SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934)
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HOLLYWOOD ENTERTAINMENT CORPORATION
(NAME OF ISSUER)
HOLLYWOOD ENTERTAINMENT CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK
(TITLE OF CLASS OF SECURITIES)
436141 105
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------------------------
DONALD J. EKMAN
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
HOLLYWOOD ENTERTAINMENT CORPORATION
25600 SW PARKWAY CENTER DRIVE
WILSONVILLE, OREGON 97070
(503) 570-1600
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS
ON BEHALF OF THE PERSON(S) FILING STATEMENT)
COPY TO:
ROBERT J. MOORMAN
STOEL RIVES LLP
900 SW FIFTH AVENUE
SUITE 2300
PORTLAND, OREGON 97204
(503) 224-3380
------------------------------------------
DECEMBER 23, 1997
(DATE TENDER OFFER FIRST PUBLISHED,
SENT OR GIVEN TO SECURITY HOLDERS)
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CALCULATION OF FILING FEE
TRANSACTION VALUATION* AMOUNT OF FILING FEE
- - - ---------------------------------- -----------------------------------
$184,999,991 $37,000.00
* For purposes of calculating the amount of the filing fee only. Based upon
$11.00 cash per share for 16,818,181 shares of Common Stock.
[ ] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: N/A Filing Party: N/A
Form or Registration No: N/A Date Filed: N/A
- - - -------------------------------------------------------------------------------
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ITEM 1. SECURITY AND ISSUER.
(a) The issuer of the securities to which this statement relates is
Hollywood Entertainment Corporation, an Oregon corporation (the "Company"), and
the address of its principal executive office is 25600 SW Parkway Center Drive,
Wilsonville, Oregon 97070.
(b) This Schedule 13E-4 relates to a tender offer by the Company to
purchase up to 16,818,181 shares of its Common Stock (the "Shares"), at $11.00
per Share, net to the seller in cash, upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated December 23, 1997 (the
"Offer to Purchase"), and in the related Letter of Transmittal (which together
constitute the "Offer"), copies of which are filed as Exhibits (a)(1) and
(a)(2), respectively. As of December 22, 1997, there were 36,786,396 Shares
issued and outstanding. In addition, as of such date, 6,300,946 Shares were
reserved for issuance pursuant to the exercise of outstanding stock options
under the Company's equity-based incentive plans. The information set forth in
the sections of the Offer to Purchase captioned "Introduction," "The Offer -- 1.
Terms of the Offer; Expiration Date" and "The Offer -- 10. Transactions and
Arrangements Concerning the Common Stock" is incorporated herein by reference.
(c) The information set forth in the sections of the Offer to Purchase
captioned "Introduction" and "The Offer -- 6. Price Range of the Common Stock;
Cash Dividends" is incorporated herein by reference.
(d) This statement is being filed by the Company.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth in the section of the Offer to Purchase
captioned "The Offer -- 8. Source and Amount of Funds" is incorporated herein by
reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
The information set forth in the sections of the Offer to Purchase
captioned "Introduction," "The Offer -- 7. Certain Information Concerning the
Company," "The Offer -- 10. Transactions and Arrangements Concerning the Common
Stock," "The Offer -- 9. The Purpose of the Offer; Certain Effects of the
Offer," "The Offer -- 8. Source and Amount of Funds" and "The Offer -- 6. Price
Range of the Common Stock; Cash Dividends" is incorporated herein by reference.
(a)-(j) The information set forth in the sections of the Offer to Purchase
captioned "Introduction," "The Offer -- 7. Certain Information Concerning the
Company," "The Offer -- 10. Transactions and Arrangements Concerning the Common
Stock," "The Offer -- 9. The Purpose of the Offer; Certain Effects of the
Offer," "The Offer -- 8. Source and
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Amount of Funds" and "The Offer -- 6. Price Range of the Common Stock; Cash
Dividends" is incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in the section of the Offer to Purchase captioned
"The Offer -- 10. Transactions and Arrangements Concerning the Common Stock" is
incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR
RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES.
The information set forth in the sections of the Offer to Purchase
captioned "Introduction," "The Offer -- 7. Certain Information Concerning the
Company," "The Offer -- 10. Transactions and Arrangements Concerning the Common
Stock" and "The Offer -- 8. Source and Amount of Funds" is incorporated herein
by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the sections of the Offer to Purchase
captioned "Introduction" and "The Offer -- 14. Fees and Expenses" is
incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) The information set forth in the section of the Offer to Purchase
captioned "The Offer -- 7. Certain Information Concerning the Company" is
incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) The information set forth in the sections of the Offer to Purchase
captioned "Introduction" is incorporated herein by reference.
(b) The information set forth in the section of the Offer to Purchase
captioned "The Offer -- 13. Certain Legal Matters; Regulatory Approvals" is
incorporated herein by reference.
(c) The information set forth in the section of the Offer to Purchase
captioned "The Offer -- 11. Effect of the Offer on the Market for Common Stock;
Registration Under the Exchange Act" is incorporated herein by reference.
(d) The information set forth in the sections of the Offer to Purchase
captioned "Introduction" is incorporated herein by reference.
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(e) Reference is hereby made to the Offer to Purchase and the related
Letter of Transmittal which are attached hereto as Exhibits (a)(1) and (a)(2),
respectively, and incorporated in their entirety herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a) (1) -- Offer to Purchase, dated December 23, 1997.
(a) (2) -- Letter of Transmittal.
(a) (3) -- Notice of Guaranteed Delivery.
(a) (4) -- Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Nominees.
(a) (5) -- Letter to Clients for Use by Brokers, Dealers,
Commercial Bank Companies and Other Nominees.
(a) (6) -- Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.
(a) (7) -- Form of Summary Advertisement dated December 23,
1997.
(a) (8) -- Press Release issued by the Company on
December 23, 1997.
(b) (1) -- Commitment Letter from GS Mezzanine Partners,
L.P. and GS Mezzanine Partners Offshore, L.P.,
dated December 23, 1997.
(c) (1) -- Proposed Share Ownership, Voting and Co-Sale
Agreement between the Company and Mark J.
Wattles.
(d) -- Not applicable.
(e) -- Not applicable.
(f) -- Not applicable.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: December 23, 1997
HOLLYWOOD ENTERTAINMENT CORPORATION
By: DONALD J. EKMAN
-----------------------------------------
Name: Donald J. Ekman
Title: Senior Vice President and
General Counsel
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EXHIBIT INDEX
Exhibit No. Description
- - - ----------- -------------------------------------------------------------
(a) (1) -- Offer to Purchase, dated December 23, 1997.
(a) (2) -- Letter of Transmittal.
(a) (3) -- Notice of Guaranteed Delivery.
(a) (4) -- Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees.
(a) (5) -- Letter to Clients for Use by Brokers, Dealers,
Commercial Banks and Other Nominees.
(a) (6) -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
(a) (7) -- Form of Summary Advertisement dated December 23, 1997.
(a) (8) -- Press Release issued by the Company on December 23, 1997.
(b) (1) -- Commitment Letter from GS Mezzanine Partners, L.P. and
GS Mezzanine Partners Offshore, L.P., dated December 23, 1997.
(c) (1) -- Proposed Share Ownership, Voting and Co-Sale Agreement
between the Company and Mark J. Wattles.
(d) -- Not applicable.
(e) -- Not applicable.
(f) -- Not applicable.
Offer to Purchase for Cash
by
HOLLYWOOD ENTERTAINMENT CORPORATION
Up to 16,818,181 Shares of its Common Stock
at
$11.00 Net Per Share
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN TIME, ON FRIDAY, JANUARY 23, 1998,
UNLESS THE OFFER IS EXTENDED.
Hollywood Entertainment Corporation, an Oregon corporation (the "Company"),
is offering to purchase up to 16,818,181 shares (the "Shares") of its common
stock ("Common Stock") at $11.00 per Share, net to the seller in cash, (the
"Offer Price") upon the terms and subject to the conditions set forth in this
Offer to Purchase and in the related Letter of Transmittal (which, together with
any amendments or supplements hereto or thereto, collectively constitute the
"Offer").
THIS OFFER IS CONDITIONED UPON A MINIMUM OF 8,045,454 SHARES BEING PROPERLY
TENDERED AND NOT WITHDRAWN AND IS SUBJECT TO CERTAIN OTHER CONDITIONS INCLUDING
RECEIPT BY THE COMPANY OF PROCEEDS OF THE FINANCING DESCRIBED HEREIN. SEE
"INTRODUCTION," SECTION 8 - "SOURCE AND AMOUNT OF FUNDS" AND SECTION 12 -
"CERTAIN CONDITIONS OF THE OFFER."
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE MAKING OF THIS
OFFER. NEITHER THE BOARD OF DIRECTORS NOR THE COMPANY, HOWEVER, MAKES ANY
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY SHARES PURSUANT
TO THE OFFER. EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO TENDER SHARES
AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NONE OF
ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES PURSUANT TO THE
OFFER.
The Company's Board of Directors has determined that current financial
market conditions, including recent trading prices of the Common Stock, make
this an attractive time to repurchase a significant number of shares of Common
Stock, taking into account the increased debt leverage, related interest and
financing costs thereof and financial and operating constraints associated with
the financing required to fund the Offer. In particular, the Board of Directors
of the Company believes the purchase of Shares at this time (i) furthers the
Company's goal of seeking to increase shareholder value per share in the long
term and (ii) provides shareholders the opportunity to sell their Shares at a
premium to recent market prices without paying associated transaction costs. See
"Introduction," Section 8 - "Source and Amount of Funds" and Section 9 - "The
Purpose of the Offer; Certain Effects of the Offer."
The Common Stock is traded principally in the over-the-counter market and
is reported on the Nasdaq National Market ("NNM") under the symbol "HLYW." On
December 5, 1997, the last trading day prior to the announcement by the Company
that it was considering the Offer at a price of $11.00 per share, the last sale
price per share of Common Stock reported on the NNM was $9.375. On
<PAGE>
December 22, 1997, the last trading day before the Company announced its
intention to commence the Offer, the last sale price per share of Common Stock
as reported on the NNM was $9.50.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE COMMON
STOCK. SEE SECTION 6 - "PRICE RANGE OF THE COMMON STOCK; CASH DIVIDENDS."
(cover continued on following page)
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING
SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL.
IF GIVEN OR MADE, SUCH RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
--------------------------
The Information Agent for the Offer is:
Georgeson & Company, Inc.
December 23, 1997
IMPORTANT
Any shareholder desiring to tender all or any portion of such shareholder's
Shares should either (1) complete and sign the Letter of Transmittal (or a
facsimile thereof) in accordance with the instructions in the Letter of
Transmittal, have such shareholder's signature guaranteed if required by
Instruction 1 to the Letter of Transmittal, and mail or deliver the Letter of
Transmittal (or such manually executed facsimile) or transmit an Agent's Message
as defined in Section 3 in connection with any book entry transaction and any
other required documents to Continental Stock Transfer and Trust Company, who is
acting as the depositary (the "Depositary") in connection with the Offer, and
either deliver the stock certificates representing the tendered Shares and any
other required documents to the Depositary or tender such Shares pursuant to the
procedure for book-entry transfer set forth in Section 2 - "Acceptance for
Payment and Payment for Shares," or (2) request such shareholder's broker,
dealer, bank, trust company or other nominee to effect the transaction for such
shareholder. Shareholders with Shares registered in the name of a broker,
dealer, bank, trust company or other nominee must contact such broker, dealer,
bank, trust company or other nominee if they desire to tender Shares so
registered.
If a shareholder desires to tender Shares and such shareholder's
certificates for such Shares are not immediately available, or the procedures
for book-entry transfer cannot be completed on a timely basis, or time will not
permit all documents to reach the Depositary prior to the Expiration Date (as
defined in Section 1 - "Terms of the Offer; Expiration Date"), such shareholder
may tender such Shares by following the procedures for guaranteed delivery set
forth in Section 2 - "Acceptance for Payment and Payment for Shares."
Questions and requests for assistance may be directed to the Information
Agent (as defined herein) at the address and telephone number set forth on the
back cover of this Offer to Purchase. Additional copies of this Offer to
Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be
obtained from the Information Agent or from brokers, dealers, commercial banks
or trust companies.
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TABLE OF CONTENTS
Page
INTRODUCTION...................................................................5
THE OFFER ...................................................................13
1. Terms of the Offer; Expiration Date............................13
2. Acceptance for Payment and Payment for Shares..................15
3. Procedure for Tendering Shares.................................16
4. Withdrawal Rights..............................................20
5. Certain Federal Income Tax Consequences........................21
6. Price Range of Common Stock; Cash Dividends....................24
7. Certain Information Concerning the Company.....................25
8. Source and Amount of Funds.....................................40
9. The Purpose of the Offer; Certain Effects of the Offer.........43
10. Transactions and Arrangements Concerning the Common Stock......45
11. Effect of the Offer on the Market for the Common Stock;
Registration Under the Exchange Act............................47
12. Certain Conditions of the Offer................................47
13. Certain Legal Matters; Regulatory Approvals....................50
14. Fees and Expenses..............................................50
15. Miscellaneous..................................................50
Forward-Looking Statements
Statements in this Offer to Purchase concerning the Company's planned
expansion, financial resources and projected financial information include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Factors that could adversely affect financial resources, planned
expansion and projected financial information include, but are not limited to,
competitive factors (including increased competition and price pressures),
technological developments affecting the video retail industry, changes in the
release and marketing of movies, the quality and availability of movies for
rental or sale, the ability of the Company to finance the opening of new stores,
the ability of the Company to hire and retain qualified personnel and manage a
growing business, the ability of the Company to identify and obtain new store
sites in attractive locations and on favorable terms, seasonality, weather and
general economic conditions. The Company's planned expansion and financial
resources may also be adversely affected by indebtedness incurred in connection
with this Offer, prior issuances of debt securities and other credit facilities.
Some of these risks and uncertainties are described in Section 7 - "Certain
Information Concerning the Company - Certain Considerations."
3
<PAGE>
To the Holders of Common Stock of Hollywood Entertainment Corporation:
INTRODUCTION
General
Hollywood Entertainment Corporation, an Oregon corporation (the "Company"
or "Hollywood Entertainment"), is offering to purchase up to 16,818,181 shares
(the "Shares") of its Common Stock (the "Common Stock") at $11.00 per Share, net
to the seller in cash, (the "Offer Price") upon the terms and subject to the
conditions set forth in this Offer to Purchase and in the related Letter of
Transmittal (which, together with any amendments or supplements hereto or
thereto, collectively constitute the "Offer").
To finance the Offer, the Company has entered into a commitment letter,
dated as of December 23, 1997, (the "Commitment Letter") from GS Mezzanine
Partners, L.P. and GS Mezzanine Partners Offshore, L.P. (collectively, the
"Purchasers"), which are investment funds affiliated with Goldman, Sachs & Co.,
pursuant to which the Purchasers have committed, subject to the terms and
conditions set forth in the Commitment Letter, to purchase for cash at the face
amount thereof up to $200 million principal amount of pay-in-kind notes (the
"Notes") of the Company. (The issuance of the Notes is hereinafter referred to
as the "Financing.") To facilitate the Financing, the Company will adopt a
holding company structure, and it will transfer all of its existing assets,
liabilities (other than the Notes) and business to a newly formed, wholly owned
subsidiary (the "Operating Subsidiary"). The only asset of Hollywood
Entertainment, as the holding company (the "Holding Company"), will be its
ownership of all of the outstanding capital stock of the Operating Subsidiary.
Included among the liabilities to be assumed by the Operating Subsidiary are the
Company's existing obligations with respect to its $200 million principal amount
of 10 5/8% Senior Subordinated Notes (the "Senior Notes") and the obligations
under its $300 million Revolving Credit Agreement dated as of September 5, 1997
(the "Credit Agreement"). (After the transfer, the Holding Company will remain
liable for the payment of principal of and interest on the Senior Notes.) See
Section 9 - "The Purpose of the Offer; Certain Effects of the Offer."
The Company's Board of Directors has determined that current financial
market conditions, including recent trading prices of the Common Stock, which
the Company believes have been adversely affected by concerns about the future
of the video retail industry generally, make this an attractive time to
repurchase a significant number of shares of Common Stock. The Board made this
determination taking into account, among other things, increased debt leverage
and resulting increased interest and financing costs and financial and operating
constraints associated with the borrowing required to fund the Offer, together
with additional dilution associated with issuance to the Purchasers of warrants
to purchase between 1.25 million and 2.25 million shares of Common Stock in
connection with the Financing. See Section 8 - "Source and Amount of Funds." In
particular, the Board of Directors believes the purchase of Shares at this time,
although substantially dilutive to book value and earnings per share on a pro
forma basis as of and for the periods ended December 31, 1996 and September 30,
1997, as described in Section 7 - "Certain Information Concerning the Company -
Certain Financial Information," and projected to be dilutive to earnings per
share for one year, (i) furthers the Company's long term goal of seeking to
increase shareholder value by creating the opportunity, after at least one year,
for increases in earnings per share as the result of the reduction in the number
of shares of Common Stock outstanding and (ii) provides shareholders the
opportunity to sell Shares at a premium to recent market prices without having
4
<PAGE>
to pay brokerage fees or commissions or, except as set forth in Instruction 6 of
the Letter of Transmittal, transfer taxes on the purchase of Shares pursuant to
the Offer. Although the purchase of Shares is projected to be dilutive to
earnings per share for one year, the Company expects the Offer to be cash flow
accretive on a per share basis immediately.
At November 30, 1997, Mark J. Wattles, Chairman and Chief Executive Officer
of the Company, was the beneficial owner of 11,124,600 shares of Common Stock,
representing approximately 30.2% of the 36,786,346 shares issued and outstanding
at that date. It is a condition to the completion of the Financing that Mr.
Wattles not tender any of his shares of Common Stock pursuant to the Offer. As a
result, if the Offer is completed, his percentage ownership of the shares of
Common Stock outstanding (before giving effect to shares of Common Stock
issuable upon exercise of outstanding employee stock options and the warrants
issued to the Purchasers in connection with the Financing) will increase to
between approximately 39% and 56%, depending on the number of Shares purchased
in the Offer. Because the Offer, if completed, would significantly increase the
percentage ownership by Mr. Wattles of the Common Stock, the Board of Directors
of the Company appointed a committee of directors who are not officers or
employees of the Company (the "Special Committee") to consider the effect of the
Offer on the degree of Mr. Wattles' ability to control the affairs of the
Company and to advise and make recommendations to the Board of Directors
concerning those effects. The Special Committee consists of James N. Cutler, Jr.
and Richard A. Galanti, neither of whom are officers or employees of the
Company. To assist it in its deliberations, the Special Committee retained
independent legal counsel and Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") as its financial adviser. See Section 14 "Fees and Expenses"
for a description of the fees payable to, and certain relationships of the
Company with, DLJ.
Background
The Company does not believe the current market price of the Common Stock
reflects the longer-term financial prospects of the Company. On March 13, 1997,
the intraday high sale price of the Common Stock as reported on the NNM was
$25.875 (the 52-week high price as of the date of this Offer). Since that date,
the price of the Common Stock and the related price to earnings ratio of the
Company has declined steadily, and on December 5, 1997, the last trading day
before announcement by the Company that it was considering the Offer, the last
sale price per share of the Common Stock reported on the NNM was $9.375. See
Section 6 - "Price Range of Common Stock; Cash Dividends." Over the same period,
the Nasdaq Composite Index has risen approximately 25% from 1,292.97 to 1,613.42
and the S&P 500 Stock Index has risen approximately 23% from 793.17 to 973.10.
The movement of the price of the Company's Common Stock since March 1997 has
substantially tracked the movement of a composite of the stock prices of the
other four video retailers whose stock is publicly traded. (The four other
publicly traded video retail companies are Moovies, Inc., Movie Gallery, Inc.,
Video Update, Inc. and West Coast Entertainment Corporation. Blockbuster
Entertainment ("Blockbuster") is a division of Viacom, Inc. and is not
separately a reporting company.)
The Company believes it is undervalued, based on the current market price
for its Common Stock, in part because of the increasing concern among investors
about the long-term viability of the video rental industry, the recent financial
performance of other video retailers, including Blockbuster, and the recent
financial performance of the Company. Since the Company's initial public
offering in July 1993, the Company has disclosed, in registration statements and
reports filed with Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the
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<PAGE>
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the risks related to possible technological advances or changes
in the manner in which movies are marketed, which could have a material adverse
effect on the business of the Company. Although the Company does not believe
these possible developments represent a near-term competitive threat to its
business, it also believes certain of its shareholders are increasingly
concerned about the long-term viability of the video rental industry. See
Section 7 - "Certain Information Concerning the Company - Certain Considerations
Competition and Technological Obsolescence." Accordingly, management of the
Company began to consider possible transactions, including a repurchase of
Common Stock, designed to increase shareholder value.
During the late summer and early fall of 1997, Mr. Wattles was contacted by
personnel from several investment banking firms and other financial institutions
with respect to his or the Company's possible interest in various transactions,
including the possible acquisition of the Company in a leveraged going-private
transaction and with respect to the financing of a recapitalization of the
Company involving the repurchase of a substantial portion of its outstanding
Common Stock after which the Company would continue to have significant public
float. Mr. Wattles and other Company personnel met with certain of these
institutions and provided them with limited financial information about the
Company. The inquiries regarding the possible acquisition of the Company did not
result in any specific proposal, and the Company declined to pursue any proposal
that would eliminate the public market for the Company's Common Stock.
The Company continued to review alternative proposals from various
financial institutions, including the Purchasers, with respect to the financing
of a repurchase of a significant portion of the outstanding Common Stock at a
premium to then current market prices. Certain of these proposals involved the
placement of junior debt securities to the Purchasers and a concurrent public
offering of other high yield mezzanine securities that would be managed by other
investment banking firms. Ultimately, the Company determined to work with the
Purchasers, as described below, to develop a proposal under with the Purchasers
would provide all of the debt financing needed to consummate the Offer.
In early November 1997, management of the Company informally advised the
directors of the Company that management expected to propose to the Board of
Directors a recapitalization of the Company by means of a self-tender offer
financed by borrowings from the Purchasers. On Friday, November 14, 1997, the
Board of Directors of the Company met, management described generally the
proposed transaction, and the directors unanimously voted to appoint Messrs.
Cutler and Galanti to the Special Committee. Over the following weekend, the
Special Committee hired Perkins Coie, Portland, Oregon, as legal counsel to the
Special Committee and later hired DLJ as its financial adviser. Over the next
month, at various meetings held in person and by telephone conference, the
Special Committee, directly and through its advisers, reviewed pro forma
financial information of the Company reflecting the Offer and the terms of the
Financing, reviewed historical and projected financial data, including
projections based on various scenarios proposed by management as well as
projections based on circumstances suggested by the Special Committee and its
advisers, discussed and reviewed the proposed terms of the Financing, reviewed
proposed restrictions on share voting and ownership by Mr. Wattles, and reviewed
the proposed contents of this Offer to Purchase.
At a meeting held on December 1, 1997, management of the Company made a
presentation concerning the proposed transaction to the Special Committee.
Present at that meeting were the entire
6
<PAGE>
Board of Directors, Company management personnel, including the Chief Executive
Officer, the President, the General Counsel, and the Chief Financial Officer,
the Company's outside general legal counsel, legal counsel to the Special
Committee, representatives of DLJ, together with legal counsel for DLJ,
representatives of the Purchasers, and its outside legal counsel. The
presentation and the materials provided to the participants included information
with respect to the business rationale for the proposed transaction, an overview
of the proposed transaction, pro forma financial analyses, potential transaction
benefits, a draft term sheet from the Purchasers for the financing, certain cash
flow analyses, proposed restrictions on share voting and ownership by Mr.
Wattles and data related to the average price and volume of the Common Stock and
its historical price performance. At the conclusion of this presentation, the
Special Committee and its advisers questioned management financial personnel
about various matters outside of the presence of Mr. Wattles and other
management personnel and the Company's legal counsel.
On December 7, 1997, in connection with the initial public announcement by
the Company of its consideration of the proposed transaction, the Company
entered into an agreement with the Purchasers (the "Letter Agreement") pursuant
to which the Company agreed to work with the Purchasers on an exclusive basis
through December 31, 1997 in connection with the possibility of the Purchasers'
provision of financing for the transactions being considered, to reimburse the
Purchasers' expenses subject to an aggregate cap of $375,000, to pay certain of
the transaction fees contemplated by the Commitment Letter and certain other
matters. This Letter Agreement has been superseded and replaced by the
Commitment Letter issued by the Purchasers described herein under Section 8 -
"Source and Amount of Funds."
A joint meeting of the Special Committee and the Board of Directors was
held on December 17, 1997. The Special Committee and its legal counsel discussed
and negotiated possible restrictions on the share ownership and voting rights of
Mr. Wattles. The Board confirmed its commitment to establishing and maintaining
a board of directors with a majority of independent directors. The completion of
the Offer would result in an increase in the percentage of the Common Stock
owned by Mr. Wattles, and could result in his ownership of up to approximately
56% of the Common Stock immediately following the Offer (before giving effect to
outstanding employee stock options and the warrants to be issued to the
Purchasers in connection with the Financing). To address concerns of the Special
Committee, Mr. Wattles agreed to restrictions on the ownership, voting and sale
of his Common Stock so that, after giving effect to the Offer, the voting and
control rights of all shareholders would be protected. After negotiation between
Mr. Wattles and the Special Committee, Mr. Wattles agreed to the restrictions
summarized in the following paragraph.
Upon completion of the Offer, Mr. Wattles will enter into a Share
Ownership, Voting and Co-Sale Agreement with the Company (the "Wattles Voting
Agreement"), pursuant to which he will agree not to acquire Common Stock other
than from the Company if, as a result, shares of Common Stock owned by Mr.
Wattles shall exceed 11,124,600 (representing his current ownership). In
addition, Mr. Wattles will agree to certain limitations on his right to transfer
shares of Common Stock held by him following the Closing and will agree to
provide a right of co-sale to all other holders of Common Stock and holders of
the Warrants in the event of certain private sales of Mr. Wattles' Common Stock.
Mr. Wattles will also agree to vote any shares of Common Stock beneficially
owned by him and representing in excess of 31.2% (representing his current
ownership plus his outstanding options) of the outstanding Common Stock of the
Company in the same proportions as the votes actually cast by shareholders other
than Mr. Wattles, excepting abstentions.
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At the request of the Special Committee, the Company will amend its bylaws
to provide that a majority of the Board will be independent, as determined by
the independent directors. For all vacancies, including the vacancy created upon
the increase in the size of the Board following completion of the Offer, Mr.
Wattles will present a candidate to the Board's Nominating Committee, which will
be composed of Mr. Wattles and all non-employee directors, for filling the
vacancy. Subject to the reasonable objection of the Nominating Committee as to
the candidate's qualifications and the condition that the candidate is
independent, the candidate will be nominated or considered for election as a
director. If Mr. Wattles does not present a reasonably acceptable candidate
within six months of the creation of an independent director vacancy, the
Nominating Committee will select a candidate for election or consideration to
fill the vacancy. Pursuant to the Wattles Voting Agreement, Mr. Wattles will
vote all of his shares below 31.2% of the outstanding common stock in favor of
independent director-nominees that are selected in accordance with the new Bylaw
provisions, except in circumstances where he determines, reasonably and in good
faith, that the nominee is not qualified to be a director. See Section 10 -
"Transactions and Arrangements Concerning the Common Stock."
At the December 17 meeting, DLJ made a presentation to the Board of
Directors, including the Special Committee. As part of its analysis, DLJ
analyzed the impact of the Financing on the Company's capitalization as
estimated for December 31, 1997. In addition, using the Company's projected
financial results, DLJ analyzed the impact of the Financing on such projected
financial results, and in particular DLJ analyzed the impact of the Financing on
the Company's projected earnings per share and on the Company's projected credit
statistics (including the ratios of (i) cash flow to interest expense, (ii) cash
flow less capital expenditures to interest expense, (iii) and indebtedness to
cash flow). At the direction of the Company and the Special Committee, DLJ
analyzed the impact of varying certain of the assumptions underlying the
Company's financial projections. Using the Company's projected financial
results, DLJ analyzed the expected returns to the holders of the Notes and the
Warrants (as a single group). DLJ analyzed (i) the results of past self tender
offers, (ii) the terms and trading prices of certain publicly traded debt
securities of selected comparable companies (recognizing that the Notes are
not and will not initially be publicly traded debt securities), and (iii) the
historical performance of the Company's stock price, selected publicly traded
companies' stock prices and the S&P 500 Stock Index.
In evaluating the Offer and the related transactions, the Board considered
managements's belief that the recent financial performance of the Company's
competitors in the video industry generally and of Blockbuster in particular can
be attributed to company - specific factors affecting those companies rather
than technological advances or changes in the industry. The factors include, in
the case of Blockbuster, recent changes with respect to management personnel,
product mix, distribution facilities and headquarters location. The Board also
considered management's view that many of the Company's investors see the
financial performance of the video retail companies as an indication that the
entire video retail industry is beginning to suffer inroads from competing movie
distribution technologies. Furthermore, the Board weighed management's belief
that any report by the Company of disappointing operating results, such as
comparable store revenue numbers, may be perceived by many of the Company's
investors as evidence of fundamental industry deterioration, rather than being
attributed to factors such as the quality of new releases from the movie studios
or weather patterns. The Company believes, after the Offer is complete, it will
have sufficient cash flow and access to other sources of capital to fund the
Operating Subsidiary's working capital needs and provide for its current capital
expenditure requirements, including the costs of opening approximately 400 new
superstores in 1998. These factors, the Board believes, make this an attractive
time to repurchase a significant portion of the Company's Common Stock.
Based on the DLJ presentation, the recommendation of the Special Committee
and all other factors considered, the Board of Directors unanimously approved
the making of the Offer, the Financing, the Reorganization (described below) and
the related transactions, agreements and arrangements.
8
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The Offer price of $11.00 per share was principally determined by the
Company's desire to offer a sufficient premium over current market prices to
result in the tender of at least the minimum number of shares of Common Stock.
The maximum number of shares sought by the Company in the Offer was determined
by the Company's desire to obtain substantial potential long-term increase in
earnings per share and cash flow per share consistent with the Company's
anticipated ability to service and ultimately repay the debt incurred in the
Financing.
The Company believes the Offer presents an opportunity for those
shareholders who would like to reduce their exposure to the risks of the video
rental industry to do so at a premium to recent market prices for the Common
Stock, while those shareholders who are more confident in the future of the
industry, in general, and of the Company, in particular, can increase their
percentage ownership of the Company without the commitment of additional funds.
The indenture pursuant to which the Company issued the Senior Notes and the
Credit Agreement each contain covenants that effectively prohibit the Company
from incurring the additional indebtedness necessary to finance the Offer. The
Company believes it will be able to obtain an amendment to the Credit Agreement
or to replace the Credit Agreement with a new revolving credit facility to
permit the Financing, but the Company believes obtaining such an amendment to
the Senior Notes indenture is not practicable. Consequently, to facilitate the
Financing for the Offer, the Board of Directors has approved a reorganization
pursuant to which the Company's corporate structure will become that of a
publicly traded holding company (the "Holding Company"), with substantially all
of the operating assets and the liabilities (other than the liabilities
associated with the Financing) of the Company contributed to and assumed by a
newly established, wholly owned subsidiary of the Company (the "Operating
Subsidiary") through which the Company's business will be conducted (the
"Reorganization"). Following the Reorganization, the Credit Agreement and the
Senior Notes will remain in place at the Operating Subsidiary level, and the
publicly traded Holding Company will, subject to the terms and conditions of the
Commitment Letter, issue the Notes to the Purchasers to provide financing for
the Offer. (The Holding Company will remain liable for the payment of principal
of and interest on the Senior Notes.) See Section 8 - "Source and Amount of
Funds" and Section 9 - "The Purpose of the Offer; Certain Effects of the Offer."
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE MAKING OF THE OFFER.
NEITHER THE BOARD OF DIRECTORS NOR THE COMPANY, HOWEVER, MAKES ANY
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY SHARES PURSUANT
TO THE OFFER. EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO TENDER SHARES
AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NONE OF
ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES PURSUANT TO THE
OFFER.
Tendering shareholders will not be obligated to pay brokerage fees or
commissions or, except as set forth in Instruction 6 of the Letter of
Transmittal, transfer taxes on the purchase of Shares pursuant to the Offer. The
Company will pay all fees and expenses of the Depositary, and Georgeson &
Company, Inc., which is acting as Information Agent (the "Information Agent")
incurred in connection with the Offer. See Section 14 - "Fees and Expenses."
9
<PAGE>
THE OFFER IS CONDITIONED UPON A MINIMUM OF 8,045,454 SHARES BEING PROPERLY
TENDERED AND NOT WITHDRAWN AND IS SUBJECT TO CERTAIN OTHER CONDITIONS, INCLUDING
RECEIPT OF PROCEEDS OF THE FINANCING DESCRIBED HEREIN. The Company reserves the
right to waive any one or more of the conditions to the Offer. See Section 12 -
"Certain Conditions of the Offer."
As of November 30, 1997 there were 36,786,346 shares of Common Stock issued
and outstanding. In addition, as of that date, an aggregate of 6,300,946 shares
were reserved for issuance pursuant to the exercise of outstanding stock options
(the "Options") under the Company's 1993 Stock Incentive Plan and 1997 Employee
Nonqualified Stock Option Plan. The Company is not offering to purchase any of
the Options. Holders of Options who wish to sell shares of Common Stock issuable
upon exercise of the Options must first exercise the Options in accordance with
the terms and provisions thereof. The maximum 16,818,181 Shares that the Company
is offering to purchase represents approximately 46% of the shares of Common
Stock outstanding at November 30, 1997, and approximately 70% of such
outstanding Shares of Common Stock are not held by Mr. Wattles.
If, before the Expiration Date (as defined herein), more than 16,818,181
Shares are properly tendered and not withdrawn, the Company will buy Shares on a
pro rata basis from all shareholders who properly tendered Shares. The Company
will return all Shares not purchased pursuant to the Offer, including Shares not
purchased because of proration. See Section 1 - "Terms of the Offer; Expiration
Date."
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
THE OFFER
1. Terms of the Offer; Expiration Date.
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of such extension or
amendment), the Company will purchase up to 16,818,181 Shares of Common Stock
that are validly tendered on or prior to the applicable Expiration Date and not
withdrawn as permitted by the withdrawal rights set out in Section 4 -
"Withdrawal Rights" ("Withdrawal Rights"). The Offer is conditioned upon the
minimum of 8,045,454 Shares being tendered and not withdrawn in accordance with
Withdrawal Rights and is subject to certain conditions of the Offer specified in
Section 12 hereof. The term "Expiration Date" means 12:00 Midnight, Eastern
time, on January 23, 1998, unless and until the Company, in its sole discretion,
extends the period during which the Offer is open, in which event the term
"Expiration Date" shall mean the latest time and date at which the Offer, as so
extended by the Company, will expire.
If the Offer is oversubscribed, Shares tendered before the Expiration Date
will be subject to proration. The proration period also expires on the
Expiration Date.
THE OFFER IS CONDITIONED UPON SATISFACTION OF CERTAIN CONDITIONS SET FORTH
IN SECTION 12 - "CERTAIN CONDITIONS OF THE OFFER."
10
<PAGE>
Subject to the applicable rules and regulations of the Commission, the
Company also reserves the right, in its sole discretion, at any time and from
time to time, to (i) terminate the Offer and not accept for payment or pay for
any Shares and return all tendered Shares to tendering shareholders, (ii) delay
acceptance for payment or, regardless of whether such Shares were theretofore
accepted for payment, payment for any Shares, (iii) waive any condition or
otherwise amend the Offer in any respect, (iv) extend the Offer and, subject to
the right of shareholders to withdraw Shares until the Expiration Date, retain
the Shares that have been tendered during the period or periods for which the
Offer is extended, in each case by giving oral or written notice of such
termination, delay, waiver, amendment or extension to the Depositary. IN NO
CIRCUMSTANCES WILL INTEREST BE PAID ON THE OFFER PRICE FOR TENDERED SHARES,
WHETHER OR NOT THE COMPANY EXERCISES ITS RIGHT TO EXTEND THE OFFER.
There is no assurance that the Company will exercise its right to extend
the Offer. Any extension, amendment or termination will be followed as promptly
as practicable by public announcement issued no later than 9:00 a.m., Eastern
time, on the next business day after the previously scheduled Expiration Date.
Subject to applicable law, which requires that any material change in the
information published, sent or given to shareholders in connection with the
Offer be promptly disseminated to shareholders in a manner reasonably designed
to inform shareholders of such change, and without limiting the manner in which
the Company may choose to make any public announcement, the Company will not
have any obligation to publish, advertise or otherwise communicate any such
public announcement other than by making a release to the Dow Jones News
Service. As used in this Offer to Purchase, "business day" has the meaning set
forth in Rule 13e-4(a)(3) under the Exchange Act.
If the Company extends the Offer or if the Company is delayed in its
acceptance for payment of or payment (whether before or after its acceptance for
payment of Shares) for Shares or it is unable to pay for Shares pursuant to the
Offer for any reason, then, without prejudice to the Company's rights under the
Offer, the Depositary may retain tendered Shares on behalf of the Company, and
such Shares may not be withdrawn except to the extent tendering shareholders are
entitled to Withdrawal Rights. The ability of the Company to delay the payment
for Shares that the Company has accepted for payment, however, is limited by
Rule 13e-4(f)(5) under the Exchange Act, which requires that a company pay the
consideration offered or return the securities deposited by or on behalf of
holders of securities promptly after the termination or withdrawal of such
company's offer.
If the Company makes a material change in the terms of the Offer or the
information concerning the Offer, or waives a material condition of the Offer,
the Company will extend the Offer to the extent required by Rules 13e-4(d)(2)
and 13e-4(e)(2) under the Exchange Act. The minimum period during which an offer
must remain open following material changes in the terms of an offer or
information concerning an offer, other than a change in the percentage of
securities sought or a change in price, will depend upon the facts and
circumstances, including the relative materiality of the changes or information.
If, prior to the Expiration Date, the Company increases or decreases the
number of Shares being sought or increases or decreases the price to be paid for
the Shares, such increase or decrease would be applicable to all holders whose
Shares are accepted for payment pursuant to the Offer and if, at the time notice
of any increase or decrease is first published, sent or given to holders of
Shares, the Offer is scheduled to expire at any time earlier than the tenth
business day from and including the date that such notice is first so published,
sent or given, the Offer would be extended at least until the expiration of such
ten business day period.
11
<PAGE>
All Shares purchased pursuant to the Offer will be purchased at the Offer
Price, net to the seller in cash.
If the number of Shares properly tendered and not withdrawn prior to the
Expiration Date is greater than or equal to 8,045,454 and less than or equal to
16,818,181 Shares, the Company, upon the terms and subject to the conditions of
the Offer, will purchase at the Offer Price all Shares so tendered and not
withdrawn.
If the number of Shares properly tendered and not withdrawn prior to the
Expiration Date is greater than 16,818,181 Shares, the Company, upon the terms
and subject to the conditions of the Offer, will accept for purchase all Shares
properly tendered and not withdrawn prior to the Expiration Date on a pro rata
basis (with adjustments to avoid purchases of fractional Shares).
If proration of tendered Shares is required, the Company will determine the
final proration factor as promptly as practicable after the Expiration Date. The
Company will announce preliminary results of proration by press release as
promptly as practicable after the Expiration Date. Shareholders may obtain such
preliminary information from the Information Agent and may be able to obtain
such information from their brokers or financial advisors.
All Shares not purchased pursuant to the Offer, including Shares not
purchased because of proration and Shares tendered and withdrawn, will be
returned to the tendering shareholders at the Company's expense as promptly as
practicable (which, in the event of proration, is expected to be up to
approximately seven business days) following the Expiration Date or as promptly
as practicable following withdrawal, as the case may be.
This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Common Stock as of December 22, 1997 and will be furnished
to brokers, dealers, commercial banks, trust companies and similar persons whose
names, or the names of whose nominees, appear on the Company's shareholder list
or, if applicable, who are listed as participants in a clearing agency's
security position listing for subsequent transmittal to beneficial owners of
Common Stock.
2. Acceptance for Payment and Payment for Shares.
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any extension or
amendment), the Company will accept for payment, and will pay for up to
16,818,181 Shares validly tendered prior to the Expiration Date (and not
properly withdrawn in accordance with Section 4 - "Withdrawal Rights") promptly
(subject to possible delay in the event of proration) after the Expiration Date.
See Section 1 - "Terms of the Offer; Expiration Date" and Section 12 - "Certain
Conditions of the Offer." The Company reserves the right, in its sole
discretion, to delay acceptance for payment of, or, subject to the requirements
of Rule 13e-4(f)(5) referred to above, payment for, Shares until the conditions
to the Offer have been satisfied and to comply in whole or in part with any
applicable law.
For purposes of the Offer, the Company will be deemed to have accepted for
payment, and thereby purchased, Shares validly tendered and not withdrawn as, if
and when the Company gives oral or written notice to the Depositary of the
Company's acceptance for payment of such Shares pursuant to the Offer. Upon the
terms and subject to the conditions of the Offer, payment for Shares accepted
for
12
<PAGE>
payment pursuant to the Offer will be made by deposit of the aggregate purchase
price therefor with the Depositary, which will act as agent for tendering
shareholders for the purpose of receiving payments from the Company and
transmitting such payments to shareholders whose Shares have been accepted for
payment. In the event of proration, the Company will determine the proration
factor and pay for those tendered Shares accepted for payment as soon as
practicable after the Expiration Date. The Company does not expect to be able to
announce the final results of any such proration until approximately seven
business days after the Expiration Date. IN NO CIRCUMSTANCES WILL INTEREST BE
PAID ON THE OFFER PRICE FOR TENDERED SHARES, REGARDLESS OF ANY DELAY IN MAKING
THE PAYMENT AFTER THE EXPIRATION DATE.
In all cases, payment for Shares tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (i)
certificates for such Shares or timely confirmation of a book-entry transfer of
such Shares (a "Book-Entry Confirmation") into the Depositary's account at The
Depository Trust Company or the Philadelphia Depository Trust Company (each a
"Book-Entry Transfer Facility"), pursuant to the procedure set forth in Section
3 - "Procedure for Tendering Shares," (ii) the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, with any required
signature guarantees or any Agent's Message in connection with a book entry
transfer, and (iii) any other documents required by the Letter of Transmittal.
If any tendered Shares are not accepted for payment for any reason,
including Shares not purchased due to proration, certificates evidencing
unpurchased Shares will be returned, without expense, to the tendering
shareholder (or, in the case of Shares tendered by book-entry transfer into the
Depositary's account at a Book-Entry Transfer Facility pursuant to the
procedures set forth in Section 3 "Procedure for Tendering Shares," such Shares
will be credited to an account maintained at such Book-Entry Transfer Facility),
as promptly as practicable following the expiration or termination of the Offer.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer; provided, however,
that if payment of the Purchase Price is to be made to, or (in the circumstances
permitted by the Offer) if unpurchased Shares are to be registered in the name
of, any person other than the registered holder, or if tendered certificates are
registered in the name of any person other than the person signing the Letter of
Transmittal, the amount of all stock transfer taxes, if any (whether imposed on
the registered holder or such other person), payable on account of the transfer
to such person will be deducted from the Purchase Price unless evidence
satisfactory to the Company of the payment of such taxes or exemption therefrom
is submitted. See Instruction 6 of the Letter of Transmittal.
3. Procedure for Tendering Shares.
Valid Tender. For a shareholder validly to tender Shares pursuant to the
Offer, either (i) the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, together with any required signature guarantees, or
an Agent's Message in connection with book entry transfers, and any other
documents required by the Letter of Transmittal, must be received by the
Depositary at one of its addresses set forth on the back cover of this Offer to
Purchase and either the certificates evidencing tendered Shares ("Share
Certificates") must be received by the Depositary at such address or such Shares
must be tendered pursuant to the procedure for book-entry transfer described
below and a Book-Entry
13
<PAGE>
Confirmation must be received by the Depositary, in each case prior to the
Expiration Date, or (ii) the tendering shareholder must comply with the
guaranteed delivery procedure described below.
THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY,
IS AT THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. SHARES WILL BE DEEMED
DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE
OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer. The Depositary will establish accounts with respect to
the Shares at the Book-Entry Transfer Facilities for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any financial
institution that is a participant in the system of any Book-Entry Transfer
Facility may make book-entry delivery of Shares by causing such Book-Entry
Transfer Facility to transfer such Shares into the Depositary's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. Although delivery of Shares may be
effected through book-entry transfer at a Book-Entry Transfer Facility, the
Letter of Transmittal (or a facsimile thereof), properly completed and duly
executed, together with any required signature guarantees, or an Agent's Message
(as defined below), and any other required documents must in any case be
received by the Depositary set forth on the back cover of this Offer to Purchase
prior to the Expiration Date, or the tendering shareholder must comply with the
guaranteed delivery procedure described below. The confirmation of a book-entry
transfer of Shares into the Depositary's account at a Book-Entry Transfer
Facility as described above is referred to herein as a "Book-Entry
Confirmation." The term "Agent's Message" means a message transmitted by a
Book-Entry Transfer Facility to, and received by, the Depositary and forming a
part of a Book-Entry Confirmation, which message states that such Book-Entry
Transfer Facility has received an express acknowledgment from the participant in
such Book-Entry Transfer Facility tendering the Shares that such participant has
received, and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against the participant. DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE
DEPOSITARY.
Signature Guarantees. Signatures on Letters of Transmittal must be
guaranteed by a firm that is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or by a
bank or trust company having an office or correspondent in the United States
(each of the foregoing being referred to as an "Eligible Institution"), except
no signature guarantee is required where Shares are tendered (i) by the
registered holder(s) thereof (which term, for purposes of this Section, includes
any participant in any of the Book-Entry Transfer Facilities' system whose name
appears on a security position listing as the owner of the Shares) who has not
completed either the box entitled "Special Payment Instructions" or the box
entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii)
for the account of an Eligible Institution. See Instruction 1 of the Letter of
Transmittal. If the Share Certificates are registered in the name of a person
other than the signer of the Letter of Transmittal, or if payment is to be made,
or Share Certificates not accepted for payment or not tendered are to be
returned, to a person other than the registered holder(s), the Share
Certificates, as the case may be, must be endorsed or accompanied by appropriate
stock powers, in either case, signed
14
<PAGE>
exactly as the name(s) of the registered holder(s) appear(s) on such
certificates, with the signature(s) on such certificates or stock powers
guaranteed as described above. See Instructions 1 and 5 of the Letter of
Transmittal.
A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL (OR A
FACSIMILE THEREOF) MUST ACCOMPANY EACH DELIVERY OF SHARE CERTIFICATES TO THE
DEPOSITARY.
Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to
the Offer and such shareholder's Share Certificates are not immediately
available or such shareholder cannot deliver the Share Certificates and all
other required documents to the Depositary prior to the Expiration Date, or such
shareholder cannot complete the procedure for delivery by book-entry transfer on
a timely basis, such Shares may nevertheless be tendered, provided all of the
following conditions are satisfied:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery
is received by the Depositary, as provided below, on or prior to the
Expiration Date; and
(iii) the Share Certificates (or a Book-Entry Confirmation) representing
all tendered Shares, in proper form for transfer, in each case
together with the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature
guarantees, or, in the case of a book-entry transfer, an Agent's
Message, and any other required documents are received by the
Depositary within three trading days after the date of execution of
such Notice of Guaranteed Delivery. A "trading day" is any day on
which the NNM is open for business.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by telegram, telex, facsimile transmission or mail to the Depositary and must
include a guarantee by an Eligible Institution in the form set forth in such
Notice of Guaranteed Delivery.
In all cases, payment for Shares accepted for payment pursuant to the Offer
will be made only after timely receipt by the Depositary of (a) certificates for
(or a timely Book-Entry Confirmation with respect to) such Shares, (b) a Letter
of Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees, or, in the case of a book-entry
transfer, an Agent's Message, and (c) any other documents required by the Letter
of Transmittal. Accordingly, tendering shareholders may be paid at different
times depending upon when Share Certificates or Book-Entry Confirmations with
respect to Shares are actually received by the Depositary.
Determination of Validity. For any tender of Shares to be valid, it must be
in proper form. All questions as to the validity, form, eligibility (including
time of receipt) and acceptance for payment of any tender of Shares will be
determined by the Company, in its sole discretion, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance for payment of which may, in the opinion of its counsel, be unlawful.
The Company also reserves the absolute right to waive any defect or irregularity
in any tender of Shares of any particular shareholder whether or not similar
defects or irregularities are waived in the case of other shareholders. No
tender of Shares will be deemed to have
15
<PAGE>
been validly made until all defects and irregularities have been cured or
waived. None of the Company, the Depositary, the Information Agent or any other
person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. The Company's determinations with regard to compliance with the
terms and conditions of the Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding.
Stock Options. As of November 30, 1997, 6,300,946 shares of Common Stock
were reserved for issuance pursuant to the exercise of the Options. The Company
is not offering to purchase any of the Options. Holders of Options who wish to
participate in the Offer must first exercise such Options, in accordance with
the terms and provisions thereof. NEITHER THE BOARD OF DIRECTORS OF THE COMPANY
NOR THE COMPANY MAKES ANY RECOMMENDATION TO ANY HOLDER OF OPTIONS AS TO WHETHER
TO EXERCISE ANY OR ALL SUCH OPTIONS OR AS TO WHETHER TO TENDER ANY OR ALL SHARES
ISSUABLE UPON SUCH EXERCISE.
Tendering Shareholder's Representation and Warranty; Company's Acceptance
Constitutes an Agreement. It is a violation of Rule 14e-4 promulgated under the
Exchange Act for a person acting alone or in concert with others, directly or
indirectly, to tender shares for such person's own account unless at the time of
tender and at the Expiration Date such person has a "net long position" equal to
or greater than the amount tendered in (i) the Shares and will deliver or cause
to be delivered such Shares for the purpose of such tender to the Company within
the period specified in the Offer or (ii) other securities immediately
convertible into, exercisable for or exchangeable into Shares ("Equivalent
Securities") and, upon the acceptance of such tender, will acquire such Shares
by conversion, exchange or exercise of such Equivalent Securities to the extent
required by the terms of the Offer and will deliver or cause to be delivered
such Shares so acquired for the purpose of such tender to the Company within the
period specified in the Offer. Rule 14e-4 also provides a similar restriction
applicable to the tender or guarantee of a tender on behalf of another person. A
tender of Shares made pursuant to any method of delivery set forth herein will
constitute the tendering shareholder's representation and warranty to the
Company that (i) such shareholder has a "net long position" in Shares or
Equivalent Securities being tendered within the meaning of the Rule 14e-4, (ii)
such tender of Shares complies with Rule 14e-4 and (iii) such tendering
shareholder accepts the terms and conditions of the Offer. The Company's
acceptance for payment of Shares tendered pursuant to the Offer will constitute
a binding agreement between the tendering shareholder and the Company upon the
terms and subject to the conditions of the Offer.
TO AVOID BACKUP WITHHOLDING OF FEDERAL INCOME TAX WITH RESPECT TO PAYMENT
TO CERTAIN SHAREHOLDERS OF THE OFFER PRICE FOR THE SHARES PURCHASED PURSUANT TO
THE OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH
SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH
SHAREHOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY
COMPLETING THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL. SEE
INSTRUCTION 10 OF THE LETTER OF TRANSMITTAL.
4. Withdrawal Rights.
Except as otherwise provided in this Section 4 - "Withdrawal Rights,"
tenders of Shares are irrevocable. Shares tendered pursuant to the Offer may be
withdrawn pursuant to the procedures set forth
16
<PAGE>
below at any time prior to the Expiration Date and, unless theretofore accepted
for payment by the Company pursuant to the Offer, may also be withdrawn at any
time after February 23, 1998.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Depositary at its address set forth on the back cover of this Offer to Purchase.
Any notice of withdrawal must specify the name of the person who tendered the
Shares to be withdrawn, the number of Shares to be withdrawn and the name(s) of
the registered holder(s), if different from that of the person(s) who tendered
such Shares. If Share Certificates to be withdrawn have been delivered or
otherwise identified to the Depositary, then, prior to the physical release of
such certificates, the serial number shown on such certificates must be
submitted to the Depositary and the signature(s) on the notice of withdrawal
must be guaranteed by an Eligible Institution unless such Shares have been
tendered for the account of an Eligible Institution. If Shares have been
tendered pursuant to the procedure for book-entry transfer as set forth in
Section 3 - "Procedure for Tendering Shares," any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Shares and otherwise comply with such
Book-Entry Transfer Facility's procedures.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by the Company, in its sole
discretion, whose determination will be final and binding. None of the Company,
the Depositary, the Information Agent or any other person will be under any duty
to give notification of any defects or irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. Withdrawn Shares, however, may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in Section 3 - "Procedure for Tendering Shares."
5. Certain Federal Income Tax Consequences.
The following discussion summarizes the principal federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
associated with the Offer, assuming the Offer is completed as contemplated
herein. This summary does not purport to be comprehensive, does not describe all
potentially relevant tax considerations and does not discuss state, local or
foreign tax laws.
Under Section 302 of the Code, a sale of Shares pursuant to the Offer will,
as a general rule, be treated as a sale or exchange if the receipt of cash upon
such sale (i) is "substantially disproportionate" with respect to the
shareholder, (ii) results in a "complete redemption" of the shareholder's
interest in the Company or (iii) is "not essentially equivalent to a dividend"
with respect to the shareholder. If any of those three tests is satisfied, a
tendering shareholder will recognize gain or loss equal to the difference
between the amount of cash received by the shareholder pursuant to the Offer and
the shareholder's tax basis in the Shares sold pursuant to the Offer. If a
shareholder holds Shares with different adjusted bases, and tenders only some of
his or her Shares, gain or loss will be computed using the adjusted basis of the
Shares actually tendered. Recognized gain or loss will be capital gain or loss,
assuming the Shares are held as capital assets. The rate at which any such gain
will be taxed to non-corporate shareholders will, as a general matter, depend
upon the shareholder's holding period in the Shares. If a non-corporate
shareholder has net capital gain for his or her taxable year in which the gain
is recognized and such
17
<PAGE>
shareholder's holding period for the Shares is more than 18 months, either a 20
percent or a 10 percent capital gains rate generally will apply to such gain,
depending on the amount of taxable income of such shareholder for such year. If
the non-corporate Shareholders' holding period for the Shares is more than 12
months, but not more than 18 months, a 28 percent tax rate generally will apply
to such gain. If the shareholder's holding period for the Shares is 12 months or
less, such gain will be taxed in the same manner as ordinary income.
In determining whether any of the tests under Section 302 of the Code is
satisfied, shareholders must take into account not only the Shares they actually
own, but also Shares they are deemed to own pursuant to the constructive
ownership rules of Section 318 of the Code. Pursuant to those constructive
ownership rules, a shareholder is deemed to own the Shares actually owned, and
in some cases constructively owned, by certain related individuals or entities,
and any Shares that the shareholder has the right to acquire by exercise of an
option or by conversion or exchange of a security.
The receipt of cash will be "substantially disproportionate" with respect
to a shareholder if the percentage of the outstanding Shares actually and
constructively owned by the shareholder immediately following the sale of Shares
pursuant to the Offer (treating as no longer outstanding all Shares purchased
pursuant to the Offer) is less than 80% of the percentage of the outstanding
Shares actually and constructively owned by such shareholder immediately before
the sale of Shares pursuant to the Offer (treating as outstanding all Shares
purchased pursuant to the Offer). Shareholders should consult their tax advisers
with respect to the application of the "substantially disproportionate" test to
their particular facts and circumstances.
The receipt of cash by a shareholder will result in a "complete redemption"
of the shareholder's interest in the Company if either (i) all the Shares
actually and constructively owned by the shareholder are sold pursuant to the
Offer or (ii) all the Shares actually or constructively owned by the
shareholder, except those constructively owned as the result of attribution of
Shares owned by members the shareholder's family, are sold pursuant to the Offer
and the shareholder is eligible to waive and does effectively waive attribution
of all Shares owned by members of the shareholder's family in accordance with
Section 302(c) of the Code.
Even if the receipt of cash by a shareholder fails to satisfy the
"substantially disproportionate" test or the "complete redemption" test, such
shareholder may nevertheless satisfy the "not essentially equivalent to a
dividend" test if the shareholder's sale of Shares pursuant to the Offer results
in a "meaningful reduction" in the shareholder's proportionate interest in the
Company. Whether the receipt of cash by a shareholder will be "not essentially
equivalent to a dividend" will depend upon the individual shareholder's facts
and circumstances. In certain circumstances, even a small reduction in a
shareholder's proportionate interest may satisfy the test. For example, the
Internal Revenue Service has indicated in a published ruling that a 3.3%
reduction in the proportionate interest of a small minority (substantially less
than 1%) shareholder in a publicly held corporation who exercises no control
over corporate affairs constitutes such a "meaningful reduction." Shareholders
expecting to rely upon the "not essentially equivalent to a dividend" test
should, therefore, consult their tax advisers as to its application in their
particular situations.
It may be possible for a tendering shareholder to satisfy one of the above
three tests by contemporaneously selling or otherwise disposing of all or some
of the Shares that are actually or constructively owned by such shareholder but
are not purchased pursuant to the Offer. Correspondingly,
18
<PAGE>
a tendering shareholder may not be able to satisfy one of the above three tests
because of contemporaneous acquisitions of Shares by such shareholder or a
related party whose shares would be attributed to such shareholder. Furthermore,
even if a shareholder tenders sufficient shares to satisfy one or more of the
three tests under Section 302, such shareholder still may not satisfy any of
such tests if the Offer is oversubscribed and only a pro-rata number of the
shares tendered by such shareholder are purchased pursuant to the Offer.
Shareholders should consult their tax advisers regarding the tax consequences of
such sales or acquisitions in their particular circumstances.
If none of the three tests under Section 302 is satisfied, then, to the
extent the Company has sufficient earnings and profits, the tendering
shareholder will be treated as having received a dividend includible in gross
income in an amount equal to the entire amount of cash received by the
shareholder pursuant to the Offer (without regard to gain or loss, if any). To
the extent the cash received by the shareholder exceeds the Company's earnings
and profits, it will be applied against and reduce the adjusted basis the
shareholder has in all his or her Shares and, to the extent the cash exceeds
such adjusted basis, it will be treated as gain from the sale or exchange of
property.
In the case of a corporate shareholder, if the cash paid is treated as a
dividend, the dividend income may be eligible for the 70% dividends-received
deduction. The dividends-received deduction is subject to certain limitations
and may not be available if the corporate shareholder does not satisfy certain
holding period requirements with respect to the Shares or if the Shares are
treated as "debt financed portfolio stock." Generally, if a dividends-received
deduction is available, it is expected that the dividend will be treated as an
"extraordinary dividend" under Section 1059(a) of the Code, in which case such
corporate shareholder's tax basis in Shares retained by such shareholder would
be reduced, but not below zero, by the amount of the nontaxed portion of the
dividend. Any amount of the nontaxed portion of the dividend in excess of the
shareholder's basis would generally be currently taxed as gain from the sale of
such Shares. However, if a redemption of Shares from a corporate shareholder
pursuant to the Offer is treated as a dividend as a result of the shareholder's
constructive ownership of other Shares that it has an option or other right to
acquire, the portion of the extraordinary dividend not otherwise taxed because
of the dividends-received deduction would reduce the shareholder's adjusted tax
basis only in its Shares sold pursuant to the Offer, and any excess of such
non-taxed portion over such basis would be currently taxable as gain on the sale
of such Shares.
The Depositary will withhold federal income taxes equal to 30% of the gross
payments payable to a foreign shareholder or his agent unless the Depositary
determines that a reduced rate of withholding is available pursuant to a tax
treaty or an exemption from withholding is applicable because such gross
proceeds are effectively connected with the conduct of a trade or business in
the United States. For this purpose, a foreign shareholder is a shareholder that
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or (iii) any estate or trust
the income of which is subject to United States federal income taxation
regardless of the source of such income. In order to obtain a reduced rate of
withholding pursuant to a tax treaty, a foreign shareholder must deliver to the
Depositary a properly completed Form 1001. In order to obtain an exemption from
withholding on the grounds that the gross proceeds paid pursuant to the offer
are effectively connected with the conduct of a trade or business within the
United States, a foreign shareholder must deliver to the Depositary a properly
executed form 4224. The Depositary will determine a shareholder's status as a
foreign shareholder and eligibility for a reduced rate of, or an exemption from,
withholding by reference to any outstanding certificates or statements
concerning eligibility for a reduced rate of, or exemption from, withholding
19
<PAGE>
(e.g., Form 1001 or Form 4224) unless facts and circumstances indicate that such
reliance is not warranted. A foreign shareholder who has not previously
submitted the appropriate currently effective certificates or statements with
respect to a reduced rate of, or exemption from, withholding for which such
shareholder may be eligible should consider doing so in order to avoid
overwithholding. A foreign shareholder may be eligible to obtain a refund of tax
withheld if such shareholder meets one of the three tests for capital gain or
loss treatment described above or is otherwise able to establish that no tax or
a reduced amount of tax was due.
The foregoing discussion may not apply to Shares acquired pursuant to
certain compensation arrangements with the Company.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE TAX CONSEQUENCES OF A SALE PURSUANT TO THE OFFER MAY VARY DEPENDING
UPON, AMONG OTHER THINGS, THE PARTICULAR CIRCUMSTANCES OF THE TENDERING
SHAREHOLDER. NO INFORMATION IS PROVIDED HEREIN AS TO THE STATE, LOCAL OR
NON-U.S. TAX CONSEQUENCES OF THE TRANSACTION CONTEMPLATED BY THE OFFER.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS TO DETERMINE THE
PARTICULAR FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SALES MADE BY
THEM PURSUANT TO THE OFFER AND THE EFFECT OF THE CONSTRUCTIVE STOCK OWNERSHIP
RULES MENTIONED ABOVE.
6. Price Range of Common Stock; Cash Dividends
The Common Stock is traded principally in the over-the-counter market and
is reported on the NNM under the symbol "HLYW." The following table sets forth,
for the quarters indicated, the high and low sales prices as reported on the
NNM.
High Low
1995:
First Quarter........................................$18.25 $11.25
Second Quarter....................................... 23.13 15.00
Third Quarter........................................ 35.00 19.00
Fourth Quarter....................................... 28.63 7.38
1996:
First Quarter........................................$14.25 $6.25
Second Quarter....................................... 19.00 13.13
Third Quarter........................................ 22.63 11.75
Fourth Quarter....................................... 23.63 17.00
1997:
First Quarter........................................$25.88 $18.25
Second Quarter ...................................... 25.25 17.50
Third Quarter ....................................... 23.38 11.50
Fourth Quarter (through December 22)................ 14.38 8.13
20
<PAGE>
On December 5, 1997, the last full trading day prior to the announcement by
the Company that it was considering the Offer at a price of $11 per share, the
last sale price per share of Common Stock reported on the NNM was $9.375. On
December 22, 1997, the last full trading day prior to the announcement of the
Company's intention to commence the Offer, the last sale price per share of
Common Stock reported on the NNM was $9.50. As of November 30, 1997, there were
218 holders of record of Shares.
The Company has not paid any cash dividends on the Common Stock since its
initial public offering in July 1993. As has been the case in the past, the
Company anticipates that all future earnings will be retained for development of
its business. The indenture relating to the Notes will contain a covenant
prohibiting the payment of dividends or stock repurchases by the Company. In
addition, the indenture for the Senior Notes and the Credit Agreement contain
provisions that will limit the ability of the Operating Subsidiary to pay
dividends to the Company, which will be the Company's only source of funds,
including for the payment of dividends by the Company to its shareholders and
payment of the debt service on the Notes. See Section 7 - "Certain Information
Concerning the Company - Certain Considerations - Increased Leverage."
7. Certain Information Concerning the Company.
General
The Company owns and operates 837 video retail superstores in 39 states as
of November 30, 1997 and is the second largest video retailer in the United
States. As part of its goal to build a strong national brand, Hollywood
Entertainment has developed a store format and design that captures the bright
lights, excitement and energy of the motion picture industry and enables the
public to easily identify and recognize Hollywood Video superstores.
Hollywood Video superstores average approximately 7,500 square feet and
typically carry approximately 10,000 titles and 16,000 videocassettes and video
games, consisting of many copies of popular new releases and an extensive
selection of older or "catalog" movies. Hollywood Entertainment is a category
killer in its industry, offering more copies of popular new videocassette
releases and more titles than its competitors to achieve greater customer
satisfaction and encourage repeat visits. Hollywood Video stores are primarily
located in high traffic locations, in stand-alone buildings, at the end of
shopping strips or in other highly visible locations.
Recent Developments
On December 8, 1997, the Company announced that it believed revenue for the
three months ending December 31, 1997 would be between $147 million and $153
million and earnings per share would be between $0.14 and $0.20. For the three
months ended December 31, 1996, revenue was $97.6 million and net income per
share was $0.23. The Company believes the expected increase in revenue for the
three months ended December 31, 1997 will result primarily from new store
expansion. Although revenue and income from operations are expected to increase
in this period, the Company has and will incur additional interest expense
associated with the issuance of the Senior Notes. Accordingly, the Company
believes net income per share will decrease for the three months ended December
31, 1997 compared to the comparable period in 1996. The Company also announced
that it believed adjusted EBITDA, as defined in the indenture for the Senior
Notes, would be between $ 23.5 million and $27.5
21
<PAGE>
million for the same period. For the comparable period in 1996, adjusted EBITDA
was $18.9 million. The Company believes this increase will result from expected
increases in income from operations and depreciation and amortization associated
with new store expansion. The Company expects a comparable store revenue
increase for the three months ended December 31, 1997 of between 1% and 3%.
Certain Financial Information
Historical and Pro Forma Financial Information. The tables below set forth
summary historical and summary unaudited pro forma consolidated financial
information of the Company and its subsidiaries. The summary historical
financial information for the nine months ended September 30, 1996 and 1997 and
as of September 30, 1997 and for the years ended December 31, 1995 and 1996 and
as of December 31, 1996 (other than the ratios of earnings to fixed charges) has
been derived from, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and notes thereto included in the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
and the audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
respectively, (the "Hollywood Financial Statements"), which are hereby
incorporated herein by reference. The summary historical financial information
is qualified in its entirety by reference to the Hollywood Financial Statements.
Copies of the Hollywood Financial Statements may be obtained as described in
Section 15 - "Miscellaneous." The unaudited condensed consolidated financial
statements of the Company, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of financial position and results of operations for such periods. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1997.
The following summary unaudited pro forma condensed consolidated financial
information should be read in conjunction with the Hollywood Financial
Statements. The unaudited pro forma condensed consolidated financial information
does not purport to represent what the Company's results of operations or
financial position would actually have been if the events described below had
occurred as of the dates indicated or what such results of operations or
financial position will be for any future periods. In addition, such information
has been prepared on the basis of certain estimates and assumptions and do not
give effect to any matters other than those described in the notes thereto or in
the following paragraphs.
The following summary unaudited pro forma condensed financial information
of the Company gives effect to the Offer as if the Offer occurred as of January
1, 1996 with respect to the unaudited pro forma condensed statement of
operations information for the year ended December 31, 1996, and as of January
1, 1997 with respect to the unaudited pro forma condensed statement of
operations information for the nine months ended September 30, 1997 and as of
September 30, 1997 with respect to the unaudited pro forma condensed balance
sheet information. The unaudited pro forma condensed information (i) assumes
8,045,454 Shares (the minimum amount contemplated by the Offer (the "Minimum
Offer") are purchased January 1, 1996 with respect to the unaudited pro forma
condensed statement of operations information for the year ended December 31,
1996, and January 1, 1997 with respect to the unaudited pro forma condensed
statement of operations information for the nine months ended September 30, 1997
and as of September 30, 1997 with respect to the unaudited pro forma condensed
balance sheet information, each at a price of $11.00 per Share, with the
purchase being financed pursuant to the Financing; (ii) assumes the
Reorganization was effected on January 1, 1996 with respect to the unaudited pro
forma condensed statement of operations information for the year ended
22
<PAGE>
December 31, 1996, and as of January 1, 1997 with respect to the unaudited pro
forma condensed statement of operations information for the nine months ended
September 30, 1997 and as of September 30, 1997 with respect to the unaudited
pro forma condensed balance sheet information; (iii) assumes the issuance at the
completion of the Minimum Offer of $100 million original principal amount of
Notes to finance the Minimum Offer and interest on such Notes at 13% per annum,
compounded semi-annually and payable in additional Notes, and the amortization
over eight years of the expenses of the Minimum Offer in the aggregate amount of
$11.5 million; (iv) gives effect to the issuance of the Warrants (as defined
herein) to purchase 1.25 million shares of Common Stock at an exercise price of
$0.01 per share for a total value of $13.7 million; and (v) gives effect to a
combined federal and state income tax rate that takes into account (A)
limitations on the deductibility of interest on the Notes under Section
163(e)(5)(A) of the Code and analogous state law provisions and (B) provisions
under the tax laws of certain states that limit the ability of the Operating
Subsidiary to deduct a portion of the interest payable by the Holding Company.
<TABLE>
<CAPTION>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
MINIMUM OFFER
(In thousands, except ratios and per Share data)
Year Ended December 31,
Actual Pro Forma
1995 1996 Adjustments 1996
---- ---- ----------- ----
<S> <C> <C> <C> <C>
Income Statement Data
Revenue ....................... $149,530 $302,342 $ -- $302,342
Operating income .............. 17,537 38,418 (1,438)(a) 36,980
Interest expense .............. 490 4,339 13,570 (b) 17,909
Income (loss) before income tax 18,661 34,282 (15,008) 19,275
Net income (loss) ............. 9,226(6) 20,630 (10,192)(c) 10,438
Net income (loss) per share ... $ 0.28 $ 0.59 $ 0.36
Weighted average shares
outstanding(1) .............. 32,962 35,159 28,741
Ratio of earnings to
fixed charges(2) ............ 3.09x 2.48x 1.50x
Balance Sheet Data
Adjusted working capital(3) ... $104,622 $150,657
Total assets .................. 334,660 449,783
Long-term obligations(4) ...... 7,971 82,361
Shareholders' equity .......... 217,783 274,703
Book value per share(5) ....... $ 6.42 $ 7.63
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Actual Pro Forma
1996 1997 Adjustments 1997
---- ---- ----------- ----
<S> <C> <C> <C> <C>
Income Statement Data
Revenue........................ $204,718 $345,098 $ -- $345,098
Operating income............... 23,573 37,649 (1,078)(a) 36,571
Interest expense............... 2,857 7,379 10,178(b) 17,557
Income (loss) before income tax 20,855 11,681(7) (11,256) 425
Net income (loss).............. 12,574 6,446(8) (7,624)(c) (1,178)
Net income (loss) per share.... $ 0.36 $ 0.19 $ (0.04)
Weighted average shares
outstanding(1)............... 34,971 37,873 28,578
Ratio of earnings to
fixed charges(2)............. 2.35x 1.38x 1.00x
Balance Sheet Data
Adjusted working capital(3).... 155,474 $212,513 $(6,436) $206,077
Total assets................... 372,315 590,474 10,422 600,896
Long-term obligations(4)....... 85,549 209,059 86,360 295,419
Shareholders' equity........... 231,148 292,100 (82,374) 209,726
Book value per share(5)........ $ 6.81 $ 7.94 $ 7.00
- - - ------------------------
<FN>
(1) Weighted average shares outstanding include the dilutive effect of stock
options and the Warrants, if appropriate for each period presented.
(2) For purposes of computing this ratio, fixed charges consist of interest
expense, including amounts capitalized and the amortization of deferred
financing fees, and that portion of rental expense that management deems to
be a reasonable approximation of interest costs.
(3) Includes videocassette rental inventories, which are otherwise accounted
for as noncurrent assets under generally accepted accounting principles
because they are not assets that are reasonably expected to be completely
realized in cash or sold in the normal business cycle. The Company
</FN>
</TABLE>
23
<PAGE>
believes the inclusion of rental inventory in the computation of working
capital is meaningful to an understanding of the Company because this
inventory generates a substantial portion of the Company's revenues.
(4) Consists of long-term debt obligations, including current portion.
(5) Pro forma book value per share is calculated as total shareholders equity
divided by the number of pro forma shares outstanding at the end of the
period, including the 1.25 million Warrants.
(6) Effective January 1, 1995, the Company changed its method of amortizing the
cost of videocassette rental inventory. The change in amortization method
resulted in a charge to earnings in 1995 totaling $2.6 million,
representing the cumulative effect as of January 1, 1995 if the new method
had been applied retroactively to all videocassettes in service at that
date.
(7) Reflects a pre-tax charge of $18.9 million for settlement of certain
litigation in the nine months ended September 30, 1997.
(8) Reflects an extraordinary loss of $563,000, net of tax, associated with the
extinguishment of certain debt in the nine months ended September 30, 1997.
Notes to Adjustments
(a) Represents the amortization of the Minimum Offer costs of $11.5 million
over eight years.
(b) Represents the additional interest expense associated with the issuance at
the completion of the Minimum Offer of $100 million principal amount of
Notes to finance the Minimum Offer at an interest rate of 13% per annum,
compounded semi-annually and payable in additional Notes.
(c) Gives effect to a combined federal and state income tax rate that takes
into account (i) limitations on the deductibility of interest on the Notes
under section 163(e)(5)(A) of the Code and analogous state law provisions
and (ii) provisions under the tax laws of certain states that limit the
ability of the Operating Subsidiary to deduct a portion of the interest
payable by the Holding Company.
The following summary unaudited pro forma condensed financial information
of the Company gives effect to the Offer as if the Offer occurred as of January
1, 1996 with respect to the unaudited pro forma condensed statement of
operations information for the year ended December 31, 1996, and as of January
1, 1997 with respect to the unaudited pro forma condensed statement of
operations information for the nine months ended September 30, 1997 and as of
September 30, 1997 with respect to the unaudited pro forma condensed balance
sheet information. The unaudited pro forma condensed information (i) assumes
16,818,181 Shares (the maximum amount contemplated by the Offer (the "Maximum
Offer") are purchased January 1, 1996 with respect to the unaudited pro forma
condensed statement of operations information for the year ended December 31,
1996, and January 1, 1997 with respect to the unaudited pro forma condensed
statement of operations information for the nine months ended September 30, 1997
and as of September 30, 1997 with respect to the unaudited pro forma condensed
balance sheet information, each at a price of $11.00 per Share, with the
purchase being financed pursuant to the Financing; (ii) assumes the
Reorganization was effected on January 1, 1996 with respect to the unaudited pro
forma condensed statement of operations information for the year ended December
31, 1996, and as of January 1, 1997 with respect to the unaudited pro forma
condensed statement of operations information for the nine months ended
September 30, 1997 and as of September 30, 1997 with respect to the unaudited
pro forma condensed balance sheet information; (iii) assumes the issuance at the
completion of the Maximum Offer of $200 million original principal amount of
Notes to finance the Maximum Offer and interest on such Notes at 13% per annum,
24
<PAGE>
compounded semi-annually and payable in additional Notes, and the amortization
over eight years of the expenses of the Maximum Offer in the aggregate amount of
$15.0 million; (iv) gives effect to the issuance of the Warrants to purchase
2.25 million shares of Common Stock at an exercise price of $0.01 per share for
a total value of $24.7 million; and (v) gives effect to a combined federal and
state income tax rate that takes into account (A) limitations on the
deductibility of interest on the Notes under Section 163(e)(5)(A) of the Code
and analogous state law provisions and (B) provisions under the tax laws of
certain states that limit the ability of the Operating Subsidiary to deduct a
portion of the interest payable by the Holding Company.
25
<PAGE>
<TABLE>
<CAPTION>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
MAXIMUM OFFER
(In thousands, except ratios and per Share data)
Year Ended December 31,
Actual Pro Forma
1995 1996 Adjustments 1996
---- ---- ----------- ----
<S> <C> <C> <C> <C>
Income Statement Data
Revenue ....................... $149,530 $302,342 $ -- $302,342
Operating income .............. 17,537 38,418 (1,875)(a) 36,543
Interest expense .............. 490 4,339 27,136 (b) 31,475
Income (loss) before income tax 18,661 34,282 (29,011) 5,271
Net income (loss) ............. 9,226(6) 20,630 (19,644)(c) 938
Net income (loss) per share ... $ 0.28 $ 0.59 $ 0.05
Weighted average shares
outstanding(1) .............. 32,962 35,159 20,968
Ratio of earnings to
fixed charges(2) ............ 3.09x 2.48x 1.09x
Balance Sheet Data
Adjusted working capital(3) ... $104,622 $150,657
Total assets .................. 334,660 449,783
Long-term obligations(4) ...... 7,971 82,361
Shareholders' equity .......... 217,783 274,703
Book value per share(5) ....... $ 6.42 $ 7.63
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Actual Pro Forma
1996 1997 Adjustments 1997
---- ---- ----------- ----
<S> <C> <C> <C> <C>
Income Statement Data
Revenue........................ $204,718 $345,098 $ -- $ 345,098
Operating income............... 23,573 37,649 (1,406)(a) 36,243
Interest expense............... 2,857 7,379 20,352(b) 27,731
Income (loss) before income tax 20,855 11,681(7) (21,758) (10,077)
Net income (loss).............. 12,574 6,446(8) (14,698)(c) (8,252)
Net income (loss) per share.... $ 0.36 $ 0.19 $ (0.42)
Weighted average shares
outstanding(1)............... 34,971 37,873 19,805
Ratio of earnings to
fixed charges(2)............. 2.35x 1.38x --
Balance Sheet Data
Adjusted working capital(3).... 155,474 $212,513 $(13,074) $ 199,439
Total assets................... 372,315 590,474 13,594 604,068
Long-term obligations(4)....... 85,549 209,059 175,468 384,527
Shareholders' equity........... 231,148 292,100 (174,948) 117,152
Book value per share(5)........ $ 6.81 $ 7.94 $ 5.27
</TABLE>
- - - ------------------------
(1) Weighted average shares outstanding include the dilutive effect of stock
options and the Warrants, if appropriate for each period presented.
(2) For purposes of computing this ratio, fixed charges consist of interest
expense, including amounts capitalized and the amortization of deferred
financing fees, and that portion of rental expense that management deems to
be a reasonable approximation of interest costs. For the nine months ended
September 30, 1997, earnings were inadequate to cover fixed charges by
$10.4 million; however, the ratio of earnings to fixed charges for such
period would have been 1.16x, excluding the effect of a pre-tax charge of
$18.9 million relating to the settlement of a securities class action
lawsuit.
(3) Includes videocassette rental inventories, which are otherwise accounted
for as noncurrent assets under generally accepted accounting principles
because they are not assets that are reasonably expected to be completely
realized in cash or sold in the normal business cycle. The Company believes
the inclusion of rental inventory in the computation of working capital is
meaningful to an understanding of the Company because this inventory
generates a substantial portion of the Company's revenues.
(4) Consists of long-term debt obligations, including current portion.
(5) Pro forma book value per share is calculated as total shareholders equity
divided by the number of pro forma shares outstanding at the end of the
period, including the 2.25 million Warrants.
26
<PAGE>
(6) Effective January 1, 1995, the Company changed its method of amortizing the
cost of videocassette rental inventory. The change in amortization method
resulted in a charge to earnings in 1995 totaling $2.6 million,
representing the cumulative effect as of January 1, 1995 if the new method
had been applied retroactively to all videocassettes in service at that
date.
(7) Reflects a pre-tax charge of $18.9 million for settlement of certain
litigation in the nine months ended September 30, 1997.
(8) Reflects an extraordinary loss of $563,000, net of tax associated with the
extinguishment of certain debt in the nine months ended September 30, 1997.
Notes to Adjustments
(a) Represents the amortization of the Maximum Offer costs of $15.0 million
over eight years.
(b) Represents the additional interest expense associated with the issuance at
the completion of the Maximum Offer of $200 million principal amount of
Notes to finance the Maximum Offer at an interest rate of 13% per annum,
compounded semi-annually and payable in additional Notes.
(c) Gives effect to a combined federal and state income tax rate that takes
into account (i) limitations on the deductibility of interest on the Notes
under section 163(e)(5)(A) of the Code and analogous state law provisions
and (ii) provisions under the tax laws of certain states that limit the
ability of the Operating Subsidiary to deduct a portion of the interest
payable by the Holding Company.
27
<PAGE>
Certain Projected Financial Information
The Company does not as a matter of course make public projections as to
future financial results. The Company, however, has prepared the projected
financial information described below to present certain potential effects of
the Maximum Offer. In the Company's view, these projections were prepared on a
reasonable basis; this information, however, is not fact and should not be
relied upon as necessarily indicative of future results, and readers of this
Offer to Purchase are cautioned not to place undue reliance on the projected
financial information.
In the fourth quarter of 1997, in connection with the planning and
development of the Offer, management of the Company prepared base case
projections of certain financial information for the Company for the five-year
period ending December 31, 2002, on both a status quo basis and on a pro forma
basis giving effect to the Offer and the Financing. At the request of the
Special Committee, management prepared additional projections for the same
period but assumed negative comparable store revenue over the period and
substantially reduced new store openings. These projections reflect an assumed
date of completion of the Maximum Offer of January 1, 1998 (although the Offer
is not expected to close until January 23, 1998). The projected information
reflects (i) the repurchase and retirement of 16,818,181 Shares, at a price of
$11.00 per Share, with the purchase being financed pursuant to the Financing;
(ii) the Reorganization being effected as of January 1, 1998; (iii) the issuance
at the completion of the Maximum Offer of $200 million original principal amount
of Notes to finance the Maximum Offer and (iv) the other assumptions set forth
above under "Historical and Pro Forma Financial Information."
The projected financial information is based necessarily on various
assumptions and cannot take into account all factors that may affect the Company
or all decisions the Company may consider or undertake. For the purposes of
preparing these projections only, the Company assumed, for the base case, among
other things, new store revenue amounts greater than the Company's experience in
the nine months ended September 30, 1997 and comparable store revenue increases
of 2% on stores open more than 24 months, which is consistent with the Company's
historical experience. In addition, the projected financial information assumes
the opening of 400 new stores in each of the four years in the period ended
December 31, 2001 and no new store openings thereafter. Furthermore, the
projected information assumes other expenses, as a percentage of revenue, would
decrease slightly over the periods shown, other than advertising expense, which
was projected to increase slightly as a percentage of revenue. The downside case
assumed lower new store revenue amounts than the base case; comparable store
revenue of negative 2% on stores open more than 24 months; and 400 new stores in
1998, 200 new stores in 1999, and no new stores thereafter. Other assumptions
were similar to the base case.
The assumptions and estimates underlying the base case projections prepared
by the Company are inherently uncertain and, though considered reasonable by the
Company as of the date hereof, are subject to a wide variety of significant
business, economic and competitive risks and uncertainties that could cause
actual results to differ materially from those projected. See Section 7 -
"Certain Information Concerning the Company - Certain Considerations."
Accordingly, there is no assurance that projected base case results are
indicative of the future performance of the Company or that actual results will
not be materially higher or lower than these projections. Inclusion of
information with respect to these projections in this Offer to Purchase should
not be regarded as a representation by any person that the projected results
will be achieved.
28
<PAGE>
The Company does not generally publish its business plans and strategies or
make external projections of its anticipated financial position or results of
operations. Accordingly, after the expected date of completion of the Offer, the
Company does not intend to update or otherwise revise the projections to reflect
circumstances existing since their preparation or to reflect the occurrence of
unanticipated events, even if any or all of the underlying assumptions are shown
to be in error. Furthermore, the Company does not intend to update or revise the
projections to reflect changes in general economic or industry conditions. The
Company's regular quarterly and annual financial statements and the accompanying
discussion and analysis contained in the Company's Quarterly Reports on Form
10-Q and Annual Reports on Form 10-K, however, will contain disclosure
concerning the Company's actual financial condition and results of operations
during the periods covered by the projections.
Based on the assumptions, and subject to the qualifications, set forth
above, 1998 base case earnings per share decrease approximately 12.3% versus the
comparable period under the status quo scenario. Under the pro forma base case,
the compounded annual growth rate of earnings per share from 1998 to 2002 is
51.9% compared to 36.4% under the status quo scenario. On a cash flow per share
basis, the Offer is accretive in 1998, with cash flow per share increasing 13.9%
compared to the comparable period under the status quo scenario. The pro forma
base case compounded annual growth of cash flow per share from 1998 to 2002 is
47.2% compared to 30.9% under the status quo scenario.
Projected downside pro forma earnings per share and cash flow per share
were substantially less than comparable downside status quo figures.
Certain Considerations
In evaluating the Offer and in making a decision whether to tender Shares
pursuant to the Offer, shareholders of the Company should consider carefully the
following information, as well as the information contained in the reports filed
by the Company pursuant to the Exchange Act and the other information contained
in this Offer to Purchase.
Increased Leverage. Upon completion of the Offer and the Financing, the
Company will have substantially greater amounts of outstanding indebtedness and
interest cost. (The Company will not, however, be required to make any cash
interest payments on the Notes until 2002.) The Company's level of indebtedness
presents an increased level of risk to shareholders compared to the existing
capital structure, including the possibility that the Company may be unable to
generate cash sufficient to pay the principal of and interest on indebtedness
when due. At September 30, 1997, on a pro forma basis after giving effect to the
purchase of the maximum number of Shares pursuant to the Offer and the Financing
for such purchase, the Company would have had total indebtedness of $384.5
million. In addition, as of that date the Company would have been able to borrow
up to an additional $60 million under the Credit Agreement.
The Company's ability to make principal and interest payments on its
indebtedness will be dependent on the Company's future operating performance,
including its ability to open new stores and operate those stores profitably,
which is itself dependent on a number of factors, many of which are out of the
Company's control. An important factor related to Company's ability to make such
payments on the Notes is the ability of the Operating Subsidiary to pay
dividends and make other distributions to the Company in order for the Company
to timely service debt incurred as a result of issuing the Notes,
29
<PAGE>
including interest expense on the Notes which must be paid in cash starting in
2002. The Operating Subsidiary's ability to pay dividends and make other
distributions to the Company will be limited under the indenture for the Senior
Notes and the Credit Agreement to be assumed by the Operating Subsidiary. Other
factors include prevailing economic conditions and financial, competitive,
regulatory and other factors affecting the Company's business and operations,
and may be dependent on the availability of borrowings under the Credit
Agreement or other borrowings. Although the Company believes, based on current
levels of operations, its cash flow from operations, together with other sources
of liquidity, will be adequate to make required payments of principal and
interest on its debt, whether at or prior to maturity, finance anticipated
capital expenditures and fund working capital requirements, there is no
assurance in this regard. If the Company does not have sufficient available
resources to repay any indebtedness when it becomes due and payable, the Company
may find it necessary to refinance such indebtedness, and there is no assurance
that refinancing will be available, or available on reasonable terms.
Additionally, the Company's level of indebtedness could have a material
adverse effect on the Company's future operating performance, including, but not
limited to, the following: (i) a significant portion of the Company's cash flow
from operations will be dedicated to debt service payments (with respect to the
Notes beginning in 2002), thereby reducing the funds available to the Company
for other purposes; (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions or general
corporate purposes or other purposes may be impaired; (iii) the Company's
leverage may place the Company at a competitive disadvantage; (iv) the Company's
leverage may limit its ability to expand and otherwise meet its growth
objectives; and (v) the Company's leverage may hinder its ability to adjust
rapidly to changing market conditions and could make it more vulnerable in the
event of a downturn in general economic conditions or its business.
Expansion Strategy. The Company opened its first video superstore in
October 1988 and had grown to 25 stores in Oregon and Washington by the end of
1993. In 1994 the Company significantly accelerated its store expansion program,
adding 88 new stores (55 of which were acquired) and expanding into California,
Texas, Nevada, New Mexico, Virginia and Utah. In 1995 the Company opened 122 new
stores, acquired 70 stores and entered major new markets in the midwest,
southwest, east and southeast regions of the United States. The Company's
expansion strategy is to continue to open stores in regions where it has
existing operations and to expand into new geographic regions where it believes
it can become a dominant video retailer. The Company opened 250 new stores and
closed four stores in 1996 and opened 231 new stores in the nine months ended
September 30, 1997. The Company expects to open approximately 174 new stores in
the last quarter of 1997 and approximately 400 new stores in 1998. The Company
has signed leases for all of these 1997 locations and many of the 1998
locations.
The Company believes the selection of locations for its stores is critical
to the success of its operations. The Company has assembled a new store
development team with broad and significant experience in retail tenant
development. The majority of the Company's new store development personnel are
located in the geographic area for which they are responsible, but all final
site approval takes place at the corporate office, where new sites are approved
by a committee of senior management personnel. Final approval of all new sites
is the responsibility of the Company's Chief Executive Officer. Important
criteria for the location of a Hollywood Video superstore include density of
local residential population, traffic count on roads immediately adjacent to the
store location, visibility and accessibility of the store and availability of
ample parking. The Company generally seeks what it considers the most desirable
locations, typically locating its stores in high-visibility stand-alone
structures or in prominent
30
<PAGE>
locations in multi-tenant shopping developments. The Company typically competes
for these prime sites with other retailers, banks, restaurants and gas stations.
All of the Company's stores are in leased premises; the Company does not own any
real estate.
Uncertain Ability to Achieve and Manage Planned Expansion. The Company's
future performance in general, and its ability to repay amounts borrowed to
finance the Offer in particular, will depend on its ability to open new stores
and to operate these stores profitably. The Company will continue to open stores
in markets where it has limited or no operating history. Additionally, the
Company has been decreasing the size of its acceptable trade areas primarily
through the increased opening of stores in small markets with populations under
40,000 people. The Company has a limited operating history in these smaller
markets and may experience lower than anticipated revenue and operating results.
The Company's expansion is dependent on a number of factors, including its
ability to hire, train and assimilate management and store-level employees, the
adequacy of the Company's financial resources and the Company's ability to
identify and successfully compete in new markets, to locate suitable store sites
and negotiate acceptable lease terms and to adapt its purchasing, management
information and other systems to accommodate expanded operations. Furthermore,
the agreement pursuant to which the Company will issue the Notes will limit the
number of new stores the Company will be permitted to open, acquire or lease or
prevent the Company from opening, acquiring or leasing any new stores if the
average annualized revenues of new stores opened during the four quarters
preceding the measurement date was less than certain levels. See Section 8 -
"Source and Amount of Funds." If recent trends (based on the average annualized
revenue of new stores opened since June 30, 1997) continue, the Company could be
prevented by this covenant from opening, acquiring or leasing new stores after
June 30, 1998. The Company believes, however, that average annualized revenue of
new stores opened since June 30, 1997 have been negatively affected by the
reduced number of "hit" new release titles available for rental and sale in this
period.
The size of the Company's store base and the geographic scope of its
operations have expanded significantly over the last several years. This
expansion has placed and is expected to continue to place increasing pressure on
the Company's operating and management controls. The Company has hired a
significant number of additional senior management and other personnel to manage
this larger store base and has reorganized its operations into four geographic
zones, each of which is managed by a senior officer with responsibility for
store operations and new store development in the zone. This operating structure
is in the early stages of implementation, and there is no assurance it will be
effective for managing the Company's expanding operations. In addition, to
manage its larger store base and planned expansion, the Company will need to
continually evaluate the adequacy of its financial controls, management
information systems and distribution facilities. There is no assurance that the
Company will adequately anticipate or respond to all of the changing demands
that its planned expansion will impose on its infrastructure.
The Company believes the amounts available for borrowing under the Credit
Agreement, together with cash on hand and cash generated from operations, will
be sufficient to fund its expansion through at least 1999. The Company's
expansion is also dependent on the timely fulfillment by landlords and others of
their contractual obligations to the Company, the maintenance of construction
schedules and the speed at which local zoning and construction permits can be
obtained. There is no assurance that the Company will be able to achieve its
planned expansion or that expansion will be profitable. There is also
31
<PAGE>
no assurance that the Company's new stores will achieve sales and profitability
comparable to the Company's existing stores.
Competition and Technological Obsolescence. The video retail industry is
highly competitive. The Company competes with other local, regional and national
video retail stores, including Blockbuster, the dominant video retailer in the
U.S., and with supermarkets, pharmacies, convenience stores, bookstores, mass
merchants, mail order operations and other retailers, as well as with
noncommercial sources such as libraries. According to the Video Software Dealers
Association, in 1996 there were approximately 27,000 video specialty stores in
the U.S. The Company believes approximately 7,200 of these stores were video
retail superstores. Some of the Company's competitors have significantly greater
financial and marketing resources, market share and name recognition than the
Company. Substantially all of the Company's stores compete with stores operated
by Blockbuster, most in very close proximity. As a result of direct competition
with Blockbuster, rental pricing of videocassettes may become a more significant
competitive factor in the Company's business, which could have an adverse impact
on the results of operations of the Company.
The Company also competes with cable, satellite and pay-per-view television
systems, in which subscribers pay a fee to see a movie selected by the
subscriber. Existing pay-per-view services offer a limited number of movies and
are available only to households with a direct broadcast satellite receiver or a
cable converter to unscramble incoming signals. Digital compression technology
and other developing technologies permit cable companies, direct broadcast
satellite companies, telephone companies and other telecommunications companies
to transmit a much greater number of movies to homes at more frequently
scheduled intervals throughout the day on demand. As availability and demand for
these services grow, demand for video rentals may decrease. Certain cable and
other telecommunications companies have tested and are continuing to test movie
on demand services in some markets. "Movie on demand" service would allow a
viewer to pause, rewind and fast forward movies. Based on publicly available
information, the Company believes these tests have been unsuccessful. The
Company also believes movie studios have a significant interest in maintaining a
viable movie rental business because the sale of videocassettes to video retail
stores represents the largest source of revenue for the studios. In addition,
home video provides the only reliable source of revenue on "non-hit" or
"B-title" movies which make up the majority of movies produced by the major
studios each year. As a result, the Company believes movie studios will continue
to make movie titles available to cable television or other distribution
channels only after revenues have been derived from the sale of videocassettes
to video stores.
In addition, the Company believes substantial technological developments
will be necessary to allow pay-per-view television to match the viewing
convenience and selection available through video rental, and substantial
capital expenditures will be necessary to implement these systems. In contrast,
according to Adams Media Research, 78.8 million, or 82%, of all U.S. television
households own a VCR. Although the Company does not believe cable television,
video on demand or other distribution channels represent a near-term competitive
threat to its business, technological advances or changes in the manner in which
movies are marketed, including in particular the earlier release of movie titles
to pay-per-view, including direct broadcast satellite, cable television or other
distribution channels, could make these technologies more attractive and
economical, which could have a material adverse effect on the business of the
Company.
32
<PAGE>
Two new technologies, digital video disk ("DVD") and digital video express
("DIVX"), provide an alternative to the VHS videocassette format and are gaining
support among the studios. DVD is currently being promoted as primarily a
sell-through product and DIVX, a developing technology which is not yet
available, is promoted as a rental product. Both are discs, similar to audio
compact discs. The acceptance by consumers of DVD as primarily a sell-through
product could lead to a decline in consumer demand for rentals. The Company
believes that DVD, if successful, will attain success as both a rental and
sell-through format. The DIVX format could allow consumers to rent a movie
without requiring a return visit. The DIVX format is a disc encoded to allow
viewing for a short number of days through a special player that communicates
with a central location. DIVX would allow consumers to keep the disc and pay for
each viewing period thereafter with no return required. Additionally, under the
DIVX business model retail stores would not run out of stock of new releases. If
successful, DIVX may be offered through an increased number of retailers because
of the elimination of the need to return the disc. The Company plans to offer
through its stores any new retail based technology that is widely accepted by
consumers.
Fluctuations in Future Operating Results. Future operating results may be
affected by many factors, including variations in the number and timing of store
openings, the performance of new or acquired stores, the quality and number of
new release titles available for rental and sale and the expense associated with
the acquisition of new release titles, acquisition by the Company of existing
video stores, changes in comparable store revenue, additional and existing
competition, marketing programs, weather, special or unusual events, seasonality
and other factors that may affect retailers in general. In addition, any
concentration of new store openings and the related new store pre-opening costs
near the end of a fiscal quarter could have an adverse effect on the financial
results for that quarter and could, in certain circumstances, lead to
fluctuations in quarterly financial results. If the Offer is not completed, the
Company will be required to expense substantial transaction costs in the period
in which the Offer is abandoned.
Possible Volatility of Common Stock Price. The market price of the
Company's Common Stock has fluctuated substantially since the initial public
offering of the Company in July 1993. See Section 6 "Price Range of Common
Stock; Cash Dividends." The Common Stock is traded on the NNM, which market has
experienced and is likely to experience in the future significant price and
volume fluctuations that could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. The Company
believes that many factors, including fluctuations in operating results,
announcements of new technologies or changes in movie distribution or
announcements by the Company or its competitors may cause the market price of
the Common Stock to fluctuate, perhaps substantially. These factors, as well as
general economic conditions, such as recessions or high interest rates, may
adversely affect the market price of the Common Stock. If the Offer is
completed, there will be fewer shares of Common Stock outstanding, which could
result in reduced liquidity for remaining shareholders and have an adverse
affect on the market price of the Common Stock. There is no assurance that the
market price of the Company's Common Stock will not, following completion of the
Offer, fall below the Offer Price or below the prices that prevailed immediately
prior to the announcement that the Company was considering the Offer or
commencing the Offer.
8. Source and Amount of Funds.
The Company estimates that the total amount of funds required to purchase
up to 16,818,181 Shares pursuant to the Offer and to pay fees and expenses
related to the Offer will be approximately
33
<PAGE>
$200.0 million. The Company plans to finance the Offer through the issuance of
up to $200.0 million in original principal amount of pay-in-kind notes due 2006
(the "Notes") to the Purchasers. The Company has entered into a Commitment
Letter with the Purchasers committing the Purchasers to purchase a minimum of
$100.0 million and a maximum of $200.0 million in original principal amount of
the Notes, subject to the execution of definitive documentation and the
satisfaction of certain closing conditions. The date of the Closing of the Offer
shall not be later than January 31, 1998 unless the Purchasers otherwise agree
(the "Closing").
The following is a summary of the key terms of the Notes and the Warrants.
The Notes will be general unsecured obligations of the Company and are expected
to mature on the eighth anniversary of the completion of the Offer. The amount
of Notes to be issued will depend upon the amount of Shares repurchased pursuant
to this Offer to Purchase. The maximum commitment of the Purchasers is $200.0
million in original principal amount of Notes. At the Closing, the Company will
be required to issue at least $100.0 million in original principal amount of the
Notes. The minimum and maximum original principal amounts of the Notes to be
issued at the Closing will be adjusted ratably with the amount of Shares
repurchased pursuant to the Offer. Interest on the Notes will accrue at a rate
of 13% per annum payable in cash semi-annually in arrears; provided that on any
semi-annual interest payment date on or prior to the four and one-half year
anniversary of the Closing Date, the Company will have the option to pay all or
any portion of the interest by issuing additional Notes in the principal amount
of the interest if the Company elects not to pay in cash. After the four and
one-half year anniversary of the Closing Date, all interest on the Notes will be
payable in cash semi-annually in arrears. At any time when the Company is in
default with respect to payment of any amount due under the Notes, or any other
specified event of default shall have occurred and be continuing, interest on
the Notes will accrue semi-annually at 2% above the rate otherwise applicable.
The Company is permitted to make, at any time after the fourth anniversary of
the Closing, in whole or in part, voluntary prepayments at premiums ranging from
106.500% after the fourth anniversary of the Closing and declining to 101.625%
in the final year, together with accrued and unpaid interest, if any, to the
date of payment. Upon a change of control, the Company will be required to offer
to purchase the Notes from each holder thereof within 30 days thereafter at 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of payment. After the closing of the sale of the Notes, the
holders of at least 25% of the Notes as a group will have a one-time right to
demand the Company to register the Notes for resale under the Securities Act of
1933, as amended (the "Securities Act"), subject to certain customary
limitations. The Company will also enter into a tax sharing agreement with the
Operating Subsidiary pursuant to which the Operating Subsidiary will remit to
the Company taxes computed on a separate company basis.
In connection with its purchase of the Notes, the Purchasers will acquire,
at no additional consideration, warrants evidencing the right to purchase
between 1.25 million and 2.25 million shares of Common Stock, at a warrant
exercise price of $0.01 per share, exercisable at any time prior to the fifth
anniversary of the Closing (the "Warrants"). The number of shares of Common
Stock issuable pursuant to the Warrants will be based on the original principal
amount of the Notes issued in the Financing. After the closing of the sale of
the Notes, holders of at least 25% of the Warrants as a group will have a
one-time right to demand that the Company register the Common Stock issuable
upon exercise of the Warrants for resale under the Securities Act, subject to
certain customary limitations, and will have unlimited customary "piggyback"
registration rights, subject to customary cutbacks. Each holder of the Warrants
will upon exercise of the Warrants for Common Stock participate with other
holders of Common Stock in the "tag-along" rights granted to the Company's
shareholders pursuant to
34
<PAGE>
the Wattles Voting Agreement. As long as the Purchasers and their affiliates own
at least 331/3% of the original principal amount of the Notes issued at Closing
and 331/3% of the original amount of Warrants or the Common Stock underlying the
Warrants the Company will, at the request of the Purchasers, nominate one
director to the Company's Board of Directors who has been designated by the
Purchasers. The Warrants will be subject to customary anti-dilution protection,
including an adjustment in the aggregate number of shares issuable upon exercise
of the Warrants in the event that the Company reduces the aggregate exercise
proceeds under employee stock options outstanding at the Closing below a
threshold reduction amount.
In connection with the Financing, the Company expects to reimburse the
Purchasers for out-of-pocket expenses associated with the Financing, subject to
a maximum expense reimbursement of $375,000. The Company also will pay any
sales, use or similar taxes arising in connection with the Financing. In
consideration of the Purchasers' commitment to purchase the Notes, moreover, the
Company will pay the Purchasers (i) a commitment fee of $2 million on execution
of the Commitment Letter and (ii) a funding fee equal to 3.5% of the original
principal amount of the Notes issued to the Purchasers, less the amount of the
commitment fee previously paid pursuant to (i) above, and will pay to Goldman,
Sachs & Co. a fee of $2 million if (a) the Offer is completed or (b) if the
Notes are not issued, and within one year after the date of the Commitment
Letter the Company enters into another transaction involving the acquisition by
the Company or another party of 15% or more of the Company's Common Stock or 15%
or more of the Company's assets. The Company will also pay other fees and
expenses associated with the Financing. The Company has agreed not to solicit or
negotiate alternative financing arrangements with respect to the Offer through
January 31, 1998. The Company has also agreed to indemnify the Purchasers
against certain liabilities, including liabilities under the Securities Act.
The Commitment Letter provides that conditions to Closing include the
following: (i) absence of any change of control of the Company; (ii) if the
Closing occurs on or after January 31, 1998, adjusted EBITDA for the fiscal year
ending December 31, 1997 as estimated by the Company in good faith being not
less than $80 million; (iii) Consolidated Net Indebtedness of the Operating
Subsidiary not exceeding $240 million at December 31, 1997; (iv) no change in
fully-diluted equity ownership from the structure contemplated by the Commitment
Letter and the term sheet annexed to it; (v) issuance at Closing of at least
$100 million in original principal amount of Notes; (vi) the Purchasers'
satisfaction with the terms and conditions of the Transactions, including the
Wattles Voting Agreement; (vii) the Purchasers' reasonable satisfaction with the
amendment to the Credit Agreement; and (viii) other customary conditions to
Closing. The Commitment Letter also provides for certain covenants, including
(i) that the Company will continue to own all the capital stock of the Operating
Subsidiary; (ii) a limitation on indebtedness; (iii) a limitation on provisions
restricting dividends by subsidiaries; (iv) a limitation on liens; (v) a
limitation on mergers, consolidations and sales of assets; (vi) a limitation on
restricted payments; (vii) the Purchasers' reasonable satisfaction with the
amendment to the Credit Agreement; (viii) a limitation on investments; (viii) a
limitation on sale of assets; and (ix) a limitation on affiliated transactions.
The Commitment Letter also contains a covenant which provides the following
limitations on the number of new stores that the Company and its Subsidiaries
are allowed to open, acquire or lease. Without the prior consent of the holders
of a majority in principal amount of Notes at the time outstanding (the
"Required Holders"), the Company and its Subsidiaries cannot open, acquire or
lease more than 25 stores per quarter if the average annualized revenue from
stores opened or acquired by the Company or its Subsidiaries in the preceding
four quarters is less than $575,000 per store. If such revenue is below $525,000
per store, the Company and its Subsidiaries shall not open, acquire or lease any
new stores unless the Required Holders have agreed otherwise. After the fourth
anniversary of the Closing, all limitations on new store openings will terminate
if the ratio of the Company's Consolidated Net Indebtedness to Adjusted EBITDA
for the trailing four quarter period is less than 4.50, subject to
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reimposition of such prohibition if the ratio exceeds 4.50 as of any subsequent
fiscal quarter end. This covenant also terminates at such time as the Purchasers
and their Affiliates own less than 50% of the aggregate principal amount of the
Notes. (All the capitalized terms used in this paragraph not otherwise defined
in this Offer to Purchase shall have the meaning ascribed to them in the
Commitment Letter and the term sheet annexed to it.)
Upon the completion of the Offer, the Company will be significantly more
leveraged than the Company was prior to the completion of the Offer and will
have indebtedness that is substantial in relation to its shareholders' equity.
As of September 30, 1997, on a pro forma basis after giving effect to the Offer,
the Reorganization and the Financing, the Company would have had on a
consolidated basis an aggregate of $384.5 million of outstanding indebtedness.
See Section 9 - "The Purpose of the Offer; Certain Effects of the Offer;
Increased Leverage."
THE OFFER IS CONDITIONED UPON THE RECEIPT BY COMPANY OF THE PROCEEDS OF
THE FINANCING DESCRIBED HEREIN. SEE INTRODUCTION AND SECTION 12 - CERTAIN
CONDITIONS OF THE OFFER."
9. The Purpose of the Offer; Certain Effects of the Offer
Purpose
The purpose of the Offer is (i) to further the Company's long term goal of
seeking to increase shareholder value by creating the opportunity, after at
least one year, for increases in earnings per share as a result of the reduction
in the number of shares of Common Stock outstanding and (ii) provide
shareholders who wish to sell at least a portion of their shares of Common Stock
the opportunity to do so at a premium to recent market prices without having to
pay brokerage fees or commissions or, except as set forth in Instruction 6 of
the Letter of Transmittal, transfer taxes on the purchase of Shares pursuant to
the Offer.
The Company's Board of Directors has determined that the current financial
market conditions, including recent trading prices of the Common Stock, which
the Company believes have been adversely affected by concerns about the future
of the video retail business in general, make this an attractive time to
repurchase a significant number of Shares of Common Stock. The Board made this
determination taking into account increased debt leverage and resulting
increased interest expense and financing costs and financial and operating
constraints associated with the borrowing required to fund the Offer and
additional dilution associated with issuance of Warrants contemplated by the
Financing. See "Introduction."
To facilitate the financing for the Offer, the Board of Directors has
approved the Reorganization. Following the Reorganization, the Company's
existing bank financing and publicly traded debt securities will remain in place
at the Operating Subsidiary level, and the publicly traded Holding Company will
issue the Notes to the Purchasers in a private placement. See Section 8 -
"Source and Amount of Funds." The Company will be required to obtain consents to
the Reorganization from the lessors under certain of its store and equipment
leases and from its lenders under the Credit Agreement. Although the Company
expects to obtain the required consents, if it is unable to obtain such
consents, it may be unable to effect the Reorganization and complete the Offer.
At the request of the Special Committee, the Company has agreed to amend
its bylaws to provide that a majority of the Board will be independent, as
determined by the independent directors. For all vacancies, including the
vacancy created upon the increase in the size of the Board following completion
of the Offer, Mr. Wattles will present a candidate to the Board's Nominating
Committee, which will be composed of Mr. Wattles and all non-employee directors,
for filling the vacancy of an independent
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director. Subject to the reasonable objection of the Nominating Committee as to
the candidate's qualifications and the condition that the candidate is
independent, the candidate will be nominated or considered for election as a
director. If Mr. Wattles does not present a reasonably acceptable candidate
within six months of the creation of a vacancy, the Nominating Committee will
select a candidate for election or consideration to fill the vacancy. Pursuant
to the Wattles Voting Agreement, Mr. Wattles will vote all of his Shares below
31.2% of the outstanding Common Stock in favor of independent director-nominees
that are selected in accordance with the new Bylaw provisions, except in
circumstances where he determins, reasonably and in good faith, that the nominee
is not qualified to be a director. It is anticipated that the officers of the
Company would be reduced to Mark J. Wattles, Chairman, President and Chief
Executive Officer, F. Mark Wolfinger, Chief Financial Officer, and Donald J.
Ekman, Senior Vice President and General Counsel. It is anticipated that those
persons who are now officers of the Company would generally hold the same office
with the Operating Subsidiary and that the directors of the Operating Subsidiary
would be Mr. Wattles and Mr. Ekman.
Certain Effects of the Offer
Shareholders who do not tender their Shares pursuant to the Offer and
shareholders who otherwise retain an equity interest in the Company as a result
of a partial tender of Shares or a proration pursuant to Section 1 - "Terms of
the Offer; Expiration Date" will continue to be owners of the Company with the
attendant risks and benefits associated with owning the equity securities of the
Company.
Shareholders who determine not to accept the Offer will realize a
proportionate increase in their relative equity interest in the Company and,
thus, in the Company's earnings and assets, subject to any risks resulting from
the Company's purchase of Shares and the Company's ability to issue additional
equity securities in the future. At September 30, 1997, Mark J. Wattles,
Chairman and Chief Executive Officer of the Company, was the beneficial owner of
11,124,600 shares of Common Stock, representing approximately 30.2% of the
36,786,346 shares issued and outstanding at that date. Because Mr. Wattles will
not tender any of his shares pursuant to the Offer, if the Offer is completed,
his percentage ownership of the shares outstanding (before giving effect to
outstanding management stock options and the Warrants issued to the Purchasers
in connection with the Financing) will increase to between approximately 39% and
56%, depending on the number of shares purchased in the Offer. See Section 10 -
"Transactions and Arrangements Concerning the Common Stock."
The Offer will adversely affect the Company's ability to qualify for
pooling-of-interests accounting treatment for any merger transaction for
approximately the next two years. As a consequence, acquisitions during this
period would need to be accounted for under the purchase method, which would
require the amortization of any goodwill as an operating expense of the Company,
which could make an acquisition less attractive or impracticable.
Shares the Company acquires pursuant to the Offer will be restored to the
status of authorized and unissued shares and will be available for the Company
to issue without further shareholder action (except as required by applicable
law or the rules of the NNM or any other securities exchange on which the Common
Stock is listed) for purposes including, but not limited to, the acquisition of
other businesses, the raising of additional capital for use in the Company's
business and the satisfaction of obligations under existing or future employee
benefit plans. The Company has no plans for reissuance of the Shares repurchased
pursuant to the Offer.
Upon completion of the Offer and the Financing, the Company will have
substantially greater amounts of outstanding indebtedness and interest cost.
See Section 7 - "Certain Information Concerning the Company - Certain
Considerations."
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NEITHER THE COMPANY, ITS BOARD OF DIRECTORS NOR THE SPECIAL COMMITTEE MAKES
ANY RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER ALL OR ANY SHARES.
EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW
MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NO DIRECTOR OR
EXECUTIVE OFFICER INTENDS TO TENDER SHARES PURSUANT TO THE OFFER.
10. Transactions and Arrangements Concerning the Common Stock.
As of November 30, 1997, the Company's directors and executive officers as
a group (7 persons) beneficially owned an aggregate of 11,173,500 shares of
Common Stock, representing approximately 30.3% of the outstanding shares of
Common Stock, and Mark J. Wattles, the Company's Chief Executive Officer and
Chairman of the Board beneficially owned 11,124,600 shares, representing
approximately 30.2% of the outstanding shares. Each of the Company's executive
officers and directors has advised the Company that he does not intend to tender
any shares pursuant to the Offer. As a result, if the maximum number of Shares
is purchased pursuant to the Offer, after consummation of the Offer the
directors and executive officers as a group will beneficially own approximately
56% of the outstanding shares, and Mr. Wattles will beneficially own
approximately 56% of the outstanding shares (before giving effect to outstanding
employee stock options and the Warrants issued to the Purchasers in connection
with the Financing). If the minimum numbers of shares is purchased, the
executive officers and directors as a group will beneficially own approximately
39% of the outstanding shares, and Mr. Wattles will beneficially own
approximately 39% of the outstanding shares. As of November 30, 1997 there were
6,300,946 Shares subject to outstanding Options, of which 1,180,500 were subject
to outstanding options granted to the Company's executive officers. The Board of
Directors anticipates that following the Offer it will review and consider
changes to outstanding Options, taking into account the Reorganization, the
increased leverage of the Company, incentives needed to attract and retain
talented personnel and price of the Common Stock.
Based on the Company's records and upon information provided to the Company
by its directors, executive officers and affiliates, neither the Company nor, to
the best of the Company's knowledge, any of the directors or executive officers
of the Company nor any associates of any of the foregoing has effected any
transactions in the Common Stock during the 40 business days prior to the date
hereof.
Simultaneously with completion of the Offer, Mr. Wattles will enter into
the Wattles Voting Agreement with the Company. Under the terms of the Wattles
Voting Agreement, Mr. Wattles will agree not to acquire Common Stock other than
from the Company if, as a result of such acquisition, the Shares held by Mr.
Wattles shall exceed the sum of 11,124,600 shares (representing his current
ownership position). In addition, Mr. Wattles will agree to certain limitations
on his right to transfer shares of Common Stock held by him at any time prior to
the second anniversary or the Closing and will agree to provide a right of
co-sale to all other holders of Common Stock and outstanding Warrants in the
event of certain private sales of Mr. Wattles' Common Stock to an unaffiliated
party, other than a private sale approved by the Board of Directors or to a
person who is a professional investor who acquires the shares in the ordinary
course of business and not with the purpose or the effect of changing or
influencing the control of the Company and who, after such sale, is otherwise a
person described in Rule 13d-1(b)(1) under the Exchange Act. Pursuant to this
co-sale right, all other holders of Common Stock shall have
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20 business days after receipt of notice of the proposed sale by Mr. Wattles of
more than 5% of the then outstanding shares of Common Stock of the Company, to
participate on a pro rata basis in the sale, subject to the terms and conditions
thereof.
Under the terms of the Wattles Voting Agreement, Mr. Wattles may (i)
transfer up to 2,775,000 shares of Common Stock at any time after six months
following the Closing or (ii) transfer shares of Common Stock by will or
pursuant to applicable laws of descent and distribution. He will also agree to
limits on his ability to pledge his shares of Common Stock to secure personal
loans. Mr. Wattles will agree to vote any shares of Common Stock beneficially
held by him and representing in excess of 31.2% (representing his current
ownership position plus options) of the outstanding capital stock of the Company
in the same proportions as the votes actually cast by shareholders other than
Mr. Wattles, excepting abstentions. The Wattles Voting Agreement will expire
eight years following the Closing; the restrictions on the transfer or pledge of
Shares by Mr. Wattles will expire two years following the Closing.
Except as set forth in this Offer to Purchase, neither the Company nor, to
the best of the Company's knowledge, any of its affiliates, directors or
executive officers, or any of the executive officers or directors of its
subsidiaries, is a party to any contract, arrangement, understanding or
relationship with any other person relating, directly or indirectly, to the
Offer with respect to any securities of the Company (including, but not limited
to, any contract, arrangement, understanding or relationship concerning the
transfer of the voting of any such securities, joint ventures, loan or option
arrangements, puts or calls, guarantees of loans, guarantees against loss or the
giving or withholding or proxies, consents or authorizations).
11. Effect of the Offer on the Market for the Common Stock; Registration
Under the Exchange Act.
The purchase of Shares pursuant to the Offer will reduce the number of
shares of Common Stock that might otherwise be traded publicly and may reduce
the number of shareholders. Nonetheless, the Company anticipates that there will
be a sufficient number of shares of Common Stock outstanding and publicly traded
following consummation of the Offer to ensure a continued trading market for the
Common Stock. Based upon published guidelines of the NNM, the Company does not
believe its purchase of Shares pursuant to the Offer will cause the Company's
remaining Shares to be delisted from the NNM.
Shares of Common Stock are currently "margin securities" under the rules of
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). Among other things, this status has the effect of allowing lenders to
extend credit to shareholders who wish to use the shares as collateral. The
Company believes following the Offer the Shares will continue to be "margin
securities" for purposes of the Federal Reserve Board's margin regulations.
The Shares are registered under the Exchange Act, which requires, among
other things, that the Company furnish certain information to its shareholders
and to the Commission and comply with the Commission's proxy rules in connection
with meetings of the Company's shareholders.
See Section 7 - "Certain Information Concerning the Company - Certain
Considerations - Possible Volatility of Common Stock Price."
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12. Certain Conditions of the Offer.
Notwithstanding any other condition or provision of the Offer, the Company
will not be required to accept for payment or, subject to any applicable rules
and regulations of the Commission, including Rule 13e-4(f) under the Exchange
Act, to pay for any Shares not theretofore accepted for payment or paid for, and
may terminate or amend the Offer if, at any time on or after December 22, 1997,
and before the acceptance for payment of such Shares or the payment therefor,
any of the following events or facts shall have occurred or exist:
(a) There shall be threatened, instituted or pending any action,
proceeding, application or counterclaim by any government or governmental,
regulatory or administrative authority, tribunal, instrumentality or agency,
domestic, foreign or supranational (each, a "Governmental Entity"), or by any
other person, domestic or foreign, before any court or Governmental Entity, that
(i)(A) challenges or seeks to, or is reasonably likely to, make illegal, delay
or otherwise directly or indirectly restrain or prohibit, or seeks to, or is
reasonably likely to, impose voting, procedural, price or other requirements, in
addition to those required by federal securities laws (as in effect on the date
of this Offer to Purchase), in connection with, the making of the Offer, the
acceptance for payment of, or payment for, some of or all the Shares by the
Company of the Company on the terms contemplated hereby, or any material
development in any such action (B) seeks to obtain material damages or (C)
otherwise directly or indirectly relates to the transactions contemplated by the
Offer, or (ii) in the sole judgment of the Company, (A) might otherwise
materially and adversely affect the Company or any of its affiliates or the
value of the Shares or (B) could materially and adversely affect the business,
properties, assets, liabilities, capitalization, shareholders' equity, condition
(financial or other), operations, licenses, results of operations or prospects
of the Company or any of its affiliates or (C) could materially impair the
contemplated benefits to the Company of the Offer;
(b) there shall be any action taken, threatened or pending, or any
statute, rule, regulation, legislation, interpretation, judgment, order or
injunction proposed, enacted, enforced, promulgated, amended, issued or deemed
applicable to (i) the Company or any of its affiliates or (ii) the Offer by any
government, legislative body or court, domestic, foreign or supranational, or
Governmental Entity, that, in the sole judgment of the Company, might, directly
or indirectly, (A) make the acceptance for payment of, or payment for, Shares
illegal or otherwise restrict or prohibit completion of the Offer, (B) delay or
restrict the ability of the Company, or render the Company unable, to accept for
payment, or pay for some or all of the Shares, (C) materially impair the
contemplated benefits to the Company of the Offer, (D) change in any material
respect the terms of the Offer, (E) materially impair in any way the
contemplated future conduct of the business of the Company or (F) result in any
of the consequences referred to in clauses (i) and (ii) of paragraph (a) above;
(c) any change shall have occurred or been threatened (or any
condition, event or development shall have occurred or been threatened involving
a prospective change) in the business, properties, assets, liabilities,
capitalization, shareholders' equity, condition (financial or other),
operations, results of operations or prospects of the Company or that, in the
sole judgment of the Company, is or may be material to the Company;
(d) (i) there shall have occurred or been threatened any general
suspension of trading in, or limitation on prices for, securities on any
national securities exchange or in the over-the-counter market in the United
States (other than any coordinated trading halt triggered solely by a specified
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decrease in a market index), (ii) any extraordinary or material adverse change
in the financial markets or major stock exchange indices in the United States or
abroad or in the market price of Shares, (iii) any change in the general
political, market, economic or financial conditions in the United States or
abroad that could, in the sole judgment of the Company, have a material adverse
effect upon the business, properties, assets, liabilities, capitalization,
shareholders' equity, condition (financial or other), operations, results of
operations or prospects of the Company or the trading in, or value of, the
Shares, (iv) any material percentage change in United States currency exchange
rates or any other currency exchange rates or a suspension of, or limitation on,
the markets therefor, (v) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States, (vi) any
limitation (whether or not mandatory) by any government, domestic, foreign or
supranational, or Governmental Entity on, or other event that, in the sole
judgment of the Company, might affect, the extension of credit by banks or other
lending institutions, (vii) a commencement of a war or armed hostilities or
other national or international calamity directly or indirectly involving the
United States or (viii) in the case of any of the foregoing existing at the time
of the commencement of the Offer, a material acceleration or worsening thereof;
(e) (i) a tender or exchange offer with respect to some or all of the
Shares (other than the Offer), or a solicitation of proxies from the Company's
shareholders with respect or related to any proposal for a merger, acquisition
or other business combination or acquisition of a material amount of assets
involving the Company, shall have been made or publicly proposed to be made by
any person, (ii) it shall have been publicly disclosed or the Company shall have
otherwise learned that (A)(x) any person, entity or "group" (within the meaning
of Section 13(d)(3) of the Exchange Act) shall have proposed to acquire, or (y)
any person, entity or group shall have acquired, beneficial ownership of more
than five percent of the outstanding Shares, through the acquisition of stock,
the formation of a group or otherwise (other than a person, entity or group
which had publicly disclosed such ownership in a Schedule 13D or Schedule 13G
(or an amendment thereto) on file with the Commission prior to December 19,
1997, (B) any such person, entity or group that prior to December 19, 1997 had
filed such a Schedule 13G or 13D with the Commission has acquired or proposes to
acquire, through the acquisition of stock the formation of a group or otherwise,
beneficial ownership of an additional one percent or more of the Shares or (C)
any person shall have filed a Notification and Report Form under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (or amended a prior filing
to increase the applicable filing threshold set forth therein) or made a public
announcement reflecting an intent to acquire the Company or any assets of the
Company;
(f) the Credit Agreement shall not have been amended, or a replacement
revolving credit facility shall not have been obtained, in each case to permit
the Financing and on terms satisfactory to the Company in its sole judgment;
(g) the Company shall not receive the proceeds of the Financing
described herein for any reason or obtain proceeds of alternative financing on
acceptable terms;
(h) the Company shall be, for any reason, unable to effect the
Reorganization on terms satisfactory to the Company in its sole discretion; or
(i) the Company shall have entered into a definitive agreement or an
agreement in principle with any person with respect to a merger, other business
combination or acquisition proposal, dispositions of assets other than in the
ordinary course, or the Board of Directors of the Company shall
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have approved any other transaction that, in any such case, in the sole
discretion of the Company, makes the Offer inadvisable.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion; provided, however, that the Exchange
Act and the rules and regulations promulgated thereunder require that all
conditions to the Offer, other than those relating to the receipt of necessary
governmental approvals, must be satisfied or waived prior to the Expiration
Date. The failure by the Company at any time to exercise any of the foregoing
rights will not be deemed a waiver of any such right, the waiver of any such
right with respect to particular facts and circumstances will not be deemed a
waiver with respect to any other facts and circumstances and each such right
will be deemed an ongoing right that may be asserted at any time and from time
to time. Any determination by the Company concerning the events described in
this section and any related judgment by the Company regarding the
inadvisability of proceeding with the acceptance for payment or payment for any
tendered Shares will be final and binding upon all parties.
13. Certain Legal Matters; Regulatory Approvals.
The Company is not aware of any license or regulatory permit that appears
to be material to the Company's business that might be adversely affected by the
Company's acquisition of the Shares pursuant to this Offer or of any approval or
other action by any Government Entity that would be required for the Company's
acquisition or ownership of Shares pursuant to the Offer. Should any such
approval or other action be required, the Company expects such approval or
action would be sought. The Company is unable to predict whether it may
determine that it is required to delay the acceptance for payment or payment for
Shares tendered pursuant to this Offer pending the outcome of any such matter.
There is no assurance that any such approval or other action, if needed, could
be obtained without substantial delay or conditions, or at all, or that the
failure to obtain any such approval or other action might not result in adverse
consequences to the Company's business. The Company's obligation under the Offer
to accept for payment and pay for Shares is subject to certain conditions. See
Section 12 - "Certain Conditions to the Offer."
14. Fees and Expenses.
The Company has retained Continental Stock Transfer and Trust Company to
act as Depositary and Georgeson & Company, Inc. to serve as Information Agent in
connection with the Offer. The Company will pay each of the Depositary and the
Information Agent reasonable and customary compensation for their services in
connection with the Offer, plus reimbursement for out-of-pocket expenses, and
will indemnify each of them against certain liabilities and expenses in
connection therewith, including certain liabilities under the federal securities
laws. The Company will pay any fees or commissions to any broker or dealer or
other person (other than the Information Agent) in connection with the
solicitation of tenders of Shares pursuant to the Offer. Brokers, dealers,
commercial banks and trust companies will be reimbursed by the Company for
customary mailing and handling expenses incurred by them in forwarding material
to their customers. The Company will reimburse the Purchasers for certain
expenses and pay a fee to Goldman, Sachs & Co., an affiliate of the Purchasers.
See Section 8 - "Source and Amount of Funds." Pursuant to a letter agreement,
dated December 18, 1997, the Company has paid DLJ a retainer fee of $250,000 and
has agreed to pay an additional fee of $150,000 if the Offer or similar
transaction is completed. The Company has also agreed to reimburse
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DLJ for its out-of-pocket expenses (including the reasonable fees and expenses
of its legal counsel not to exceed $50,000) and to indemnify DLJ and certain
related persons against certain liabilities in connection with its engagement,
including certain liabilities under the federal securities laws. Under certain
circumstances the Company will be required to make additional payments to DLJ.
If a share repurchase is completed and, as a result, persons other than Goldman,
Sachs & Co. or its affiliates, the Company's management, or parties involved in
the repurchase own less than 25% of the Company's outstanding Common Stock on a
fully diluted basis, the Company will be required to pay 0.25% of the aggregate
value of the outstanding Common Stock of the Company (treating any shares
issuable upon exercise of options, warrants or other rights of conversion as
outstanding), plus the amount of any debt assumed, acquired, remaining
outstanding, retired or defeased or preferred stock redeemed or remaining
outstanding (the "Enterprise Value") in connection with or alternative share
repurchase, less the amounts previously paid as described above. If the Offer is
not completed, and an alternative transaction (other than an alternative share
repurchase) is completed with a party other than Goldman, Sachs & Co. or its
affiliates, the Company will be required to pay 0.50% of the Enterprise Value of
the Company, less the amounts previously paid as described above.
DLJ acted as one of three initial purchasers in the Company's August 1997
offering of the Senior Notes, and affiliates of DLJ are a lender, arranger and
administrative agent with respect to the Company's Credit Agreement. In
addition, the affiliate of DLJ which is a lender under the Credit Agreement will
receive its proportionate share of certain fees to be paid to the lenders in
connection with the contemplated amendment of the Credit Agreement.
In addition to the expenses described above and in Section 8 - "Source and
Amount of Funds," the Company expects to pay, in connection with the Offer,
aggregate expenses of approximately $5.25 million, including fees in connection
with the contemplated amendment of the Credit Agreement, the Schedule 13E-4
filing fee and legal, accounting, printing, and other expenses.
15. Miscellaneous.
The Company is subject to the information filing requirements of the
Exchange Act and, in accordance therewith, is obligated to file with the
Commission periodic reports, proxy statements and other information relating to
its business, financial condition and other matters. Information as of
particular dates concerning the Company's directors and officers, their
remuneration, stock options granted to them, the principal holders of the
Company's securities and any material interest of such persons in transactions
with the Company is required to be disclosed in reports filed with the
Commission or in proxy statements distributed to the Company's shareholders and
filed with the Commission. Such reports, proxy statements and other information
may be inspected at the commission's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and also should be available for inspection at the
regional offices of the Commission located in the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois, and 7 World Trade
Center, 13th Floor, New York, New York. Copies of such materials should be
obtainable, upon payment of the Commission's customary charges, by writing to
the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission
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maintains an Internet Web Site at http://www.sec.gov. The information also
should be available at the offices of the NNM, 1735 K Street N.W., Washington,
D.C. 20006-1500.
The Company is not aware of any jurisdiction where the making of the Offer
is not in compliance with applicable law. If the Company becomes aware of any
jurisdiction where the making of the Offer is not in compliance with any valid
applicable law, the Company will make a good faith effort to comply with such
law. If, after such good faith effort, the Company cannot comply with such law,
the Offer will not be made to (nor will tenders be accepted from or on behalf
of) the holders of Shares residing in such jurisdiction. In any jurisdiction the
securities or blue sky laws of which require the Offer to be made by a licensed
broker or dealer, the Offer is being made on the Company's behalf by one or more
registered brokers or dealers licensed under the laws of such jurisdiction.
The Company has filed with the Commission an Issuer Tender Offer Statement
on Schedule 13E-4 (including exhibits) pursuant to Rule 13e-4 under the Exchange
Act, furnishing certain additional information with respect to the Offer, and
may file amendments thereto. Such Schedule 13E-4 and any amendments thereto,
including exhibits, may be examined and copies may be obtained from the
principal office of the Commission in Washington, D.C. in the manner described
above.
No person has been authorized to give any information or make any
representation on behalf of the Company not contained in this Offer to Purchase
or in the Letter of Transmittal and, if given or made, such information or
representation must not be relied upon as having been authorized.
December 23, 1997 HOLLYWOOD ENTERTAINMENT CORPORATION
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Facsimile copies of the Letter of Transmittal will be accepted. The Letter
of Transmittal, certificates for the Shares and any other required documents
should be sent by each shareholder of the Company or his or her broker-dealer,
bank, trust company or other nominee to the Depositary as follows:
The Depositary for the Offer is:
Continental Stock Transfer & Trust Company
<TABLE>
<CAPTION>
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
(for Eligible Institutions Only)
<S> <C> <C>
Tender & Exchange Department (212) 509-5150 Tender & Exchange Department
2 Broadway 2 Broadway
New York, New York 10004 New York, New York 10004
</TABLE>
For Information Telephone:
(212) 509-4000
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
Questions or requests for assistance may be directed to the Information
Agent at the address and telephone number set forth below. Additional copies of
this Offer to Purchase, the Letter of Transmittal and other tender offer
materials may be obtained from the Information Agent as set forth below.
Shareholders may also contact their brokers, dealers, banks or trust companies
or other nominees for assistance concerning the Offer.
The Information Agent for the Offer is:
GEORGESON
& COMPANY INC.
Wall Street Plaza
New York, New York 10005
Banks and Brokers call collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
LETTER OF TRANSMITTAL
To Tender Shares of Common Stock
of
HOLLYWOOD ENTERTAINMENT CORPORATION
Pursuant to the Offer to Purchase dated December 23, 1997
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 12:00 MIDNIGHT, EASTERN TIME, ON FRIDAY, JANUARY 23, 1998
UNLESS THE OFFER IS EXTENDED
The Depositary for the Offer is:
Continental Stock Transfer & Trust Company
Facsimile Transmission:
(212) 509-5150
(For Eligible Institutions Only)
To Confirm Receipt:
212-509-4000, ext. 535
By Mail: By Hand or Overnight Courier:
Tender & Exchange Department Tender & Exchange Department
2 Broadway 2 Broadway
New York, New York 10004 New York, New York 10004
Your bank or broker can assist you in completing this Letter of
Transmittal. The instructions enclosed with this Letter of Transmittal must be
followed and should be read carefully. Questions and requests for additional
copies of the Offer to Purchase (as defined below) and this Letter of
Transmittal may be directed to the Information Agent as indicated in Instruction
8.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OR TELEX
NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE VALID DELIVERY.
This Letter of Transmittal is to be completed by shareholders if (A)
certificates for Shares (as defined below) are to be forwarded herewith or (B)
tenders of Shares are to be made by book-entry transfer into the account of
Continental Stock Transfer & Trust Company as Depositary (the "Depositary") at
The Depository Trust Company or the Philadelphia Depository Trust Company (each
a "Book-Entry Transfer Facility") pursuant to the procedures set forth in
Section 3 of the Offer to Purchase. Shareholders who tender Shares by book-entry
transfer are referred to herein as "Book-Entry Shareholders." Holders of Shares
whose certificates for such Shares (the "Share Certificates") are not
immediately available or who cannot deliver their Share Certificates and all
other required documents to the Depositary prior to the Expiration Date (as
defined in Section 1 of the Offer to Purchase), or who cannot complete the
procedure for book-entry transfer on a timely basis, must tender their Shares
according to the guaranteed delivery procedure set forth in Section 3 of the
Offer to Purchase. See Instruction 2. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Depositary.
<PAGE>
DESCRIPTION OF SHARES TENDERED
- - - --------------------------------------------------------------------------------
Name(s) & Address(es) of Registered Holder(s) Share Certificate(s) and Share(s)
(Please fill in, if blank, exactly as Tendered (Attach additional
name(s) appear(s) on certificate(s)) signed list if necessary)
- - - --------------------------------------------------------------------------------
| Total Number
| Shares of Shares Number
| Certificate(s) Represented By of Shares
| Number(s)* Certificate(s)* Tendered**
|
|
|
|
|
| Total Shares
- - - --------------------------------------------------------------------------------
* Need not be completed by Book-Entry Shareholders.
** Unless otherwise indicated, all Shares represented by certificates
delivered to the Depositary will be deemed to have been tendered. See
Instruction 4.
[ ] CHECK HERE IF SHARES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER MADE TO THE
ACCOUNT MAINTAINED BY THE DEPOSITARY WITH THE BOOK-ENTRY TRANSFER FACILITY
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _________________________________________________
Name of Book-Entry Transfer Facility __________________________________________
Book-Entry Transfer Facility Account Number ___________________________________
Transaction Code Number _______________________________________________________
[ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING:
Names(s) of Registered Holder(s) ______________________________________________
Window Ticket Number (if any) _________________________________________________
Date of Execution of Notice of Guaranteed Delivery ____________________________
Name of Institution which Guaranteed Delivery _________________________________
2
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Hollywood Entertainment Corporation,
an Oregon corporation (the "Company"), the above-described shares of common
stock (the "Shares") at a purchase price of $11.00 per Share, net to the seller
in cash, upon the terms and subject to the conditions set forth in the Offer to
Purchase dated December 23, 1997 and any amendments or supplements thereto (the
"Offer to Purchase"), and in this Letter of Transmittal (which together
constitute the "Offer"), receipt of which is hereby acknowledged.
Subject to, and effective upon, acceptance for payment for the Shares
tendered herewith in accordance with the terms and conditions of the Offer, the
undersigned hereby sells, assigns and transfers to, or upon the order of, the
Company all right, title and interest in and to all of the Shares tendered
hereby or orders the registration of such Shares if being tendered by book-entry
transfer and hereby appoints the Depositary the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that the Depositary
also acts as the agent of the Company) with respect to such Shares with full
power of substitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest) to (a) deliver such Share Certificates (as
defined herein) or transfer ownership of such Shares on the account books
maintained by a Book-Entry Transfer Facility, together in either case with
appropriate evidence of transfer and authenticity, to or upon the order of the
Company upon receipt by the Depositary as the undersigned's agent, of the
aggregate Purchase Price (as defined below) with respect to such Shares, (b)
present such Shares for cancellation and transfer on the books of the Company,
and (c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such Shares, all in accordance with the terms and subject to the
conditions of the Offer.
The undersigned hereby represents and warrants that: (a) the
undersigned has full power and authority to tender, sell, assign and transfer
the Shares tendered hereby and (b) when and to the extent that the Shares are
accepted for payment by the Company, the Company will acquire good, marketable
and unencumbered title to such Shares, free and clear of all liens,
restrictions, charges and encumbrances, and not subject to any adverse claim,
(c) upon request, the undersigned will execute and deliver any additional
documents deemed by the Depositary or the Company to be necessary or desirable
to complete the sale, assignment, transfer and purchase of the Shares tendered
hereby.
All authority herein conferred or agreed to be conferred shall not be
affected by and shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
personal representatives, executors, administrators, successors and assigns of
the undersigned.
Tenders of Shares made pursuant to the Offer are irrevocable, except
that Shares tendered pursuant to the Offer may be withdrawn at any time prior to
the Expiration Date and, unless theretofore accepted for payment by the Company
pursuant to the Offer, may also be withdrawn at any time after February 23,
1998. See Section 4 of the Offer to Purchase.
The undersigned understands that tenders of Shares pursuant to any of
the procedures described in Section 3 of the Offer to Purchase and in the
instructions hereto will constitute the undersigned's acceptance of the terms
and conditions of the Offer, including the undersigned's representations and
warranty that (i) the undersigned owns the Shares being tendered, (ii) the
undersigned has a net long position in the Shares or equivalent securities at
least equal to the Shares tendered within the meaning of Rule 14e-4 under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and (iii) such
tender of Shares complies with Rule 14e-4 under the 1934 Act.
The Company's acceptance for payment of Shares tendered pursuant to
the Offer will constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Offer.
3
<PAGE>
Unless otherwise indicated herein under "Special Payment
Instructions," please mail the check for the purchase price and/or issue or
return any certificate(s) for Shares not tendered or not accepted for payment
(and accompanying documents, as appropriate) to the address(es) of the
registered holder(s) appearing under "Description of Shares Tendered." In the
event that both the Special Delivery Instructions and Special Payment
Instructions are completed, please issue the check for the purchase price and/or
issue or return any certificate(s) for Shares not tendered or accepted for
payment in the name of, and deliver such check and/or such certificate to, the
person or persons so indicated. Unless otherwise indicated herein under "Special
Payment Instructions," please credit any Shares tendered herewith by book-entry
transfer that are not accepted for payment by crediting the account at the
Book-Entry Transfer Facility designated above.
The undersigned recognizes that the Company has no obligation,
pursuant to the Special Payment Instructions, to transfer any Shares from the
name(s) of its registered holder(s) or to order the registration or transfer of
Shares tendered by book-entry transfer if the Company does not accept for
payment any of the Shares so tendered.
4
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5, 6 and 7) (See Instructions 1, 5, 6 and 7)
To be completed ONLY if To be completed ONLY if
certificate(s) for Shares not certificate(s) for Shares not
tendered or not accepted for payment tendered or not accepted for payment
and/or the check for the purchase and/or the check for the purchase
price of Shares accepted for payment price of Shares accepted for payment
are to be issued in the name of are to be mailed to someone other
someone other than the undersigned, than the undersigned, or to the
or if Shares tendered by book-entry undersigned at an address other than
transfer which are not accepted for that shown above.
payment are to be returned by credit
to an account maintained at the Book-
Entry Transfer Facility. Mail |_| check |_| certificate(s)
to:
Issue |_| check |_| certificate(s)
to: Name
-------------------------------
Name (Please Print)
-------------------------------
(Please Print) Address
----------------------------
Address
---------------------------- -----------------------------------
(Include Zip Code) (Include Zip Code)
- - - ----------------------------------- -----------------------------------
(Tax Identification or Social (Tax Identification or Social
Security No.) Security No.)
(See Substitute Form W-9 included (See Substitute Form W-9 included
herein) herein)
Credit Shares tendered by Book-Entry
Transfer that are not accepted for
payment to Book-Entry Transfer
Facility.
- - - -------------------------------------
(Book-Entry Transfer Facility Account
No., if applicable)
5
<PAGE>
SIGN HERE
AND COMPLETE SUBSTITUTE FORM W-9 INCLUDED HEREIN
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Signature(s) of Holder(s))
Dated: , 199
----------------------------------------------------------------- --
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on
certificate(s) or on a security position listing or by person(s) authorized to
become registered holder(s) by certificates and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or another acting in a fiduciary or
representative capacity, please set forth full title and see Instruction 5.)
Name(s)
------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Please Type or Print)
Capacity (full title)
----------------------------------------------------------
Address
------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone
Number
-------------------------------------------------------------------------
Tax Identification or
Social Security No.
------------------------------------------------------------
COMPLETE SUBSTITUTE FORM W-9 INCLUDED HEREIN
Guarantee of Signature(s)
(See Instructions 1 and 5)
Authorized Signature
-----------------------------------------------------------
Name
---------------------------------------------------------------------------
(Please Type or Print)
Title
--------------------------------------------------------------------------
Name of Firm
-------------------------------------------------------------------
Address
------------------------------------------------------------------------
Dated: , 199
------------------------------------------------------------------ --
6
<PAGE>
INSTRUCTIONS
Forming Part Of The Terms And Conditions Of The Offer
1. Guarantee of Signatures. No signature guarantee on this Letter of
Transmittal is required (i) if this Letter of Transmittal is signed by the
registered holder(s) of Shares (which term, for purposes of this document, shall
include any participant in the Book-Entry Transfer Facility whose name appears
on a security position listing as the owner of Share(s)), unless such holder has
completed either the box entitled "Special Payment Instructions" or the box
entitled "Special Delivery Instructions" included herein or (ii) if such Shares
are tendered for the account of a firm which is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc. or by a commercial bank or trust company having an office or
correspondent in the United States (each of the foregoing being referred to as
an "Eligible Institution"). In all other cases, all signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution. See Instruction 5.
2. Delivery of Letter of Transmittal and Certificates. This Letter of
Transmittal is to be completed either if certificates are to be forwarded
herewith or if tenders are to be made pursuant to the procedure for tender by
book-entry transfer set forth in Section 3 of the Offer to Purchase. Share
Certificates, or timely confirmation (a "Book-Entry Confirmation") of a
book-entry transfer of such Shares into the Depositary's account at the
Book-Entry Transfer Facility, as well as this Letter of Transmittal (or a
facsimile hereof), or an Agent's Message in connection with a book-entry
transfer, in each case properly completed and duly executed, with any required
signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Depositary at its address set forth herein
prior to the Expiration Date.
Shareholders whose Share Certificates are not immediately available, or who
cannot deliver their Share Certificates and all other required documents to the
Depositary prior to the Expiration Date, or who cannot complete the procedure
for delivery by book-entry transfer on a timely basis, may tender their Shares
by properly completing and duly executing a Notice of Guaranteed Delivery
pursuant to the guaranteed delivery procedure set forth in Section 3 of the
Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by
or through an Eligible Institution; (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form provided by the Company
(with any required signature guarantees) must be received by the Depositary
prior to the Expiration Date; and (iii) the Share Certificates (or a Book-Entry
Confirmation) representing all tendered Shares, in proper form for transfer, in
each case together with the Letter of Transmittal (or a facsimile hereof),
properly completed and duly executed, with any required signature guarantees and
any other documents required by this Letter of Transmittal, must be received by
the Depositary within three trading days after the date of execution of such
Notice of Guaranteed Delivery.
The term "Agent's Message" means a message from a Book-Entry Transfer
Facility transmitted to, and received by, the Depository forming a part of a
timely confirmation of a book-entry transfer of Shares (a "Book- Entry
Confirmation") which states that: (a) such Book-Entry Transfer Facility has
received from the participant in such Book-Entry Transfer Facility an express
acknowledgment of such participant's lender of the Shares that are the subject
of the Book-Entry Confirmation and specifying the price at which such Shares are
to be tendered, (b) the participant in such Book-Entry Transfer Facility has
received and agrees to be bound by the terms of the Letter of Transmittal, and
(c) the Company may enforce such agreement against the participant in such Book-
Entry Transfer Facility.
Delivery of Documents to a Book-Entry Transfer Facility in accordance with
such Facility's procedures does not constitute delivery to the Depository.
The Notice of Guaranteed Delivery may be delivered by hand or by facsimile
transmission or mail to the Depository and must include a guarantee by an
Eligible Institution on the form set forth in such notice.
7
<PAGE>
The method of delivery of Share Certificates and all other required
documents, including delivery through the Book-Entry Transfer Facility, is at
the option and risk of the tendering shareholder. If delivery is by mail,
registered mail with return receipt requested, properly insured, is recommended.
In all cases, sufficient time should be allowed to ensure timely delivery.
No alternative, conditional or contingent tenders will be accepted and no
fractional Shares will be purchased. All tendering shareholders, by execution of
this Letter of Transmittal (or a facsimile thereof), waive any right to receive
any notice of the acceptance of such shareholder's tender.
3. Inadequate Space. If the space provided in the box entitled "Description
of Shares Tendered" is inadequate, the certificate numbers and/or the number of
Shares should be listed on a separate signed schedule and attached to this
Letter of Transmittal.
4. Partial Tenders. (Not Applicable to Shareholders Who Deliver Shares by
Book-Entry.) If fewer than all the Shares evidenced by any Share Certificate are
to be tendered, fill in the number of Shares which are to be tendered in the box
entitled "Number of Shares Tendered." In such cases, new Share Certificates for
the Shares that were evidenced by your old Share Certificates, but were not
tendered by you, will be sent to you, unless otherwise provided in the
appropriate box on this Letter of Transmittal, as soon as practicable after the
purchase of Shares pursuant to the Offer. All Shares represented by Share
Certificates delivered to the Depositary will be deemed to have been tendered
unless otherwise indicated.
5. Signatures on Letter of Transmittal, Stock Powers and Endorsements. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
tendered hereby, the signature(s) must correspond with the name(s) as written on
the face of the certificate without any change whatsoever.
If any of the Shares tendered hereby are owned of record by two or more
joint owners, each such owner must sign this Letter of Transmittal.
If any of the tendered Shares are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations of certificates.
If this Letter of Transmittal or any certificate or stock power is signed
by a trustee, executor, administrator, guardian, attorney-in-fact, agent,
officer of a corporation or another acting in a fiduciary or representative
capacity, such person should so indicate when signing, and proper evidence
satisfactory to the Company of such person's authority so to act must be
submitted.
When this Letter of Transmittal is signed by the registered holder(s) of
the Shares tendered herewith, no endorsements of certificates or separate stock
powers are required unless payment of the purchase price for Shares is to be
made to or certificates for Shares not tendered or purchased are to be in the
name of a person other than the registered holder(s). If this Letter of
Transmittal is signed by a person other than the registered holder(s) of the
certificate(s) listed, the certificate(s) must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear on the certificate(s). Signatures on such
certificates or stock powers must be guaranteed by an Eligible Institution.
6. Stock Transfer Taxes. Except as provided in this Instruction 6, the
Company will pay any stock transfer taxes with respect to the transfer and sale
of the purchased Shares pursuant to the Offer. If, however, payment of the
purchase price is to be made to, or (in the circumstances permitted hereby and
if applicable) if certificates for Shares not tendered or purchased are to be
registered in the name of, any person other than the registered holder, or if
tendered certificates are registered in the name of any person other than the
person(s) signing this Letter of Transmittal, the amount of stock transfer taxes
(whether imposed on the registered holder or such person) payable on account of
the transfer to such person will be deducted from the
8
<PAGE>
purchase price if satisfactory evidence of the payment of such taxes, or
exemption therefrom, is not submitted. Except as provided in this Instruction 6,
it will not be necessary for transfer tax stamps to be affixed to the
certificate(s) listed in this Letter of Transmittal.
7. Special Payment and Delivery Instructions. If a check for the aggregate
purchase price of any Shares purchased is to be issued in the name of, and/or
certificates for Shares not tendered or not accepted for payment are to be
issued or returned to, a person other than the signer of this Letter of
Transmittal, or if a check and/or such certificates are to be mailed to a person
other than the signer of this Letter of Transmittal or to an address other than
that shown in this Letter of Transmittal, the appropriate boxes on this Letter
of Transmittal should be completed. Book-Entry Shareholders may request that
Shares not accepted for payment be credited to such account maintained at the
Book-Entry Transfer Facility as such Book-Entry Shareholder may designate under
"Special Payment Instructions." If no such instructions are given, such Shares
not accepted for payment will be returned by crediting the account at the
Book-Entry Transfer Facility designated herein.
8. Requests for Assistance or Additional Copies. Questions or requests for
assistance may be directed to the Information Agent at the addresses and
telephone number set forth below. Additional copies of the Offer to Purchase,
this Letter of Transmittal and the Notice of Guaranteed Delivery may also be
obtained from the Information Agent or brokers, dealers, commercial banks or
trust companies.
9. Waiver of Conditions. All questions as to the number of Shares to be
accepted and the validity, form, eligibility (including time of receipt) and
acceptance for payment of any tender of Shares will be determined by the
Company, in its sole discretion, which determination shall be final and binding
on all parties. The Company reserves the absolute right to reject any or all
tenders determined by it not to be in proper form or the acceptance for payment
of which may, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the absolute right to waive any of the conditions of the Offer and
any defect or irregularity in the tender of any particular Shares. The Company's
interpretation of the terms and conditions of the Offer (including these
instructions) shall be final and binding on all parties. No tender of Shares
will be deemed properly made until all defects or irregularities have been cured
or waived. None of the Company, the Depositary, the Information Agent or any
other person is or will be obligated to give notice of any defects or
irregularities in tenders, and none of them will incur any liability for failure
to give any such notice.
10. Substitute Form W-9. Each tendering shareholder generally is required
to provide the Depositary with a correct Taxpayer Identification Number ("TIN"),
generally the shareholder's social security or federal employer identification
number, on Substitute Form W-9 contained herein. Failure to provide the
information on the form may subject the tendering shareholder to a $50 penalty
and a 31% federal income tax withholding on the payment of the purchase price
for Shares. The box in Part I of the Substitute Form W-9 may be checked if the
shareholder has not been issued a TIN and has applied for a number or intends to
apply for a number in the near future. If the box in Part I is checked and the
Depositary is not provided with a TIN within 60 days, the Depositary will
thereafter withhold a $50 penalty and 31% of any purchase price payment made for
Shares before a TIN is provided to the Depositary.
IMPORTANT TAX INFORMATION
Under federal income tax law, a tendering shareholder whose tendered
shares are accepted for purchase generally is required by law to provide the
Depositary (as payer) with such shareholder's correct TIN on Substitute Form W-9
contained herein. If such shareholder is an individual, the TIN is such
shareholder's social security number. If the Depositary is not provided with the
correct TIN, the shareholder or other payee may be subject to a $50 penalty
imposed by the Internal Revenue Service. In addition, payments that are made to
any shareholder with respect to Shares pursuant to the Offer may be subject to
backup withholding.
Certain shareholders (including, among others, corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to
9
<PAGE>
qualify as an exempt recipient, that shareholder must submit a statement, signed
under penalties of perjury, attesting to that individual's exempt status. Such
statements can be obtained from the Depositary. See the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional instructions.
If backup withholding applies, the Depositary is required to withhold
31% of any payments made to the shareholder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
Purpose of Substitute Form W-9
To prevent backup withholding on payments of the purchase price for
Shares, each tendering shareholder generally is required to notify the
Depositary of his or her correct TIN by completing the Substitute Form W-9
contained herein, certifying that the TIN provided on Substitute Form W-9 is
correct (or that such shareholder is awaiting a TIN), and that (1) such
shareholder has not been notified by the Internal Revenue Service that such
shareholder is subject to backup withholding as a result of a failure to report
all interest or dividends, or (2) the Internal Revenue Service has notified such
shareholder that such shareholder is no longer subject to backup withholding
(see Part II of Substitute Form W-9).
What number to give the Depositary
The shareholder is required to give the Depositary the social security
number or employer identification number of the record holder of the Shares. If
the Shares are in more than one name or are not in the name of the actual owner,
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to report.
IMPORTANT: IF A SHAREHOLDER DESIRES TO ACCEPT THE OFFER, THIS LETTER
OF TRANSMITTAL (OR A FACSIMILE HEREOF), TOGETHER WITH CERTIFICATES OR
CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS, OR THE
NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE
EXPIRATION DATE.
The Information Agent for the Offer is:
GEORGESON
& COMPANY INC.
Wall Street Plaza
New York, New York 10005
Banks and Brokers call collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
10
<PAGE>
- - - --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9 | PART I -- Taxpayer Identification Number (TIN)
|
Dept. of the Treasury |
Internal Revenue Service | Please enter your correct number in the
| appropriate box below. NOTE: If the account is
Payer's Request for | more than one name, see the chart on the enclosed
Taxpayer Identification | form, Guidelines for Certification of Taxpayer
Number and Certification | Identification on Substitute Form W-9, for
| guidance on which number to enter.
|
| Your Social Security Or Employee Identification
| Number Number
|
| ---------------------- -----------------------
|
| If you do not have a TIN, see the instructions
| under "How to Get a TIN" and check the box below.
|
| TIN Applied For [ ]
|
| PART II - For Payees Exempt from Backup
| Withholding (See instructions)
- - - --------------------------------------------------------------------------------
PART III Certification -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest and dividends, or (c) IRS has notified me
that I am no longer subject to backup withholding.
Certification Instructions. You must cross out Item (2) above if you have been
notified by IRS that you are subject to backup withholding because you have
failed to report all interest or dividends on your tax return. However, if after
being notified by IRS that you were subject to backup withholding you received
another notification from IRS that you are no longer subject to backup
withholding, do not cross out Item (2) above.
Signature(s) of Registered Owner(s) or Authorized Agent. Your signature is both
acknowledgment of the exchange and certification of your taxpayer identification
number. The Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to avoid
backup withholding.
Please Sign
Signature(s) Date
-------------------------------------- -------------------------
- - - ----------------------------------------
(Please Print)
(Signature(s) of Registered Owner(s) or Authorized Agent) Your signature is
both acknowledgment of the exchange and certification of your taxpayer
identification number.)
- - - --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE
FORM W-9 FOR ADDITIONAL DETAILS.
11
<PAGE>
NOTICE OF GUARANTEED DELIVERY
to
Tender Shares of Common Stock
of
HOLLYWOOD ENTERTAINMENT CORPORATION
As set forth in Section 3 of the Offer to Purchase (as defined below), this
instrument or one substantially equivalent hereto must be used to accept the
Offer (as defined below) if certificates for Shares (as defined below) are not
immediately available or the certificates for Shares and all other required
documents cannot be delivered to the Depositary prior to the Expiration Date (as
defined in Section 1 of the Offer to Purchase) or if the procedure for delivery
by book-entry transfer cannot be completed on a timely basis. This instrument
may be delivered by hand or transmitted by telegram, telex, facsimile
transmission or mail to the Depositary.
The Depositary for the Offer is:
Continental Stock Transfer & Trust Company
Facsimile Transmission:
(212) 509-5150
(For Eligible Institutions Only)
To Confirm Receipt:
212-509-4000, ext. 535
By Mail: By Hand or Overnight Courier:
Tender & Exchange Department Tender & Exchange Department
2 Broadway 2 Broadway
New York, New York 10004 New York, New York 10004
Delivery of this Instrument to an address other than as set forth above, or
transmission of instructions via facsimile transmission or telex number other
than as set forth above, will not constitute valid delivery.
Ladies and Gentlemen:
The undersigned hereby tenders to Hollywood Entertainment Corporation, an
Oregon corporation (the "Company"), upon the terms and subject to the conditions
set forth in the Offer to Purchase dated December 23, 1997 (the "Offer to
Purchase") and in the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Offer"), receipt
of which is hereby acknowledged, the number of shares of common stock (the
"Shares") indicated below of the Company, pursuant to the guaranteed delivery
procedure set forth in Section 3 of the Offer to Purchase.
Signature(s) Address(es)
Name(s) ---------------------------------------
---------------------------- Zip Code
Area Code and Tel. No(s)
- - - ----------------------------------- ---------------
<PAGE>
Please Type or Print
Number of Shares________________________
Certificate Nos. (If Available)_________ (Check if Shares will be Tendered
by book-entry transfer)
___ The Depository Trust Company
________________________________________ ___ Philadelphia Depository Trust
Company
- - - ----------------------------------------
Dated___________________________________
<PAGE>
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm that is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States, guarantees (i) that the above-named person(s) has a net long
position in the Shares being tendered within the meaning of Rule 14e-4
promulgated under the Securities Exchange Act of 1934, as amended; (ii) that
such tender of shares complies with Rule 14e-4; and (iii) that the above-named
person(s) will deliver to the Depositary either the certificates evidencing all
tendered Shares, in proper form for transfer, or delivery of Shares pursuant to
the procedure for book-entry transfer into the Depositary's account at The
Depository Trust Company or the Philadelphia Depository Trust Company (each a
"Book-Entry Transfer Facility"), in either case together with the Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed, or
an Agent's Message in connection with a book-entry transfer, together in each
case with any required signature guarantees and any other required documents,
all within three NASDAQ National Market trading days after the date thereof.
- - - ---------------------------------------- ----------------------------------
Name of Firm Authorized Signature
- - - ---------------------------------------- Name______________________________
Address Please Type or Print
- - - ---------------------------------------- Title_____________________________
Zip Code
Area Code and Tel. No.__________________ Dated_____________________________
NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS FORM-CERTIFICATES ARE
TO BE DELIVERED WITH YOUR LETTER OF TRANSMITTAL.
Offer to Purchase for Cash
by
HOLLYWOOD ENTERTAINMENT CORPORATION
Up to 16,818,181 Shares of its Common Stock
at
$11.00 Net Per Share
===============================================================================
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 12:00 MIDNIGHT, EASTERN TIME, ON FRIDAY, JANUARY 23, 1998
UNLESS THE OFFER IS EXTENDED.
===============================================================================
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are asking you to contact your clients for whom you hold shares of
common stock (the "Shares") of Hollywood Entertainment Corporation, an Oregon
corporation (the "Company"). Please bring to their attention as promptly as
possible the offer being made by the Company to purchase up to 16,818,181
Shares, at a purchase price of $11.00 per Share, net to the seller in cash, upon
the terms and subject to the conditions set forth in the Offer to Purchase dated
December 23, 1997 (the "Offer to Purchase") and in the related Letter of
Transmittal (which, together with any amendments or supplements thereto,
collectively constitute the "Offer").
Enclosed for your information and for forwarding to your clients, for whose
account you hold Shares registered in your name or in the name of your nominee,
or who hold Shares registered in their own names, are copies of the following
documents:
1. The Offer to Purchase dated December 23, 1997;
2. The Letter of Transmittal to be used in accepting the Offer. Facsimile
copies of the Letter of Transmittal may be used to accept the Offer;
3. A printed form of letter which may be sent to your clients for whose
account you hold Shares in your name or in the name of your nominee, with space
provided for obtaining such clients' instructions with regard to the Offer;
4. A Notice of Guaranteed Delivery to be used to accept the Offer if
certificates for Shares are not immediately available or if the procedure for
book-entry transfer cannot be completed on a timely basis;
5. Guidelines of the Internal Revenue Service for certification of Taxpayer
Identification Number on Substitute Form W-9; and
6. Return envelope addressed to Continental Stock Transfer & Trust Company,
the Depositary.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE MAKING OF THE OFFER.
NEITHER THE BOARD OF DIRECTORS NOR THE COMPANY, HOWEVER, MAKES ANY
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY SHARES PURSUANT
TO THE OFFER. EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO TENDER SHARES
AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NONE OF
ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES PURSUANT TO THE
OFFER.
<PAGE>
We are asking you to contact your clients for whom you hold Shares
registered in your name (or in the name of your nominee) or who hold Shares
registered in their own names. Please bring the Offer to their attention as
promptly as possible. The Company will not pay any fees or commissions to any
broker or dealer or any other person (other than the Information Agent) for
soliciting tenders of Shares pursuant to the Offer. You will be reimbursed by
the Company for customary mailing expenses incurred by you in forwarding any of
the enclosed materials to your clients. The Company will pay or cause to be paid
any stock transfer taxes payable on the sale and transfer of Shares to it or its
order, except as otherwise provided in Instruction 6 of the Letter of
Transmittal.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER, PRORATION PERIOD AND
WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN TIME, ON FRIDAY,
JANUARY 23, 1998, UNLESS THE OFFER IS EXTENDED.
In order to take advantage of the Offer, (i) a duly executed and properly
completed Letter of Transmittal and, if necessary, any other required documents
should be sent to the Depositary and (ii) either certificates representing the
tendered Shares should be delivered to the Depositary, or such Shares should be
tendered by book-entry transfer into the Depositary's account at the Book-Entry
Transfer Facility (as described in the Offer to Purchase), all in accordance
with the instructions set forth in the Letter of Transmittal and the Offer to
Purchase.
If holders of Shares wish to tender, but it is impracticable for them to
forward their certificates or other required documents to the Depositary prior
to the expiration of the Offer or to comply with the book-entry transfer
procedures on a timely basis, a tender may be effected by following the
guaranteed delivery procedures specified in Section 3 of the Offer to Purchase.
Any inquiries you may have with respect to the Offer should be addressed to
the Information Agent at the address and telephone number set forth on the back
cover page of the Offer to Purchase.
Additional copies of the above documents may be obtained from the
Information Agent, at the address and telephone number set forth on the back
cover of the Offer to Purchase.
Very truly yours,
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY PERSON THE AGENT OF THE COMPANY OR THE DEPOSITARY, OR AS AGENT OF ANY
AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO, OR USE ANY DOCUMENT IN
CONNECTION WITH, THE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE OFFER TO
PURCHASE OR THE LETTER OF TRANSMITTAL AND THE DOCUMENTS INCLUDED HEREWITH.
Offer to Purchase for Cash
by
HOLLYWOOD ENTERTAINMENT CORPORATION
Up to 16,818,181 Shares of its Common Stock
at
$11.00 Net Per Share
===============================================================================
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS, WILL EXPIRE
AT 12:00 MIDNIGHT, EASTERN TIME, ON FRIDAY, JANUARY 23, 1998
UNLESS THE OFFER IS EXTENDED.
===============================================================================
To our Clients:
Enclosed for your consideration is an Offer to Purchase dated December 23,
1997 (the "Offer to Purchase"), and the related Letter of Transmittal relating
to an offer by Hollywood Entertainment Corporation, an Oregon corporation (the
"Company"), to purchase up to 16,818,181 of its shares of Common Stock (the
"Shares"), at a purchase price of $11.00 per Share, net to the seller in cash,
upon the terms and subject to the conditions set forth in the Offer to Purchase
and in the related Letter of Transmittal (which, together with any amendments or
supplements thereto, collectively constitute the "Offer"). We are the holder of
record of Shares held by us for your account. A tender of such Shares can be
made only by us as the holder of record and pursuant to your instructions. The
Letter of Transmittal is furnished to you for your information only and cannot
be used by you to tender Shares held by us for your account.
We request instructions as to whether you wish to have us tender on your
behalf any or all of such Shares held by us for your account, pursuant to the
terms and conditions set forth in the Offer to Purchase.
Your attention is invited to the following:
1. The tender price is $11.00 per Share, net to you in cash.
2. The Offer is for up to 16,818,181 Shares, representing approximately 46%
of the Shares outstanding at November 30, 1997.
3. The Offer is conditioned upon a minimum of not less than 8,045,454 Shares
being properly tendered and not withdrawn and is subject to certain other
conditions. See Section 12 of the Offer to Purchase.
4. The Offer, proration period and withdrawal rights will expire at 12:00
Midnight, Eastern time, on Friday, January 23, 1998 unless the Offer is
extended.
5. Tendering shareholders will not be obligated to pay brokerage fees or
commissions or, except as set forth in Instruction 6 of the Letter of
Transmittal, stock transfer taxes on the purchase of Shares pursuant to the
Offer.
6. You may tender any portion of or all your Shares as indicated in the
attached instruction form.
THE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM, OR ON
BEHALF OF HOLDERS OF SHARES RESIDING IN ANY JURISDICTION IN WHICH THE MAKING OR
ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION. IN THOSE JURISDICTIONS WHOSE SECURITIES, BLUE SKY OR OTHER LAWS
REQUIRE THE OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE
DEEMED TO BE MADE ON BEHALF OF THE COMPANY BY ONE OR MORE REGISTERED BROKERS OR
DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION.
If you wish to have us tender any or all of the Shares held by us for your
account, please instruct us by completing, executing and returning to us the
instruction form contained in this letter. If you authorize us to tender your
Shares, all such Shares will be tendered unless otherwise specified in such
instruction form. Your instruction should be forwarded to us in ample time to
permit us to submit a tender on your behalf prior to the expiration of the
Offer.
<PAGE>
Instructions with Respect to
the Offer to Purchase for Cash
by
HOLLYWOOD ENTERTAINMENT CORPORATION
of
Up to 16,818,181 Shares of its Common Stock
The undersigned acknowledge(s) receipt of your letter enclosing the Offer
to Purchase dated December 23, 1997 (the "Offer to Purchase"), and the related
Letter of Transmittal pursuant to an offer by Hollywood Entertainment
Corporation, an Oregon corporation (the "Company") to purchase up to 16,818,181
shares of its Common Stock (the "Shares").
This will instruct you to tender the number of Shares indicated below (or,
if no number is indicated below, all Shares which are held by you for the
account of the undersigned), upon the terms and subject to the conditions set
forth in the Offer to Purchase and in the related Letter of Transmittal
furnished to the undersigned.
Number of Shares SIGN HERE
to be tendered
_________ Shares ---------------------------------------
-------------------------------------------------
Signature
-------------------------------------------------
Please print name(s)
-------------------------------------------------
Address
-------------------------------------------------
Area Code and Telephone Number
-------------------------------------------------
Tax Identification or Social Security Number(s)
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Taxpayer Identification Number to Give the
Payer--Social security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
You must enter your TIN in the appropriate box. If you are a resident alien and
you do not have and are not eligible to get an SSN, your TIN is your IRS
individual taxpayer identification number (ITIN). Enter it in the social
security number box. If you do not have an ITIN, see How To Get a TIN below.
If you are a sole proprietor and you have an EIN, you may enter either your SSN
or EIN. However, using your EIN may result in unnecessary notices to the
requester.
<TABLE>
<CAPTION>
Give the NAME and Give the NAME and
SOCIAL SECURITY EMPLOYER IDENTIFI-
For this type of account: NUMBER of-- For this type of account: CATION NUMBER of--
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Individual The individual 6. Sole Proprietorship The owner (3)
2. Two or more The actual owner of the 7. A valid trust, Legal entity (4)
individuals (joint account or, if combined estate, or pension
account) funds, the first individual on trust
the account (1)
3. Custodian account The minor (2) 8. Corporate The corporation
of a minor
(Uniform Gift to
Minors Act)
4. a. The usual The grantor-trustee (1) 9. Association, club, The organization
revocable savings religious,
trust (grantor) is charitable,
also trustee educational, or
other tax-exempt
organization
b. So-called trust The actual owner (1) 10. Partnership The partnership
account that is not
a legal or valid
trust under state
law
5. Sole proprietorship The owner (3) 11. A broker or The broker or nominee
registered nominee
12. Account with the The public entity
Department of
Agriculture in the
name of a public
entity (such as a
state or local
government, school
district, or prison)
that receives
agricultural
program payments
</TABLE>
<PAGE>
(1) List above the signature line and circle the name of the person whose
number you furnish
(2) List minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use your social security number or
employer identification number.
(4) List the name of the legal trust, estate, or pension trust. (Do not furnish
the TIN of the personal representative or trustee unless the legal entity
itself is not designated in the account title.)
Note: If no name above the signature line is listed when more than one name
appears in the registration, the number will be considered to be that of
the first name appearing in the registration.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
(Section references are to the Internal Revenue Code.)
Purpose of Form. -- A person who is required to file an information return with
the IRS must get your correct Taxpayer Identification Number ("TIN") to report,
for example, income paid to you, real estate transactions, mortgage interest you
paid, the acquisition or abandonment of secured property, cancellation of debt,
or contributions you made to an IRA. Use Form W-9 to give your correct TIN to
the requester (the person requesting your TIN) and, when applicable, (1) to
certify the TIN you are giving is correct (or you are waiting for a number to be
issued), (2) to certify you are not subject to backup withholding, or (3) to
claim exemption from backup withholding if you are an exempt payee.
Note: If a requester gives you a form other than a W-9 to request your TIN, you
must use the requester's form if it is substantially similar to Form W-9.
What Is Backup Withholding? -- Persons making certain payments to you must
withhold and pay to the IRS 31% of such payments under certain conditions. This
is called "backup withholding." Payments that could be subject to backup
withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee pay, and certain payments from
fishing boat operators. Real estate transactions are not subject to backup
withholding.
If you give the requester your correct TIN, make the proper certifications, and
report all your taxable interest and dividends on your tax return, payments you
receive will not be subject to backup withholding. Payments you receive will be
subject to backup withholding if:
1. You do not furnish your TIN to the
requester, or
2. The IRS tells the requester that you furnished an incorrect TIN,
or
3. The IRS tells you that you are subject to backup withholding
because you did not report all your interest and dividends on your tax return
(for reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to
backup withholding under 3 above (for reportable interest and dividend accounts
opened after 1983 only), or
5. You do not certify your TIN.
Certain payees and payments are exempt from backup withholding and information
reporting. See below.
How To Get a TIN: If you do not have a TIN, apply for one immediately. To apply
for an SSN, get Form SS-5 from your local Social Security Administration office.
Get Form W-7 to apply for an ITIN or Form SS-4 to apply for an EIN. You can get
Forms W-7 and SS-4 from the IRS by calling 1-800- TAX-FORM (1-800-829-3676).
If you do not have a TIN, check the box titled "Applied For" in the space for
the TIN, sign and date the form, and give it to the requester. Generally, you
will then have 60 days to get a TIN and give it to the requester. If the
requester does not receive your TIN within 60 days, backup withholding, if
applicable, will begin and continue until you furnish your TIN.
NOTE: Checking the box titled "Applied For" on the form
means that you have already applied for a TIN OR that you
intend to apply for one soon.
As soon as you receive your TIN, complete another Form W- 9, include your TIN,
sign and date the form, and give it to the requester.
Payees Exempt from Backup Withholding
Individuals (including sole proprietors) are not exempt from backup
withholding. Corporations are exempt from backup withholding for certain
payments, such as interest and dividends.
If you are exempt from backup withholding, you should still complete this form
to avoid possible erroneous backup withholding. Enter your correct TIN in Part
I, write "Exempt" in Part II, and sign and date the form. If you are a
nonresident alien or a foreign entity not subject to backup withholding, give
the requester a completed Form W-8, Certificate of Foreign Status.
The following is a list of payees exempt from backup with holding and for which
no information reporting is required. For interest and dividends, all listed
payees are exempt except the payee listed in item (9). For broker transactions,
payees listed in (1) through (13) and a person registered under the Investment
Advisers Act of 1940 who regularly acts as a broker are exempt. Payments subject
to reporting under sections 6041 and 6041A are generally exempt from backup
withholding only if made to payees described in items (1) through (7). However,
a corporation (other than certain hospitals or extended care facilities) that
provides medical and health care services or bills and collects payments for
such services is not exempt from backup withholding or information reporting.
Only payees described in items (2) through (6) are exempt from backup
withholding for barter exchange transactions and patronage dividends. (1) A
corporation. (2) An organization exempt from tax under section 501(a), or an
IRA, or a custodial account under section 403(b)(7) if the account satisfies the
requirements of section 401(f)(2). (3) The United States or any of its agencies
or instrumentalities. (4) A state, the District of Columbia, a possession of the
United States, or any of their political subdivisions or instrumentalities. (5)
A foreign government or any of its political subdivisions, agencies, or
instrumentalities. (6) An international organization or any of its agencies or
instrumentalities. (7) A foreign central bank of issue. (8) A dealer in
securities or commodities required to register in the United States, the
District of Columbia or a possession of the United States. (9) A futures
commission merchant registered with the Commodity Futures Trading Commission.
(10) A real estate investment trust. (11) An entity registered at all times
during the tax year under the Investment Company Act of 1940. (12) A common
trust fund operated by a bank under section 584(a). (13) A financial
institution. (14) A middleman known in the investment community as a nominee or
listed in the most recent publication of the American Society of Corporate
Secretaries, Inc., Nominee List. (15) A trust exempt from tax under section 664
or described in section 4947.
<PAGE>
Payments of dividends and patronage dividends that generally
are exempt from backup withholding include the following:
o Payments to nonresident aliens subject to withholding under section 1441.
o Payments to partnerships not engaged in a trade or business in the United
States and that have at least one nonresident alien partner.
o Payments of patronage dividends not paid in money.
o Payments made by certain foreign organizations.
o Section 404(k) payments made by an ESOP.
Payments of interest that generally are exempt from backup
withholding include the following:
o Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct TIN to the payer.
o Payments of tax-exempt interest (including exempt- interest dividends under
section 852).
o Payments described in section 6049(b)(5) to nonresident aliens.
o Payments on tax-free covenant bonds under section 1451.
o Payments made by certain foreign organizations.
o Mortgage interest paid to you.
Payments that are not subject to information reporting also are not subject to
backup withholding. For details, see sections 6041, 6041A, 6042, 6044, 6045,
6049, 6050A, and 6050N, and their regulations.
Privacy Act Notice.--Section 6109 requires you to give your correct TIN to
persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. The IRS may also
provide this information to the Department of Justice for civil and criminal
litigation and to cities, states, and the District of Columbia to carry out
their tax laws.
You must provide your TIN whether or not you are required to file a tax return.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not give a TIN to a payer. Certain penalties
may also apply.
Penalties
(1) Failure to Furnish TIN.--If you fail to furnish your TIN to a requester, you
are subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect. (2) Civil Penalty for False
Information With Respect to Withholding.--If you make a false statement with no
reasonable basis that results in no backup withholding, you are subject to a
penalty of $500. (3) Criminal Penalty for Falsifying Information.--Willfully
falsifying certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment. (4) Misuse of TINs.--If the requester
discloses or uses TINs in violation of Federal law, the requester may be subject
to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR
TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
This announcement is neither an offer to purchase nor a
solicitation of an offer to sell Shares. The Offer is being
made solely by the Offer to Purchase dated December 23, 1997
and the related Letter of Transmittal and is being made to
all holders of Shares. The Offer is not being made to, nor
will tenders be accepted from or on behalf of, holders of
Shares in any jurisdiction in which the making of the Offer
or the acceptance thereof would not be in compliance with
the other laws of such jurisdiction. In those jurisdictions
whose securities, blue sky or other laws require the Offer
to be made by a licensed broker or dealer, the Offer shall
be deemed to be made on behalf of Hollywood Entertainment
Corporation by one or more registered brokers or dealers
licensed under the laws of such jurisdiction.
Notice of Offer to Purchase For Cash
by
HOLLYWOOD ENTERTAINMENT CORPORATION
up to 16,818,181 Shares of its Common Stock
at
$11.00 Net Per Share
Hollywood Entertainment Corporation, an Oregon corporation (the "Company"),
is offering to purchase up to 16,818,181 shares (the "Shares") of its common
stock ("Common Stock"), at $11.00 per Share, net to the seller in cash, upon the
terms and subject to the conditions set forth in the Offer to Purchase dated
December 23, 1997 (the "Offer to Purchase") and in the related Letter of
Transmittal (which, together with any amendments or supplements thereto,
collectively constitute the "Offer"). The Company owns and operates 837 video
retail superstores in 39 states as of November 30, 1997, and is the second
largest video retailer in the United States.
===============================================================================
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS, WILL EXPIRE
AT 12:00 MIDNIGHT, EASTERN TIME, ON FRIDAY, JANUARY 23, 1998
UNLESS THE OFFER IS EXTENDED.
===============================================================================
THE OFFER IS CONDITIONED UPON A MINIMUM OF 8,045,454 SHARES BEING PROPERLY
TENDERED AND NOT WITHDRAWN AND IS SUBJECT TO CERTAIN OTHER CONDITIONS, INCLUDING
RECEIPT BY THE COMPANY OF PROCEEDS OF THE FINANCING DESCRIBED IN THE OFFER TO
PURCHASE.
If, before the Expiration Date, more than 16,818,181 Shares are properly
tendered and not withdrawn, the Company will buy Shares on a pro rata basis from
all shareholders who properly tendered Shares. The Company will return all
Shares not purchased pursuant to the Offer, including Shares not purchased
because of proration.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE MAKING OF THE OFFER.
NEITHER THE BOARD OF DIRECTORS NOR THE COMPANY, HOWEVER, MAKES ANY
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY SHARES PURSUANT
TO THE OFFER. EACH SHAREHOLDER MUST MAKE THE DECISION WHETHER TO TENDER SHARES
AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED
<PAGE>
THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES
PURSUANT TO THE OFFER.
The term "Expiration Date" means 12:00 Midnight, Eastern time, on Friday,
January 23, 1998, unless and until the Company, in its sole discretion, shall
have extended the period during which the Offer is open, in which event the term
"Expiration Date" shall mean the latest time and date at which the Offer, as so
extended by the Company, shall expire.
If the Offer is oversubscribed, shares tendered before the Expiration Date
will be subject to proration. The proration period also expires on the
Expiration Date.
The Company's Board of Directors has determined that current financial
market conditions, including recent trading prices of the Common Stock, make
this an attractive time to repurchase a significant number of shares of Common
Stock, taking into account increased debt leverage, associated costs thereof,
and financial and operating constraints associated with the financing required
to fund the Offer. In particular, the Board of Directors of the Company believes
the purchase of Shares at this time (i) furthers the Company's goal of seeking
to increase shareholder value per share in the long term, and (ii) provides
shareholders the opportunity to sell their Shares at a premium to recent market
prices without having to pay associated transaction costs. See Section 8 and
Section 9 of the Offer to Purchase.
For purposes of the Offer, the Company will be deemed to have accepted for
payment Shares validly tendered and not withdrawn as, if and when the Company
gives oral or written notice to the Depositary of the acceptance for payment of
such Shares pursuant to the Offer. Upon the terms and subject to the conditions
of the Offer, payment for Shares accepted for payment pursuant to the Offer will
be made by deposit of the aggregate purchase price therefor with the Depositary,
which will act as agent for tendering shareholders for the purpose of receiving
payments from the Company and transmitting such payments to shareholders whose
Shares have been accepted for payment. In the event of proration, the Company
will determine the proration factor and pay for those tendered Shares as soon as
practicable after the Expiration Date. The Company does not expect to be able to
announce the results of any such proration until approximately seven business
days after the Expiration Date. Under no circumstances will interest on the
purchase price for Shares be paid, regardless of any delay in making the payment
after the Expiration Date. In all cases, payment for Shares tendered and
accepted for payment pursuant to the Offer will be made only after timely
receipt by the Depositary of (i) certificates representing Shares ("Share
Certificates"), or timely confirmation of a book-entry transfer of such Shares
into the Depositary's account at The Depository Trust Company or the
Philadelphia Depository Trust Company (each a "Book-Entry Transfer Facility")
pursuant to the procedure set forth in Section 3 of the Offer to Purchase, (ii)
the Letter of Transmittal (or a facsimile thereof), properly completed and duly
executed, with any required signature guarantees or an Agent's Message in lieu
thereof, and (iii) any other documents required by the Letter of Transmittal.
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time for any reason, to extend the period during which the
Offer is open, by giving oral or written notice of such extension to the
Depositary. Any such extension will be followed as promptly as practicable by
public announcement thereof, such announcement to be made no later than 9:00
A.M., Eastern time, on the next business day after the previously scheduled
Expiration Date.
Tenders of Shares made pursuant to the Offer are irrevocable, except that
Shares tendered pursuant to the Offer may be withdrawn at any time prior to
12:00 Midnight, Eastern time, on Friday, January 23, 1998, or if the Company
shall have extended the period of time during which the Offer is open, the
latest time and date at which the Offer as extended by the Company will expire,
and, unless theretofore accepted for payment as provided in the Offer, may also
be withdrawn at any time after February 23, 1998. For a withdrawal to be
effective, a written, telegraphic, telex or facsimile transmission notice of
withdrawal must be timely received by the Depositary at its address set forth on
the back cover of the Offer to Purchase. Any such notice of withdrawal must
specify the name of the person who tendered the Shares to be withdrawn, the
number of Shares to be withdrawn and the name of the registered holder(s), if
different from that of the person(s) who tendered such Shares. If Share
Certificates to be withdrawn have been delivered or otherwise identified to the
Depositary, then, prior to the physical release of such certificates, the serial
numbers shown on such certificates must be submitted to the Depositary, and the
signature(s) on the notice of withdrawal must be guaranteed by an Eligible
Institution (as defined in Section 3 of the Offer to Purchase) unless such
Shares have been tendered for the account of any Eligible Institution. If Shares
have been tendered pursuant to the procedure for book-entry transfer as set
forth in the Offer to Purchase, any notice of withdrawal must specify the name
and number of the account at the Book- Entry Transfer Facility to be credited
with the withdrawn Shares. All questions as to the form and validity (including
the time of receipt) of any notice of withdrawal will be determined by the
Company, in its sole discretion, whose determination will be final and binding.
<PAGE>
The information required to be disclosed by Rule 13e-4 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended, is
contained in the Offer to Purchase and is incorporated herein by reference.
The Offer to Purchase and the related Letter of Transmittal are being
mailed to the record holders of Shares whose names appear on the Company's
shareholder lists and will be furnished to brokers, dealers, commercial banks,
trust companies and similar persons whose names, or the names of whose nominees,
appear on the shareholder list or, if applicable, who are listed as participants
in a clearing agency's security position listing for subsequent transmittal to
beneficial owners of Common Stock.
The Offer to Purchase and the related Letter of Transmittal contain
important information which holders of Shares should read before making any
decision with respect to the Offer.
Questions and requests for copies of the Offer to Purchase and the related
Letter of Transmittal and all other tender offer materials may be directed to
the Information Agent as set forth below, and copies will be furnished promptly
at the Company's expense. The Company will not pay any fees or commissions to
any broker or dealer or any other person for soliciting tenders of Shares
pursuant to the Offer.
The Information Agent for the Offer is:
GEORGESON
& COMPANY INC.
--------------
Wall Street Plaza
New York, New York 10005
Banks and Brokers call collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
FOR IMMEDIATE RELEASE: Contact: Doug Gordon
Senior Vice President of Finance
Hollywood Entertainment
Corporation
(503) 570-1600
HOLLYWOOD ENTERTAINMENT CORPORATION
COMMENCES SELF-TENDER OFFER
Portland, Oregon - December 23, 1997 - Hollywood Entertainment Corporation
(Nasdaq symbol: HLYW), dba Hollywood Video (the "Company"), a chain of 837
corporate-owned video rental superstores operating in 39 states as of November
30, 1997, today announced that it had commenced a self-tender offer to purchase
a maximum of 16,818,181 and a minimum of 8,045,454 shares of its Common Stock at
$11.00 per share, net to the seller in cash. The Company has received a
commitment letter from G.S. Mezzanine Partners, L.P. and G.S. Mezzanine Partners
Offshore, L.P., affiliates of Goldman, Sachs & Co., to provide up to $200
million of financing, in the form of pay-in-kind notes, for the offer. This
financing will be contingent upon the execution of definitive agreements and
certain other conditions, including amendment of the Company's revolving credit
agreement to the satisfaction of the lenders. In connection with the tender
offer, the existing assets, liabilities and business operations of the Company
will be transferred to a newly formed operating subsidiary, and Hollywood
Entertainment Corporation will become a holding company that will borrow the
funds to complete the repurchase. The form and terms of the proposed transaction
have been structured to comply with provisions of the indenture for the
Company's existing 10 5/8% Senior Subordinated Notes due 2004.
<PAGE>
Mark J. Wattles, chairman, chief executive officer and principal
shareholder of the Company, will not tender any of his shares pursuant to the
offer. As a result, if the offer is completed, Mr. Wattles' percentage ownership
of the shares of Common Stock outstanding will increase to between approximately
39% and 56%, depending on the number of shares purchased. Mr. Wattles will agree
to restrictions on his ownership, voting and sale of his shares of Common Stock,
which were negotiated on behalf of the Company by a special committee of its
independent directors. In addition to the conditions described in this press
release, completion of the tender offer is subject to other conditions,
including that a minimum of 8,045,454 shares be tendered on or prior to the
expiration date, midnight, Eastern time, on January 23, 1998. There is no
assurance the tender offer will be completed.
2
DRAFT - December 23, 1997
PRIVILEGED AND CONFIDENTIAL
December 23, 1997
Hollywood Entertainment Corporation
25600 SW Parkway Center Drive
Wilsonville, Oregon 97070
Attention: Mark J. Wattles
Chairman of the Board and
Chief Executive Officer
Gentlemen:
We understand that Hollywood Entertainment Corporation, an Oregon corporation
(the "Company") is proposing to acquire, pursuant to a self-tender offer (the
"Tender Offer"), a minimum of 8,045,454 shares of the Company's outstanding
shares of common stock (the "Common Stock") and a maximum of 16,818,181 shares
of Common Stock at $11 per share in cash net to the Seller (the "Offer Price").
It is our understanding that Mark J. Wattles ("Wattles"), who owns 11,124,600
shares of Common Stock and holds options issued under the Company's stock option
plans to purchase an additional 520,000 shares of Common Stock, will not sell
any shares of Common Stock pursuant to the Tender Offer and, as a result
thereof, will own between 33.1% and 42.5% of the fully-diluted Common Stock
after giving effect to the consummation of the Tender Offer, the financing
thereof, and the transactions contemplated thereby. The Tender Offer will be
made pursuant to an offer to purchase (the "Offer to Purchase") in substantially
the form previously reviewed by us which describes the terms of the Tender Offer
and Share Ownership, Voting and Co-Sale Agreement in the form attached to the
Schedule 13E-4 filed by the Company with respect to the Tender Offer (the
"Management Standstill Agreement") being contemporaneously entered into between
the Company and Wattles with respect to the Common Stock beneficially owned by
him. Immediately prior to the consummation of the Tender Offer, the Company will
transfer (the "Asset Transfer" and, collectively with the Tender Offer, the
"Transactions") substantially all of its assets to a newly-formed, wholly-owned
subsidiary of the Company which will be organized as an Oregon corporation
("Opco") and cause Opco to assume all of the Company's liabilities, whereupon
the Company's sole business will be the ownership of the capital stock of Opco.
<PAGE>
Hollywood Entertainment Corporation
December 23, 1997
Page 2
We further understand that in order to finance the Transactions and to pay
related transaction costs (a) the Company will require up to $200 million in
cash proceeds from a new financing consisting of a minimum of $100.0 million and
up to a maximum of $200.0 million in original principal amount of pay-in-kind
notes of the Company (the "PIK Notes"), and (b) Opco will assume pursuant to the
Asset Transfer all of the Company's obligations in respect of the Company's $200
million in outstanding principal amount of 10-5/8% Series B Senior Subordinated
Notes due 2004 and the Company's $300 million Revolving Credit Agreement, dated
as of September 5, 1997.
This letter confirms the terms and conditions pursuant to which GS Mezzanine
Partners, L.P. and GS Mezzanine Partners Offshore, L.P. (together, the
"Purchasers"), are willing to purchase from the Company in connection with the
Transactions: (i) between $100.0 million and $200.0 million in original
principal amount of the PIK Notes and (ii) warrants evidencing the right to
purchase, at a warrant exercise price of $0.01 per share, between 1.25 million
and 2.25 million shares of Common Stock (the "Warrants" and, collectively with
the PIK Notes, the "Securities").
1. Purchase and Sale. The purchase and sale of the Securities shall be at the
price and subject to the terms and conditions specified herein and in the
term sheet attached hereto as Annex A (the "Term Sheet").
2. Closing Date. The Closing Date (sometimes referred to herein as "Closing")
will be on the date of the Closing of the Tender Offer, but in no event
later than January 31, 1998 unless the Purchasers otherwise agree. The
commitment of the Purchasers hereunder shall terminate on January 31, 1998
unless the Closing shall have previously occurred.
3. Definitive Agreements. As soon as reasonably practicable after the
execution of this letter, the Company and the Purchasers shall commence the
negotiation of definitive agreements and documents (the "Definitive
Agreements") relating to the issuance of the Securities and other related
matters, including:
(a) Securities Purchase Agreement between the Company and the
Purchasers which shall set forth the terms and conditions upon which the
Securities will be purchased by the Purchasers;
(b) Indenture between the Company and the trustee for the holders of
the PIK Notes pursuant to which the PIK Notes are to be issued;
(c) Registration Rights Agreement with respect to the PIK Notes and
the Common Stock underlying the Warrants;
<PAGE>
Hollywood Entertainment Corporation
December 23, 1997
Page 3
(d) Warrant Agreement; and
(e) Agreement(the "Wattles Letter Agreement") between Wattles and the
Purchasers restricting the aggregate margin indebtedness which may be
incurred by Wattles.
Each of the agreements or documents referred to above will initially be
prepared by counsel to the Purchasers, and will include the terms
summarized in the Term Sheet and such other representations, warranties,
conditions, covenants, indemnities and other terms determined by the
Purchasers in their sole reasonable judgment and are not inconsistent with
the Term Sheet. Each of the foregoing documents will be negotiated in good
faith by the Purchasers and the Company.
4. Certain Conditions. The commitment of the Purchasers hereunder is subject,
in their sole discretion, to the following conditions (in addition to the
conditions set forth elsewhere herein and in the Term Sheet): (i) there
shall not have been, since September 30, 1997, any change in the capital
stock of the Company and its subsidiaries (other than the exercise of
employee stock options and other than as contemplated by this letter) or
any adverse change, or any development involving a prospective adverse
change, in or affecting the business, management, financial position,
stockholder's equity, results of operation, or prospects of the Company and
its subsidiaries, taken as a whole (other than the financial results
announced by the Company in its press release issued on December 8, 1997),
and (ii) there shall not have been any disruption or adverse change in the
financial or capital markets generally or in the markets for high yield
debt or equity securities in particular which, in any case under clause (i)
or (ii), the Purchasers, in their sole discretion, deem material. The
commitment of the Purchasers hereunder is also subject to the accuracy in
all material respects of all information heretofore furnished to the
Purchasers and the Purchasers not becoming aware after the date hereof, as
part of the Purchasers' due diligence investigation of the Company and its
subsidiaries or otherwise, of any information or other matters affecting
the Company and its subsidiaries or the transactions contemplated hereby
which is inconsistent in a material and adverse manner with any information
disclosed to the Purchasers prior to the date hereof.
5. Inspection and Access to Information. From and after the date of execution
of this letter by the parties hereto, the Company shall permit access to,
and shall make available to the Purchasers' representatives and their
accounting and legal advisors for inspection and review, the properties,
books, records, accounts, and documents of or relating to the Company, and
the Company shall make available at reasonable times and to a reasonable
extent officers and employees of the Company to discuss with the
Purchasers' representatives and their accounting and legal advisors the
business and
<PAGE>
Hollywood Entertainment Corporation
December 23, 1997
Page 4
affairs of the Company, such inspection and discussion to be undertaken
prior to and after the execution of the Definitive Agreements.
6. No-Shop; Ordinary Course. From the date hereof until the earliest of: (a)
the mutual agreement of the parties not to pursue the execution of the
Definitive Agreements, (b) the termination of such Definitive Agreements in
accordance with the terms thereof, (c) the Closing Date and (d) if the
Closing Date shall not have theretofor occurred, January 31, 1998 (or such
later date as the Company and the Purchasers shall have mutually agreed to
extend the Purchasers' commitment hereunder), (i) the Company shall not,
and shall cause its agents, representatives, and any other person acting on
its behalf not to, directly or indirectly solicit, participate in any
negotiations or discussions with or provide or afford access to information
to any third party with respect to, or otherwise facilitate, encourage or
accept any offers for the purchase of the Securities or any alternative
financing arrangements in connection with the Transactions or any other
transactions involving the acquisition by the Company of 15% or more of the
Common Stock or a recapitalization or other extraordinary distribution in
respect of the Common Stock and shall terminate any of the foregoing
activities and discussions as may exist on the date hereof with any party
other than the Purchasers and their representatives, and the Company shall
promptly advise the Purchasers of any inquiry or proposal relating thereto
that may be received, including the terms of the proposal and the identity
of the inquirer or offeror, and (ii) the Company shall conduct its business
only in the ordinary course.
7. Syndication. The Company, if so requested by the Purchasers (whether before
or after the Closing), agrees actively to assist the Purchasers as set
forth in the Term Sheet in completing the public or private syndication
(including a Rule 144A offering), satisfactory to the Purchasers, of the
Securities or any portion thereof (including all or any portion of the PIK
Notes and/or the Warrants, to third party purchasers (the "Assignees"));
provided that the commitments of the Purchasers hereunder shall not be
subject to the completion of any such syndication.
8. Fees and Expenses. In consideration of the Purchasers' agreements
hereunder, the Company agrees to pay or cause to be paid (without
duplication) in cash in immediately available funds the following
non-refundable fees:
(a) Commitment Fee. At the signing of this letter, the Company will
pay to the Purchasers a commitment fee equal to $2,000,000,
representing 1.0% of the maximum $200.0 million purchase price of
the PIK Notes.
(b) Funding Fee. At the Closing Date, the Company will pay to the
Purchasers a funding fee equal to 3.5% of the original principal
amount
<PAGE>
Hollywood Entertainment Corporation
December 23, 1997
Page 5
of PIK Notes issued at the Closing, less the amount of the
commitment fee previously paid pursuant to Section 8(a) above.
(c) Transaction Fee. If, within one year after the date of this
letter, either (i) the Tender Offer contemplated hereby is
consummated or (ii) any other transaction involving the
acquisition by the Company or a third party of 15% or more of the
Company's Common Stock or assets is consummated, the Company
will, promptly upon the first event specified in clauses (i) and
(ii) to occur, pay to our affiliate, Goldman, Sachs & Co., a
transaction fee of $2,000,000.
In addition to, and whether or not the proposed Transactions are
consummated, the Company agrees to periodically reimburse the Purchasers
for (i) their reasonable out-of-pocket expenses, including the fees and
disbursements of their attorneys, accountants and consultants (subject to a
maximum expense reimbursement for such items if the Transactions are
consummated of $250,000 plus 50% of the amount by which such expenses
exceed $250,000 until such expenses total $500,000 (e.g., a maximum
reimbursement of $375,000); provided that the foregoing maximum shall not
apply if the Transactions are not consummated (other than as a result of
the failure of the minimum of 8,045,454 shares of Common Stock to be
tendered to the Company pursuant to the Tender Offer) and the Purchasers
have not breached their obligations hereunder, and provided further, that
the foregoing maximum shall not limit the Company's obligations under
paragraph 11 below), plus (ii) any sales, use or similar taxes (including
additions to such taxes, if any) arising in connection with any matter
referred to in this letter.
9. Confidentiality. This letter and its terms and the transactions
contemplated hereby shall be kept confidential until the parties hereto
mutually agree upon the language and timing of a press release or until
such time as one such party determines, based upon the advice of counsel,
that a public announcement is required by law, in which case the parties
hereto shall in good faith attempt to agree on any public announcements or
publicity statements with respect thereto.
10. Conditions to Closing. The Purchasers' commitment hereunder is subject to:
(i) the negotiation, execution and delivery on or before the Closing Date
of the Definitive Agreements; (ii) the satisfaction of the conditions set
forth in paragraph 4 above, (iii) the Company's performance of its
obligations under paragraphs 5 through 9 hereof; and (iv) the other
conditions set forth in the Term Sheet.
11. Indemnification. In connection with arrangements such as this, it is our
policy to receive indemnification. Effective upon execution of this letter,
the Company hereby
<PAGE>
Hollywood Entertainment Corporation
December 23, 1997
Page 6
agrees to the provisions with respect to our indemnity and other matters
set forth in Annex B which are incorporated by reference into this letter.
12. Other Activities. As you know, Goldman, Sachs & Co. is a full service
securities firm and as such may from time to time effect transactions, for
its own account or the account of customers, and hold positions in
securities or options on securities of the Company and other companies
which may be the subject of the arrangements contemplated by this letter.
13. Governing Law. This letter shall be governed by the internal laws of the
State of New York without regard to principles of conflicts of laws.
14. No Beneficiaries; Assignments. This letter has been and is made solely for
the benefit of the Company, the Purchasers and the Purchasers' affiliates
and no other person will acquire or have any right under or by virtue of
this letter. The Company may not assign any of its rights or obligations
hereunder without the prior written consent of the Purchasers.
15. Entire Agreement. This letter constitutes the entire agreement between the
parties hereto with respect to the matters covered hereby and supersedes in
its entirety the letter agreement, dated December 7, 1997 between the
Company and the Purchasers.
16. Counterparts. This letter may be executed in counterparts, each of which
shall be deemed to constitute an original but all of which shall constitute
one and the same instrument.
<PAGE>
Hollywood Entertainment Corporation
December 23, 1997
Page 7
If the foregoing terms and conditions are acceptable to you, please so indicate
by signing both of the enclosed copies of this letter where indicated and
returning one to the undersigned on or prior to December __, 1997 whereupon this
letter shall become binding agreements between us. If this letter is not signed
and returned as described in the preceding sentence by such date, this letter
will terminate on such date.
Very truly yours,
GS MEZZANINE PARTNERS, L.P.
BY: GS MEZZANINE ADVISORS, L.P.,
its general partner
BY: GS MEZZANINE ADVISORS, INC.,
its general partner
By:
-----------------------------------------
Name:
Title:
GS MEZZANINE PARTNERS OFFSHORE, L.P.
BY: GS MEZZANINE ADVISORS (CAYMAN), L.P.,
its general partner
BY: GS MEZZANINE ADVISORS, INC.,
its general partner
By:
-----------------------------------------
Name:
Title:
Agreed To And Accepted As
Of The Date First Above Written
HOLLYWOOD ENTERTAINMENT CORPORATION
By:
-------------------------------------
Name:
Title:
<PAGE>
Annex A
-------
Term Sheet
----------
Summary of Proposed Principal Terms of PIK Notes and Warrants
-------------------------------------------------------------
(Defined terms used in this Term Sheet shall have the
same respective
meanings as such terms have in the letter to which the
Term Sheet is attached
(the "Commitment Letter"), unless otherwise defined
herein)
PIK Notes: A minimum of $100.0 million and a maximum of $200.0
million in original principal amount of pay-in-kind
notes of the Issuer (the "PIK Notes") will be issued by
the Issuer at the Closing of the Transactions for the
purposes described under "Use of Proceeds" below.
Purchase Price: The PIK Notes, together with the applicable number of
Warrants (as described below), will be issued for cash
at the original principal amount of the PIK Notes being
issued (the "Purchase Price") to generate gross cash
proceeds of between $100 million and $200 million.
Issuer: Hollywood Entertainment Corporation, an Oregon
corporation (the "Issuer").
Wholly Owned
Subsidiary of Issuer: Hollywood Operating Company, a newly-formed wholly-
owned Oregon corporation ("Opco"), which will be
organized as a direct subsidiary of the Issuer, will
acquire, immediately prior to the issuance of the PIK
Notes, all of the assets and assume all of the
liabilities of the Issuer, including the indebtedness
under the existing Revolving Credit Agreement and the
existing 10-5/8% Notes.
Equity: In connection with its purchase of the PIK Notes, the
Purchasers will acquire, at no additional
consideration, warrants (the "Warrants") evidencing the
right, exercisable at any time prior to the 5th
anniversary of the Closing, to purchase at a warrant
exercise price of $0.01 per share, shares of Common
Stock (as set forth on the second schedule below)
ranging from a minimum of 1.25 million shares of Common
Stock (if $100 million principal amount of PIK Notes
are issued) and increasing proportionately to 2.25
million shares of Common Stock (if $200 million
principal amount of PIK Notes are issued). The
Purchasers,
A-1
<PAGE>
at their option, may convert all or part of the
Warrants, in which event the Issuer will deliver to the
holder of such converted Warrants, without payment of
any exercise price, shares of Common Stock equal to the
quotient obtained by dividing the aggregate spread
(i.e. the excess of the fair market value of the
underlying shares of Common Stock over the exercise
price therefor) on the Warrants to be converted by the
fair market value of a share of Common Stock. The
number of shares of Common Stock covered by the
Warrants will be subject to further adjustment as
provided under the heading "Anti-dilution Provisions"
below.
Purchasers: GS Mezzanine Partners, L.P. and GS Mezzanine Partners
Offshore, L.P. (together the "Purchasers").
Amount of PIK
Notes to be Issued: The amount of PIK Notes to be issued depends on the
amount of Common Stock repurchased at Closing according
to the first schedule set forth below. The maximum
commitment on the part of the Purchasers is $200
million in original principal amount of PIK Notes. At
the Closing of the Tender Offer, the Issuer will be
required to issue at least $100 million in original
principal amount of the PIK Notes. The minimum and
maximum amounts of the PIK Notes shall be adjusted
ratably with the amount of Common Stock repurchased.
After the initial Closing, no further PIK Notes shall
be available for purchase.
<TABLE>
<CAPTION>
Pre-Transaction Pro Forma Pro Forma
Consolidated Net Consolidated Net Consolidated Net Non-Wattles Common
PIK Indebtedness Indebtedness Indebtedness/ Stock Repurchased (c)
Notes (a) at 12/31/97 at 12/31/97 Adj. EBITDA (b) Percent Number
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100.0 $ 240.0 $ 340.0 4.25x 21.9% 8.05
125.0 240.0 365.0 4.56 27.8% 10.24
150.0 240.0 390.0 4.88 33.8% 12.43
175.0 240.0 415.0 5.19 39.8% 14.63
200.0 240.0 440.0 5.50 45.7% 16.82
- - - -----------------------------------------------------------------------------------------------------------------------------------
(dollar and share amounts shown above are in millions)
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Fully-Diluted Ownership at Closing (c)
Pro Forma ------------------------------------------------------------------------ Purchasers'
PIK Fully-Diluted Non-Wattles Fully-Diluted
Notes (a) Shares Wattles (d) Employees (e) Public Purchasers (f) Shares (f)
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 100.0 35.15 33.1% 13.2% 50.1% 3.6% 1.25
125.0 33.20 35.1% 14.0% 46.4% 4.5% 1.50
150.0 31.26 37.3% 14.8% 42.3% 5.6% 1.75
175.0 29.32 39.7% 15.8% 37.6% 6.8% 2.00
200.0 27.37 42.5% 16.9% 32.3% 8.2% 2.25
- - - -----------------------------------------------------------------------------------------------------------------------------------
(dollar and share amounts shown above are in millions)
</TABLE>
(a) Original principal amount.
(b) Based on adjusted EBITDA of $80 million in FY 1997 and pro forma
Consolidated Net Indebtedness at December 31, 1997 of $240 million.
(c) Assumes 36.8 million shares outstanding, 11.1 million shares owned by
Wattles, up-front commitment fee of 1.0% of original principal amount of
PIK Notes, financing fee of 3.5% on the original principal amount of PIK
Notes actually purchased (less the up-front commitment fee previously
paid), $2 million transaction fee payable to Goldman Sachs & Co., $3
million of additional transaction costs incurred by the Company, 1% waiver
fee on the Senior Secured Credit Facility, and $11 per share tender price.
Percentage of Non-Wattles Common Stock repurchased shown as a percentage of
the pre-transaction outstanding shares of 36.8 million shares.
(d) Based on 11.1 million shares owned by Wattles plus options covering 520,000
shares presently owned by Wattles.
(e) Includes vested options covering 1.1 million shares at an average exercise
price of $7.87 per share and unvested options covering 3.5 million shares
at an average exercise price of $12.53 per share as of September 30, 1997.
(f) $.01 per share exercise price.
Use of Proceeds: To finance the purchase of Common Stock pursuant to the
Tender Offer and pay related transaction costs.
Interest: The PIK Notes will be issued at their stated principal
amount to generate aggregate gross proceeds to the
Company of between $100 million to $200 million. The
PIK Notes will bear interest at a rate of 13% per annum
payable in cash semiannually in arrears; provided that
on any semiannual interest payment date on or prior to
the 54th month anniversary of the Closing Date, the
Issuer will have the option to pay all or any portion
of the interest due and payable on such date by issuing
additional PIK Notes in a principal amount equal to the
interest the Company elects not to pay in cash;
provided, further, that the Purchasers shall have the
additional right, on one occasion prior to the first
semiannual interest date after Closing, to require that
the Issuer issue additional PIK Notes as of the date
that Purchasers exercise this right in a principal
amount equal to all accrued and unpaid interest on the
PIK Notes through such date. After the 54th month
anniversary of the Closing Date, all interest on the
PIK Notes will be payable in cash
A-3
<PAGE>
semiannually in arrears. Interest will be computed
based on a 360-day year of 12, 30-day months. At any
time when the Issuer is in default in the payment of
any amount due under the PIK Notes or any other Event
of Default shall have occurred and be continuing, the
PIK Notes will bear interest at 2% per annum above the
rate otherwise applicable.
Final Maturity: 8 years from the Closing.
Voluntary Prepayments: Not permitted prior to the 4th anniversary of the
Closing. Thereafter, voluntary redemption will be
permitted at any time, in whole or in part, at the
redemption prices listed below applied to the aggregate
then outstanding principal amount of all PIK Notes then
outstanding, plus in each case accrued and unpaid
interest to the date of prepayment payable in cash:
Between the 4th and 5th anniversary from Closing:
106.500%
Between the 5th and 6th anniversary from Closing:
104.875%
Between the 6th and 7th anniversary from Closing:
103.250%
Between 7th anniversary from Closing
and Final Maturity: 101.625%
Change of Control: Upon the occurrence of a Change of Control on or after
the Closing Date, the Issuer will be required, within
30 days thereafter, to offer to purchase for cash the
PIK Notes at a redemption price equal to 101% applied
to the aggregate then outstanding principal amount of
all PIK Notes, together with accrued and unpaid
interest thereon to the date of payment (a "Change of
Control Offer").
Each holder of PIK Notes will have the option of
accepting or rejecting such offer to purchase.
Tax Sharing Agreement: Issuer will enter into a tax sharing agreement
satisfactory to the Purchasers with Opco, pursuant to
which Opco shall pay to the Issuer taxes computed on a
separate company basis. Opco will enter this agreement
on a basis consistent with the requirements of the
10-5/8% Notes Indenture and the Revolving Credit
Agreement.
Fees and Reimbursement
of Expenses: As provided in the Commitment Letter.
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Conditions Precedent
to Closing: Customary conditions to closing, including without
limitation, the following:
(i) (a) all required governmental and third party
consents and agreements to the Transactions have
been obtained and entered into (except consents
required under not more than 10 store leases,
which individually and in the aggregate are not
material to Opco's business, so long as the Issuer
uses its best efforts after the Closing to obtain
such consents), including consents under the
Revolving Credit Agreement to the Asset Transfer
and to amendments to certain covenants under the
Revolving Credit Agreement; provided that the
terms of any amendments to the Revolving Credit
Agreement made in connection with the Transactions
are satisfactory to the Purchasers; and (b) the
absence of any required consent of the holders of,
or any default under, or obligation on the part of
the obligor to offer to purchase, the 10-5/8%
Notes under the 10-5/8% Notes Indenture as a
result of the consummation of the Transactions;
(ii) no material adverse change in business, assets,
financial condition or prospects of Issuer and its
subsidiaries taken as a whole since 9/30/97
(except for the financial results announced by the
Company in its press release issued on December 8,
1997);
(iii) negotiation and execution of Definitive
Agreements;
(iv) the absence of any Change of Control of the
Issuer;
(v) if the Closing occurs on or after January 31,
1998, Adjusted EBITDA for the fiscal year ending
December 31, 1997 as estimated by the Issuer in
good faith being not less than $80 million;
(vi) consolidated Net Indebtedness at Opco on December
31, 1997 not exceeding $240 million and not
increasing thereafter through the Closing except
for borrowings under the Revolving Credit
Agreement in the ordinary course of business;
(vii) absence of material litigation, including any
litigation seeking to enjoin or seek damages
against the Issuer or the Purchasers in connection
with the contemplated transactions;
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(viii) no change in fully-diluted equity ownership from
the structure contemplated by the Commitment
Letter and this Term Sheet (including, Wattles not
having sold any Common Stock pursuant to the
Tender Offer or otherwise);
(ix) delivery by the Issuer of a satisfactory solvency
opinion issued by a reputable firm which shall
opine as to the solvency of the Issuer after
giving effect to the Transactions;
(x) issuance at closing of at least $100 million in
original principal amount of PIK Notes;
(xi) transaction costs (including consent payments and
legal, investment banking, accounting and other
fees, but excluding fees and expenses payable
under the Commitment Letter) not exceeding
$6,000,000;
(xii) the Purchasers' satisfaction with the terms and
conditions of the Transactions, including the
Management Standstill Agreement, it being under-
stood that the drafts of the Offer to Purchase
and the Management Standstill Agreement attached
as Exhibits B and C hereto are satisfactory to
the Purchasers;
(xiii) the terms of the Transactions (including the
Offer Price and the Management Standstill
Agreement described in the Offer to Purchase) not
having been amended or modified and remaining in
full force and effect;
(xiv) customary officers' certificates and legal
opinions, including legal opinions as to the
satisfaction of the conditions specified in clause
(i) above; and
(xv) execution of Wattles Letter Agreement providing
for (a) a representation by Wattles as of the
Closing Date as to the accuracy in all material
respects of Wattles' financial assets balance
sheet as of a recent date (showing (i) the Common
Stock owned by Wattles, (ii) the aggregate amounts
of (x) all other margin securities and (y) all
other financial assets owned by Wattles and (iii)
the aggregate amount of Indebtedness secured by
any of the foregoing assets) which financial
assets balance sheet shall not differ materially
from that furnished to the Purchasers prior to the
date of the Commitment Letter, and (b) a covenant
by Wattles that the total principal amount of
indebtedness secured by margin securities of
Wattles outstanding at
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any one time will not exceed $35 million in the
aggregate at any time prior to 6 months after the
Closing and $40 million in the aggregate at any
time thereafter and prior to the second
anniversary of the Closing.
Representations and
Warranties: Customary representations and warranties.
Covenants: Affirmative and negative covenants as are customary for
similar transactions as determined by the Purchasers in
their reasonable judgment, plus the following:
(i) Stock of Opco.
Issuer shall continue to own, of record and
beneficially, all of the capital stock or
membership interests of Opco. The Issuer's sole
business will be the ownership of the capital
stock of Opco, and the Issuer will have no
liabilities or obligations other than (i)
liability for the indebtedness evidenced by the
PIK Notes, (ii) liabilities arising out of the
conduct of the business of the Issuer prior to the
Asset Transfer and with respect to which the
Issuer is not released, (iii) liabilities arising
after the Asset Transfer as a matter of law solely
as a result of its ownership of capital stock of
Opco, and (iv) franchise taxes, other liabilities
required to maintain the Issuer's existence as a
corporation and any other immaterial liabilities
inadvertently incurred, provided that Opco shall
satisfy all such liabilities under subclause (iv)
within 30 days after the same become due and
payable.
(ii) Limitation on Indebtedness:
Issuer will not Incur any Indebtedness, except the
PIK Notes and except for a guarantee of the
obligations of Opco under the Revolving Credit
Agreement.
Opco will not, and will not permit any Restricted
Subsidiary to, Incur any Indebtedness unless, (i)
the Incurrence of such Indebtedness would be
permitted under the 10-5/8% Notes Indenture (as in
effect on the date hereof and without giving
effect to any amendment thereto) and (ii) after
giving effect to the Incurrence of such
Indebtedness, the ratio of Consolidated Net
Indebtedness (based on the actual amount
outstanding thereof) to Adjusted EBITDA
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of the Issuer computed on a pro forma basis for
the preceding four quarters would not exceed 6.00
to 1.
(iii) Limitation on Provisions Restricting Dividends by
Subsidiaries:
Issuer will not, and will not permit Opco or any
other Subsidiary to, enter into or suffer to exist
any agreement, which restricts Opco's or any other
Subsidiary's ability or right to pay dividends to,
make payments under the Tax Sharing Agreement to,
or make advances to or investments in, the Issuer
or, if such other Subsidiary is not directly owned
by Issuer, the "parent" Subsidiary of such
Subsidiary except for restrictions in effect on
the date hereof under the 10-5/8% Notes Indenture
and under the Revolving Credit Agreement or any
refinancing thereof; provided that such
restrictions are no more restrictive than that
contained in the Indebtedness being refinanced;
provided further that no such restriction which is
more restrictive than that contained in the
10-5/8% Notes Indenture as in effect on the date
hereof shall be entered into or agreed to if such
restriction would apply after September 5, 2002,
the maturity date under the Revolving Credit
Agreement (including, as a result of the
refinancing or extension of the Revolving Credit
Agreement).
(iv) Limitation on Liens:
Issuer will not create or allow to exist any Liens
on its assets provided that the foregoing
restrictions shall not apply to any lien on the
stock of Opco to secure the obligations of the
Company's guarantee of all Indebtedness under
the terms of any amendment to the Revolving Credit
Agreement.
(v) Limitation on Merger, Consolidation and Sale of
Assets:
Issuer will not, and will not permit any of its
Subsidiaries to, consolidate with or merge with or
into any other Person or transfer substantially
all of its assets in a single transaction or
series of transactions to any Person (except that
a wholly owned Subsidiary of Opco may consolidate
with or merge with, or convey, transfer or lease
substantially all of its assets in a single
transaction or series of transactions to Opco or
another wholly owned Subsidiary of Opco); provided
that the foregoing restriction shall not apply to
the
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consolidation or merger of Issuer with, or the
transfer of all or substantially all of the assets
of the Issuer in a single transaction or series of
transactions to, any Person so long as:
(a) the successor is Issuer, or if the successor
is not Issuer, the successor assumes the due
and punctual performance and observance of
each covenant and condition of the operative
documents;
(b) after giving effect to such transaction (i)
the successor and its Subsidiaries could
incur at least $1.00 of additional
Indebtedness in compliance with its covenants
described herein, and (ii) the successor has
a net worth at least equal to the net worth
of the Issuer immediately prior to such
transaction;
(c) immediately before and after giving effect to
such transaction no Default or Event of
Default exists or would exist; and
(d) a Change of Control shall have resulted
therefrom.
(vi) Limitation on Restricted Payments.
Issuer will not, and will not permit any of its
Subsidiaries to, directly or indirectly, declare
or make, or incur any liability to declare or
make, any Restricted Payments.
(vii) Limitations on Investments.
Issuer will not make any Investments in any Person
(other than Opco), nor will Opco or any Subsidiary
of Opco make any Investment in any Person other
than Permitted Investments (as defined in the
10-5/8% Notes Indenture as in effect on the date
hereof and without giving effect to any amendment
thereto) provided, however, that the Issuer may
guarantee the obligations of Opco under the
Revolving Credit Agreement.
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<PAGE>
(viii) Limitation on Sale of Assets.
Issuer will not, and will not permit any
Subsidiary to, consummate any asset disposition,
unless (i) at least 75% of the proceeds therefrom
are in cash and (ii) all cash proceeds therefrom
are used (x) to repay indebtedness of Opco or the
Issuer or, within one year after the receipt
thereof, are reinvested in Opco's business and (y)
to the extent not used under (x), to offer to
purchase the PIK Notes at the then outstanding
principal amount thereof (an "Offer"). The
foregoing restrictions on asset dispositions
described in clauses (i) and (ii) above shall not
apply to certain dispositions by Opco and its
Subsidiaries in the ordinary course of business,
which shall be deemed to include (a) the sale of
rental inventory, consistent with past practice,
and (b) the sales or closure of stores; provided
that in the case of clause (b) the Issuer or its
Restricted Subsidiaries acquires or opens another
store within 90 days thereof for each such store
sold or closed.
(ix) Limitation on Affiliated Transactions.
Issuer will not, and will not permit any
Subsidiary to, enter into or permit to exist any
transaction with an Affiliate of the Issuer unless
such transaction would be permitted under the
10-5/8% Notes Indenture (as in effect on the date
hereof and without giving effect to any amendment
thereto); provided, however, Issuer may guarantee
the obligations of Opco under the Revolving Credit
Agreement.
(x) Limitation on Store Openings.
The Issuer will covenant that Issuer and its
Subsidiaries will not, without the prior written
consent of the Required Holders (as defined under
"Voting" below), open, acquire, or enter into any
new leases with respect to, more than 25 stores in
the current quarter (except such greater number of
stores that the Issuer and its Subsidiaries have
opened, acquired or leased prior to the
calculation of Average New Store Revenues (as
defined herein) for the current quarter) and each
following quarter if the average annualized
revenues for stores opened and acquired during the
preceding four full quarters together, such amount
to be calculated by month and weighted for the
number of opened and acquired stores in each such
month (the "Average New Store Revenues"), are
below $575,000 per store. If the Average New Store
Revenues for any four quarter period are below
$525,000 per store, the Issuer and its
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<PAGE>
Subsidiaries will, unless the Required Holders
have otherwise agreed in writing, not open,
acquire, or enter into any leases with respect to,
any new stores in the current quarter (except such
stores that the Issuer and its Subsidiaries have
opened, acquired or leased prior to the
calculation of Average New Store Revenues for the
current quarter) and each following quarter. At
any time after the 4th anniversary of the Closing
any then existing or thereafter occurring store
opening prohibition as set forth in the
immediately preceding two sentences will terminate
if the ratio of Consolidated Net Indebtedness
(based on the actual amount outstanding thereof)
to Adjusted EBITDA for the trailing four quarter
period is less than 4.50 to 1 as of four
consecutive fiscal quarter ends, subject to
reimposition of such prohibition if such ratio
exceeds 4.50 to 1 as of any subsequent fiscal
quarter end. The Required Holders and the Issuer
will give good faith consideration to the decrease
or increase, respectively, of the thresholds
described above in the event that an independent
auditor acceptable to the Required Holders
confirms (at the Issuer's expense) that the
average pretax return on capital (including all
corporate overhead) for newly opened or acquired
stores has increased or decreased from levels
presented during due diligence and, in any event,
is greater than the Issuer's cost of debt. The
foregoing covenant in this clause (x) will cease
to be of further force and effect at such time as
the Purchasers and their Affiliates own less than
50% of the aggregate principal amount of the PIK
Notes issued at the Closing. See Schedule B
attached hereto for the method of calculating
Average New Store Revenues.
(xi) Other.
Other customary affirmative covenants and negative
covenants for mezzanine securities, including (i)
a limitation on the issuance or sale of capital
stock of Subsidiaries of Opco, (ii) payment of
taxes and other claims, (iii) maintenance of
corporate existence, properties and insurance and
(iv) a requirement that Issuer and its
Subsidiaries not engage in any material line of
business substantially different from those lines
of business carried on by Issuer on the date of
the Commitment Letter.
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<PAGE>
Events of Default: Customary Events of Default, including:
(i) a default in the payment of any Indebtedness of
Issuer, Opco or any other Subsidiary that is
outstanding in an aggregate amount of $5 million
or more; or
(ii) a default in the payment of any Indebtedness
within any applicable grace period after final
maturity or there occurs any acceleration of any
such Indebtedness by the holders thereof because
of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5.0
million and in either case, such default is not
cured or waived and such acceleration, if any,
rescinded or the Indebtedness is not paid in 30
days;
(iii) a default for 30 days in the payment of any
interest required to be paid on the PIK Notes;
(iv) a default in the payment of principal of or
premium on the PIK Notes, or any mandatory payment
of the PIK Notes;
(v) a default in the performance of any covenant or
agreement of the Issuer (other than a default in
the performance or breach of a covenant or
agreement which is specifically dealt with
elsewhere in the Indenture between the Company and
the trustee for the holder of the PIK Notes) and
such default or breach shall continue for a period
of 60 days after written notice or (b) a default
in the performance or breach of the provisions of
"Limitation on Merger, Consolidation and Sale of
Assets", or the Issuer shall have failed to make
or consummate an Offer in accordance with the
provisions of "Limitation on Sale of Assets" or
the Issuer shall have failed to make or consummate
a Change of Control Offer in accordance with the
provisions of "Change in Control"; and, in any
such case described in this clause (b), such
default or breach shall continue for a period of
30 days after written notice;
(vi) one or more judgments, orders or decrees for the
payment of money in excess of $5 million, either
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individually or in the aggregate, shall be
rendered against the Issuer or any Subsidiary or
any of their respective properties and shall not
be discharged and either (a) any creditor shall
have commenced an enforcement proceeding upon such
judgment, order or decree or (b) there shall have
been a period of 60 days during which a stay or
enforcement of such judgment or order, by reason
of an appeal or otherwise, shall not be in effect;
and
(vii) events of bankruptcy, insolvency or
reorganization.
Subordination: The payment of principal of, premium (if any) and
interest on and all other liabilities under or in
connection with the Indebtedness now or hereafter
represented by the PIK Notes will be subordinate in
right of payment to the prior payment of the Company's
obligations under its guarantee of all Indebtedness
evidenced by the Revolving Credit Agreement in the
same manner as the 10-5/8% Notes are subordinated
under the 10-5/8% Notes Indenture to the amounts
payable under the Revolving Credit Agreement.
Registration Rights: After the Closing, holders of the PIK Notes as a group
will have one demand registration right (exercisable by
the holders of at least 25% of the PIK Notes
outstanding) to require Issuer to register the sale of
the PIK Notes pursuant to an "evergreen" shelf
registration statement (including in connection with
any market making activities), or to issue in exchange
for the PIK Notes registered exchange notes on the same
terms as the PIK Notes, in each case subject to certain
customary limitations. The registration rights herein
will be contained in a registration rights agreement
on customary terms.
Assignment; Syndication The Purchasers will have the right to assign the PIK
Notes to Assignees without the consent of the Issuer
(both prior to and after closing). The Issuer will, if
so requested by the Purchasers, actively assist the
Purchasers in completing any public or private
(including by means of a Rule 144A offering)
syndication of the PIK Notes. Such assistance shall, in
each case, include (a) the Issuer's using commercially
reasonable efforts to ensure that the syndication
efforts benefit materially from the Issuer's existing
lending relationships, (b) direct contact between the
Issuer's senior management and advisors and the
proposed Assignees, (c) assistance in the preparation
of a Confidential Information Memorandum and other
materials to be used in connection with the syndication
(including assistance in the completion of the
Purchasers' or, in the case of an underwritten
offering, the managers' due diligence review of the
Issuer and its subsidiaries as an aid to such
preparation) and (d) the hosting of one or more
meetings of prospective Assignees.
The Purchasers (or lead managers selected by the
Purchasers), in consultation with the Issuer, will
manage all aspects of the syndication, if any,
including decisions as to the selection of institutions
to be approached and when they
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will be approached, when their commitments will be
accepted, which institutions will participate, the
allocations of the commitments among the Assignees and
the amount and distribution of fees among the
Assignees. To assist the Purchasers (or such lead
managers) in the syndication efforts, the Issuer agrees
promptly to prepare and provide to the Purchasers (or
such lead managers) all information with respect to the
Issuer and the Transactions contemplated hereby,
including all financial information and projections
(the "Projections"), as the Purchasers may reasonably
request, it being understood that such Projections
shall not be included in any Confidential Offering
Memorandum without the Issuer's consent. The Issuer
represents and covenants that (a) all information,
including any Confidential Offering Memorandum prepared
by the Issuer, other than the Projections, taken as a
whole, that has been or will be made available by the
Issuer or any of its representatives is or will be,
when furnished complete and correct in all material
respects and does not or will not, when furnished,
contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the
statements contained therein not materially misleading
in light of the circumstances under which such
statements are made, and (b) the Projections that have
been or will be made available to the Purchasers (or
such lead managers) by the Issuer or any of its
representatives have been or will be prepared in good
faith based upon reasonable assumptions.
Voting: Amendments and waivers of the PIK Notes at any time
will require the approval of the holders of a majority
of the PIK Notes then outstanding (the "Required
Holders"), except that for matters that would
customarily require the consent of 100% of the holders
of the PIK Notes.
Equity Provisions:
Registration Rights: (i) After the Closing, holders of the Warrants as
a group will have one demand registration
right (exercisable by the holders of
Warrants, or the Common Stock underlying the
Warrants, representing at least 25% of the
Common Stock covered by the Warrants on the
Closing Date) to require Issuer to register
the sale of the common equity underlying the
Warrants, subject to certain
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customary limitations; and
(ii) Each holder of the Warrants shall have
unlimited customary "piggyback" rights,
subject to standard cutbacks for piggyback
registrations.
Tag Along Rights: Each holder of the Warrants shall have the same
tag-along rights in respect of the shares of
Common Stock covered thereby as are granted to the
Issuer's public stockholders pursuant to the
Management Standstill Agreement.
Anti-dilution Provisions: The Warrants will contain customary anti-dilution
provisions provided that (a) the exercise price on
any Wattles' options outstanding on the date
hereof may be reduced (but not below the Offer
Price) without resulting in any anti-dilution
adjustment, and (b) if the Issuer reduces, within
one year of the Closing, the exercise price for
non-Wattles employees' options, the aggregate
reduction in the exercise price (provided that no
such exercise price is reduced below the Offer
Price) will, if the aggregate dollar amount of
such reduction for non-Wattles employees' options
exceeds $8,500,000, result at the time of each
such reduction in an increase in the number of
Warrants issuable to the Purchasers' based on a
formula detailed in the Schedule C attached
hereto.
Board Representation: So long as the Purchasers and their Affiliates own
(i) PIK Notes representing at least 33-1/3% of the
original principal amount of the PIK Notes issued
at the Closing and (ii) Common Stock or Warrants
representing or covering at least 33-1/3% of the
number of shares of Common Stock covered by the
Warrants issued to the Purchasers at the Closing,
the Issuer shall, at the request of the
Purchasers, (a) elect one (1) director to the
Issuer's Board of Directors who has been
designated by the Purchasers and (b) at each
meeting of the Issuer's stockholders for the
election of directors thereafter nominate such
director (or another person designated by the
Purchasers) in the Board's slate of directors and
use reasonable efforts to have such nominee
elected to the Board.
Access: So long as the Purchasers and their Affiliates own
(i) PIK Notes representing at least 20% of the
original principal amount of PIK Notes issued at
the Closing and (ii) Common Stock or Warrants
representing or covering at least 20% of the
number of shares of Common Stock covered by the
Warrants issued to the Purchasers at the Closing,
the Issuer will grant the Purchasers' and their
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representatives (a) access at reasonable times and
intervals, to the properties, books and records,
management of, and to the independent public
accountants for, the Issuer, and (b) the right to
attend Board meetings, to receive information
provided to the Board at the same time as received
by the Board and to consult with management
regarding the Issuer's business and financial
matters and to have the Purchasers' views given
due consideration.
Information: So long as the Purchasers and their Affiliates own
(i) PIK Notes representing at least 20% of the
original principal amount of the PIK Notes issued
at the Closing and (ii) Common Stock or Warrants
representing or covering at least 20% of the
number of shares of Common Stock covered by the
Warrants issued to the Purchasers at the Closing,
the Issuer shall provide the Purchasers with
annual audited and monthly unaudited consolidated
and consolidating financial statements (within 90
days in the case of year-end information and 30
days in the case of monthly information) including
a consolidated balance sheet as at the end of each
such period and related period and year-to-date
statement of earnings and cash flows (setting
forth in comparative form the figures for the
prior comparable periods and the budgeted figures
for the periods being reported on), together with
such other information as the Purchasers may
reasonably request, including (a) the Average New
Store Revenues for the four quarter period ending
on such month end (including month by month
Average New Store Revenues broken down by month
and by region) , (b) comparable same store sales
information, and (c) a schedule showing, by month,
new stores to be opened under signed leases. In
addition, the Issuer will provide all holders of
the PIK Notes information with respect to itself
comparable to that provided under Section 4.2 of
the 10-5/8% Notes Indenture.
Exchange Right: The Purchasers will have the right to exchange all
or part of the outstanding PIK Notes for one or
more series of new PIK Notes ("Exchange Notes") in
the same aggregate original principal amount at
issuance as the then principal amount of PIK Notes
then being exchanged with the Exchange Notes
having identical terms as the PIK Notes for which
they are exchanged provided that the different
series of Exchange Notes may differ as to relative
ranking and interest rate or yield provided the
aggregate cost to the Issuer is not increased.
All references herein to the PIK Notes, except
where the context otherwise specifically requires,
shall include the Exchange Notes.
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Miscellaneous: (i) The PIK Notes shall be issued in registered
form.
(ii) At the request of the Purchasers, the Issuer
will use its best efforts to obtain a credit
rating for the PIK Notes.
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Schedule A
Defined Terms
"10-5/8% Notes" means the promissory note issued under the 10-5/8% Notes
Indenture evidencing the $200 million in principal amount of 10-5/8% Series B
Senior Subordinated Notes due 2004 issued by the Issuer.
"10-5/8% Notes Indenture" means the Indenture, dated as of August 13, 1997,
by and among the Issuer and the U.S. Trust Company of California, N.A.
"Adjusted EBITDA" shall have the same meaning as the term "Operating Cash
Flow" is defined in the 10-5/8% Notes Indenture.
"Affiliate" or "Affiliates" shall have the meaning set forth in the 10-5/8%
Notes Indenture.
"Change of Control" shall have the meaning substantially similar to that
contained in the 10-5/8% Notes Indenture provided that such definition shall
include any event that triggers a Change of Control (as defined in the 10-5/8%
Notes Indenture).
"Consolidated" or "consolidated" (including the correlative term
"consolidating") or on a "consolidated basis", when used with reference to any
financial term (but not when used with respect to any tax return or tax
liability), means the aggregate for two or more Persons of the amounts signified
by such term for all such Persons, with inter-company items eliminated and, with
respect to net income or earnings, after eliminating the portion of net income
or earnings properly attributable to minority interests, if any, in the capital
stock of any such Person or attributable to shares of preferred stock of any
such Person not owned by any other such Person, in accordance with GAAP.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America which are consistent with the
principles promulgated or adopted by the Financial Accounting Standards Board
and its predecessors.
"Incur" shall have the meaning set forth in the 10-5/8% Note Indenture.
"Indebtedness" shall have the meaning set forth in the 10-5/8% Notes
Indenture.
"Lien" or "Liens" shall have the meaning set forth in the 10-5/8% Notes
Indenture.
"Net Indebtedness" means Indebtedness less cash.
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"Person" means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization, or a government or
agency or political subdivision thereof.
"Restricted Payment" means: (a) every dividend or other distribution paid,
made, declared or authorized by Issuer or any Subsidiary (other than dividends
or other distributions paid, made, declared or authorized by any Subsidiary to
Issuer or to a wholly-owned Subsidiary of Issuer) on or in respect of any class
of its capital stock, and (b) every payment by or on behalf of Issuer or any
Subsidiary in connection with the redemption, purchase, retirement or other
acquisition of any shares of Issuer's or any Subsidiary's capital stock or any
indebtedness which is subordinated in right of payment to the PIK Notes. For
purposes of this definition, "capital stock" will include warrants, stock
appreciation rights and other rights and options to acquire capital stock. The
amount of any Restricted Payment made in property shall be the greater of (x)
the fair market value of such property (as determined in good faith by the board
of directors (or equivalent governing body) of the Person making such Restricted
Payment) and (y) the net book value thereof on the books of such Person, in each
case determined as of the date on which such Restricted Payment is made.
"Revolving Credit Agreement" means the Issuer's $300 million Revolving
Credit Agreement, dated as of September 5, 1997.
"Subsidiary" or "Subsidiaries" means, as to any Person, any corporation,
association or other business entity in which such Person or one or more of its
Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient
equity or voting interests to enable it or them (as a group) ordinarily, in the
absence of contingencies, to elect a majority of the directors (or Persons
performing similar functions) of such entity, and any partnership, limited
liability company or joint venture if more than a 50% interest in the profits or
capital thereof is owned by such Person or one or more of its Subsidiaries or
such Person and one or more of its Subsidiaries (unless such partnership,
limited liability company or joint venture can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to a
"Subsidiary" is a reference to a Subsidiary of Issuer.
A-19
<PAGE>
Schedule B
Average New Store Revenues Analysis:
1. Analysis to include stores opened or acquired by the Issuer and its
Subsidiaries in the preceding four quarters (excluding stores that have
been open for less than 2 full calendar months and acquired stores that
have been owned for less than one full calendar month).
2. To compute annual revenue, use actual monthly revenue when available.
For each full calendar month that actual revenue is not available, compute
forecasted revenue for such month adjusted for seasonal, ramp and number of
day factors as outlined below:
2.1. Take the actual revenue for each of the three preceding full calendar
months (or, to the extent not available, the actual revenue for the
two preceding full calendar months) and adjust the revenue for each
such month as indicated below:
(a) First, for each such month, multiply the actual monthly revenue by the
product of each of the appropriate monthly ramp factors beginning with
the month immediately following the month being adjusted and
concluding with the first forecasted month being forecasted; provided
that for the last month with actual revenue, no ramp factor adjustment
is made;
(b) Second, divide the result of (a) above by the appropriate monthly
seasonal factor;
(c) Third, divide the result of (b) above by the appropriate monthly
day and weekend factor; and
(d) Finally, compute the arithmetic average of the monthly revenue
amounts from (c) above (the "Adjusted Last Month Actual
Revenue").
2.2. Then, compute the projected monthly revenues as follows:
(a) First, for each projected month, multiply the Adjusted Last Month
Actual Revenue by the product of each of the appropriate monthly
ramp factors beginning with the first forecasted month of
calculation and concluding with the month being forecasted;
(b) Second, multiply the result of (a) above by the appropriate
monthly seasonal factor; and
(c) Third, multiply the result of (b) above by the appropriate
monthly day and weekend factor.
2.3 For an example of this calculation, see Exhibit A attached hereto.
A-20
<PAGE>
Seasonal Factors:
Calendar Calendar
Month Factor Month Factor
----------------------------------------
January 1.07x July 1.11x
February 0.99 August 0.96
March 1.02 September 0.88
April 0.95 October 0.87
May 0.91 November 1.03
June 1.00 December 1.20
Ramp Factors:
Month Month
After After
Opening Ramp Opening Ramp
---------------------------------------------------
2 14.3% 8 0.5%
3 1.6% 9 0.5%
4 1.5% 10 0.5%
5 1.4% 11 0.5%
6 1.3% 12 0.5%
7 1.0%
Day and Weekend Factors:
Calendar Calendar
Month Factor Month Factor
----------------------------------------
January 1.02x July 0.99
February 0.92 August 1.06
March 1.03 September 0.96
April 0.96 October 1.02
May 1.06 November 1.02
June 0.98 December 0.99
3. Average New Store Revenues for any four quarter period is computed as
follows:
3.1 First, for each such month included in the applicable four quarter
periods divide (x) the sum of the latest annualized actual/forecasted
first year revenue for all stores opened or acquired during any month
as computed above, by (y) the number of stores so opened or acquired
during such month; and
3.2 Second, compute the weighted average of the months included in the
applicable four quarter period as determined in paragraph 3.1 above
(with such weighting based on the number of stores opened or acquired
during each such month).
4. Ramp, seasonality, and day and weekend factors are subject to an annual
audit to ensure they reflect the current operating model. Day and weekend
factors will be changed annually and will be supplied by the Issuer.
A-21
<PAGE>
Exhibit A
A-22
<PAGE>
Example: The following chart shows the calculation of Adjusted Last Month Actual
Revenue for a store opened during the month of December with such calculation
done during the following month of September (eight actual months of revenue and
four projected months of revenue).
<TABLE>
<CAPTION>
Adjustments
-----------------------------------------------------------------------------------
Ramp Factor Adustments
--------------------------------------------
Historical Day and Actual Unadjusted Day and Run
Ramp Seasonal Weekend Monthly Monthly Seasonal Weekend Rate/
Factor(c) Factor(c) Factor(b) Revenue Revenue July Aug. Sept. Oct. Nov. Dec. Factor(c) Factor(c) Forecast
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
----------
January 1.07x 1.02x |$50,000 |
February 14.00% 0.99 0.92 | 52,276 |
March 1.60% 1.02 1.08 | 54,813 |
April 1.50% 0.95 0.96 | 52,363 |
May 1.40% 0.91 1.06 | 50,691 |
June 1.30% 1.00 0.98 | 56,075 | $56,076 x 1.010 x 1.005 / 1.00 / 0.98 = 58,060
July 1.00% 1.11 0.99 | 63,799 | 63,799 x 1.005 / 1.11 / 0.99 = 58,347
August 0.50% 0.96 1.06 | 55,402 | 55,402 / 0.96 / 1.06 = 54,444
---------- ------
Adjusted Last Month 58,857
Actual Revenue
---------
September 0.50% 0.88x 0.96x $56,957 x 1.005 0.88 x 0.96 = |48,358 |
October 0.50% 0.87 1.02 56,957 x 1.005 x 1.005 0.87 x 1.02 = |51,050 |
November 0.50% 1.03 1.02 56,957 x 1.005 x 1.005 x 1.005 1.03 x 1.02 = |60,741 |
December 0.50% 1.20 0.99 56,957 x 1.005 x 1.005 x 1.005 x 1.005 1.20 x 0.99 = |69,029 |
--------
Actual Revenue (8 months) $ 435,439
Projected Revenue (4 months) 229,178
-----------
Total Revenue(a) 664,617
- - - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Sum of boxed amounts.
(b) Day and Weekend Factor will change for each forecast year.
(c) Ramp, Seasonality and Day and Weekend Factors subject to an annual audit to
ensure they reflect current operating model.
</FN>
</TABLE>
<PAGE>
Schedule C
The number of additional Warrants will be issuable to the Purchasers upon any
decrease, within the first anniversary of Closing, in the aggregate exercise
price of outstanding non-Wattles employee options. Such additional Warrants
will have the same terms as the PreAdjustment Warrants, including an exercise
price of $.01 per share. (This assumes one share of Common Stock is issuable
upon the exercise of one Warrant).
1. Subtract the New Aggregate Option Exercise Proceeds from the Initial
Aggregate Option Exercise Proceeds (the "Shortfall Amount").
2. If the Shortfall Amount is $8,500,000 or less, no adjustment is made. If
the Shortfall Amount is greater than $8,500,000, an adjustment is made as
follows:
2.1 Subtract the $8,500,000 from the Shortfall Amount (the "Adjusted
Shortfall Amount").
2.2 Multiply the Adjusted Shortfall Amount by the Purchasers' Initial
Fully Diluted Ownership Percentage (the "Purchasers' Pro Rata Share
of the Shortfall Amount").
2.3 Divide the Purchasers' Pro Rata Share of the Adjusted Shortfall Amount
by the Offer Price.
2.4 Subtract any Warrants previously issued pursuant to this Schedule C
from the result of Step 2.3.
Definitions:
"Initial Aggregate Option Exercise Proceeds" shall mean the sum of the
products of each non-Wattles employee option outstanding as of the Closing Date
multiplied by the exercise price of such non-Wattles employee option immediately
before the adjustment of the exercise price.
"New Aggregate Option Exercise Proceeds" shall mean the sum of the products
of each non-Wattles employee option outstanding as of the Closing Date
multiplied by the exercise price of such non-Wattles employee option immediately
after the adjustment of the exercise price.
"Pre-Adjustment Warrants" means the number of Warrants issued pursuant to
the Commitment Letter without taking into account any adjustment provided for in
this Schedule C.
"Purchasers' Initial Fully Diluted Ownership Percentage" shall mean the
Purchasers' percentage of the fully diluted ownership of the Common Stock
represented by the Warrants issued to the Purchasers without taking into account
the adjustment provided for in this Schedule C.
"Initial Fully Diluted Shares" shall mean the fully diluted number of
shares pro forma for the Tender Offer at Closing.
A-23
<PAGE>
Example:
Assumptions:
Initial Aggregate Option Exercise Proceeds: $52,938,819 (a)
New Aggregate Option Exercise Proceeds: $41,700,000
Purchasers' Initial Fully Diluted Ownership 8.2%
Percentage:
Offer Price $11.00 per share
Warrants Previously Issued Pursuant to Schedule C: 0
Calculation:
Step 1 $52,938,819 - $41,700,000 = $11,238,819
Step 2 Because $11,238,819 is greater than $8,500,000, an adjustment
is made
Step 3 $11,238,819 - $8,500,000 = $2,738,819
Step 4 $10,834,684 * 8.2% = $224,583
Step 4 $224,583/$11.00 = 20,417 (b)
- - - -------------------------------------------------------
(a) 4,638,413 options at an average exercise price of $11.41 as of
September 30, 1997.
(b) The number of Warrants issuable to the Purchasers in addition to the
Pre-Adjustment Warrants.
A-24
<PAGE>
Annex B
In the event that the Purchasers become involved in any capacity in any action,
proceeding or investigation brought by or against any person, including
stockholders of the Company, in connection with or as a result of the
Purchasers' agreements contained or any matter referred to in this letter, the
Company periodically will reimburse the Purchasers for their legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith. The Company also will indemnify and hold the Purchasers
harmless against any and all losses, claims, damages or liabilities to any such
person in connection with or as a result of the Purchasers' agreements contained
or any matter referred to in this letter, except to the extent that any such
loss, claim, damage or liability results from the gross negligence or bad faith
of the Purchasers in performing the obligations that are the subject of this
letter. If for any reason the foregoing indemnification is unavailable to the
Purchasers or insufficient to hold it harmless, then the Company shall
contribute to the amount paid or payable by the Purchasers as a result of such
loss, claim, damage or liability in such proportion as is appropriate to reflect
the relative economic interests of the Company and its stockholders on the one
hand and the Purchasers on the other hand in the matters contemplated by this
letter as well as the relative fault of the Company and the Purchasers with
respect to such loss, claim, damage or liability and any other relevant
equitable considerations. The reimbursement, indemnity and contribution
obligations of the Company under this paragraph shall be in addition to any
liability which the Company may otherwise have, shall extend upon the same terms
and conditions to (i) any affiliate of the Purchasers (including Goldman, Sachs
& Co.), (ii) any Assignees (as defined in this letter) and (iii) the partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers the Assignees and any such affiliate, and shall be binding
upon and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers, any such affiliate and any such
person. The Company also agrees that neither the Purchasers nor any of such
affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any person asserting claims on behalf of or
in the right of the Company in connection with or as a result of the Purchasers'
agreements contained or any matter referred to in this letter except to the
extent that any losses, claims, damages, liabilities or expenses incurred by the
Company result from the gross negligence or bad faith of the Purchasers in
performing the obligations that are the subject of this letter. Any right to
trial by jury with respect to any action or proceeding arising in connection
with or as a result of this letter agreement or any matter referred to in this
letter is hereby waived by the parties hereto. The provisions of this Annex B
shall survive any termination or completion of this letter agreement, and this
letter agreement shall be governed by and construed in accordance with the laws
of the State of New York without regard to principles of conflicts of laws.
B-1
HOLLYWOOD ENTERTAINMENT CORPORATION
SHARE OWNERSHIP, VOTING AND CO-SALE AGREEMENT
This SHARE OWNERSHIP, VOTING AND CO-SALE AGREEMENT (the "Agreement") is
entered into as of January ____, 1998 by and between Hollywood Entertainment
Corporation, an Oregon corporation (the "Company"), and Mark J. Wattles
("Wattles")."
RECITALS
A. The Company proposes to acquire, pursuant to a self-tender offer (the
"Tender Offer"), outstanding shares of the Company's Common Stock (the "Common
Stock").
B. To facilitate the Company's ability to complete the Tender Offer,
Wattles agrees to limitations on his ownership, transfer and voting of shares of
Common Stock on the terms set forth herein.
AGREEMENT
The parties agree as follows:
1. Definitions. The following terms and phrases used in this Agreement
shall have the meanings given in this Section 1:
"Affiliate" of Wattles means any other person or entity, directly or
indirectly, controlled by or under direct or indirect common control with
Wattles or any member of Wattles' immediate family. For the purposes of this
definition, "control" means the power to direct the management and policies of
such person or entity, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise.
"Acquisition" shall have the meaning given in Section 5 of this
Agreement;
"beneficial owner" of Shares means a person who has or shares (1)
voting power, which includes the power to vote, or to direct the voting of, such
Shares or (2) investment power, which includes the power to dispose, or to
direct the disposition of, such Shares. "Beneficial ownership" shall be
determined in accordance with the foregoing definition.
"business day" shall have the meaning given in Rule 14d-1(c) under the
Exchange Act;
<PAGE>
"Closing" means the closing of the purchase of Shares pursuant to the
Tender Offer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended;
"group" shall have the meaning given in Rule 13d-5(b) under the
Exchange Act;
"Lien" shall have the meaning given in Section 2 of this Agreement;
"Outsider Shares" means outstanding Shares other than Shares
beneficially owned by Wattles;
"outstanding Shares on a fully diluted basis" as of any date shall
mean (i) Shares issued and outstanding and (ii) Shares issuable by the Company
pursuant to the exercise of any outstanding options or other rights to subscribe
for or purchase Shares or pursuant to the conversion or exchange of any
outstanding instrument convertible into or exchangeable for Shares, whether or
not then exercisable, convertible or exchangeable;
"Proposed Transferee" shall have the meaning given in Section 6 of
this Agreement;
"Securities Act" shall mean the Securities Act of 1933, as amended;
"Shares" shall mean issued and outstanding shares of Common Stock of
the Company and any other class or series of capital stock that at any time
gives the holder the right to vote on the election of directors;
"the Company" shall have the meaning given in the preamble of this
Agreement;
"Threshold Amount" shall have the meaning given in Section 3 of this
Agreement;
"transfer" shall mean any sale, contract to sell, exchange,
assignment, gift or other disposition (other than a pledge or encumbrance to
secure a loan), whether voluntary or involuntary, because of any act or
occurrence;
"Warrants" shall mean the warrants issued by the Company in connection
with financing the Tender Offer.
"Wattles" shall have the meaning given in the preamble of this
Agreement;
2
<PAGE>
"Wattles Shares" shall have the meaning given in Section 2 of this
Agreement.
2. Representations of Wattles. Wattles represents and warrants that as of
the date of this Agreement (a) he beneficially owns 11,124,600 Shares and is the
holder of options to purchase 520,000 Shares (collectively, "Wattles Shares");
(b) except as permitted by this Agreement, Wattles Shares are not subject to any
lien, charge, pledge, security interest, adverse claim, obligation to sell or
otherwise dispose or other encumbrance of any kind or nature whatsoever and
however arising ("Lien"); and (c) neither the execution and delivery of this
Agreement nor the observance or performance of its terms by Wattles violates, or
creates any Lien with respect to Wattles Shares, pursuant to any statute,
ordinance, regulation, order, judgment or decree applicable to Wattles or the
Wattles Shares or any agreements to which Wattles or the Wattles Shares are
bound.
3. Voting of Shares Generally.
3.1 Shares Below Threshold Amount. Any Shares beneficially owned by
Wattles that constitute up to 31.2 percent of the then outstanding Shares (the
"Threshold Amount") may be voted by Wattles in his discretion without
restriction except as set forth in Section 3.4.
3.2 Shares Above Threshold Amount. With respect to all matters
submitted to shareholders of the Company for a vote, all Shares beneficially
owned by Wattles in excess of the Threshold Amount shall be voted in proportion
to the votes of all Outsider Shares actually cast, not including abstentions.
3.3 Affiliates. Wattles agrees that the voting provisions set forth in
this Agreement shall apply to Wattles Shares transferred by him to his
Affiliates and that prior to any such transfer such Affiliates shall have agreed
in writing to be bound by the provisions of this Section 3.
3.4 Director Elections. Wattles shall vote all of his Shares below the
Threshold Amount to elect independent director-nominees who are nominated in
accordance with the provisions of Section 3.5(3) of the Company's Bylaws;
provided, however, that Wattles may vote his Shares below the Threshold Amount
against any such director-nominee if, within 21 days of receiving notice of the
nomination, he reasonably and in good faith determines that the director-nominee
is not qualified to be a director of the Company and provides a notification to
the Company of this determination.
3
<PAGE>
4. Lock-Up.
4.1 General. Wattles may transfer or encumber any Shares except as
otherwise provided in Section 4.2 and Section 6 of this Agreement.
4.2 Restrictions on Transfers and Pledges. Subject to the provisions
of Section 6, Wattles shall not (a) transfer any Shares or pledge Shares to
secure loans in an aggregate principal amount in excess of $35 million prior to
180 days after the Closing or (b) transfer more than 2,775,000 Shares or pledge
Shares to secure loans in an aggregate principal amount in excess of $40 million
between the date which is 180 days after the Closing and the second anniversary
of the Closing. Notwithstanding the foregoing restrictions, Wattles Shares may
be transferred by will or otherwise pursuant to the applicable laws of descent
and distribution; provided, however, that with respect to a transfer of any
Shares permitted pursuant to this sentence, the obligations set forth in this
Agreement shall continue to be applicable to the transferee of such Shares and
provided further that the transferee of such Shares shall have agreed in writing
to be bound by the provisions of this Agreement affecting the transferred
Shares. Subject to the provisions in Section 6, Wattles may transfer or pledge
all of his Shares, without restriction, after the second anniversary of the
Closing.
4.3 No Restrictions on Pledgees. Nothing in this Agreement shall
restrict a pledgee of Wattles Shares from transferring such Shares.
5. Limitation on Acquisition of New Shares. Unless approved by the
Company's Board of Directors, Wattles shall not acquire beneficial ownership
from any person other than the Company, whether by purchase or otherwise, of any
Shares (an "Acquisition") if, as a result of such Acquisition, the number of
Shares beneficially owned by Wattles shall exceed 11,124,600.
6. Tag-Along Rights.
6.1 Proposed Transfers. If Wattles proposes to sell any Wattles Shares
to any person or group in one or a series of related transactions (a "Proposed
Transferee"), no such sale shall be completed unless the Proposed Transferee
offers to purchase a ratable number of Shares from the other holders of Shares
and from the holders of Warrants upon substantially the same terms and
conditions offered to Wattles. All holders of Shares and Warrants other than
Wattles shall be permitted only to sell to the Proposed Transferee a ratable
number of Shares based on their percentage ownership of all outstanding Shares
plus Shares issuable upon exercise of the Warrants at the time of the offer.
Subject to the provisions of the foregoing sentence, Wattles may sell any number
of Shares to a Proposed Transferee. The other holders of Shares and Warrants
must respond to an offer from a Proposed Transferee within 20 business days
after receipt of the offer to purchase Shares or such longer period as is
required by law. Failure to respond within such period shall be considered
rejection of such offer.
4
<PAGE>
6.2 Receipt of Offer. For the purposes of this Agreement, if an offer
is made by a Proposed Transferee pursuant to a tender offer, holders of Shares
and Warrants shall be deemed to have received the offer on the date of the
commencement of the tender offer pursuant to Rule 14d-2 under the Exchange Act.
6.3 Transfers Not Subject to Tag-Along Rights. This Section 6 shall
not apply to any transfer (i) to a person or a group of up to a number of Shares
equal to 5% percent of the then outstanding Shares plus Shares issuable upon
exercise of the Warrants, provided that upon completion of such transfer, the
transferee does not beneficially own in excess of 20% of the then outstanding
Shares, (ii) pursuant to a broadly distributed public offering registered under
the Securities Act, (iii) to a purchaser who acquires the Shares in the ordinary
course of business and not with the purpose or effect of changing or influencing
the control of the Company and who, after such sale, is a person described in
Rule 13d-1(b)(1) under the Exchange Act, or (iv) that is approved by the
Company's Board of Directors including a majority of the independent directors.
7. Term and Termination. This Agreement shall become effective upon
execution and shall continue in full force and effect until the earlier of (i)
such time as Wattles no longer beneficially owns any Shares or (ii) the eighth
anniversary of the Closing. Except as otherwise expressly provided in this
Agreement, the obligations and restrictions set forth in this Agreement shall
not apply to any person who acquires beneficial ownership of Shares pursuant to
a transfer permitted by this Agreement.
8. Specific Performance. The parties to this Agreement acknowledge and
agree that it is impossible to measure in money the damages that will accrue to
a party or to their successors, heirs, personal representatives or assigns by
reason of a failure to perform any of the obligations under this Agreement and
agree that the terms of this Agreement shall be specifically enforceable, and
appropriate injunctive relief may be applied for and granted in connection with
the enforcement of this Agreement. If any party to this Agreement or his or its
successors, heirs, personal representatives or assigns institutes any action or
proceeding to enforce specifically any provision of this Agreement, any person
against whom such action or proceeding is brought waives the claim or defense
that such party has an adequate remedy at law, and such person shall not offer
in any such action or proceeding the claim or defense that such remedy at law
exists. Such equitable remedies shall, however, be cumulative and not exclusive
and shall be in addition to any other remedies that any party may have under
this Agreement or otherwise.
9. Further Assurances. Each party to this Agreement shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments or
documents as any other party may reasonably request from time to time in order
to carry out the intent and purposes of this Agreement. No party to this
Agreement shall voluntarily undertake any course of action inconsistent with
satisfaction of the requirements applicable to them set
5
<PAGE>
forth in such instruments and documents, and each party shall promptly do
all such acts and take all such measures as may be appropriate to enable him or
it to perform as early as practicable the obligations herein and therein
required to be performed by them.
10. Governing Law. This Agreement, and the rights of the parties hereto,
shall be governed by and construed in accordance with the laws of the state of
Oregon.
11. Amendment. This Agreement may be amended, or its terms waived, only by
an instrument in writing signed by Wattles and the Company and approved by the
Company's Board of Directors, including approval by a majority of the
independent directors of the Company.
12. Severability. If any provision of this Agreement is held to be invalid
or unenforceable, the validity and enforceability of the remaining provisions of
this Agreement shall not be affected thereby.
13. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, successors,
assigns, administrators, executors and other legal representatives.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which together
shall constitute one and the same agreement.
15. No Third Party Beneficiaries. This Agreement is entered into solely for
the benefit of the Company and Wattles and nothing in this Agreement shall
confer rights or benefits on any third party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HOLLYWOOD ENTERTAINMENT CORPORATION
--------------------------------------------
By:
Its:
--------------------------------------------
Mark J. Wattles
6
