Video Update

Video Update

Company type	Public
Industry	Video rental
Founded	1982 in St. Paul, Minnesota, United States
Founder	Daniel Potter, John Bedard
Defunct	2001
Fate	Acquired by Movie Gallery
Headquarters	St. Paul, Minnesota , United States
Area served	United States, Canada, Singapore (mid-1980s)
Key people	Daniel Potter (CEO), John Bedard (co-founder)
Products	Movie rentals

Video Update was a U.S.-based movie rental enterprise established in Minnesota in 1982 by Daniel Potter and John Bedard. The company maintained a modest footprint until its 1994 Nasdaq public offering, which fueled a rapid expansion through multiple acquisitions. Following a 1998 merger with South Carolina’s Moovies, Video Update became the nation’s third-largest video rental chain, trailing only Blockbuster and Hollywood Video, with a network exceeding 700 outlets. Nevertheless, mounting debt and operational difficulties amid a declining industry led to a Chapter 11 bankruptcy filing in 2000. Subsequently, Movie Gallery acquired Video Update’s U.S. and Canadian locations in 2001. The brand name continued to exist at least through one franchise until 2012.

Early years and rapid growth

Originating in St. Paul, Minnesota, founders Potter and Bedard launched their inaugural store in 1982, initially operating out of a basement space. Early franchisees were predominantly law students, and the company adopted the Video Update brand in 1983. Ambitious plans to enter the Singapore market during the mid-1980s aimed at establishing up to 50 stores but were ultimately reduced to approximately 15–20 locations. By 1986, Video Update operated 91 units across the United States, primarily franchised, with a significant concentration in the Minneapolis–Saint Paul area. An unsuccessful effort to bring distribution in-house led to cash flow problems, a negative net worth position, and imposed restrictions on franchising activities within Minnesota. In 1986, corporate headquarters relocated to the Minnesota World Trade Center, and the company opened its first store under direct ownership in 1989.

The 1994 initial public offering generated capital that supported further expansion and positioned Video Update among three rental chains going public alongside Hollywood Entertainment and Movie Gallery. At the time of the IPO, the chain consisted of 45 stores. Subsequent stock offerings financed several acquisitions between 1995 and 1997, including Arizona and Nevada’s Video Powerstores; Indianapolis-based Indy Video; Oklahoma and Texas’s Cox Video; as well as Canadian chains Wilderness Video (Vancouver), Video West, and Alberta’s Video View. Acquiring Wilderness elevated Video Update to become Canada’s third-largest rental operator.

Daniel Potter gained recognition as a shrewd negotiator throughout these purchase deals. Market analysts favored Video Update for its effective management team and economical investment per store relative to competitors Blockbuster and Hollywood Video. By April 1997, the chain expanded significantly to encompass 340 stores after adding 145 locations that year.

Purchase of Moovies

In October 1996, Video Update arranged its largest acquisition to date: Moovies, a Greenville, South Carolina-based chain with 269 outlets. Moovies had experienced rapid growth from just eight stores in 1992 to nearly 272 by 1997 and had recently completed its own public offering. Potter’s objective for the merged company was to negotiate revenue-sharing contracts with film studios akin to Blockbuster’s arrangements. The initial agreement proposed in July 1997 offered Moovies shareholders a swap ratio of 1.1 shares of Video Update stock for each Moovies share.

The video rental sector faced considerable challenges in 1997 due to evolving consumer viewing preferences and a shortage of blockbuster titles. Both companies suffered steep declines in their stock prices: Moovies’ shares dropped by 79%, while Video Update’s fell by 46%. In response, Potter renegotiated terms in October 1997, reducing the exchange ratio to 0.75 shares of Video Update for each Moovies share. These extended merger negotiations continued until March 1998, diverting management focus; during this period, Video Update’s CFO resigned amid disagreements over financial disclosures.

The acquisition expanded Video Update’s footprint to approximately 685 stores nationwide, solidifying its position as the third-largest U.S. video rental chain behind Blockbuster and Hollywood Video. The company invested $7 million to rebrand former Moovies locations but encountered difficulties integrating operations; notably, Moovies concentrated on small-town markets while Video Update targeted urban centers. Expansion initiatives into regions such as Dallas–Fort Worth were partially scaled back due to complications arising from the merger.

The combined entity also encountered legal disputes following the acquisition. In 1998, mutual lawsuits were filed between Video Update and Rentrak concerning alleged coerced purchases linked to acquiring Moovies. In 1999, a jury awarded $1.3 million to an ex-Moovies COO after determining that his contract buyout had been conducted fraudulently. Additionally, another legal action accused Daniel Potter of withholding financial information from shareholders.

Financial difficulties and bankruptcy

Video Update experienced a drastic shift from reporting a $5 million profit in 1997 to incurring losses of $14 million and $110 million over the subsequent two years. During the 1998–1999 fiscal period, the company shut down more locations than it launched. By August 1999, the chain operated 707 stores, both company-owned and franchised, but planned to close an additional 70 outlets, primarily in the Southeastern region, by May 2000. The company’s stock was removed from Nasdaq after shareholders rejected a reverse stock split designed to maintain the share price above $1. Increasing pressure from creditors mounted; Allen Industries, contracted to update signage for the acquired Moovies stores, filed suit against Video Update for unpaid invoices, and liens led to temporary shutdowns of four stores in North Carolina.

In mid-2000, Video Update faced difficulties meeting loan obligations related to its Moovies acquisition. CEO Potter managed to secure loan modifications from 14 out of 15 lenders; however, Fleet Bank declined, citing concerns about the video rental sector’s future. This refusal resulted in a loan default, a going concern alert issued by auditor Deloitte Touche, demands for vendor payments, and ultimately compelled the company to file for Chapter 11 bankruptcy protection on September 18, 2000. The stock price had fallen by 99.3% from its August 1995 high to just seven cents per share. Bankruptcy documents revealed over 1,000 creditors, including significant unsecured parties such as Ingram Entertainment, Warner Home Video, and St. Louis Sight and Sound. Ingram received equity stakes in exchange for continued product supply. St. Louis Sight and Sound soon ceased operations due to uncollectible debts. Notably, the bankruptcy did not encompass Video Update’s Canadian operations.

During the bankruptcy process, senior executives proposed retention bonuses that were met with resistance from lenders—particularly Banque Paribas—who viewed them as unwarranted financial rewards for management. In January 2001, co-founder Bedard left amid internal conflicts with Potter. The company also grappled with declining employee morale and a rise in theft incidents at stores. Two rounds of closures reduced the number of U.S. outlets from 450 down to 260 as part of restructuring measures.

Disposition

In March 2001, Movie Gallery purchased Video Update’s senior secured bank debt at a significant discount, securing the opportunity to participate in the company’s reorganization and influence the fate of its retail locations. Two objections arose: one from a franchisee operating 23 stores across Virginia Peninsula and New Hampshire who expressed uncertainty about Movie Gallery’s franchisee policies; another from a secured creditor disputing payment arrangements. Ultimately, the bankruptcy court approved Movie Gallery’s acquisition in December 2001, which included Canadian stores and marked Movie Gallery’s expansion into a new geographic market.

After acquiring Video Update, Movie Gallery released its final financial statements, highlighting deficiencies in internal accounting and managerial controls during bankruptcy proceedings and raising concerns about potential embezzlement and fraudulent activities by Video Update executives.

Franchised outlets experienced mixed results following the acquisition. The franchisee in Virginia and New Hampshire failed to reach terms with Movie Gallery; since Movie Gallery gained ownership of the Video Update brand name, these stores underwent rebranding. The final store operating under the Video Update name—a franchise located in Eagan, Minnesota—closed its doors in 2012 after having negotiated a lifetime franchise agreement during bankruptcy.