<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1999
or
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 0-24346
-------
VIDEO UPDATE, INC.
---------------------------
(Exact Name of Registrant as Specified in its Charter
Delaware 41-1461110
------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3100 World Trade Center
30 East 7th Street
St. Paul, Minnesota 55101
--------------------------
(Address of Principal Executive Offices)
(Zip Code)
(651) 312-2222
------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
----------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 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
----
The number of shares of Class A Common Stock, $.01 par value, outstanding
at March 15, 1999 is 29,278,457.
<PAGE>
VIDEO UPDATE, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - April 30, 1998 and January 31, 1999 3
Consolidated Statements of Operations - Three Months
and Nine Months Ended January 31, 1998 and January 31, 1999 4
Consolidated Statements of Cash Flows - Nine Months Ended
January 31, 1998 and January 31, 1999 5
Notes to Consolidated Financial Statements - January 31, 1999 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
- ----------
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Video Update, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets
April 30, January 31,
1998 1999
------------- ---------------
<S> <C> <C>
(Unaudited)
Cash and cash equivalents $ 1,433 $ 696
Accounts receivable 4,737 4,098
Inventory 9,167 14,043
Video and game rental inventory -- net 97,734 96,009
Property and equipment -- net 69,720 67,138
Prepaid expenses 4,162 3,663
Income taxes receivable 2,430 307
Deferred income taxes 2,592 2,603
Goodwill and other intangibles -- net 85,360 83,385
Other assets 1,096 2,290
-------- --------
Total assets $278,431 $274,232
======== ========
Liabilities and Stockholders' Equity
Notes payable $104,488 $116,960
Accounts payable 39,045 46,042
Accrued expenses 12,841 9,948
Accrued rent 5,073 7,564
Accrued compensation 7,685 7,655
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.01 per share:
Authorized shares -- 5,000,000
Issued shares -- none - -
Class A Common Stock, par value $.01 per share:
Authorized shares -- 60,000,000
Issued and outstanding shares -- 29,278,457 293 293
at April 30,1998 and at January 31, 1999
Additional paid-in capital 117,641 116,645
Retained deficit (7,674) (28,904)
Foreign currency translation (961) (1,971)
-------- --------
Total stockholders' equity 109,299 86,063
-------- --------
Total liabilities and stockholders' equity $278,431 $274,232
======== ========
</TABLE>
See accompanying notes.
Note: The balance sheet at April 30, 1998 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
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<PAGE>
Video Update, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended January 31, Nine Months Ended January 31,
1998 1999 1998 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue $ 36,530 $ 60,161 $ 93,494 $168,816
Product sales 5,073 10,281 11,703 24,962
Service fees 179 250 522 791
-------- -------- -------- --------
41,782 70,692 105,719 194,569
Costs and expenses:
Store operating expenses 31,205 56,549 84,821 169,614
Selling, general and 3,326 5,483 8,948 16,590
administrative
Cost of product sales 3,095 6,241 6,946 16,340
Amortization of intangibles 626 1,621 1,867 4,528
-------- -------- -------- --------
38,252 69,894 102,582 207,072
-------- -------- -------- --------
Operating income (loss) 3,530 798 3,137 (12,503)
Interest expense (747) (2,967) (1,923) (8,954)
Other income 403 46 827 227
-------- -------- -------- --------
(344) (2,921) (1,096) (8,727)
-------- -------- -------- --------
Income (loss) before income taxes 3,186 (2,123) 2,041 (21,230)
Income tax expense 1,378 - 1,128 -
-------- -------- -------- --------
Net income (loss) $ 1,808 $ (2,123) $ 913 $(21,230)
======== ======== ======== ========
Net income (loss) per share-basic
and diluted $ 0.10 $ (0.07) $ 0.05 $ (0.73)
======== ======== ======== ========
</TABLE>
See accompanying notes.
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Video Update, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended January 31,
1998 1999
--------- ---------
Operating activities
<S> <C> <C>
Net income (loss) $ 913 $(21,230)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 31,505 65,767
Deferred income taxes 1,086 (11)
Changes in operating assets and liabilities, net
of acquisitions of businesses:
Accounts receivable 10 639
Inventory (663) (4,876)
Income taxes (1,627) 2,123
Other assets (2,230) (916)
Accounts payable 13,016 6,352
Accrued liabilities 2,764 (1,210)
Other operating activities - 24
------- --------
Net cash provided by operating activities 44,774 46,662
Investing activities
Purchase of video and game rental inventory (42,638) (50,964)
Purchase of property and equipment (14,312) (11,578)
Investment in businesses, net of cash (610) (525)
acquired
Payment of deficiency on stock guarantee (1,327) -
Other investing activities (177) -
------- --------
Net cash used in investing activities (59,064) (63,067)
Financing activities
Proceeds from notes payable 15,204 27,300
Payments on notes payable (1,914) (16,032)
Proceeds from sale lease-back - 5,000
Other financing activities - (600)
------- --------
Net cash provided by financing activities 13,290 15,668
------- --------
Decrease in cash and cash equivalents (1,000) (737)
Cash and cash equivalents at beginning of the period 2,424 1,433
------- --------
Cash and cash equivalents at end of the period $ 1,424 $ 696
======= ========
</TABLE>
See accompanying notes.
5 of 16
<PAGE>
VIDEO UPDATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended January 31, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending April 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended April 30, 1998.
Reclassification
Certain prior year items have been reclassified to conform with the fiscal
1999 presentation.
2. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 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 excludes 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, and when necessary, restated to
conform to the Statement 128 requirements.
The following table is a reconciliation of the basic and diluted earnings
per share computation:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended January 31, Ended January 31,
-------------------------- --------------------------
1998 1999 1998 1999
------------ ---------- ----------- -----------
(In thousands, except per share amounts)
Numerator:
- ---------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share--
net income (loss) available to common stockholders $ 1,808 $(2,123) $ 913 $(21,230)
======= ======= ======= ========
Denominator:
- -----------
Denominator for basic earnings per share--weighted-average shares
Class A common shares 18,105 29,278 18,105 29,278
Class B common shares 700 - 700 -
------- ------- ------- --------
Denominator for basic earnings per share 18,805 29,278 18,805 29,278
Effect of dilutive securities:
Contingent stock acquisition 177 - 177 -
------- ------- ------- --------
Dilutive potential common shares 177 - 177 -
------- ------- ------- --------
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed conversions 18,982 29,278 18,982 29,278
------- ------- ------- --------
Basic net earnings (loss) per share $ 0.10 $ (0.07) $ 0.05 $ (0.73)
======= ======= ======= ========
Diluted net earnings (loss) per share $ 0.10 $ (0.07) $ 0.05 $ (0.73)
======= ======= ======= ========
</TABLE>
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<PAGE>
3. Comprehensive Income
As of May 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (Statement 130). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of the Statement had no impact on the
Company's net loss or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity to be
included in other comprehensive income. Prior years' financial statements have
been reclassified to conform to the requirements of Statement 130. During the
three months ended January 31, 1998 and 1999, total comprehensive income (loss)
amounted to $1,136,000 and $(1,700,000), respectively; and during the nine
months ended January 31, 1998 and 1999, total comprehensive income (loss)
amounted to $52,000 and $ (22,240,000), respectively.
4. Income Tax Expense
The Company has estimated that its effective tax rate for fiscal year 1999
will be 0%. The Company has therefore used this rate in providing for income
taxes in the current quarter and nine months ended January 31, 1999. The
Company will continue to evaluate and estimate its effective tax rate at the end
of each interim period during fiscal 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's unaudited
consolidated financial statements and notes thereto appearing elsewhere herein.
Overview
The Company franchised its first store in January 1983 and opened its first
Company-owned store in September 1989. By July 1994, when the Company completed
its initial public offering, the Company had grown to 15 Company-owned stores
and 30 franchised stores. Subsequently, the Company substantially accelerated
its growth and as of January 31, 1999 operated 661 Company-owned stores in 32
states and five provinces in Canada, and had 66 franchised stores predominantly
in the United States. The majority of the Company's stores located in the United
States are superstores. Superstores are video specialty stores that carry more
than 7,500 rental units.
The Company generates revenues primarily from the rental of videos and
games, from the sale of products, and from service fees from its franchisees.
As reflected in the chart below, rental revenue at Video Update stores has
accounted for the substantial majority of the Company's revenues. The Company
expects that this trend will continue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------- -----------------------------------
1998 1999 1998 1999
------------- ------------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Rental revenue $ 36,530 $ 60,161 $ 93,494 $168,816
Product sales 5,073 10,281 11,703 24,962
Service fees 179 250 522 791
-------- -------- -------- --------
Total Revenues $ 41,782 $ 70,692 $105,719 $194,569
======== ======== ======== ========
</TABLE>
Overall revenues, including same store sales, did not meet management
expectations for the first nine months of fiscal 1999, due in significant part
to certain factors, including: (i) a significant number of Moovies locations not
yet performing to management's expectations for the period; and, (ii) the timing
advantage afforded by direct studio revenue sharing arrangements obtained by
some of the Company's largest competitors, including the Blockbuster
Entertainment division of Viacom, Inc. and Hollywood Entertainment Corporation.
7 of 16
<PAGE>
Management is continuing several actions intended to enhance prospects for
profitable revenue growth for fiscal 1999. The Company successfully converted
all Moovies stores by November 30, 1998. During the first nine months of fiscal
1999, the Company opened 13 new stores, closed 32 under-performing stores, and
performed significant conversions on seven other stores. The Company is now
obtaining inventory under five direct revenue sharing arrangements with major
motion picture studios and is pursuing additional direct revenue sharing
arrangements with other studios.
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>
Three Months Ended January 31, Nine Months Ended January 31,
--------------------------------- ---------------------------------
1998 1999 1998 1999
--------------- --------------- ---------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Rental revenue 87.4 % 85.1 % 88.4 % 86.8 %
Product sales 12.2 14.5 11.1 12.8
Service fees 0.4 0.4 0.5 0.4
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Store operating expenses 74.7 80.0 80.2 87.2
Selling, general and administrative 8.0 7.8 8.5 8.5
Cost of product sales 7.4 8.8 6.6 8.4
Amortization of intangibles 1.5 2.3 1.7 2.3
----- ----- ----- -----
Total cost and expenses 91.6 98.9 97.0 106.4
----- ----- ----- -----
Operating income (loss) 8.4 1.1 3.0 (6.4)
Other income (expense):
Interest expense (1.8) (4.2) (1.8) (4.6)
Other income 1.0 0.1 0.8 0.1
----- ----- ----- -----
Total other income (expense) (0.8) (4.1) (1.0) (4.5)
----- ----- ----- -----
Income (loss) before income taxes 7.6 (3.0) 2.0 (10.9)
Income tax expense 3.3 - 1.1 -
----- ----- ----- -----
Net income (loss) 4.3 % (3.0) % 0.9 % (10.9) %
====== ===== ===== =====
</TABLE>
Nine Months Ended January 31, 1998 Compared to Nine Months Ended January 31,
1999
Rental revenue. Rental revenue was approximately $93,494,000 and
--------------
$168,816,000, or 88.4% and 86.8% of total revenues for the nine months ended
January 31, 1998 and 1999, respectively. The increase in rental revenue of
$75,322,000 was derived primarily from the 266 video stores acquired from
Moovies in March 1998 and from a 2% increase in same store revenues. Rental
revenues did not meet management's expectations for the nine months, primarily
due to the conversion of the Moovies locations in several significant markets,
which was completed during the third 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 five direct revenue sharing
arrangements with
8 of 16
<PAGE>
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 $11,703,000 and
-------------
$24,962,000, or 11.1% and 12.8% of total revenues for the nine months ended
January 31, 1998 and 1999, respectively. The increase in product sales of
$13,259,000 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.
Service fees. Service fees were approximately $522,000 and $791,000, or
------------
0.5% and 0.4% of total revenues for the nine months ended January 31, 1998 and
1999, respectively.
Store operating expenses. Store operating expenses were approximately
------------------------
$84,821,000 and $169,614,000, or 80.2% and 87.2% of total revenues for the nine
months ended January 31, 1998 and 1999, respectively. The increase in store
operating expenses of $84,793,000 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) the timing advantage
resulting from 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 yet
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>
Nine Months Ended January 31, Percent of Revenue
1998 1999 1998 1999
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Cost of rental revenue $ 25,218 $ 52,909 23.9% 27.2%
Occupancy expenses 27,226 53,657 25.7% 27.6%
Compensation and related benefits 23,529 45,803 22.3% 23.5%
Furniture, fixtures, and equipment expenses 4,784 9,518 4.5% 4.9%
Other store operating expenses 4,064 7,727 3.8% 4.0%
-------- -------- ---- ----
Total Store Operating Expenses $ 84,821 $169,614 80.2% 87.2%
======== ======== ==== ====
</TABLE>
Cost of rental revenue was approximately $25,218,000 and $52,909,000, or
23.9% and 27.2% of total revenues for the nine months ended January 31, 1998 and
1999, 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 $27,691,000 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, which is subject to change based on the
Company's rate of expansion, revenue sharing arrangements, studio release
schedules and anticipated market demand.
Occupancy expenses were approximately $27,226,000 and $53,657,000, or 25.7%
and 27.6% of total revenues for the nine months ended January 31, 1998 and 1999,
respectively. The increase of approximately $26,431,000 was primarily due to the
Moovies locations acquired in March 1998.
Compensation and related benefits were approximately $23,529,000 and
$45,803,000, or 22.3% and 23.5% of total revenues for the nine months ended
January 31, 1998 and 1999, respectively. The increase of approximately
$22,274,000 was primarily due to the Moovies locations acquired in March 1998.
Selling, general and administrative. Selling, general and administrative
-----------------------------------
expenses were approximately $8,948,000 and $16,590,000, or 8.5% and 8.5% of
total revenues for the nine months ended January 31, 1998 and 1999,
respectively. The increase of approximately $7,642,000 was primarily due to (i)
additional 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 Company
anticipates that the
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<PAGE>
expense as a percentage of revenues will decline in the next year with the
Moovies locations now integrated into its operations.
Cost of product sales. Cost of product sales was approximately $6,946,000
---------------------
and $16,340,000, or 6.6% and 8.4% of total revenues for the nine months ended
January 31, 1998 and 1999. The cost of product sales as a percentage of total
product sales revenue was approximately 59.4% and 65.5% for fiscal 1998 and
1999, 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.
Amortization of intangibles. Amortization of intangibles was approximately
---------------------------
$1,867,000 and $4,528,000 for the nine months ended January 31, 1998 and 1999,
respectively. The increase was primarily attributable to the acquisition of
Moovies in March 1998.
Interest expense. Interest expense was approximately $1,923,000 and
----------------
$8,954,000, or 1.8% and 4.6% of total revenues for the nine months ended January
31, 1998 and 1999, respectively. The increase of $7,031,000 was primarily
attributable to interest on increased borrowings under the Company's Senior
Facility (as defined below).
Other income. Other income was approximately $827,000 and $227,000 for the
------------
nine months ended January 31, 1998 and 1999, respectively.
Liquidity and Capital Resources
The Company has funded its operations to date through cash from operations,
the proceeds of prior equity and debt offerings, borrowings under bank
facilities, trade credit and equipment leases. The Company's principal capital
requirements are for the opening and build out of new superstores and the
purchase of video and game rental inventory, each of which varies based on
market conditions, expansion plans and conversion of the acquired Moovies
stores.
At January 31, 1999, the Company had cash and cash equivalents of
approximately $696,000. The Company uses an unclassified balance sheet in its
financial statements, and as a result, does not classify its assets or
liabilities as current or noncurrent. If the Company were to use a classified
balance sheet, a portion of video and game rental inventories would be
classified as noncurrent because they are not assets that are reasonably
expected to be completely realized in cash or sold in one year. The acquisition
cost of these inventories, however, would be reflected in current liabilities.
The Company believes that classification of video and game rental inventories as
noncurrent assets would be misleading because it would not indicate the level of
assets expected to be converted into cash in the next year as a result of
rentals or sales of these videos and games.
For the nine months ended January 31, 1999 net cash provided by operating
activities was approximately $46,662,000. Net cash used in investment
activities was approximately $63,067,000 consisting primarily of approximately
$50,964,000 for the purchase of video and game rental inventory for existing and
new stores and approximately $11,578,000 for new and remodeled stores, and
conversion costs associated with acquired stores. Net cash generated from
financing activities was approximately $15,668,000 resulting primarily from
proceeds under the Company's Senior Facility (as defined below) and a
sale/leaseback arrangement.
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 (the "Senior Facility Lenders")
had extended it a $120 million credit/term loan facility (the "Senior
Facility") which was subsequently amended during the second and third quarters
of fiscal 1999. This Senior Facility replaced the Company's previous line of
credit. The Senior Facility, as amended in the second quarter, consists of the
following: (i) two term loans totaling $95.0 million; (ii) a $15.0 million
capital expenditure line; and, (iii) a $5.0 million revolving line, reduced from
$10.0 million. The Company borrowed the $95.0 million of the two term loans in
conjunction with the closing of the Moovies 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,
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<PAGE>
(iii) pay transaction fees and expenses relating to the Moovies merger of
approximately $10,000,000, (including legal fees, accounting fees, and
registration fees). The capital expenditure line is available to fund the
conversion of the acquired Moovies stores and integration costs, the opening of
new stores, working capital needs, and selected acquisitions. As of January 31,
1999, the Company had $15.0 million outstanding under this facility. The
revolving line is available for normal working capital needs. As of January 31,
1999; the Company had $5.0 million outstanding under this facility.
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 interbank Eurodollar rate
(approximately 7.75% and 4.88% per annum, respectively as of January 29, 1999)
plus an applicable margin rate that could range from 2.75% to 4.5%. Amounts
outstanding at January 31, 1999 had a weighted average rate of 9.35%.
The Senior Facility includes negative, affirmative and financial covenants
including, but not limited to, minimum pretax earnings, minimum free cash flow,
minimum net worth, maximum indebtedness, maximum leverage, minimum fixed charge
coverage, minimum revenue, 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.
As a result of its expected results for the first quarter of fiscal 1999,
the Company sought and obtained certain waivers under the Senior Facility for
the quarter ended July 31, 1998. 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) reduced the Senior Facility from $120 million to $115
million; (ii) revise 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%; and, (v) reprice warrants held by the bank
syndicate to a more current market price. As a result of its operations for the
second quarter of fiscal 1999, the Company was not in compliance with certain
financial covenants under the Senior Facility at the end of the second quarter
but has since received a waiver and is in compliance with the amended covenants
for the quarter ended January 31, 1999. In January and March 1999, the Company
and the Senior Facility Lenders amended the terms of the Senior Facility to,
among other things: (i) revise certain financial covenants; (ii) increase the
overall interest rate by 0.25%; and, (iii) defer the January 31, 1999 principal
payments to April 30, 1999. In connection with the waiver and amendments under
the Senior Facility, the Company has agreed to seek additional junior financing,
including but not limited to a subordinated debt financing, of at least $15
million in gross proceeds on or before May 31, 1999, with the proceeds of such
financing to be used for working capital and possible expansion. The Company is
working towards obtaining a commitment for such financing, the form and
structure of which must be satisfactory to the Senior Facility Lenders, but no
assurances can be given that such a financing can be completed: (i) on terms
that are satisfactory to the Company and the Senior Facility Lenders, or (ii) on
a timely basis, if at all. Failure to obtain the additional junior financing on
a timely basis could cause the Company to incur increased interest rates and
fees and to be in default under the Senior Facility. The Company intends to seek
additional deferrals of principal payments due April 30, 1999 under the Senior
Facility. Moreover, no assurances can be given that future waivers, deferrals,
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.
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.
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<PAGE>
During the remainder of fiscal 1999, the Company expects to continue its
focus on maximizing the operating efficiencies of its existing and previously
acquired locations and on completing the build out of new stores in locations
for which 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 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. In addition
to such traditional product purchase relationships, the Company also recently
entered into five direct revenue sharing arrangements with major motion picture
studios, which agreements allow the Company to obtain videocassette rental
product directly from the studios under arrangements that involve a sharing of
revenues over the first months of the release of a movie title on videocassette.
The Company expects that such arrangements will allow its locations to offer a
greater number of titles and copies of new releases than it would have obtained
under traditional inventory purchasing arrangements, allowing it to lower the
cost of inventory and compete better with larger competitors as well as
independently owned locations. Given that the Company has recently entered into
such revenue sharing arrangements, no assurances can be given as to the impact
on the Company's operations or that such arrangements will allow the Company to
achieve its intended results.
Assuming the Company is able to maintain a satisfactory relationship with
its selected vendors and its bank lenders, the Company expects that cash from
operations, trade credits, equipment leases, available revenue sharing
arrangements, and available borrowing 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 store openings
or build outs currently in progress, disappointing operating results,
unavailability under the Senior Facility as a result of disappointing operating
results, or unanticipated cash needs or opportunities. In fact, in connection
with the waiver and amendments under the Senior Facility, the Company has agreed
to seek additional junior financing, including but not limited to a subordinated
debt financing, of at least $15 million in gross proceeds on or before May 31,
1999, with the proceeds of such financing to be used for working capital and
possible expansion. The Company is working towards obtaining a commitment for
such a financing, the form and structure of which must be satisfactory to the
Senior Facility Lenders, but no assurances can be given that such a financing
can be completed: (i) on terms that are satisfactory to the Company and the
Senior Facility Lenders, or (ii) on a timely basis, if at all. Failure to obtain
the additional junior financing on a timely basis could cause the Company to
incur increased interest rates and fees and to be in default under the Senior
Facility. Moreover, 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.
Daniel A. Potter, the Company's Chief Executive Officer and John Bedard,
the Company's President, 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.
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 (through April 30, 1998) 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 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 these executives, subject to any required
approval of the Company's bank lenders. If such bonuses are not effected, the
Recourse Notes will remain outstanding.
Reference to Private Securities Litigation Reform Act: Statements made by
the Company that are not historical facts are forward looking statements that
involve risks and uncertainties. Actual results could differ
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<PAGE>
materially from those expressed or implied in forward looking statements. All
such forward looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. Important factors that could
cause financial performance to differ materially from past results and from
those expressed or implied in this document include, without limitation, the
risks of acquisition of businesses (including limited knowledge of the
businesses acquired and misrepresentations by sellers), including the
acquisition of Moovies, changes in business strategy or development plans, new
store openings, availability of products, availability of financing,
competition, management, ability to manage growth, loss of customers, weather
(particularly on weekends and holidays), consumer acceptance of new release
videocassette titles, and a variety of other factors. Further information on
these and other risks is included in the Company's Annual Report on Form 10-K
for the year ended April 30, 1998.
Year 2000 Compliance
The year 2000 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 year 2000 compliance efforts and has identified all computer-
based systems and applications (including embedded systems) the Company uses in
its operations that might not be year 2000 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 70%
complete. The Company estimates that all critical systems and applications will
be year 2000 compliant by June 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' year 2000 compliance. The Company has been contacting such outside
parties and attempting to seek assurances that such parties will be year 2000
compliant. The Company does not believe that its relationships 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 year 2000 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 year 2000 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 year 2000 related systems failure. The
Company expects to have a comprehensive contingency plan established by October
1999. If the Company's systems are not sufficiently year 2000 compliant 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 January 31, 1999, the Company has expended approximately $371,200
to address year 2000 compliance issues. The Company estimates that it will
incur an additional $2,323,900 for a total of approximately $2,695,100 to
address year 2000 compliance issues, which includes the estimated costs of all
modifications, testing and consultant fees.
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<PAGE>
Inflation
To date, inflation has not had a material effect on the Company's business.
The Company anticipates that its business will be affected by general economic
trends. Although the Company has not operated during a period of high inflation,
it believes that it would generally be able to pass increased costs resulting
from inflation on to customers.
Seasonality and Quarterly Fluctuations
The video rental industry generally experiences revenue declines in April
and May, due in part to the change to Daylight Savings Time and to improved
weather, and in September and October, due in part to school openings and the
introduction of new network and cable television programs.
The Company's video and game rental business may be affected by other
factors, including acquisitions by the Company of existing video stores,
additional and existing competition, marketing programs, weather, special or
unusual events, variations in the number of superstore openings, and other
factors that may affect retailers in general.
The Company depends significantly on availability and consumer acceptance
of new release videocassette titles available for rental. To the extent that
available new release titles fail to stimulate consumer interest and retail
traffic, operating results could be materially adversely affected.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. 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 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
Company believes it has meritorious grounds for its appeal, which is currently
pending. 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.
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<PAGE>
The Company has filed a renewed motion to dismiss. 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).
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's motion for summary judgment on
the Company's antitrust claims was denied last month, with discovery in the
matter now set for at least the next six months. The federal court also
rejected Rentrak's motion for $4.4 million in fees and interest, which had been
interposed as a counterclaim by Rentrak after the Company initiated its
antitrust claims. Rentrak has indicated that it intends to renew its motions
following discovery and to pursue its claims against the Company. 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)
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.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits. The following exhibits are filed herewith:
---------
Exhibit No. Title
----------- -----
10.1 Third Amendment to Credit Agreement
10.2 Fourth Amendment to Credit Agreement
10.3 Fifth Amendment to Credit Agreement
27 Financial Data Schedule
B. Reports on Form 8-K.
--------------------
A report on Form 8-K dated January 25, 1999 was filed by the
Company on February 3, 1999.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIDEO UPDATE, INC.
Date: March 17, 1999: By: /s/Daniel A. Potter
-----------------------------------------
Daniel A. Potter,
Chief Executive Officer and
Chairman of the Board of Directors
Date: March 17, 1999: By: /s/Dale E. Lauwagie
-----------------------------------------
Dale E. Lauwagie
Chief Financial Officer
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<PAGE>
Exhibit No. 10.1
THIRD AMENDMENT
---------------
THIRD AMENDMENT (this "Amendment"), dated as of November 16, 1998, among
VIDEO UPDATE, INC., a Delaware corporation (the "Borrower"), the lending
institutions party to the Credit Agreement referred to below (the "Banks") and
BANQUE PARIBAS, as Agent (in such capacity, the "Agent"). Unless otherwise
indicated, all capitalized terms used herein and not otherwise defined shall
have the respective meanings provided such terms in the Credit Agreement
referred to below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of March 6, 1998 (as amended, modified or supplemented to
the date hereof, the "Credit Agreement"); and
WHEREAS, subject to and on the terms and conditions set forth in this
Amendment, the parties hereto wish to amend the Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
I. Amendments to Credit Agreement.
------------------------------
1. Section 9.01 of the Credit Agreement is hereby amended by (i)
deleting the word "and" appearing at the end of clause (x) of said Section, (ii)
redesignating clause (xi) of said Section as clause (xii) and (iii) inserting
the following new clause (xi) immediately after clause (x) of said Section:
"(xi) Liens arising pursuant to the Permitted Sale-Leaseback
Transaction, so long as such Liens do not attach to any assets of the
Borrower or any of its Subsidiaries other than those which are the
subject of the Permitted Sale-Leaseback Transaction; and".
2. Section 9.02 of the Credit Agreement is hereby amended by (i)
deleting the word "and" appearing at the end of clause (x) of said Section, (ii)
deleting the period at the end of clause (xi) of said Section and inserting the
text "; and" in lieu thereof and (iii) inserting the following new clause (xii)
at the end of the Section:
"(xii) the Borrower and its Subsidiaries may effect the Permitted
Sale-Leaseback Transaction in accordance with the definition
thereof.".
3. Section 9.05 of the Credit Agreement is amended by (i) deleting
the word "and" appearing at the end of clause (v) of said Section, (ii) deleting
the period appearing at the end of clause (vi) of said Section and inserting the
text "; and" in lieu thereof and (iii) inserting the following new clause (vii)
at the end of said Section:
"(vii) Indebtedness of the Borrower evidenced by Capitalized Lease
Obligations arising from the Permitted Sale-Leaseback Transaction, so
long as (x) the Liens arising as a result thereof are permitted
pursuant to
<PAGE>
Section 9.01(xi) and (y) the aggregate outstanding amount
of such Indebtedness does not exceed $5,000,000.".
4. Section 11 of the Credit Agreement is amended by inserting the
following definition in appropriate alphabetical order in said Section:
"Permitted Sale-Leaseback Transaction" shall mean the sale by
Borrower and/or any of its Subsidiaries of certain equipment and other
property to a third party financial institution which is then leased
back to the Borrower or any of its Subsidiaries by such financial
institution, provided that (i) the proceeds of the sale shall be
--------
entirely cash and in an amount at least equal to 95% of the net book
value of, and 70% of the aggregate amount expended by the Borrower and
its Subsidiaries in acquiring, such equipment and other property, (ii)
the aggregate amount of all proceeds received by the Borrower and its
Subsidiaries from the sale of such equipment and other property shall
not exceed $5,000,000 and (iii) the documentation governing such sale-
lease-back arrangement shall be in form and substance satisfactory to
the Agent and the Required Banks.
5. Notwithstanding anything to the contrary contained in Section
4.02(A)(g) of the Credit Agreement, the Net Sale Proceeds of assets sold by the
Borrower and its Subsidiaries pursuant to the Permitted Sale Leaseback
Transaction shall not be required to be applied as provided in Section 4.02(B)
of the Credit Agreement, so long as 100% of such Net Sale Proceeds are utilized
by the Borrower for purposes previously disclosed to the Agent and the Banks.
II. Miscellaneous.
-------------
1. In order to induce the Banks to enter into this Amendment, the
Borrower hereby (i) makes each of the representations, warranties and agreements
contained in Section 7 of the Credit Agreement and (ii) represents and warrants
that there exists no Default or Event of Default, in each case on the Third
Amendment Effective Date (as defined below), both before and after giving effect
to this Amendment.
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the "Third
Amendment Effective Date") when the Borrower and the Banks constituting the
Required Banks shall have signed a copy hereof (whether the same or different
copies) and shall have delivered
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<PAGE>
(including by way of facsimile transmission) the same to White & Case LLP, 1155
Avenue of the Americas, New York, NY 10036 Attention: David Kizner (facsimile
number 212-354-8113).
6. From and after the Third Amendment Effective Date, all references
to the Credit Amendment in the Credit Agreement and the other Credit Documents
shall be deemed to be references to the Credit Agreement as modified hereby.
* * *
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter
--------------------------------------
Name: Daniel A. Potter
Title: Chairman and CEO
BANQUE PARIBAS,
Individually and as Agent
By: /s/ Donald J. Ercole
-------------------------------------
Name: Donald J. Ercole
Title: Managing Director
By: /s/ Walter Bellingham
--------------------------------------
Name: Walter Bellingham
Title: Vice President
CAROLINA FIRST BANK
By: /s/ Charles D. Chamberlain
--------------------------------------
Name: Charles D. Chamberlain
Title: Executive Vice President
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<PAGE>
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc., Its
Agent/Manager
By: /s/ James W. Wilson
--------------------------------------
Name: James W. Wilson
Title: Senior Vice President
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By: /s/ John M. Johnson
--------------------------------------
Name: John M. Johnson
Title: Authorized Signatory
PPM AMERICA, INC. as agent, on behalf of
Jackson National Life Insurance Company
By: /s/ Michael DiRe
--------------------------------------
Name: Michael DiRe
Title: Managing Director
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
--------------------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
4 of 5
<PAGE>
ML CLO XIX STERLING (CAYMEN) LTD.
By: Sterling Asset Manager, as its
Investment Advisor
By: /s/ Louis A. Pistecchia
--------------------------------------
Name: Louis A. Pistecchia
Title: Executive Vice President
KZH STERLING LLC
By: /s/ Virginia Conway
--------------------------------------
Name: Virginia Conway
Title: Authorized Agent
5 of 5
<PAGE>
Exhibit No. 10.2
FOURTH AMENDMENT
----------------
FOURTH AMENDMENT (this "Amendment"), dated as of January 21, 1999,
among VIDEO UPDATE, INC., a Delaware corporation (the "Borrower"), the lending
institutions party to the Credit Agreement referred to below (the "Banks") and
PARIBAS, as Agent (in such capacity, the "Agent"). Unless otherwise indicated,
all capitalized terms used herein and not otherwise defined shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of March 6, 1998 (as amended, modified or supplemented to
the date hereof, the "Credit Agreement"); and
WHEREAS, subject to and on the terms and conditions set forth in this
Amendment, the parties hereto wish to amend the Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
I. Amendments to Credit Agreement.
------------------------------
1. Section 1.08(d) of the Credit Agreement is hereby amended by (i)
deleting the text "quarterly in arrears on each Quarterly Payment Date"
appearing in said Section, (ii) inserting the text "monthly in arrears on the
last Business Day of each month" in lieu thereof, (iii) deleting the text "three
months, on each date occurring at three" and (iv) inserting the text "one month,
on each date occurring at one" in lieu thereof.
2. Section 1.09(vi) of the Credit Agreement is hereby amended by inserting
the text "in excess of one month" between the words "Period" and "may" and by
inserting the following text at the end of said Section "provided that the
--------
Borrower shall be permitted to select an Interest Period of six months on the
Fourth Amendment Effective Date with respect to A Term Loans and B Term Loans
maintained as Eurodollar Loans;"
3. Notwithstanding anything to the contrary contained in Section
4.02(A)(b) of the Credit Agreement, the mandatory repayment of A Term Loans
otherwise required to be made on January 31, 1999 pursuant to said Section shall
instead be required to be made on March 12, 1999, so long as at all times after
the Fourth Amendment Effective Date (as defined below) and prior to March 12,
1999 the Borrower is working in good faith and cooperating with Arthur Andersen
LLP ("Andersen") in connection with Andersen's engagement to perform consulting
services with respect to the Borrower and its Subsidiaries (the "Andersen
Engagement"), as determined by the Agent in its sole discretion.
4. Notwithstanding anything to the contrary contained in Section
4.02(A)(c) of the Credit Agreement, the mandatory repayment of B Term Loans
otherwise required to be made on January 31, 1999 pursuant to said Section shall
instead be required to be made on March 12, 1999, so long as at all times after
the Fourth Amendment Effective Date and prior to March 12, 1999 the Borrower is
working in good faith and cooperating with Anderson in connection with the
Andersen Engagement.
<PAGE>
5. Section 8 of the Credit Agreement is hereby amended by inserting the
following new Section 8.21 at the end of said Section:
"8.21 Engagement of Investment Banking Advisor. The
----------------------------------------
Borrower shall have engaged an investment banking advisor acceptable
to the Agent and the Required Banks to evaluate the Borrower's options
for raising additional capital and shall have received advice and
evaluations from such investment banking advisor in scope, form and
substance acceptable to the Agent and the Required Banks on or prior
to March 12, 1999."
6. Section 7 of the Credit Agreement is hereby amended by inserting
the following new Section 7.30 at the end of said Section:
"7.30 Updated Schedules to Credit Documents. The updated
-------------------------------------
schedules to the Credit Documents delivered pursuant to Section 5(ii) of
Part II of the Fourth Amendment are true and correct in all material
respects as of the Fourth Amendment Effective Date and accurately
present in all material respects all information which was originally
required to be scheduled pursuant to the relevant Credit Document on the
Initial Borrowing Date, but modified to reflect the addition of any
Credit Parties, and any changes thereto which occurred, after the
Initial Borrowing Date and on or prior to the Fourth Amendment Effective
Date."
7. Section 11.01 of the Credit Agreement is hereby amended by (i) deleting
the definition of "Applicable Margin" appearing in Section 11.01 of the Credit
Agreement and (ii) inserting the following new definitions in said Section in
appropriate alphabetical order:
"Applicable Margin" shall mean the percentage per annum equal to (I) at
any time prior to the Initial Compliance Date, (i) in the case of Revolving
Loans, Capital Expenditure Loans and A Term Loans maintained as (x)
Eurodollar Loans, 4.25% and (y) Base Rate Loans, 3.25%, (ii) in the case of
B Term Loans maintained as (x) Eurodollar Loans, 4.50% and (y) Base Rate
Loans, 3.50% and (iii) in the case of Swingline Loans, 3.25% and (II)
thereafter, (i) in the case of Revolving Loans, Capital Expenditure Loans
and A Term Loans maintained as (x) Eurodollar Loans, 3.75% and (y) Base
Rate Loans, 2.75%, (ii) in the case of B Term Loans maintained as (x)
Eurodollar Loans, 4.00% and (y) Base Rate Loans, 3.00% and (iii) in the
case of Swingline Loans, 2.75%.
"Fourth Amendment" shall mean the Fourth Amendment to the Agreement,
dated as of January 21, 1999.
"Fourth Amendment Effective Date" shall have the meaning provided in
the Fourth Amendment.
8. Notwithstanding anything to the contrary contained in Section 13.01 of
the Credit Agreement, the Borrower hereby agrees to pay all fees, costs,
expenses and other amounts owing to Andersen in connection with the Andersen
Engagement not paid by Paribas under the terms of the definitive engagement
letter to be entered into in connection with the Andersen Engagement in form and
substance mutually acceptable to the Borrower and the Banks (the "Engagement
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<PAGE>
Letter") and to indemnify the Banks and the other Indemnitees (other than
Paribas to the extent expressly provided in the Engagement Letter) for any and
all liabilities, obligations, costs, expenses and disbursements of any kind or
nature that may at any time be incurred by, imposed on or assessed against the
Banks or such other Indemnitees with respect to or resulting from the Andersen
Engagement.
9. Each of the Credit Parties, on its own behalf and on behalf of its
successors and assigns, hereby waives, releases and discharges the Agent and
each Bank and all of the affiliates of the Agent and each Bank, and all of the
directors, officers, employees, attorneys and agents of the Agent and each Bank,
from any and all claims, demands, actions or causes of action (known and
unknown) arising out of or in any way relating to the Credit Documents and any
documents, agreements, dealings or other matters connected with the Credit
Documents, in each case to the extent arising (x) on or prior to the Fourth
Amendment Effective Date or (y) out of, or relating to, actions, dealings or
matters occurring on or prior to the Fourth Amendment Effective Date. The
waivers, releases, and discharges in this Section 9 shall be effective
regardless of whether the conditions to this Amendment are satisfied and
regardless of any other event that may occur or not occur after the Fourth
Amendment Effective Date.
II. Miscellaneous.
-------------
1. In order to induce the Banks to enter into this Amendment, the Borrower
hereby makes each of the representations, warranties and agreements contained in
Section 7 of the Credit Agreement, in each case on the Fourth Amendment
Effective Date, both before and after giving effect to this Amendment, subject
to the acknowledgment set forth in the second sentence of Section 2 of Part II
of this Amendment.
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document. In connection with the foregoing, the
Borrower acknowledges and agrees that an Event of Default under Section 10.03(i)
of the Credit Agreement is in existence as a result of its failure to comply
with one or more of the financial covenants contained in the Credit Agreement,
both before and after giving effect to this Amendment, and nothing contained in
this Amendment shall be construed as a waiver of such Event of Default.
3. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
5. This Amendment shall become effective on the date (the "Fourth
Amendment Effective Date") when (i) the Borrower, the Banks constituting the
Required Banks, each Bank with outstanding A Term Loans and each Bank with
outstanding B Term Loans shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of facsimile
transmission) the same to White & Case LLP, 1155 Avenue of the Americas, New
York, NY 10036 Attention: David Kizner (facsimile number 212-354-8113) and (ii)
the Borrower shall have delivered updated Schedules III, VIII, X and XV to the
Credit Agreement, Annexes A, B, C, D, E, F and G to the U.S. Security Agreement,
Schedules A, B, C
3 of 12
<PAGE>
and D to each Canadian Security Agreement, Annexes A and B to
the U.S. Pledge Agreement and Schedule A to the Canadian Pledge Agreement, in
each case modified to reflect the addition of any Credit Parties, and any
changes thereto which occurred , after the Initial Borrowing Date and on or
prior to the Fourth Amendment Effective Date.
6. By executing and delivering a copy hereof, each Credit Party hereby
agrees that all Loans shall be (and are) fully guaranteed pursuant to the
Subsidiaries Guaranty in accordance with the terms and provisions thereof and
shall be (and are) fully secured pursuant to the Security Documents.
7. From and after the Fourth Amendment Effective Date, all references to
the Credit Amendment in the Credit Agreement and the other Credit Documents
shall be deemed to be references to the Credit Agreement as modified hereby.
* * *
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
VIDEO UPDATE, INC.
By: /s/Daniel A. Potter
--------------------------------
Name: Daniel A. Potter
Title: Chairman & CEO
BANQUE PARIBAS,
Individually and as Agent
By: /s/Donald J. Ercole
--------------------------------
Name: Donald J. Ercole
Title: Managing Director
By: /s/Edward Irwin
--------------------------------
Name: Edwin Irwin
Title: Director
CAROLINA FIRST BANK
By: /s/Charles D. Chamberlain
--------------------------------
Name: Charles D. Chamberlain
Title: Executive Vice President
4 of 12
<PAGE>
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By: /s/ John G. Taylor
----------------------------------
Name: John G. Taylor
Title: Senior Associate
By: /s/ Scott Kray
----------------------------------
Name: Scott Kray
Title: Vice President
FIRST SOURCE FINANCIAL LLP
By: First Source Fiancial, Inc., its Agent
By: /s/ James W. Wilson
----------------------------------
Name: James W. Wilson
Title: Senior Vice President
FLEET NATIONAL BANK
By: /s/ Michael F. O'Neill
----------------------------------
Name: Michael F. O'Neill
Title: Senior Vice President
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By: /s/ John M. Johnson
----------------------------------
Name: John M. Johnson
Title: Authorized Signatory
5 of 12
<PAGE>
PPM AMERICA, INC., as attorneys-in fact, on
behalf of Jackson National Life Insurance
Company
By: /s/ Michael DiRe
---------------------------------
Name: Michael DiRe
Title: Managing Director
BOEING CAPITAL CORPORATION
By: /s/ David A. Nelson
----------------------------------
Name: David A. Nelson
Title: Special Credits Officer
KEY CORPORATE CAPIRAL, INC.
By: /s/ Marvin S. Kodish
----------------------------------
Name: Marvin S. Kodish
Title: Designated Signer
PARIBAS CAPITAL FUNDING LLC
By: /s/ M.S. Alexander
----------------------------------
Name: M.S. Alexander
Title: Director
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
----------------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
6 of 12
<PAGE>
ML CLO XIX STERLING (CAYMEN) LTD.
By: Sterling Asset Manager, as its Investment
Advisor
By: /s/Louis A. Pistecchia
----------------------------------
Name: Louis A. Pistecchia
Title: Executive Vice President
KZH STERLING LLC
By: /s/ Virginia Conway
---------------------------------
Name: Virginia Conway
Title: Authorized Agent
Each of the undersigned, each being a Subsidiary Guarantor under, and
as defined in, the Credit Agreement referenced in the foregoing Fourth
Amendment, hereby consents to the entering into of the Fourth Amendment, and
agrees to the provisions thereof (including without limitation, Sections 6 and 7
of Part II thereof).
MOOVIES, INC.
By: /s/Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
TINSELTOWN VIDEO, INC.
By: /s/Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
7 of 12
<PAGE>
WILLIAMS VIDEO, INC.
By: /s/ Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF THE CAROLINAS, INC.
By: /s/ Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF GEORGIA, INC.
By: /s/ Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF IOWA, INC.
By: /s/ Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF MICHIGAN, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
8 of 12
<PAGE>
MOVIE WAREHOUSE FRANCHISE SYSTEMS, INC.
By: /s/ Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
E.C.6., INC.
By: /s/ Daniel A. Potter
--------------------------------
Name: Daniel A. Potter
Title: President
SONI, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
PQ3, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
SNO, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
9 of 12
<PAGE>
GBO, INC.
By: /s/ Daniel A. Potter
----------------------------------
Name: Daniel A. Potter
Title: President
D-SKIPPY, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
DCO, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
PTO, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
THE MOVIE STORE, INC. #2
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
10 of 12
<PAGE>
THE MOVIE STORE III, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
ALPHARETTA MEDIA ASSOCIATES, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
VIDEO UPDATE CANADA INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
11 of 12
<PAGE>
24 HOUR ENTERTAINMENT GROUP LTD.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
24 HOUR ENTERTAINMENT LEASING LTD.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
1137239 ONTARIO LIMITED
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
RIO MEDIA ASSOCIATES, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
PIC-A-FLICK OF GREENVILLE, INC.
By: /s/ Daniel A. Potter
---------------------------------
Name: Daniel A. Potter
Title: President
12 of 12
<PAGE>
Exhibit 10.3
FIFTH AMENDMENT AND WAIVER
--------------------------
FIFTH AMENDMENT AND WAIVER (this "Amendment"), dated as of March 10,
1999, among VIDEO UPDATE, INC., a Delaware corporation (the "Borrower"), the
lending institutions party to the Credit Agreement referred to below (the
"Banks") and PARIBAS, as Agent (in such capacity, the "Agent"). Unless otherwise
indicated, all capitalized terms used herein and not otherwise defined shall
have the respective meanings provided such terms in the Credit Agreement
referred to below.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agent are parties to a
Credit Agreement, dated as of March 6, 1998 (as amended, modified or
supplemented to the date hereof, the "Credit Agreement"); and
WHEREAS, subject to and on the terms and conditions set forth in
this Amendment, the parties hereto wish to amend the Credit Agreement and the
Banks wish to grant certain waivers to the Credit Agreement, in each case as
herein provided;
NOW, THEREFORE, it is agreed:
I. Amendments to Credit Agreement.
1. Notwithstanding anything to the contrary contained in Section
4.02(A)(b) of the Credit Agreement, the mandatory repayment of A Term Loans
otherwise required to be made on March 12, 1999 pursuant to said Section (as
modified by the Fourth Amendment) shall instead be required to be made on April
30, 1999.
2. Notwithstanding anything to the contrary contained in Section
4.02(A)(c) of the Credit Agreement, the mandatory repayment of B Term Loans
otherwise required to be made on March 12, 1999 pursuant to said Section (as
modified by the Fourth Amendment) shall instead be required to be made on April
30, 1999.
3. Section 8.21 of the Credit Agreement is hereby amended by
deleting said Section in its entirety and inserting the following new Section
8.21 in lieu thereof:
"8.21 Forecasts and Other Analyses. On or prior to April 15, 1999,
the Borrower shall deliver to the Agent and each of the Banks (x) a
comprehensive forecast of the businesses of the Borrower and its Subsidiaries
and (y) an analysis and forecast for each store of the Borrower and each of its
Subsidiaries, all of which forecasts and analyses shall be in form and substance
satisfactory to the Agent and the Required Banks."
4. Section 9.09 of the Credit Agreement is hereby amended by
deleting said Section in its entirety and inserting the following new Section
9.09 in lieu thereof.
"9.09 Fixed Charge Coverage Ratio. The Borrower will not permit the
Fixed Charge Coverage Ratio for any period of four consecutive fiscal
quarters
<PAGE>
(or, if shorter, the period beginning on November 1, 1998 and ending on
the last day of a fiscal quarter of the Borrower ended on or after January
31, 1999, in each case taken as one accounting period, ending on a date
set forth below to be less than the ratio set forth opposite such date:
Fiscal Quarter Ended Ratio
-------------------- -----
January 31, 1999 0.60:1.0
Last day of each fiscal quarter
of the Borrower thereafter 1.20:1.0".
5. Section 9.10 of the Credit Agreement is hereby amended by (i)
deleting the date "August 1, 1998" appearing in the parenthetical in said
Section and inserting the date "November 1, 1998" in lieu thereof, (ii) deleting
the date "October 31, 1998" appearing in the parenthetical in said Section and
inserting the date "January 31, 1999" in lieu thereof and (iii) deleting the
ratio "3.20:1.0" appearing in the table in said Section opposite the fiscal
quarter ended January 31, 1999 and inserting the ratio "1.50:1.0" in lieu
thereof.
6. Section 9.11 of the Credit Agreement is hereby amended by (i)
deleting the date "August 1, 1998" appearing in the parenthetical in said
Section and inserting the date "November 1, 1998" in lieu thereof, (ii) deleting
the date "October 31, 1998" appearing in the parenthetical in said Section and
inserting the date "January 31, 1999" in lieu thereof and (iii) deleting the
ratio "4.80:1.0" appearing in the table in said Section opposite the fiscal
quarter ended January 31, 1999 and inserting the ratio "6.00:1.0" in lieu
thereof.
7. Notwithstanding anything to the contrary contained in Section
9.12 of the Credit Agreement or elsewhere in the Credit Agreement, the Borrower
will not be required to comply with the requirements of said Section 9.12 for
the period from and including November 1, 1998 to and including April 30, 1999.
8. Section 9.13 of the Credit Agreement is hereby amended (i)
deleting the date "August 1, 1998" appearing in the parenthetical in said
Section and inserting the date "November 1, 1998" in lieu thereof, (ii) deleting
the date "October 31, 1998" appearing in the parenthetical in said Section and
inserting the date "January 31, 1999" in lieu thereof and (iii) deleting the
amount "$56,100" appearing in the table in said Section opposite the fiscal
quarter ended January 31, 1999 and inserting the amount "$26,500" in lieu
thereof.
9. Section 9.14 of the Credit Agreement is hereby amended by (i)
deleting the date "August 1, 1998" appearing in the parenthetical in said
Section and inserting the date "November 1, 1998" in lieu thereof, (ii) deleting
the date "October 31, 1998" appearing in the parenthetical in said Section and
inserting the date "January 31, 1999" in lieu thereof and (iii) deleting the
amount "$18,325" appearing in the table in said Section opposite the fiscal
quarter ended January 31, 1999 and inserting the amount "$7,600" in lieu
thereof.
10. The Banks hereby waive (i) compliance by the Borrower with the
financial covenants contained in Sections 9.09, 9.10, 9.11, 9.12, 9.13 and 9.14
of the Credit Agreement for (and only for) the fiscal quarter of the Borrower
ending October 31, 1998 and (ii) any Default or Event of Default that may have
existed solely as a result of the Borrower's failure to comply
2 of 12
<PAGE>
with the financial covenants contained in Sections 9.09, 9.10, 9.11, 9.12, 9.13
and 9.14 of the Credit Agreement for (and only for) the fiscal quarter of the
Borrower ending October 31, 1998.
11. The Banks hereby waive (i) compliance by the Borrower with the
covenants contained in Sections 8.20(c) and 9.20 of the Credit Agreement for
(and only for) the monthly period ending January 31, 1999 and (ii) any Default
or Event of Default that may have existed solely as a result of the Borrower's
failure to comply with the covenants contained in Sections 8.20(c) and 9.20 of
the Credit Agreement for (and only for) the monthly period ending January 31,
1999.
12. The definition of "Pro Forma Basis" appearing in Section 11.01
of the Credit Agreement is hereby amended by deleting each reference to "August
1, 1998" appearing in clause (iii) of said definition and inserting the date
"November 1, 1998" in lieu thereof.
13. Section 11.01 of the Credit Agreement is hereby amended by
inserting the following new definitions in said Section in appropriate
alphabetical order:
"Fifth Amendment" shall mean the Fifth Amendment to this Agreement,
dated as of March 10, 1999.
"Fifth Amendment Effective Date" shall have the meaning provided in
the Fifth Amendment.
14. Section 13.12(a) of the Credit Agreement is hereby amended by
(i) inserting the text "(it being understood that additional extensions of
credit made on a super-priority basis (i.e., on a basis that provides priority
payment rights to holders of indebtedness evidencing such credit extensions
vis-a-vis the holders of the other Obligations hereunder or provides for
security for such credit extensions on a priority lien basis (rather than a pari
passu basis with all other Obligations)) shall not constitute a release of
Collateral for purposes of this clause (ii))" immediately after the text "Credit
Document)" appearing in clause (ii) of the first proviso to said Section and
(ii) inserting the text "release any portion of the Collateral (except in
connection with a sale or other disposition of Collateral permitted by Section
9.02 of this Agreement as in effect on the Fifth Amendment Effective Date) (it
being understood and agreed that additional extensions of credit made on a
super-priority basis (i.e., on a basis that provides priority payment rights to
holders of indebtedness evidencing such credit extensions vis-a-vis the holders
of the other Obligations hereunder or provides for security for such credit
extensions on a priority lien basis (rather than a pari passu basis with all
other Obligations)) shall constitute a release of Collateral for (and only for)
purposes of this clause (o)), or" immediately after the text "without the
consent of the Supermajority Banks," appearing in clause (o) of the second
proviso to said Section.
15. Each of the Credit Parties, on its own behalf and on behalf of
its successors and assigns, hereby waives, releases and discharges the Agent and
each Bank and all of the affiliates of the Agent and each Bank, and all of the
directors, officers, employees, attorneys and agents of the Agent, each Bank and
such affiliates, from any and all claims, demands, actions or causes of action
(known and unknown) arising out of or in any way relating to the Credit
Documents and any documents, agreements, dealings or other matters connected
with the Credit Documents, in each case to the extent arising (x) on or prior to
the Fifth Amendment Effective Date or (y) out of, or relating to, actions,
dealings or matters occurring on or prior to the Fifth
3 of 12
<PAGE>
Amendment Effective Date. The waivers, releases, and discharges in this Section
15 shall be effective regardless of whether the conditions to this Amendment are
satisfied and regardless of any other event that may occur or not occur after
the Fifth Amendment Effective Date.
II. Miscellaneous.
1. In order to induce the Banks to enter into this Amendment, the
Borrower hereby (i) makes each of the representations, warranties and agreements
contained in Section 7 of the Credit Agreement (other than, in the case of
representations made by the Borrower immediately prior to the effectiveness of
this Amendment, the representation contained in the last sentence of Section
7.05(a)), in each case on the Fifth Amendment Effective Date, both before and
after giving effect to this Amendment, and (ii) represents and warrants that no
Default or Event of Default is in existence on the Fifth Amendment Effective
Date, after giving effect to this Amendment.
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the "Fifth
Amendment Effective Date") when (i) the Borrower shall have paid to the Agent
and the Banks all costs, fees and expenses (including, without limitation, legal
fees and expenses of White & Case LLP) payable to the Agent and the Banks to the
extent then due, (ii) each of the Borrower and the Agent shall have executed and
delivered a side letter relating to the Fifth Amendment in form and substance
satisfactory to the Agent and the Banks and (iii) each of the Borrower and each
of the Banks shall have signed a copy hereof (whether the same or different
copies) and shall have delivered (including by way of facsimile transmission)
the same to White & Case LLP, 1155 Avenue of the Americas, New York, New York
10036 Attention: David Kizner (facsimile number 212-354-8113).
6. By executing and delivering a copy hereof, each Credit Party
hereby agrees that all Loans shall be fully guaranteed pursuant to the
Subsidiaries Guaranty in accordance with the terms and provisions thereof and
shall be (and are) fully secured pursuant to the Security Documents.
7. From and after the Fifth Amendment Effective Date, all references
to the Credit Agreement in the Credit Agreement and each of the other Credit
Documents shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
4 of 12
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
VIDEO UPDATE, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: Chairman & CEO
BANQUE PARIBAS,
Individually and as Agent
By: /s/Donald J. Ercole
-----------------------------------------
Name: Donald J. Ercole
Title: Managing Director
By: /s/Darryl M. Monasebian
-----------------------------------------
Name: Darryl M. Monasebian
Title: Director, Merchant Banking Group
CAROLINA FIRST BANK
By: /s/Charles D. Chamberlain
-----------------------------------------
Name: Charles D. Chamberlain
Title: Executive Vice President
BANK AUSTRIA CREDITANSTALT CORPORATE
FINANCE, INC.
By: /s/John G. Taylor
-----------------------------------------
Name: John G. Taylor
Title: Senior Associate
5 of 12
<PAGE>
FIRST SOURCE FINANCIAL LLP
By: /s/James W. Wilson
-----------------------------------------
Name: James W. Wilson
Title: Senior Vice President
FLEET NATIONAL BANK
By: /s/Michael F. O'Neill
-----------------------------------------
Name: Michael F. O'Neill
Title: Senior Vice President
MERRILL LYNCH SENIOR FLOATING RATE
FUND LLC
By: /s/John M. Johnson
-----------------------------------------
Name: John M. Johnson
Title: Authorized Signatory
PPM AMERICA, INC. as agent, on behalf
of Jackson National Life Insurance
Company
By: /s/Michael DiRe
-----------------------------------------
Name: Michael DiRe
Title: Managing Director
BOEING CAPITAL CORPORATION
By: /s/David Nelson
-----------------------------------------
Name: David Nelson
Title: Special Credits Officer
6 of 12
<PAGE>
KEY CORPORATE CAPITAL INC.
By: /s/ Marvin S. Kodish
-----------------------------------------
Name: Marvin S. Kodish
Title: Designated Signer
PARIBAS CAPITAL FUNDING LLC
By: /s/M.S. Alexander
-----------------------------------------
Name: M.S. Alexander
Title: Director
THE BANK OF NOVA SCOTIA
By: /s/F.C.H. Ashby
-----------------------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
ML CLO XIX STERLING (CAYMEN) LTD.
By: Sterling Asset Manager, as its Investment
Advisor
By: /s/Louis A. Pistecchia
-----------------------------------------
Name: Louis A. Pistecchia
Title: Executive Vice President
KZH STERLING LLC
By: /s/Virginia Conway
-----------------------------------------
Name: Virginia Conway
Title: Authorized Agent
Each of the undersigned, each being a Subsidiary Guarantor under,
and as defined in, the Credit Agreement referenced in the foregoing Fifth
Amendment, hereby consents to the entering into of the Fifth Amendment, and
agrees to the provisions thereof (including without limitation, Sections 6 and 7
of Part III thereof).
7 of 12
<PAGE>
MOOVIES, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
TINSELTOWN VIDEO, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
WILLIAMS VIDEO, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF THE CAROLINAS, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF GEORGIA, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
8 of 12
<PAGE>
MOOVIES OF IOWA, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
MOOVIES OF MICHIGAN, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
MOVIE WAREHOUSE FRANCHISE SYSTEMS, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
E.C.6., INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
SONI, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
9 of 12
<PAGE>
PQ3, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
SNO, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
GBO, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
D-SKIPPY, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
DCO, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
10 of 12
<PAGE>
PTO, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
THE MOVIE STORE, INC. #2
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
THE MOVIE STORE III, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
ALPHARETTA MEDIA ASSOCIATES, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
VIDEO UPDATE CANADA INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
11 of 12
<PAGE>
24 HOUR ENTERTAINMENT GROUP LTD.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
24 HOUR ENTERTAINMENT LEASING LTD.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
1137239 ONTARIO LIMITED
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
RIO MEDIA ASSOCIATES, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
PIC-A-FLICK OF GREENVILLE, INC.
By: /s/ Daniel A. Potter
-----------------------------------------
Name: Daniel A. Potter
Title: President
12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 696
<SECURITIES> 0
<RECEIVABLES> 4,098
<ALLOWANCES> 411
<INVENTORY> 110,052
<CURRENT-ASSETS> 0<F1>
<PP&E> 86,376
<DEPRECIATION> 19,238
<TOTAL-ASSETS> 274,232
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 293
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 274,232
<SALES> 24,962
<TOTAL-REVENUES> 194,569
<CGS> 16,340
<TOTAL-COSTS> 207,072
<OTHER-EXPENSES> (227)
<LOSS-PROVISION> 411
<INTEREST-EXPENSE> 8,954
<INCOME-PRETAX> (21,230)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,230)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
<FN>
<F1>The Company utilizes an unclassified balance sheet presentation. This format
was followed based on the premise that the videocassette rental inventory
represents assets used by the Company to generate current operating income, and
management believes that to classify all of these costs 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 videocassettes.
</FN>
</TABLE>
