
of 3,250 shares of Common Stock issuable upon the exercise of stock
options that have not vested.
(13) Includes 1,310,000 shares of Common Stock of which the beneficial owner
has shared voting power and 2,560,800 shares of Common Stock of which the
beneficial owner has shared dispositive power. The information with
respect to the beneficial owner has been taken from the beneficial
owner's Schedule 13G/A filed with the Commission on February 10, 1999.
Item 13. Certain Relationships and Related Transactions
Craig Belisle, the brother-in-law of John Bedard, the Company's President
and a Director, owned a majority interest in two franchise stores as of April
30, 1999. The amount of service fees earned from these franchisees was
approximately $87,230 for the year ended April 30, 1999. The amount due from
Mr. Belisle, as a franchisee, at April 30, 1999 approximated $15,100.
40
<PAGE>
During the years ended April 30, 1997, 1998 and 1999, the Company paid
approximately $271,000, $561,000 and $270,000, respectively, to Johnson, West
& Co., PLC ("Johnson, West & Co.") for accounting and tax services. Paul
Kelnberger, a Director of the Company, is a member of Johnson, West & Co.
Constance Koppenhaver, the daughter of Mr. Kelnberger, owned an interest in
one franchise store as of April 30, 1999. The amount of service fees earned
from this franchise was approximately $15,420 for year ended April 30, 1999.
The amount due from Ms. Koppenhaver, as a franchisee, at April 30, 1999,
approximated $4,200.
Robert Yager, formerly a director of the Company, is employed as a Company
vice president of franchise development and is the brother-in-law of Mr.
Potter. Richard Bedard and Glenn Bedard, Company executive vice presidents,
and Paul Bedard, a Company vice president, are each the brother of Mr. John
Bedard. In fiscal 1999, each of the non-executive employees received an annual
compensation ranging from $69,800 to $98,700.
Brown, Coburn & Co. ("Brown, Coburn"), a privately held investment banking
firm of which Theodore J. Coburn, a director of the Company, is a principal,
received $15,000 for consulting services provided to the Company for the
fiscal year ended April 30, 1999. The Company intends to use Brown, Coburn's
services during fiscal 2000.
In connection with the acquisition of Moovies, Inc., the Company was
obligated to make certain "change of control" payments to F. Andrew Mitchell,
one of the Company's former directors, and to Stephen L. Reynolds, the
Company's former Chief Financial Officer, both of whom were formerly employed
by Moovies. As of April 30, 1999, all change of control payments had been made
to Messrs. Mitchell and Reynolds, in the amount of $558,000 and $313,200
respectively.
The Company believes that the above arrangements were on terms at least as
favorable as could be obtained from unaffiliated parties.
Each of Messrs. Potter and Bedard have issued notes to the Company (the
"Recourse Notes") in connection with stock option exercises, for approximately
$2,080,147 and $1,155,637, respectively, including accrued interest through
April 30, 1998. In fiscal 1999, the Recourse Notes accrued additional interest
of $147,097 and $81,721 for a total Recourse Note balance of $2,227,244 and
$1,237,358 for Messrs. Potter and Bedard, respectively. The Recourse Notes
were issued by the executives upon their exercise in August 1995 of 420,000
options granted to them under the Stock Option Plans in May 1995 at an
exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to
satisfy then anticipated tax liabilities. The Recourse Notes, which provide
for full recourse against the respective officer's personal assets and Company
stockholdings, are 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 the Company's stock, the
net proceeds thereof will be applied to payment, in part or in full, of the
Recourse Notes.
In connection with the restated employment agreements for Mr. Potter and Mr.
Bedard, the Board has approved an accrual of bonuses that will be directed
primarily to satisfying obligations arising from the Recourse Notes. For
fiscal year 1998, bonus payments aggregating $816,580 were awarded as
reimbursement of previous payments of principal and interest on the Recourse
Notes and accompanying tax liability to the recipients. In addition, the Board
has approved the subsequent payment of additional aggregate bonuses of
approximately $6,345,000 to be used primarily to satisfy the Recourse Notes,
as well as the anticipated income tax liabilities to the executives subject to
any required approvals. In fiscal 1999, the Company accrued an additional
bonus of approximately $458,000 to be used to satisfy the fiscal 1999 accrued
interest related to the Recourse Notes as well as the anticipated income tax
liabilities of the executives subject to any required approvals. If such
bonuses are not effected, the Recourse Notes will remain outstanding.
41
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
All financial statements of the Company as set forth under Item 8 of this
report.
2. Financial Statement Schedules
No financial statement schedules have been included since they are either
not applicable or the information is included elsewhere herein.
3. Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
1 -- Form of Purchase Agreement by and between Video Update, Inc. (the
"Company"), Piper Jaffray Inc. and The Robinson Humphrey Company,
Inc. (filed as Exhibit 1 to the Company's Pre-Effective Amendment
No. 2 to its Form S-3 Registration Statement filed with the
Securities and Exchange Commission (the "Commission") on September
27, 1996 and incorporated herein by reference) (replaced and
superseded a corresponding exhibit previously filed with the
Commission).
2.1 -- 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 the Company, VUI Merger Corp. and Moovies,
Inc. ("Moovies") (filed as Exhibit 2.1 to the Company's Form S-4
Registration Statement filed with the Commission on January 23,
1998 and incorporated herein by reference).
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 the Company'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 the Company, Cox Video
Corporation, and Robert W. Cox, dated as of February 28, 1997
(filed as Exhibit 2a to the Company'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 the Company, Susan Janae Kingston,
and Larry Peterman, dated as of March 17, 1997 (filed as Exhibit
2b to the Company'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 the Company, Video Warehouse,
Inc., and Donald and Katherine Cianci, dated as of January 15,
1997 (filed as Exhibit 2 to the Company'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 the Company'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 the Company, Videoland, Inc. and
the Stockholder of Videoland, Inc., dated as of November 14, 1995
(filed as Exhibit 2 to the Company's Current Report on Form 8-K/A
filed with the Commission on January 26, 1996 and incorporated
herein by reference).
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
2.8 -- Purchase Agreement by and among the Company, 94 Video West, Inc.
and Michael Bennett and Paul Levens, dated as of October 2, 1995
(filed as Exhibit 2a to the Company'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 the Company, Talerico Enterprises,
Inc. ("TEI") and the stockholder of TEI, dated as of October 5,
1995 (filed as Exhibit 2b to the Company'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 the Company, and the
Stockholders of Indy Video, Inc., dated as of September 26, 1995
(filed as Exhibit 2 to the Company'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 the Company,
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 the Company'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 the Company and
Glenn Forth, dated August 23, 1995 (filed as Exhibit 2b to the
Company'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 the Company and
Seig Badke, dated August 23, 1995 (filed as Exhibit 2c to the
Company'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 the Company, 443972
B.C., Ltd., Dale Mounzer and Jim Collen dated August 22, 1995
(filed as Exhibit 2d to the Company'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 the Company and the Stockholders
of AV Video, dated as of July 14, 1995 (filed as Exhibit 2 to the
Company'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 the Company and the Proprietors
of Video Powerstore, dated as of June 2, 1995 (filed as Exhibit 2
to the Company'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
the Company, Schmidt & Schmidt Limited ("SSL"), and the
Stockholders of SSL, dated February 28, 1995 (filed as Exhibit 2a
to the Company'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 the Company, Jarzig
Enterprises, Inc., and the Stockholders of Jarzig Enterprises,
Inc., dated October 25, 1994 (filed as Exhibit 2b to the Company'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 the Company, Schmidt &
Schmidt Limited, and the Stockholders of Schmidt & Schmidt
Limited, dated September 16, 1994 (filed as Exhibit 2a to the
Company's Current Report on Form 8-K filed with the Commission on
October 3, 1994 and incorporated herein by reference).
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
2.20 -- Agreement and Plan of Merger by and among the Company, Halgrimson
Enterprises, Inc., and the Stockholders of Halgrimson Enterprises,
Inc., dated September 16, 1994 (filed as Exhibit 2b to the
Company'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 the Company, Koonrod,
Inc., and the Stockholders of Koonrod, Inc., dated September 2,
1994 (filed as Exhibit 2 to the Company'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 the
Company's Current Report on Form 8-K filed with the Commission on
January 20, 1997 and incorporated herein by reference).
3.2 -- Bylaws of the Company, as amended on June 23, 1998 (filed as
Exhibit 3 to the Company's Current Report on Form 8-K filed with
the Commission July 7, 1998 and incorporated herein by reference).
4.1 -- Form of Unit Purchase Option (filed as Exhibit 4a to the Company'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
the Company'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
the Company'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 the Company'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 the Company's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on
July 20, 1994 and incorporated herein by reference).
4.6 -- Rights Agreement by and between the Company and American Stock
Transfer and Trust Company (filed as Exhibit 4 to the Company's
Form 8-K filed April 14, 1998 and incorporated herein by
reference).
10.1 -- Amended and Restated Voting Agreement, dated October 27, 1997
among the Company, Moovies, and directors and certain officers of
the Company and Moovies (filed as Exhibit 10 to the Company's Form
10-Q for the fiscal quarter ended October 31, 1997 and
incorporated herein by reference).
10.2 -- Amended and Restated Undertaking Agreement, dated October 27, 1997
among the Company, Moovies, Daniel A. Potter, John M. Bedard and
Daniel C. Howard (filed as Exhibit 10.2 of the Company's Form S-4
Registration Statement filed with the Commission on January 23,
1998 and incorporated herein by reference).
10.3 -- Form of 1998 Stock Option Plan (filed as Exhibit 10.3 of the
Company's Form S-4 Registration Statement filed with the
Commission on January 23, 1998 and incorporated herein by
reference).
10.4 -- Agreement between Rentrak Corporation and the Company (filed as
Exhibit 10.4 of the Company's Form S-4 Registration Statement
filed with the Commission on January 23, 1998 and incorporated
herein by reference).
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
10.5 -- Form of Employment Agreement between the Company and Daniel C.
Howard (filed as Exhibit 10.6 of the Company's Form S-4
Registration Statement filed with the Commission on January 23,
1998 and incorporated herein by reference).
10.6 -- Credit Agreement entered into as of March 6, 1998, among the
Company, Video Update Canada Inc., various lending institutions
and Banque Paribas, as agent (the "Credit Agreement") (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed
with the Commission on March 11, 1998 and incorporated herein by
reference).
10.7 -- U.S. Pledge Agreement in favor of Banque Paribas, as Collateral
Agent, dated as of March 6, 1998 (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K filed with the Commission on
March 11, 1998 and incorporated herein by reference).
10.8 -- U.S. Security Agreement among the Company, Various U.S.
Subsidiaries of the Company, and Banque Paribas, as Collateral
Agent, dated as of March 6, 1998 (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K filed with the Commission on
March 11, 1998 and incorporated herein by reference).
10.9 -- Subsidiaries Guarantee Agreement among Various Subsidiaries of the
Company, and Banque Paribas, as Collateral Agent and as Pledgee,
dated as of March 6, 1998 (filed as Exhibit 10.4 to the Company's
Current Report on Form 8-K filed with the Commission on March 11,
1998 and incorporated herein by reference).
10.10 -- Warrant Purchase Agreement between the Company, and Banque
Paribas, Grand Cayman Branch, dated as of March 6, 1998 (filed as
Exhibit 10.5 to the Company's Current Report on Form 8-K filed
with the Commission on March 11, 1998 and incorporated herein by
reference).
10.11 -- Warrant Agreement between the Company and Banque Paribas, Grand
Cayman Branch, dated as of March 6, 1998 (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K filed with the Commission
on March 11, 1998 and incorporated herein by reference).
10.12 -- Registration Rights Agreement between the Company and Banque
Paribas, Grand Cayman Branch, dated as of March 6, 1998 (filed as
Exhibit 10.7 to the Company's Current Report on Form 8-K filed
with the Commission on March 11, 1998 and incorporated herein by
reference).
10.13 -- 1996 Stock Option Plan (filed as Exhibit 10a to the Company's
Quarterly Report on Form
10-QSB for the fiscal quarter ended July 31, 1996 and incorporated
herein by reference).
10.14 -- Form of Franchise Offering Circular (filed as Exhibit 10b to the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended July 31, 1996 and incorporated herein by reference).
10.15 -- Restated Employment Agreement between the Company and Daniel A.
Potter, effective as of April 30, 1998 (filed as Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1998 and incorporated herein by reference).
10.16 -- Restated Employment Agreement between the Company and John M.
Bedard, effective as of April 30, 1998 (filed as Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1998 and incorporated herein by reference).
10.17 -- Form of Merger and Acquisition Agreement between the Company and
D.H. Blair Investment Banking Corp. (filed as Exhibit 10a to the
Company'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).
10.18 -- Form of Amendment to Warrant Agreement dated July 20, 1994 between
the Company, American Stock Transfer & Trust Company and D.H.
Blair Investment Banking Corp. (filed as Exhibit 10b to the
Company'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).
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
10.19 -- Stock Exchange Agreement by and between the Company and certain
stockholders of Tinseltown Video, Inc. (filed as Exhibit 10a to
the Company's Current Report on Form 8-K filed with the Commission
on February 16, 1995 and incorporated herein by reference).
10.20 -- Formula Stock Option Plan (filed as Exhibit 10a to the Company's
Form SB-2 Registration Statement (No. 33-89018) filed with the
Commission on January 31, 1995 and incorporated herein by
reference).
10.21 -- Form of Franchise Agreement between the Company and Franchisees
(filed as Exhibit 10d to the Company's Form SB-2 Registration
Statement (No. 33-79292-C) declared effective by the Commission on
July 20, 1994 and incorporated herein by reference).
10.22 -- Form of Consulting Agreement between the Company and D.H. Blair
Investment Banking Corp. (filed as Exhibit 10f to the Company's
Form SB-2 Registration Statement (No. 33-79292-C) declared
effective by the Commission on July 20, 1994 and incorporated
herein by reference).
10.23 -- Form of Agency Agreement between the Company and D.H. Blair
Investment Banking Corp. (filed as Exhibit 10aa to the Company's
Form SB-2 Registration Statement (No. 33-79292-C) declared
effective by the Commission on July 20, 1994 and incorporated
herein by reference).
10.24 -- 1994 Stock Option Plan (filed as Exhibit 10bb to the Company's
Form SB-2 Registration Statement (No. 33-79292-C) declared
effective by the Commission on July 20, 1994 and incorporated
herein by reference).
10.25 -- Form of Second Amendment and Waiver to the Credit Agreement, dated
as of August 12, 1998 (filed as Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended April 30,
1998 and incorporated herein by reference).
10.26 -- Form of First Amendment to Warrant Agreement between the Company
and Banque Paribas, dated as of August 12, 1998 (filed as Exhibit
10.26 to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1998 and incorporated herein by reference).
10.27 -- Third Amendment to Credit Agreement (filed as Exhibit 10.1 to the
Company's Form 10-Q filed March 17, 1999 and incorporated herein
by reference).
10.28 -- Fourth Amendment to Credit Agreement (filed as Exhibit 10.2 to the
Company's Form 10-Q filed March 17, 1999 and incorporated herein
by reference).
10.29 -- Fifth Amendment to Credit Agreement (filed as Exhibit 10.3 to the
Company's Form 10-Q filed March 17, 1999 and incorporated herein
by reference).
10.30 -- Sixth Amendment to Credit Agreement and Waiver (filed as Exhibit
10a to the Company's Form 8-K filed July 1, 1999 and incorporated
herein by reference).
10.31 -- Seventh Amendment to Credit Agreement and Waiver (filed as Exhibit
10b to the Company's Form 8-K filed July 1, 1999 and incorporated
herein by reference).
10.32 -- Form of Warrant between the Company and U.S. Bancorp Libra, a
division of U.S. Bancorp Investments, Inc. (filed as Exhibit 4a to
the Company's Form 8-K filed July 1, 1999 and incorporated herein
by reference).
10.33 -- Form of Warrant between the Company and Existing Lenders under the
Credit Agreement (filed as Exhibit 4b to the Company's Form 8-K
filed July 1, 1999 and incorporated herein by reference).
10.34 -- Form of Warrant between the Company and C Term Loan Participants
under the Credit Agreement (filed as Exhibit 4c to the Company's
Form 8-K filed July 1, 1999 and incorporated herein by reference).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
10.35 -- Registration Rights Agreement between the Company and U.S. Bancorp
Libra, a division of U.S. Bancorp Investments, Inc. and certain
Investors dated June 23, 1999 (filed as Exhibit 4d to the
Company's Form 8-K filed July 1, 1999 and incorporated herein by
reference).
10.36 -- Warrant between the Company and Ingram Entertainment Inc. dated
May 11, 1999.
10.37 -- Registration Rights Agreement by and between the Company and
Ingram Entertainment Inc. dated May 11, 1999.
10.38 -- Promissory Note of the Company to the order of Ingram
Entertainment Inc. dated May 11, 1999.
+10.39 -- Revenue Sharing Agreement dated as of November 20, 1998, between
the Company and the party named therein.
+10.40 -- Revenue Sharing Agreement dated as of October 20, 1998, between
the Company and the party named therein.
+10.41 -- Revenue Sharing Agreement dated as of July 22, 1998, between the
Company and the party named therein.
+10.42 -- Revenue Sharing Agreement dated as of June, 1998, between the
Company and the party named therein.
+10.43 -- Revenue Sharing Agreement dated as of June 1998, between the
Company and the party named therein.
10.44 -- Employment Agreement dated as of April 8, 1999, between the
Company and Michael G. Schifsky.
10.45 -- Employment Agreement dated as of April 20, 1999, between the
Company and Richard Bedard.
10.46 -- Master Lease Agreement dated as of November 23, 1998 between the
Company and Heller Financial Leasing, Inc.
16 -- Letter of Ernst & Young LLP (filed as Exhibit 16 to the Company's
Form 8-K filed February 3, 1999 and incorporated herein by
reference).
18.1 -- Letter on Change in Accounting Principles (filed as Exhibit 18 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended April 30, 1996 and incorporated herein by reference).
18.2 -- Letter on Change in Accounting Principles.
21 -- List of the Company's Subsidiaries (filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1998 and incorporated herein by reference).
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of Ernst & Young LLP.
27.1 -- Financial Data Schedule.
27.2 -- Financial Data Schedule--Restated 1997.
27.3 -- Financial Data Schedule--Restated 1998.
</TABLE>
- --------
+ Exhibits for which Company is seeking confidential treatment for certain
portions. The confidential material in Exhibits 10.39, 10.40, 10.41, 10.42
and 10.43 has been redacted and separately filed with the Securities and
Exchange Commission.
47
<PAGE>
(b) Reports on Form 8-K
Set forth below is a list of reports on Form 8-K that were filed during the
last quarter of the period covered by this report, listing the items reported,
any financial statements filed, and the dates of such reports.
1. Form 8-K filed February 3, 1999 reporting a change in the Company's
certifying accountants and the resignation of director F. Andrew Mitchell.
48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Video Update, Inc.
/s/ Daniel A. Potter
Date: August 13, 1999 By: _________________________________
Daniel A. Potter
Chairman and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel A. Potter Chairman and Chief Executive August 13,
______________________________________ Officer (Principal 1999
Daniel A. Potter Executive Officer)
/s/ John M. Bedard President and Director August 13,
______________________________________ 1999
John M. Bedard
/s/ Daniel C. Howard Chief Operations Officer and August 13,
______________________________________ Director 1999
Daniel C. Howard
/s/ Paul M. Kelnberger Chief Financial Officer August 13,
______________________________________ 1999
Paul M. Kelnberger
/s/ Dale E. Lauwagie Director August 13,
______________________________________ 1999
Dale E. Lauwagie
/s/ Bernard R. Patriacca Director August 13,
______________________________________ 1999
Bernard R. Patriacca
/s/ Theodore J. Coburn Director August 13,
______________________________________ 1999
Theodore J. Coburn
</TABLE>
49
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of April 30, 1998 and 1999................ F-4
Consolidated Statements of Operations for the years ended April 30, 1997,
1998 and 1999........................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended April
30, 1997, 1998 and 1999................................................. F-6
Consolidated Statements of Cash Flows for the years ended April 30, 1997,
1998 and 1999........................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Video Update, Inc.
We have audited the accompanying consolidated balance sheet of Video Update,
Inc. and subsidiaries as of April 30, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
ended April 30, 1999. 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 audit.
We conducted our audit 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 audit provides 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, 1999, and the consolidated results of its operations and its cash flows
for the year ended April 30, 1999 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for the amortization of its video and
game rental inventory.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
August 12, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Video Update, Inc.
We have audited the accompanying consolidated balance sheet of Video Update,
Inc. and subsidiaries as of April 30, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended April 30, 1998. 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, 1998, and the consolidated results of its operations and its cash flows
for each of the two years in the period ended April 30, 1998 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
August 13, 1998
F-3
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, April 30,
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 1,433 $ 1,235
Accounts receivable....................................... 4,737 3,826
Merchandise inventory..................................... 9,167 6,393
Video and game rental inventory--net...................... 97,734 45,040
Property and equipment--net............................... 69,720 59,395
Prepaid expenses.......................................... 4,162 6,419
Income taxes receivable................................... 2,430 --
Deferred income taxes..................................... 2,592 --
Goodwill--net............................................. 80,664 77,715
Other assets.............................................. 5,792 7,185
-------- ---------
Total assets.......................................... $278,431 $ 207,208
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable............................................. $104,488 $ 116,014
Accounts payable.......................................... 39,045 56,055
Accrued expenses.......................................... 12,841 23,054
Accrued rent.............................................. 5,073 7,118
Accrued compensation...................................... 7,685 8,062
-------- ---------
Total liabilities..................................... 169,132 210,303
-------- ---------
Commitments and contingencies (Note 9)
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--29,278,518 at April 30,
1998 and 29,278,457 at April 30, 1999.................. 293 293
Additional paid-in capital.............................. 117,641 116,372
Retained deficit........................................ (7,674) (118,045)
Foreign currency translation............................ (961) (1,715)
-------- ---------
Total stockholders' equity............................ 109,299 (3,095)
-------- ---------
Total liabilities and stockholders' equity............ $278,431 $ 207,208
======== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
-------------------------------
1997 1998 1999
--------- --------- ----------
(In thousands, except per
share amounts)
<S> <C> <C> <C>
Revenues:
Rental revenue.............................. $ 83,489 $ 138,279 $ 221,409
Product sales............................... 7,743 17,075 31,915
Service fees................................ 567 800 772
-------- --------- ----------
91,799 156,154 254,096
Costs and expenses:
Store operating expenses.................... 70,205 129,920 232,287
Selling, general and administrative......... 7,883 25,223 26,179
Cost of product sales....................... 3,705 9,809 20,257
Store closing charge........................ -- 5,082 14,798
Inventory valuation charge.................. -- -- 50,629
Amortization of goodwill.................... 1,613 2,353 4,471
-------- --------- ----------
83,406 172,387 348,621
-------- --------- ----------
Operating income (loss)....................... 8,393 (16,233) (94,525)
Interest expense.............................. (892) (4,292) (13,695)
Other income (expense)........................ 461 (71) 677
-------- --------- ----------
(431) (4,363) (13,018)
-------- --------- ----------
Income (loss) before income taxes............. 7,962 (20,596) (107,543)
Income tax expense (benefit).................. 3,342 (6,116) 2,828
-------- --------- ----------
Net income (loss)............................. $ 4,620 $ (14,480) $ (110,371)
======== ========= ==========
Net income (loss) per share, basic............ $ 0.29 $ (0.71) $ (3.77)
======== ========= ==========
Net income (loss) per share, diluted.......... $ 0.28 $ (0.71) $ (3.77)
======== ========= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Officers'
Class A Class B Paid-in Earnings Comprehensive Notes
Common Stock Common Stock Capital (Deficit) Income Receivable
------------------ ------------------ ---------- --------- ------------- ----------
Number of Number of
Shares Amount Shares Amount Amount Amount Amount Amount Total
---------- ------ ---------- ------ ---------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30,
1996.................. 11,017,735 $110 2,000,000 $ 20 $ 61,029 $ 2,186 $ (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.............. 7,015,000 70 -- -- 24,962 -- -- -- 25,032
Issuance of shares in
connection with the
Company's
acquisitions.......... 136,606 2 -- -- 90 -- -- -- 92
Issuance of shares
related to employee
stock options
exercised............. 1,000 -- -- -- 4 -- -- -- 4
Comprehensive Income:
Net income (loss)..... -- -- -- -- -- 4,620 -- -- 4,620
Foreign currency
translation.......... -- -- -- -- -- -- (387) -- (387)
---------
Total comprehensive
income (loss)........ -- -- -- -- -- -- -- -- 4,233
---------- ---- ---------- ---- -------- --------- ------- ------- ---------
Balance at April 30,
1997.................. 18,170,341 182 2,000,000 20 86,085 6,806 (421) (1,680) 90,992
Adjustment of shares
issued in
acquisition........... (65,811) -- -- -- (500) -- -- -- (500)
Issuance of shares in
connection with the
Moovies acquisition... 9,303,927 93 -- -- 28,107 -- -- -- 28,200
Release, partial
forfeiture and
conversion of escrow
shares................ 1,170,000 11 (1,300,000) (13) 3,546 -- -- -- 3,544
Issuance of warrants in
connection with the
Senior Facility....... -- -- -- -- 1,730 -- -- -- 1,730
Conversion of Class B
to Class A Common
Stock................. 700,000 7 (700,000) (7) -- -- -- -- --
Acquisition related
deficiency payments... -- -- -- -- (1,327) -- -- -- (1,327)
Forgiveness of officers
note receivable....... -- -- -- -- -- -- -- 1,680 1,680
Comprehensive Income:
Net income (loss)..... -- -- -- -- -- (14,480) -- -- (14,480)
Foreign currency
translation.......... -- -- -- -- -- -- (540) -- (540)
---------
Total comprehensive
income (loss)........ -- -- -- -- -- -- -- -- (15,020)
---------- ---- ---------- ---- -------- --------- ------- ------- ---------
Balance at April 30,
1998.................. 29,278,457 293 -- -- 117,641 (7,674) (961) -- 109,299
Revaluation of stock
warrants.............. -- -- -- -- 192 -- -- -- 192
Acquisition related
deficiencies.......... -- -- -- -- (1,461) -- -- -- (1,461)
Comprehensive Income:
Net income (loss)..... -- -- -- -- -- (110,371) -- -- (110,371)
Foreign currency
translation.......... -- -- -- -- -- -- (754) -- (754)
---------
Total comprehensive
income (loss)........ -- -- -- -- -- -- -- -- (111,125)
---------- ---- ---------- ---- -------- --------- ------- ------- ---------
Balance at April 30,
1999.................. 29,278,457 $293 -- $-- $116,372 $(118,045) $(1,715) $ -- $ (3,095)
========== ==== ========== ==== ======== ========= ======= ======= =========
</TABLE>
See accompany notes.
F-6
<PAGE>
VIDEO UPDATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
-----------------------------
1997 1998 1999
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss)............................. $ 4,620 $(14,480) $(110,371)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 25,702 48,459 89,494
Deferred income taxes....................... 1,486 (4,356) 2,592
Inventory valuation charge.................. -- -- 50,629
Compensation expense from release of escrow
shares..................................... -- 3,546 --
Compensation expense related to restated
employment agreements...................... -- 7,161 458
Charge for store closings................... -- 5,082 14,798
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Accounts receivable......................... (3,332) (191) 911
Merchandise inventory....................... (2,772) (960) 1,977
Income taxes................................ 503 (3,397) 2,430
Other assets................................ (1,270) (5,873) (4,316)
Accounts payable............................ 3,891 6,770 17,010
Accrued rent................................ 1,516 2,834 2,045
Accrued liabilities......................... 483 (1,190) 1,050
-------- -------- ---------
Net cash provided by operating
activities............................... 30,827 43,405 68,707
Investing activities
Purchase of video and game rental inventory... (33,434) (61,752) (71,212)
Purchase of property and equipment............ (14,951) (17,458) (12,962)
Proceeds from sale-leaseback.................. -- -- 5,000
Investment in businesses, net of cash
acquired..................................... (21,340) 3,027 --
Payment of deficiency on stock guarantee...... -- (1,327) (241)
Other investing activities.................... 292 -- --
-------- -------- ---------
Net cash used in investing activities..... (69,433) (77,510) (79,415)
Financing activities
Proceeds from notes payable................... 26,326 103,700 27,300
Payments of notes payable..................... (10,621) (20,046) (16,036)
Payment of acquisition debt................... -- (50,000) --
Proceeds from issuance of common stock........ 25,032 -- --
Other financing activities.................... 4 -- --
-------- -------- ---------
Net cash provided by financing
activities............................... 40,741 33,654 11,264
Effect of exchange rate changes on cash......... (387) (540) (754)
-------- -------- ---------
Increase (decrease) in cash and cash
equivalents.................................... 1,748 (991) (198)
Cash and cash equivalents at beginning of the
Year........................................... 676 2,424 1,433
-------- -------- ---------
Cash and cash equivalents at end of the Year.... $ 2,424 $ 1,433 $ 1,235
======== ======== =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1999, 1998 and 1997
1. Significant Accounting Policies
Nature of Business
Video Update, Inc. and subsidiaries ("Video Update" or 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 inter-
company 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 video and
game 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 video and game rental inventory represents
assets used by the Company to generate current operating income, and
management believes that to classify all of these costs as non-current 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 videos and games.
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 operations 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.
Merchandise Inventory
Merchandise inventory is stated at the lower of cost (first in, first out)
or market. Inventory consists of videos and games held for sale, supplies and
concessions.
F-8
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Video and Game Rental Inventory
Video 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....... Accelerated basis to a net book value of $8.00 over
the first three months and then straight-line over
33 months to a salvage value of $4.00 per video.
Four and over........... Accelerated basis to a net book value of $4.00 over
the first three months and then fully amortized on a
straight-line basis over nine months.
</TABLE>
Game rental inventory is amortized on a straight-line basis to $10.00 over
12 months then straight-line over 6 months to a salvage value of $4.00 per
game.
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 $5,121,000 and $9,592,000 at April 30, 1998 and 1999,
respectively and is being amortized on a straight-line basis over 20 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 to its estimated fair value.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 109 "Accounting for Income Taxes."
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 only the net earnings and earnings per share
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," in fiscal 1997. The Company has elected to recognize
compensation expense for its stock based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense is recognized for stock
options with exercise prices equal to, or in excess of, the market value of
the underlying shares of stock at the date of grant.
Long-Lived Assets
The Company 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 No. 121 prescribes the accounting treatment for long-lived assets,
identifiable intangibles and goodwill related to those assets when there are
F-9
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Fair Value of Financial Instruments
At April 30, 1998 and 1999, the carrying value of financial instruments such
as cash and cash equivalents, accounts receivable, accounts payable and notes
payable approximated their fair values (see Note 16 of the Notes to
Consolidated Financial Statements for further information).
Revenue Recognition
Revenue on videos and games is recognized at the time of rental or sale.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excluded
any dilutive effect of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform to the SFAS No. 128 requirements.
The following table is a reconciliation of the basic and diluted earnings
per share computation:
<TABLE>
<CAPTION>
Fiscal Year Ended April
30,
---------------------------
1997 1998 1999
------- -------- ---------
(In thousands, except per
share amounts)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per
share--net income (loss)...................... $ 4,620 $(14,480) $(110,371)
======= ======== =========
Denominator:
Denominator for basic earnings per share--
weighted average shares
Class A common shares........................ 15,185 20,412 29,278
Class B common shares........................ 700 -- --
------- -------- ---------
Denominator for basic earnings per share....... 15,885 20,412 29,278
Effect of dilutive securities:
Employee stock options....................... 200 -- --
Contingent stock acquisition................. 177 -- --
------- -------- ---------
Dilutive potential common shares............... 377 -- --
------- -------- ---------
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed
conversions................................... 16,262 20,412 29,278
======= ======== =========
Basic net income (loss) per share.............. $ 0.29 $ (0.71) $ (3.77)
======= ======== =========
Diluted net income (loss) per share............ $ 0.28 $ (0.71) $ (3.77)
======= ======== =========
</TABLE>
F-10
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassification
Certain reclassifications have been made to the prior year financial
statements to conform with the 1999 presentation.
2. Change in Amortization Method for Video and Game Rental Inventory
Effective February 1, 1999, the Company changed the amortization policy for
videos to the method as described in Note 1 of the Notes to Consolidated
Financial Statements. 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.
Prior to February 1, 1999, base stock videos were amortized over 36 months
on a straight-line basis to a salvage value of $6.00 per video; the fourth
through ninth copies of each title per store were amortized straight-line over
6 months to a book value of $6.00 and then fully amortized straight-line over
30 months; the tenth and any succeeding copies of each title per store were
amortized straight-line over 6 months to a book value of $6.00 and then fully
amortized straight-line over 3 months. Video games were fully amortized
straight-line over a period of 36 months.
The new method accelerates the rate of amortization and has been adopted as
a result of revenue sharing agreements with studios, which have increased the
copy-depth, which is satisfying consumer demand over a shorter period of time.
The Company believes accelerating expense recognition during the first 3
months more closely matches the new business model of higher revenue generated
following a title's release. Under the new accounting method, the Company
expenses revenue sharing payments as revenues are earned pursuant to
contractual arrangements.
The new method of accounting has been applied to rental inventory held as of
February 1, 1999. The Company recorded a pre-tax charge of approximately
$50,629,000 to operating expenses in the fourth quarter of 1999. The effect of
the change had the impact of decreasing inventory and increasing amortization
expense through a one-time charge.
3. Moovies, Inc. Acquisition
In March 1998 the Company completed the acquisition of Moovies, Inc.
("Moovies") in a tax-free reorganization, whereby Moovies stockholders
received .75 shares of Video Update Class A Common Stock in exchange for each
share of Moovies common stock. Video Update issued approximately 9.3 million
shares in this transaction. The acquisition was accounted for under the
purchase method of accounting and the excess of the cost over the estimated
fair value of the assets acquired, estimated to be approximately $46,291,000,
will be amortized over 20 years.
In March 1998, the stockholders in conjunction with the Moovies transaction
approved the termination and cancellation of the Escrow Agreement by and among
American Stock Transfer & Trust Company, Video Update and certain stockholders
of Video Update. As a result: (i) 10% or 130,000 of the 1,300,000 shares of
Class B Common Stock held in escrow were forfeited; (ii) the remaining
1,170,000 shares of common stock were released from escrow, resulting in a
one-time compensation expense charge of approximately $3,546,000 which the
Company recognized as selling, general and administrative expense in the
fourth quarter of fiscal 1998; and, (iii) all 1,870,000 shares of Class B
Common Stock were converted into Class A Common Stock and the preferential
voting rights were eliminated.
F-11
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the fourth quarter of 1998, the Company performed an analysis of the
stores acquired in the acquisition of Moovies, Inc. and adopted a business
restructuring plan to close approximately 17 of the acquired stores. This
resulted in a reserve of approximately $1,843,000 of future cash outlays for
lease terminations and miscellaneous closing costs, which was recorded in the
balance sheet as a result of purchase accounting. In fiscal year 1999, the
Company expended approximately $579,000 for lease terminations and
miscellaneous closing costs which reduced the reserve. Successful negotiations
of lease terminations resulted in an excess reserve of approximately $619,000
that was recorded as an adjustment to goodwill. The April 30, 1999 reserve of
approximately $645,000 represents future expected cash outlays for lease
terminations.
4. Provision for Store Closing and Other Charges
During the fourth quarter of 1998, the Company began and completed an
extensive analysis of its base store performance and adopted a business
restructuring plan to close approximately 24 of its stores. This analysis
resulted in the Company recording a pretax charge of approximately $5,100,000.
The components of the restructuring charge included approximately $2,700,000
in reserves of future cash outlays for lease terminations and miscellaneous
closing costs, as well as approximately $2,400,000 in asset write downs
comprised of $1,596,000 and $804,000 for property and equipment and goodwill,
respectively. The revenues of stores identified for closure were not material
for the fiscal years ended April 30, 1997 and 1998. During fiscal year 1999,
$473,000 was expended for lease terminations and miscellaneous closing costs.
Successful negotiations of lease terminations resulted in an excess reserve of
approximately $1,337,000 that was recorded as an increase to net income. The
April 30, 1999 reserve of approximately $890,000 represents future expected
cash outlays for lease terminations.
In addition, during the fourth quarter of fiscal 1998, the Company recorded
approximately the following significant charges in its selling, general and
administrative expenses: (i) $3,800,000 related to the Moovies acquisition,
$3,546,000 of which was a non-cash, non-tax deductible charge to compensation
expense related to the release of 1,170,000 shares of Class B Common Stock
from escrow (see Note 12 of the Notes to Consolidated Financial Statements
"Stockholders' Equity"); (ii) $3,236,000 non-cash charge relating to the
restated employment agreements for the Company's Chief Executive Officer and
its President, representing amounts which will be applied to their existing
stock option related loan obligations to the Company and $3,925,000 which will
be used by the executives to pay income taxes and loans arising from the same
stock option transaction (see Note 8 of the Notes to Consolidated Financial
Statements "Related Party Transactions"); and, (iii) $700,000 for the
previously capitalized bank fees related to the Company's previous Revolving
Credit Facility which was repaid prior to its maturity (see Note 7 of the
Notes to Consolidated Financial Statements "Notes Payable").
During the fourth quarter of 1999, the Company began and completed an
extensive analysis of each store's performance and adopted a business
restructuring plan to close approximately 70 of its stores. This analysis
resulted in the Company recording a pretax charge of approximately
$16,135,000. The components of the restructuring charge included approximately
$9,535,000 in reserves of future cash outlays for lease terminations and
miscellaneous closing costs, as well as approximately $6,600,000 in net asset
write-downs. The revenues of stores identified for closure were approximately
$5,193,000, $11,592,000 and $17,742,000 for the fiscal years ended April 30,
1997, 1998, and 1999, respectively.
F-12
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Video and Game Rental Inventory--Net
<TABLE>
<CAPTION>
April 30,
-------------------
1998 1999
-------- ---------
(In thousands)
<S> <C> <C>
Video and game rental inventory......................... $171,072 $ 232,374
Accumulated amortization................................ (73,338) (187,334)
-------- ---------
$ 97,734 $ 45,040
======== =========
</TABLE>
Amortization expense for video and game rental inventory, which is included
in store operating expenses, was $20,317,000, $37,613,989 and $63,781,000 for
the years ended April 30, 1997, 1998 and 1999, respectively. Accumulated
amortization at April 30, 1999 also includes $50,629,000 related to the
valuation charge (see Note 2 of the Notes to Consolidated Financial Statements
"Change in Amortization Method for Video and Game Rental Inventory").
6. Property and Equipment--Net
<TABLE>
<CAPTION>
April 30,
------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Land..................................................... $ 488 $ 488
Buildings................................................ 1,403 1,403
Furniture and equipment.................................. 45,720 43,463
Leasehold improvements................................... 34,454 36,204
Accumulated depreciation................................. (12,345) (22,163)
-------- --------
$ 69,720 $ 59,395
======== ========
</TABLE>
Depreciation expense was $3,307,000, $6,880,000, and $11,370,000 for the
years ended April 30, 1997, 1998 and 1999, respectively.
F-13
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Notes Payable
Simultaneously with the closing of the Movies transaction the Company
announced that a syndicate lead by Banque Paribas had extended a $120 million
Senior Facility (the "Senior Facility"), which replaced the previous revolving
credit facility. During fiscal year 1999 the Senior Facility was reduced to
$115 million. The notes payable balance consists of the following:
<TABLE>
<CAPTION>
April 30,
------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Senior Facility with banks consisting of two term loans
of $52,500,000 and $42,500,000; interest at 9.25% and
9.50%, respectively; with principal payments beginning
in May 1999, maturing in April 2002 and April 2003,
respectively. Secured by substantially all assets of
the Company........................................... $ 95,000 $ 95,000
Capital expenditure loan with banks; interest payable
April 30, 1999 at 9.19%; with monthly payments begin-
ning July 2000, and final maturity April 2002. Secured
by substantially all assets of the Company............ 4,500 15,000
Revolving loan with banks; interest payable April 30,
1999 at 9.21%; maturity April 2002. Secured by sub-
stantially all assets of the Company.................. 4,200 5,000
Note payable with interest at 6.25% (see Note 18)...... 2,000 2,000
Note payable in monthly installments of $6,180 until
January 2000, with a balloon payment of approximately
$458,000, interest at the United States government
treasury securities rate plus 4.5% (8.99% at April 30,
1999). The note is secured by a mortgage and specific
assets of the Company................................. 507 481
Note payable with monthly installments of approximately
$1,000 with interest rate of 12% maturing in May
1999.................................................. 11 1
Discount on debt for 1,000,000 bank warrants; expiring
March 2003............................................ (1,730) (1,468)
-------- --------
$104,488 $116,014
======== ========
</TABLE>
The weighted-average interest rate on borrowings outstanding was 7.61%,
9.29% and 9.33% at April 30, 1997, 1998 and 1999, respectively.
The aggregate maturities (effective May 28, 1999--See Notes 19 and 20 of the
Notes to Consolidated Financial Statements "Subsequent Events") of the notes
payable at April 30, 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 (9 months)............................................... $ 3,880
2001.......................................................... 18,912
2002.......................................................... 24,875
2003.......................................................... 59,565
2004.......................................................... 10,250
Thereafter.................................................... --
--------
$117,482
Discount on debt.............................................. (1,468)
--------
$116,014
========
</TABLE>
The Senior Facility replaced the Company's previous $60 million revolving
credit facility. The Senior Facility consists of the following: (i) two term
loans totaling $95 million; (ii) a $15 million capital expenditure line; and,
(iii) a $10 million revolving line (reduced to $5 million in fiscal 1999). The
Company borrowed the
F-14
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$95 million under the two term loans in conjunction with the closing of the
Moovies merger and the proceeds were used to refinance the current
indebtedness of Moovies and Video Update and pay transaction expenses. The
capital expenditure line was primarily available to fund the conversion of the
Moovies stores and integration costs, the opening of new stores and selected
acquisitions. In fiscal year 1999, the Senior Facility was amended to modify
the terms of the capital expenditure line to allow usage for working capital
needs. The revolving line is available for normal working capital needs. The
facility is secured by all of the Company's assets. In connection with the
Senior Facility, the Company also issued five year warrants to Banque Paribas
to purchase one million shares of the Company's Class A Common Stock at an
exercise price of $2.68. The warrants were valued at $1,730,000 and resulted
in an increase in paid in capital and corresponding discount on debt. In
fiscal year 1999, the warrants were repriced to a more current market price in
conjunction with amendments to the Senior Facility as described above. This
discount, as well as related bank fees, will be amortized over the life of the
Senior Facility (see Note 20 of the Notes to Consolidated Financial
Statements).
The Senior Facility includes negative, affirmative and financial covenants
including, but not limited to, minimum free cash flow, consolidated
indebtedness to consolidated free cash flow, 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, divestitures, 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 is secured by
substantially all of the Company's assets as well as by pledges of its stock
in its subsidiaries, which subsidiaries also have provided guarantees of the
Company's obligations. The Company was not in compliance of certain of the
financial covenants of the Senior Facility at April 30, 1999. The Company has
obtained waivers with respect to the non-complying conditions and has further
amended the Senior Faiclity (see Note 20 of the Notes to Consolidated
Financial Statements).
8. Related Party Transactions
Family members of stockholders and a Company director own a majority
interest at April 30, 1997, 1998 and 1999 in one, three and three franchise
stores, respectively. The amount of service fees earned from these franchisees
was approximately $25,000, $73,104 and $102,650 for the years ended April 30,
1997, 1998 and 1999, respectively. The amount due from the franchisees at
April 30, 1997, 1998 and 1999 approximated $2,850, $73,322 and $19,331,
respectively.
During the years ended April 30, 1997, 1998 and 1999, the Company incurred
expenses of approximately $271,000, $561,000 and $270,000, respectively, to
Johnson, West & Co., PLC ("Johnson, West & Co.") for accounting and tax
services. A director of the Company is a member of Johnson, West & Co.
Each of Messrs. Potter and Bedard have issued notes to the Company (the
"Recourse Notes") in connection with stock option exercises, for approximately
$2,080,147 and $1,155,637, respectively, including accrued interest through
April 30, 1998. In fiscal 1999, the Recourse Notes accrued additional interest
of $147,097 and $81,721 for a total Recourse Note balance of $2,227,244 and
$1,237,358 for Messrs. Potter and Bedard, respectively. The Recourse Notes
were issued by the executives upon their exercise in August 1995 of 420,000
options granted to them under the Stock Option Plans in May 1995 at an
exercise price of $4.3125, the fair market value of the stock on the date the
options were granted. The Recourse Notes represent the total exercise price of
such options plus amounts advanced by the Company to such executives to
satisfy then anticipated tax liabilities. The Recourse Notes, which provide
for full recourse against the respective officer's personal assets and Company
stockholdings, are 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 the Company's stock, the
net proceeds thereof will be applied to payment, in part or in full, of the
Recourse Notes.
F-15
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the restated employment agreements for Mr. Potter and Mr.
Bedard, the Board has approved an accrual of bonuses that will be directed
primarily to satisfying obligations arising from the Recourse Notes. For
fiscal year 1998, bonus payments aggregating $816,580 were awarded as
reimbursement of previous payments of principal and interest on the Recourse
Notes and accompanying tax liability to the recipients. In addition, the Board
has approved the subsequent payment of additional aggregate bonuses of
approximately $6,345,000 to be used primarily to satisfy the Recourse Notes,
as well as the anticipated income tax liabilities to the executives subject to
any required approvals. In fiscal 1999, the Company accrued an additional
bonus of approximately $458,000 to be used to satisfy the fiscal 1999 accrued
interest related to the Recourse Notes as well as the anticipated income tax
liabilities of the executives subject to any required approvals. If such
bonuses are not effected, the Recourse Notes will remain outstanding. The
Company recorded compensation expense of approximately $7,162,000 in general
and administrative expense in 1998 to reflect these revisions. The resultant
accrual for compensation expense has been recorded as an offset to the
officers' loan obligations, in essence treated as loan forgiveness, with the
balance of the accrual included in accrued compensation in the balance sheet
as of April 30, 1998 and 1999 (see Note 4 of the Notes to Consolidated
Financial Statements "Provision for Store Closing and Other Charges").
9. Commitments and Contingencies
Employment Contracts
In fiscal 1998, the Company entered into employment agreements with three of
its executive officers. In fiscal 1999, the Company entered into employment
contracts with two additional officers. The agreements provide for annual base
salary amounts as well as provisions for potential bonuses and stock option
grants. The agreements further provide for specified additional payments in
the event of termination or transactions that would result in change of
control of the Company.
Lease Agreements
The Company leases office and retail space under operating leases with terms
of 6 to 204 months. These leases generally have a term of 3 to 10 years and
provide options to renew for periods ranging from 3 to 5 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 2015. The Company also leases vehicles
and computer equipment.
In November 1998, the Company entered into a sale/leaseback arrangement with
respect to certain of its furniture, fixtures, equipment and signage used in
selected retail locations. Under the arrangement the Company obtained
approximately $5.0 million.
At April 30, 1999, minimum annual rental commitments under non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
2000 (9 months--see Note 19).................................. $ 38,235
2001.......................................................... 44,654
2002.......................................................... 36,882
2003.......................................................... 31,434
2004.......................................................... 29,704
Thereafter.................................................... 109,932
--------
Total minimum lease payments.................................. $290,841
========
</TABLE>
F-16
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense, principally retail and office space, under operating leases
amounted to $13,513,000, $28,180,000 and $47,201,000 for the years ended April
30, 1997, 1998 and 1999, respectively.
Supplier Agreement
The Company has an agreement with a United States supplier of video rental
tapes. Under the terms of the agreement, the Company has purchase obligations
related to all non-studio revenue sharing rental tape purchases. The quantity
of purchases is subject to availability by the supplier and the established
credit limit for the Company.
10. Income Taxes
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended April
30,
---------------------------
1997 1998 1999
------ -------- ---------
(In thousands)
<S> <C> <C> <C>
United States..................................... $5,525 $(21,308) $ (94,635)
Canada............................................ 2,437 712 (12,908)
------ -------- ---------
Net income (loss) before income taxes............. $7,962 $(20,596) $(107,543)
====== ======== =========
Income tax expense is as follows:
<CAPTION>
Fiscal Year Ended April
30,
---------------------------
1997 1998 1999
------ -------- ---------
(In thousands)
<S> <C> <C> <C>
Current:
Federal......................................... $1,384 $ (1,812) $ 154
State........................................... 422 52 100
International................................... 50 -- --
------ -------- ---------
1,856 (1,760) 254
Deferred:
Federal......................................... 413 (3,706) (30,093)
State........................................... (15) (1,062) (5,786)
International................................... 1,088 412 (5,695)
------ -------- ---------
1,486 (4,356) (41,574)
Less: Valuation allowance....................... -- -- 44,148
------ -------- ---------
1,486 (4,356) 2,574
------ -------- ---------
Total income tax expense (benefit)................ $3,342 $ (6,116) $ 2,828
====== ======== =========
</TABLE>
F-17
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of the net deferred tax asset, resulting from differences in book
and income tax accounting methods, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
April 30,
-------------------
1998 1999
-------- ---------
(In thousands)
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation and amortization.............. $ (4,798) $ --
Tax over book mergers basis adjustment................... (254) --
-------- ---------
Deferred income tax liabilities........................ (5,052) --
Deferred income tax assets:
Book over tax depreciation and amortization.............. -- 9,853
Book over tax deferred expense........................... -- 738
Book over tax rent expense............................... 1,613 2,339
Book over tax deferred revenue........................... -- 25
Book over tax employment related accruals................ 2,414 2,586
Net operating loss carryforwards......................... 1,649 24,372
Book over tax restructuring and other accruals........... 1,968 4,235
-------- ---------
Deferred income tax assets............................. 7,644 44,148
Deferred tax asset valuation allowance..................... -- (44,148)
-------- ---------
7,644 --
-------- ---------
Net deferred income tax assets............................. $ 2,592 $ --
======== =========
</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,
-------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Federal tax at statutory rate................. 34.0% (34.0)% (34.0)%
State tax, net of federal benefit............. 2.8 (3.3) (3.6)
Release of escrow shares...................... 0.0 5.8 0.0
International................................. 3.5 0.5 (1.3)
Goodwill amortization......................... 1.0 0.7 0.3
Other......................................... 0.7 0.6 0.0
Change in valuation allowance................. 0.0 0.0 41.2
-------- --------- ---------
42.0% (29.7)% 2.6%
======== ========= =========
</TABLE>
Realization of the future tax benefits related to the deferred assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes.
At April 30, 1999, the Company has United States federal and state tax loss
carryforwards of approximately $84 million which expire between the years 2007
to 2014. Approximately $20 million of the net operating loss carryforward is
limited to $1.5 million each year in accordance with the Internal Revenue
Code.
F-18
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Fiscal Year Ended
April 30,
----------------------
1997 1998 1999
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Interest paid.......................................... $ 390 $ 3,223 $12,345
Income taxes paid (refunded)........................... $1,394 $ 1,725 $(2,175)
Common stock issued in Moovies acquisition............. $ -- $28,200 $ --
</TABLE>
12. Stockholders' Equity
Class A Common Stock; Class B Common Stock
In connection with the Company's initial public offering, all of the holders
of the Company's Class B Common Stock placed on a pro rata basis, an aggregate
of 1,300,000 shares (the "Escrow Shares") into escrow. As a result of the
Stockholders' vote to release 90% of the shares from escrow in fiscal 1998,
the remaining 130,000 shares were forfeited. The shares released from escrow
and the remaining 700,000 shares of Class B Common Stock outstanding were
converted into Class A Common Stock. As a result, as of April 30, 1998 and
1999, there were no shares of Class B Common Stock outstanding.
The Securities and Exchange Commission requires that the release of the
Escrow Shares to officers, directors, employees and consultants of the Company
be recognized as a compensatory non-cash compensation expense in the statement
of operations with a corresponding offset as an increase to additional paid-in
capital. As such, stockholders' equity in total did not change. The expense of
$3,546,000 was equal to the fair market value of the Escrow Shares on the date
of release.
Shareholders' Rights Agreement
In April 1998, the Board of Directors approved the declaration of a dividend
of one preferred share purchase right (a "Right") for each outstanding share
of Class A Common Stock, par value $.01 per share (the "Common Shares") and
for each outstanding Class B Warrant ("Warrants"), of the Company. The
dividend was paid on April 24, 1998 (the "Record Date") to the stockholders
and Class B Warrant holders of record on that date. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.01 per share (the
"Preferred Shares"), of the Company at a price of $20.00 per one one-hundredth
of a Preferred Share (the "Purchase Price") subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons have acquired
beneficial ownership of 15% or more of the outstanding Common Shares (an
"Acquiring Person") or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Shares or Warrant
certificates outstanding as of the Record Date, by such Common Share
certificate or such Warrant certificate, as the case may be.
In the event that any person or group or affiliated of associated persons
becomes an Acquiring Person, proper provision shall be made so that each
holder of a Right, other than Rights beneficially owned by the Acquiring
Person (which will thereafter be void), will thereafter have the right to
receive upon exercise--in lieu of Preferred Shares--that number of Common
Shares having a market value of two times the exercise price of the Right. At
any time after any person or group becomes an Acquiring Person and prior to
the acquisition by
F-19
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such person or group of 50% or more of the outstanding Common Shares, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by such person or group which will have become void), in whole or in
part, at an exchange ratio of one Common Share, or one one-hundredth of a
Preferred Share (or of a share of a class or series of the Company's preferred
stock having equivalent rights, preferences and privileges), per Right
(subject to adjustment).
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends.
Warrants--Class A and B
Each of the units sold in connection with the Company's public offerings
consisted of one share of Class A Common Stock of the Company, one Class A
Warrant and one Class B Warrant. The components of the units were separately
transferable immediately. When issued, each Class A Warrant, upon its
exercise, entitled the holder to purchase one share of the Company's Class A
Common Stock and one Class B Warrant. The Class A Warrant exercise price was
$6.50 per share subject to certain adjustments. In August 1995, the Company
called for redemption all of its outstanding Class A Warrants. The redemption
date set forth in the Notice of Redemption was September 7, 1995.
Approximately 4,502,000 Class A Warrants were exercised resulting in net
proceeds to the Company of approximately $28,414,000. At April 30, 1999, the
Company had 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 expired in July 1999. In addition, there were 500,000
Class B Warrants outstanding that were issued by the Company in a 1994 bridge
financing. These warrants provided the holders the ability to purchase the
underlying Class A Common Stock of the Company at $8.75 per share and expired
in July 1999.
Blair Options
At April 30, 1999 the Company had 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; and 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. The issuable Class A Warrants and the
issuable and outstanding Class B Warrants underlying the Blair Options expired
in July 1999.
13. 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 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
F-20
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granting of options to non-management directors of the Company. 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.
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.
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. 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 granted under such plan have been exercised.
In January 1998, the Board of Directors approved an additional stock option
plan (the "1998 Plan"). The 1998 Plan provides for the granting of up to
1,750,000 options to eligible individuals to purchase shares of Class A Common
Stock of the Company. Options under the 1998 Plan may be incentive stock
options or non-qualified stock options. 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.
In August 1999, the Board of Directors approved the repricing of
approximately 1,360,000 stock options to $1.06 per share.
In fiscal 1997, the Company adopted the disclosure-only provision of SFAS
No. 123 for Stock-based Compensation. SFAS No. 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 1997, 1998,
and 1999, 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>
1997 1998 1999
------ -------- ---------
(In thousands,
except per share amount)
<S> <C> <C> <C>
Net income (loss)--pro forma....................... $4,217 $(15,700) $(111,481)
Basic net income (loss) per share--pro forma....... $ .27 $ (.77) $ (3.81)
Diluted net income (loss) per share--pro forma..... $ .26 $ (.77) $ (3.81)
</TABLE>
F-21
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair market value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected dividend yields............................. 0% 0% 0%
Expected stock price volatility...................... 42.5% 88.9% 69.5%
Risk free interest rate.............................. 5.1% 5.5% 4.6%
Expected life of options............................. 5 years 5 years 5 years
</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 1997, 1998
and 1999 is $1.89, $1.45 and $0.83 per share, respectively.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Outstanding Average Exercise
Options Price Per Share
----------- ----------------
<S> <C> <C>
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
Granted....................................... 1,015,402 6.93
Exercised..................................... -- --
Canceled...................................... (193,650) 4.49
---------
Outstanding at April 30, 1998................... 2,202,702 5.64
Granted....................................... 174,000 1.06
Exercised..................................... --
Canceled...................................... (733,202) 7.36
---------
Outstanding at April 30, 1999................... 1,643,500 4.17
---------
Exercisable at April 30, 1997................... 293,480 5.40
Exercisable at April 30, 1998................... 1,021,578 7.85
Exercisable at April 30, 1999................... 947,923 4.95
</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 Exerciseable Price
--------------- ----------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0 to $3.50 529,000 9.15 $2.45 116,583 $3.14
$3.51 to $5.00 807,600 7.24 4.06 583,650 4.07
$5.01 to $8.00 231,150 3.17 5.95 171,940 6.01
$8.01 to $12.00 47,600 5.10 10.58 47,600 10.58
$12.01 to $16.00 28,150 6.62 14.51 28,150 14.51
---------------- --------- ---- ----- ------- -----
$0 to $16.00 1,643,500 7.21 $4.17 947,923 $4.95
================ ========= ==== ===== ======= =====
</TABLE>
F-22
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Acquisitions
During fiscal year 1997 and 1998, the Company acquired, in 11 transactions,
one video retail store previously operated by Video Update franchisees, and
341 video retail stores operated by unaffiliated third party operators (the
"Acquisitions"). There were no acquisitions in fiscal year 1999. 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 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.
During fiscal 1998, the Company acquired, in 1 transaction, 267 retail
stores. The aggregate purchase price of this acquisition totaled approximately
$83,458,900 included approximately $50,171,200 in assumed indebtedness,
approximately $5,087,500 in transaction costs, and 9,303,927 shares of Class A
Common Stock valued at approximately $28,200,200. The excess of the cost over
the estimated fair value of the assets acquired (goodwill) of approximately
$46,291,000 is being amortized over 20 years on a straight-line basis.
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the fiscal year 1997 and 1998
acquisitions had been completed at the beginning of the year in which the
acquisition occurred and the immediately preceding year. There were no
acquisitions in fiscal 1999. 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,
---------------------------
1997 1998
------------- -------------
(In thousands, except per
share data)
<S> <C> <C>
Revenues....................................... $ 200,244 $ 248,134
Net income (loss) from continuing operations... $ 9,558 $ (28,562)
Basic net income (loss) per share.............. $ .33 $ (.98)
Diluted net income (loss) per share............ $ .32 $ (.98)
</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.
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. During fiscal 1998, cash deficiency payments were made with
regard to one acquisition in the amount of $1,327,000. In addition, in fiscal
1998, 65,750 shares placed in escrow as a result of an acquisition were
cancelled.
In connection with an acquisition that the Company completed in fiscal 1996,
the Company was obligated to make deficiency payments to the sellers equal to
the difference between a guaranteed price for each share issued, and the
actual market price obtained for such shares as of specified dates. During
fiscal 1999, deficiency payments of approximately $181,000 were made with
respect to this acquisition and in June 1999 a final payment of approximately
$71,000 (including approximately $60,000 for deficiency payments) was made in
full settlement of all obligations related to the sellers.
F-23
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is currently disputing a deficiency payment allegedly due with
respect to 239,163 shares which were issued to a seller in the Videoland
acquisition (see Note 18 of the Notes to Consolidated Financial Statements
"Legal Proceedings"); the seller is claiming a deficiency payment of
approximately $1,220,000 based on proceeds from the sale of Class A Common
Stock during the six month period of March 1996 to September 1996. The Company
has the option of satisfying approximately $1,220,000 (with respect to 239,163
shares) through the issuance of additional shares of Class A Common Stock.
15. 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 1997, 1998, and 1999. All inter-company revenues and
expenses have been eliminated.
<TABLE>
<CAPTION>
Operating Long-Lived
Revenues Income (Loss) Assets
-------- ------------- ----------
(In thousands)
<S> <C> <C> <C>
Fiscal 1997
United States............................ $ 71,650 $ 6,913 $ 65,749
Canada................................... 20,149 1,480 20,117
-------- -------- --------
$ 91,799 $ 8,393 $ 85,866
======== ======== ========
Fiscal 1998
United States............................ $116,958 $(17,579) $150,061
Canada................................... 39,196 1,346 26,560
-------- -------- --------
$156,154 $(16,233) $176,621
======== ======== ========
Fiscal 1999
United States............................ $212,980 $(81,748) $ 97,268
Canada................................... 41,116 (12,777) 13,560
-------- -------- --------
$254,096 $(94,525) $110,828
======== ======== ========
</TABLE>
16. Financial Instruments with Off-Balance-Sheet Risk and Fair Value of
Financial Instruments
The Company is party to financial instruments with off-balance-sheet risk
which are entered into in the normal course of business to meet its financing
needs and to manage its exposure to fluctuations in market rates. These
financial instruments include swap agreements and interest rate caps. The
instruments involve, to a varying degree, elements of credit and market risk
in addition to amounts recognized in the financial statements. The Company
does not hold or issue financial instruments for trading purposes.
The swap agreements are contracts to exchange fixed and floating payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of such agreements are used
to measure amounts to be paid or received and do not represent the amount of
the exposure to credit loss. The amounts to be paid or received under the swap
agreements are accrued consistently with the terms of the agreements and
market rates. The agreements are with major financial institutions which are
currently expected to fully perform under the terms of the agreements, thereby
mitigating the credit risk from the transactions in the event of
nonperformance by the counter-parties. In addition, the Company continuously
monitors the credit ratings of the counter-parties, and the likelihood of
default is considered remote.
F-24
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company had two interest rate swaps at April 30, 1999 as detailed below.
The notional amount of the first variable-to-fixed swap agreements totaled
$14,700,000 at April 30, 1999, with a pay rate of 6.737% and a receive rate of
4.99% based on three month LIBOR. The agreement expires in April 2000.
The notional amount of the second variable-to-fixed swap agreement is
$4,920,000 which will be in effect beginning April 30, 2000, with a pay rate
of 5.94% and a receive rate based on three month LIBOR. The agreement expires
April 2001.
The carrying amounts and estimated fair values of the Company's swap
instrument at April 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount (A) Value (A)
---------- ---------
<S> <C> <C>
Swap agreements expiring April 2000..................... $ 0 $(117)
Swap agreements expiring April 2001..................... $ 0 $ 15
</TABLE>
(A) Carrying amount represents accrued payments under the swap agreements. The
fair value represents the estimated amount that the Company would
receive/(pay) to the counter-parties to terminate the swap agreement at
April 30, 1999. (B)
17. Quarterly Financial Data (Unaditied)
Selected quarterly financial data is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Fiscal 1999 Quarter Quarter Quarter Quarter
----------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue................................... $61,693 $62,184 $70,692 $ 59,527
Operating income (loss)(1)................ (3,103) (9,486) 1,160 (83,096)
Net income (loss)......................... (6,478) (12,629) (2,123) (89,141)
Basic earnings per share.................. (0.22) (0.43) (0.07) (3.05)
Diluted earnings per share................ $ (0.22) $ (0.43) $ (0.07) $ (3.05)
<CAPTION>
1st 2nd 3rd 4th
Fiscal 1998 Quarter Quarter Quarter Quarter
----------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue................................... $30,806 $33,131 $41,782 $ 50,435
Operating income (loss)(1)................ 945 (636) 4,093 (20,635)
Net income (loss)......................... 110 (1,007) 1,808 (15,391)
Basic earnings per share.................. 0.01 (0.05) 0.10 (0.77)
Diluted earnings per share................ $ 0.01 $ (0.05) $ 0.10 $ (0.77)
</TABLE>
- --------
(1) Certain reclassifications have been made to conform with the 1999 fiscal
year-end presentation.
18. Legal Proceedings
In connection with the acquisition of the assets of Videoland, Inc.
("Videoland") in November 1995, the Company issued 239,163 shares of its Class
A Common Stock (the "Videoland Shares") to the sellers of the assets of
Videoland (the "Videoland Sellers"). With respect to the Videoland Shares, the
Company agreed to make a deficiency payment in October 1996 to the Videoland
Sellers if the gross proceeds received by such sellers from the sale of the
Videoland Shares during the six months from March 1996 through September 1996
is not equal to the number of shares of Videoland Shares sold multiplied by
$12.00. The Videoland Sellers were subject to certain "lockup" or sale
restrictions as a condition to any deficiency payment. The Company initiated
F-25
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
an action in federal district court in Minnesota for a declaratory judgment
that the Videoland Sellers are not entitled to any deficiency payment in light
of the failure by such sellers to comply with the lockup or sale restrictions.
In January 1998, the court entered a judgment, payable in the Company's stock
or cash, against the Company in the amount of $1,220,403 plus interest from
October 1996, and attorney's fees. The Eighth Circuit recently denied the
Company's appeal. The Company is exploring further avenues of relief. The
foregoing description is qualified in its entirety by reference to the full
text of the complaint and papers on file in the action.
In May 1998, Rousnam Video, Inc., a Michigan corporation and Hani (Al)
Monsour (collectively "Monsour") filed a lawsuit in state court (Macomb
County, Michigan) claiming amounts due pursuant to post-closing adjustments
contemplated in connection with an Asset Purchase Agreement among Monsour and
Moovies, Inc. dated as of March 14, 1997, and the alleged default on a
Promissory Note among Monsour and Moovies, Inc. in the amount of $2,000,000
which is currently reflected in notes payable. The trial court has ruled in
favor of the plaintiffs on a motion for summary judgment, and a judgment for
$2,370,195 has been entered against the Company. The Company believes it has
meritorious grounds for its appeal which is currently pending, although
assurances cannot be given as to the outcome of such action. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action.
In May 1998, four stockholders filed suit in the US District Court for the
Central District of California. The Plaintiff stockholders allege that Mr.
Potter and the Company made false and misleading statements or omitted
material information about the Company and the video industry during the
period April 1995 to September 1996, the date of its subsequent public
offering. Plaintiffs are seeking "at least the sum of $967,967," plus
interest, additional damages and attorneys' fees. The Company and Mr. Potter
believe that the claims are unsubstantiated, without merit and they intend to
defend the matter vigorously. A motion to dismiss the First Amended Complaint
was granted, but the court allowed Plaintiffs to re-file. At present, the
Second Amended Complaint has been filed. The Company is in the process of
discovery, which is not scheduled to close until December 1999. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action.
In August 1998, the Company filed suit in federal court in Oregon against
Rentrak Corporation, an Oregon Corporation. The Company alleges that Rentrak
has violated the federal antitrust law, given Rentrak's position in the market
and its exercise of monopoly power. Rentrak has counter-claimed for amounts it
alleges were owed by Moovies, Inc. prior to the acquisition of Moovies, Inc.
by the Company; the Company has denied that any sums are due. Discovery in the
matter is now scheduled to be completed in December 1999. The Company intends
to pursue its claims aggressively, although assurances cannot be given as to
the outcome of this matter. The foregoing description is qualified in its
entirety by reference to the full text of the complaint and papers on file in
the action.
On June 20, 1999, Allen Industries, Inc., a North Carolina corporation,
filed a lawsuit against the Company claiming approximately $3 million in
unpaid invoices arising out of the conversion of various Moovies stores. The
Company has asserted that Allen Industries breached its contract and performed
defective work. The Company believes that the claims of Allen Industries are
unsubstantiated and without merit. The Company intends to defend the matter
vigorously. The foregoing description is qualified in its entirety by
reference to the full text of the complaint and papers on file in the action.
On April 12, 1999, Sight and Sound Distributors, Inc., a Delaware
corporation, filed a lawsuit in state court (St. Louis County, Missouri)
alleging that the Company owes approximately $7.7 million for goods and
services purchased from Sight & Sound. The Company filed its answer denying
liability and alleging entitlements to off-sets and credits in the amount of
$3.5 million. The Company is in the process of discovery. A required
settlement conference has been scheduled for December 20, 1999. The foregoing
description is qualified in its entirety by reference to the full text of the
complaint and papers on file in the action.
F-26
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the above, 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.
19. Change in Fiscal Year-End
In December 1998, the Company's Board of Directors approved a resolution
changing the Company's fiscal year-end from April 30 to January 31, effective
January 31, 2000.
20. Subsequent Events
On May 11, 1999, the Company provided a 12% interest bearing promissory note
to Ingram Entertainment, Inc. ("Ingram") for $14,000,000 for the settlement of
accounts payable to be repaid in monthly installments through May 11, 2002.
The Company also issued Ingram a warrant to purchase 1,000,000 shares of Class
A Common Stock for an aggregate purchase price of $810,000 which expires May
11, 2004.
In August 1999, the Board of Directors approved the repricing of
approximately 1,360,000 stock options to $1.06 per share.
Effective May 28, 1999, the Company and the bank syndicate amended the terms
of the Senior Facility to, among other things; (i) increase the overall Senior
Facility with a new tranche of C Term loans in the aggregate amount of $10.5
million maturing June 2006, and bearing 12% interest; (ii) revise certain
financial covenants; (iii) revise and defer certain principal payments; (iv)
increase the overall interest rate by 0.75%; and (v) reflect the issuance of
7,481,250 warrants at $0.8719 per share expiring June 2006. The Company is
using proceeds of the new C Term loans for, among other things, the purchase
of rental inventory, payments related to expected store closings, trade
payables, and debt service. The Company believes that its relationship with
the Senior Facility lenders is satisfactory and that it would be able to
obtain any necessary waivers, amendments or modifications to the Senior
Facility if the Company's operating performance causes it to fall short of
certain financial covenants in the Senior Facility, although no assurances can
be given. If the Company is unable to maintain such a level of operations, it
will be required to reduce its overall expenditures and expansion plans to
comply with the covenants and requirements of the Senior Facility.
Additionally, any failure by the Company to maintain its level of operations
within the covenants and requirements of the Senior Facility could cause the
Company to be in default thereunder, allowing the lenders to take legal action
against the Company, including but not limited to, the immediate acceleration
of payment of borrowed funds, which could materially and adversely affect the
Company'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 the Company's operations and financial condition.
21. Management's Plan
During fiscal 2000, the Company is proceeding with actions intended to
enhance prospects for revenue growth and profitability including the closing
of approximately 70 under-performing locations; and the continued pursuit of
additional direct revenue sharing arrangements with motion picture studios,
which arrangements allow the Company to provide additional copies of rental
titles. The Company continues to evaluate opportunities to reduce costs and
improve revenues. The Company has maintained a longstanding and satisfactory
relationship with its primary product vendors and has negotiated extended
payment terms with several of these vendors. The loss of its primary product
vendors could have a material adverse effect on the Company. The Company will
continue to focus on reducing the aged accounts payable with payments, the
extension of terms, and negotiated settlements. If the Company is unable to
reduce the aged accounts payable to the satisfaction of the trade creditors,
it could have a material adverse effect on the Company. The Company's
principal capital requirements are for the purchase of rental inventory,
payments related to approximately 70 store closings, payments related to aged
accounts payable, payments of interest and principal related to the
credit/term loan facility (the "Senior Facility") and the Ingram Entertainment
Inc. note, and potential acquisitions that fit its growth strategies. Assuming
the Company is able to maintain a satisfactory relationship with its selected
vendors, its bank lenders,
F-27
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and its trade creditors, the Company expects that cash from operations, trade
credits, equipment leases, available revenue sharing arrangements, and
available borrowings under the Senior Facility will be sufficient to fund
future inventory purchases and other working capital needs for the next 12
months, although no assurances can be given that the Company will not require
additional sources of financing as a result of disappointing 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 the Company is unable to obtain such additional
financing, the Company may be required to reduce its overall expenditures and
the Company's ability to maintain or expand its current level of operations
could be materially and adversely affected.
F-28
<PAGE>
Exhibit 10.36
NEITHER THIS WARRANT NOR THE SHARES OF CLASS A COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Void after 5:00 p.m. Eastern Time, on May 11,2004.
WARRANT TO PURCHASE CLASS A COMMON STOCK
OF
VIDEO UPDATE, INC.
1,000,000 Shares
FOR VALUE RECEIVED, VIDEO UPDATE, INC. (the "Company"), a Delaware
corporation, hereby certifies that Ingram Entertainment Inc. or its permitted
assigns, is entitled to purchase from the Company, at any time or from time to
time (subject, however, to the restrictions set forth herein) commencing May 11,
1999, and prior to 5:00 p.m., Eastern Time, on May 11, 2004, a total of One
Million (1,000,000) fully paid and nonassessable shares of the Class A Common
Stock, par value $.01 per share ("Common Stock"), of the Company for an
aggregate purchase price of Eight Hundred Ten Thousand and 00/100 Dollars
($810,000.00) (computed on the basis of $.81 per share).
Hereinafter, (i) said Common Stock, together with any other equity
securities which may be issued by the Company with respect thereto or in
substitution therefor, is referred to as the "Common Stock," (ii) the
shares of the Common Stock purchasable hereunder are referred to as the
"Warrant Shares," (iii) the aggregate purchase price payable hereunder for
the Warrant Shares is referred to as the "Aggregate Warrant Price," (iv)
the price payable hereunder for each of the Warrant Shares is referred to
as the "Per Share Warrant Price," (v) this Warrant, and all warrants
hereafter issued in exchange or substitution for this Warrant are referred
to as the "Warrant" and (vi) the holder of this Warrant, together with any
permitted transferee or assignee, is referred to as the "Holder." The Per
Share Warrant Price is subject to adjustment as hereinafter provided; in
the event of any such adjustment, the number of Warrant
<PAGE>
Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per
Share Warrant Price in effect immediately after such adjustment.
1. Exercise of Warrant. This Warrant may be exercised, in whole at any
-------------------
time or in part from time to time, commencing May 11, 1999 and prior to 5:00
P.M., Eastern Time then current, on May 11, 2004, by the Holder of this Warrant
by the surrender of this Warrant (with the subscription form at the end hereof
duly executed) at the address set forth in Subsection 9(a) hereof, together with
proper payment of the Aggregate Warrant Price, or the proportionate part thereof
if this Warrant is exercised in part.
Payment for Warrant Shares shall be made by certified or official bank
check payable to the order of the Company, by wire transfer or, at the option of
the Holder, in whole or in part by forgiveness of indebtedness (including
principal, interest, fees or late charges) of the Company to the Holder,
including indebtedness evidenced by one or more promissory notes. If this
Warrant is transferred or exercised in part, the Holder is entitled to receive a
new Warrant covering the number of Warrant Shares in respect of which this
Warrant has not been transferred or exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such surrender of this Warrant, the Company will issue a
certificate or certificates in the name of the Holder, or as such Holder may
direct, for the number of shares of the Common Stock to which the Holder shall
be entitled, plus in lieu of any fractional shares to which such Holder would be
otherwise entitled, cash in an amount equal to the Per Share Warrant Price times
the fraction.
2. Reservation of Warrant Shares. The Company agrees that, prior to the
-----------------------------
expiration of this Warrant, the Company will at all times have authorized and in
reserve, and will keep available, solely for issuance and delivery upon the
exercise of this Warrant, the shares of the Common Stock as from time to time
shall be receivable upon the exercise of this Warrant.
3. Adjustments.
-----------
(a) If, at any time or from time to time after the date of this
Warrant, the Company shall distribute to the holders of the Common Stock (i)
securities, other than shares of the Common Stock, or (ii) property, other than
cash, without payment therefor, with respect to the Common Stock, then, and in
each such case, the Holder, upon the exercise of this Warrant, shall be entitled
to receive the securities and properties which the Holder would hold on the date
of such exercise if, on the date of this Warrant, the Holder had been the holder
of record of the number of shares of the Common Stock subscribed for upon such
exercise and, during the period from the date of this Warrant to and including
the date of such exercise, had retained such shares and the securities and
properties receivable by the Holder during such period. Notice of each such
distribution shall be forthwith mailed to the Holder.
(b) In case the Company shall hereafter (i) pay a dividend or make a
distribution on its capital stock in shares of Common Stock, (ii) subdivide its
outstanding
-2-
<PAGE>
shares of Common Stock into a greater number of shares, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares or (iv) issue
by reclassification of its Common Stock any shares of capital stock of the
Company, the Per Share Warrant Price (and number of Warrant Shares) in effect
immediately prior to such action shall be adjusted so that if the Holder
surrendered this Warrant for exercise immediately thereafter the Holder would be
entitled to receive the number of shares of Common Stock or other capital stock
of the Company which he would have owned immediately following such action had
such Warrant been exercised immediately prior thereto. An adjustment made
pursuant to this subsection (b) shall become effective immediately after the
record date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification. If, as a result of an adjustment made pursuant to this
subsection (b), the Holder of this Warrant shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose determination
shall be made reasonably and in good faith and shall be described in a written
notice to the Holder of this Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Per Share Warrant Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock, based upon the fair market value of such Common Stock and
other capital stock.
(c) In case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another entity
or entities of the property of the Company as an entirety or substantially as an
entirety, or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), the Holder shall have the right thereafter
to convert this Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to receive immediately
after such consolidation, merger, statutory exchange, sale or conveyance had
such Warrant been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth in this Section 3 with respect to the rights and
interests thereafter of the Holder to the end that the provisions set forth in
this Section 3 shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of this Warrant. The above
provisions of this subsection (c) shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances. Notice of
any such consolidation, merger, statutory exchange, sale or conveyance and of
said provisions so proposed to be made, or of any liquidation or dissolution of
the Company, shall be mailed to the Holder not less than ten (10) business days
prior to such event. A sale of all or substantially all of the assets of the
Company for a consideration consisting primarily of securities shall be deemed a
consolidation or merger for the foregoing purposes.
(d) Whenever the Per Share Warrant Price and the number of Warrant
Shares is adjusted as provided in this Section 3 and upon any modification of
the rights of
-3-
<PAGE>
the Holder of this Warrant in accordance with this Section 3, the Company shall
promptly prepare a certificate of an officer of the Company, setting forth the
Per Share Warrant Price and the number of Warrant Shares after such adjustment
or modification, a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause a copy of such
certificate to be mailed to the Holder.
(e) If the Board of Directors of the Company shall declare any
dividend or other distribution in cash with respect to the Common Stock, other
than out of earned surplus, the Company shall mail notice thereof to the Holder
not less than five (5) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution and
shall pay or distribute to the Holder of this Warrant, upon the exercise hereof,
in addition to the Warrant Shares purchased upon such exercise, such dividend or
distribution which would have been paid to the Holder if the Holder had been the
owner of record of such Warrant Shares immediately prior to the record date for
such dividend or distribution.
(f) Except in connection with the conversion or exercise of any
outstanding Options (as defined below) or Convertible Securities (as defined
below) of the Company or Moovies, Inc. (as such Options and Convertible
Securities are in effect on the date hereof) or with respect to any Option
granted under an option plan adopted by the Board of Directors of the Company
for the benefit of employees, independent contractors and similar persons (an
"Approved Option Plan"), in the event the Company shall, at any time or from
time to time after the date hereof, issue, sell, distribute or otherwise grant
in any manner (including by assumption) any rights to subscribe for or to
purchase, or any warrants or options for the purchase of, or any stock or
securities convertible into or exchangeable for Common Stock (any such rights,
warrants or options being herein called "Options" and any such convertible or
-------
exchangeable stock or securities being herein called "Convertible Securities")
----------------------
or any Convertible Securities (other than upon exercise of any Option), whether
or not such Options or the rights to convert or exchange such Convertible
Securities are immediately exercisable, and the price per share at which Common
Stock is issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (determined by dividing (i) the
aggregate amount if any, received or receivable by the Company as consideration
for the issuance, sale, distribution or granting of such Options or any such
Convertible Security, plus the minimum aggregate amounts of additional
consideration, if any, payable to the Company upon the exercise of all such
Options or upon conversion or exchange of all such Convertible Securities, plus,
in the case of Options to acquire Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the conversion or
exchange of all such Convertible Securities, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of all such Options or upon
the conversion or exchange of all such Convertible Securities or upon the
conversion or exchange of all Convertible Securities issuable upon the exercise
of all such Options) shall be less than the Market Price (as defined below) per
share of Common Stock on the record date for the issuance, sale, distribution or
granting of such Options (any such event being herein called a "Distribution")
------------
then, effective upon such Distribution, the Per Share Warrant Price shall be
reduced to the price (calculated to the nearest 1/1,000 of one cent) determined
by multiplying such Per Share Warrant Price in effect immediately
-4-
<PAGE>
prior to such Distribution by a fraction, the numerator of which shall be the
sum of (i) the number of shares of Common Stock outstanding (exclusive of any
treasury shares) immediately prior to such Distribution multiplied by the Market
Price per share of Common Stock on the date of such Distribution plus (ii) the
consideration, if any, received by the Company upon such Distribution, and the
denominator of which shall be the product of (A) the total number of shares of
Common Stock outstanding (exclusive of any treasury shares) immediately after
such Distribution multiplied by (B) the Market Price per share of Common Stock
on the record date for such Distribution. For purposes of the foregoing, the
total maximum number of shares of Common Stock issuable upon exercise of all
such Options or upon conversion or exchange of all such Convertible Securities
or upon the conversion or exchange of the total maximum amount of the
Convertible Securities issuable upon the exercise of all such Options shall be
deemed to have been issued as of the date of such Distribution and thereafter
shall be deemed to be outstanding and the Company shall be deemed to have
received as consideration therefor such price per share, determined as provided
above. No additional adjustment of Per Share Warrant Price shall be made upon
the actual exercise of such Options or upon conversion or exchange of the
Convertible Securities or upon the conversion or exchange of the Convertible
Securities issuable upon the exercise of such Options. "Market Price" means,
with respect to a share of Common Stock on any business day:
(a) If the Common Stock is (i) listed on a domestic
securities exchange, (ii) quoted on NASDAQ or (iii) traded in the
domestic over-the-counter market, which trades are reported by the
National Quotation Bureau, Incorporated ((i) - (iii) defined herein as
"Publicly Traded") at the time of determination, the average of the
closing prices on such day of the Common Stock on all domestic
securities exchanges on which the Common Stock is then listed or, if
there have been no sales on any such exchange on such day, the average
of the highest bid and lowest asked prices on all such exchanges at
the end of such day, or if on any such day the Common Stock is not so
listed, the average of the representative bid and asked prices quoted
on the NASDAQ System as of 4:00 P.M., New York time, on such day, or
if on any day such security is not quoted on the NADSAQ System, the
average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of thirty (30) days consisting of the
day as of which Market Price is being determined and the twenty-nine
(29) consecutive business days prior to such day (provided that, if
--------
Market Price is being determined as of the date of a bona fide public
offering, Market Price as of such date shall be the offering price of
the Common Stock subject to such public offering; or
(b) if the Common Stock is not Publicly Traded at the time
of determination, the Common Stock Per Share Market Value. "Common
Stock Per Share Market Value" means the price per share of the Common
Stock obtained by dividing (A) the Market Value by (B) the number of
shares of Common Stock outstanding (on a Fully-Diluted Basis) at the
time of
-5-
<PAGE>
determination. "Market Value" means the highest price that would be
------------
paid for the entire common equity of the Company on a going-concern
basis in an arm's-length transaction between a willing buyer and a
willing seller (neither acting under compulsion), using valuation
techniques then prevailing in the securities industry (but without
giving effect to any discount in respect of a minority interest), and
assuming full disclosure and understanding of all relevant information
and a reasonable period of time for effectuating such sale. For the
purposes of determining the Market Value, (a) the exercise price of
options or warrants to acquire Common Stock which are deemed to have
been exercised for the purpose of determining the number of shares of
Common Stock outstanding on a Fully-Diluted Basis (as defined below),
shall be deemed to have been received by the Company, (b)(i) the
liquidation preference or indebtedness, as the case may be,
represented by securities which are deemed exercised for or converted
into Common Stock for the purpose of determining the number of shares
of Common Stock outstanding on a Fully-Diluted Basis and (ii) any
contractual limitation in respect of the shares of Common Stock
relating to voting rights, shall be deemed to have been eliminated or
cancelled and (c) full effect shall be given to any discount that may
arise as the result of the fact that the shares of
Common Stock are not Publicly Traded. "Fully-Diluted Basis" means, as
-------------------
applied to the calculation of the total number of shares of Common
Stock outstanding at any time, after giving effect to (a) all shares
of Common Stock outstanding at the time of determination, and (b) all
shares of Common Stock issuable upon the exercise of any Convertible
Security (including this Warrant) or similar right to purchase Common
Stock outstanding at the time of determination and then so convertible
or exchangeable at a conversion or exchange price equal to or less
than the Market Price per share of Common Stock at such time.
(g) If at any time the Company shall (except as hereinafter provided)
issue or sell any Additional Shares (as defined below) for consideration in an
amount per Additonal Share less than the Market Price, then the Warrant Shares
shall be adjusted to equal the product obtained by multiplying the number of
Warrant Shares immediately prior to such issue or sale by a fraction (A) the
numerator of which shall be the number of shares of Common Stock outstanding
immediately after such issue or sale (on a Fully-Diluted Basis), and (B) the
denominator of which shall be the sum of (1) the number of shares of Common
Stock outstanding immediately prior to such issue or sale (on a Fully-Diluted
Basis), and (2) the aggregate consideration received from the issuance or sale
of the Additional Shares divided by the Market Price. For the purposes of this
subsection (g), the date as of which the Market Price per share of Common Stock
shall be computed shall be the earlier of (a) the first business day on which
the Company shall be able to determine the Market Price per share of Common
Stock pursuant to the the terms of a firm contract for the issuance of such
Additional Shares or (b) the date of actual issuance of such Additional Shares.
"Additional Shares" means any shares of Common Stock issued after the date
hereof except (i) Common Stock issued upon the exercise of any Warrant, (ii)
except as provided in clause (iii) below, Common Stock issued upon conversion or
exercise of any outstanding Options or Convertible Securities of the Company or
Moovies, Inc. (as such Options and Convertible
-6-
<PAGE>
Securities are in effect on the date hereof); (iii) Common Stock issued upon
conversion or exercise of any Option or other rights granted under Approved
Option Plans or a rights plan; or (iv) Common Stock issued pursuant to or upon
stock splits, combinations or dividends or other transactions described in the
subsections to this Section 3 (after giving effect to any adjustments required
to be made by such subsections).
(h) No adjustment shall be made in connection with the issuance of shares
of Common Stock or other securities in a bona fide public offering pursuant to a
firm commitment underwriting by a firm which is member of the National
Association of Securities Dealers, Inc.
4. Fully Paid Stock; Taxes. The Company agrees that the shares of the
-----------------------
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable, and not
subject to pre-emptive rights, and the Company will take all such actions as may
be necessary to assure that the par value or stated value, if any, per share of
the Common Stock is at all times equal to or less than the then Per Share
Warrant Price. The Company further covenants and agrees that it will pay, when
due and payable, any and all federal and state stamp, original issue or similar
taxes that may be payable in respect of the issue of any Warrant Share or
certificate therefor.
5. Transfer.
--------
(a) Securities Laws. Neither this Warrant nor the Warrant Shares
---------------
issuable upon the exercise hereof have been registered under the Securities Act
of 1933, as amended (the "Securities Act") or under any state securities laws
and unless so registered may not be transferred, sold, pledged, hypothecated or
otherwise disposed of unless an exemption from such registration is available.
In the event Holder desires to transfer this Warrant or any of the Warrant
Shares issued, the Holder must give the Company prior written notice of such
proposed transfer including the name and address of the proposed transferee.
Such transfer may be made only either (i) upon issuance by the Securities and
Exchange Commission (the "Commission") of a ruling, interpretation, opinion or
"no action letter" based upon facts presented to said Commission, or (ii) upon
receipt by the Company of an opinion of counsel to the Holder, reasonably
acceptable to the Company, in either case to the effect that the proposed
transfer will not violate the provisions of the Securities Act, or the rules and
regulations promulgated under such act, or in the case of clause (ii) above, to
the effect that the Warrant or Warrant Shares to be sold or transferred has been
registered under the Securities Act, and that there is in effect a current
prospectus meeting the requirements of Subsection 10(a) of the Securities Act,
which is being or will be delivered to the purchaser or transferee at or prior
to the time of delivery of the certificates evidencing the Warrant or Warrant
Shares to be sold or transferred.
(b) Lock-Up Agreements with Underwriters. In the event of a public
------------------------------------
offering of the Company's securities, the Holder agrees to enter into an
agreement with the underwriter or underwriter's representative for such offering
restricting the sale, transfer or other disposition of this Warrant or the
Warrant Shares for a period of 90 days after the
-7-
<PAGE>
offering to the extent that such agreement is required to be executed by the
underwriter or the underwriter's representative.
(c) Conditions to Transfer. Prior to any such proposed transfer, and
----------------------
as a condition thereto, if such transfer is not made pursuant to an effective
registration statement under the Securities Act, the Holder will, if requested
by the Company, deliver to the Company (i) an agreement by the proposed
transferee to the impression of the restrictive investment legend set forth
herein on the certificate or certificates representing the securities acquired
by such transferee, (ii) an agreement by such transferee that the Company may
place a "stop transfer order" with its transfer agent or registrar, and (iii) an
agreement by the transferee to indemnify the Company to the same extent as set
forth in the next succeeding paragraph.
(d) Indemnity. The Holder acknowledges that the Holder understands
---------
the meaning and legal consequences of this Section 5, and the Holder hereby
agrees to indemnify and hold harmless the Company, its representatives and each
officer and director thereof from and against any and all loss, damage or
liability (including all reasonable attorneys' fees and costs incurred in
enforcing this indemnity provision) due to or arising out of (a) the inaccuracy
of any representation or the breach of any warranty of the Holder contained in,
or any other breach of, this Warrant, (b) any transfer of any of the Warrant or
the Warrant Shares in violation of the Securities Act or the rules and
regulations promulgated under such act, (c) any transfer of the Warrant or any
of the Warrant Shares not in accordance with this Warrant or (d) any untrue
statement or omission to state any material fact in connection with the
investment representations or with respect to the facts and representations
supplied by the Holder to counsel to the Company upon which its opinion as to a
proposed transfer shall have been based.
(e) Transfer. Except as restricted hereby, this Warrant and the
--------
Warrant Shares issued may be transferred by the Holder in whole or in part at
any time or from time to time; provided, however, that neither this Warrant nor
the Warrant Shares may be transferred to any person or entity that competes with
the business of the Company, as set forth on Schedule I hereto. Upon surrender
----------
of this Warrant to the Company or at the office of its stock transfer agent, if
any, with assignment documentation duly executed and funds sufficient to pay any
transfer tax, and upon compliance with the foregoing provisions, the Company
shall, without charge, execute and deliver a new Warrant in the name of the
assignee named in such instrument of assignment, and this Warrant shall promptly
be cancelled. Any assignment, transfer, pledge, hypothecation or other
disposition of this Warrant attempted contrary to the provisions of this
Warrant, or any levy of execution, attachment or other process attempted upon
the Warrant, shall be null and void and without effect.
(f) Legend and Stop Transfer Orders. Unless the Warrant Shares have
-------------------------------
been registered under the Securities Act, upon exercise of any part of the
Warrant and the issuance of any of the shares of Warrant Shares, the Company
shall instruct its transfer agent to enter stop transfer orders with respect to
such shares, and all certificates representing
-8-
<PAGE>
Warrant Shares shall bear on the face thereof substantially the following
legend, insofar as is consistent with Delaware law:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY
STATE LAW AND, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND OTHER LAWS, MAY NOT BE OFFERED,
SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF WITHOUT AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH DISPOSITION MAY BE MADE WITHOUT SUCH
REGISTRATION."
The foregoing legend shall be removed from the certificates representing any
Warrant Shares at the request of the Holder thereof at such time as they become
eligible for resale pursuant to Rule 144(k) of the Securities Act.
6. Registration Rights. The Company shall register any Warrant or Warrant
-------------------
Shares, to permit the sale or other disposition thereof in accordance with the
registration requirements of the Securities Act or any state securities laws or
regulations in accordance with the Registration Rights Agreement annexed as
Exhibit 1.
- ---------
7. Redemption.
----------
(a) If, at any time following the date hereof, the average closing bid
price for any twenty (20) consecutive business days of the Common Stock as
reported by Nasdaq or (ii) alternatively, the last reported sale price, for any
twenty (20) consecutive business days on any other primary exchange on which the
Common Stock is instead traded, is at least $6.00 (the "Target Price"), then the
Company, at its option, may redeem the Warrant (or any unexercised portion
thereof) at a redemption price of $0.05 per Warrant Share (the "Redemption
Price"). The date fixed for redemption of the Warrant is referred to herein as
the "Redemption Date".
(b) If the conditions set forth above are met, and the Company desires to
exercise its right to redeem the Warrant as described above, it shall mail a
notice of redemption to the Holder, certified or registered mail, postage
prepaid, not later than the tenth day before the date fixed for redemption, at
the last address for the Holder as shall appear on the records of the Company.
Any notice mailed in the manner provided herein shall be conclusively presumed
to have been duly given whether or not the Holder receives such notice.
(c) The notice of redemption shall specify (i) the Redemption Price, (ii)
the Redemption Date, (iii) the place where the Warrant shall be delivered and
the Redemption Price paid, (iv) that the right to exercise the Warrant shall
terminate at 5:00 P.M. (Eastern time) on the business day immediately preceding
the Redemption Date. No failure to mail
-9-
<PAGE>
such notice nor any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to a Holder (a) to
whom notice was not mailed or (b) whose notice was defective.
(d) Any right to exercise a Warrant (or any unexercised portion thereof)
shall terminate at 5:00 P.M. (Eastern time) on the business day immediately
preceding the Redemption Date. On and after the Redemption Date, a Holder shall
have no further rights except to receive, upon surrender of the Warrant, the
Redemption Price.
(e) From and after the Redemption Date, the Company shall, at the place
specified in the notice of redemption, upon presentation and surrender to the
Company by or on behalf of the Holder thereof of the Warrant (or any unexercised
portion thereof) to be redeemed, deliver or cause to be delivered to or upon the
written order of such Holder a sum in cash equal to the Redemption Price of each
such Warrant or portion thereof. From and after the Redemption Date and upon
the deposit or setting aside by the Company of a sum sufficient to redeem the
Warrant called for redemption, such Warrant shall expire and become void and all
rights hereunder and under the Warrant, except the right to receive payment of
the Redemption Price, shall cease.
(f) If the shares of the Company's Common Stock are subdivided or combined
into a greater or smaller number of shares of Common Stock, the Target Price
shall be proportionally adjusted by the ratio which the total number of shares
of Common Stock outstanding immediately prior to such event bears to the total
number of shares of Common Stock to be outstanding immediately after such event.
8. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the
---------------------
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
9. Warrant Holder Not Shareholder. Except as otherwise provided herein,
------------------------------
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
10. Communication. No notice or other communication under this Warrant
-------------
shall be effective unless the same is in writing and is mailed by certified or
registered mail, postage prepaid, addressed to:
(a) the Company at 3100 World Trade Center, 30 East Seventh Street,
St. Paul, Minnesota 55101, or such other address as the Company has designated
in writing to the Holder, or
-10-
<PAGE>
(b) the Holder at Two Ingram Boulevard, La Vergne, Tennessee 37809,
Attention: General Counsel, or such other address as the Holder has designated
in writing to the Company.
11. Headings. The headings of this Warrant have been inserted as a matter
--------
of convenience and shall not affect the construction hereof.
12. Applicable Law. This Warrant shall be governed by and construed in
--------------
accordance with the internal laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof.
13. Certain Restrictions. The Company will not, without the consent of
--------------------
the Holder representing at least a majority of all Warrant Shares issued and
issuable upon the exercise of this Warrant on the date of determination, permit
any amendment to the Company's Certificate of Incorporation or By-laws, if such
amendment would alter the powers, preferences or special rights of the shares of
any class of capital stock of the Company so as to affect the Warrant Shares
adversely in any material respect.
-11-
<PAGE>
IN WITNESS WHEREOF, VIDEO UPDATE, INC., has caused this Warrant to be
signed by its Chief Executive Officer as of the 11th day of May, 1999.
VIDEO UPDATE, INC.
By:/s/ Daniel A. Potter
-----------------------------------------
Daniel A. Potter, Chief Executive Officer
-12-
<PAGE>
SCHEDULE I: COMPETITORS OF THE COMPANY
--------------------------------------
The proposed transferee or assignee of Holder must represent and warrant to
both Holder and the Company that he/she/it is not one of the following entities,
a subsidiary or affiliate (as defined in Rule 144 promulgated under the
Securities Act of 1933, as amended) thereof, or a holder of a minimum of 25% of
the outstanding stock thereof, for purposes of Section 5(e) of this Agreement:
1. Blockbuster, Inc.
2. Viacom, Inc.
3. Hollywood Entertainment Corporation
4. West Coast Entertainment Corporation
5. Video City, Inc.
6. Hastings Entertainment, Inc.
7. Movie Gallery, Inc.
8. Rentrak Corporation
-13-
<PAGE>
SUBSCRIPTION
------------
The undersigned, _________________________________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for the purchase
of ____________ shares of the Common Stock of VIDEO UPDATE, INC. covered by said
Warrant, and makes payment therefor in full at the price per share provided by
said Warrant.
Dated:_________________________ Signature
Address
ASSIGNMENT
----------
FOR VALUE RECEIVED ______________________________________ hereby sells,
assigns and transfers unto __________________________ the foregoing Warrant and
all rights evidenced thereby, and does irrevocably constitute and appoint
____________________________, attorney, to transfer said Warrant on the books of
VIDEO UPDATE, INC.
Dated:_________________________ Signature
Address
PARTIAL ASSIGNMENT
------------------
FOR VALUE RECEIVED _______________________________________________ hereby
assigns and transfers unto _______________________________________ the right to
purchase __________ shares of the Common Stock of VIDEO UPDATE, INC. by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced hereby, and does irrevocably constitute and appoint
____________________________________________, attorney, to transfer that part of
said Warrant on the books of VIDEO UPDATE, INC.
Dated:_________________________ Signature
Address
-14-
<PAGE>
Exhibit 10.37
-------------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of May
---------
11, 1999 (the "Effective Date") and entered into by and between VIDEO UPDATE,
--------------
INC., a Delaware corporation (the "Company"), and Ingram Entertainment Inc. or
-------
any permitted transferee of the Warrant or shares of common stock issued upon
exercise of the Warrant (the "Purchaser"). Unless otherwise provided in this
---------
Agreement, capitalized terms used herein shall have the meanings set forth in
the Warrant.
WHEREAS, the Company has issued the Warrant, dated May 11, 1999 (the
"Warrant") to the Purchaser; and
WHEREAS, the execution and delivery of this Agreement is required by the
Purchaser in connection with the Warrant.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. Registration on Request.
-----------------------
(a) Registration on Request. (i) At any time and from time to time
-----------------------
after December 31, 1999, upon the request of the Purchaser for a registration of
Registrable Securities the anticipated gross proceeds of which equals or exceeds
$1,000,000, the Company will promptly give written notice of such requested
registration to all registered holders of Registrable Securities, and thereupon
the Company, in accordance with the provisions of Section 4 hereof, will use its
best efforts to effect the registration under the Securities Act of
(A) the Registrable Securities which the Company has been so
requested to register for disposition in accordance with the intended
method or methods of disposition stated in such request, and
(B) all other Registrable Securities which the Company has
been requested to register by the holders thereof by written request
given to the Company within 20 days after the giving of such written
notice by the Company (which request shall specify the intended method
of disposition of such Registrable Securities),
all to the extent requisite to permit the disposition (in accordance with the
intended methods thereof as aforesaid) of the Registrable Securities so to be
registered. The Company shall not be required to effect more than two
registrations pursuant to this Section 1 (each, a "Demand Registration") and, in
-------------------
any event, not more than one such Demand Registration within any six-month
period.
<PAGE>
(ii) Effective Registration Statement. A registration
--------------------------------
requested pursuant to this Section 1 shall not be deemed to be effected (A)
if a registration statement with respect thereto shall not have become
effective, or (B) if, after it has become effective, such registration is
interfered with for any reason by any stop order, injunction or other order
or requirement of the Securities and Exchange Commission (the "Commission")
or any other governmental agency or any court, and the result of such
interference is to prevent the holders of Registrable Securities to be sold
thereunder from disposing thereof in accordance with the intended methods
of disposition, or (C) if the conditions to closing specified in the
purchase agreement or underwriting agreement entered into in connection
with any underwritten registration shall not be satisfied or waived with
the consent of the underwriters of such Registrable Securities that were to
have been sold thereunder, other than as a result of any breach by any such
holder of its obligations thereunder or hereunder.
(iii) Registration Statement Form. Registrations under this
---------------------------
Section 1 shall be on such appropriate registration form of the Commission
as shall be selected by the Company and as shall permit the disposition of
the Registrable Securities so to be registered in accordance with the
intended method or methods of disposition specified in the request of the
holders of Registrable Securities being registered for such registration.
The Company agrees to include in any such registration statement all
information which the holders of Registrable Securities being registered
shall reasonably request.
(iv) Selection of Underwriters. If a requested registration
-------------------------
pursuant to this Section 1 involves an underwritten offering, the managing
underwriter or underwriters shall be selected by the Company in its sole
discretion.
(v) Priority in Requested Registrations. If a requested
-----------------------------------
registration pursuant to this Section 1 involves an underwritten offering,
and the managing underwriter shall advise the Company in writing (with a
copy to each Person requesting registration of Registrable Securities)
that, in its opinion, the number of securities requested to be included in
such registration exceeds the number which can be sold in such offering
within a price range acceptable to the holders of a majority of the
Registrable Securities requested to be included therein, the Company will
include in such registration, to the extent of the number which the Company
is so advised can be sold in such offering, first all Priority Securities
(as hereinafter defined) requested to be included (to the extent described
in the last sentence of this clause (v)) and then pro rata among the
--- ----
holders of Registrable Securities requesting inclusion therein in
accordance with the number of securities requested to be included in such
registration by each such holder; provided, that if, as a result of the
--------
preceding clause or the last sentence of this clause (v), the number of
Registrable Securities registered and sold on behalf of holders of
Registrable Securities in any registration requested pursuant to this
Section 1 is less than 80% of the Registrable Securities as to which such
holders requested registration pursuant to this Section 1,
-2-
<PAGE>
then such registration shall be deemed to be a registration under Section 2
hereof and not under Section 1 hereof. To the extent that any of the
holders listed on Schedule A (collectively, "Priority Holders") request
---------- ----------------
registration of any of the shares of common stock held by them on the date
hereof and identified on Schedule A (collectively, the "Priority
---------- --------
Securities")), the Priority Securities shall, but only to the extent the
----------
registration rights of such holders as in effect the date hereof so
require, be first included in the proposed registration prior to the
inclusion of any Registrable Securities.
SECTION 2. Piggyback Registrations.
------------------------
(a) Right to Piggyback. Whenever the Company proposes to
------------------
register any of its equity securities under the Securities Act (other than
pursuant to a transaction described in Rule 145 of the Securities Act or on Form
S-8), whether or not for sale for its own account, the Company will each time
give prompt written confidential notice of such proposed filing to the Purchaser
or any other holder of the Warrant ("Holders") (i) in all cases at least 20 days
before the anticipated filing date and (ii) in the case of a proposed
registration in connection with the exercise of any demand registration rights
(other than the demand registration rights under Section 1) within five (5)
Business Days after the Company receives notice of such demand. Such notice
shall offer such Holders the opportunity to register such amount of Registrable
Securities as they shall request (a "Piggyback Registration"). Subject to
----------------------
Sections 3(b) and 3(c) hereof, the Company shall include in each such Piggyback
Registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 15 days after such notice
has been given by the Company to the Holders. If the Registration Statement
relating to the Piggyback Registration is to cover an underwritten offering,
such Registrable Securities shall be included in the underwriting on the same
terms and conditions as the securities otherwise being sold through the
underwriters. The Holders shall be permitted to withdraw all or part of the
Registrable Securities from a Piggyback Registration at any time prior to the
effective time of such Piggyback Registration.
(b) Priority on Primary Registrations. If a Piggyback
---------------------------------
Registration is an underwritten primary registration on behalf of the Company by
or through one or more underwriters of recognized standing and the managing
underwriters thereof advise the Company in writing that in their good faith
judgment the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without materially and
adversely affecting the marketability of the offering, then the Company will
include in the Registration Statement relating to such registration (i) first,
the securities the Company proposes to sell, (ii) second, the Priority
Securities (but only to the extent the registration rights of such holders as in
effect on the date hereof so require) and the Registrable Securities (but only
to the extent the registration rights of the holders of the Priority Securities
permit the Registrable Securities to be included) requested to be included in
such registration by the holders thereof, reduced, if necessary, on a pro rata
-3-
<PAGE>
basis, based on the number of shares owned by each such Holder, and (iii) third,
if no Registrable Securities had to be excluded pursuant to this Section 2(b),
securities other than Registrable Securities requested to be included in such
registration, reduced, if necessary, on a pro rata basis, based on the amount of
such other securities owned by such other holders; provided, that if such
--------
registration contemplates an "over-allotment option" on the part of
underwriters, to the extent such over-allotment option is exercised and Holders
were excluded from registering any Registrable Securities pursuant to the
priority provisions of Section 2(b) or 2(c), then the over-allotment option
shall be exercised with respect to such Registrable Securities to the extent of
such exclusion, subject to the provisions of Section 2(b)(ii).
(c) Priority on Secondary Registrations. If a Piggyback
-----------------------------------
Registration is an underwritten secondary registration on behalf of any holders
of the Company's securities, by or through one or more underwriters of
recognized standing and the managing underwriters advise the Company in writing
that in their good faith judgment the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering without materially and adversely affecting the marketability of the
offering, the Company will include in such registration, (i) first, the Priority
Securities (but only to the extent the registration rights of such holders as in
effect on the date hereof so require) and the Registrable Securities (but only
to the extent the registration rights of the holders of the Priority Securities
permit the Registrable Securities to be included) requested to be included in
such registration by the Holders thereof, reduced, if necessary, on a pro rata
basis, based on the number of shares owned by any other Holder and (ii) second,
the securities owned by such other holders.
SECTION 3. Holdback Agreements.
-------------------
Restrictions on Public Sale by Holders of Registrable Securities.
----------------------------------------------------------------
Each Holder agrees, if so requested by the managing underwriter of an
underwritten registration effected pursuant to Section 1 or 2 hereof in which
such Holder is selling Registrable Securities, not to effect any public sale or
distribution of any securities of the Company of the same class as the
securities included in such underwritten registration, during the fourteen (14)
days prior to the effective date of such registration and until the earlier of
(i) the end of the 90-day period beginning on the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration, unless the underwriters
managing the registered public offering otherwise agree) and (ii) the
abandonment of such offering. Notwithstanding the preceding sentence, a Holder
may sell any or all of its Registrable Securities in a private sale, provided
that such sale is not to a direct competitor of the Company, as set forth on
Schedule B hereto.
None of the foregoing provisions of this Section 3 shall apply to any
Holder if such Holder is prevented by applicable statute or regulation from
entering into any such agreement; provided, that any such Holder shall
--------
undertake not to effect any public sale or distribution of the applicable class
of Registrable Securities unless it has provided 45 days' prior written notice
of such sale or distribution to the underwriter or underwriters.
SECTION 4. Registration Procedures. Whenever the Company is required
-----------------------
to register Registrable Securities pursuant to Section 1 or 2 hereof, the
Company will use its reasonable best efforts to effect the registration to
permit the sale of such Registrable
-4-
<PAGE>
Securities in accordance with the intended method or methods of disposition
thereof, and pursuant thereto the Company will as expeditiously as possible:
(a) prepare and file with the Commission as soon as practicable a
Registration Statement with respect to such Registrable Securities as prescribed
by Section 1 or 2 on a form available for the sale of the Registrable Securities
by the holders thereof in accordance with the intended method or methods of
distribution thereof and use its reasonable best efforts to cause each such
Registration Statement to become and remain effective until all such Registrable
Securities are sold by the Holders thereof; provided, however, that before
-------- -------
filing a Registration Statement, the Company will furnish to the Holders of the
Registrable Securities covered by such Registration Statement, the underwriters,
if any, and any attorney, accountant or other agent retained by any such Holder
of Registrable Securities or underwriters (i) copies of all such documents
proposed to be filed, which documents will be subject to the review and comment
of such Holders, their counsel and underwriters, if any, and (ii) if requested,
financial and other information required by the Commission to be included in
such Registration Statement and all financial and other records, pertinent
corporate documents and properties of the Company customarily reviewed in
connection with an underwritten registration; and shall cause the officers,
directors and employees of the Company, counsel to the Company and independent
certified public accountants of the Company, to respond to such reasonable
inquiries and supply all information, as shall be reasonably necessary, in the
opinion of respective counsel to such Holders and underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act, and will not
file any Registration Statement to which the holders of at least a majority of
the Registrable Securities covered by such Registration Statement or the
underwriters, if any, shall reasonably object;
(b) prepare and file with the Commission such amendments, post-
effective amendments and prospectus supplements to such Registration Statement
as may be necessary to keep such Registration Statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement until such time as all of such
securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such Registration
Statement and take no action that results in the selling Holder of the
Registrable Securities covered thereby not being able to sell such Registrable
Securities during that period;
(c) furnish to each selling Holder of Registrable Securities covered
by a registration statement and to each underwriter, if any, such number of
copies of such registration statement, each amendment and post-effective
amendment thereto, the prospectus included in such registration statement
(including each preliminary prospectus and any supplement to such prospectus and
any other prospectus filed under Rule 424 of the Securities Act), in each case
including all exhibits, and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller or to be disposed of by such underwriter (the Company
hereby consenting to the use in accordance with all applicable law of each such
registration statement (or amendment or post-effective amendment thereto) and
each such prospectus (or
-5-
<PAGE>
preliminary prospectus or supplement thereto) by each such seller and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such registration statement or prospectus);
(d) use its reasonable best efforts to register or qualify and, if
applicable, to cooperate with the selling Holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of, the securities to be included in a Registration Statement for
offer and sale under the securities or blue sky laws of such jurisdictions
within the United States of America as any selling Holder or managing
underwriters (if any) shall reasonably request, to keep each such registration
or qualification (or exemption therefrom) effective during the period such
Registration Statement is required to be kept effective and to do any and all
other acts or things necessary or advisable to enable the disposition in such
jurisdictions of the securities covered by the applicable Registration
Statement; provided, that the Company will not be required to (i) qualify
--------
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this paragraph or (ii) consent to general service of
process in any such jurisdiction;
(e) cause all such Registrable Securities to be listed on each
securities exchange on which securities of the same class as the Registrable
Securities are then listed and, if not so listed, to be listed on the NASD
automated quotation system and, if listed on the NASD automated quotation
system, use its reasonable best efforts to secure designation of all such
Registrable Securities covered by such Registration Statement as a NASDAQ
Security within the meaning of Rule 11Aa3-l under the Exchange Act or, failing
that, to secure NASDAQ authorization for such Registrable Securities and,
without limiting the generality of the foregoing, to use its reasonable best
efforts to arrange for at least two market makers to register as such with
respect to such Registrable Securities with the NASD;
(f) provide a transfer agent and registrar for all such Registrable
Securities and a CUSIP number for all such Registrable Securities not later than
the effective date of such Registration Statement;
(g) comply with all applicable rules and regulations of the
Commission, and make available to its security holders an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any similar rule promulgated under the Securities Act) no later
than 45 days after the end of any 12-month period (or 90 days after the end of
any 12-month period if such period is a fiscal year) (or in each case within
such extended period of time as may be permitted by the Commission for filing
the applicable report with the Commission) (i) commencing at the end of any
fiscal quarter in which Registrable Securities are sold to underwriters in a
firm commitment or best efforts underwritten offering or (ii) if not sold to
underwriters in such an offering, commencing on the first day of the fiscal
quarter of the Company after the effective date of a Registration Statement,
which earnings statement shall cover said 12-month periods;
-6-
<PAGE>
(h) permit any Holder which, in its sole and exclusive judgment,
might be deemed to be an underwriter or a controlling person of the Company, to
participate in the preparation of such registration or comparable statement and
to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such Holder and its counsel should
be included;
(i) use its best efforts to prevent the issuance of any order
suspending the effectiveness of a Registration Statement or suspending the
qualification (or exemption from qualification) of any of the securities
included therein for sale in any jurisdiction within the United States of
America, and, in the event of the issuance of any stop order suspending the
effectiveness of a Registration Statement, or of any order suspending the
qualification of any securities included in such Registration Statement for sale
in any jurisdiction within the United States of America, the Company will use
its best efforts promptly to obtain the withdrawal of such order at the earliest
possible moment;
(j) if the piggyback or requested registration is an underwritten
registration, obtain "cold comfort" letters and updates thereof (which letters
and updates (in form, scope and substance) shall be reasonably satisfactory to
the managing underwriters, if any, and counsel to the selling Holders of
Registrable Securities) from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public accountants
of any subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data are, or are required to be,
included in the Registration Statement), addressed to each of the underwriters,
if any, and each selling Holder of Registrable Securities, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings and such other
matters as the underwriters, if any, or the Holders of a majority of the
Registrable Securities being sold may reasonably request;
(k) obtain opinions of independent counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, and not objected
to by the Holders of a majority of the Registrable Securities being sold),
addressed to each selling Holder and each of the underwriters, if any, covering
the matters customarily covered in opinions of issuer's counsel requested in
underwritten offerings, such as the effectiveness of the Registration Statement
and such other matters as may be reasonably requested by such counsel and
underwriters, if any;
(l) promptly (but in any event, within five business days) notify the
selling Holders of Registrable Securities, their counsel and the managing
underwriters, if any, and confirm such notice in writing,
(i) when a prospectus or any supplement or post-effective
amendment to such prospectus has been filed, and, with respect to a
Registration Statement or any post-effective amendment thereto, when
the same has become effective,
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<PAGE>
(ii) of any request by the Commission or any other Federal
or state governmental authority for amendments or supplements to a
Registration Statement or related prospectus or for additional
information,
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of a Registration Statement or of any
order preventing or suspending the use of any prospectus or the
initiation of any proceedings by any Person for that purpose,
(iv) if at any time the representations and warranties of
the Company contemplated by clause (i) of paragraph (q) below cease to
be true and correct in any respect,
(v) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from
qualification of a Registration Statement or any of the Registrable
Securities for offer or sale under the securities or blue sky laws of
any jurisdiction, or the contemplation, initiation or threatening, of
any proceeding for such purpose,
(vi) of the happening of any event that makes any statement
made in such Registration Statement untrue in any material respect or
that requires the making of any changes in such Registration Statement
so that it will not 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 were made (in the case of any
prospectus), not misleading, and
(vii) of the Company's reasonable determination that a post-
effective amendment to a Registration Statement would be appropriate;
(m) if requested by the managing underwriters, if any, or a Holder of
Registrable Securities being sold, promptly incorporate in a prospectus,
supplement or post-effective amendment such information as the managing
underwriters, if any, and the Holders of a majority of the Registrable
Securities being sold reasonably request to be included therein relating to the
sale of the Registrable Securities, including, without limitation, information
with respect to the number of shares of Registrable Securities being sold to
underwriters, the purchase price being paid therefor by such underwriters and
with respect to any other terms of the underwritten offering of the Registrable
Securities to be sold in such offering, and make all required filings of such
prospectus, supplement or post-effective amendment promptly following
notification of the matters to be incorporated in such supplement or post-
effective amendment;
(n) furnish to each selling Holder of Registrable Securities and the
managing underwriter, without charge, at least one signed copy of the
Registration Statement;
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<PAGE>
(o) cooperate with the selling Holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing the Registrable Securities not bearing any
restrictive legends and in a form eligible for deposit with The Depository Trust
Company to be sold and cause such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters, if any,
or holder of Registrable Securities may request at least three business days
prior to any sale of Registrable Securities to the underwriters;
(p) as promptly as practicable upon the occurrence of any event
contemplated by clause (vi) of paragraph (l) above, prepare a supplement or
post-effective amendment to the Registration Statement, or file any other
required document so that, as thereafter delivered to the purchasers of the
Registrable Securities being sold hereunder, the prospectus will not contain an
untrue statement of a material fact or an omission to state a material fact
required to be stated in a Registration Statement or prospectus or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading;
(q) enter into such agreements (including underwriting agreements in
customary form, scope and substance) and take all such other actions in
connection therewith as the Holders of a majority of the Registrable Securities
being sold or the underwriters, if any, reasonably request in order to expedite
or facilitate the registration or the disposition of such Registrable
Securities, and in such connection, whether or not an underwriting agreement is
entered into and whether or not the registration is an underwritten
registration:
(i) make such representations and warranties to the Holders of
such Registrable Securities and the underwriters, if any, with respect to
the business of the Company and the Registration Statement, in form,
substance and scope as are customarily made by issuers to underwriters in
underwritten offerings and confirm the same, if and when requested;
(ii) if an underwriting agreement is entered into, cause the
same to include the indemnification and contribution provisions and
procedures substantially similar to (and no less favorable to the selling
Holders of Registrable Securities and the underwriters than) those
contained in Section 6 hereof with respect to all parties to be indemnified
pursuant to said Section (or, with respect to the indemnification of such
underwriters, such similar indemnification and contribution provisions as
such underwriters shall customarily require); and
(iii) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable
Securities being sold and managing underwriters, if any, to evidence
compliance with clause (i) above and with any conditions contained in the
underwriting agreement or other similar agreement entered into by the
Company,
it being understood that the above shall be done at each closing under such
underwriting or
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<PAGE>
similar agreement or as and to the extent otherwise reasonably requested by the
holders of a majority of the Registrable Securities being sold;
(r) cooperate with each seller of Registrable Securities covered by
any Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the NASD; and
(s) use its reasonable best efforts to take all other steps necessary
to effect the registration of the Registrable Securities covered by the
Registration Statement contemplated hereby.
Each Holder agrees by acquisition of such Registrable Securities that,
upon receipt of written notice from the Company of the happening of any event of
the kind described in Section 4(l)(ii), (iii), (v), (vi) or (vii), such Holder
will forthwith discontinue disposition of such Registrable Securities covered by
such Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Registration Statement contemplated by Section 4(p) or
until it is advised in writing (the "Advice") by the Company that the use of the
------
applicable prospectus may be resumed, and has received copies of any additional
or supplemental filings that are incorporated or deemed to be incorporated by
reference in such prospectus, and, if so directed by the Company, such Holder
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice. If the Company shall give any such notice, the time periods mentioned
in Section 1 hereof shall be extended by the number of days during such periods
from and including the date of the giving of such notice to and including the
date when each seller of Registrable Securities covered by such Registration
Statement receives (x) the copies of the supplemented or amended prospectus
contemplated by Section 4(p) hereof or (y) the Advice, as the case may be.
SECTION 5. Registration Expenses.
---------------------
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation (i) all
registration, filing fees and expenses (including fees with respect to filings
made with NASD (including, if applicable, the fees and expenses of any
"qualified independent underwriter", as may be required by the rules and
regulations of the NASD), (ii) fees and expenses of the Company's compliance
with securities or blue sky laws (including reasonable fees and disbursements of
one (1) counsel for the underwriters or selling shareholders in connection with
blue sky qualifications of the Registrable Securities and determinations of
their eligibility for investment under the laws of such jurisdiction as the
managing underwriters or Holders of a majority of the Registrable Securities
being sold may designate), (iii) printing expenses (including printing
certificates for the Registrable Securities to be sold and the Registration
Statements), messenger and delivery expenses, duplication, word processing, and
telephone expenses, (iv) fees and disbursements of counsel for the Company, and
(v) fees and disbursements of all independent certified public accountants of
the Company incurred in
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<PAGE>
connection with such registration (including the expenses of any special audit
and "cold comfort" letters incident to such registration), underwriters
(excluding discounts, commissions or fees of underwriters, selling brokers,
dealer managers or similar securities industry professionals relating to the
distribution of the Registrable Securities) and other persons retained by the
Company (all such expenses being herein called "Registration Expenses"), will be
---------------------
borne by the Company regardless of whether a Registration Statement becomes
effective.
(b) To the extent any expenses of registration are not required to be
paid by the Company, each holder of securities included in any registration
hereunder will pay those expenses allocable to the registration of such holder's
securities so included, and any expenses not so allocable will be borne by all
sellers of securities included in such registration in proportion to the
aggregate selling price of the securities to be so registered.
SECTION 6. Indemnification.
---------------
(a) Indemnification by the Company. The Company agrees to indemnify,
------------------------------
to the fullest extent permitted by law, each Holder, each affiliate of a Holder
and each officer, director, employee, counsel, agent or representative of such
Holder and its affiliates and each Person who controls any such Person (within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act) against, and hold it and them harmless from, all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees and disbursements) and expenses, including expenses of
investigation (collectively, "Losses") arising out of, caused by or based upon
------
any untrue or alleged untrue statement of material fact contained in any
Registration Statement, or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (a "Misstatement/Omission"), except that the Company shall not be
---------------------
liable (i) insofar as such Misstatement/Omission is based upon and in conformity
with information furnished in writing to the Company by a Holder expressly for
use therein and (ii) to the extent that any such claim arises out of or is based
upon a Misstatement/Omission made in any preliminary prospectus, (x) to the
extent such Misstatement/Omission is corrected in the final prospectus and (y)
having previously been timely furnished by or on behalf of the Company with
sufficient copies of the final prospectus, such indemnified Person thereafter
fails to deliver such prospectus prior to or concurrently with the sale to the
Person who purchased a Registrable Security from such indemnified Person and who
is asserting such claim. In connection with an underwritten offering, the
Company will indemnify such underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution,
their officers and directors and each Person who controls (within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act) such
underwriters to the same extent as provided above with respect to the
indemnification of the Holders. This indemnity shall be in addition to any other
indemnification arrangements to which the Company may otherwise be party.
(b) Indemnification by Holders. In connection with any Registration
--------------------------
Statement in which a Holder is participating, each such Holder will furnish to
the Company
-11-
<PAGE>
in writing such powers of attorney, custody agreements and letters of direction
and other information and affidavits as the Company reasonably requests for use
in connection with any such Registration Statement, and each such Holder agrees
to indemnify, to the fullest extent permitted by law, the Company, its directors
and officers and each Person who controls the Company (within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act)
against, and hold it and them harmless from, any Losses resulting from any
Misstatement/Omission, but only to the extent that such Misstatement/Omission is
based upon and in conformity with information furnished in writing by such
Holder expressly for use in such Registration Statement; provided, that the
obligation to indemnify will be individual (several and not joint) to each
Holder and will be limited to the net amount of proceeds (net of payment of all
expenses) received by such Holder from the sale of Registrable Securities
pursuant to such Registration Statement giving rise to such indemnification
obligation.
(c) In case any action, claim or proceeding shall be brought against
any Person entitled to indemnification hereunder, such indemnified party shall
promptly notify each indemnifying party in writing, and such indemnifying party
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all fees and expenses
incurred in connection with the defense thereof. The failure to so notify such
indemnifying party shall not affect any obligation it may have to any
indemnified party under this Agreement or otherwise except to the extent that
(as finally determined by a court of competent jurisdiction (which determination
is not subject to review or appeal)) such failure materially and adversely
prejudiced such indemnifying party. Each indemnified party shall have the right
to employ separate counsel in such action, claim or proceeding and participate
in the defense thereof, but the fees and expenses of such counsel shall be at
the expense of each indemnified party unless: (i) such indemnifying party has
agreed to pay such expenses; (ii) such indemnifying party has failed promptly to
assume the defense and employ counsel reasonably satisfactory to such
indemnified party; or (iii) the named parties to any such action, claim or
proceeding (including any impleaded parties) include both such indemnified party
and such indemnifying party or an affiliate or controlling person of such
indemnifying party, and such indemnified party shall have been advised in
writing by counsel that either (x) there may be one or more legal defenses
available to it which are different from or in addition to those available to
such indemnifying party or such affiliate or controlling person or (y) a
conflict of interest may exist if such counsel represents such indemnified party
and such indemnifying party or its affiliate or controlling person; provided,
--------
however, that such indemnifying party shall not, in connection with any one such
action or proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be responsible hereunder for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel), which
counsel shall be designated by such indemnified party.
No indemnified party shall be liable for any settlement effected
without its written consent. Each indemnifying party agrees, jointly and
severally, that it will not, without the indemnified party's prior written
consent, consent to entry of any judgment or settle or compromise any pending or
threatened, claim, action or proceeding in respect of
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<PAGE>
which indemnification or contribution may be sought hereunder unless the
foregoing contains an unconditional release, in form and substance reasonably
satisfactory to the indemnified parties, of the indemnified parties from all
liability and obligation arising therefrom.
(d) The indemnifying party's liability to any such indemnified party
hereunder shall not be extinguished solely because any other indemnified party
is not entitled to indemnity hereunder.
(e) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party, and will survive the transfer of securities.
(f) Contribution. If the indemnification provided for in this
------------
Section 6 is unavailable to, or insufficient to hold harmless, an indemnified
party under Section 6(a) or Section 6(b) above in respect of any Losses referred
to in such Sections, then each applicable indemnifying party shall have an
obligation to contribute to the amount paid or payable by such indemnified party
as a result of such Losses in such proportion as is appropriate to reflect the
relative fault of the Company, on the one hand, and of the Holder, on the other,
in connection with the Misstatement/Omission which resulted in such Losses,
taking into account any other relevant equitable considerations. The amount paid
or payable by a party as a result of the Losses referred to above shall be
deemed to include, subject to the limitations set forth in Section 6(c) above,
any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation, lawsuit or legal or administrative action or
proceeding.
The relative fault of the Company, on the one hand, and of the Holder,
on the other, shall be determined by reference to, among other things, whether
the relevant Misstatement/Omission relates to information supplied by the
Company or by the Holder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such Misstatement/Omission.
The Company and each Holder agree that it would not be just and
equitable if contribution pursuant to this Section 6(f) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this Section 6(f), a Holder shall not be required to contribute
any amount in excess of the amount by which (i) the amount (net of payment of
all expenses) at which the securities that were sold by such Holder and
distributed to the public were offered to the public exceeds (ii) the amount of
any damages which such Holder has otherwise been required to pay by reason of
such Misstatement/Omission.
No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
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<PAGE>
The indemnity and contribution agreements contained in this Section 6
are in addition to any liability that the indemnifying parties may have to the
indemnified parties.
SECTION 7. Rules 144 and 144A.
------------------
The Company shall timely file the reports required to be filed by it
under the Securities Act and the Exchange Act (including but not limited to the
reports under sections 13 and 15(d) of the Exchange Act referred to in
subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act)
and the rules and regulations adopted by the Commission thereunder (or, if the
Company is not required to file such reports, it will, upon the request of any
holder of Registrable Securities, make publicly available other information) and
will take such further action as any holder of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 and Rule
144A under the Securities Act, as such Rules may be amended from time to, time,
or (b) any similar rule or regulation hereafter adopted by the Commission. Upon
the request of any holder of Registrable Securities, the Company will deliver to
such Holder a written statement as to whether it has complied with the filing
requirements of this Section 6.
SECTION 8. (a) Limitation on Obligations to Register.
------------------------------------
Anything in this Agreement to the contrary notwithstanding:
(i) The Company may defer the filing of any registration
statement one time if (i) the Company is engaged in active
negotiations with respect to the acquisition of a "significant
subsidiary" as defined in Regulation S-X of the Commission which would
in the opinion of counsel for the Company be required to be disclosed
in the proposed filing; (ii) in the opinion of counsel for the
Company, the proposed filing would require the inclusion therein of
audited financial statements other than those in respect of the
Company's most recently ended full fiscal year and any preceding full
fiscal year, and the Company may then, at its option, delay the
imposition of its obligations pursuant to this Agreement hereof until
the earlier of (A) the conclusion or termination of such negotiations,
or the date of availability of such audited financial statements,
whichever is applicable, or (B) 120 days from the date of the
registration request, or (iii) the proposed filing would be made
within 180 days from the date of effectiveness of any registration
statement that could have included the Registrable Securities.
(b) Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) timely completes and executes all
questionnaires, powers of attorney, customary indemnities, underwriting
agreements and other documents required under the terms of such
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<PAGE>
underwriting arrangements; provided, that no Holder included in any underwritten
--------
registration shall be required to make any representations or warranties to the
Company or the underwriters other than representations and warranties regarding
such Holder and such Holder's intended method of distribution.
SECTION 9. Definitions.
-----------
"Commission" means the Securities and Exchange Commission or any other
----------
Federal agency at the time administering the Securities Act.
"Common Stock" means the Company's Class A Common Stock, par value
------------
$.01 per share, or any other shares of capital stock or other securities of the
Company into which such shares of Common Stock shall be reclassified or changed,
including, by reason of a merger, consolidation, reorganization or
recapitalization. If the Common Stock has been so reclassified or changed, or if
the Company pays a dividend or makes a distribution on the Common Stock in
shares of capital stock, or subdivides (or combines) its outstanding shares of
Common Stock into a greater (or smaller) number of shares of Common Stock, a
share of Common Stock shall be deemed to be such number of shares of stock and
amount of other securities to which a holder of a share of Common Stock
outstanding immediately prior to such change, reclassification, exchange,
dividend, distribution, subdivision or combination would be entitled.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
------------
from time to time, or any similar Federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the time.
"NASD" means the National Association of Securities Dealers, Inc.
----
"Person" means any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency, limited liability company
or any other entity, whether acting in an individual, fiduciary or other
capacity.
"Registrable Securities" means (i) any of the shares of Common Stock
----------------------
issuable upon the exercise of the Warrant and (ii) any securities issued or
issuable with respect to such Common Stock referred to in clause (i) above by
way of stock dividends or stock splits or in connection with a combination of
shares, recapitalization, merger, consolidation, or other reorganization or
otherwise. As to any particular Registrable Securities, such securities will
cease to be Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or are eligible to
be sold to the public through a broker, dealer or market maker in compliance
with Rule 144 under the Securities Act or any successor rule. For purposes of
this Agreement, a Person will be deemed to be a "Holder" whenever such Person
(x) has acquired such Registrable Securities or (y) has the right to acquire
directly such Registrable Securities upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right, whether or not such acquisition has
actually been effected (any such Person, a "Holder").
-15-
<PAGE>
"Registration Statement" means any registration statement under the
----------------------
Securities Act of the Company that covers any of the Registrable Securities
pursuant to the provisions of this Agreement, including the related prospectus,
all amendments and supplements to such registration statement, including pre-
and post-effective amendments, all exhibits thereto and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
"Securities Act" means the Securities Act of 1933, as amended from
--------------
time to time, or any similar Federal statute, and the rules and regulations of
the Commission promulgated thereunder, all as the same shall be in effect at the
time.
"Warrant" shall mean and include the Warrant.
-------
Unless otherwise stated, other capitalized terms contained herein have
the meanings set forth in the Warrant.
SECTION 10. Miscellaneous.
-------------
(a) Remedies. The parties hereto agree and acknowledge that money
---------
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and hereby agree to waive the defense in any action for specific
performance or injunctive relief that a remedy at law would be adequate.
Accordingly, any party may in its sole discretion apply to any court of law or
equity of competent jurisdiction for specific performance and for other
injunctive relief in order to enforce or prevent violation of the provisions of
this Agreement.
(b) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement, including the provisions of this sentence, may be
amended, modified, supplemented or waived with the prior written consent of the
Company and the Holder or the Holders of a majority of the Registrable
Securities.
(c) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of the
Purchaser or Holders are also for the benefit of, and enforceable by, any
subsequent Holder of Registrable Securities. Notwithstanding any other provision
hereof, no Holder may assign or transfer this Agreement nor any rights hereunder
to any Person or entity that directly competes with the business of the Company,
as set forth on Schedule B hereto.
(d) Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in
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<PAGE>
any way impaired or affected, it being intended that the rights and privileges
of the parties hereto shall be enforceable to the fullest extent permitted by
law.
(e) Counterparts. This Agreement may be executed in any number of
------------
counterparts, any one of which need not contain the signatures of more than one
party, but each of which when so executed shall be deemed to be an original and
all such counterparts taken together shall constitute one and the same
Agreement.
(f) Descriptive Headings: Interpretation. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience of reference only and shall not
limit or otherwise affect the meaning hereof. The use of the word "including" in
this Agreement shall be by way of example rather than by limitation.
(g) Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable air courier guaranteeing
overnight delivery (charges prepaid), mailed to the recipient by certified or
registered mail, return receipt requested and postage prepaid or sent by
facsimile. Such notices, demands and other communications shall be sent to the
Purchaser at the address indicated below the Purchaser's name on the signature
pages hereto and to the Company at the address indicated below:
Video Update
3100 World Trade Center
30 East Seventh Street
St. Paul, MN 55101
Attention: Daniel A. Potter,
Chairman and Chief Executive Officer
Tel: (612) 222-0006
Fax:(612) 229-9661
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party, Any
notice, demand or other communication given hereunder will be deemed to have
been given as of the date so delivered; as of the first business day after being
delivered to an overnight air courier guaranteeing overnight delivery; on the
fifth business day after being mailed; when answered back, if telexed; when
receipt acknowledged, if telecopied; as the case may be.
(h) Governing Law: Submission to Jurisdiction. This Agreement shall
-----------------------------------------
be governed by and construed in accordance with the internal laws of the State
of Delaware Each of the Company and each Holder hereby irrevocably submits to
the jurisdiction of any state or federal Delaware court in respect of any suit,
action or proceeding arising out of or relating to this Agreement and the
Registrable Securities, and irrevocably accepts for itself and in respect of its
property, generally and unconditionally, jurisdiction of the aforesaid courts.
Each of the Company and each Holder irrevocably waives, to the fullest extent it
-17-
<PAGE>
may effectively do so under applicable law, any objection which it may now or
hereafter have to the laying of the venue of any such suit, action or proceeding
brought in any such court and any claim that any such suit, action or proceeding
has been brought in an inconvenient forum. Nothing herein shall affect the right
of any Holder to serve process in any other manner permitted by law or to
commence legal proceedings or otherwise proceed against the Company in any other
jurisdiction.
(i) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(j) Attorneys' Fees. In any action or proceeding brought to enforce
---------------
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, shall
be entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
(k) No Inconsistent Agreements. The Company will not hereafter enter
--------------------------
into any agreement with respect to its securities which is inconsistent with,
adversely affects or violates the rights granted to the Holders in this
Agreement. The Company has not previously entered into any agreement with
respect to its securities granting any registration rights to any Person other
than as set forth in Schedule A attached hereto.
(l) Certain Restrictions. The Company will not, without the consent
--------------------
of the Holders representing at least a majority of all Registrable Shares issued
and on the date of determination, permit any amendment to the Company's
Certificate of Incorporation or By-laws, if such amendment would alter the
powers, preferences or special rights of the shares of any class of capital
stock of the Company so as to affect the Registrable Shares adversely in any
material respect.
IN WITNESS WHEREOF the parties hereto have or have caused this Registration
Agreement to be duly executed as of the date first above written.
VIDEO UPDATE, INC.
By:/s/ Daniel A. Potter (CEO)
--------------------------
Name: Daniel A. Potter
Title: Chairman and Chief Executive Officer
INGRAM ENTERTAINMENT INC.
By:/s/ W. Donnie Daniel
--------------------
Name: W. Donnie Daniel
Title: Senior Vice President
-18-
<PAGE>
SCHEDULE A: PRIORITY HOLDERS/PRIORITY SECURITIES
------------------------------------------------
1. Registration rights assumed under any registration rights or similar
agreement of Moovies, Inc., acquired by the Company in March 1998.
2. Registration rights relating to 50,000 shares of Class A Common Stock
issued in connection with the Company's acquisition of Video View, in January
1997.
3. Registration rights relating to 25,000 shares Class A Common Stock issued
in connection with the Company's acquisition of Video Warehouse, in January
1997.
4. Registration rights relating to 11,500 shares Class A Common Stock issued
in connection with the Company's acquisition of Tigre Holdings in March 1997.
5. Registration rights relating to 50,000 shares Class A Common Stock issued
in connection with the Company's acquisition of Superior Video, in April 1997.
6. Registration rights relating to the Unit Purchase Options granted by the
Company to D.H. Blair Investment Banking Corp. and its designees on July 27,
1994.
7. Registration Rights relating to the Unit Purchase Options granted by the
Company to D.H. Blair Investment Corp. and its designees on April 17, 1995.
8. Registration of Warrants issued pursuant to the Warrant Agreement between
the Company, American Stock Transfer & Trust Company and D.H. Blair Investment
Banking Corp., dated as of July 20, 1994.
9. All warrants and underlying securities issued in connection with the Credit
Agreement among the Company, certain lenders and Banque Paribas, as Agent, dated
March 6, 1998, as amended
<PAGE>
SCHEDULE B: COMPETITORS OF THE COMPANY
--------------------------------------
The proposed transferee or assignee of Holder must represent and warrant to
both Holder and the Company that he/she/it is not one of the following entities,
a subsidiary or affiliate (as defined in Rule 144 promulgated under the
Securities Act of 1933, as amended) thereof, or a holder of a minimum of 25% of
the outstanding stock thereof, for purposes of Sections 3 and 10(c) of this
Agreement:
1. Blockbuster, Inc.
2. Viacom, Inc.
3. Hollywood Entertainment Corporation
4. West Coast Entertainment Corporation
5. Video City, Inc.
6. Hastings Entertainment, Inc.
7. Movie Gallery, Inc.
8. Rentrak Corporation
-20-
<PAGE>
EXHIBIT 10.38
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY. IT HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND IT MAY NOT BE SOLD, ENCUMBERED
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN
EXEMPTION SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED. THIS LEGEND SHALL BE ENDORSED ON ANY NOTE ISSUED IN EXCHANGE FOR THIS
NOTE.
PROMISSORY NOTE
---------------
May 11, 1999
FOR VALUE RECEIVED, the undersigned Video Update, Inc., a Delaware
corporation (the "Company"), promises to pay to the order of Ingram
Entertainment Inc. ("Ingram"), on the 11th day of May, 2002, Fourteen Million
Dollars ($14,000,000) with interest from the date hereof on the unpaid balance
from time to time outstanding at 12% per annum, calculated on the basis of a
360-day year to the extent permitted by applicable law; provided, however, that
-------- -------
in no event shall the rate of interest payable in respect of the indebtedness
evidenced hereby exceed the maximum rate of interest from time to time allowed
to be charged by applicable law (the "Maximum Rate"). The principal and
interest of this Note shall be repaid in monthly installments in accordance with
the attached Schedule 1. All monthly payments set out in Schedule 1 shall be
---------- ----------
due and payable on the first day of such month, with the first such monthly
payment due and payable on July 1, 1999. This Note may be prepaid in whole or
in part at any time without premium penalty, fees or price notice. All payments
and prepayments hereunder shall be applied first to accrued, but unpaid
interest, with the remainder (if any) being applied to principal.
Time is of the essence of this Note. To the extent permitted by applicable
law, a late charge equal to 5% will be assessed on any monthly principal or
interest payment due pursuant to this Note that is not made when due to cover
additional expenses incident to the handling and processing of delinquent
payments. In the event that the Company (a) fails to make any payment required
under this Note as provided herein and such failure continues for a period of
five days after written notice, (b) is in default under the Trade Terms
Agreement, dated May 11, 1999, between the Company and Ingram, (c) experiences a
"change in control," meaning the closing of a transaction after which (i)
Company stockholders currently owning a majority of the Company's Class A Common
Stock, $.01 par value, fail to continue to own such majority or (ii) the
individuals
<PAGE>
who are, as of the date of the issuance of this Note, members of the Company's
Board of Directors (or designees approved by them), cease to constitute at least
2/3 of the Company's Board of Directors, (d) is in default of any Senior
Indebtedness (defined below), with the result that the entire amount of such
indebtedness is immediately due and payable, (e) is in default under the Warrant
to Purchase Common Stock of the Company dated as of May 11, 1999, issued to
Ingram, (f) is in default under the Registration Rights Agreement dated as of
May 11, 1999, by and between the Company and Ingram, (g) is in default under its
trade indebtedness or any other payment or contractual obligation to Ingram,
however evidenced or documented, or (h) files or has filed against it any
petition under any bankruptcy or insolvency law or for the appointment of a
receiver a general assignment for the benefit of creditors or (i) is in default,
or there occurs an event of default under the Senior Debt (subject to subsection
(ii) of the Section 2 of the Subordination Section below and notice of which
must be given to Ingram as provided herein)(each a "default"), then the holder
may, subject to the limitations on remedies set forth in the subordination
section below, by notice in writing to the Company declare the entire unpaid
principal of this Note, together with the accrued interest thereon, and any
other amounts due thereunder, and all other amounts advanced by Ingram to the
Company of any kind, including pursuant to any agreement described in this
paragraph, immediately due and payable. No failure by the holder to take action
with respect to any such default shall affect its subsequent rights to take
action with respect to the same or any other default. In the event of default
the Company agrees to pay all reasonable costs of collection, including
reasonable attorneys' fees to the extent allowed by law.
Upon the occurrence of any default, at the option of the holder of this
Note and without notice to the Company, all accrued and unpaid interest, if any,
shall be added to the outstanding principal balance hereof, and the entire
outstanding principal balance, as so adjusted, shall bear interest thereafter
until paid at an annual rate (the "Default Rate") equal to the lesser of (a) the
rate that is three percentage points (3.0%) in excess of the above-specified
interest rate, or (b) the Maximum Rate, regardless of whether there has been an
acceleration of the payment of principal as set forth herein. All such interest
shall be paid at the time of and as a condition precedent to the curing of any
such default.
1. Subordination of Liabilities. Ingram by its acceptance of this Note
----------------------------
covenants and agrees, that the payment of the principal of, interest on, and all
other amounts owing in respect of, this Note (the "Subordinated Indebtedness")
is hereby expressly subordinated, to the extent and in the manner hereinafter
set forth, to the prior payment in full in cash of all Senior Debt. The
provisions of this Subordination Section shall constitute a continuing offer to
all persons who, in reliance upon such provisions, become payees of, or continue
to hold, Senior Debt, and such provisions are made for the benefit of the
holders of Senior Debt, and such holders are hereby made obligees hereunder the
same as if their names
-2-
<PAGE>
were written herein as such, and they and/or each of them may proceed to enforce
such provisions.
2. The Company is Not to Make Payments with Respect to Subordinated
----------------------------------------------------------------
Indebtedness in Certain Circumstances.
- -------------------------------------
(i) Upon the maturity of any Senior Debt (including interest
thereon or fees or any other amounts owing in respect thereof), whether at
stated maturity, by acceleration or otherwise, all Obligations owing in
respect thereof, in each case to the extent due and owing, shall first be
paid in cash, before any payment (whether in cash, property, securities or
otherwise) is made on account of the Subordinated Indebtedness.
(ii) The Company may not, directly or indirectly make any payment
with respect to any Subordinated Indebtedness and may not acquire any
Subordinated Indebtedness for cash or property until all Senior Debt has
been paid in full in cash if any default or event of default under the
Credit Agreement or any other issue of Senior Debt is then in existence or
would result therefrom. Ingram hereby agrees that, so long as any such
default or event of default in respect of any issue of Senior Debt exists,
it will not sue for, or otherwise take any action to enforce the Company's
obligations to pay, amounts owing in respect of this Note. Ingram
understands and agrees that to the extent that this Subordination Section
prohibits the payment of any Subordinated Indebtedness, such unpaid amount
shall not constitute a payment default under this Note and Ingram may not
sue for, or otherwise take action to enforce the Company's obligation to
pay such amount, provided that such unpaid amount shall remain an
--------
obligation of the Company to Ingram pursuant to the terms of this Note and
provided that such unpaid amount shall, until paid, bear interest at the
Default Rate.
(iii) In the event that notwithstanding the provisions of the
preceding clauses (i) and (ii) of this Section 2 of this Subordination
Section, the Company shall make any payment on account of the Subordinated
Indebtedness at a time when payment is not permitted by said clause (i) or
(ii), such payment shall be held by Ingram, in trust for the benefit of,
and shall be paid forthwith over and delivered to, the holders of Senior
Debt or their representative or the trustee under the indenture or other
agreement pursuant to which any instruments evidencing any Senior Debt may
have been issued, as their respective interests may appear, for application
pro rata to the payment of all Senior Debt remaining unpaid to the extent
necessary to pay all Senior Debt in full in accordance with the terms of
such Senior Debt, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt. Without in any way
modifying the provisions of this Subordination Section or affecting the
subordination effected hereby if the hereafter
-3-
<PAGE>
referenced notice is not given, the Company shall give Ingram prompt
written notice of any event which would prevent payments under clause (i)
or (ii) of this Section 2.
3. Subordination to Prior Payment of All Senior Debt on Dissolution,
-----------------------------------------------------------------
Liquidation or Reorganization of the Company. Upon any distribution of assets
- --------------------------------------------
of the Company upon dissolution, winding up, liquidation or reorganization of
the Company (whether in bankruptcy, insolvency or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise):
(i) the holders of all Senior Debt shall first be entitled to
receive payment in full cash of all Senior Debt (including, without
limitation, post-petition interest at the rate provided in the
documentation with respect to the Senior Debt, whether or not such post-
petition interest is an allowed claim against the debtor in any bankruptcy
or similar proceeding) before Ingram is entitled to receive any payment of
any kind or character on account of the Subordinated Indebtedness;
(ii) any payment or distributions of assets of the Company of any
kind or character, whether in cash, property or securities to which Ingram
would be entitled except for the provisions of this Subordination Section,
shall be paid by the liquidating trustee or agent or other person making
such payment or distribution, whether a trustee in bankruptcy, a receiver
or liquidating trustee or other trustee or agent, directly to the holders
of the Senior Debt or their representative or representatives, or to the
trustee or trustees under any indenture under which any instruments
evidencing any such Senior Debt may have been issued, to the extent
necessary to make payment in full in cash of all Senior Debt remaining
unpaid, after giving effect to any concurrent payment or distribution to
the holders of such Senior Debt; and
(iii) in the event that, notwithstanding the foregoing provision of
this Section 3 of this Subordination Section, any payment or distribution
of assets of the Company of any kind or character, whether in cash,
property or securities, shall be received by Ingram on account of
Subordinated Indebtedness before all Senior Debt is paid in full in cash,
such payment or distribution shall be received and held in trust for and
shall be paid over to the holders of the Senior Debt remaining unpaid or
unprovided for or their representative or representatives, or to the
trustee or trustees under any indenture under which any instruments
evidencing any of such Senior Debt may have been issued, for application to
the payment of such Senior Debt until all such Senior Debt shall have been
paid in full in cash, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
-4-
<PAGE>
Without in any way modifying the provisions of this Subordination Section
or affecting the subordination effected hereby if the hereafter referenced
notice is not given, the Company shall give prompt written notice to Ingram of
any dissolution, winding up, liquidation or reorganization of the Company
(whether in bankruptcy, insolvency or receivership proceedings or upon
assignment for the benefit of creditors or otherwise).
4. Subrogation. Subject to the prior payment in full in cash of all
-----------
Senior Debt, Ingram shall be subrogated to the rights of the holders of Senior
Debt to receive payments or distributions of assets of the Company applicable to
the Senior Debt until all amounts owing on this Note shall be paid in full, and
for the purpose of such subrogation no payments or distributions to the holders
of the Senior Debt by or on behalf of the Company or by or on behalf of Ingram
shall, as between them, its creditors other than the holders of Senior Debt, and
Ingram, be deemed to be payment by the Company to or on account of the Senior
Debt, it being understood that the provisions of this Subordination Section are
and are intended solely for the purpose of defining the relative rights of
Ingram, on the one hand, and the holders of the Senior Debt, on the other hand.
5. Obligation of the Company Unconditional. Nothing contained in this
---------------------------------------
Subordination Section or otherwise in this Note is intended to or shall impair,
as between the Company and Ingram, the obligation of the Company, which is
absolute and unconditional, to pay to Ingram the principal of and interest on
this Note as and when the same shall become due and payable in accordance with
their terms, or is intended to or shall affect the relative rights of Ingram and
creditors of the Company other than the holders of the Senior Debt, nor shall
anything herein or therein prevent Ingram from exercising all remedies otherwise
permitted by applicable law upon an event of default under this Note, subject to
the limitations, if any, under this Subordination Section or the rights of
payees of Senior Debt to exercise rights and remedies, and subject to the
rights, if any, under this Subordination Section of the holders of Senior Debt
in respect of cash, property, or securities of the Company received upon the
exercise of any such remedy. Upon any distribution of assets of the Company
referred to in this Subordination Section, Ingram shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction in which such
dissolution, winding up, liquidation or reorganization proceedings are pending,
or a certificate of the liquidating trustee or agent or other person making any
distribution to Ingram, for the purpose of ascertaining the persons entitled to
participate in such distribution to Ingram, the holders of the Senior Debt and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Subordination Section. The Company agrees to notify Ingram of
any event of default under the Senior Debt documents.
6. Subordination Rights Not Impaired by Acts or Omissions of the Company
---------------------------------------------------------------------
or Holders of Senior Debt. No right of any present or future holders of
- -------------------------
-5-
<PAGE>
any Senior Debt to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act of failure to act on the part of
the Company or by any act or failure to act in good faith by any such holder, or
by any noncompliance by the Company with the terms and provisions of this Note,
regardless of any knowledge thereof which any such holder may have or be
otherwise charged with. The holders of the Senior Debt may, without in any way
affecting the obligations of Ingram with respect hereto, at any time or from
time to time and in their absolute discretion, change the manner, place or terms
of payment of, change or extend the time of payment of, or renew or alter, any
Senior Debt or amend, modify or supplement any agreement or instrument governing
or evidencing such Senior Debt or any other document referred to therein, or
exercise or refrain from exercising any other of their rights under this Senior
Debt including, without limitation, the waiver of default thereunder and the
release of any collateral securing such Senior Debt, all without notice to or
assent from Ingram.
7. Additional Rights. In furtherance of the subordination provided
-----------------
herein, Ingram hereby grants to the holder(s) of the Senior Debt irrevocable
authority, after any default in the payment of any amounts due on the Senior
Debt or in any event specified in Sections 2 or 3 above, to demand, collect,
file proofs of claim with respect to, receive and take any and all proceedings
for the recovery of any and all monies due or to become due on account of this
Note. In addition, Ingram agrees to execute and deliver any and all documents
requested by the Company for delivery to its creditors (in the form as requested
by such creditors) in order to implement or verify this subordination.
8. Definitions. For purposes of this Note, the following capitalized
-----------
terms have the following meanings:
"Credit Agreement" means the Credit Agreement (as amended, modified,
----------------
supplemented, extended, restated, refinanced, replaced or refunded from time to
time, the "Credit Agreement"), dated as of March 6, 1998, by and among the
Company, various lending institutions (the "Banks") and Banque Paribas, as Agent
(the "Agent") and any amendment, modification, supplement, extension,
restatement, refinancing, replacement or refunding thereof (without regard to
whether the amount of Senior Debt thereunder has been increased) and the other
Credit Documents (as defined in the Credit Agreement).
"Obligation" means any principal, interest, premium, penalties, fees,
----------
expenses, indemnities and other liabilities and obligations (including any
guaranties of the foregoing liabilities and obligations) payable under the
documentation governing any indebtedness (including interest accruing after the
commencement of any bankruptcy, insolvency, receivership or similar proceeding,
whether or not such interest is an allowed claim against the debtor in any such
proceeding).
-6-
<PAGE>
"Senior Debt" means all Obligations (i) of the Company under, or in respect
-----------
of, the Credit Agreement and any guaranty thereunder and (ii) of the
Company with respect to indebtedness for present and future borrowed money and
guarantees thereof from any public or private venture, mezzanine or high-yield
debt offering, but other than, with respect to subsection (ii) of this
Definition, (a) indebtedness which is pari passu with, or junior and subordinate
---- -----
in right of payment to, this Note, (b) Obligations in respect of trade payables
incurred in the ordinary course of business or (c) Obligations in respect of
federal, state, local or other taxes.
Presentation for payment, demand, protest and notice of demand, protest and
nonpayment are hereby waived by the Company and all other parties hereto. No
failure to accelerate indebtedness by reason of default, acceptance of a past-
due installment or other indulgences granted from time to time shall be
construed as a novation of this Note, as a waiver of such right of acceleration
or of the subsequent right to insist upon strict compliance with the terms of
this Note, or to prevent the exercise of a right of acceleration or any other
right. Unless otherwise specifically agreed by the holder in writing, the
liability of the Company and all other persons now or hereafter liable for
payment, or any portion thereof, shall not be affected by (a) any renewal of
this Note or other extension of the time for payment, (b) the release of all or
any part of any collateral now or hereafter securing payment, or (c) the release
of or resort to any person now or hereafter liable for payment. This Note may
not be changed orally, but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought.
To the extent permitted by applicable law, the Company hereby waives and
renounces for itself, its heirs, successors and assigns, all rights to the
benefits of any appraisement, exception or homestead now provided, or that may
hereafter be provided by the Constitution and laws of the United States of
America and of any state in and to all of its property, real and personal,
against the enforcement and collection of the obligations evidenced by this
Note.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds, acceleration of
maturity of the unpaid balance of this Note or otherwise, shall the interest and
loan charges agreed to be paid to any holder exceed the maximum amounts
collectible under applicable laws in effect from time to time (the "Maximum
Interest Amount"). If for any reason whatsoever the interest or loan charges
paid or contracted to be paid shall exceed the Maximum Interest Amount then,
ipso facto, the obligation to pay such interest and/or loan charges shall be
- ---- ------
reduced to the Maximum Interest Amount, and any amounts collected by Holder that
exceed the Maximum Interest Amount shall be applied to the reduction of the
principal balance remaining unpaid hereunder and/or refunded to the Company so
that at no time shall the interest or loan charges paid or payable exceed the
Maximum Interest Amount. This provision shall control every other provision in
-7-
<PAGE>
any and all other agreements and instruments now existing or hereafter arising
between the Company and any holder with respect to the indebtedness evidenced by
this Note.
All payments to the holder hereof shall be made at the following address or
at such other address as the holder hereof shall specify in writing to the
Company: Two Ingram Boulevard, La Vergne, TN 37089, Attn: Chief Financial
Officer. All notices to the Company shall be made by certified or registered
mail to it at: 3100 World Trade Center, 30 East 7th Street, St. Paul, Minnesota
55101-4913.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Delaware, without regard to its conflict of laws
provisions. The Company agrees that it has reasonable contacts with both the
State of Minnesota and the State of Tennessee. Any dispute or controversy with
respect to this Note shall be adjudicated in the courts located in one of these
two states and no other place.
IN WITNESS WHEREOF, the undersigned Company has caused this note to be
executed as a document under seal by its duly authorized officer.
Attest: Video Update, Inc.
______________________________ By: /s/ Daniel A. Potter
--------------------
Name: Daniel A. Potter
Title: Chief Executive Officer
-8-
<PAGE>
Exhibit 10.39
UNITED STATES
-------------
REVENUE SHARING AGREEMENT
-------------------------
THIS AGREEMENT (the "AGREEMENT") is made the 20th day of November, 1998.
BETWEEN:
(1) *
(2) VIDEO UPDATE INC. whose principal place of business is at 3100 World Trade
Center, 30 East 7th Street, St. Paul, Minnesota, 55101 (hereinafter
referred to as "VIDEO UPDATE," which shall be deemed to include its
permitted assigns).
WHEREAS:
(A) Video Update owns and operates retail stores throughout the United States
and Canada which, among other things, rent, sell and market pre-recorded
videocassette tapes to the general public; and
(B) * acquires, produces, markets and sells motion pictures on pre-recorded
videocassette tapes; and
(C) Video Update is willing to purchase on a per Store (the terms initially
capitalized in this Agreement and not otherwise defined herein shall have
the respective meanings set forth in Paragraph 19 of this Agreement) basis
a specified number of videocassette copies of each Picture; and
(D) Video Update is willing to provide various marketing, advertising and
promotional services and activities in support of the Pictures; and
(E) Video Update is willing to report electronically on an ongoing basis
information as to the rental and sales of Pictures.
NOW THEREFORE, based on the above premises and in consideration of the mutual
covenants and agreements contained herein, the parties agree as follows:
1. AGREEMENT TERM:
---------------
The term of this Agreement shall be for * (the "TERM"), commencing as of
the date of this Agreement. Each year of the Term, as measured from the date of
this Agreement, is a "CONTRACT YEAR."
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 2
2. TERRITORY:
----------
The territory for purposes of this Agreement with respect to each Picture
shall be the United States and its territories and possessions (the
"TERRITORY").
3. VIDEO UPDATE COMMITMENTS:
-------------------------
Beginning as of the date of this Agreement, Video Update agrees as follows:
a. Purchasing: The following purchasing requirements shall apply to all
----------
Stores for the duration of the Term:
(1) *
(2) *
(3) *
(4) *
(a) *
(b) *
(c) *
b. Missing Copies: For all Copies in excess of * of the total number of
--------------
aggregate copies shipped on a Rental Picture per Rental Picture basis,
which are lost, stolen or otherwise not reasonably accounted for, for more
than thirty (30) calendar days during the period commencing upon delivery
to Video Update's distribution center and ending on the last day of the
relevant Revenue Sharing Period (each, a "MISSING COPY"), Video Update
shall pay to * * standard distribution wholesale price only less the
relevant Upfront Price.
c. Payment: *
-------
d. Remedy: The parties acknowledge and agree that if Video Update fails
------
to order the number of Copies required under this Paragraph 3, Video Update
shall pay to * as liquidated damages, an amount equal to * for each Copy
which Video Update failed to order. The parties hereto expressly agree and
acknowledge that actual damages for purposes of this Subparagraph would be
difficult to ascertain and that the amount set forth above represents the
parties' reasonable estimate of such damages.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 3
e. Placement: Video Update shall exercise good faith commercially
---------
reasonable efforts to maximize Rental Revenue on the Pictures. At all
times during the entire Revenue Sharing Period, Video Update shall display
for rental at each Store all of the Copies of the Picture purchased for
such Store, which are not currently being rented, in the "New Releases"
rental section of such Store (or another comparably prominent section of
such Store which has been pre-approved by *).
f. Sell-Off: * All sell-off copies will be prominently labeled as
--------
"Previously Viewed Rental Product."
g. Packing and Shipping: Video Update will be solely responsible for
--------------------
making the Copies ready for consumer rental and for shipping the Copies
from its distribution center to its Stores.
h. Delivery: As between * and Video Update, title in and to the Copies
--------
and risk of loss shall pass from * to Video Update upon delivery of the
Copies to Video Update's distribution center in accordance with Paragraph
5.b.
i. Defective Copies: The purchase requirements set forth in this
----------------
Paragraph 3 shall not be subject to any returns by Video Update. * will
exchange defective Copies for a working Copy of the same title. Defective
Copies shall mean those videocassettes which are mechanically defective,
mispackaged or contain extraneous material. Video Update shall report
defective Copies to * promptly following discovery of such defect.
j. Store Count: Video Update will report to * on a calendar month basis
-----------
the number of currently operation Stores, New Stores and newly closed
Stores.
k. Demographic Information: Video Update will provide to *, on an ongoing
-----------------------
basis, information regarding the demographic make-up generally of those
customers renting the Copies.
l. Credit: Video Update agrees that on or before the execution of this
------
Agreement, Video Update will execute the Security Deposit attached as
Exhibit B and incorporated by this reference and provide * with a check in
the amount of * ("SECURITY DEPOSIT"). If Video Update fails to do so, *
may immediately withdraw its offer to enter into this Agreement. Said
Security Deposit shall secure payment of Video Update's obligations
hereunder and under any other prior, concurrent or subsequent agreement
between the parties, including, but not limited to, the * between the
parties executed ____________________.] * shall only draw down on the
Security Deposit required hereunder in the event Video Update fails to
timely pay one or more monetary obligations secured by the Security
Deposit. In the event of one or more partial draws on such Security
Deposit, Video Update agrees to restore it to the full amount of * within
fifteen (15) days after the partial draw(s). Failure to restore to the full
amount within fifteen (15) days shall constitute a
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 4
material breach of this Agreement upon which * shall be entitled to
terminate immediately.
4. PRODUCT TO BE MADE AVAILABLE:
-----------------------------
a. * shall have the right, in its sole and absolute discretion, to
determine what titles shall be made available as Pictures. * shall also
have the right in its sole and absolute discretion, to determine the
release schedule of Pictures, including, but not limited to the Prebook
Dates and Street Dates, and to change such schedules.
b. * shall have the right to withdraw any Picture from further
distribution under this Agreement in its sole and absolute discretion. In
such event, * shall give Video Update written notice of such withdrawal,
and Video Update shall not sell or rent any Copies of the withdrawn Picture
after its receipt of such notice.
5. *COMMITMENTS:
-------------
a. Marketing Support: In lieu of specific marketing support programs such
-----------------
as rebate, co-op, and MDF programs, and as payment and in consideration for
the various other services and activities which Video Update has agreed to
perform hereunder for the benefit of *, such as marketing, sales and rental
reporting functions:
(1) * agrees to credit, on a quarterly basis, Video Update with
marketing support funds ("MARKETING SUPPORT FUNDS") in the amount of *
of the Purchase Price of the Copies purchased by Video Update provided
Video Update has complied with the purchasing requirements set forth
in Paragraph 3 above. Video Update will use * of such Marketing
Support Funds solely to advertise in measured media one or more of the
Pictures released within the relevant quarter or within the sixty (60)
days prior to said quarter.
(2) Marketing Support Funds will accrue on a quarterly basis and will
be credited to Video Update upon submission of proof of the
advertising spend. With respect to said Marketing Funds, Video Update
agrees to consult with * and to keep * apprised of its advertising
plans and activities and to comply with * then-current marketing
support policies and practices, which policies and practices shall be
no more restrictive than any of * policies and practice as applied to
other rental retailers. Video Update shall be bound by changes in *
marketing support policies and practices only to the extent * has
given Video Update reasonable prior written notice of such changes. *
shall have the right to approve such advertising plans, and Video
Update shall provide a meaningful and timely opportunity for said
approval by *. * shall exercise approval rights in a timely and
reasonable manner.
(3) Marketing Support Funds must be spent within ninety (90) calendar
days of accrual, except as otherwise agreed in writing by *. Any
Marketing
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 5
Support Funds not spent within ninety (90) calendar days and
claimed by within one hundred eighty (180) calendar days of accrual
and shall be deemed waived and credited back to *. Marketing Support
Funds shall not be used to advertise, promote or otherwise market
product not distributed by *. Video Update shall provide evidence of
its compliance with this Paragraph 5.a as requested by *.
(4) Should Video Update fail to comply in good faith with the approval
rights of * or fail to keep * reasonably apprised of its marketing
plans and activities, * shall be entitled to give written notice to
Video Update of such failure. If Video Update fails to remedy such
failure to * reasonable satisfaction within fifteen (15) calendar days
following receipt of such notice, * shall have the right to terminate
Video Update's right to the Marketing Support Funds for six (6)
months.
b. Shipping: * will deliver the Copies at * expense to one (1) primary
--------
distribution center in the United States. * shall credit Video Update with
an amount determined by *, in * sole discretion, to help defray the cost of
picking, packing and shipping to Stores.
6. ELECTRONIC REPORTING:
---------------------
a. At no cost or expense to *, Video Update will provide to *,
electronically, daily access to complete and accurate information (along
with weekly summaries, in such reasonable form as may be specified by *
from time to time) as to Video Update's sale and rental of the Pictures,
including, but not limited to, daily rental turn data, daily inventory and
daily Rental Revenue on a Picture by Picture, Store by Store, Copy by Copy
basis. Video Update shall collect and maintain a computer database of
performance information on a per Picture, per Copy and per Store basis
recording Rental Transactions and Rental Revenue. In addition, * shall
have the unlimited right to use and equal access to, the database of
performance information of each of the Pictures and Video Update shall
provide a copy of such database * on request and without cost to *. Video
Update shall allow * access to all data, reports, and information Retailers
may generate from time to time with respect to the Pictures and shall
submit to * such other data, reports, and information with respect to the
Pictures as Video Update is reasonably able to produce and which * may
inform Video Update that it requires from time to time. * shall have no
right of access to and Video Update shall not provide electronic reporting
and data base information relating to any product not distributed by * or
any specific individual customer information.
b. Video Update represents, warrants and agrees that during the Term and
continuing until the expiration of the respective Revenue Sharing Periods
of Pictures sold prior to the expiration or termination of the Term, Video
Update shall have implemented and maintain in good working condition a
computer system, including any and all necessary hardware and software,
capable of accurately and timely
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 6
fulfilling the electronic reporting requirements set forth in this
Paragraph 6. To that end, Video Update may as necessary, at its sole cost
and expense, enter into a software licensing and support services agreement
with Supercomm Inc., Rentrak Corporation or such other supplier of revenue
sharing software systems and support services as * shall approve in its
sole and absolute discretion. Video Update acknowledges and agrees that *
shall have no liability to Video Update as a consequence of any damage or
injury caused by, relating to, or arising from Video Update's use of the
Supercomm system, the Rentrak system or any other approved revenue sharing
software system.
c. Video Update shall enter each Copy into its computer system either
prior to the relevant Street Date or within twenty four (24) hours of
delivery, whichever is later and process through said computer system all
Rental Transactions of all Copies. In the event that said computer system
shall be nonfunctional for any period of time, all Rental Transactions
occurring during such period shall be manually one hundred percent (100%)
captured and processed through said system as soon as practicable after it
is again functional.
d. In the event that said computer system shall become nonfunctional (i.e.
unable to contemporaneously provide all the data processing and reporting
functions described in this Paragraph 6), Video Update shall use its best
efforts to make such system fully functional as soon as possible.
7. REVIEW:
-------
Within thirty (30) calendar days following the end of each Contract Year,
the parties shall meet and in good faith review the terms of this Agreement.
Should no agreement be reached between the parties with respect to adjusting or
amending the terms of the Agreement, the then current terms of the Agreement
shall remain in full force and effect.
8. *
9. TERMINATION:
------------
a. The following transactions or occurrences shall constitute material
events of default (each an "EVENT OF DEFAULT") by the applicable party (the
"DEFAULTING PARTY") hereunder such that, in addition to and without
prejudice to or limiting any other rights and remedies available to the
non-defaulting party at law or in equity the non-defaulting party may elect
to immediately and prospectively terminate this Agreement and the * between
the parties dated _______________, 1998 at the sole discretion of the non-
defaulting party by giving written notice thereof to the other party at any
time after the occurrence of an Event of Default setting forth sufficient
facts to establish the existence of such Event of Default:
(1) A material breach by a party of any material covenant, material
warranty, or material representation contained herein, where such
defaulting
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 7
party fails to cure such breach within thirty (30) calendar days after
receipt of written notice thereof, or within such specific cure period
as is expressly provided for elsewhere in this Agreement; or
(2) A party makes an attempt to make any arrangement for the benefit
of creditors, or a voluntary or involuntary bankruptcy, insolvency or
assignment for the benefit of creditors of a party or in the event any
action or proceeding is instituted relating to any of the foregoing
and the same is not dismissed within thirty (30) calendar days after
such institution; or
(3) A failure by either party to make payment of any monies payable
pursuant to this Agreement as and when due.
b. Except as otherwise provided herein, no termination of this Agreement
for any reason shall relieve or discharge any party hereto from any duty,
obligation, or liability hereunder which was accrued as of the date of such
termination.
10. PUBLIC DISCLOSURE AND CONFIDENTIALITY:
--------------------------------------
a. Public Disclosure: Each party agrees that no press release or public
-----------------
announcement relating to the terms of this Agreement (including within the
context of a trade press or other interview or advertisement in any media)
shall be issued without the express prior written approval of the other
party hereto.
b. Confidential Information: During the Term and for a period of three
------------------------
(3) years thereafter, Video Update and * shall hold, and shall cause each
of their directors, officers, employees and agents to hold in confidence
the terms of this Agreement (including the financial terms and provisions
hereof and all information received pursuant to, or developed in accordance
with, this Agreement) specifically including but not limited to the
database referred to in Paragraph 6 above. Video Update and * hereby
acknowledge and agree that all information contained in, relating to or
furnished pursuant to this Agreement, not otherwise known to the public, is
confidential and proprietary and is not to be disclosed to third parties
without the prior written consent of both Video Update and *. Neither
Video Update nor * shall disclose such information to any third party
(other than to officers, directors, employees, attorneys, accountants and
agents of Video Update and * the affiliates of either, who have a business
reason to know or have access to such information, and only after each of
whom agrees to being bound by this paragraph) except:
(1) To the extent necessary to comply with any Law or the valid order
of a governmental agency or court of competent jurisdiction or as part
of its normal reporting or review procedure to regulatory agencies or
as required by the rules of any major stock exchange on which either
party's stock may be listed; provided however, that the party making
such disclosure shall seek, and use reasonable efforts to obtain,
confidential treatment of said
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 8
information and shall promptly, to the greatest extent practicable,
notify the other party in advance of such disclosure;
(2) As part of the normal reporting or review procedure by its parent
company, its auditors and its attorneys;
(3) To the extent necessary to obtain appropriate insurance, to its
insurance agent or carrier, that such agent or carrier agrees to the
confidential treatment of such information; and
(4) To actual or potential successors in interest, provided however,
that such person or entity shall have first agreed in writing to the
confidential treatment of such information.
11. NO RIGHT TO USE NAMES:
----------------------
Neither Video Update nor Stores shall acquire any right to use, nor shall
the same use any copyrights, trademarks, characters or designs owned or
controlled by * or any of its affiliates, including without limitation, * alone
or in conjunction with other words or names, in any advertising, publicity or
promotion, either express or implied, without * prior consent in each case, and
in no case shall any Video Update or Store advertising, publicity, or promotion,
express or imply any endorsement of the same.
12. ASSIGNMENT:
-----------
This Agreement and the rights and licenses granted hereunder are personal
and neither party shall have the right to sell, assign, transfer, mortgage,
pledge nor hypothecate (each an "ASSIGNMENT") any such rights or licenses in
whole or in part without the prior written consent of the non-assigning party,
nor will any of said rights or licenses be assigned or transferred to any third
party by operation of law, including, without limitation, by merger or
consolidation or otherwise; provided, however that an Assignment pursuant to or
resulting from a sale of all or substantially all of the assets or all or a
majority of the equity of Video Update to any Person or Persons or any other
form of business combination, such that the Video Update business as currently
existing remains substantially intact, including, without limitation, a sale to
the public, shall not require such consent so long as such Assignment is not to
a motion picture studio. Provided, further, that any Assignment by either party
to an affiliate of said party shall also not require consent. In the event that
Video Update or * assigns its rights or interest in or to this Agreement in
whole or in part, the assigning party will nevertheless continue to remain fully
and primarily responsible and liable to the other party for prompt, full,
complete and faithful performance of all terms and conditions of this Agreement.
13. AUDIT RIGHTS:
-------------
a. During the Term and continuing until the date one (1) year following
the date of expiration of earlier termination of this Agreement, * may,
audit the financial
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 9
books, information systems and records of Video Update as reasonably
necessary to verify Video Update's compliance with its obligations under
this Agreement; provided, however, that (a) such audit shall be at the sole
cost and expense of * (unless such audit reveals that payments due to * for
any twelve (12) month period were understated by more than five (5%), in
which case, in addition to all other rights which * may have, Video Update
shall promptly reimburse * to the extent of its reasonable out-of-pocket
costs of such audit,) (b) * may not audit more than twice per year (and no
such audit shall continue for more than thirty (30) calendar days from the
date the auditors are given access to the applicable records), and (c) any
such audit shall be conducted only during regular business hours and in
such a manner as not unreasonably to interfere with the normal business
activities of Video Update. Video Update shall keep and maintain complete
and accurate books of account and records in connection with its
obligations under this Agreement at its principal place of business until
the date thirty-nine (39) months following the date of rendering of the
initial statement reflecting such records unless a legal action with regard
thereto is commenced during such period.
b. During the Term and continuing until the date one (1) year following
the date of expiration or earlier termination of this Agreement, * (and its
agents or representatives) may inspect, examine, audit, and make copies of
the books, records, invoices, and store premises of Stores. * rights
hereunder shall also include the right to inspect and examine the premises
and inventory of Copies of Stores, warehouses, transfer or storage
facilities, and any other locations under Video Update's operation or
control. Video Update and Store employees shall cooperate with * exercise
of its rights hereunder and provide * such assistance as * shall reasonably
request to enable * to verify Video Update's compliance with the terms of
this Agreement. Any such audit shall be conducted only during regular
business hours and in such a manner as not unreasonably to interfere with
the normal business activities of Store.
14. * REPRESENTATIONS AND WARRANTIES:
---------------------------------
* represents and warrants that:
a. It is a corporation organized and existing under the laws of the *,
with its principal place of business in the *;
b. The undersigned has the full right, power and authority to sign this
Agreement on behalf of *;
c. The execution, delivery and performance of this Agreement does not and
will not, violate any provisions of * articles or certificates of
incorporation and bylaws, or any contract or other agreement to which * a
party.
d. There is no broker, finder or intermediary involved in connection with
the negotiations and discussions incident to the execution of this
Agreement, and no broker, finder, agent or intermediary who might be
entitled to a fee, commission or
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 10
any other payment upon the consummation of the transactions contemplated by
this Agreement;
e. This Agreement has been duly executed and delivered and constitutes the
legal, valid and binding obligation of * enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereinafter in
effect, affecting the enforcement of creditors' rights in general and by
general principles of equity, regardless of whether such enforceability is
considered in a proceeding in equity or at law;
15. VIDEO UPDATE'S REPRESENTATIONS AND WARRANTIES:
----------------------------------------------
Video Update represents and warrants that:
a. It is a corporation organized and existing under the laws of the State
of Delaware with its principal place of business in the State of Minnesota;
b. The undersigned has the full right, power and authority to sign this
Agreement on behalf of Video Update;
c. There is no broker, finder or intermediary involved in connection with
the negotiations and discussions incident to the execution of this
Agreement, and no broker, finder, agent or intermediary who might be
entitled to a fee, commission or any other payment upon the consummation of
the transactions contemplated by this Agreement;
d. This Agreement has been duly executed and delivered and constitutes the
legal, valid and binding obligation of Video Update enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereinafter in effect, affecting the enforcement of creditors'
rights in general and by general principles of equity, regardless of
whether such enforceability is considered in a proceeding in equity or at
law;
e. The execution, delivery and performance of this Agreement does not, and
will not, violate any provisions of Video Update's articles or certificates
of incorporation and bylaws, or any contract or other agreement to which
Video Update is a party;
16. FORCE MAJEURE:
--------------
The duties and obligations of the parties hereunder may be suspended upon
the occurrence and continuation of any "Event of Force Majeure" which inhibits
or prevents performance hereunder, and for a reasonable start-up period
thereafter. An "Event of Force Majeure" shall mean any act, cause, contingency
or circumstance beyond the reasonable
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 11
control of such party (whether or not reasonably foreseeable), including,
without limitation, to the extent beyond the reasonable control of such party,
any governmental action, nationalization, expropriation, confiscation, seizure,
allocation, embargo, prohibition of import or export of goods or products,
regulation, order or restriction (whether foreign, federal or state), war
(whether or not declared), civil commotion, disobedience or unrest,
insurrection, public strike, riot or revolution, lack or shortage of, or
inability to obtain, any labor, machinery, materials, fuel, supplies or
equipment from normal sources of supply, strike, work stoppage or slowdown,
lockout or other labor dispute, fire, flood, earthquake, drought or other
natural calamity, weather or damage or destruction to plants and/or equipment,
commandeering of vessels or other carriers resulting from acts of God, or any
other accident, condition, cause, contingency or circumstances including
(without limitation, acts of God) within or without the United States. Neither
party shall, in any manner whatsoever, be liable or otherwise responsible for
any delay or default in, or failure of, performance resulting from or arising
out of or in connection with any Event of Force Majeure and no such delay,
default in, or failure of, performance shall constitute a breach by either party
hereunder. As soon as reasonably possible following the occurrence of an Event
of Force Majeure, the affected party shall notify the other party, in writing,
as to the date and nature of such Event of Force Majeure and the effects of
same. If any Event of Force Majeure shall prevent the performance of a material
obligation of either party hereunder, and if the same shall have continued for a
period of longer than 180 days, then either party hereto shall have the right to
terminate this Agreement by written notice to the other party hereto.
17. INDEMNIFICATION:
----------------
Each party (the "INDEMNIFYING PARTY") shall indemnify and hold the other
party and its affiliates and their respective employees, officers, agents,
attorneys, stockholders and directors, and their respective permitted
successors, licensees and assigns (the "INDEMNIFIED PARTY(IES)") harmless from
and against (and shall pay as incurred) any and all claims, proceedings,
actions, damages, costs, expenses and other liabilities and losses (whether
under a theory of strict liability, or otherwise) of whatsoever kind or nature
("CLAIM(S)") incurred by, or threatened, imposed or filed against, any
Indemnified Party (including, without limitation, (a) actual and reasonable
costs of defense, which shall include without limitation court costs and
reasonable attorney and other reasonable expert and reasonable third party fees;
and (b) to the extent permitted by Law, any fines, penalties and forfeitures) in
connection with any proceedings against an Indemnified Party caused by any
breach (or, with respect to third party claims only, alleged breach) by the
Indemnifying Party of any representation, term, warranty, or agreement
hereunder. Neither party shall settle, compromise or consent to the entry of
any judgment in or otherwise seek to terminate any pending or threatened Claim
in respect of which the Indemnified Party is entitled to indemnification
hereunder (whether or not the Indemnified Party is a party thereto), without the
prior written consent of the other party hereto; provided, however, that the
Indemnifying Party shall be entitled to settle any claim without the written
consent of the Indemnified Party so long as such settlement only involves the
payment of money by the Indemnifying Party and in no way affects any rights of
the Indemnified Party.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 12
18. REMEDIES:
---------
No remedy conferred by any of the specific provisions of this Agreement is
intended to be exclusive of any other remedy which is otherwise available at
law, in equity, by statute or otherwise, and except as otherwise expressly
provided for herein, each and every other remedy shall be cumulative and shall
be in addition to every other remedy given hereunder or now or hereafter
existing at law, in equity, by statute or otherwise and no provision hereof
shall be construed so as to limit any party's available remedies in the event of
a breach by the other party hereto. The election of any one or more of such
remedies by any of the parties hereto shall not constitute a waiver by such
party of the right to pursue any other available remedies.
19. DEFINITIONS:
------------
a. "Copy" or "Copies" shall mean VHS videocassette units. Other formats,
including laserdisc and DVD are not included under this Agreement.
b. "Escalator" shall mean the annual percent increase or decrease, if any,
in * weighted average standard rental distribution wholesale price but in
no event shall it exceed *.
c. *
d. "Home Video" shall mean the providing of motion pictures and other
programming to members of the general public by means of the temporary or
permanent transfer of physical possession of a VHS videocassette for non-
public viewing on a home television receiver.
e. "Laws" shall mean all international, federal, national, state,
provincial, municipal or other laws, ordinances, orders, statutes, rules or
regulations.
f. "New Store" shall mean a Store which Video Update first owns or
operates after the commencement date of this Agreement.
g. "Picture" shall mean any motion picture, including but not limited to
live-action, animated or other medium, or any other programming for which *
owns or controls Home Video Distribution Rights in the Territory or in the
U.S. Territory, as applicable, and which * has determined to make generally
available for sale at a "rental price" (as opposed to a "sell through
price") as such terms are generally understood in the Home Video industry
in Los Angeles, California.
h. *
i. "Prebook Date" shall mean, with respect to any Picture, the date
specified by * in its sole discretion, when * videocassette orders are due
for all channels of distribution.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 13
j. "Revenue Sharing Period" shall mean the period commencing on the Street
Date of the relevant Picture and running through the one hundred eighty-
second (182nd) day thereafter.
k. "Store" shall mean any retail operation in the United States which, at
any time during the Term of this Agreement, is wholly owned and/or operated
by Video Update, whether or not such retail operation is operated under the
"Video Update" trademarks, including non-traditional stores, such as by way
of example, kiosks, carts, "stores within a store", "rack jobbing"
operations, or vending machines.
l. "Street Date" shall mean, with respect to an Picture, the first date on
which, in the Territory, both: (i) such Picture is authorized by * for
Home Video distribution, and (ii) Home Video copies of such Picture are
actually available to the general public.
20. MISCELLANEOUS:
--------------
a. This Agreement shall not constitute any partnership, joint venture or
agency relationship between the parties hereto. The parties shall be
considered independent contractors.
b. This Agreement, together with the attached Exhibits, embodies the
entire understanding of the parties with respect to the subject matter
hereof and may not be altered, amended or otherwise modified except by an
instrument in writing executed by both parties.
c. The headings in this Agreement are for convenience of reference only
and shall not have any substantive effect.
d. All rights and remedies granted to the parties hereunder are cumulative
and are in addition to any other rights or remedies that the parties may
have at law or in equity.
e. Should any non-material provision of this Agreement be held to be void,
invalid, or inoperative, as a matter of law the remaining provisions hereof
shall not be affected and shall continue in effect as though such
unenforceable provision(s) have been deleted herefrom.
f. Unless otherwise indicated, all dollar amounts referenced herein shall
refer to and be paid in United States dollars.
g. No waiver of any right under or breach of this Agreement shall be
effective unless it is in writing and signed by the party to be charged.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 14
h. This Agreement shall be governed by and construed in accordance with
the internal Laws of the * applicable to Agreements entered into and wholly
performed therein. Video Update hereby consents to and submits to the
jurisdiction of the * and any action or suit under this Agreement may be
brought in any federal or state court with appropriate jurisdiction over
the subject matter established or sitting within the *.
i. None of the provisions of this Agreement is intended for the benefit of
or shall be enforceable by any third parties.
j. This Agreement may be executed in separate counterparts each of which
shall be an original and all of which taken together shall constitute one
and the same Agreement.
k. All notices shall be in writing and either personally delivered, mailed
first class mail (postage prepaid), sent by reputable overnight courier
service (charges prepaid), or sent by transmittal by any electronic means
whether now known or hereafter developed, including, but not limited to,
telex, telecopier, or laser transmissions, able to be received by the party
intended to receive notice, to the parties at the following addresses:
If to Video Update:
Video Update
3100 World Trade Center
30 East 7 1h Street
St. Paul, Minnesota 55101
Attention: Dan Potter, CEO
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
Video Update U.S. Revenue Sharing Agreement
Page 15
If to *:
*
*
*
*
*
IN WHEREOF, the parties have executed this Agreement as of the date and
year first above written.
*
*
- ----------------------------------------------
By: *
Title: *
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Title: CEO
---------------------------------------
<PAGE>
EXHIBIT A
VIDEO UPDATE BUY MATRIX
Copies per Rental Picture per Store
*
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
EXHIBIT B
---------
*
*
*
SECURITY DEPOSIT
----------------
Video Update, Inc. ("Customer") hereby delivers to * the attached check
(describe check, bank) * for * to secure certain obligations and liabilities as
set forth below ("Security Deposit").
Customer hereby pledges and grants to * a lien, charge and security interest in,
all right title and interest of Customer in and to Security Deposit and all
interest, dividends, cash and other property from time to time received,
receivable or otherwise distributed with respect to the Security Deposit and all
proceeds of the foregoing, to secure the prompt payment and performance in full
when due of all obligations and liabilities of Customer now or hereafter
existing to *.
* may apply the Security Deposit to such obligations and liabilities and
exercise all other rights and remedies with respect thereto available to * under
applicable law. The Security Deposit may not be allocated to invoices by
Customer until the net balance due *, according to * records, is at or below the
credit availability established with the Security Deposit.
The accounts payable will be issued as a credit to Customer's account. Interest
will be paid at the thirty (30) day commercial rate as published in the Wall
Street Journal on the date the accounts payable are credited to Customer's
account until the account balance falls below the established credit
availability without the Security Deposit or upon default by Customer in the
prompt payment of its obligations and liabilities as set forth above. Interest
will be issued as a credit to Customer's account with *. Interest will not be
paid on the Security Deposit if Customer's balance, according to * records,
falls below the credit availability without the Security Deposit in less than
thirty (30) days from the date of deposit into * bank account.
By:/s/ Daniel A. Potter, CEO
-------------------------
Video Update, Inc.
----------------------------
Debtor
Date 20--November--98
-----------------------
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
<PAGE>
Exhibit 10.40
As of October 20, 1998
Video Update, Inc.
3100 World Trade Center
St. Paul, Minnesota 55101
Attention: John Bedard, President
This letter agreement ("Agreement") sets forth the terms of the agreement
between Video Update, Inc. and * in connection with (i) Video Update's ordering
of certain "Videocassettes" (as defined below) for, and Video Update's and *
participation in a "Revenue Sharing Program" (as defined below) for, the "Rental
Pictures" (as defined below) covered by this Agreement; and (ii) Video Update's
ordering of each "Direct-To-Sell-Through Picture" (as defined below) of *.
A. CONDITIONS PRECEDENT: All of * obligations under this Agreement are subject
--------------------
to the satisfaction of the following conditions precedent ("Conditions
Precedent"): (i) Video Update's willingness and operational capability to
electronically report * point-of-sale information with respect to Rental
Pictures on an ongoing basis; and (ii) * receipt of this Agreement executed by
Video Update.
1. TERM: The initial term of this Agreement shall be for a period of *
----
commencing on * and ending on * ("Initial Term"). * shall have the
irrevocable option, but not the obligation, to extend the Initial Term for
an additional period of *, commencing on the date of expiration of the
Initial Term and ending on * ("Extending Term"). * shall exercise its
option for the Extended Term, if at all, by notice to Video Update, ten
(10) days prior to the expiration of the Initial Term. The Initial Term
and Extended Term shall be hereinafter collectively referred to as the
"Term".
2 RENTAL PICTURES:
---------------
a. Definition: For purposes of this Agreement, "Rental Picture" shall be
----------
defined as each and every feature motion picture which * intends to
release on Videocassette in the "Territory" (as defined below) during
the Term which has an intended "Street Date" (as defined below) during
the Term and for which * has determined to initially release
Videocassettes thereof to consumers in the Territory on a "rental
basis" (as opposed to a "sell-through basis") as such terms are
generally understood in the home video industry in Los Angeles,
California. For purposes of this Agreement, "Videocassette" shall
mean only prerecorded VHS videocassettes. Other formats, including
laserdiscs and DVD, are not included in this Agreement.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
b. Election/Order Requirements: With respect to each and every Rental
---------------------------
Picture, Video Update agrees to order from *, and * agrees to provide
to Video Update, a specified number of Videocassettes of such Rental
Picture as mutually determined by Video Update and *; provided,
however, that if the parties are unable to agree on a quantity of
Videocassettes, Video Update agrees to order and * agrees to provide
to Video Update, the number of Videocassettes of such Rental Picture
as set forth in the "Matrix" (attached hereto as Exhibit "A" and
incorporated herein by this reference).
c. Matrix: The Matrix sets forth Video Update's ordering obligations for
------
Rental Pictures ordered on a revenue sharing basis and Direct-to-Sell-
Through Pictures in the event that Video Update and * are unable to
come to a mutual agreement regarding such orders. For purposes of
determining total "Base Buy Copies" (as set forth in the Matrix) and
total "Revenue Sharing Copies" (as set forth in the Matrix), the
Matrix assumes a "Participating Store" (as defined below) count of
520. The Participating Store count shall be adjusted on a title-by-
title basis to reflect the actual number of Participating Stores. If
Video Update fails to order a specified number of Videocassettes of a
particular Rental Picture, Video Update shall be deemed to have
elected to order * times the "Base Buy Copies" (as set forth in the
Matrix) for such Rental Picture.
3. STREET DATE/ORDERING OF COPIES/DISTRIBUTION OF COPIES: With respect to
-----------------------------------------------------
each of the Rental Pictures ordered on a revenue sharing basis, * shall
specify the date for the first Videocassette rental of such Rental Picture
to the general public (the "Street Date"). Video Update shall place its
orders with * for each Rental Picture, in accordance with the Matrix
("Initial Order"), not later than 21 days prior to the Street Date for such
Rental Picture. Once the Initial Order has been delivered to the
"Participating Stores" (as defined below), Video Update shall cause all of
the Videocassettes comprising the Initial Order to be placed on the shelf
of the Participating Stores. For purposes of this Agreement,
"Participating Store" shall mean (i) any video store in the United States,
which at any time during the Term of this Agreement, is owned and/or
operated by Video Update. For purposes of this Agreement, "video store"
shall mean a retail outlet that is primarily, or is otherwise, in any
material respect, engaged in the rental of videocassettes to the public for
home viewing entertainment purposes.
4. TERRITORY: The territory of the rights granted hereunder shall be and be
---------
limited to the United States and its territories and possessions (the
"Territory").
5. "DIRECT-TO-SELL-THROUGH PICTURE": * agrees to sell to Video Update and
--------------------------------
Video Update agrees to purchase from *, at the published wholesale price
for direct retail accounts in the Territory, for rental to consumers,
Videocassettes of all Direct-To-Sell-Through Pictures in quantities as
mutually determined by * and Video Update on a title-by-title basis;
provided, however, that if the parties are unable to agree on a quantity of
Videocassettes, Video Update agrees to order and * agrees to provide to
Video Update, the number of Videocassettes of each Direct-to-Sell-Through
Picture that is comparable to the number of "Revenue Share Copies" as
determined and set forth in
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
2
<PAGE>
the Matrix attached hereto as Exhibit "A" and incorporated herein by this
reference. For purposes of this Agreement, "Direct-to-Sell-Through
Pictures" shall mean each and every theatrical motion picture for which *
owns or controls home video distribution rights in the Territory, provided
such picture, when initially released during the Term on videocassette, is
priced and distributed by * at a "sell-through price" (as opposed to a
"rental price"), as such terms are generally understood in the home video
industry in Los Angeles, California.
6. "REVENUE SHARING PROGRAM": Each and every Rental Picture hereunder shall
-------------------------
be ordered by Video Update and shall be provided by * pursuant to a
"Revenue Sharing Program". The consideration payable by Video Update for
the right to participate in the Revenue Sharing Program with respect to any
particular Rental Picture shall consist, in whole or in part, of a
percentage of the "Rental Revenues" (as defined below) earned by Video
Update from the rental of the Videocassettes of such Rental Picture.
7. "REVENUE SHARING PERIOD": The "Revenue Sharing Period" for each Rental
------------------------
Picture shall be 26 weeks commencing with the Street Date for the
applicable Rental Picture. Subject to Paragraph 8 below, Video Update
shall ensure that all Videocassettes of the Rental Pictures remain on the
shelf of the Participating Stores and available for rental during the
entire Revenue Sharing Period.
8. DESTRUCTION/RETURN/"SELL-OFF" OF VIDEOCASSETTES:
-----------------------------------------------
a. At such time as Video Update orders Videocassettes of a particular
Rental Picture pursuant to the Revenue Sharing Program * shall elect one of
the following with respect to all "Revenue Share Copies" in excess of the
"Base Buy Copies", as determined and set forth in the Matrix ("Excess
Videocassettes"): (i) at the end of the applicable Revenue Sharing Period
for such Rental Picture, such Excess Videocassettes shall be destroyed by
Video Update at * cost and expense (and in such a manner as * may so
direct); (ii) at the end of the applicable Revenue Sharing Period for such
Rental Picture, such Excess Videocassettes shall be returned to * at * cost
and expense (and in such a manner as * may so direct); or (iii) such
Excess Videocassettes may be sold in accordance with the "sell-off"
provisions of Paragraph 8.b. below. If * fails to elect one of the above
disposition alternatives, it will be deemed that alternative (iii) was
elected.
b.
(i) *
(ii) *
(iii) *
c. If a Videocassette of a Rental Picture is made available for
sale and is thereafter made available for rental in a
Participating Store during the Revenue Sharing Period, any
rental revenues derived therefrom shall be
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
3
<PAGE>
considered Rental Revenues hereunder (as defined below). Video
Update shall not have the right to sell Videocassettes to any
third-party vendors, including brokers, liquidators or other
wholesale distributors. For purposes of this Agreement, "Left
on Shelf" Videocassettes shall be defined as the least number
of Videocassettes left on the shelf at the close of business on
any given day following the first * of the applicable Revenue
Sharing Period.
9. PROGRAM PRICE: In consideration for the rights granted hereunder, for each
-------------
Videocassette ordered by Video Update on a revenue sharing basis, Video
Update shall pay a Program Price equal to the aggregate of the following:
a. *
b. *
(i) *
(ii) *
*
10. MINIMUM GUARANTEE: For each Rental Picture ordered by Video Update
-----------------
hereunder on a revenue sharing basis, Video Update agrees to pay * an
advance equal to * of the "Base Buy Copies" (as determined and set forth in
the Matrix) ("Minimum Guarantee"). The Upfront Price, Revenue Percentage
Payment and any and all revenues collected from the sale of Excess
Videocassettes of a particular Rental Picture during the applicable Revenue
Sharing Period shall be credited against the Minimum Guarantee.
11. DELIVERY/SHIPPING: * will deliver all Videocassettes ordered by Video
-----------------
Update hereunder to Video Update's distribution center, currently located
in ________________, at least 2 weeks prior to the Street Date for each
applicable Rental Picture. Video Update will be responsible for making the
Videocassettes ready for consumer rental and for shipping the
Videocassettes from Video Update's distribution center to the Participating
Stores.
12. PAYMENT: Video Update shall pay: (i) the Upfront Price within * following
-------
the applicable Rental Picture's Street Date; (ii) * share of the Rental
Revenue within * following the end of the relevant month in which Rental
Revenue is received by Video Update during the Term; (iii) the Minimum
Guarantee within * following the applicable Rental Picture's Street Date;
and (iv) any "sell-off" revenue pursuant to Paragraph 8 hereof within *
following the end of the relevant month in which such "sell-off" revenue is
received by Video Update during the Term.
13. MISSING VIDEOCASSETTES: In the event that any Videocassette of a Rental
----------------------
Picture is lost, stolen or otherwise unaccounted for during the first * of
the Revenue Sharing
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
4
<PAGE>
Period for the applicable Rental Picture, Video Update shall so inform *
and shall pay * a sum equal to * per missing Videocassette ("Missing
Videocassette Fee"), less the Upfront Fee and any Revenue Percentage
Payments theretofore generated from (and paid to * with respect to) such
Videocassette. Missing Videocassette Fees for a Rental Picture shall be
payable to * within 30 days following the end of the calendar month during
which the Revenue Sharing Period for the applicable Rental Picture expires.
14. DEFECTIVE/DAMAGED VIDEOCASSETTES: * shall deliver to Video Update, at no
--------------------------------
additional cost, additional Videocassettes of each Rental Picture in the
amount of * of the "Base Buy Copies" for Video Update to retain at its
distribution center and to use solely as replacements for "Defective
Videocassettes" and/or "Damaged Videocassettes" (as defined below) in the
Participating Stores; provided, however, that if any of such additional
Videocassettes are placed in the Participating Stores, * shall receive its
share of the Rental Revenue for the Videocassette used to replace the
Damaged and/or Defective Videocassette. For purposes of this Agreement
"Damaged Videocassettes" shall mean those Videocassettes which become
materially damaged by Participating Store personnel, customers, or
otherwise, during the Revenue Sharing Period. "Defective Videocassettes"
shall mean those Videocassettes that are mechanically defective or
mispackaged.
15. MARKETING SUPPORT: In lieu of specific marketing support programs and as
-----------------
consideration for services to be performed by Video Update hereunder, *
agrees that Video Update shall accrue, on a per-Rental Picture basis,
marketing support funds (the "Marketing Support Funds") in an amount equal
to * of the Minimum Guarantee for each Rental Picture. Video Update shall
use the Marketing Support Funds solely for the purpose of advertising and
promoting the applicable Rental Picture. Upon * receipt of a Marketing
Support Fund invoice (and, if required, adequate assurances that such
monies were actually used to advertise and promote the applicable Rental
Picture), * shall reimburse Video Update for the Marketing Support Funds
within sixty (60) days of * receipt of such invoice (or adequate
assurances, as applicable).
16. REPORTING OBLIGATIONS: Video Update shall report electronically to * or to
---------------------
* designee, at * election, on a daily basis, complete and accurate
information regarding (i) the rental and sale (as applicable) of
Videocassettes of the Rental Pictures on a Participating Store-by-
Participating Store, Rental Picture-by Rental Picture basis and
Videocassette-by-Videocassette basis and (ii) the rental activity of
Direct-to-Sell-Through Pictures on a Participating Store-by-Participating
Store and title-by-title basis, as more fully set forth in Exhibit "B-1" if
Video Update is reporting to * or Exhibit "B-2" if Video Update is
reporting to * designee (which such Exhibits are attached hereto and
incorporated herein by this reference). At * request, Video Update shall
provide * with a copy of all tracking and other information obtained by
Video Update, insofar as such information relates to the Rental Pictures
and/or the Direct-to-Sell-Through Pictures.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
5
<PAGE>
17. AUDIT:
------
(a) Video Update grants * the right, from time to time during the period
commencing on the date hereof and concluding on the date which is 18 months
after the expiration of the Term, upon reasonable prior notice, but no more
than once in any calendar quarter, to examine and audit Video Update's
records, invoices, books of account, computer or data base information
which relate to the rental and/or sale of Videocassettes of the Rental
Pictures and/or the Revenue Sharing Program for the then immediately
preceding 18 month period (including, without limitation, all appropriate
information provided to Video Update by the Participating Stores). All
such audits shall be at * sole cost and expense; provided however, that in
the event such audit shall disclose an error or errors which in the
aggregate equal or exceed 5% of the amounts owed to * hereunder for the
period being audited, Video Update shall promptly reimburse * for all costs
and expenses actually incurred in connection with such audit. * may make
copies of or make excerpts from only such part of Video Update's records,
invoices, books of account, computer or data base information which relate
to matters and time frames subject to examination as herein provided. Such
examination shall be at such place where the relevant information is
maintained and during reasonable business hours and in such manner so as
not to interfere with Video Update's normal business activities. Such
examination shall continue for such time as is reasonably necessary (but in
any event not more than 30 consecutive days, provided that * has been
provided with the requisite access and information) for * to complete the
examination. Such right to examine hereunder is limited to the financial
matters in connection with Videocassettes of Rental Pictures and/or the
Revenue Sharing Program and under no circumstances shall * have the right
to examine records relating to Video Update's business generally or with
respect to other projects not related to Videocassettes of Rental Pictures
(and/or the Revenue Sharing Program) for purposes of comparison or
otherwise; provided, however, that where any original income or expense
document with third parties relates to Videocassettes of Rental Pictures
(and/or the Revenue Sharing Program) and videocassettes of any third
party's titles, * shall have the right to examine the entire document,
provided, that any information contained therein which does not relate to
Videocassettes and/or the Revenue Sharing Program shall be redacted
therefrom. Any amounts determined to be due and owing to * following an
audit shall be paid to * with interest at *% above the prime rate of
interest announced from time-to-time by * (or the highest rate of interest
permissible under applicable law, if less) from the date the applicable
sums should have been paid to * to the date of payment to *.
(b) Video Update grants * the right to conduct, or to engage an
auditor to conduct, upon 48 hours notice, in-store audits for
purposes of "spot-checking" transaction information relating to
the rental and/or sale of Videocassettes of the Rental Pictures
and/or the Revenue Sharing Program on a Participating Store-by-
Participating Store basis.
18. NOTICE: Any notice or communications provided for hereunder must be in
------
writing and delivered either personally, by telecopy, telex or by
registered mail, postage prepaid to the following addresses (or to such
other address as specified by like notice):
For Video Update:
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
6
<PAGE>
Video Update, Inc.
3100 World Trade Center
St. Paul, Minnesota
Attention: John Bedard, President
Facsimile: (612) 229-9690
For *
*
*
*
*
*
All payments made and accounting statements issued to * shall be sent to *, by
personal delivery or by registered mail, postage prepaid, at the address set
forth above, to the attention of _____________.
19. REPRESENTATIONS AND WARRANTIES:
------------------------------
a. * warrants and represents that it is a corporation duly organized and
validly existing in good standing under the laws of the state of * and
has the full right, power, legal capacity and authority to enter into
and carry out the terms of this Agreement.
b. Video Update warrants and represents that it is a corporation duly
organized and validly existing in good standing under the laws of the
state of Delaware and has the full right, power, legal capacity and
authority to enter into and carry out the terms of this Agreement.
20. INDEMNIFICATION: Each party ("Indemnifying Party") hereby indemnifies,
---------------
defends and holds harmless the other party and its successors, permitted
assigns, employees, officers and directors (collectively, for purposes of
this Paragraph, "Indemnified Party") from and against any and all
liability, loss, damage, cost and expense, including, without limitation,
reasonable attorneys' fees arising out of any breach or, solely in
connection with a third party claim, any alleged breach, of any warranty,
representation or agreement made by the Indemnifying Party herein. The
Indemnified Party shall promptly notify the Indemnifying Party of any claim
to which the foregoing indemnification applies and the Indemnifying Party
shall undertake, at its own cost and expense, the defense thereof. The
Indemnified Party may, at its option and expense, engage its own counsel.
If the Indemnifying Party fails to provide the Indemnified Party with
timely written notice confirming the Indemnifying Party's acceptance of the
defense of the applicable claim and its engagement of competent and
experienced counsel, the Indemnified Party may engage its own counsel and
the reasonable charges in connection therewith shall promptly be paid by
the Indemnifying Party. If the Indemnified Party settles or
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
7
<PAGE>
compromises any such Suit, claim or proceeding, the amount thereof shall
(in addition to any other indemnified costs incurred by the Indemnified
Party) be charged to the Indemnifying Party, provided that the Indemnifying
Party's reasonable prior approval of such settlement or compromise has been
secured.
21. CONFIDENTIALITY: Other than as may be required (i) by applicable law,
---------------
governmental order or regulation or by order or decree of any court of
competent jurisdiction, (ii) as part of its normal reporting requirements
or review procedures to its parent company, auditors, attorneys or other
advisors, (iii) in connection with a possible sale, merger or other
consolidation transaction involving it or its parent company or (iv) in the
case of * as may be disclosed to third party "profit" participants in
connection with the Rental Pictures: neither party hereto shall divulge or
disclose to any third party any of the material terms and conditions of
this Agreement, without the prior written consent of the other party
hereto. In the event that disclosure is required pursuant to clause (i)
above, the party so making disclosure shall so notify the other party (if
possible, prior to making such disclosure and in any event as promptly as
practical) and shall seek confidential treatment of such information. In
addition, and without limiting the generality of its obligations under this
Paragraph, Video Update agrees that it will not share, and will not permit
the Participating Stores to share, with any third party any financial or
other reporting information with respect to the Rental Pictures which is
kept, maintained or compiled as part of the Revenue Sharing Program, except
as may be required by clauses (i), (ii) or (iii) above. The initial press
release regarding the parties entering into this Agreement (if any) shall
require the mutual written approval of both parties.
22. DEFAULT OF OTHER AGREEMENTS/ISSUANCE OF GOING CONCERN LETTER: During the
------------------------------------------------------------
term of this Agreement, Video Update shall give written notification to *
within five (5) business days of the occurrence, of any of the following
events (each an "Early Trigger Event"): (a) the receipt by Video Update of
written notice that a default or an event of default has occurred under any
agreement, mortgage or instrument to which Video Update is a party and the
effect of such default or event of default is to cause the acceleration of
any amount due by Video Update in an amount in excess of *; and (b) the
issuance by any auditor or accountant of a going concern letter or similar
qualification in connection with any audit of Video Update's financial
records.
23. ASSIGNMENT/CHANGE OF CONTROL:
----------------------------
a. Assignment: * shall be free to assign this Agreement and its rights
----------
hereunder, and to delegate its duties at any time and from time to
time, in whole or in part, to any person or entity; provided, however,
that * shall be released from its obligations under this Agreement
only if such assignment is (i) to a person or entity into which *
merges or is consolidated or (ii) to a person or entity which acquires
all or substantially all of * business and assets or (iii) to a person
or entity which is controlled by, under common control with, or
controls * or (iv) with Video Update's prior written consent. Video
Update shall not assign this Agreement nor its rights hereunder, nor
delegate its duties under this Agreement in whole or in
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
8
<PAGE>
part, without * prior written consent unless such assignment is to (i)
an entity which is controlled by, or under common control with Video
Update or (ii) the current executive officers of Video Update (as of
the date of this Agreement and as identified in Video Update's most
recent [as of the date of this Agreement] 10-K filing ("Executive
Officers")) and pursuant to such assignment, such Executive Officers
acquire all or substantially all of Video Update's business and
assets.
b. Change-of-Control: In the event of a "change-of-control" of Video
-----------------
Update, * shall have the right to terminate this Agreement. For
purposes of this provision, a "change-of-control" shall mean: (a) the
purchase or other acquisition by any person, entity or group of
persons or entities, (other than the Executive Officers), within the
meaning of section 13(d) or 14(d) of the Securities Exchange Act of
1934, or any comparable successor provisions, of (i) ownership of 30%
(or, in the case of any Competing Major Studio, 10%) or more of the
combined voting power of Video Update's then outstanding voting
securities or (ii) a percentage of the combined voting power of Video
Update's then outstanding voting securities that exceeds the
percentage of the combined voting power of Video Update then held by
Video Update's current stockholders or (iii) all or substantially all
of the direct and indirect assets of Video Update and its
subsidiaries; or (b) the sale of equity securities in Video Update by
Video Update's current stockholders other than to the Executive
Officers or the issuance of equity securities by Video Update or the
consummation of a merger, reorganization, business combination or
liquidation of Video Update that results in (i) the current Video
Update stockholders directly or indirectly holding less than 30% of
the combined voting power of Video Update's (or its successors)
outstanding voting securities or (ii) at least 30% of Video Update's
(or its successors') voting securities being held by or for the
benefit of any person, entity or group of persons or entities acting
in concert (other than the Executive Officers). For purposes of the
foregoing, the term "Competing Major Studio" shall mean *, or any
division of any of the foregoing, or any entity which controls, is
controlled by, or is under common control with any of the foregoing.
In the event of a "change of control" of Video Update pursuant to
subsection (a) or (b) above, if * elects not to terminate this
Agreement, this Agreement and all of Video Update's rights,
obligations and duties hereunder shall be assumed in writing by the
person, entity or group of persons or entities then having "control"
over Video Update (within the meaning of subsection (a) or (b) above).
24. REMEDIES:
--------
a. In addition to any and all other rights and remedies available to it
at law or in equity, * shall have the right to terminate this
Agreement for (i) any material breach by Video Update (a "Video Update
Material Breach"), (ii) the occurrence of an Early Trigger Event
and/or (iii) in the event of bankruptcy, insolvency, reorganization,
assignment for the benefit of creditors or any such similar proceeding
filed by or against Video Update, or the appointment of a receiver (or
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
9
<PAGE>
similar proceeding) for any of Video Update's property (each, a "Video
Update Insolvency Event"). Notwithstanding the foregoing, solely with
respect to the first such Video Update Material Breach by Video Update
and provided that such breach is not willful and is capable of cure,
* shall notify Video Update of such Video Update Material Breach in
writing and Video Update shall have 7 days to cure such Video Update
Material Breach. * shall have the right to terminate this Agreement
for any such Video Update Material Breach that shall remain uncured
for 7 days following such notice and/or for any such Video Update
Material Breach for which no cure right is provided under this
Paragraph and/or for any Video Update Insolvency Event.
Notwithstanding the foregoing, with respect to an Early Trigger Event,
if the default that constitutes such Early Trigger Event is being
challenged in good faith by Video Update in a court of law or equity
(a "Court Action") and no collection, foreclosure or similar action is
being taken by any creditor against Video Update or any of its
property as a result of such default, then * right to terminate this
Agreement under this Paragraph 24.a. shall be delayed to until the
early of the dismissal of such Court Action or such Court Action
determines that the default is proper.
Notwithstanding anything to the contrary set forth herein, with
respect to an Early Trigger Event, if the default that constitutes
such Early Trigger Event is under a real property lease pursuant to
which Video Update is the lessee, and no judgment or order for the
payment of money has been entered with respect to such default or any
collection, foreclosure or similar action is being taken by any
creditor against * or any of its property as a result of such default,
then * right to terminate this Agreement under this Paragraph 24.a. as
a result of such Early Trigger Event shall be waived, provided,
however, that such waiver shall occur only once during the term of
this Agreement.
b. In the event of a breach by *, Video Update shall be limited to an
action at law for damages. In no event shall Video Update be entitled
to enjoin or restrain or otherwise interfere with the exhibition or
other exploitation of Videocassettes of the Rental Pictures or any
part or element thereof, or the use, publication or dissemination of
any advertising issued in connection with such Videocassettes.
25. GOVERNING LAW/ALTERNATIVE DISPUTE RESOLUTION:
--------------------------------------------
a. Governing Law. THE INTERNAL SUBSTANTIVE LAWS (AS DISTINGUISHED FROM
-------------
THE CHOICE OF LAW RULES) OF THE * APPLICABLE TO CONTRACTS MADE AND
PERFORMED ENTIRELY IN * SHALL GOVERN (i) THE VALIDITY AND
INTERPRETATION OF THIS AGREEMENT, (ii) THE PERFORMANCE BY THE PARTIES
OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER, AND (iii) ALL OTHER CAUSES
OF ACTION (WHETHER SOUNDING IN CONTRACT OR IN
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
10
<PAGE>
TORT) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TERMINATION
OF THIS AGREEMENT.
b. Legal Proceedings. The parties hereto agree that any dispute or
-----------------
controversy relating to any of the matters referred to in clauses (i),
(ii) and/or (iii) of Paragraph 24(a), above, shall be decided by a *
mutually selected by the parties (or, if they cannot agree, by the *
appointed in accordance with * sitting without a jury, in * and the
parties hereby submit to the jurisdiction of such court. All such
proceedings shall be closed to the public and confidential and all
records relating thereto shall be permanently sealed.
26. MISCELLANEOUS:
-------------
a. Nothing contained herein shall be deemed to create a relationship of
partnership, joint venture, agency, fiduciary or employment between
the parties.
b. This Agreement sets forth the entire understanding of the parties
regarding the subject matter hereof and supersedes all prior oral or
written agreements between them.
c. No waiver of any default or breach of this Agreement by either party
shall be deemed a continuing waiver or a waiver of any other breach or
default, no matter how similar.
d. This Agreement may not be changed, modified, amended or supplemented,
except in a writing signed by both parties.
e. Paragraph headings are inserted herein for convenience only and do not
constitute a part of this Agreement.
f. Video Update and * shall execute, acknowledge and deliver any and all
further documents that are necessary, expedient or proper to
implement, administer and effectuate the purpose and intent of this
Agreement.
g. If any term or provision of this Agreement shall be found to be void
or contrary to law, such term or provision shall, but only to the
extent necessary to bring this Agreement within the requirements of
law, be deemed to be severable from the other terms and provisions of
this Agreement, and the remainder of this Agreement shall be given
effect as if the parties had not included the severed term herein.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
11
<PAGE>
Please confirm your agreement with the foregoing by signing below, and
return both copies to the undersigned, after which we will return a fully
executed copy to you.
Very truly yours,
*
By: /s/ *
-------------------------------------------
Title: *
----------------------------------------
AGREED TO AND ACCEPTED THIS ____ DAY OF __________, 1998:
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter (CEO)
--------------------------
Title: CEO
-----------------------
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
12
<PAGE>
EXHIBIT A
VIDEO UPDATE
- ------------
*
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
13
<PAGE>
Revenue Sharing System EXHIBIT B1
System Interface Requirements Version 1.6-August 27, 1998
GENERAL REQUIREMENTS FOR DATA TRANSMISSION OF TRANSACTIONS TO *
- -----------------------------------------------------------------
FREQUENCY: Daily
SOURCE: From a central point in each chain
(not from each store in chain)
PREFERRED METHOD: EDI using X12 Transaction Set or proprietary format
OF TRANSPORT (to be defined by *) transferred through 3rd party VAN
FILE DESCRIPTIONS FOR DATA TRANSMISSIONS
- ----------------------------------------
All the following data is required from the chains. Some of the data here (A8
and B2) may not be currently available but * expects that every effort will be
made by the chain to secure this missing data and that this data be made
available to * when they are secured.
A. INVENTORY TRANSACTIONS FILE
- -- ---------------------------
This file will contain all transactions that deal with the actual movements of
individual copies. Any transaction with the transaction types stated below
should be captured in this file.
The file that * needs to receive is to contain the following information:
DATA REQUIRED DESCRIPTION
- ------------- -----------
1. Bar Code This must uniquely identify the specific
-------- COPY of a Revenue Sharing (RS) title
2. Transaction Date Date when the transaction took place
----------------
3. Transaction Type `R1' for Store Receipts from DC
---------------- `R2' for Store Receipts from other stores
`T1' for Store Transfers to DC
`T2' for Store Transfers to other stores
`DC' for Store Transfers out for Defective copies
`SH' for Shortages
`SF' Shortage Found
4. Process Date Date when data was processed for transmission to *
5. UPC# UPC Code of the tape
6. Store # Store Number of store receiving tape
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
14
<PAGE>
Revenue Sharing System EXHIBIT B1
System Interface Requirements Version 1.6-August 27, 1998
7. Former Store # Store Number of store where tape was sent from (for
Store Transfers)
8. Former Bar Code Bar Code as used in previous store (if bar code was
changed)
B. REVENUE SHARING TRANSACTIONS
- -- ----------------------------
This file will contain details of any transaction that has an impact on the
Revenue Sharing computations. These transactions include:
TRANSACTION TYPE
- ----------------
1. RENTAL OUT TRANSACTIONS. These transactions are to be generated whenever a
customer rents out a RS title
2. RENTAL RETURN TRANSACTIONS. These transactions are to be generated
whenever a customer returns a RS title
3. EXTENDED VIEWING FEE (EVF) TRANSACTIONS. These transactions are to be
generated whenever an EVF is billed for a RS title.
4. PVT SALES TRANSACTIONS. These transactions are to be generated whenever
PVT sale takes place for a RS title.
5. MISSING COPY TRANSACTION. These transactions are to be generated whenever
a missing copy is identified for a RS title.
The file that * needs to receive is to contain the following information:
DATA REQUIRED DESCRIPTION
- ------------- -----------
1. Bar Code This must uniquely identify the specific
-------- COPY of a Revenue Sharing (RS) title
2. Transaction Date Date when the transaction took place
----------------
3. Transaction Type `RO' for Rental Out transaction,
---------------- `RR' for Rental Return transactions
`EV' for Extended Viewing Fee transactions
`SA' for PVT Sales transactions and
`MC' for Missing Copy transactions.
4. Process Date Date when data was processed for transmission to *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
15
<PAGE>
Revenue Sharing System EXHIBIT B1
System Interface Requirements Version 1.6-August 27, 1998
5. UPC# UPC Code of the tape
6. Store # Store Number of store where tape is currently located.
7. Revenue # The actual revenue that the store charged for a Rental Out,
EVF or PVT Sale transaction
8. Days Rented The number of rental days allowed for a particular Rental
Out transaction or the ACTUAL number of rental days for a
Rental Return transaction.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
16
<PAGE>
Revenue Sharing System EXHIBIT B2
System Interface Requirements Version 1.6-August 27, 1998
THIRD PARTY DESIGNEE SYSTEM REVENUE FILE
This is the layout of the transaction file that is created for transmission and
loading into the Third Party Designee Revenue Processing System.
Header and Trailer must always exist. All files contained in this document are
plain DOS text files delimited with TABs (ASCII9). Each line is terminated with
DOS EOL. (e.g. ASCII 13 + ASC 10) This is known to DOS as a CR+LF (Carriage
Return and Line Feed)
HEADER RECORD
<TABLE>
<CAPTION>
Record Type `H' for Header H
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Chain A number which identifies a store grouping - allocated by 316
Third Party Designee
- -----------------------------------------------------------------------------------------------------------
Store A number which identifies a store location S002
- -----------------------------------------------------------------------------------------------------------
Batch Date The last date for which there are transactions in the file. MM/DD/YYYY
If the process to create this file is run the day after the
transactions take place, this date should be the date of the
transactions, and not the date this process is run.
- -----------------------------------------------------------------------------------------------------------
Batch Time The Time a group of transactions is processed HH:MM:SS
- -----------------------------------------------------------------------------------------------------------
Conversion Format This field is the name, version and date of the software VDMNCNV V4.00
creating the extract file. 03/02/1998
- -----------------------------------------------------------------------------------------------------------
Extraction Version This Field specifies the numeric format of the version of this 9.00
file format with an optional alphanumeric release - specified
by Third Party Designee
- -----------------------------------------------------------------------------------------------------------
</TABLE>
DETAIL RECORD
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Chain A number which identifies a store grouping 316
- -----------------------------------------------------------------------------------------------------------
Store A number which identifies a store location S002
- -----------------------------------------------------------------------------------------------------------
Store Bar-code Store Tape ID Number or bar-code (allocated by retailer - ABC123
unique for each copy)
- -----------------------------------------------------------------------------------------------------------
Title String, No Quotes CHARIOTS OF FIRE
- -----------------------------------------------------------------------------------------------------------
Last Rented Date Date that this particular bar-code was last rented, or date of MM/DD/YYYY
transaction
- -----------------------------------------------------------------------------------------------------------
Total Turns If Transaction Type is SUMMARY: 30
Total, cumulative number of turns for this particular bar-code
since being added to this system
If Transaction Type is RENT
Amount of turns for this bar-code that are included in this
file
For other transaction types this field is set to zero
- -----------------------------------------------------------------------------------------------------------
Total Revenue If Transaction Type is SUMMARY 12048
Total, cumulative number of turns for this particular bar-code
since being added to the system
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
17
<PAGE>
Revenue Sharing System EXHIBIT B2
System Interface Requirements Version 1.6-August 27, 1998
<TABLE>
<CAPTION>
Record Type `H' for Header H
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
If Transaction Type is RENT:
Amount of rental revenue for the transactions for this
bar-code that are included in this file.
If Late fee revenue cannot be separately identified in the
Late Fee revenue filed it should be included in here
This field contains no decimal points.
For other transaction types this field is set to zero
- -----------------------------------------------------------------------------------------------------------
Acquired Date Date this particular bar-code was added to the system MM/DD/YYYY
- -----------------------------------------------------------------------------------------------------------
Number of copies This is the number of copies this records applies to. Where 1
possible one record should be created for each tape/disc
- -----------------------------------------------------------------------------------------------------------
UPC The product code used to identify all copies of the title 0301000A2
within the video rental system
- -----------------------------------------------------------------------------------------------------------
Late Fee Revenue If Transaction type is SUMMARY 2600
Total cumulative revenue of late fees for this bar-code since
being added to the system
If Transaction type is RENT or RETURN
Amount of rental revenue for the transactions for this
bar-code that are included in this file
This field contains no decimal points
- -----------------------------------------------------------------------------------------------------------
Sell Amount of The amount that is title was sold for. This field contains no 1495
Revenue decimal points.
- -----------------------------------------------------------------------------------------------------------
Transaction Type Transaction type defining what type of record. SUMMARY
SUMMARY=(default) Cumulative Summary Record of title
RENT=Rental Record
RETURN=Return
ADD=Addition of Product
DELETE=Removal of Product from System
SELL=The Sell of Product
- -----------------------------------------------------------------------------------------------------------
Total Days Out Total, cumulative number of days for this particular bar-code 38
since being added to this system, or amount of days out for
this transaction. (should be one)
- -----------------------------------------------------------------------------------------------------------
Tape Status Status of this tape in POS software. 1=IN / O=OUT O
- -----------------------------------------------------------------------------------------------------------
Active Active flag should reflect if a bar-code is still in the POS A
system for use, or no longer an active copy. A=Active /
N=Non-Active
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TRAILER RECORD
Record Type `T' for Trailer T
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Chain A number which identifies a store grouping (Bill-to) 316
- -----------------------------------------------------------------------------------------------------------
Store A number which identifies a store location (Ship-to) S002
- -----------------------------------------------------------------------------------------------------------
No. of records Integer-Number of record contained in file (excludes header
and trailer)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
Dates are in American format-month / day / year
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
18
<PAGE>
Revenue Sharing System EXHIBIT B2
System Interface Requirements Version 1.6-August 27, 1998
Revenue figures do not include decimal points. The file assumes that the last 2
digits in the revenue field are the currency sub-element (cents/pence). An
entry of (Pounds)5 in this field should be 500. If there is no sub-element to
the currency 2 zeroes should be added, for example a value of 1000 would be
shown in the field as 100000.
One file may contain the data for an entire chain. The header and trailer of
the entire file should have 0000 as the store location. The record count in the
trailer should include all records in the file excluding the file header and
trailer. If the file contains headers and trailers for each store within the
chain then these should be at the start and end of that store's data.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
19
<PAGE>
EXHIBIT 10.41
STANDARD REVENUE SHARING
OUTPUT LICENSE TERMS
(RETAILER)
As of July 22, 1998
The following (the "Agreement") sets forth the terms of the license agreement
(the "License") between * and the retailer set forth on the cover letter
attached hereto (the "Retailer") for revenue sharing on * Rental Picture output
(as defined below).
1. TERM: * period commencing upon the date first set forth above. After the
----
first six (6) months of the Term, the parties agree to evaluate the
commercial feasibility and benefits of revenue sharing.
2. TERRITORY: United States and its territories and possessions only.
---------
3. DEFINITIONS AND CALCULATIONS:
----------------------------
a. *
(i) *
(ii) *
(iii) *
(iv) *
(A) *
(B) *
(C) *
(D) *
(E) *
(F) *
(G) *
(H) *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
(I) *
(J) *
b. *
c. *
d. *
e. "Month" shall be defined as each calendar Month, and each Month shall
-----
end on the last day of such Month.
f. "Picture Term" means for each Rental Picture the first 26 weeks of
------------
rental release beginning with Street Date.
g. "Rental Picture" means each and every new release on videocassette of
--------------
a feature motion picture for which are (A) produced, financed, owned
or controlled by * and (B) for which * owns or controls home video
distribution rights in the Territory (subject to any and all approvals
required by any third party) of not fewer than seventy (70) minutes in
length, priced for rental in the retail market; provided, however the
following shall be specifically excluded from Rental Pictures: (i) *
distributed lines, (ii) product controlled by third parties who do not
approve of the terms hereof and (iii) videocassettes of sports events,
concert footage, stage plays, documentaries, video or theatrical re-
releases, or library titles.
h. *
(i) *
(ii) "Taxes" shall mean any and all sales, excise, value added or
-----
other taxes which meet the following qualifications: (A) the
taxes are separately stated, (B) the taxes are required by law to
be collected from Retailer's customers, and (C) the taxes are
actually paid by Retailer to taxing authorities.
i. "Stores" shall mean all Retailer-owned rental retail stores and any
------
and all Retailer franchisees that elect to participate in, and comply
with, the obligations set forth under this Agreement and any other
obligations that Retailer may impose to administer the terms hereof
with respect to any such franchisees. All franchisees that
participate shall be treated as Retailer Stores for the purposes of
this Agreement, and the actual rental transactions of such franchisees
on Measurement Titles shall be included in Retailer's total rental
transactions. In the event that there is insufficient historical
data, the parties
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
2
<PAGE>
shall use good faith efforts to agree on estimated rental transactions
for such franchisees. "Stores" shall specifically exclude any new
store or stores owned or controlled by Retailer operating under any
name other than Retailer's name. The parties agree that with respect
to stores and/or chains of stores acquired by Retailer during the
Term, such stores shall be eligible to assume the rights and
obligations set forth hereunder provided Retailer shall report for
such new stores through its existing established reporting mechanism,
and, any existing revenue sharing agreement of any such store with *
shall terminate. Upon the addition or acquisition of stores, Retailer
shall notify * immediately in writing, and the parties shall begin
good faith discussions to immediately increase the number of Base
Units to reflect such store acquisitions and/or additions.
j. "Street Date" means the first day retailers are permitted by * to make
-----------
a title available for rental to consumers.
4. LICENSED RIGHTS:
---------------
a. Homevideo Distribution License: * licenses to Retailer on a limited
------------------------------
and non-exclusive basis homevideo distribution rights to the Rental
Pictures in VHS format only for rental only in Stores in the retail
market in the Territory during the Term, subject to the terms
hereunder and subject to Retailer's agreement to accept all Rental
Pictures offered by * pursuant to the terms hereunder.
b. Credit Approval: * and Retailer agree that this License is and shall
---------------
during the Term be conditioned upon and subject to (i) Retailer's
credit approval by * or its designee and (ii) maintenance of such
level of credit worthiness during the Term, which level may be
evaluated periodically by * or its designee at any time during the
Term.
c. Reservation of Title: Legal title to, and risk of loss of, the
--------------------
Licensed Units hereunder shall remain vested in *, subject to
disposition of PVTs pursuant to Paragraph 8 below. Retailer shall not
permit any encumbrance to attach to any Licensed Units delivered
pursuant to this Agreement.
5. *
a. *
(i) *
(ii) *
b. *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
3
<PAGE>
c. *
6. *
a. *
c. *
6A. FREIGHT AND HANDLING: For each Rental Picture, Retailer shall pay to * *
--------------------
per Licensed Unit for freight and handling (the "Freight Fee").
7. STATEMENTS AND PAYMENTS:
-----------------------
a. Statements: On a Monthly basis, within seven (7) business days after
----------
the Month, for each Rental Picture, Retailer shall provide to *, in
the formats reasonably requested and as periodically amended by *, a
statement (the "Statement) which reflects the rental and related
activities for such Month, including, without limitation, Initial
Payment, * Revenue Share, sales of PVTs (as defined below in Paragraph
8), and actual Bad Debt.
b. Payments: For each Rental Picture, to the extent any amounts are due
--------
pursuant to the Statements, * or its designee shall invoice Retailer,
with such amounts due and payable the tenth of the second month
following to an account designated by *.
8. DISPOSITION OF PREVIOUSLY VIEWED TAPES:
--------------------------------------
a. Sale: For each Rental Picture, * may direct Retailer, as its agent,
----
to sell previously viewed tapes ("PVTs") to consumers pursuant to the
following conditions:
(i) *
(ii) *
(iii) *
(A) *
(B) *
b. Other Disposition:
-----------------
(i) *
(A) *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
4
<PAGE>
(B) *
(C) *
(ii) *
d. *
9. PLACEMENT OF LICENSED UNITS: Retailer shall place all Licensed Units of
---------------------------
each Rental Picture licensed hereunder on prominent "new release" display
walls or another agreed equivalent in-store location for not fewer than *
after Street Date, subject to prior sale pursuant to the terms of Paragraph
8(a) above.
10. ADVERTISING SUPPORT: * may elect from time to time to provide advertising
-------------------
support funds in a lawful, fair and proportional manner to be used by
Retailer with respect to the Rental Pictures licensed hereunder.
11. DELIVERY: *, at its cost, shall use its reasonable good faith efforts to
--------
deliver product to a distribution center designated by Retailer in a timely
manner prior to Street Date for each Rental Picture. The parties agree
that for each Rental Picture, Retailer may retain up to * of the Base Units
at its distribution center for replenishment of defectives (the
"Replenishment Units"), new stores, and unexpected spikes in product
performance. To the extent the Replenishment Units are still in the
distribution center at the end of the applicable Picture Term for each
Rental Picture, such Replenishment Units shall be subject to disposition
pursuant to the terms of Paragraph 8(b) above.
12. INFORMATION TO BE PROVIDED BY RETAILER: To the extent reasonably available
--------------------------------------
to Retailer and with respect to * product only, Retailer agrees to provide
the following information to * at Retailer's expense:
a. Revenue Share Reporting: On a weekly basis, no later than Tuesday
-----------------------
morning for activity through the previous Sunday, Retailer shall
deliver to * * reports detailing the number of rental transactions and
gross revenues per Rental Picture, per Store, by market.
b. Other Information: Retailer and * shall mutually agree on other
-----------------
information to be provided to *.
13. AUDIT RIGHTS: Upon not less than fourteen (14) days advance written notice
------------
to Retailer, *, or its representatives or designees, shall have the right
during normal business hours, but not more than three (3) times during the
Term and all the Picture Terms and one (1) time after the expiration or
earlier termination of the Term and all the Picture Terms, to inspect,
audit and make extracts of the books and records of Retailer insofar as
said books and records relate to the calculation or determination
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
5
<PAGE>
by Retailer of (a) Revenue, (b) * Revenue Share, (c) Credit, (d) Bad Debt,
and (e) the rights licensed hereunder. Such rights of audit shall continue
for a period of two (2) years following the expiration of all Picture Terms
as provided for under this Agreement. The parties agree that Retailer shall
have the right reasonably to approve independent auditors hired by * to
conduct an audit, provided that the internal auditors of * and/or * and the
accounting firm of * or * then existing auditors shall be deemed pre-
approved for any and all audits conducted pursuant hereto. Notwithstanding
the foregoing, the parties agree that no * or * employees shall have direct
access to Retailer's information relating to * competitors or Retailer's
aggregate market data.
14. CONFIDENTIALITY: Each of * and Retailer acknowledges that (i) the terms
---------------
and conditions of this Agreement, and (ii) all information and data
(including, without limitation, rental and revenue forecasts, projections
and estimates and actual results, in whatever form or medium)
(collectively, the "Confidential Information") provided by each party to
the other under this Agreement are highly proprietary and confidential.
Each of * and Retailer agrees that it shall not use Confidential
Information (other than in connection with the performance of its
obligations under this Agreement or the exercise of its rights under this
Agreement) or disclose Confidential Information to any person (other than
its officers, employees, agents, representatives and licensors on a need-
to-know basis only and who agree to be bound by the confidentiality
obligations hereunder) or unless compelled by subpoena or court order or
state or federal securities laws to disclose any such Confidential
Information. This Paragraph 14 shall survive expiration or earlier
termination of this Agreement.
15. INDEMNIFICATION:
---------------
a. Indemnification by Retailer: Except as otherwise provided in
---------------------------
Paragraph 15(b) below, Retailer shall defend, indemnify and hold *,
its parent company, their affiliates and subsidiaries, and the
officers, directors, agents and employees of each, free and harmless
from all suits, claims, demands and other liabilities and expenses
(including attorneys' fees) (each, a "Claim") which may arise directly
or indirectly out of or by reason of (i) the unauthorized use by
Retailer of any patented invention, or of any copyrighted material
provided by *, (ii) a Claim from a customer arising out of Retailer's
rental or retail practices or course of dealing with respect to such
customer, and/or (iii) a breach or violation of this Agreement or any
obligation, covenant, representation or warranty made hereunder by
Retailer.
b. Indemnification by *: Except as otherwise provided in Paragraph 15(a)
--------------------
above, * shall defend, indemnify and hold Retailer, its parent
company, their affiliates, subsidiaries, and franchisees, and the
officers, directors, agents, and employees of each, free and harmless
from all Claims (including reasonable attorneys' fees) which may arise
directly or indirectly out of or by reason of (i) copyright
infringement by, or other third party Claim against, * with
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
6
<PAGE>
respect to the content of any Rental Picture, provided such Claim or
infringement is not the result of the negligence of Retailer or any
employee or agent of Retailer, (ii) a physical defect in any Licensed
Unit provided to Retailer hereunder by *, provided such defect was not
caused by the negligence of Retailer or any employee or agent of
Retailer, and/or (iii) a breach or violation of this Agreement or any
obligation, covenant, representation or warranty made hereunder by *.
16. REMEDIES: Each of * and Retailer acknowledge and agree that a material
--------
breach by either party of any of its obligations under this Agreement,
gives the other party the right to terminate this Agreement upon * prior
written notice. Retailer waives any rights to seek injunctive relief with
respect to the sale, license and/or other distribution of any Rental
Picture, provided that Retailer does not waive any right it may have to
seek specific performance under this Agreement with respect to any Rental
Picture being distributed by * in the rental retail marketplace. The
termination of this Agreement shall not relieve the parties of any
obligations incurred prior to such termination.
17. DEFECTIVES: The parties agree that there shall be no replacements of, or
----------
credits or set-offs against the Initial Payment, overages, or any other
amounts owed to * by Retailer for, defective Licensed Units. For each
Rental Picture, to the extent defectives exceed * of the total number of
Licensed Units delivered to Retailer during the first thirty (30) days
after Street Date, Retailer may exchange defectives for new videos from *
to be delivered within a reasonable time thereafter, which reasonable time
shall be within seventy-two (72) hours, provided that Retailer utilizes *
eight hundred (800) number defective replacement system.
18. REPRESENTATIONS AND WARRANTIES:
------------------------------
a. Representations and Warranties of Retailer: Retailer hereby agrees,
------------------------------------------
warrants and represents that Retailer has full authority, capacity and
ability to execute this Agreement and to perform all of its
obligations hereunder.
b. Representations and Warranties of *: * hereby agrees, warrants and
-----------------------------------
represents that * has full authority, capacity and ability to execute
this Agreement and to perform all of its obligations hereunder.
19. MISCELLANEOUS:
-------------
a. Amendment and Waiver: Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement
shall be effective against any party unless such modification,
amendment or waiver is approved in writing by Retailer and *. The
failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions
and shall not affect the right of such party
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
7
<PAGE>
thereafter to enforce each and every provision of this Agreement in
accordance with its terms.
b. Severability: Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid, illegal, or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision or any other
jurisdiction, but this Agreement shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
c. Entire Agreement: Except as otherwise expressly set forth herein,
----------------
this document embodies the complete agreement and understanding
between the parties hereto with respect to the subject matter hereof
and supersedes and preempts any prior understandings, agreements or
representations by or between the parties, written or oral, which may
have related to the subject matter hereof in any way.
d. Assignment:
----------
(i) Retailer Assignment: This Letter Agreement shall not be
-------------------
assigned by Retailer without the prior written consent of *.
(ii) * Assignment: This Letter Agreement shall not be assigned by
------------
* without the prior written consent of Retailer, except to
any corporation or entity which controls, is controlled by,
or under common control with *.
(iii) Purchase of Retailer by a Studio or Third Party Retailer.
--------------------------------------------------------
(A) Purchase by Studio: In the event a motion picture studio
------------------
or home video company (for purposes hereof, in each
instance, a "Studio") enters into an agreement to
acquire Retailer, * shall be given prompt notice of such
agreement and shall have the option to terminate this
Agreement immediately upon written notice to Retailer.
Promptly following such notice of acquisition agreement,
Retailer, in consultation with *, shall undertake to
provide adequate assurance in writing to * that
proprietary and confidential information of * shall not
be disclosed to, or otherwise made accessible to, the
management or other employees of such Studio following
such acquisition. As used in this Paragraph
19(d)(iii)(A), the term "Studio" shall also include,
without limitation, the respective affiliated
corporations which control, are controlled by, or are
under common control with, any such Studio. The term
"control"
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
8
<PAGE>
shall refer to the ownership of at least fifty
percent (50%) of the outstanding voting power of the
corporation or entity which is subject to such
"control".
(B) Purchase by/of Third Party Retailer: In the event a
-----------------------------------
third party retailer enters into an agreement to acquire
Retailer, or Retailer enters into an agreement to
acquire a third party retailer, * and Retailer agree
that in such event, the terms of this Agreement shall
apply only (i) to already existing Retailer Stores and
(ii) to any new stores which operate under the Retailer
name at the retail level, subject to the ability of such
new stores to report through Retailer's established
reporting mechanism.
(C) Definition of "Purchase": For purposes of this
------------------------
Subparagraph 19(d)(iii) the term "Purchase" shall
include acquisition, merger and/or other consolidation.
e. Counterparts. This Agreement may be executed in separate counterparts
------------
each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
f. Due Authorization. Each of * and Retailer represents and warrants
-----------------
that the officer executing this Agreement has been duly authorized and
that this Agreement when executed and delivered shall be valid and
binding and enforceable in accordance with its terms.
g. Notices. All notices provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, or mailed first
class mail (postage prepaid) or sent by reputable overnight courier
service (charges prepaid) to the parties as follows:
If to Retailer:
As set forth in the cover letter attached hereto,
with a copy to the General Counsel.
If to *:
*
*
*
*
*
*
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
9
<PAGE>
h. Governing Law. This Agreement and all matters or issues material
-------------
thereto shall be governed by the laws of the *, applicable to
contracts performed entirely therein. * and Retailer hereby agree
that all actions, proceedings or litigation relating to this Agreement
shall be instituted and prosecuted solely within the * and each party
hereby consents to the jurisdiction of the * and the * with respect to
any matter arising out of or relating to this Agreement.
i. Descriptive Headings. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this
Agreement.
j. Relationship of Parties. Nothing contained herein shall constitute a
-----------------------
partnership, joint venture, association or principal and agent
relationship or be construed to evidence the intention of the parties
to constitute such. Retailer and * are independent contractors and
neither has any authority to act on the other's behalf or to bind the
other in any way.
k. Force Majeure. Whenever performance by any party of its obligations
-------------
under this Agreement, other than any of Retailer's payment obligations
hereunder, is substantially prevented by reason of any act of God,
strike, lock-out, or other industrial or transportational disturbance,
fire, lack of materials, law, regulation or ordinance, war or war
conditions, or by reason of any other matter beyond such party's
reasonable control, then such performance shall be excused and this
Agreement shall be deemed suspended during the continuation of such
prevention, and the term shall be extended for a period equal to the
time of such suspension.
l. Third Parties. None of the provisions of this Agreement is intended
-------------
for the benefit of or shall be enforceable by any third parties,
including creditors of Retailer or *.
In WITNESS WHEREOF, this Agreement was executed by the parties on the date first
written above.
RETAILER *
By: /s/ Daniel A. Potter By: /s/ *
------------------------ -----------------------
Its: CEO Its: *
------------------------ -----------------------
Retailer: Video Update, Inc.
------------------
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
10
<PAGE>
Exhibit 10.42
STANDARD REVENUE SHARING
OUTPUT LICENSE TERMS
(RETAILER)
As of June ___, 1998
The following (the "Agreement") sets forth the terms of the license agreement
(the "License") between * and the retailer set forth on the cover letter
attached hereto (the "Retailer") for revenue sharing on * Rental Picture output
(as defined below), distributed by *.
1. TERM: * period commencing upon the date first set forth above. After the
----
first six (6) months of the Term, the parties agree to evaluate the
commercial feasibility and benefits of revenue sharing.
2. TERRITORY: United States and its territories and possessions only.
---------
3. DEFINITIONS AND CALCULATIONS:
----------------------------
a. *
(i) *
(ii) *
(iii) *
(iv) *
(A) *
(B) *
(C) *
(D) *
(E) *
(F) *
(G) *
(H) *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
<PAGE>
(I) *
(J) *
b. *
c. *
d. *
e. "Month" shall be defined as each calendar Month, and each Month shall
-----
end on the last day of such Month.
f. "Picture Term" means for each Rental Picture the first 26 weeks of
------------
rental release beginning with Street Date.
g. "Rental Picture" means each and every new release on videocassette of
--------------
a feature motion picture for which * owns or controls home video
distribution rights in the Territory (subject to any and all approvals
required by any third party) of not fewer than seventy (70) minutes in
length, priced for rental in the retail market; provided, however the
following shall be specifically excluded from Rental Pictures: (i)
product controlled by third parties who do not approve of the terms
hereof and (ii) videocassettes of sports events, concert footage,
stage plays, documentaries, video or theatrical re-releases, or
library titles.
h. *
(i) *
(ii) "Taxes" shall mean any and all sales, excise, value added or
-----
other taxes which meet the following qualifications: (A) the
taxes are separately stated, (B) the taxes are required by law
to be collected from Retailer's customers, and (C) the taxes
are actually paid by Retailer to taxing authorities.
i. "Stores" shall mean all Retailer-owned rental retail stores and any
------
and all Retailer franchisees that elect to participate in, and comply
with, the obligations set forth under this Agreement and any other
obligations that Retailer may impose to administer the terms hereof
with respect to any such franchisees. All franchisees that participate
shall be treated as Retailer Stores for the purposes of this
Agreement, and the actual rental transactions of such franchisees on
Measurement Titles shall be included in Retailer's total rental
transactions. In the event that there is insufficient historical data,
the parties shall use good faith efforts to agree on estimated rental
transactions for such
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
2
<PAGE>
franchisees. "Stores" shall specifically exclude any new store or
stores owned or controlled by Retailer operating under any name other
than Retailer's name or trade marks or trade names utilized by
Retailer, provided that Retailer agrees to provide any such names to *
in writing, upon execution hereof for existing Retailer-owned stores,
or upon acquisition of any such new stores, as the case may be. The
parties agree that with respect to stores and/or chains of stores
acquired by Retailer during the Term, such stores shall be eligible to
assume the rights and obligations set forth hereunder provided
Retailer shall report for such new stores through its existing
established reporting mechanism, and, any existing revenue sharing
agreement of any such store with * shall terminate. Upon the addition
or acquisition of stores, Retailer shall notify * immediately in
writing, and the parties shall begin good faith discussions to
immediately increase the number of Base Units to reflect such store
acquisitions and/or additions.
j. "Street Date" means the first day retailers are permitted by * to make
-----------
a title available for rental to consumers.
4. LICENSED RIGHTS:
---------------
a. Homevideo Distribution License: * licenses to Retailer on a limited
------------------------------
and non-exclusive basis homevideo distribution rights to the Rental
Pictures in VHS format only for rental only in Stores in the retail
market in the Territory during the Term, subject to the terms
hereunder.
b. Credit Approval: * and Retailer agree that this License is and shall
---------------
during the Term be conditioned upon and subject to (i) Retailer's
credit approval by * or its designee and (ii) maintenance of such
level of credit worthiness during the Term, which level may be
evaluated periodically by * or its designee at any time during the
Term.
c. Reservation of Title: Legal title to, and risk of loss of, the
--------------------
Licensed Units hereunder shall remain vested in *, subject to
disposition of PVTs pursuant to Paragraph 8 below. Retailer shall not
permit any encumbrance to attach to any Licensed Units delivered
pursuant to this Agreement.
5. *
a. *
(i) *
(ii) *
b. *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
3
<PAGE>
c. *
6. *
a. *
b. *
7. STATEMENTS AND PAYMENTS:
-----------------------
a. Statements: On a Monthly basis, within seven (7) business days after
----------
the Month, for each Rental Picture, Retailer shall provide to *, in
the formats reasonably requested and as periodically amended by *, a
statement (the "Statement) which reflects the rental and related
activities for such Month, including, without limitation, Initial
Payment, * Revenue Share, sales of PVTs (as defined below in Paragraph
8), and actual Bad Debt.
b. Payments: For each Rental Picture, to the extent any amounts are due
--------
pursuant to the Statements, * or its designee shall invoice Retailer,
with such amounts due and payable the tenth of the second month
following to an account designated by *.
8. DISPOSITION OF PREVIOUSLY VIEWED TAPES:
--------------------------------------
a. Sale: For each Rental Picture, * may direct Retailer, as its agent,
----
to sell previously viewed tapes ("PVTs") to consumers pursuant to the
following conditions:
(i) *
(ii) *
(iii) *
(A) *
(B) *
b. Other Disposition:
-----------------
(i) *
(A) *
(B) *
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
4
<PAGE>
(C) *
(ii) *
c. *
9. PLACEMENT OF LICENSED UNITS: Retailer shall place all Licensed Units of
---------------------------
each Rental Picture licensed hereunder on prominent "new release" display
walls or another agreed equivalent in-store location for not fewer than *
after Street Date, subject to prior sale pursuant to the terms of Paragraph
8(a) above.
10. ADVERTISING SUPPORT: * may elect from time to time to provide advertising
-------------------
support funds in a lawful, fair and proportional manner to be used by
Retailer with respect to the Rental Pictures licensed hereunder.
11. DELIVERY: *, at its cost, shall use its reasonable good faith efforts to
--------
deliver product to a distribution center designated by Retailer in a timely
manner prior to Street Date for each Rental Picture. The parties agree
that for each Rental Picture, Retailer may retain up to * of the Base Units
at its distribution center for replenishment of defectives (the
"Replenishment Units"), new stores, and unexpected spikes in product
performance. To the extent the Replenishment Units are still in the
distribution center at the end of the applicable Picture Term for each
Rental Picture, such Replenishment Units shall be subject to disposition
pursuant to the terms of Paragraph 8(b) above.
12. INFORMATION TO BE PROVIDED BY RETAILER: To the extent reasonably available
--------------------------------------
to Retailer and with respect to * product only, Retailer agrees to provide
the following information to * at Retailer's expense:
a. Revenue Share Reporting: On a weekly basis, no later than Tuesday
-----------------------
morning for activity through the previous Sunday, Retailer shall
deliver to * * reports detailing the number of rental transactions and
gross revenues per Rental Picture, per Store, by market.
b. Other Information: Retailer and * shall mutually agree on other
-----------------
information to be provided to *.
13. AUDIT RIGHTS: Upon not less than fourteen (14) days advance written notice
------------
to Retailer, *, or its representatives or designees, shall have the right
during normal business hours, but not more than three (3) times during the
Term and all the Picture Terms and one (1) time after the expiration or
earlier termination of the Term and all the Picture Terms, to inspect,
audit and make extracts of the books and records of Retailer insofar as
said books and records relate to the calculation or determination by
Retailer of (a) Revenue, (b) * Revenue Share, (c) Credit, (d) Bad Debt, and
(e) the rights licensed hereunder. Such rights of audit shall continue for
a period of two (2) years following the expiration of all Picture Terms as
provided for under this Agreement. The parties agree that Retailer shall
have the right reasonably to
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
5
<PAGE>
to approve independent auditors hired by * to conduct an audit, provided
that the internal auditors of * and/or * and the accounting firm of * or *
then existing auditors shall be deemed pre-approved for any and all audits
conducted pursuant hereto. Notwithstanding the foregoing, the parties agree
that no * or * employees shall have direct access to Retailer's information
relating to * competitors or Retailer's aggregate market data.
14. CONFIDENTIALITY: Each of * and Retailer acknowledges that (i) the terms
---------------
and conditions of this Agreement, and (ii) all information and data
(including, without limitation, rental and revenue forecasts, projections
and estimates and actual results, in whatever form or medium)
(collectively, the "Confidential Information") provided by each party to
the other under this Agreement are highly proprietary and confidential.
Each of * and Retailer agrees that it shall not use Confidential
Information (other than in connection with the performance of its
obligations under this Agreement or the exercise of its rights under this
Agreement) or disclose Confidential Information to any person (other than
its officers, employees, agents, representatives, licensees and licensors
on a need-to-know basis only and who agree to be bound by the
confidentiality obligations hereunder) or unless compelled by subpoena or
court order or state or federal securities laws to disclose any such
Confidential Information. This Paragraph 14 shall survive expiration or
earlier termination of this Agreement.
15. INDEMNIFICATION:
---------------
a. Indemnification by Retailer: Except as otherwise provided in
---------------------------
Paragraph 15(b) below, Retailer shall defend, indemnify and hold *,
its parent company, their affiliates and subsidiaries, and the
officers, directors, agents and employees of each, free and harmless
from all suits, claims, demands and other liabilities and expenses
(including attorneys' fees) (each, a "Claim") which may arise directly
or indirectly out of or by reason of (i) the unauthorized use by
Retailer of any patented invention, or of any copyrighted material
provided by *, (ii) a Claim from a customer arising out of Retailer's
rental or retail practices or course of dealing with respect to such
customer, and/or (iii) a breach or violation of this Agreement or any
obligation, covenant, representation or warranty made hereunder by
Retailer.
b. Indemnification by *: Except as otherwise provided in Paragraph 15(a)
--------------------
above, * shall defend, indemnify and hold Retailer, its parent
company, their affiliates, subsidiaries, and franchisees, and the
officers, directors, agents, and employees of each, free and harmless
from all Claims (including reasonable attorneys' fees) which may arise
directly or indirectly out of or by reason of (i) copyright
infringement by, or other third party Claim against, * with respect to
the content of any Rental Picture, provided such Claim or infringement
is not the result of the negligence of Retailer or any employee or
agent of Retailer, (ii) a physical defect in any Licensed Unit
provided to Retailer hereunder by *, provided such defect was not
caused by the
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
6
<PAGE>
negligence of Retailer or any employee or agent of Retailer, and/or
(iii) a breach or violation of this Agreement or any obligation,
covenant, representation or warranty made hereunder by *.
16. REMEDIES: Each of * and Retailer acknowledge and agree that a material
--------
breach by either party of any of its obligations under this Agreement,
gives the other party the right to terminate this Agreement upon * prior
written notice. Retailer waives any rights to seek injunctive relief with
respect to the sale, license and/or other distribution of any Rental
Picture, provided that Retailer does not waive any right it may have to
seek specific performance under this Agreement with respect to any Rental
Picture being distributed by * in the rental retail marketplace. The
termination of this Agreement shall not relieve the parties of any
obligations incurred prior to such termination.
17. DEFECTIVES: The parties agree that there shall be no replacements of, or
----------
credits or set-offs against the Initial Payment, overages, or any other
amounts owed to * by Retailer for, defective Licensed Units. For each
Rental Picture, to the extent defectives exceed * of the total number of
Licensed Units delivered to Retailer during the first thirty (30) days
after Street Date, Retailer may exchange defectives for new videos from *
to be delivered within a reasonable time thereafter, which reasonable time
shall be within seventy-two (72) hours, provided that Retailer utilizes *
eight hundred (800) number defective replacement system.
18. REPRESENTATIONS AND WARRANTIES:
------------------------------
a. Representations and Warranties of Retailer: Retailer hereby agrees,
------------------------------------------
warrants and represents that Retailer has full authority, capacity and
ability to execute this Agreement and to perform all of its
obligations hereunder.
b. Representations and Warranties of *: * hereby agrees, warrants and
-----------------------------------
represents that * has full authority, capacity and ability to execute
this Agreement and to perform all of its obligations hereunder.
19. MISCELLANEOUS:
-------------
a. Amendment and Waiver: Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement
shall be effective against any party unless such modification,
amendment or waiver is approved in writing by Retailer and *. The
failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions
and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its
terms.
b. Severability: Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law,
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
7
<PAGE>
but if any provision of this Agreement is held to be invalid, illegal,
or unenforceable in any respect under any applicable law or rule in
any jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision or any other jurisdiction, but
this Agreement shall be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision
had never been contained herein.
c. Entire Agreement: Except as otherwise expressly set forth herein,
----------------
this document embodies the complete agreement and understanding
between the parties hereto with respect to the subject matter hereof
and supersedes and preempts any prior understandings, agreements or
representations by or between the parties, written or oral, which may
have related to the subject matter hereof in any way.
d. Assignment:
----------
(i) Retailer Assignment: This Letter Agreement shall not be
-------------------
assigned by Retailer without the prior written consent of *.
(ii) * Assignment: This Letter Agreement shall not be assigned
-------------
by * without the prior written consent of Retailer, except
to any corporation or entity which controls, is controlled
by, or under common control with *.
(iii) Purchase of Retailer by a Studio or Third Party Retailer.
--------------------------------------------------------
(A) Purchase by Studio: In the event a motion picture
------------------
studio or home video company (for purposes hereof, in
each instance, a "Studio") enters into an agreement to
acquire Retailer, * shall be given prompt notice of
such agreement and shall have the option to terminate
this Agreement immediately upon written notice to
Retailer. Promptly following such notice of acquisition
agreement, Retailer, in consultation with *, shall
undertake to provide adequate assurance in writing to *
that proprietary and confidential information of *
shall not be disclosed to, or otherwise made accessible
to, the management or other employees of such Studio
following such acquisition. As used in this Paragraph
19(d)(iii)(A), the term "Studio" shall also include,
without limitation, the respective affiliated
corporations which control, are controlled by, or are
under common control with, any such Studio. The term
"control" shall refer to the ownership of at least
fifty percent (50%) of the outstanding voting power of
the corporation or entity which is subject to such
"control".
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
8
<PAGE>
(B) Purchase by/of Third Party Retailer: In the event a
-----------------------------------
third party retailer enters into an agreement to
acquire Retailer, or Retailer enters into an agreement
to acquire a third party retailer, * and Retailer agree
that in such event, the terms of this Agreement shall
apply only (i) to already existing Retailer Stores and
(ii) to any new stores which operate under the Retailer
name at the retail level, subject to the ability of
such new stores to report through Retailer's
established reporting mechanism.
(C) Definition of "Purchase": For purposes of this
------------------------
Subparagraph 19(d)(iii) the term "Purchase" shall
include acquisition, merger and/or other consolidation.
e. Counterparts. This Agreement may be executed in separate counterparts
------------
each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
f. Due Authorization. Each of * and Retailer represents and warrants
-----------------
that the officer executing this Agreement has been duly authorized and
that this Agreement when executed and delivered shall be valid and
binding and enforceable in accordance with its terms.
g. Notices. All notices provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, or mailed first
class mail (postage prepaid) or sent by reputable overnight courier
service (charges prepaid) to the parties as follows:
If to Retailer:
As set forth in the cover letter attached hereto,
with a copy to the General Counsel.
If to *:
*
*
*
*
*
*
*
*
*
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
9
<PAGE>
*
With a copy to *:
*
*
*
*
*
h. Governing Law. This Agreement and all matters or issues material
-------------
thereto shall be governed by the laws of the *, applicable to
contracts performed entirely therein. * and Retailer hereby agree
that all actions, proceedings or litigation relating to this Agreement
shall be instituted and prosecuted solely within the * and each party
hereby consents to the jurisdiction of the * and the * with respect to
any matter arising out of or relating to this Agreement.
i. Descriptive Headings. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this
Agreement.
j. Relationship of Parties. Nothing contained herein shall constitute a
-----------------------
partnership, joint venture, association or principal and agent
relationship or be construed to evidence the intention of the parties
to constitute such. Retailer and * are independent contractors and
neither has any authority to act on the other's behalf or to bind the
other in any way.
k. Force Majeure. Whenever performance by any party of its obligations
-------------
under this Agreement, other than any of Retailer's payment obligations
hereunder, is substantially prevented by reason of any act of God,
strike, lock-out, or other industrial or transportational disturbance,
fire, lack of materials, law, regulation or ordinance, war or war
conditions, or by reason of any other matter beyond such party's
reasonable control, then such performance shall be excused and this
Agreement shall be deemed suspended during the continuation of such
prevention, and the term shall be extended for a period equal to the
time of such suspension.
l. Third Parties. None of the provisions of this Agreement is intended
-------------
for the benefit of or shall be enforceable by any third parties,
including creditors of Retailer or *.
*Confidential material omitted and separately filed with the Commission under an
application for confidential treatment.
10
<PAGE>
In WITNESS WHEREOF, this Agreement was executed by the parties on the date first
written above.
RETAILER *
By: /s/ Daniel A. Potter By: /s/ *
-------------------- --------------------------------------
Its: CEO Its: *
------- --------------------------------------
Retailer:
----------------
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
11
<PAGE>
Exhibit 10.43
STANDARD REVENUE SHARING
OUTPUT LICENSE TERMS
(RETAILER)
As of June ___, 1998
The following (the "Agreement") sets forth the terms of the license agreement
(the "License") between * and the retailer set forth on the cover letter
attached hereto (the "Retailer") for revenue sharing on * Rental Picture output
(as defined below).
1. TERM: * period commencing upon the date first set forth above. After the
----
first six (6) months of the Term, the parties agree to evaluate the
commercial feasibility and benefits of revenue sharing.
2. TERRITORY: United States and its territories and possessions only.
---------
3. DEFINITIONS AND CALCULATIONS:
----------------------------
a. *
(i) *
(ii) *
(iii) *
(iv) *
(A) *
(B) *
(C) *
(D) *
(E) *
(F) *
(G) *
(H) *
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
<PAGE>
(I) *
(J) *
b. *
c. *
d. *
e. "Month" shall be defined as each calendar Month, and each Month shall
-----
end on the last day of such Month.
f. "Picture Term" means for each Rental Picture the first 26 weeks of
------------
rental release beginning with Street Date.
g. "Rental Picture" means each and every new release on videocassette of
--------------
a feature motion picture for which * owns or controls home video
distribution rights in the Territory (subject to any and all approvals
required by any third party) of not fewer than seventy (70) minutes in
length, priced for rental in the retail market; provided, however the
following shall be specifically excluded from Rental Pictures: (i) *
distributed lines, (ii) product controlled by third parties who do not
approve of the terms hereof and (iii) videocassettes of sports events,
concert footage, stage plays, documentaries, video or theatrical re-
releases, or library titles.
h. *
(i) *
(ii) "Taxes" shall mean any and all sales, excise, value added or
-----
other taxes which meet the following qualifications: (A) the
taxes are separately stated, (B) the taxes are required by
law to be collected from Retailer's customers, and (C) the
taxes are actually paid by Retailer to taxing authorities.
i. "Stores" shall mean all Retailer-owned rental retail stores and any
------
and all Retailer franchisees that elect to participate in, and comply
with, the obligations set forth under this Agreement and any other
obligations that Retailer may impose to administer the terms hereof
with respect to any such franchisees. All franchisees that
participate shall be treated as Retailer Stores for the purposes of
this Agreement, and the actual rental transactions of such franchisees
on Measurement Titles shall be included in Retailer's total rental
transactions. In the event that there is insufficient historical
data, the parties shall use good faith efforts to agree on estimated
rental transactions for such franchisees. "Stores" shall specifically
exclude any new store or stores
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
2
<PAGE>
owned or controlled by Retailer operating under any name other than
Retailer's name. The parties agree that with respect to stores and/or
chains of stores acquired by Retailer during the Term, such stores
shall be eligible to assume the rights and obligations set forth
hereunder provided Retailer shall report for such new stores through
its existing established reporting mechanism, and, any existing
revenue sharing agreement of any such store with * shall terminate.
Upon the addition or acquisition of stores, Retailer shall notify *
immediately in writing, and the parties shall begin good faith
discussions to immediately increase the number of Base Units to
reflect such store acquisitions and/or additions.
j. "Street Date" means the first day retailers are permitted by * to make
-----------
a title available for rental to consumers.
4. LICENSED RIGHTS:
---------------
a. Homevideo Distribution License: * licenses to Retailer on a limited
------------------------------
and non-exclusive basis homevideo distribution rights to the Rental
Pictures in VHS format only for rental only in Stores in the retail
market in the Territory during the Term, subject to the terms
hereunder and subject to Retailer's agreement to accept all Rental
Pictures offered by * pursuant to the terms hereunder.
b. Credit Approval: * and Retailer agree that this License is and shall
---------------
during the Term be conditioned upon and subject to (i) Retailer's
credit approval by * or its designee and (ii) maintenance of such
level of credit worthiness during the Term, which level may be
evaluated periodically by * or its designee at any time during the
Term.
c. Reservation of Title: Legal title to, and risk of loss of, the
--------------------
Licensed Units hereunder shall remain vested in *, subject to
disposition of PVTs pursuant to Paragraph 8 below. Retailer shall not
permit any encumbrance to attach to any Licensed Units delivered
pursuant to this Agreement.
5. *
a. *
(i) *
(ii) *
b. *
c. *
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
3
<PAGE>
6. *
a. *
b. *
7. STATEMENTS AND PAYMENTS:
-----------------------
a. Statements: On a Monthly basis, within seven (7) business days after
----------
the Month, for each Rental Picture, Retailer shall provide to *, in
the formats reasonably requested and as periodically amended by *, a
statement (the "Statement) which reflects the rental and related
activities for such Month, including, without limitation, Initial
Payment, * Revenue Share, sales of PVTs (as defined below in Paragraph
8), and actual Bad Debt.
b. Payments: For each Rental Picture, to the extent any amounts are due
--------
pursuant to the Statements, * or its designee shall invoice Retailer,
with such amounts due and payable the tenth of the second month
following to an account designated by *.
8. DISPOSITION OF PREVIOUSLY VIEWED TAPES:
--------------------------------------
a. Sale: For each Rental Picture, * may direct Retailer, as its agent,
----
to sell previously viewed tapes ("PVTs") to consumers pursuant to the
following conditions:
(i) *
(ii) *
(iii) *
(A) *
(B) *
b. Other Disposition:
-----------------
(i) *
(A) *
(B) *
(C) *
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
4
<PAGE>
(ii) *
c. *
9. PLACEMENT OF LICENSED UNITS: Retailer shall place all Licensed Units of
---------------------------
each Rental Picture licensed hereunder on prominent "new release" display
walls or another agreed equivalent in-store location for not fewer than *
after Street Date, subject to prior sale pursuant to the terms of Paragraph
8(a) above.
10. ADVERTISING SUPPORT: * may elect from time to time to provide advertising
-------------------
support funds in a lawful, fair and proportional manner to be used by
Retailer with respect to the Rental Pictures licensed hereunder.
11. DELIVERY: *, at its cost, shall use its reasonable good faith efforts to
--------
deliver product to a distribution center designated by Retailer in a timely
manner prior to Street Date for each Rental Picture. The parties agree
that for each Rental Picture, Retailer may retain up to * of the Base Units
at its distribution center for replenishment of defectives (the
"Replenishment Units"), new stores, and unexpected spikes in product
performance. To the extent the Replenishment Units are still in the
distribution center at the end of the applicable Picture Term for each
Rental Picture, such Replenishment Units shall be subject to disposition
pursuant to the terms of Paragraph 8(b) above.
12. INFORMATION TO BE PROVIDED BY RETAILER: To the extent reasonably available
--------------------------------------
to Retailer and with respect to * product only, Retailer agrees to provide
the following information to * at Retailer's expense:
a. Revenue Share Reporting: On a weekly basis, no later than Tuesday
-----------------------
morning for activity through the previous Sunday, Retailer shall
deliver to * * reports detailing the number of rental transactions and
gross revenues per Rental Picture, per Store, by market.
b. Other Information: Retailer and * shall mutually agree on other
-----------------
information to be provided to *.
13. AUDIT RIGHTS: Upon not less than fourteen (14) days advance written notice
------------
to Retailer, *, or its representatives or designees, shall have the right
during normal business hours, but not more than three (3) times during the
Term and all the Picture Terms and one (1) time after the expiration or
earlier termination of the Term and all the Picture Terms, to inspect,
audit and make extracts of the books and records of Retailer insofar as
said books and records relate to the calculation or determination by
Retailer of (a) Revenue, (b) * Revenue Share, (c) Credit, (d) Bad Debt, and
(e) the rights licensed hereunder. Such rights of audit shall continue for
a period of two (2) years following the expiration of all Picture Terms as
provided for under this Agreement. The parties agree that Retailer shall
have the right reasonably to approve independent auditors hired by * to
conduct an audit, provided that the
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
5
<PAGE>
internal auditors of * and/or * and the accounting firm of * or * then
existing auditors shall be deemed pre-approved for any and all audits
conducted pursuant hereto. Notwithstanding the foregoing, the parties agree
that no * or * employees shall have direct access to Retailer's information
relating to * competitors or Retailer's aggregate market data.
14. CONFIDENTIALITY: Each of * and Retailer acknowledges that (i) the terms
---------------
and conditions of this Agreement, and (ii) all information and data
(including, without limitation, rental and revenue forecasts, projections
and estimates and actual results, in whatever form or medium)
(collectively, the "Confidential Information") provided by each party to
the other under this Agreement are highly proprietary and confidential.
Each of * and Retailer agrees that it shall not use Confidential
Information (other than in connection with the performance of its
obligations under this Agreement or the exercise of its rights under this
Agreement) or disclose Confidential Information to any person (other than
its officers, employees, agents, representatives and licensors on a need-
to-know basis only and who agree to be bound by the confidentiality
obligations hereunder) or unless compelled by subpoena or court order or
state or federal securities laws to disclose any such Confidential
Information. This Paragraph 14 shall survive expiration or earlier
termination of this Agreement.
15. INDEMNIFICATION:
---------------
a. Indemnification by Retailer: Except as otherwise provided in
---------------------------
Paragraph 15(b) below, Retailer shall defend, indemnify and hold *,
its parent company, their affiliates and subsidiaries, and the
officers, directors, agents and employees of each, free and harmless
from all suits, claims, demands and other liabilities and expenses
(including attorneys' fees) (each, a "Claim") which may arise directly
or indirectly out of or by reason of (i) the unauthorized use by
Retailer of any patented invention, or of any copyrighted material
provided by *, (ii) a Claim from a customer arising out of Retailer's
rental or retail practices or course of dealing with respect to such
customer, and/or (iii) a breach or violation of this Agreement or any
obligation, covenant, representation or warranty made hereunder by
Retailer.
b. Indemnification by *: Except as otherwise provided in Paragraph 15(a)
--------------------
above, * shall defend, indemnify and hold Retailer, its parent
company, their affiliates, subsidiaries, and franchisees, and the
officers, directors, agents, and employees of each, free and harmless
from all Claims (including reasonable attorneys' fees) which may arise
directly or indirectly out of or by reason of (i) copyright
infringement by, or other third party Claim against, * with respect to
the content of any Rental Picture, provided such Claim or infringement
is not the result of the negligence of Retailer or any employee or
agent of Retailer, (ii) a physical defect in any Licensed Unit
provided to Retailer hereunder by *, provided such defect was not
caused by the negligence of Retailer or any employee or agent of
Retailer, and/or (iii) a
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
6
<PAGE>
breach or violation of this Agreement or any obligation, covenant,
representation or warranty made hereunder by *.
16. REMEDIES: Each of * and Retailer acknowledge and agree that a material
--------
breach by either party of any of its obligations under this Agreement,
gives the other party the right to terminate this Agreement upon * prior
written notice. Retailer waives any rights to seek injunctive relief with
respect to the sale, license and/or other distribution of any Rental
Picture, provided that Retailer does not waive any right it may have to
seek specific performance under this Agreement with respect to any Rental
Picture being distributed by * in the rental retail marketplace. The
termination of this Agreement shall not relieve the parties of any
obligations incurred prior to such termination.
17. DEFECTIVES: The parties agree that there shall be no replacements of, or
----------
credits or set-offs against the Initial Payment, overages, or any other
amounts owed to * by Retailer for, defective Licensed Units. For each
Rental Picture, to the extent defectives exceed * of the total number of
Licensed Units delivered to Retailer during the first thirty (30) days
after Street Date, Retailer may exchange defectives for new videos from *
to be delivered within a reasonable time thereafter, which reasonable time
shall be within seventy-two (72) hours, provided that Retailer utilizes *
eight hundred (800) number defective replacement system.
18. REPRESENTATIONS AND WARRANTIES:
------------------------------
a. Representations and Warranties of Retailer: Retailer hereby agrees,
------------------------------------------
warrants and represents that Retailer has full authority, capacity and
ability to execute this Agreement and to perform all of its
obligations hereunder.
b. Representations and Warranties of *: * hereby agrees, warrants and
-----------------------------------
represents that * has full authority, capacity and ability to execute
this Agreement and to perform all of its obligations hereunder.
19. MISCELLANEOUS:
-------------
a. Amendment and Waiver: Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement
shall be effective against any party unless such modification,
amendment or waiver is approved in writing by Retailer and *. The
failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions
and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its
terms.
b. Severability: Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid, illegal, or
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
7
<PAGE>
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this
Agreement shall be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision
had never been contained herein.
c. Entire Agreement: Except as otherwise expressly set forth herein,
----------------
this document embodies the complete agreement and understanding
between the parties hereto with respect to the subject matter hereof
and supersedes and preempts any prior understandings, agreements or
representations by or between the parties, written or oral, which may
have related to the subject matter hereof in any way.
d. Assignment:
----------
(i) Retailer Assignment: This Letter Agreement shall not be
-------------------
assigned by Retailer without the prior written consent of *.
(ii) * Assignment: This Letter Agreement shall not be assigned
------------
by * without the prior written consent of Retailer, except
to any corporation or entity which controls, is controlled
by, or under common control with *.
(iii) Purchase of Retailer by a Studio or Third Party Retailer.
--------------------------------------------------------
(A) Purchase by Studio: In the event a motion picture
------------------
studio or home video company (for purposes hereof, in
each instance, a "Studio") enters into an agreement to
acquire Retailer, * shall be given prompt notice of
such agreement and shall have the option to terminate
this Agreement immediately upon written notice to
Retailer. Promptly following such notice of acquisition
agreement, Retailer, in consultation with *, shall
undertake to provide adequate assurance in writing to *
that proprietary and confidential information of *
shall not be disclosed to, or otherwise made accessible
to, the management or other employees of such Studio
following such acquisition. As used in this Paragraph
19(d)(iii)(A), the term "Studio" shall also include,
without limitation, the respective affiliated
corporations which control, are controlled by, or are
under common control with, any such Studio. The term
"control" shall refer to the ownership of at least
fifty percent (50%) of the outstanding voting power of
the corporation or entity which is subject to such
"control".
(B) Purchase by/of Third Party Retailer: In the event a
-----------------------------------
third party retailer enters into an agreement to
acquire Retailer, or
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
8
<PAGE>
Retailer enters into an agreement to acquire a third
party retailer, * and Retailer agree that in such
event, the terms of this Agreement shall apply only (i)
to already existing Retailer Stores and (ii) to any new
stores which operate under the Retailer name at the
retail level, subject to the ability of such new stores
to report through Retailer's established reporting
mechanism.
(C) Definition of "Purchase": For purposes of this
------------------------
Subparagraph 19(d)(iii) the term "Purchase" shall
include acquisition, merger and/or other consolidation.
e. Counterparts. This Agreement may be executed in separate counterparts
------------
each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
f. Due Authorization. Each of * and Retailer represents and warrants
-----------------
that the officer executing this Agreement has been duly authorized and
that this Agreement when executed and delivered shall be valid and
binding and enforceable in accordance with its terms.
g. Notices. All notices provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, or mailed first
class mail (postage prepaid) or sent by reputable overnight courier
service (charges prepaid) to the parties as follows:
If to Retailer:
As set forth in the cover letter attached hereto,
with a copy to the General Counsel.
If to *
*
*
*
*
h. Governing Law. This Agreement and all matters or issues material
-------------
thereto shall be governed by the laws of the *, applicable to
contracts performed entirely therein. * and Retailer hereby agree
that all actions, proceedings or litigation relating to this Agreement
shall be instituted and prosecuted solely within the * and each party
hereby consents to the jurisdiction of the * and the federal courts
located within the * with respect to any matter arising out of or
relating to this Agreement.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
9
<PAGE>
i. Descriptive Headings. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this
Agreement.
j. Relationship of Parties. Nothing contained herein shall constitute a
-----------------------
partnership, joint venture, association or principal and agent
relationship or be construed to evidence the intention of the parties
to constitute such. Retailer and * are independent contractors and
neither has any authority to act on the other's behalf or to bind the
other in any way.
k. Force Majeure. Whenever performance by any party of its obligations
-------------
under this Agreement, other than any of Retailer's payment obligations
hereunder, is substantially prevented by reason of any act of God,
strike, lock-out, or other industrial or transportational disturbance,
fire, lack of materials, law, regulation or ordinance, war or war
conditions, or by reason of any other matter beyond such party's
reasonable control, then such performance shall be excused and this
Agreement shall be deemed suspended during the continuation of such
prevention, and the term shall be extended for a period equal to the
time of such suspension.
l. Third Parties. None of the provisions of this Agreement is intended
-------------
for the benefit of or shall be enforceable by any third parties,
including creditors of Retailer or *.
* Confidential material omitted and separately filed with the Commission under
an application for confidential treatment.
10
<PAGE>
In WITNESS WHEREOF, this Agreement was executed by the parties on the date first
written above.
RETAILER *
By: Daniel A. Potter By: /s/ *
---------------- ---------------------------
Its: CEO Its: *
--- ---------------------------
Retailer: Video Update, Inc.
------------------
11
<PAGE>
Exhibit 10.44
EMPLOYMENT AGREEMENT
TO: Michael G. Schifsky As of April 8, 1999
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 Senior Vice President 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 Employee hereby represents and warrants to Employer that he
has the legal right to enter into this Agreement and perform the duties,
hereunder,
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
(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
<PAGE>
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. 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
-2-
<PAGE>
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 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
-3-
<PAGE>
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.
--------------------------
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,
-4-
<PAGE>
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 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.
-5-
<PAGE>
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.
16. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
under Minnesota law, excluding its conflict of law principles.
-6-
<PAGE>
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: /s/ Daniel A. Potter
--------------------------------
Title: Daniel A. Potter, Chairman
and Chief Executive Officer
Accepted and Agreed:
/s/ Michael G. Schifsky
- -----------------------
Michael G. Schifsky
-7-
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
MICHAEL G. SCHIFSKY
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 $119,700 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>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
MICHAEL G. SCHIFSKY
None.
<PAGE>
EXHIBIT C
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
As of April 8, 1999
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 April 8, 1999):
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>
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
<PAGE>
from this Agreement. To preclude any possible uncertainty, I have set forth on
Schedule A 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.
<PAGE>
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]
<PAGE>
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
/s/ Michael G. Schifsky
-----------------------
Michael G. Schifsky
Accepted and Agreed:
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter
--------------------------
Daniel A. Potter, Chairman
and Chief Executive Officer
<PAGE>
SCHEDULE A
----------
None.
<PAGE>
Exhibit 10.45
EMPLOYMENT AGREEMENT
TO: Richard Bedard As of April 20, 1999
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 Executive Vice President 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 Employee hereby represents and warrants to Employer that he
has the legal right to enter into this Agreement and perform the duties,
hereunder,
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
(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
<PAGE>
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. 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
-2-
<PAGE>
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 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
-3-
<PAGE>
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.
--------------------------
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,
-4-
<PAGE>
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 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.
-5-
<PAGE>
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.
16. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
under Minnesota law, excluding its conflict of law principles.
-6-
<PAGE>
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: /s/ Daniel A. Potter (CEO)
---------------------------------
Title: Daniel A. Potter, Chairman
and Chief Executive Officer
Accepted and Agreed:
/s/ Richard Bedard EVP
- ----------------------
Richard Bedard
-7-
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
RICHARD BEDARD
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 $98,600.00 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>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
RICHARD BEDARD
None.
<PAGE>
EXHIBIT C
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
As of April 20, 1999
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 April 20, 1999):
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>
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
2
<PAGE>
from this Agreement. To preclude any possible uncertainty, I have set forth on
Schedule A 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>
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>
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
/s/ Richard Bedard
------------------
Richard Bedard
Accepted and Agreed:
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter (CEO)
---------------------------
Daniel A. Potter, Chairman
and Chief Executive Officer
5
<PAGE>
SCHEDULE A
----------
None.
<PAGE>
Exhibit 10.46
MASTER LEASE AGREEMENT
----------------------
THIS MASTER LEASE AGREEMENT (this "Lease") is between HELLER FINANCIAL LEASING,
INC., a Delaware corporation ("Lessor"), with an office address at 500 West
Monroe Street, Chicago, Illinois 60661, and Video Update, Inc., a Delaware
corporation ("Lessee"), with its address and principal place of business at 3100
World Trade Center, 30 East 7th Street, St. Paul, MN 55101-4913, which parties
hereby agree as follows:
1. LEASING OF EQUIPMENT: Subject to the terms and conditions set forth
below, Lessor agrees to lease to Lessee and Lessee agrees to hire from Lessor
the equipment (the "Equipment;" a unit or part thereof being sometimes
hereinafter referred to as an "Item") described in any Master Lease Schedule
hereto, now or hereafter executed by the parties (each, a "Schedule"). Nothing
contained herein shall obligate either party to execute any Schedule subsequent
to the date hereof. The Equipment shall be delivered and installed at the
location specified or referred to in the applicable Schedule. The Equipment
shall be deemed to have been accepted by Lessee for all purposes under this
Lease as of the Acceptance Date (defined below) shown on the executed Delivery
and Acceptance Certificate (an "Acceptance Certificate") with respect to such
Equipment. Any modifications to this Lease contained in any Schedule shall be
controlling, but only with respect to the Equipment described in such Schedule.
[Until and unless a Schedule is sold, assigned or otherwise transferred by
Lessor, or Lessor and Lessee expressly agree otherwise in writing, this Lease,
all Riders hereto or to any Schedule, now or hereafter executed by the parties
(each, a "Rider"), and all Schedules shall constitute one lease, and references
to this Lease shall include all such Riders and Schedules. In the event that a
Schedule is sold, assigned or otherwise transferred by Lessor, such Schedule and
all Riders thereto shall be deemed to be a separate lease, which shall include
and incorporate each term and condition in this Lease and all Riders hereto.] As
used herein, "Equipment Cost" shall have the same meaning and value as set forth
in each applicable Schedule.
2. TERM, RENT AND PAYMENT: (a) The term of this Lease for each
respective Item (the "Term") shall commence on the date set forth in the
Acceptance Certificate therefor (the "Acceptance Date") and, unless sooner
terminated pursuant to Section 9 or 17, shall continue for the period specified
as the "Term" in the applicable Schedule. If any Term shall be extended or this
Lease is renewed pursuant to an extension or renewal option, the word "Term"
shall include all such extensions and renewals, and all provisions of this Lease
shall apply during all extension and renewal periods, except as may be
specifically provided otherwise in any Rider, Schedule or other written
agreement applicable thereto.
(b) Lessee agrees to pay to Lessor's order basic rent for each Item
in the amount therefor set forth in the applicable Schedule ("Basic Rent"), plus
a per diem, pro-rata portion of the periodic Basic Rent for any interim period
("Interim Rent") from the Acceptance Date through the day immediately preceding
the "Commencement Date" set forth in the applicable Schedule. (Unless otherwise
stated in the applicable Schedule, the "Commencement Date" shall be the first
day of the first calendar month immediately following the Acceptance Date.)
Interim Rent for Items covered by a particular Schedule shall be due on the
Acceptance
1
<PAGE>
Date. The first Basic Rent payment for Items covered by a particular Schedule
shall be due on the day of the period specified in such Schedule. Subsequent
Basic Rent payments for the Items described in the applicable Schedule shall be
due on the same day of each applicable period thereafter. Any payment due on a
day which is not a business day shall be made on the following business day.
(c) Basic Rent, Interim Rent and all other amounts payable to
Lessor under any provision of this Lease (collectively, "Rent") shall, unless
Lessor otherwise directs, be paid to Lessor via non cancelable ACH debit and
shall be deemed received when good funds are received by Lessor. Lessee agrees
to pay Lessor on demand an administrative and late charge on all Rent not paid
within 5 days of the date due hereunder equal to the lesser of: (i) 10% of the
amount not timely paid or (ii) the maximum rate permitted by applicable law.
3. DISCLAIMER: LESSOR IS NEITHER THE MANUFACTURER NOR SELLER OF THE
----------------------------------------------------
EQUIPMENT, AND MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR
- --------------------------------------------------------------------------
IMPLIED, WITH RESPECT TO THE EQUIPMENT, ALL OF WHICH ARE HEREBY EXPRESSLY
- -------------------------------------------------------------------------
DISCLAIMED. LESSEE UNDERSTANDS AND AGREES THAT NO WARRANTY IS TO BE IMPLIED WITH
- --------------------------------------------------------------------------------
RESPECT TO THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, THE FITNESS OF
- ------------------------------------------------------------------------------
THE EQUIPMENT FOR A PARTICULAR PURPOSE, THE ACCURACY OF THE DESCRIPTION OF THE
- ------------------------------------------------------------------------------
EQUIPMENT, OR WITH RESPECT TO INFRINGEMENT, INTERFERENCE OR THE LIKE. LESSOR
- ----------------------------------------------------------------------------
SHALL NOT BE LIABLE IF, FOR WHATEVER REASON, THE EQUIPMENT IS DELAYED OR NOT
- ----------------------------------------------------------------------------
DELIVERED TO LESSEE.
- -------------------
4. QUIET ENJOYMENT: So long as no Event of Default (as defined below)
exists, Lessor will not interfere with Lessee's quiet enjoyment and use of the
Equipment during the Term therefor.
5. NET LEASE; NO SET-OFF: This Lease is a net lease and Lessee shall not
be entitled to any abatement or reduction of, or set-off against, any Rent by
reason of any (i) past, present or future claim against Lessor or any successor
or assignee of Lessor or any supplier of any Item or any other person, (ii)
defect in or damage to, or loss, prohibition, restriction on use, damage or
destruction of, any Item (except as expressly provided otherwise in Section 9)
from whatever cause, or (iii) other cause whatsoever, whether similar or
dissimilar to the foregoing, it being the intention of the parties that all Rent
shall continue to be payable in all events in the manner and at the times
specified in this Lease and that Lessee's obligation to pay Rent shall be
absolute and unconditional unless the obligation to pay the same shall be
terminated pursuant to the express provisions of this Lease.
6. USE, LOCATION AND POSSESSION; LIENS: (a) Lessee shall use each Item
in a careful and proper manner and for the use contemplated by the manufacturer
thereof and in compliance with all applicable laws, rules, and regulations and
the provisions of the insurance required to be maintained hereunder and the
terms of any manufacturer's warranty. Each Item shall at all times be kept at
the location specified in the applicable Schedule unless Lessor has
2
<PAGE>
given prior written consent to a change in location. Lessee shall at all times
keep each Item in its possession and control.
(b) Lessee shall keep each Item free and clear of all claims, liens,
pledges, rights of others or other encumbrances, and shall not create, incur,
assume or suffer to exist any thereof in, on, of or to any Item (collectively
"Liens"), other than those arising by, through or under Lessor ("Lessor Liens").
(c) Lessor shall have the right as owner, but not the obligation, at
all reasonable times to enter upon the premises where the Equipment is located
or used to inspect the Equipment. Such inspections shall be for, among other
things, determining whether Lessee is properly complying with its obligations
hereunder. Neither Lessee nor any third party may rely upon any such inspections
by Lessor and Lessor shall not be obligated to inform Lessee or any third party
of the result of any such inspection. Any inspection that is not followed by a
notice of an Event of Default shall not constitute a waiver of any Event of
Default then existing and Lessor's failure to inspect the Equipment or to
discover any information regarding the Equipment shall not constitute a waiver
of any of Lessor's rights hereunder.
7. MAINTENANCE AND SERVICE; IMPROVEMENTS: (a) Lessee shall, at its
expense, at all times maintain, service and repair each Item as would a prudent
owner of such Item, and in any event so as to keep each Item in good operating
condition, ordinary wear and tear excepted, in compliance with all applicable
laws, rules, regulations and manufacturer's recommended basic warranty, extended
warranty and/or maintenance program requirements, and as otherwise may be
required to enforce warranty claims against each vendor and manufacturer of each
Item. To the extent that Lessee's maintenance, repair or servicing standards
exceed the foregoing, then Lessee shall keep each Item in at least as good
condition as other comparable equipment owned or used by Lessee. In addition,
Lessee shall, at its expense, comply with all maintenance requirements set forth
by Lessor in any applicable Rider now or hereafter executed by the parties.
Lessee shall, if at any time requested to do so by Lessor, affix in a prominent
position on each Item plates, tags or other identifying labels showing ownership
thereof by Lessor.
(b) Any alterations or modifications with respect to any Item that
may be required at any time during the Term therefor to comply with any
applicable law or any governmental or other rule or regulation shall be made by
Lessee, at its expense, and shall thereupon become the property of Lessor.
(c) Unless required pursuant to Subsection (b), Lessee shall
not, without Lessor's prior consent, affix or install any accessory, equipment,
or device on, or modify, any Item if such addition or modification will impair
the original function or use thereof or cannot be readily removed without
causing damage to such Item. Further, Lessee shall not, without Lessor's prior
written consent, affix or install any Item to or in any other personal property,
or to or in any real property so that such Item shall constitute a fixture. Upon
Lessor's request, Lessee shall obtain and deliver to Lessor disclaimers or
waivers from all owners and/or mortgagees of real estate in which any Item is
located in form and content acceptable to Lessor.
3
<PAGE>
8. NO AGENCY: Lessee acknowledges that it alone has selected the
Equipment and the supplier(s) thereof; that it has reviewed and approved each
written supply contract and purchase order covering the Equipment, or has been
advised by Lessor in writing of the identity of each supplier; that it may have
rights under each such supply contract and purchase order; and that it may
contact each supplier for a description of any such rights and/or supplier's
warranty. Nothing herein contained shall be construed to deprive Lessee of
whatever rights Lessee may have against parties other than Lessor or Lessor's
assignee, such as the supplier or manufacturer of any Item, and Lessee agrees to
look solely to such third parties with respect to any and all claims concerning
the Equipment. So long as no Event of Default exists, Lessee may pursue such
claims for the mutual benefit of Lessor and Lessee in accordance with their
interests in the Equipment. Without in any way limiting any other provision in
this Lease, Lessor shall not in any event be liable for any consequential
damages hereunder or with respect to any Item. No supplier is the agent of
Lessor and no employee of any supplier is authorized to waive, supplement or
otherwise alter any provision of this Lease. Lessee and Lessor hereby agree that
they intend this Lease to be a "Finance Lease" as defined by Article 2A of the
Uniform Commercial Code (the "UCC"). Lessee acknowledges that Lessee has
reviewed and approved any written "Supply Contract" covering the Equipment from
any "Supplier" (as those terms are defined in Article 2A of the UCC).
9. RISK OF DAMAGE AND LOSS: Lessee assumes and shall be solely
responsible for the entire risk of any Item being lost, destroyed, damaged,
stolen, confiscated or condemned, from whatever source, until the date such Item
is returned and accepted by Lessor (the "Return Date") in accordance with
Section 12. In the event of damage to any Item, Lessee, at its expense, shall
promptly repair the same, restoring it to the condition required to be
maintained hereunder. If any Item is lost, destroyed, stolen, damaged in such a
way that it is not commercially reasonable to repair it (or such repairs are not
completed within 60 days of the damage or by the end of the Term with respect
thereto, whichever is shorter), confiscated or condemned (each, an "Event of
Loss"), then Lessee shall pay to Lessor the Stipulated Loss Value (as defined
below) of such Item and all other Rent owing with respect to such Item, which
such payment shall be due on the first to occur of (i) the end of the Term with
respect thereto or (ii) the sooner of (A) 60 days after such Event of Loss or
(B) the second Basic Rent payment date with respect to such Item following such
Event of Loss. Lessor and Lessee shall execute a Stipulated Loss Value Rider
applicable to each Item and the Stipulated Loss Value for each Item shall be as
set forth therein (the "Stipulated Loss Value").
In the event Lessee shall discontinue the operations or be in
default with the landlord at any store location ("Store Closure") in which
Lessor has Items of Equipment, then Lessee shall pay to Lessor the Stipulated
Loss Value (as defined in Section 9 below) of such Items of Equipment and all
other Rent owing with respect to such Items of Equipment, which such payment
shall be due within 30 days of such Store Closure.
Upon due payment by Lessee of all such amounts, this Lease shall
terminate with respect to such Item and Lessor shall transfer title thereto to
Lessee, without representation or warranty other than as to Lessor Liens. So
long as no Event of Default exists, any proceeds of insurance required hereunder
received by Lessor with respect to any damage or Event of Loss respecting any
Equipment shall be paid to Lessee to the extent necessary to reimburse Lessee
for
4
<PAGE>
costs incurred and paid by Lessee in repairing the same or shall be credited
against amounts payable by Lessee with respect to the Equipment involved.
10. INSURANCE: Lessee shall, at its expense, at all times through the
Return Date (i) keep the Equipment insured against all risks of loss or damage
from every cause whatsoever in an amount not less than the greater of fair
market value or the Stipulated Loss Value thereof, and (ii) obtain liability
insurance, including automobile coverage if the Equipment includes motor
vehicles, respecting the Equipment covering liability for bodily injury,
including death, and property damage, in an amount of at least $3 million per
occurrence or such greater amount as may comply with general industry standards,
or such greater amount as Lessee may maintain, or in such other amounts as
Lessor may from time to time require.
Lessor shall be the sole named loss-payee with respect to damage or
loss to the Equipment with no provision for co-insurance and shall be named as
an additional insured on the liability insurance. All insurance shall be with
insurers and in form satisfactory to Lessor; have a deductible not to exceed
$50,000 per occurrence, or such other amount as Lessor may from time to time
require; shall provide for at least 30 days' prior written notice to Lessor
before any cancellation or material modification thereof; shall waive any claim
for premium against Lessor; and shall provide that Lessor will be insured
regardless of any breach by Lessee of any representation, warranty or covenant
in any such policy or any application therefor. Lessee shall deliver to Lessor
certificates of insurance and other evidence satisfactory to Lessor evidencing
the insurance required hereby, and at Lessor's request Lessee will furnish
copies of such policies to Lessor. In the case of renewals, evidence of renewal
shall be delivered to Lessor at least 5 days prior to expiration of the current
policy.
In the event Lessee fails to provide Lessor with evidence of the
insurance coverage required by this Lease, Lessor may purchase insurance at
Lessee's expense to protect Lessor's interests in the Equipment. This insurance
may, but need not, protect Lessee's interests. The coverage purchased by Lessor
may not pay any claim made by lessee or any claim that is made against Lessee in
connection with the Equipment. Lessee may later cancel any insurance purchased
by Lessor, but only after providing Lessor with evidence that Lessee has
obtained insurance as required by this Lease. If Lessor purchases insurance for
the Equipment, Lessee will be responsible for the costs of that insurance,
including interest and other charges imposed by Lessor in connection with the
placement of the insurance, until the effective date of the cancellation or
expiration of the insurance. The costs of the insurance may be added to the
Rent. The costs of the insurance may be more than the cost of insurance Lessee
is able to obtain on its own.
11. ACCEPTANCE: By its execution of any Acceptance Certificate, Lessee
warrants and agrees that the Equipment covered thereby conforms to the
specifications and requirements of Lessee and that, as between Lessee and
Lessor, it was delivered in good repair and that Lessee has unconditionally
accepted it hereunder "AS IS" and "WITH ALL FAULTS" as of the Acceptance Date.
12. RETURN OF EQUIPMENT: Upon the expiration or earlier termination or
cancellation of this Lease with respect to any Item, except in the case of
retention by Lessee
5
<PAGE>
upon purchase of the Equipment in accordance with any applicable Rider now or
hereafter executed by the parties, Lessee shall, at its own cost and expense,
promptly return such Item to Lessor to such location as Lessor may specify, for
acceptance by Lessor in the condition required to be maintained hereunder or in
the condition specified in any applicable Rider now or hereafter executed by the
parties. Lessee shall pay for any repairs required to place the Equipment in
such condition. In the event Lessee shall not surrender up and redeliver any
Item to Lessor as herein required or shall not timely pay the purchase price for
any Item under any applicable Rider now or hereafter executed by the parties,
then Lessee shall pay to Lessor Basic Rent for such Item (at the highest rate
payable during the Term) until the Item is duly returned, restored to the proper
condition and accepted by Lessor or the purchase price is paid in accordance
with the applicable Rider.
13. GENERAL TAX INDEMNITY: Lessee agrees to pay and indemnify, on an
after-tax basis, Lessor against all income, sales, use, personal property, ad
valorem, value added, leasing, stamp or other taxes, levies, imposts, fees,
duties, charges or withholdings of any nature, including all license and
registration fees, together with any penalties, fines or interest thereon
(collectively, "Impositions") arising out of the transactions contemplated by
this Lease (including the acquisition of any Item prior to the Acceptance Date)
and imposed against Lessor, Lessee, this Lease (including any Rent) or the
Equipment or any Item by the United States or any state or political subdivision
thereof or any foreign government or taxing authority, excluding, however, any
Impositions based on or measured by the net income of Lessor imposed by the
United States or any state or political subdivision thereof. Lessee will notify
Lessor of the need to file any reports and returns relating to any Imposition at
least 60 days before the due date thereof and will remit any amounts payable in
connection therewith to Lessor 10 days before payment is due and in such event,
Lessor shall be obligated to pay such Impositions and Lessee's obligations with
respect to such Impositions shall there upon terminate. Lessor shall prepare and
file all returns, and pay all Impositions, unless lessor directs Lessee
otherwise. In the event that Lessor pays any such Impositions, Lessee will on
demand reimburse Lessor for the full amount paid by Lessor therefor, less
amounts previously paid by lessee to Lessor in connection with such Impositions.
Lessor shall have no obligation to contest or refuse to pay any Imposition.
Lessee acknowledges that in some jurisdictions Impositions may not be billed,
audited, assessed or due until after this Lease has terminated and agrees that
in such event Lessee will remain liable for sum Impositions notwithstanding such
termination. Lessor makes no warranty, express or implied, regarding lessee's
tax or accounting treatment of this Lease.
14. INCOME TAX INDEMNIFICATION: (a) Lessee acknowledges that Lessor is
the owner of the Equipment for state law and Federal income tax purposes and
that the most accelerated depreciation or cost recovery deductions on the full
amount of the Equipment cost will be available to Lessor. Lessee acknowledges
that Lessor intends to claim and take the depreciation deductions ("Depreciation
Deductions") with respect to the Equipment in accordance with Section 168 of the
Internal Revenue Code of 1986, as amended (the "Code").
(b) Lessee represents, warrants and covenants as follows:
(i) Lessor will not be required to include any amount in its income in
connection with any Item for any taxable year or part thereof during the Term
respecting such Item other than (A)
6
<PAGE>
Interim Rent and Basic Rent, as such Rent accrues in accordance with the terms
hereof, (B) any amount constituting gain recognized with respect to or by reason
of the sale or other disposition of such Item upon the termination of this Lease
with respect thereto, (C) any amount payable to Lessor to the extent such amount
is required to be determined by reference to the income tax effect to Lessor of
the receipt thereof, (D) any amount specifically identified as interest, and (E)
any other amount with respect to which Lessor shall be entitled to a
contemporaneous and equal offsetting deduction (any amounts so includable in
Lessor's income other than as contemplated in clauses (A) through (E) above
being referred to herein as an "Inclusion"); and
(ii) Each Item will constitute the Classification of Property specified
in the applicable Schedule within the meaning of Section 168(e) of the Code and
Lessor will be entitled to Depreciation Deductions with respect to its basis in
the Equipment (which basis shall equal 100% of the Equipment Cost for each Item)
in accordance with such Classification of Property.
(c) If for any reason whatsoever, including any act or omission of
Lessee or the inaccuracy of any representation or warranty of Lessee herein or
in connection with the transactions contemplated hereby:
(i) Lessor shall lose or lose the right to claim, or be advised or
determines that it would be imprudent, improper or inadvisable to claim, or
there shall be disallowed or recaptured, all or any portion of the anticipated
Depreciation Deductions,
(ii) Lessor shall suffer an Inclusion, or
(iii) Any foreign tax credit of Lessor shall be reduced, disallowed or
recaptured, (any such loss, disallowance, reduction, recapture or Inclusion
being hereafter called a "Tax Loss"), then 30 days after written notice to
Lessee by Lessor that any Tax Loss has occurred, Lessee shall pay Lessor, as an
indemnity payment, a lump sum amount which, after deduction of all Federal,
state and local taxes required to be paid by Lessor in respect of the receipt of
such payment, shall provide Lessor with not less than the same net after-tax
return that Lessor would have realized if such Tax Loss had not occurred,
including any interest and penalties payable by Lessor attributable to such Tax
Loss. In computing Lessee's liability under this Section, the Federal, state and
local taxes payable by Lessor shall be based upon the highest marginal corporate
tax rate in effect for the taxable year in which the Tax Loss occurred.
(d) Lessee shall not be liable for indemnification respecting
a Tax Loss occurring solely as a result of: (i) Lessor being subject to the
application of the mid-quarter convention of Section 168(d)(3) of the Code, (ii)
Lessor making any election to claim the Depreciation Deductions in a manner less
rapid than contemplated by the definition thereof, (iii) Lessor failing to have
sufficient taxable income to utilize the Depreciation Deductions, (iv) Lessor
being subject to the "alternative minimum tax" of Section 55 of the Code, or (v)
A voluntary transfer or other voluntary disposition by the Lessor of any
interest in any Equipment or this Lease when no Event of Default exists.
(e) For the purposes of this Section the term "Lessor" shall
include any affiliated group within the meaning of Section 1504 of the Code of
which Lessor is a member, if
7
<PAGE>
consolidated returns are filed for such affiliated group for Federal tax
purposes, and a Tax Loss shall be deemed to have occurred upon the earliest of:
(i) The happening of any event which may cause such Tax Loss,
(ii) The payment by Lessor to the taxing authority of the tax increase
resulting from such Tax Loss, or
(iii) The adjustment of the tax return of Lessor to reflect such Tax
Loss.
15. GENERAL INDEMNIFICATION: Lessee hereby agrees to indemnify, save,
protect, defend and keep harmless Lessor, and its agents, directors, employees,
successors and assigns, from and against any and all losses, damages (including
indirect, special or consequential damage), harm, expenses, including legal fees
(and a reasonable allocation of the compensation, costs and expenses of internal
counsel, based upon time spent), penalties, injuries, claims, actions and suits,
of whatsoever kind and nature, in contract, tort or otherwise, whether caused by
the active or passive negligence of Lessor (excluding, however, Lessor's gross
negligence or willful misconduct) or otherwise and including Lessor's strict
liability in tort, in any way arising out of, related to or in connection with
the selection, modification, purchase, acceptance, rejection, ownership,
delivery, lease, possession, maintenance, use, condition (including latent or
other defects, whether or not discoverable by Lessor or Lessee, and any claim
for patent, trademark or copyright infringement), return of, or operation of any
Item prior to its Return Date or relating to any default by Lessee or Event of
Default.
16. DEFAULT: Each of the following shall constitute an event of
default (an "Event of Default") hereunder:
(a) Lessee shall fail to make any payment of Rent within five
(5) calendar days after the same shall become due and payable;
(b) Lessee or any guarantor of all or any part of Lessee's
obligations under this Lease (a "Guarantor") shall fail to pay or perform, as
and when due (including any applicable grace period), any obligations to Lessor
or any of its affiliates arising under or in connection with this Lease,
including, but not limited to, Lessee's obligation under Sections 6, 7, 9 and 10
hereof, or arising under any other document or instrument including, but not
limited to, any document or instrument executed in connection with any other
presently existing or future loans, leases or other credit arrangements from
Lessor or any of its affiliates in favor of Lessee, or otherwise;
(c) Lessee or any Guarantor shall make any representation or
warranty, respectively, in this Lease or in any certificate or statement
furnished at any time hereunder or in connection with this Lease which proves to
have been untrue or misleading in any material respect when made or furnished;
(d) Lessee or any Guarantor shall file a voluntary petition in
bankruptcy or a voluntary petition or answer seeking liquidation,
administration, reorganization, arrangement,
8
<PAGE>
readjustment of its debts, or for any other relief under the Bankruptcy Code, or
under any other act or law pertaining to insolvency or debtor relief, whether
state, federal, or foreign, now or hereafter existing; or Lessee or any
Guarantor shall enter into any agreement indicating its consent to, approval of,
or acquiescence in, any such petition or proceeding; or Lessee or any Guarantor
shall apply for or permit the appointment by consent or acquiescence of a
receiver, custodian, administrator, or trustee for all or a substantial part of
its property; or Lessee or any Guarantor shall make an assignment for the
benefit of creditors; or Lessee or any Guarantor shall be unable or shall fail
to pay its debts generally as such debts become due; or Lessee or any Guarantor
shall admit, in writing, its inability or failure to pay its debts generally as
such debts become due;
(e) There shall have been filed against Lessee or any
Guarantor an involuntary petition in bankruptcy or seeking liquidation;
administration, reorganization, arrangement, readjustment of its debts or for
any other relief under the Bankruptcy Code, or under any other act or law
pertaining to insolvency or debtor relief, whether state, federal or foreign,
now or hereafter existing, or Lessee or any Guarantor shall suffer or permit the
involuntary appointment of a receiver, custodian, administrator, or trustee for
all or a substantial part of its property; or Lessee or any Guarantor shall
suffer or permit the issuance of a warrant of attachment, diligence, execution
or similar process against all or any substantial part of its property; unless,
in each other case, such petition, appointment or process is fully bonded
against, vacated or dismissed within forty-five (45) days from its effective
date, but not later than ten (10) days prior to any proposed disposition of any
assets pursuant to any such proceeding;
(f) The occurrence of any default in the payment or
performance, and the subsequent acceleration, of any debt or other obligations
(including, but not limited to, capital lease obligations or any corporate
guaranty) owed by Lessee to any other person or entity unaffiliated with Lessor
with an outstanding principal balance in excess of $1,000,000.00, whether now or
hereafter existing;
(g) There shall be a change in the beneficial ownership and
control, directly or indirectly, of the majority of the outstanding voting
securities or other interests entitled (without regard to the occurrence of any
contingency) to elect or appoint members of the board of directors of other
managing body of Lessee or Guarantor (a "change of control"), or there is any
merger, consolidation, dissolution, liquidation, winding up or sale or other
transfer of all or substantially all of the assets of Lessee or Guarantor
pursuant to which there is a change of control or cessation of Lessee or
Guarantor or their businesses;
(h) The occurrence of any event described as a Default or an
Event of Default in any applicable Rider now or hereafter executed by the
parties.
Lessee shall have 30 days to cure after knowledge of any default under this
Lease; notwithstanding, there will be no grace period for any monetary default
or any default under Sections 6, 7, 9, 10, and 16(a) of this Lease.
9
<PAGE>
17. REMEDIES: (a) Upon the occurrence of any Event of Default, then,
to the extent permitted by applicable law, Lessor shall have the right to
exercise any one or more of the following remedies:
(i) To proceed by appropriate court action to enforce performance by
Lessee of its obligations hereunder or to recover damages for breach thereof;
(ii) To take possession of any Item, wherever located, without notice,
legal process, prior judicial hearing, or liability for trespass or other damage
(WHICH RIGHTS LESSEE HEREBY VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY WAIVES) and
thereafter hold, sell, operate or lease such Item free of claims of Lessee,
except as set forth below;
(iii) By notice to Lessee, to terminate or cancel this Lease and declare
all Rent then owing to Lessor hereunder immediately due and payable (whereupon
Lessee shall promptly pay the same);
(iv) To demand immediate payment of the Stipulated Loss Value of the
Equipment as liquidated damages for the remaining term (whereupon Lessee shall
promptly pay the same); and
(v) To pursue any other remedy available to Lessor at law or in
equity.
(b) Lessor and Lessee agree that an amount equal to the
Stipulated Loss Value of the Equipment represents a reasonable return for the
use of the Equipment and for the depreciation thereof, and shall be the basis
for liquidated damages for the remaining term for which Lessee shall be liable
to Lessor upon the occurrence of an Event of Default. Any amounts realized by
Lessor on account of the Equipment subsequent to Lessor's taking possession
thereof pursuant to Section 17(a)(ii) shall, after reimbursement to Lessor of
all its expenses incurred in connection therewith, including legal fees (and a
reasonable allocation of the compensation, costs and expenses of internal
counsel, based upon time spent), be credited to amounts of Stipulated Loss Value
and all other Rent owing by Lessee hereunder or, if such Stipulated Loss Value
and all other Rent has been paid, paid to Lessee.
(c) If Lessor elects not to sell, re-lease, or otherwise
dispose of all or any part of the Equipment, and holds such Equipment for Lessee
for the remaining Term, Lessor may recover, in addition to all Rent accrued and
unpaid as of the date of Lessor's recovery of possession of the Equipment, the
present value, as of such date, of the Rent for the remainder of the Term
respecting such Equipment (which Term shall include, for this purpose, to the
extent applicable, any agreed upon extensions and renewals which would, in the
absence of an Event of Default, automatically extend the Term upon Lessee's
failure to exercise any option to purchase contained in any addenda or Rider
hereto). Present value shall be computed using a discount rate equal to the
Prime Rate in effect on the Acceptance Date.
(d) If Lessor sells, leases, or otherwise disposes of all or
any part of the Equipment, Lessor may recover from Lessee, in addition to any
Rent accrued and unpaid as of the date of Lessor's recovery of possession of the
Equipment, the present value computed by using a discount rate equal to the
Prime Rate in effect on the Acceptance Date, of the difference
10
<PAGE>
between (i) the Rent for the remainder of the Term respecting such Equipment
(which Term shall include, for this purpose, to the extent applicable, any
agreed upon extensions and renewals which would, in the absence of an Event of
Default, automatically extend the Term upon Lessee's failure to exercise any
option to purchase contained in any addenda or Rider hereto) and (ii) except in
the case of a substantially similar lease, the market rent for such period of
time determined by Lessor in its sole discretion, or (iii) in the case of a
lease of Equipment which is substantially similar to this Lease, the total rent
for the lease term of such substantially similar lease.
(e) Time of performance of Lessee's obligations hereunder is of the
essence. All remedies of Lessor hereunder are cumulative, and may, to the extent
permitted by law, be exercised concurrently or separately, and the exercise of
any one remedy shall not be deemed to be an election of such remedy to the
exclusion of any other remedy or to preclude the exercise of any other remedy at
any other time. However, Lessor is entitled to only one satisfaction. Failure on
the part of Lessor to exercise, or delay in exercising, any right or remedy
hereunder or Lessor's failure at any time to require performance by Lessee of
any of the provisions hereof shall not operate as a waiver thereof; nor shall
any single or partial exercise by Lessor of any right or remedy hereunder
preclude any other further exercise thereof or the exercise of any other right
or remedy. Lessee shall be liable for all charges, costs, expenses and
attorneys' fees incurred by Lessor (including a reasonable allocation of the
compensation, costs and expenses of internal counsel, based upon time spent):
(i) in defending or protecting its interests in the Equipment, or any Item or
part thereof; (ii) in the negotiation, execution, delivery, administration,
amendment or enforcement of this Lease or the collection of any Rent hereunder;
(iii) in any lawsuit or other legal proceeding in any way connected with this
Lease, including, but not limited to, any contract or tort or other actions, any
arbitration or other alternative dispute resolution proceeding, all appeals and
judgement enforcement actions and any bankruptcy proceeding (including, but not
limited to, any relief from stay and/or adequate protection motions, cash
collateral disputes, assumption/rejection motions and disputes or objections to
any proposed disclosure statement or reorganization plan). Lessee acknowledges
and agrees that the preceding sentence shall survive and not be merged with any
judgment in connection with any exercise of any remedy by Lessor provided
hereunder. Lessee shall pay to Lessor interest on any overdue payments under
Section 13, 14 or 15 or amounts due under this Section 17 after demand therefor
and until paid at a rate per annum equal to the lesser of five percent (5%)
above the Prime Rate then in effect or the maximum amount permitted to be
charged by Lessor by applicable law.
18. ASSIGNMENT. (a) Lessor may sell, assign or otherwise transfer all or
any part of its right, title and interest in and to the Equipment and/or this
Lease or in any Schedule executed in connection herewith, to a third-party
assignee, subject to the terms and conditions of this Lease including, but not
limited to, the right to the quiet enjoyment by Lessee as set forth in Section 4
above. Any such assignee may assume all of the rights and obligations of Lessor
in connection with the Equipment or any Schedules sold, assigned or otherwise
transferred, in which case Lessor shall be relieved therefrom. To the extent of
any such assumption of obligations, all references to Lessor herein shall
thereafter mean such assignee.
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<PAGE>
(b) Lessor may also pledge, mortgage or grant a security
interest in the Equipment and assign this Lease as collateral. Each such
pledgee, mortgagee, lien holder or assignee shall have any and all rights as may
be assigned by Lessor but none of the obligations of Lessor hereunder. Any
pledge, mortgage or grant of security interest in the Equipment or collateral
assignment of this Lease shall be subject to the terms and conditions hereof
including, but not limited to, the right to the quiet enjoyment of the Equipment
by Lessee as set forth in Section 4 above. If Lessor grants a security interest
in all or any part of any Schedule, any Equipment covered thereby and/or any
sums payable thereunder, only the original of the Schedule held by Lessor shall
be effective to transfer Lessor's rights therein.
(c) Lessee shall not be relieved of any of its obligations
hereunder by reason of any such sale, assignment, or other transfer referred to
in Subsection (a) above, or any pledge, mortgage, grant of security interest or
collateral assignment referred to in Subsection (b) above, all of which such
obligations shall remain absolute and unconditional, including, but not limited
to, Lessee's obligations to pay Rent as set forth in Section 5 above. Lessee
agrees that it will not assert against any purchaser, pledgee, mortgagee, lien
holder or assignee (collectively, an "Assignee") any defense, counterclaim or
offset that Lessee may have against Lessor and Lessee acknowledges that any such
assignment or other transfer by Lessor, or any such pledge, mortgage, grant of
security interest or collateral assignment by Lessor, shall not materially
change Lessee's duties or obligations under this Lease nor materially increase
the burdens or risks imposed on Lessee. Upon the written request of Lessor,
Lessee shall acknowledge all such obligations to the Assignee, which such
acknowledgment shall be in such form and substance as Lessor or any such
Assignee may require, consistent with their normal business practices.
(d) LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY
---------------------------------------------------------
OR PLEDGE ANY OF ITS INTEREST IN THIS LEASE OR ANY OF THE EQUIPMENT, WITHOUT THE
- --------------------------------------------------------------------------------
PRIOR WRITTEN CONSENT OF LESSOR. ANY SUCH SALE, TRANSFER, ASSIGNMENT, SUBLEASE,
- -------------------------------------------------------------------------------
CONVEYANCE, OR PLEDGE, WHETHER BY OPERATION OF LAW OR OTHERWISE, WITHOUT THE
- ----------------------------------------------------------------------------
PRIOR WRITTEN CONSENT OF LESSOR, SHALL BE VOID.
- ----------------------------------------------
19. REPORTS: (a) Lessee will immediately notify Lessor of:
(i) Each Event of Loss or accident involving or allegedly involving
any Item;
(ii) Any Lien (other than a Lessor Lien) which shall have attached to
any Item; or
(iii) The occurrence of any Event of Default or event which, with the
lapse of time or giving of notice or both could become an Event of Default.
(b) Lessee and each Guarantor shall, as soon as practicable, and in
any event within forty-five (45) days after the end of each fiscal quarter,
furnish to Lessor its unaudited financial statements including in each instance,
balance sheets, income statements, and statements of cash flow, on a
consolidated and consolidating basis, as appropriate, and separate profit and
loss statements as of and for the quarterly and annual period then ended and for
its fiscal year to date (profit and loss statements will be forwarded at an
individual store level on a quarterly and
12
<PAGE>
annual basis as requested by Lessor), and equivalent prior year period prepared
in accordance with generally accepted accounting principles, consistently
applied, and Lessee and any Guarantor hereunder shall, as soon as practicable,
and in any event within ninety (90) days after the end of each fiscal year,
furnish to Lessor its annual audited financial statements, including balance
sheets, income statements and statements of cash flow for the fiscal year then
ended, on a consolidated and consolidating basis, as appropriate, which have
been prepared by its independent accountants. Such audited financial statements
shall be accompanied by the independent accountant's opinion, which opinion
shall be in form generally recognized as "qualified".
(c) Lessee will permit Lessor to inspect and examine the Equipment and
any Item and Lessee's records relating thereto at such times and from time to
time as Lessor may wish upon reasonable notice.
20. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee hereby represents
and warrants to Lessor that on the date hereof and on the date of execution of
each Schedule:
(a) Lessee has full power, authority and legal right to enter into
and to perform its obligations under this Lease and all related documents
(collectively the "Documents"), is in good standing under the law of its
jurisdiction of incorporation and is duly qualified to do business and in good
standing wherever necessary to carry on its present business and operations,
including the jurisdiction(s) where the Equipment is or is to be located.
(b) The Documents have been duly authorized, executed and delivered
by Lessee and constitute valid, legal and binding agreements of Lessee,
enforceable against it in accordance with their terms.
(c) No approval, consent or withholding of objections is required
from any governmental authority or instrumentality, or any person, with respect
to the entry into or performance by Lessee of the Documents except such as have
already been obtained.
(d) The entry into and performance by Lessee of its
obligations under the Documents will not (i) violate any judgment, order, law or
regulation applicable to Lessee or any provision of Lessee's Certificate of
Incorporation or By-Laws; or (ii) result in any breach of, constitute a default
under or result in the creation of any Lien, pursuant to any indenture,
mortgage, deed of trust, bank loan or credit agreement or other instrument to
which Lessee is a party.
(e) There is no existing Event of Default under this Lease or
any existing default in connection with any indenture, mortgage, deed of trust,
bank loan or credit agreement or other instrument to which Lessee is a party on
the part of the Lessee nor to Lessee's knowledge any other party.
(f) There are no suits proceedings pending or to Lessee's
knowledge threatened in any court or by any governmental agency against or
affecting, Lessee, which, if
13
<PAGE>
adversely determined, would have a material adverse effect on the ability of
Lessee to fulfill its obligations under this Lease or its financial condition or
prospects.
(g) Each balance sheet, income statement, and statement of cash flow
delivered to Lessor has been prepared in accordance with generally accepted
accounting principles, and since the date of the most recent such balance sheet,
income statement, and statement of cash flow, there has been no material adverse
change in the financial condition or prospects of Lessee.
(h) The Equipment will at all times be used for commercial or
business purposes.
(i) Lessee has made an assessment of the microchip and computer-
based systems and the software used in its business and based upon such
assessment believes that it will be "Year 2000 Compliant" by January 1, 2000.
For purposes of this paragraph, "Year 2000 Compliant" means that all software,
embedded microchips and other processing capabilities utilized by, and material
to the business operations or financial condition of, Lessee are able to
interpret, store, transmit, receive and manipulate data on and involving all
calendar dates correctly and without causing any abnormal ending scenarios in
relation to dates in and after the Year 2000. From time to time, at the request
of Lessor, Lessee shall provide to Lessor such updated information as is
requested regarding the status of its efforts to become Year 2000 Compliant.
21. MISCELANEOUS, JURY WAIVER, GOVERNING LAW, JURISDICTION, VENUE: (a)
Nothing herein contained shall give or convey to Lessee any right, title or
interest in and to any Equipment leased hereunder except as a lessee. Should
Lessor permit the use of any Equipment beyond the specified Term thereof, the
obligations of Lessee hereunder shall continue (including the obligation to pay
the Basic Rent at the highest rate applicable during the Term with respect
thereto) and such permissive use shall not be construed as renewal of the Term
thereof nor as a waiver of any right or continuation of any obligation of Lessor
hereunder. Lessee's obligations pursuant to Sections 11, 12, 13, 14 and 15 shall
survive the expiration of earlier termination of this Lease and Lessee shall
remain liable therefor. Equipment shall at all times remain personal property of
Lessor notwithstanding any affixation to the real estate.
(b) The Equipment subject hereto is an at all times shall be
and remain the sole and exclusive property of Lessor, and Lessee shall have no
right, title or interest therein or thereto, except as expressly set forth in
this Lease. As a precaution, Lessee hereby also grants hereto, Lessor a first
priority continuing lien and security interest in the Equipment subject thereto
and the proceeds thereof to secure any obligation of Lessee under this Lease,
each Schedule hereunder, any other agreement between Lessor and Lessee. Lessee
further agrees that Lessee's obligations hereunder are additionally secured by
all security interests, liens and encumbrances heretofore, now or hereafter
granted by Lessee to Lessor or Lessor's affiliates under any instrument, whether
or not related to this Lease. Lessee agrees to execute any instrument or
instruments necessary or expedient for filing, recording, perfecting, or
notifying of the interest of Lessor in the Equipment upon request of, and as
determined by, Lessor. Lessee hereby specifically authorizes Lessor to file
financing statements not signed by Lessee or to
14
<PAGE>
execute same for and on behalf of Lessee as Lessee's attorney-in-fact,
irrevocably and coupled with an interest, for such purposes.
(c) To the extent permitted by applicable law, Lessee hereby
waives any and all rights and remedies conferred upon a lessee by such
applicable law (including but not limited to Article 2A of the UCC) to: (i)
cancel this Lease; (ii) repudiate this Lease; (iii) reject the Equipment; (iv)
revoke acceptance of the Equipment; (v) recover damages from Lessor for any
breaches of warranty or for any other reason; (vi) a security interest in the
Equipment in Lessee's possession or control for any reason; (vii) deduct all or
any part of any claimed damages resulting from Lessor's default, if any, under
this Lease; (viii) accept partial delivery of the Equipment; (ix) "Cover" by
making any purchase or lease of, or contract to purchase or lease, Equipment in
substitution for that due from Lessor; (x) recover any general, special,
incidental or consequential damages, for any reason whatsoever; and (xi) obtain
specific performance, replevin, detinue, sequestration, claim and delivery or
the like for any Equipment identified to this Lease. To the extent permitted by
applicable law, Lessee also hereby waives any rights now or hereafter conferred
by statute or otherwise which may require Lessor to sell, lease or otherwise use
any Equipment in mitigation of Lessor's damages as set forth in Section 17 of
this Lease or which may otherwise limit or modify any of Lessor's rights or
remedies under Section 17.
Any action by Lessee against Lessor for any default by Lessor under
this Lease, including breach of warranty or indemnity, shall be commenced within
one (1) year after any such cause of action accrues. LESSOR AND LESSEE EACH
----------------------
WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING HEREFROM OR IN
- ---------------------------------------------------------------------------
RELATION HERETO.
- ---------------
(d) All notices hereunder shall be in writing and shall be
delivered by hand, by overnight courier or by certified or registered mail,
return receipt requested, to each party at its address set forth below, as such
address may be changed by such notice. All notices shall be deemed given when
received, when delivery is refused or when the same are returned for failure to
be called for.
(e) If Lessee fails to perform any of its obligations
hereunder Lessor may, but shall not be obligated to, perform the same (without
such performance constituting a cure or waiver of Lessee's failure to so
perform) and Lessee will on demand reimburse Lessor for all its costs and
expenses incurred in connection therewith.
(f) THIS LEASE AND THE RIGHTS AND OBLIGATION OF THE PARTIES
-------------------------------------------------------
HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
- -------------------------------------------------------------------------------
THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO PRINCIPLES OF
- ---------------------------------------------------------------------------
CONFLICTS OF LAW, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
- ---------------------------------------------------------------------
PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT OR THE STATE OF
- ------------------------------------------------------------------------
INCORPORATION OR PRINCIPAL PLACE OF BUSINESS OF THE LESSEE. LESSEE (i) CONSENTS
- -------------------------------------------------------------------------------
AT LESSOR'S ELECTION AND WITHOUT LIMITING LESSOR'S RIGHT TO COMMENCE AN ACTION
- ------------------------------------------------------------------------------
IN ANY OTHER
- ------------
15
<PAGE>
JURISDICTION, TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURTS (FEDERAL,
- -----------------------------------------------------------------------------
STATE OR LOCAL) SITUATED IN COOK COUNTY, ILLINOIS; (ii) WAIVES ANY OBJECTION TO
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IMPROPER VENUE AND FORUM NON CONVENIENS; AND (iii) CONSENTS TO SERVICE OF
- -------------------------------------------------------------------------
PROCESS BY CERTIFIED MAIL, POSTAGE PREPAID, TO LESSEE AT ITS ADDRESS AS SET
- ---------------------------------------------------------------------------
FORTH HEREIN, WHICH SERVICE SHALL BE DEEMED COMPLETE WITHIN TEN (10) DAYS AFTER
- -------------------------------------------------------------------------------
THE DATE OF MAILING THEREOF. If any provision of this Lease shall contravene or
- ---------------------------
be invalid under applicable law or regulation, such contravention or invalidity
shall not affect the entire Lease, the provisions held to be invalid to be
deemed deleted or modified and the Lease interpreted and construed as though
such invalid provision or provisions were not part hereof or conformed thereto.
(g) This Lease, together with each Schedule and Rider, constitute
the entire agreement of the parties with respect to the subject matter hereof,
and supersedes and replaces any prior or contradictory representations,
warranties or agreements by Lessor and Lessee. Unless set forth in a Schedule or
Rider, signed by an authorized manager of Lessor, Lessee shall have no right to
purchase or otherwise acquire title to or ownership of any Item of Equipment. No
agent or employee of any supplier or manufacturer is authorized to bind Lessor
to this Lease or any Schedule, or to waive, alter or add to the terms and
conditions printed herein and in any Schedule. This is a non-cancelable Lease
and Lessee's obligations hereunder are absolute and unconditional. This Lease,
any amendments to, variations or modifications of this Lease, any waiver of its
provisions or conditions, any consent hereunder and all Schedules shall not be
valid unless in writing and signed by an authorized officer or manager of
Lessor.
-----------------------
(LESSEE'S INITIALS)
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the 23rd day of November, 1998.
HELLER FINANCIAL LEASING, INC. VIDEO UPDATE, INC.
(Lessee)
By: /s/ Michael G. Nawara By: /s/ Daniel C. Howard (COO) Treasurer
------------------------------- ---------------------------------------
Name: Michael G. Nawara Name: Daniel C. Howard (COO) Treasurer
----------------------------- -------------------------------------
Title: Vice President Title: Chief Operating Officer Treasurer
---------------------------- ------------------------------------
Address: 500 West Monroe Street Address: 3100 World Trade Center
Chicago, Illinois 60661 30 East 7th Street
St. Paul, MN 55101-4913
Facsimile No.: 312-441-7519 Facsimile No.: _______________
17
<PAGE>
Exhibit 18.2
Board of Directors
Video Update, Inc.
St. Paul, Minnesota
Dear Board Members:
We have audited the consolidated financial statements of Video Update, Inc. as
of April 30, 1999 and for the year then ended, including your Annual Report on
Form 10-K to the Securities and Exchange Commission and have issued our report
thereon dated August, 12, 1999. Note 2 to such financial statements contains a
description of your adoption during the year ended April 30, 1999 of an
accelerated amortization method for video and game rental inventory. In our
judgment, such change is to an alternative accounting method that is preferable
under the circumstances.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
August 12, 1999
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-96024) pertaining to the 1994 Stock Option Plan, the 1994 Formula
Stock Option Plan, and the 1995 Stock Option Plan of Video Update, Inc. of our
report dated August 13, 1999, with respect to the consolidated financial
statements of Video Update, Inc. appearing in the Annual Report on Form 10-K for
the year ended April 30, 1999.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
August 12, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-96024) pertaining to the 1994 Stock Option Plan, the 1994 Formula
Stock Option Plan, and the 1995 Stock Option Plan of Video Update, Inc. of our
report dated August 13, 1998, with respect to the consolidated financial
statements of Video Update, Inc. included in the Annual Report (Form 10-K) for
the year ended April 30, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
August 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED APRIL 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
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<SECURITIES> 270
<RECEIVABLES> 3,826
<ALLOWANCES> 0
<INVENTORY> 51,433
<CURRENT-ASSETS> 0
<PP&E> 81,558
<DEPRECIATION> 22,163
<TOTAL-ASSETS> 207,208
<CURRENT-LIABILITIES> 82,396
<BONDS> 481
0
0
<COMMON> 293
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 207,208
<SALES> 31,915
<TOTAL-REVENUES> 254,096
<CGS> 20,257
<TOTAL-COSTS> 348,621
<OTHER-EXPENSES> (677)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,695
<INCOME-PRETAX> (107,543)
<INCOME-TAX> (2,828)
<INCOME-CONTINUING> (110,371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (110,371)
<EPS-BASIC> (3.77)
<EPS-DILUTED> (3.77)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED APRIL 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 1,446
<SECURITIES> 978
<RECEIVABLES> 3,776
<ALLOWANCES> 0
<INVENTORY> 52,797
<CURRENT-ASSETS> 0
<PP&E> 38,630
<DEPRECIATION> 5,561
<TOTAL-ASSETS> 133,607
<CURRENT-LIABILITIES> 37,785
<BONDS> 529
0
0
<COMMON> 202
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 133,607
<SALES> 7,743
<TOTAL-REVENUES> 91,799
<CGS> 3,705
<TOTAL-COSTS> 83,406
<OTHER-EXPENSES> (461)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 892
<INCOME-PRETAX> 7,962
<INCOME-TAX> 3,342
<INCOME-CONTINUING> 4,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,620
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.28
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED APRIL 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 871
<SECURITIES> 562
<RECEIVABLES> 4,737
<ALLOWANCES> 0
<INVENTORY> 106,901
<CURRENT-ASSETS> 0
<PP&E> 82,065
<DEPRECIATION> 12,345
<TOTAL-ASSETS> 278,431
<CURRENT-LIABILITIES> 70,323
<BONDS> 507
0
0
<COMMON> 293
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 278,431
<SALES> 17,075
<TOTAL-REVENUES> 156,154
<CGS> 9,809
<TOTAL-COSTS> 172,387
<OTHER-EXPENSES> 71
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,292
<INCOME-PRETAX> (20,596)
<INCOME-TAX> (6,116)
<INCOME-CONTINUING> (14,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,480)
<EPS-BASIC> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
