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 September 30, 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 charter)
Oregon 93-0981138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 November 11, 1997, there were 36,782,846 shares of the registrant's Common
Stock outstanding.
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
September 30, 1997
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------------- -------------------------------------
1997 1996 1997 1996
---------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 106,096 $ 63,993 $ 290,811 $ 173,052
Product sales 18,525 11,703 54,287 31,666
-------------- --------------- -------------- ---------------
124,621 75,696 345,098 204,718
-------------- --------------- -------------- ---------------
Operating costs and expenses:
Cost of product sales 11,586 7,018 34,015 19,194
Operating and selling 92,880 51,824 250,133 144,558
General and administrative 6,335 4,367 18,501 12,856
Amortization of intangibles 1,677 1,530 4,800 4,537
-------------- --------------- -------------- ---------------
112,478 64,739 307,449 181,145
-------------- --------------- -------------- ---------------
Income from operations 12,143 10,957 37,649 23,573
Nonoperating income (expense):
Interest income 177 11 285 139
Interest expense (3,762) (1,232) (7,379) (2,857)
Litigation settlement - - (18,874) -
-------------- --------------- -------------- ---------------
Income before income taxes and extraordinary
item 8,558 9,736 11,681 20,855
Provision for income taxes (3,423) (3,894) (4,672) (8,281)
-------------- --------------- -------------- ---------------
Income before extraordinary item 5,135 5,842 7,009 12,574
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $372) (563) - (563) -
-------------- --------------- -------------- ---------------
Net income $ 4,572 $ 5,842 $ 6,446 $ 12,574
============== =============== ============== ===============
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share:
Before extraordinary item $ 0.14 $ 0.17 $ 0.19 $ 0.36
Extraordinary loss on extinguishment of
debt (0.02) - (0.02) -
-------------- --------------- -------------- ---------------
Net income per share $ 0.12 $ 0.17 $ 0.17 $ 0.36
============== =============== ============== ===============
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 37,694 35,089 37,873 34,971
============== =============== ============== ===============
Number of Stores 782 453 782 453
============== =============== ============== ===============
The accompanying notes are an integral part of this financial statement.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands, except share amounts)
September 30, December 31,
1997 1996
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,406 $ 12,849
Construction and other receivables 28,954 25,785
Merchandise inventories 45,604 45,255
Prepaid expenses and other current assets 5,755 3,232
---------------- ---------------
Total current assets 84,719 87,121
Videocassette rental inventory, net 204,456 144,264
Property and equipment, net 189,907 115,812
Goodwill, net 95,138 99,229
Deferred tax asset 4,238 783
Other assets, net 12,016 2,574
---------------- ---------------
$ 590,474 $ 449,783
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 3,000 $ 205
Accounts payable 59,097 67,207
Accrued liabilities 13,895 10,402
Income taxes payable 670 2,914
---------------- ---------------
Total current liabilities 76,662 80,728
Long-term obligations, less current portion 206,059 82,156
Other liabilities 15,653 12,196
Shareholders' equity:
Preferred stock, 25,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value, 100,000,000 shares authorized;
36,776,271 and 36,006,201 shares issued
and outstanding, respectively 248,770 238,021
Retained earnings 45,438 38,992
Intangible assets, net (2,108) (2,310)
---------------- ---------------
Total shareholders' equity 292,100 274,703
---------------- ---------------
$ 590,474 $ 449,783
================ ===============
The accompanying notes are an integral part of this financial statement.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
---------------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Operating activities:
Net income $ 6,446 $ 12,574
Adjustments to reconcile net income to cash
provided by operating activities:
Extraordinary loss on extinguishment of debt 563 -
Depreciation and amortization 95,846 61,818
Change in deferred income taxes (2,427) 3,683
Net change in operating assets and liabilities:
Merchandise inventories (349) (7,696)
Accounts payable (8,110) (6,734)
Other current assets and liabilities 1,155 4,104
---------------- ---------------
Cash provided by operating activities 93,124 67,749
---------------- ---------------
Investing activities:
Construction and other receivables (3,169) 1,740
Purchases of videocassette rental inventory, net (137,630) (74,993)
Purchases of property and equipment, net (87,703) (42,230)
Increase in intangibles and other assets (4,512) (236)
---------------- ---------------
Cash used in investing activities (233,014) (115,719)
---------------- ---------------
Financing activities:
Proceeds from the issuance of common stock 4,695 -
Issuance of long-term obligations 204,000 -
Repayments of long-term obligations (1,302) (7,422)
Tax benefit from exercise of stock options 2,381 (207)
Proceeds from exercise of stock options 3,673 787
Repurchase of mandatorily redeemable stock - (54,250)
(Decrease) increase in revolving loan, net (82,000) 85,000
---------------- ---------------
Cash provided by financing activities 131,447 23,908
---------------- ---------------
Decrease in cash and cash equivalents (8,443) (24,062)
Cash and cash equivalents at beginning of year 12,849 29,980
---------------- ---------------
Cash and cash equivalents at end of third quarter $ 4,406 $ 5,918
================ ===============
The accompanying notes are an integral part of this financial statement.
</TABLE>
5
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The information furnished reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's Form 10-K, filed with the Securities and Exchange Commission on
March 31, 1997.
1. Accounting Policies
The consolidated financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the December 31,
1996 audited consolidated financial statements included in the Company's Form
10-K. Certain prior year amounts have been reclassified to conform to the
presentation used for the current year.
2. Statements of Changes in Shareholders' Equity
An analysis of the shareholders' equity amounts for the three quarters
ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Common Stock
------------------------------ Intangible Retained
(Thousands, except share amounts) Shares Amount Assets Earnings Total
------------------------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 36,006,201 $ 238,021 $ (2,310) $ 38,992 $274,703
Public offering of common stock, net 300,000 4,695 - - 4,695
Issuance of common stock under option plan 470,070 3,673 - - 3,673
Tax benefit from exercise of stock options - 2,381 - - 2,381
Amortization of intangible assets - - 202 - 202
Net income - - - 6,446 6,446
------------------------------ -------------- ---------------- --------------
Balance at September 30, 1997 36,776,271 $ 248,770 $ (2,108) $ 45,438 $292,100
============================== ============== ================ ==============
</TABLE>
3. Long-term Obligations
In August 1997, the Company issued $200 million principal amount senior
subordinated notes (the "Notes") due August 15, 2004. The proceeds received from
the sale of the Notes, net of offering costs of $6.0 million, were used to repay
the entire outstanding indebtedness under the then existing bank revolving loan.
The Company recorded the charge for the write-off of the
6
<PAGE>
remaining deferred financing costs related to the indebtedness repaid as an
extraordinary loss of $ 0.5 million, net of related income tax benefit of $0.4
million, in the current year third quarter.
In September 1997, the Company entered into a new senior revolving credit
agreement which provides for the availability of up to $300 million in aggregate
extension of credit. The maximum available amount of $300 million will be
reduced by $37.5 million per quarter beginning December 5, 2000. The outstanding
balance is due and payable on September 5, 2002. Revolving credit loans under
the credit agreement bear interest, at the Company's option, at an applicable
margin over the agent bank's base rate or the IBOR rate. The applicable margin
is based upon the ratio of consolidated indebtedness to consolidated adjusted
EBITDA, as defined below. The credit agreement also provides for a commitment
fee of 1/2% of any unused portion of the credit agreement. Among other
restrictions, the credit agreement contains financial covenants relating to
specified levels of: indebtedness to earnings before interest expense, taxes,
depreciation and amortization less 30% of total rental revenues for all stores
after deducting from such 30% of total revenues any cash charges associated with
the acquisition of inventory (adjusted EBITDA); adjusted EBITDA less taxes paid
in cash to interest expense; maintenance of average store contribution levels;
and the maintenance of a minimum net worth. Amounts outstanding under the credit
agreement are collateralized by substantially all of the assets of the Company.
4. Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" and Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" 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.
7
<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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Percent) (Percent)
<S> <C> <C> <C> <C>
Revenue:
Rental revenue 85.1% 84.5% 84.3% 84.5%
Product sales 14.9 15.5 15.7 15.5
------------ ------------ ------------ ------------
100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of product sales 9.3 9.3 9.8 9.4
Operating and selling 74.5 68.5 72.5 70.6
General and administrative 5.1 5.8 5.4 6.3
Amortization of intangibles 1.4 2.0 1.4 2.2
------------ ------------ ------------ ------------
90.3 85.6 89.1 88.5
Income from operations 9.7 14.4 10.9 11.5
Nonoperating income (expense), net (2.8) (1.6) (7.5) (1.3)
------------ ------------ ------------ ------------
Income before income taxes and
extraordinary item 6.9 12.8 3.4 10.2
Provision for income taxes (2.8) (5.1) (1.4) (4.0)
------------ ------------ ------------ ------------
Income before extraordinary item 4.1 7.7 2.0 6.2
Extraordinary loss on extinguishment
of debt (0.4) - (0.1) -
------------ ------------ ------------ ------------
Net income 3.7% 7.7% 1.9% 6.2%
============ ============ ============ ============
Number of superstores 782 453 782 453
============ ============ ============ ============
</TABLE>
Revenue
Revenue increased by $140.4 million, or 69%, in the current year three
quarters and by $48.9 million, or 65%, in the current year third quarter
compared with the corresponding periods of the prior year, respectively. These
increases were primarily due to the opening by the Company of 231 and 121 new
superstores in the current year three quarters and third quarter, respectively.
The Company ended the quarter with 782 stores in 39 states compared
8
<PAGE>
with 453 stores in 30 states in the corresponding period of the prior year.
Revenue was also favorably impacted by an increase of 4% and 2% in comparable
store revenue in the current year three quarters and third quarter,
respectively. The Company's pricing of videocassette rentals and merchandise for
sale has not changed significantly in 1997 compared with 1996.
Operating Costs and Expenses
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from
60.6% and 60.0%, in the prior year three quarters and third quarter,
respectively, to 62.7% and 62.5% in the current year three quarters and third
quarter, respectively. The Company's gross margin on product sales is affected
by the proportion of hit sell-through titles, since the hit titles generally
have a lower gross margin markup. The Company's gross margin was negatively
impacted by the increased sales of hit sell-through titles in the current year
three quarters and third quarter compared to the corresponding periods of the
prior year.
Operating and Selling
Operating and selling expenses consist principally of all store expenses,
including payroll, occupancy, advertising, depreciation and rental revenue
sharing. Operating and selling expenses increased by $105.6 million, or 73%, in
the current year three quarters, and increased by $41.1 million, or 79%, in the
current year third quarter compared with the corresponding periods of the prior
year. The increases were primarily due to the opening by the Company of new
superstores in the current year, as noted above.
General and Administrative
General and administrative expenses increased by $5.6 million, or 44%, in
the current year three quarters, and increased by $2.0 million, or 45%, in the
current year third quarter, compared with the corresponding periods of the prior
year. The increase was primarily due to the cost of managing additional stores
and the staffing of the Company's corporate and regional zone offices. The
decrease as a percentage of total revenue was due to the increase in total
revenue without a proportional increase in corporate overhead.
Amortization of Intangibles
Amortization of intangibles increased slightly by $0.3 million in the
current year three quarters, and increased by $0.1 million, in the current year
third quarter compared with the corresponding periods of the prior year.
9
<PAGE>
Interest Expense
Interest expense was $7.4 million and $3.8 million for the current year
three quarters and third quarter, respectively, compared with $2.9 million and
$1.2 million for the corresponding periods of the prior year. The increase in
interest expense was primarily due to increased levels of borrowing associated
with the issuance of the senior subordinated notes (see Note 3) combined with
increased borrowings under its previous revolving credit facility.
Income Taxes
The effective tax rate for the Company was a provision of 40 percent for
both the current and prior year three quarters and third quarter, respectively.
Liquidity and Capital Resources
The Company generates substantial operating cash flow since most of its
revenue is received in cash. The amount of cash generated from operations in the
current year three quarters significantly exceeded the current debt service
requirements of the Company's long-term obligations. The capital expenditures
(including purchases of videocassette inventory) of the Company are primarily
funded by the excess operating cash flow and from the excess proceeds from the
debt recapitalization (see Cash Provided by Financing Activities). In addition,
the Company has a revolving line of credit available to address the timing of
certain working capital and capital expenditure disbursements. The Company
believes that the cash flow from operations, supplemented by the availability of
a revolving line of credit, will provide the Company with adequate liquidity and
the capital necessary to achieve its planned expansion through at least 1999.
The Company ended the period with $4.4 million in cash. Working capital as
of September 30, 1997 totaled $8.1 million compared with $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.
10
<PAGE>
Cash Provided by Operating Activities
Net cash provided by operating activities increased by $25.4 million in the
current year three quarters compared with the corresponding period of the prior
year primarily due to the non-cash impact of higher depreciation and
amortization expenses, partially offset by lower results of operations in the
current year three quarters (see Results of Operations).
Cash Used in Investing Activities
Net cash used in investing activities increased by $117.3 million in the
current year three quarters compared with the corresponding period of the prior
year, primarily due to the increased purchases of videocassette rental inventory
for new and existing stores and capital expenditures with respect to new store
construction, remodeling of certain existing stores and for the continued
development of information management systems.
Cash Provided by Financing Activities
Net cash provided by financing activities increased by $107.5 million in
the current year three quarters compared with the corresponding period of the
prior year as a result of the recapitalization of the Company's debt structure
through the issuance of $200 million of 10 5/8% senior subordinated notes (the
Notes), all of the principal of which is due August 15, 2004 (see Note 3). The
proceeds from the issuance of the Notes, net of offering costs of $6.0 million,
were used to repay a previously existing bank revolving loan. The excess
proceeds from the issuance were used to fund capital expenditures (including
purchase of videocassette rental inventory) in the current year three quarters.
In connection with the issuance of the Notes, the Company entered into a new
revolving credit agreement which provided for the availability of up to $300
million in revolving credit loans. As of September 30, 1997, the Company had no
outstanding revolving credit loans under the credit facility.
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 was approved by the court on July 31,
1997 and became final 30 days later. The Company paid $8.8 million to settle the
litigation in the quarter ended September 30, 1997 (in addition to $6.0 million
paid in the quarter ended June 30, 1997). 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit (10) - Revolving Credit Agreement, dated as of September
5, 1997, among the Registrant, as Borrower, and Societe
Generale, DLJ Capital Funding, Inc., Goldman Sachs Credit
Partners L.P. and certain other financial institutions, as
Lenders, and Societe Generale, as Agent for the Lenders,
Donaldson, Lufkin & Jenrette Securities Corporation, as
Administrative Agent, Goldman Sachs Credit Partners, L.P., as
Documentation Agent, and Credit Lyonnais Los Angeles Branch,
Barclays Bank PLC, Deutsche Bank AG, New York Branch, U.S. Bank
National Association and KeyBank National Association, as
Co-Agents (incorporated by reference to Exhibit 10.1 of the
Registration Statement on Form S-4 of the Registrant (File No.
333-351))
2. Exhibit (27) - Financial data schedule submitted in electronic
format only
(b) Reports on Form 8-K. Listed below are all Current Reports on Form 8-K
that were filed during the quarter covered by this report, listing the
items reported and the dates of such reports.
1. Current Report on Form 8-K filed July 21, 1997, announced the
proposed private placement of $200 million aggregate principal amount
of senior subordinated notes.
2. Current Report on Form 8-K filed July 22, 1997, announced the
Company's financial results for the three and six months ended June
30, 1997.
3. Current Report on Form 8-K filed August 8, 1997, announced that the
Company entered into an agreement to sell $200 million aggregate
principal amount of 10-5/8% senior subordinated notes.
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)
November 14, 1997 /s/ FORREST MARK WOLFINGER
- ----------------------------- ---------------------------------------
(Date) Forrest Mark Wolfinger
Chief Financial Officer
(Principal financial and accounting
officer of the registrant)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,406
<SECURITIES> 0
<RECEIVABLES> 28,954
<ALLOWANCES> 0
<INVENTORY> 45,604
<CURRENT-ASSETS> 84,719
<PP&E> 189,907
<DEPRECIATION> 95,846
<TOTAL-ASSETS> 590,474
<CURRENT-LIABILITIES> 76,662
<BONDS> 0
0
0
<COMMON> 248,770
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 590,474
<SALES> 54,287
<TOTAL-REVENUES> 345,098
<CGS> 34,015
<TOTAL-COSTS> 307,449
<OTHER-EXPENSES> 18,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,094
<INCOME-PRETAX> 11,681
<INCOME-TAX> 4,672
<INCOME-CONTINUING> 7,009
<DISCONTINUED> 0
<EXTRAORDINARY> 563
<CHANGES> 0
<NET-INCOME> 6,446
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
