UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-21824
HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0981138
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
25600 S.W. Parkway Center Drive, Wilsonville, Oregon 97070
(Address of principal executive office, including zip code)
(503) 570-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----------
As of May 14, 1997, there were 36,692,626 shares of the registrant's
Common Stock outstanding.
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Consolidated Financial Statements: 3
Consolidated Statements of Operations 3
Three months ended March 31, 1997 and 1996
Consolidated Balance Sheets 4
March 31, 1997 and December 31, 1996
Consolidated Statements of Cash Flows 5
Three months ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Signatures 13
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and other operating data)
Three Months
Ended March 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Revenue:
Rental revenue $ 91,680 $ 54,749
Product sales 18,795 10,324
------------ -----------
110,475 65,073
Operating costs and expenses:
Cost of product sales 11,601 6,245
Operating and selling 77,049 46,217
General and administrative 5,969 4,456
Amortization of intangibles 1,527 1,524
------------ -----------
Operating income 14,329 6,631
Nonoperating income (expense):
Interest income 82 97
Interest expense (1,549) (618)
Litigation settlement (18,874) -
------------ -----------
Income before income taxes (6,012) 6,110
(Benefit ) provision for income taxes (2,405) 2,383
------------ -----------
Net income $ (3,607) $ 3,727
============ ===========
Net income per share $ (0.10) $ 0.11
============ ===========
Weighted average shares outstanding 37,416 35,127
Number of stores at end of period 601 330
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
1997 1996
----------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,602 $ 12,849
Construction and other receivables 23,201 25,785
Merchandise inventories 44,307 45,255
Prepaid expenses and other current assets 3,625 3,232
---------------- ---------------
Total current assets 84,735 87,121
Videocassette rental inventory, net 160,188 144,264
Property and equipment, net 128,650 115,812
Excess of cost over net assets acquired, net 97,880 99,229
Deferred income taxes 757 783
Other assets 3,588 2,574
---------------- ---------------
Total assets $ 475,798 $ 449,783
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 205 $ 205
Accounts payable 49,220 67,207
Accrued liabilities 17,252 10,402
Income taxes payable 712 2,914
---------------- ---------------
Total current liabilities 67,389 80,728
Long-term debt, less current portion 9,948 156
Line of credit 101,000 82,000
Deferred rent and other liabilities 7,199 6,452
Deferred income taxes 1,263 5,744
---------------- ---------------
186,799 175,080
Commitments and contingencies --- ---
---------------- ---------------
Shareholders' equity:
Common stock, 100,000,000 shares
Authorized; 36,415,616 and 36,006,201 shares
Issued and outstanding, respectively 255,859 238,021
Retained earnings 35,385 38,992
Intangible assets, net (2,245) (2,310)
---------------- ---------------
Total shareholders' equity 288,999 247,703
---------------- ---------------
Total liabilities and shareholders' equity $ 475,798 $ 449,783
================ ===============
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months
Ended March 31,
--------------------------
1997 1996
------------ ----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ (3,607) $ 3,727
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 28,904 19,587
Litigation settlements warrants 9,000 ---
Deferred rent and other liabilities 747 505
Deferred income taxes (4,455) 644
Changes in operating assets and liabilities:
Merchandise inventories 948 (525)
Prepaid expenses and other current assets (393) 163
Accounts payable (17,987) (11,888)
Accrued liabilities 6,850 (117)
Income taxes payable (2,202) 913
----------- ----------
Cash provided by operating activities 17,805 13,009
----------- ----------
Investing activities:
Construction and other receivables 2,584 4,132
Purchases of videocassette rental inventory, net (38,374) (20,946)
Purchases of property and equipment, net (17,749) (11,731)
Other (1,144) (148)
----------- ----------
Cash used in investing activities (54,683) (28,693)
----------- ----------
Financing activities:
Proceeds from the issuance of common stock, net 4,695 ---
Proceeds from long-term debt 10,000 ---
Repayments of long-term debt (208) (7,157)
Tax benefit from exercise of stock options 1,651 ---
Proceeds from exercise of stock options 2,493 ---
Repurchase of mandatorily redeemable stock --- (54,250)
Borrowings under line of credit 19,000 51,000
----------- ----------
Cash provided (used) by financing activities 37,631 (10,407)
----------- ----------
Increase/(decrease) in cash and cash equivalents 753 (26,091)
Cash and cash equivalents:
Beginning of period 12,849 29,980
----------- ----------
End of period $ 13,602 $ 3,889
=========== ==========
</TABLE>
5
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statement Presentation:
The consolidated financial statements as of March 31, 1997 and for the
periods ended March 31, 1997 and March 31, 1996 are unaudited and have been
prepared by Hollywood Entertainment Corporation ("the Company") pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is recommended that these
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1996.
The accompanying interim consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the financial position as of March 31, 1997 and the results of
operations and cash flows for the three months ended March 31, 1997 and
March 31, 1996. All such adjustments are of a normal and recurring nature.
The results of operations for the interim periods presented are
not necessarily indicative of the results to be expected for the full year.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129") which are
effective for fiscal years ending after December 15, 1997. The Company
believes the implementation of these statements will not have a material
effect on its results of operations or financial statement disclosures.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, (i) selected income
statement data expressed as a percentage of total revenue and (ii) the number of
stores open at the end of each period:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Revenue:
Rental revenue 83.0% 84.1%
Product sales 17.0 15.9
----------- -----------
100.0 100.0
Operating costs and expenses:
Cost of product sales 10.5 9.6
Operating and selling 69.7 71.0
General and administrative 5.4 6.9
Amortization of intangibles 1.4 2.3
----------- -----------
87.0 89.8
Operating income 13.0 10.2
Nonoperating income (expense), net (18.4) (0.8)
----------- -----------
Income before income taxes (5.4) 9.4
(Benefit) provision for income taxes (2.2) 3.7
----------- -----------
Net income (3.3)% 5.7%
=========== ===========
Number of stores 601 330
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Revenue
Revenue increased $45.4 million, or 70%, to $110.5 million for the three months
ended March 31, 1997, compared to $65.1 million in the first quarter of the
prior year. During the three months ended March 31, 1997, the Company added 50
superstores, ending the period with 601 superstores in 32 states compared to 330
superstores in 25 states at the end of the corresponding period in 1996.
Comparable store revenue increased 5% during the period.
Product sales as a percentage of total revenue increased to 17.0% for the first
quarter of 1997 compared to 15.9% for the first quarter of 1996. The increase in
product sales as a percentage of revenue reflects the successful product sales
promotions that were initiated during the first quarter.
7
<PAGE>
Operating Costs and Expenses:
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from 60.5%
to 61.7% for the three months ended March 31, 1996 and 1997, respectively. The
gross margin on product sales has decreased as the Company has de-emphasized the
sales of certain high gross margin movie accessories. The Company believes the
operating costs associated with maintaining those products offset the higher
gross margins that they generated.
Operating and Selling
Operating expenses, which principally consist of all store expenses including
payroll, occupancy, advertising, depreciation and rental revenue sharing,
decreased as a percentage of total revenue to 69.7% for the first quarter of
1997, compared to 71.0% for the same period last year. The decrease was
primarily due to continued cost improvements achieved at the store level.
Depreciation expense combined with rental revenue sharing costs was 24.9% of
total revenue for the first quarter of 1997 compared to 28.1% for the same
period in 1996. The combined decrease was primarily due to the Company's
decision to lease, rather than purchase, certain furniture, fixtures and
equipment during 1996. (The costs related to the leasing of furniture, fixtures
and equipment is contained in other operating expenses.) Also, improved budget
procedures in the purchase of new release videocassettes for existing stores and
lower revenue sharing expense caused a decrease in the combined cost for the
current period. All other operating and selling expenses accounted for the
remaining change in costs as a percentage of total revenue in the first quarter
of 1997 compared to the same period last year.
General and Administrative
General and administrative expenses increased from $4.5 million, or 6.9% of
total revenue, for the three months ended March 31, 1996 to $6.0 million, or
5.4% of total revenue, for the three months ended March 31, 1997. The dollar
increase was primarily due to the cost of managing additional stores and the
ongoing staffing of the company's regional zone offices. The company continues
to expect general and administrative expenses to decrease as a percentage of
sales.
Amortization of Intangibles
Amortization of intangibles remained constant from $1.5 million, or 2.3% of
total revenue, for the three months ended March 31, 1996 to $1.5 million, or
1.4% of total revenue, for the three months ended March 31, 1997.
8
<PAGE>
Nonoperating Income (Expense), Net
Net nonoperating income (expense) decreased from ($0.5) million for the three
months ended March 31, 1996 to ($20.3) million for the three months ended March
31, 1997. This change was primarily attributable to the Company's $18.9 million
charge relating to the settlement of class action litigation. The charge
consists of $15.0 million in damages and $3.9 million in expenses relating to
the settlement. The remaining dollar increase in nonoperating expense was caused
by higher borrowing levels in the first quarter of 1997 versus the same period
last year.
Income Taxes
The Company's effective tax rate increased from 39.0% of income before income
taxes for the three months ended March 31, 1996 to 40.0% for the three months
ended March 31, 1997 due to higher state tax rates in 1997 compared to 1996.
Liquidity and Capital Resources
The Company's principal capital requirements are for opening new stores, the
purchase of rental inventory and the possible acquisition of existing stores.
The Company has funded its operations primarily through cash generated from
operations, the proceeds of five public equity offerings, loans under the
Company's revolving bank line of credit, trade credit and equipment leases.
The Company ended the period with $13.6 million in cash and cash equivalents.
Working capital as of March 31, 1997 totaled $17.3 million compared to $6.4
million at December 31, 1996. Videocassette rental inventories are accounted for
as noncurrent assets under generally accepted accounting principles because they
are not assets which are reasonably expected to be completely realized in cash
or sold in the normal business cycle. Although the rental of this inventory
generates a substantial portion of the Company's revenue, the classification of
these assets as noncurrent excludes them from the computation of working
capital. The acquisition cost of videocassette rental inventories, however, is
reported as a current liability until paid and, accordingly, included in the
computation of working capital. Consequently, the Company believes working
capital is not as significant a measure of financial condition for companies in
the video retail industry as it is for companies in other industries. Because of
the accounting treatment of videocassette rental inventory as a noncurrent
asset, the Company may, from time to time, operate with a working capital
deficit.
9
<PAGE>
Net cash provided by operating activities was $17.8 million during the three
months ended March 31, 1997 compared to $13.0 million for the same period last
year. The increase in cash provided by operations was primarily due to higher
depreciation and amortization expenses and the accrual of warrants and expenses
relating to the settlement of class action litigation. These increases were
offset by decreases in deferred income taxes, accounts payable and income taxes
payable.
Cash used in investing activities was $54.7 million for the three months ended
March 31, 1997 compared to $28.7 million for the same period last year. During
the three months ended March 31, 1997, cash used in investing activities
consisted primarily of purchases of videocassette rental inventory for new and
existing stores totaling $38.4 million, capital expenditures totaling $17.7
million offset by a reduction in construction and other receivables totaling
$2.6 million. Capital expenditures included the costs to open new stores, to
remodel certain existing stores and to enhance information systems.
Cash provided by financing activities for the three months ended March 31, 1997
totaled $37.6 million and included additional proceeds of $4.7 million from the
exercise in January 1997 of the overallotment option for the Company's equity
offering in December 1996. In addition, the Company received $10.0 million under
long-term capital lease agreements. Also included are proceeds and tax benefit
from the exercise of stock options totaling $2.5 million and $1.7 million,
respectively. The Company repaid $0.2 million of long-term debt. Additional
borrowings under the Company's revolving credit line were $19.0 million during
the period.
At December 31, 1996, the Company had a $100 million revolving credit agreement
with a syndicate of banks. In February 1997, the Company replaced its existing
revolving credit agreement with a new $150 million revolving credit agreement.
Under the new agreement funds borrowed bear interest, at the Company's option,
at IBOR or the bank's base rate, plus approximately 1.25%, depending on the
amount of borrowings. The Company must also pay a fee of 0.3% per annum on the
available and unused portion of the credit facility. Amounts outstanding under
the credit line are collateralized by substantially all the assets of the
Company. The availability of borrowings under the revolving credit agreement is
based on the level of eligible inventory, the Company's financial performance
and compliance with certain covenants and financial ratios. The credit line
expires on December 28, 1998. As of March 31, 1997, $101 million was outstanding
under the revolving credit agreement.
The Company believes the net proceeds from its most recent public equity
offering, its recently increased borrowing capacity, projected cash flow from
operations, cash on hand and equipment leases and trade credit will provide the
necessary capital to fund the opening of approximately 250 new video retail
superstores in the remaining nine months of 1997.
10
<PAGE>
Forward-Looking Statements
Certain of the information set forth above under the caption "Liquidity and
Capital Resources" includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and is subject to the safe harbor
created by that section. Certain factors that could cause results to differ
materially from those projected in the forward-looking statements are set forth
under that caption, below and in the following locations in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996: in Item 1 - Business
under the captions "Expansion Strategy" and "Competition" and in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the captions "Liquidity and Capital Resources" and "General
Economic Trends, Quarterly Results and Seasonality."
The Company plans to open at least 250 new stores in the last nine months of
1997; the Company has signed leases for the majority of these anticipated new
stores. 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 new markets in which it can successfully compete, to locate suitable
store sites and negotiate acceptable lease terms and to adapt its purchasing,
management information and other systems to accommodate expanded operations. 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.
General Economic Trends, Quarterly Results and Seasonality
The Company anticipates that its business will be affected by general economic
conditions and other consumer trends. Future operating results may be affected
by various factors, including variations in the number and timing of new store
openings, the quality and number of new release titles available for rental and
sale, the expense associated with the acquisition of new release titles,
additional and existing competition, marketing programs, weather, special or
unusual events and other factors that may affect retailers in general. Any
concentration of new store openings and the related 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.
The video retail industry generally experiences relative revenue declines in
April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
11
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1997 the Company reached a settlement of the securities litigation
initiated in December 1995. The settlement, which is subject to court approval,
consists of warrants valued at $9.0 million to purchase the Company's common
stock and $6.0 million in cash. It is anticipated that the warrants will be
issued on or about August 31, 1997, will expire on August 31, 1998, and will
have an exercise price of approximately $5.00 per share in excess of the
Company's common stock price at the time of issuance. The Company may, however,
at its option reduce the spread between the stock price and the exercise price
and/or lengthen the exercise period so long as the value of the warrants remains
at $9.0 million on the date of issuance. The Company agreed to the settlement to
avoid further litigation expense and inconvenience and to put an end to all
controversy and claims related to the subject of litigation. In the settlement,
the Company has specifically disclaimed and denied any liability or wrongdoing
and that any person has suffered any harm or damage as a result of any of the
matters alleged in the litigation.
12
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD ENTERTAINMENT CORPORATION
(Registrant)
May 15, 1997 FORREST MARK WOLFINGER
- --------------------------- -------------------------------------------
(Date) Forrest Mark Wolfinger
Chief Financial Officer
(Principal financial and accounting officer
of the registrant)
13
<PAGE>
EXHIBIT INDEX
Sequential
Ex. No. Description Page No.
- ------- ----------- --------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,602
<SECURITIES> 0
<RECEIVABLES> 23,201
<ALLOWANCES> 0
<INVENTORY> 44,307
<CURRENT-ASSETS> 84,735
<PP&E> 128,650
<DEPRECIATION> 28,904
<TOTAL-ASSETS> 475,798
<CURRENT-LIABILITIES> 67,389
<BONDS> 0
0
0
<COMMON> 255,859
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 475,798
<SALES> 18,795
<TOTAL-REVENUES> 110,475
<CGS> 11,601
<TOTAL-COSTS> 96,146
<OTHER-EXPENSES> 18,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,467
<INCOME-PRETAX> (6,012)
<INCOME-TAX> (2,405)
<INCOME-CONTINUING> (3,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,607)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
