UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 0-21824
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HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0981138
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
25600 SW Parkway Center Drive Wilsonville, OR 97070
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(Address of principal executive offices) (Zip Code)
(503) 570-1600
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock Nasdaq National Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than 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
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Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
On March 14, 1997, the registrant had 36,560,596 outstanding shares of
Common Stock, and on such date, the aggregate market value of the shares of
Common Stock held was $927,725,123 based upon the last sale price reported for
such date on the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of registrant's Proxy Statement which is anticipated to be
filed within 120 days after the end of the registrant's fiscal year ended
December 31, 1996
<PAGE>
Hollywood Entertainment Corporation
Annual Report on Form 10-K
Year Ended December 31, 1996
Item Page
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PART I
1. Business................................................................. 1
2. Properties............................................................... 9
3. Legal Proceedings........................................................10
4. Submission of Matters to a Vote of Security Holders......................11
4(a) Executive Officers of the Registrant.....................................11
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 14
6. Selected Financial Data..................................................15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................17
8. Financial Statements and Supplementary Data..............................24
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................24
PART III
10. Directors and Executive Officers of the Registrant.......................25
11. Executive Compensation...................................................25
12. Security Ownership of Certain Beneficial Owners and Management...........25
13. Certain Relationships and Related Transactions...........................25
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........26
<PAGE>
PART I
Item 1. Business
General
Hollywood Entertainment owns and operates 551 video retail superstores in
29 states as of December 31, 1996 and is the second largest video retailer in
the United States. According to video industry analyst Paul Kagan Associates,
Inc., the Company operates the highest volume video stores in the country.
Hollywood Entertainment's goal is to be a dominant national video retailer
and to build a strong national brand which consumers will identify with the
entertainment industry. As part of its strategy to achieve this goal, the
Company 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, consisting of many copies
of popular new releases and an extensive selection of older or "catalog" movies.
Hollywood Entertainment's goal is to be the 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.
The Company opened its first video superstore in October 1988 and had grown
to 25 stores in two states at the end of 1993, 113 stores in eight states at the
end of 1994, 305 stores in 23 states at the end of 1995, and 551 stores in 29
states at the end of 1996. As a result, the Company's revenue increased from
$17.3 million in 1993 to $302.3 million in 1996, and its pro forma net income
increased from $1.5 million to $20.6 million over the same period. The Company
opened 250 new stores in 1996 and intends to open at least 300 new stores in
1997.
Decentralization and Creation Of Zone Offices
To support its larger store base and continued expansion, the Company has
opened four zone offices, in Chicago, Illinois; Dallas, Texas; Portland, Oregon;
and Boston, Massachusetts. Each zone now includes approximately 100 to 250
stores, and the Company believes each zone will be capable of opening 75 to 100
stores annually and of supporting the operations of 400 to 500 stores. Each zone
is headed by a senior vice president of operations, who has responsibility for
new store development and store operations in the zone, including recruiting,
training, marketing and budgeting, and is accountable for the profitability of
all stores in the zone. The Company recently hired four senior vice presidents
with significant experience managing large, national chains to fill these
positions. When fully implemented, the senior vice presidents will be supported
by a complete team that will include a vice president of new store development,
a vice president of store operations, directors of construction, recruiting and
training, product and marketing, and a controller. As part of the Company's
decentralization strategy, the
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corporate office and warehouse will provide central support to the zones,
including systems, product purchasing, distribution, accounting and national
marketing programs. In addition, the corporate office will continue to give
final approval for all new store sites and store design and oversee quality
standards and other critical elements of the Hollywood concept. The Company
believes the creation of geographic zones managed from zone offices that are
accountable for the profitability of the stores will allow the Company to more
effectively manage its business, thereby enhancing its ability to achieve its
expansion plans without compromising operating standards.
Industry Overview
Video Retail Industry. According to Paul Kagan, total U.S. consumer
spending on movies has increased from less than $3.0 billion in 1980 to
approximately $27.0 billion in 1995. The U.S. videocassette rental and sales
industry has grown at a compound annual growth rate of approximately 8.6%, from
$9.8 billion in revenue in 1990 to $14.8 billion in 1995, and is expected to
reach $18.2 billion in 2000. The video retail industry is highly fragmented and
in recent years has been characterized by increased consolidation as larger
"superstore" chains, video stores with at least 7,500 videocassettes, have
continued to increase market share by opening new stores and acquiring smaller,
local operators. According to the Video Software Dealers Association, the number
of video specialty stores has decreased from 31,500 in 1990 to 27,000 in 1995,
approximately 6,500 of which were "superstores," including approximately 3,180
Blockbuster stores. The Company believes this consolidation will continue as the
video retail industry evolves from "mom-and-pop" stores to regional and national
superstore chains.
Movie Studio Dependence on Video Retail Industry. According to Paul Kagan,
the video retail industry is the single largest source of revenue to movie
studios and represented approximately $4.3 billion, or 47%, of the $9.3 billion
of estimated domestic studio revenue in 1995. Of the hundreds of movies produced
by the major studios each year in the U.S., relatively few are profitable for
the movie studio based on box office revenue alone. The Company believes the
consumer is more likely to view "non-hit" movies on rented videocassette than
through any other form of distribution because video retail stores provide an
inviting opportunity to browse and make an impulse choice among a very broad
selection of new releases, which includes hits (movies that are successful at
the box office) and non-hits. As a result, video retail stores, including those
operated by the Company, purchase on videocassette almost all new release movies
produced theatrically (approximately 400 per year) regardless of whether the
movies were successful at the box office, thus providing the major movie studios
a reliable source of revenue for almost all of the hundreds of movies produced
each year. Consequently, the Company believes movie studios are highly motivated
to protect this unique and significant source of revenue.
Historically, movie studios have sought to generate incremental sources of
revenue through the addition of new distribution channels. To maximize revenue,
the studios have implemented a strategy of sequential release "windows," giving
each distribution channel the rights to its movies for a limited time before
making them available to the next sequential channel. The studios have
determined the sequential order in which they release movies to each
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distribution channel based upon the order they believe will maximize their total
revenue from all distribution channels combined. These distribution channels are
set forth below.
Order of Sequential Release Windows to Primary Channels of Distribution
o Movie theaters
o Video retail stores
o Pay-per-view television (including direct
broadcast satellite)
o Pay cable (HBO, Showtime, etc.)
o Basic cable television
o Network television
o Syndicated television
Trends in Video Rentals and Sales. The domestic video retail industry
includes both rentals and sales. According to Paul Kagan, video rental revenue
has increased from $6.6 billion in 1990 to $7.5 billion in 1995 and is expected
to increase to $8.3 billion in 2000, video sales have increased from $3.2
billion in 1990 to $7.3 billion in 1995 and are expected to increase to $9.9
billion in 2000. Videocassettes released at a relatively high price, typically
$60 to $65 wholesale, are generally purchased by video retail stores and
promoted primarily as a rental title and then later re-released by the studios
at a lower price, typically $10 to $20 wholesale, to promote sales directly to
consumers. Certain high grossing box office films, generally with box office
revenue in excess of $100 million, are released on videocassette at a relatively
low initial price, typically $10 to $15 wholesale, and are generally purchased
by video retailers, mass merchants, grocery stores and other retailers and
promoted both as a rental title and for sale directly to customers. Because
these videocassettes are initially priced much lower, video retailers can stock
more copies of these movies for rental at a substantially lower aggregate cost.
The best selling sell-through titles are usually among the leading rental titles
because of the substantial advertising and awareness of these titles, and the
return on investment in rental inventory for those titles is typically much
higher than for comparable titles initially priced and promoted for rental.
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. In 1996 the Company opened 250 new
stores (no acquired units) and entered into 6 new states. The Company's
expansion strategy is to continue to open or, to a lesser extent, acquire stores
in regions where it has existing operations and to expand into new geographic
regions where it believes it can become one of the dominant video retailers.
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The Company plans to open at least 300 new stores in 1997. The Company has
signed leases for approximately one-half 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 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. See "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources." 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. The Company's planned expansion,
including possible growth through acquisitions, will place increasing pressure
on the Company's management controls. A failure to manage successfully its
planned expansion would adversely affect the Company's business. There is also
no assurance that the Company's new stores will achieve sales and profitability
comparable to the Company's existing stores.
Business Strategy
The Company's goal is to create a strong national brand which consumers
will identify with the entertainment industry. The Company plans to build the
brand by becoming a dominant national videoretailer. The Company's business
strategy includes the following key elements:
Broad Selection and Superior Availability. The Company strives to provide
its customers with the broadest selection of videocassette movies and video
games. Hollywood Video superstores typically carry approximately 10,000
titles and 16,000 videocassettes and video games. The Company's goal is to
be the category killer in its industry, offering more copies of popular new
videocassette releases and more titles than its competitors. The Company
typically purchases 35 to 95 copies of "hit" movies for each Hollywood
Video store and may purchase as many as 200 copies for high volume stores.
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Exciting, Enjoyable and Convenient Shopping Experience. The Company's
superstores are designed to capture the bright lights, excitement and
energy of the motion picture industry. The Company focuses on creating an
atmosphere that invites consumers into the store, encourages browsing and
generates repeat customers. Hollywood Video stores are typically located in
high traffic, high-visibility locations. The Company believes excellent
customer service, a bright, clean and friendly shopping environment and
convenient store locations are important to its success.
Excellent Entertainment Value. The Company offers consumers the opportunity
to rent any of its approximately 10,000 catalog movie titles for five days
for only $1.50. All new release movies and video games can be rented for
approximately $3.00. The Company believes movie rental in general, and its
pricing structure and rental terms in particular, provide consumers
convenient entertainment and excellent value. The Company is testing
increased prices and may increase prices in the future.
Products
Videocassette Rental. The Company's primary source of revenue is the rental
of videocassettes. Each mature Hollywood Video superstore carries approximately
10,000 movie titles and 16,000 videocassettes. Excluding new releases, movie
titles are classified into 28 categories, such as "Action," "Drama," "Family"
and "Children, and are displayed alphabetically within those categories. The
Company does not rent or sell adult movies in Hollywood Video superstores. The
Company is committed to offering more copies of popular new releases than its
competitors.
Videocassette Sales. Hollywood Entertainment also offers new and previously
viewed videocassettes for sale. The Company believes it can profit from either
the rental or sale of videocassettes.
Video Games. In addition to video rentals and sales, Hollywood Video also
rents video games licensed by NintendoTM, SegaTM and SonyTM. Each mature
Hollywood Video store offers between 1,200 and 4,000 video games.
Other Products. The Company rents audio books, including abridged fiction
classics and religious, self-improvement and education materials such as foreign
language instruction. The Company also rents videocassette and video game
players for the convenience of its customers and sells blank videocassettes,
video cleaning equipment and confectionery and other items.
Hollywood Video Store Design
Hollywood Video superstores average approximately 7,500 square feet and are
substantially larger than the stores of most its competitors. The store
exteriors generally feature large Hollywood Video signs and colors, which make
the Company's stores easily visible to and recognizable by consumers. The
interior of each store is clean and brightly lit. Hollywood video superstores
are decorated with colorful neon, murals depicting popular screen stars and
walls of video monitors with hi-fi audio accompaniment to create an exciting
Hollywood environment. Movies in all of the Company's superstores are organized
into 28 categories, and
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videocassettes are arranged alphabetically by title within each category to
assist customers in locating the movies. New releases are prominently displayed
in easily recognizable locations within the store. Videocassettes are displayed
with the box cover facing the customer for ease of selection and visual impact.
The Company uses wall-mounted and free-standing shelves arranged in wide aisles
to provide access to products and to encourage the movement of customers
throughout the store.
Site Selection
The Company believes the selection of locations for its superstores is
critical to the success of its operations. 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
typically attempts to locate its stores in either stand-alone structures or at
the end of a shopping strip. Within a shopping center or other retail
development or area, the Company's strategy is to seek the most desirable site
with respect to its selection factors. The Company typically competes for these
prime sites with other retailers, including other video retailers, banks,
restaurants and fast food operators.
The Company maintains its own architectural staff and also uses outsourced
architectural services. The ability of the Company to use its staff to customize
its standard store design increases the Company's flexibility with respect to
the type of sites that are acceptable to it, and the Company believes this
flexibility gives it an advantage in competing for retail sites. All of the
Company's stores are in leased premises; the Company does not own any real
estate.
Marketing and Advertising
The Company primarily has used radio and direct mail advertising. The
Company frequently uses cooperative movie advertising funds made available by
studios and suppliers to promote certain videocassettes. The Company intends to
increase its advertising expenditures in the future.
Inventory and Information Management
Inventory Management. Generally, inventory for existing stores is received
by and maintained in each individual store. Inventory for new stores is
processed and stored in the Company's warehouse in Oregon. The Company's
inventory of videocassettes for rental is prepared according to uniform
standards. Each new videocassette is removed from its original carton and placed
in a rental case with a magnetic security device and bar coding is affixed to
each videocassette.
Management Information Systems. Hollywood Video stores use software
modified and periodically updated by the Company's information systems
department for use in the Company's operations. The Company maintains
information, updated daily, regarding revenue, current and historical
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sales and rental activity, demographics of store membership and videocassette
rental patterns. The Company upgraded its management information systems by the
addition of a scalable Oracle-based client-server system.
The Company maintains two distinct system areas: A point-of-sale ("POS")
system and a corporate information system. All rental and sales transactions are
recorded by the POS system when scanned at the time of customer checkout.
Nightly, the POS system transmits each store's data into the corporate
information system. The systems track products using scanned bar code
information and also maintain rental history of each customer and title. This
information is used to produce the reports used by the Company, including
reports used in making purchasing decisions on new releases. All of the
Company's stores, including all of the acquired stores, use the Company's POS
system.
Competition
The video retail industry is highly competitive. The Company competes with
other local, regional and national video retail stores, including the
Blockbuster Entertainment Division of Viacom, Inc. ("Blockbuster"), 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 1995 there
were approximately 27,000 video specialty stores in the U.S., of which
approximately 6,500 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.
The Company believes the principal competitive factors in the video retail
industry are title selection, the number of copies of popular titles available,
store location and visibility, convenience of store access and parking and, to a
lesser extent, pricing. The Company's stores compete with stores operated by
Blockbuster, many 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 believes it generally
offers more titles and more copies of popular titles than the majority of its
competitors. In addition to competing with other video retailers, the Company
competes with all leisure-time activities, especially entertainment activities
such as movies, sporting events, the Internet and network and cable television
programs.
The Company competes with cable, satellite and pay-per-view cable
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
channels and movies and are only available to households with a direct broadcast
satellite receiver or a cable converter to unscramble incoming signals. Digital
compression technology and other developing technologies are expected eventually
to 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. Certain cable and other
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telecommunications companies have tested and are continuing to test movie on
demand services in some markets. The Company 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 studios' largest
source of revenue. In addition, home video provides the only viable 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.
Although the Company does not believe cable television 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 (DBS), 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.
Seasonality
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.
Employees
As of December 31, 1996, the Company had approximately 10,150 employees, of
which 9,500 were in the retail stores and the remainder in the Company's
corporate administrative, zone office and warehousing operations. None of the
Company's employees are covered by collective bargaining agreements and employee
relations are considered to be excellent.
Service Mark
The Company owns United States federal registrations for its service marks
"Hollywood Video" and "Hollywood Video Superstores". The Company considers its
service mark important to its continued success.
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Item 2. Properties
Store Locations
As of December 31, 1996, the Company's stores by location are as follows:
California.......................................... 120
Texas............................................... 78
Michigan............................................ 41
Washington.......................................... 30
Oregon.............................................. 28
Ohio................................................ 28
Minnesota........................................... 22
Arizona............................................. 22
Illinois............................................ 22
Virginia............................................ 14
Indiana............................................. 14
Georgia............................................. 14
Utah................................................ 13
Wisconsin........................................... 12
Tennessee........................................... 12
Pennsylvania........................................ 12
Missouri............................................ 10
Oklahoma............................................ 9
Colorado............................................ 8
Maryland............................................ 8
Nevada.............................................. 6
Kansas.............................................. 6
North Carolina...................................... 6
Nebraska............................................ 4
New Mexico.......................................... 3
Iowa................................................ 3
Kentucky............................................ 3
Arkansas............................................ 1
Louisiana........................................... 1
District of Columbia................................ 1
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551
===
All of the Company's stores are located in leased premises with an initial
lease term of five to 15 years and options to renew for between five and 15
additional years. Most of the store leases are "triple net," requiring the
Company to pay all taxes, insurance and common area maintenance expenses
associated with the properties.
The Company's corporate headquarters and warehouse facility is located in
Wilsonville, Oregon and consists of approximately 170,000 square feet of leased
space.
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Item 3. Legal Proceedings
In December 1995 three complaints were filed against the Company, certain
of the Company's directors and officers and certain other parties and
consolidated in a single action entitled Murphy v. Hollywood Entertainment
Corporation et al., case no. C95-1926-MA, U.S. District Court for the District
of Oregon. The consolidated case is a class action encompassing persons who
purchased common stock of the Company between June 20 through December 6, 1995.
The plaintiffs alleged violation of certain federal securities laws with respect
to statements made to the public and losses allegedly suffered by plaintiffs as
a result of the decline in the trading price of the Company's stock. In May 1996
the court certified the class but dismissed claims based on violations of
sections 11, 12(2) and 15 of the Securities Act of 1933. The remaining claims
dealt with alleged violations of the Securities Exchange Act of 1934. Prior to
trial, the parties reached a settlement, which is subject to court approval. The
settlement consists of warrants valued at $9 million to purchase Hollywood
common stock and $6 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 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
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 proposed
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.
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Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 4(a) Executive Officers Of The Registrant.
The following table sets forth information with respect to the Company's
executive officers as of the date of this document.
<TABLE>
<CAPTION>
Name Age Positions with the Company
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<S> <C> <C>
Mark J. Wattles 36 Chairman of the Board, President and Chief
Executive Officer
F. Mark Wolfinger 41 Chief Financial Officer
Donald J. Ekman 44 Senior Vice President, General Counsel, Secretary
and Director
Max G. Fratto 53 Executive Vice President of Store Operations
James O. George 49 Executive Vice President of Product and Marketing
F. Bruce Giesbrecht 36 Senior Vice President of Product Management
Douglas A. Gordon 29 Senior Vice President of Finance
Glen E. Hahn 44 Senior Vice President of Operations
John R. Hnanicek 32 Senior Vice President of Information Systems
Dale A. Naftzger 51 Senior Vice President of Operations (Western
Zone)
Roger J. Osbourne 44 Senior Vice President of Operations (Northeast
Zone)
William M. Spae 44 Senior Vice President of Operations (Southern
Zone)
William P. Zebe 38 Senior Vice President of Development
</TABLE>
Mark J. Wattles founded the Company in June 1988 and has served as Chairman
of the Board, President and Chief Executive Officer since that time. In May 1986
Mr. Wattles founded Convenience Video Movies, Inc., a videocassette distributor
that operated video rental centers in approximately 300 convenience stores
throughout the country, and served as its Chief Executive Officer until November
1987. Mr. Wattles founded Downtown Video, a two-store video rental company, in
1985 and served as its general manager until 1986.
F. Mark Wolfinger became Chief Financial Officer of the Company in January
1997. Mr. Wolfinger joined the Company from Metromedia Restaurant Group, which
owns, operates and franchises multiple nationwide restaurant chains. Prior to
joining Metromedia as Chief Financial Officer, Mr. Wolfinger was with Grand
Metropolitan, PLC where he served in various capacities, including Chief
Financial Officer of Pearle Vision, Vice President and Group Controller of Grand
Met and Vice President for Burger King.
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Donald J. Ekman became a director of the Company in July 1993 and became
Vice President and General Counsel in March 1994. Mr. Ekman was a partner in
Ekman & Bowersox from January 1992 until March 1994, and from August 1990 until
December 1991 he practiced law with Foster Pepper & Shefelman.
Max G. Fratto joined the Company as Executive Vice President of Store
Operations in May 1994. From 1991 to 1994 Mr. Fratto was a partner in Wallpaper
Warehouse of Idaho, a small retail chain. From 1986 to 1991 he served as Vice
President of W.N.S., Inc., a retail holding company, where he was responsible
for the Wallpapers to Go division. Prior to his employment with W.N.S., Mr.
Fratto was Vice President of Store Operations for several General Mills, Inc.
specialty retailing companies.
James O. George joined the Company in October 1995 as Executive Vice
President of Product and Marketing. Previously, Mr. George was employed by
Blockbuster Entertainment for eight years. Most recently, Mr. George served as
Zone Vice President, where he managed the operations of over 450 Blockbuster
stores.
F. Bruce Giesbrecht was named Senior Vice President - Product Management in
January 1996 and joined the Company in May 1993 as Vice President of Corporate
Information Systems and Chief Information Officer. Mr. Giesbrecht was a founder
of RamSoft, Inc., a software development company specializing in management
systems for the video industry, and served as its President.
Douglas A. Gordon was named Senior Vice President - Finance in November
1995 and joined the Company as Vice President of Strategic Analysis and
Forecasting in May 1995. From September 1991 to May 1995, Mr. Gordon worked for
Montgomery Securities as a Vice President and senior analyst covering the
entertainment and retail industries.
Glen E. Hahn joined the Company in April 1996 as Senior Vice President of
Operations (Central Zone). From 1993 to 1996 Mr. Hahn was Senior Vice President
- - Director of Stores for Fayva/Parade of Shoes (a specialty retail footwear
division of J. Baker), overseeing approximately 400 stores. From 1979 to 1993
Mr. Hahn worked for Payless Shoesource (a division of May Department Stores) in
various capacities. From 1987 to 1993 Mr. Hahn worked as Division Operations
Manager for Payless Shoesource, overseeing the development of nearly 200 new
stores during this period and the overall operations of approximately 580
specialty retail footwear stores at the time of his departure.
John R. Hnanicek joined the Company in October 1996 as Senior Vice
President of Information Systems. From March 1996 to October 1996 Mr. Hnanicek
was Chief Information Officer for HomePlace, a privately owned home furnishings
speciality retailer, operating 37 stores at the time of his departure. From July
1995 to February 1996 Mr. Hnanicek was Chief Information Officer for
Communicate! Powerstores, Inc., a start-up communications superstore. From 1990
to 1995, Mr. Hnanicek worked for OfficeMax, Inc., in various capacities,
including most recently as Senior Vice President - Information Systems and
Logistics.
12
<PAGE>
Dale A. Naftzger joined the Company in April 1996 as Senior Vice President
of Operations (Western Zone). From May 1995 to November 1995, Mr. Naftzger was
Chief Operating Officer of Caribou Coffee Company, a privately owned speciality
coffee retailer with approximately 40 company-owned units. From 1994 to 1995 Mr.
Naftzger was President and Chief Executive Officer of Chop Chop Chinese to You,
a venture capital financed Chinese food delivery business, operating 40 units
and three distribution centers at the time of his departure. From 1992 to 1994
Mr. Naftzger was Senior Vice President - Operations for Checkers Drive-In
Restaurants, overseeing all 248 company-owned and 200 franchised units. From
1987 to 1992 Mr. Naftzger worked for Taco Bell Corporation as Zone Vice
President, overseeing the development of approximately 100 new units and the
overall operations of approximately 350 units. From 1980 to 1987 Mr. Naftzger
worked for Wendy's International, Inc. in various capacities, including as Zone
Vice President-Operations, overseeing more than 500 company-owned and 400
franchised units at the time of his departure.
Roger J. Osbourne joined the Company in December 1996 as Senior Vice
President of Operations (Northeast Zone). From January 1995 to December 1996,
Mr. Osbourne was Senior Vice President/Director of Stores for J. Baker, Inc.,
overseeing approximately 1,100 stores. From October 1988 to January 1995, Mr.
Osbourne was Senior Vice President/Director of Stores for Pic 'n Pay Stores,
Inc., a subsidiary of Bata Shoe Company, where he was responsible for
approximately 1,000 stores.
William M. Spae joined the Company in July 1996 as Senior Vice President of
Operations (Southern Zone). From 1991 to June 1996 Mr. Spae worked for Wendy's
International as Divisional Vice President, overseeing the development of
approximately 130 new units during this period and the overall operations of
more than 100 company-owned and 150 franchised units at the time of his
departure. From 1987 to 1991 Mr. Spae was a Zone Vice President for Taco Bell
Corporation, overseeing more than 160 company-owned and approximately 100
franchised units.
William P. Zebe was named Senior Vice President - Development in January
1996 and joined the Company as National Vice President of Real Estate in May
1994. Mr. Zebe previously worked from June 1993 to April 1994 as the Real Estate
Manager for the Western Zone for Blockbuster Video, Blockbuster Music and
Blockbuster franchisee-owned Discovery Zone. From 1992 to May 1993 Mr. Zebe was
a Real Estate Representative for Blockbuster.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market under
the symbol "HLYW". The following table sets forth the quarterly high and low
last sale prices per share, as reported on the Nasdaq National Market, adjusted
for two stock splits through December 31, 1996.
<TABLE>
<CAPTION>
1996 1995
---- ----
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter $13.88 $ 6.50 $18.25 $11.25
Second Quarter 18.13 13.31 23.13 15.00
Third Quarter 21.75 11.88 35.00 19.00
Fourth Quarter 22.44 17.88 28.63 7.38
</TABLE>
As of December 31, 1996, there were 195 holders of record of the Company's
common stock. The Company has not paid any cash dividends on its common stock
since its initial public offering in July 1993 and anticipates that all future
earnings will be retained for development of its business. The payment of any
future dividends will be at the discretion of the Company's Board of Directors.
14
<PAGE>
Item 6. Selected Financial Data
The following selected financial data have been derived from the
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (In thousands, except per share and other operating data)
Revenue:
Rental $ 252,625 $ 123,894 $ 61,941 $ 15,267 $ 9,762
Product sales 49,717 25,536 11,347 2,072 1,282
----------- ----------- ----------- ---------- ----------
$ 302,342 $ 149,430 $ 73,288 $ 17,339 $ 11,044
=========== =========== =========== ========== ==========
Operating income $ 38,418 $ 17,537 $ 12,610 $ 3,643 $ 2,270
=========== =========== =========== ========== ==========
Income before cumulative effect of a
change in accounting principle (1) $ 20,630 $ 11,786 $ 8,143 $ 2,146 $ 1,177
Cumulative effect of a change in
accounting principle (2) -- (2,560) -- -- --
----------- ----------- ----------- ---------- ----------
Net income (1) $ 20,630 $ 9,226 $ 8,143 $ 2,146 $ 1,177
=========== =========== =========== ========== ==========
Earnings per common and common
equivalent share (3):
Earnings before cumulative effect
of a change in accounting principle $ 0.59 $ 0.36 $ 0.32 $ 0.14 $ 0.09
Cumulative effect of a change in
accounting principle -- (0.08) -- -- --
----------- ----------- ----------- ---------- ----------
Net income $ 0.59 $ 0.28 $ 0.32 $ 0.14 $ 0.09
=========== =========== =========== ========== ==========
Pro forma amounts assuming the new
accounting principle were applied
retroactively (2):
Net income $ 20,630 $ 11,786 $ 6,277 $ 1,507 $ 892
Net income per share $ 0.59 $ 0.36 $ 0.25 $ 0.10 $ 0.07
Operating Data:
Number of stores at end of period 551 305 113 25 15
Comparable store revenue increase (4) 7% 1% 7% 16% 27%
Balance Sheet Data:
Working capital $ 6,393 $ 17,733 $ 27,738 $ 5,025 ($ 1,179)
Total assets 449,783 334,660 142,861 22,791 7,475
Long-term debt (including
current portion) 82,361 7,971 3,505 2,399 1,873
Mandatorily redeemable common stock -- 54,250 -- -- --
Shareholders' equity 274,703 217,783 110,765 13,303 2,282
- ------------
(1) Income before cumulative effect of a change in accounting principle and net
income for 1993 and 1992 include pro forma income tax adjustments to
reflect taxation of the Company as a C corporation rather than an S
corporation.
(2) Effective January 1, 1995, the Company changed its method of amortizing the
cost of videocassette rental inventory as discussed in Note 2 of Notes to
Consolidated Financial Statements. The change in
15
<PAGE>
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 as
of such date. The pro forma amounts shown herein reflect the impact to net
income had the new amortization method been in effect as of the beginning
of each of the periods presented.
(3) Earnings per share are based on the weighted average shares outstanding
during the period after giving effect to all stock splits through December
31, 1996.
(4) A store becomes comparable after it has been open and owned by the Company
for 12 full months. An acquired store converted to the Hollywood Video name
and store design is removed from the comparable store base when the
conversion process is initiated and returned 12 full months after the
retrofit is completed.
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Hollywood Entertainment opened its first video superstore in October 1988
and had expanded to 551 superstores in 29 states as of the end of 1996. The
Company's revenue growth has been accomplished through a combination of new
store openings, strategic acquisitions and, to a lesser extent, comparable store
revenue increases Store activity for the last three years is summarized as
follows:
<TABLE>
<CAPTION>
Video Superstores
Open
Beginning Open End
of Period Opened Closed Acquired of Period
--------- ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C>
1994 25 33 0 55 113
1995 113 122 0 70 305
1996 305 250 4 0 551
</TABLE>
The Company plans to open at least 300 stores during 1997. The Company's
results are impacted by the timing of and costs incurred in connection with new
store openings. New Hollywood Video stores typically experience lower sales
volume in the first year of operation than do mature stores. Because a portion
of store-level operating expenses is fixed, new stores generally have lower
operating margins in their first year of operation. In addition, pre-opening
expenses are charged to earnings in the first full month of a store's operation.
Therefore, the addition of a significant number of new stores to the Company's
existing store base has had and is expected to continue to have an adverse
impact on the Company's operating margins.
Forward-Looking Statements
The information set forth in this report in Item 1- Business under the
captions "Expansion Strategy" and in Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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 in Item 1 - Business under the
captions "Expansion Strategy," "Competition," and "Legal Proceedings" 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".
17
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, (i) selected
statement of operations data expressed as a percentage of total revenue; (ii)
the percentage change from the same period of the prior year in such selected
statement of operations data, and (iii) the number of stores open at the end of
each such period.
<TABLE>
<CAPTION>
Percentage Change in Dollar
Year Ended December 31, Amounts From
--------------------------------------- -----------------------------
1996 1995 1994 1995 to 1996 1994 to 1995
------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rental income 83.6% 82.9% 84.5% 104% 100%
Product sales 16.4 17.1 15.5 95 125
------------ ----------- -----------
100.0 100.0 100.0 102 104
------------ ----------- -----------
Operating costs and expenses:
Cost of product sales 10.2 9.9 9.9 108 104
Operating and selling 69.1 70.6 64.6 98 123
General and administrative 6.0 5.3 6.0 131 79
Amortization of intangibles 2.0 2.5 2.3 60 123
------------ ----------- -----------
87.3 88.3 82.8
------------ ----------- -----------
Operating income 12.7 11.7 17.2 119 39
Interest (expense) income, net (1.4) 0.8 (0.2) N/A N/A
------------ ----------- -----------
Income before income taxes and
cumulative effect of a change in
accounting principle 11.3 12.5 17.0 84 49
Income taxes 4.5 4.6 5.9 99 58
------------ ----------- -----------
Income before cumulative effect
of a change in accounting principle 6.8 7.9 11.1 75 45
Cumulative effect of a change in
accounting principle (1) -- (1.7) -- N/A N/A
------------ ----------- -----------
Net income 6.8% 6.2% 11.1% 124 13
============ =========== ===========
Pro forma net income assuming new
accounting principle is applied
retroactively (1) 6.8% 7.9% 8.6% 75 88
============ =========== ===========
Number of stores at end of period 551 305 113
- -----------
(1) Effective January 1, 1995, the Company changed its method of amortizing the
cost of videocassette rental inventory as discussed in Note 2 of Notes to
Consolidated Financial Statements. 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 as if the new
method had been applied retroactively to all videocassettes in service as
of that date. The pro forma amounts shown herein reflect the impact to net
income had the new amortization method been in effect as of the beginning
of each of the periods presented. As a result, pro forma results for 1995
do not include the charge of $2.6 million.
</TABLE>
18
<PAGE>
1996 Compared to 1995
Revenue
Revenue for 1996 increased $152.9 million, or 102%, to $302.3 million
compared to $149.4 million for 1995. The increase in revenue was primarily the
result of new store expansion. During 1996, the Company increased the number of
superstores operated by 246, ending the period with 551 superstores, compared to
305 superstores at the end of 1995. Comparable store revenue increased 7% for
1996.
Product sales as a percentage of total revenue decreased to 16.4% for 1996
from 17.1% for 1995. Product sales have decreased as the Company has
de-emphasized the sale of certain movie accessories.
Operating Costs and Expenses
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from
57.8% for 1995 to 61.8% for 1996. The gross margin on product sales has
decreased as the Company has de-emphasized the sale 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 69.1% for 1996, compared
to 70.6% for 1995.
Depreciation expense combined with rental revenue sharing costs was 27.0%
of total revenue for 1996, compared to 29.6% for 1995. The decrease was due to
lower revenue sharing expense and the implementation of improved budgeting
procedures in the purchase of new releases for existing stores. Other operating
and selling expenses increased as a percentage of total revenue primarily due to
lower average revenue per store, resulting from the addition during 1995 and
1996 of a large number of new stores, which have lower revenue per store than
mature Hollywood Video stores.
General and Administrative
General and administrative expenses increased from $7.9 million, or 5.3% of
total revenue, for 1995 to $18.3 million, or 6.0% of total revenue, for 1996.
The percentage increase is primarily attributable to the cost associated with
establishing and staffing the Company's new regional zone offices.
19
<PAGE>
Amortization of Intangibles
Amortization of intangibles increased from $3.8 million, or 2.5% of total
revenue, for 1995 to $6.0 million, or 2.0% of total revenue, for 1996. The
dollar increase in 1996 was attributable to the inclusion of the amortization of
intangible assets arising from the Title Wave and Video Watch acquisitions for
the year, while only partially included in 1995.
Interest (Expense) Income, Net
Net interest (expense) income decreased from $1.1 million for 1995 to ($4.1
million) for 1996. This change was primarily attributable to the Company's
higher level of borrowing under its revolving line of credit and a decrease in
interest earned on cash investments for 1996 compared to 1995.
Income Taxes
The Company's effective tax rate increased from 36.8% of income before
income taxes for 1995 to 39.8% for 1996 due to increased operations in states
with higher income tax rates in 1996 compared to 1995 and a decrease in tax
exempt interest income.
20
<PAGE>
1995 Compared to 1994
Revenue
Revenue for 1995 increased $76.1 million, or 104%, to $149.4 million from
$73.3 million for 1994. Comparable store revenue increased 1%. During the year,
the Company opened 122 new stores and acquired 70 stores, including 42 stores
purchased in August 1995 operating under the name "Video Watch" and 12 stores
purchased during March 1995 from Title Wave Stores, Inc.
The Company believes comparable store revenue was negatively impacted by
lower revenues from the rental and sale of video games, lower revenues at stores
acquired during 1994 prior to conversion to the Hollywood Video name and store
design and an uneven and therefore less favorable distribution of new release
"hit" movies during 1995 compared to 1994.
Product sales as a percentage of total revenue increased to 17.1% for 1995
compared to 15.5% during 1994. The increase in product sales as a percentage of
revenue was due to improved merchandising techniques and higher per store
product inventory levels.
The Company's pricing of video cassettes for rental and for sale
merchandise did not change significantly compared to 1994.
Operating Costs and Expenses:
Cost of Product Sales
The cost of product sales decreased as a percentage of product sales from
63.9% in 1994 to 57.8% for 1995. The gross margin on product sales increased in
1995 compared to 1994 due to expanded offerings of merchandise with higher gross
margins.
Operating and Selling
Operating and selling expenses, which consist of all store expenses
including payroll, occupancy, advertising, depreciation and rental revenue
sharing expense, increased as a percentage of total revenue to 70.6% in 1995
compared to 64.6% in 1994. Operating and selling expenses increased as a
percentage of total revenue primarily due to lower average revenue per store,
resulting primarily from the addition during 1995 of a large number of new and
acquired stores which have lower revenue per store than mature Hollywood Video
stores.
Depreciation expense combined with rental revenue sharing expense was 29.6%
of total revenue in 1995 compared to 27.9% in 1994. The increase was primarily
due to a change in the Company's method of depreciating videocassette rental
inventory effective January 1, 1995.
21
<PAGE>
General and Administrative
General and administrative expenses, which principally consist of corporate
overhead, decreased from 6.0% of total revenue for 1994 to 5.3% for 1995. The
decrease in expenses as a percentage of revenue was due to the Company's ability
to increase revenue without proportionally increasing corporate overhead
expenses.
Amortization of Intangibles
Amortization of intangibles increased from $1.7 million, or 2.3% of total
revenue, during 1994 to $3.8 million, or 2.5% of total revenue, during 1995. The
dollar increase was primarily attributable to the amortization of intangible
assets arising from the Title Wave, Video Watch and other store acquisitions in
1995.
Interest (Expense) Income, Net
Net interest expense was $0.1 million, or 0.2% of total revenue, in 1994
while net interest income was $1.1 million, or 0.8% of total revenue, in 1995.
The change in net interest was primarily due to the receipt of the net proceeds
of the Company's public stock offering completed in July 1995, resulting in a
decrease in average debt outstanding and an increase in interest earned on cash
investments.
Income Taxes
The Company's effective tax rate for 1995 was 36.8%, compared to 34.9% in
1994. The increase in 1995 was due to a higher federal statutory rate and a
higher aggregate state tax rate, partially offset by higher tax exempt interest
income.
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 from
operations, the proceeds of five public offerings, loans under the Company's
revolving bank line of credit, trade credit and equipment leases.
At December 31, 1996, the Company had cash and cash equivalents of
approximately $12.8 million and working capital of $6.4 million. 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.
22
<PAGE>
Net cash provided by operating activities was $125.4 million for 1996
compared to $68.7 million for 1995. The increase in cash provided by operations
was primarily due to higher net income from operations and higher depreciation
and amortization expenses, partially offset by an increase in merchandise
inventories.
Cash used in investing activities was $198.7 million for 1996 compared to
$168.9 million for 1995. For 1996, cash used in investing activities consisted
primarily of net purchases of videocassette rental inventory for new and
existing stores totaling $124.3 million and capital expenditures and related
increase in landlord receivables totaling $73.7 million. Capital expenditures
included the costs to open new stores, remodel certain existing stores and
enhance information systems.
Cash provided by financing activities for 1996 totaled $56.2 million and
included a cash reduction due to the repurchase of all of the shares issued in
connection with the Video Watch acquisition for aggregate consideration of $54.3
million, the repayment of $7.6 million of long-term debt, borrowings on the line
of credit of $82.0 million, and net proceeds from the Company's fifth equity
offering of $34.7 million.
Future capital requirements consist primarily of financing the addition of
new retail stores and converting certain acquired stores to the Hollywood Video
name and store design, together with the possible acquisition of existing
stores. The Company anticipates opening at least 300 new stores in 1997. Each
video store opening requires initial capital expenditures, including leasehold
improvements, inventory, equipment and costs related to site location, lease
negotiations, construction supervision and permits, of approximately $500,000,
excluding leasehold improvements that are customarily paid for by the property
developer.
At December 31, 1996, the Company had a $100 million revolving credit
agreement with a syndicate of banks. In January 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 December 31, 1996, $82.0 million
was outstanding under the revolving credit agreement that was in place at that
time. Of this amount, approximately $50.0 million was borrowed to fund the share
repurchase. (See Note 3).
The Company believes the net proceeds from its December 1996 public
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 300 new video retail
superstores in 1997.
23
<PAGE>
General Economic Trends, Quarterly Results and Seasonality
The Company anticipates that its business will be affected by general
economic 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 performance of new or acquired stores, 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. In addition, any concentration of new store
openings and the related new store pre-opening costs and other expenses
associated with the opening of new stores 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 in Daylight Savings Time and due to
improved weather, and in September and October, due in part to the start of
school and the introduction of new television programs. The Company believes
these seasonality trends will continue.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to Item 14 of this report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information with respect to this item has been previously reported in the
Company's Current Report on Form 8-K dated December 13, 1995 (and Amendment
No. 1 thereto on Form 8-K/A).
24
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company is hereby incorporated
by reference from the Company's definitive proxy statement, under the caption
"Nomination and Election of Board of Directors," for its 1997 annual meeting of
shareholders (the "1997 Proxy Statement") to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed no later
than 120 days after the end of the Company's fiscal year ended December 31,
1996. Information with respect to executive officers of the Company is included
under Item 4(a) of Part I of this report.
Item 11. Executive Compensation
Information required by this Item 11 is hereby incorporated by reference
from the 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item 12 is hereby incorporated by reference
from the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information required by this Item 13 is hereby incorporated by reference
from the 1997 Proxy Statement.
25
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Listed below are all financial statements, notes, schedules and exhibits
filed as part of this Annual Report on Form 10-K:
(a)(1), (2) Financial Statements
The following financial statements of the Registrant, together with
the Independent Auditors' Report dated February 20, 1997, except as to
Note 11, which is as of March 15, 1997, on pages F-1 to F-23 of this
report on Form 10-K are filed herewith:
(i) Financial Statements
Independent Accountants' Reports
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(ii) Financial Schedules
All financial schedules are omitted as the required information is
inapplicable or the information is presented in the respective
consolidated financial statements or related notes.
26
<PAGE>
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference
into this Annual Report:
Exhibit
Number Description
------ -----------
3.1 1993 Restated Articles of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Rights of Security Holders - See Article II of Exhibit 3.1 and
Articles I and V of Exhibit 3.2.
10.1 1993 Stock Incentive Plan, as amended. (2)
10.2 Employment Agreement of Mark J. Wattles, dated February 1, 1994.
(3)
10.3 Tax Indemnification Agreement dated as of February 3, 1994 between
the Registrant and Mark J. Wattles and Scott D. South. (2)
10.4 Amended and Restated Revolving Credit Agreement, dated February
12, 1997, among the Registrant and a syndicate of banks led by
Bank of America National Trust & Savings Association. (5)
10.5 Purchase and Sale Agreement, dated July 27, 1995, among the
Registrant, Video Watch Inc., Ray Sumon and Mahmood Sohrabi. (4)
23.1 Consent of Price Waterhouse LLP (5)
23.2 Consent of Coopers & Lybrand L.L.P. (5)
- -------------
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Company (File No. 33-63042).
(2) Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1995.
(3) Incorporated by reference to the Registration Statement on Form S-1 of the
Company (File No. 33-73966).
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 23, 1995.
(5) Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company in the three months
ended December 31, 1996.
27
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Hollywood Entertainment Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Hollywood Entertainment Corporation and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 of the consolidated financial statements, the Company
changed its amortization method for videocassette rental inventory.
PRICE WATERHOUSE LLP
Portland, Oregon
February 20, 1997, except as to Note 11,
which is dated as of March 15, 1997
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Hollywood Entertainment Corporation
We have audited the accompanying statements of income, changes in shareholders'
equity and cash flows of Hollywood Entertainment Corporation for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of income, changes in shareholders'
equity and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of income, changes in shareholders' equity, and cash flows. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statements of income, changes in shareholders' equity and cash flows. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Hollywood
Entertainment Corporation for the year ended December 31, 1994 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
February 14, 1995 except for Note 3
as to which the date is March 29, 1995
F-2
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
--------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $12,849 $29,980
Construction and other receivables 25,785 16,154
Merchandise inventories 45,255 25,991
Prepaid expenses and other current assets 3,232 1,555
------------- -------------
Total current assets 87,121 73,680
Videocassette rental inventory, net 144,264 86,889
Property and equipment, net 115,812 65,958
Excess of cost over net assets acquired, net 99,229 104,679
Deferred income taxes 783 1,345
Other assets 2,574 2,109
------------- -------------
Total assets $449,783 $334,660
============= =============
LIABILITIES, MANDATORILY REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $205 $7,616
Accounts payable 67,207 42,778
Accrued expenses 10,402 5,553
Income taxes payable 2,914 --
------------- -------------
Total current liabilities 80,728 55,947
Long-term debt, excluding current maturities 156 355
Line of credit 82,000 --
Deferred rent and other liabilities 6,452 3,369
Deferred income taxes 5,744 2,956
------------- -------------
175,080 62,627
------------- -------------
Commitments and contingencies (notes 9 and 11) -- --
Mandatorily redeemable common stock -- 54,250
------------- -------------
Shareholders' equity:
Preferred stock, 25,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock 100,000,000 shares
authorized; 36,006,201 and 33,879,738 shares
issued and outstanding, respectively 238,021 202,005
Retained earnings 38,992 18,362
Intangible assets, net (2,310) (2,584)
------------- -------------
Total shareholders' equity 274,703 217,783
------------- -------------
Total liabilities and shareholders' equity $449,783 $334,660
============= =============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------------ ---------- -----------
<S> <C> <C> <C>
Revenue:
Rental revenue $ 252,625 $ 123,894 $ 61,941
Product sales 49,717 25,536 11,347
------------ ---------- -----------
302,342 149,430 73,288
------------ ---------- -----------
Operating costs and expenses:
Cost of product sales 30,707 14,769 7,251
Operating and selling 208,895 105,433 47,312
General and administrative 18,302 7,916 4,419
Amortization of intangibles 6,020 3,775 1,696
------------ ---------- -----------
263,924 131,893 60,678
------------ ---------- -----------
Operating income 38,418 17,537 12,610
------------ ---------- -----------
Nonoperating income (expense):
Interest income 203 1,614 687
Interest expense (4,339) (490) (795)
------------ ---------- -----------
(4,136) 1,124 (108)
------------ ---------- -----------
Income before income taxes and cumulative
effect of a change in accounting principle 34,282 18,661 12,502
Income taxes 13,652 6,875 4,359
------------ ---------- -----------
Income before cumulative effect of a change
in accounting principle 20,630 11,786 8,143
Cumulative effect of a change in accounting
principle (note 2) -- (2,560) --
------------ ---------- -----------
Net income $ 20,630 $ 9,226 $ 8,143
============ ========== ===========
Earnings per common and common equivalent share:
Income before cumulative effect of a change
in accounting principle $ 0.59 $ 0.36 $ 0.32
Cumulative effect of a change in accounting principle -- (0.08) --
------------ ---------- -----------
Net income $ 0.59 $ 0.28 $ 0.32
============ ========== ===========
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock
-------------------------- Intangible Retained
Shares Amount Assets Earnings Total
------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 18,150,244 $ 12,890 $ (580) $ 993 $ 13,303
Public offerings of common stock, net 10,152,750 87,164 -- -- 87,164
Issuance of common stock under option plan 230,600 45 -- -- 45
Warrants exercised 450,000 1,260 -- -- 1,260
Tax benefit from exercise of stock
options and warrants -- 567 -- -- 567
Issuance of stock options in
connection with acquisitions -- 2,598 (2,598) -- --
Amortization of intangible assets -- -- 283 -- 283
Net income -- -- -- 8,143 8,143
------------- ----------- ---------- ----------- ----------
Balance at December 31, 1994 28,983,594 104,524 (2,895) 9,136 110,765
Public offering of common stock, net 4,600,000 95,436 -- -- 95,436
Issuance of common stock under
option plan 296,144 1,341 -- -- 1,341
Tax benefit from exercise of
stock options -- 704 -- -- 704
Amortization of intangible assets -- -- 311 -- 311
Net income -- -- -- 9,226 9,226
------------- ----------- ---------- ----------- ----------
Balance at December 31, 1995 33,879,738 202,005 (2,584) 18,362 217,783
Public offering of common stock, net 2,000,000 34,705 -- -- 34,705
Issuance of common stock under option plan 126,463 838 -- -- 838
Tax benefit from exercise of stock options -- 473 -- -- 473
Amortization of intangible assets -- -- 274 -- 274
Net income -- -- -- 20,630 20,630
------------- ----------- ---------- ----------- ----------
Balance at December 31, 1996 36,006,201 $ 238,021 $ (2,310) $ 38,992 $ 274,703
============= =========== ========== =========== ==========
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands, except share amounts)
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net income $20,630 $9,226 $8,143
Adjustments to reconcile net income
to cash provided by operating activities:
Cumulative effect of a change in accounting principle -- 2,560 --
Depreciation and amortization 87,115 47,292 19,826
Deferred rent and other liabilities 3,083 1,288 640
Deferred income taxes 3,350 5,045 1,270
Changes in assets and liabilities:
Merchandise inventories (19,264) (13,571) (6,532)
Prepaid expenses and other current assets (1,677) (1,251) (125)
Accounts payable 24,429 19,053 16,867
Accrued expenses 4,849 (154) 1,942
Income taxes payable 2,914 (749) 668
------------- ------------- ------------
Net cash provided by operating activities 125,429 68,739 42,699
------------- ------------- ------------
Investing activities:
Construction and other receivables (9,631) (11,332) (3,963)
Purchases of videocassette rental inventory, net (124,253) (85,634) (34,251)
Purchases of property and equipment (64,038) (54,337) (10,401)
Investment in businesses acquired -- (16,988) (53,750)
Other (794) (570) 26
------------- ------------- ------------
Net cash used in investing activities (198,716) (168,861) (102,339)
------------- ------------- ------------
Financing activities:
Proceeds from the issuance of common stock, net 34,705 95,436 88,424
Proceeds from long-term debt -- 23,500 18,979
Repayments of long-term debt (7,610) (29,896) (18,465)
Proceeds from exercise of stock options 838 1,341 45
Tax benefit from exercise of stock options 473 704 69
Repurchase of common stock (54,250) -- --
Borrowings on line of credit 82,000 -- --
------------- ------------- ------------
Net cash provided by financing activities 56,156 91,085 89,052
------------- ------------- ------------
Increase (decrease) in cash and cash equivalents (17,131) (9,037) 29,412
------------- ------------- ------------
Cash and cash equivalents:
Beginning of year 29,980 39,017 9,605
------------- ------------- ------------
End of year $12,849 $29,980 $39,017
============= ============= ============
Other Cash Flow Information:
Interest expense paid $4,339 $455 $796
Income taxes paid, net of refunds 6,130 1,953 2,421
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements
(1) Nature of the Business and Summary of Significant Accounting Policies
Nature of the Business
Hollywood Entertainment Corporation and subsidiaries (the "Company")
operates a chain of video superstores throughout the United States. The
Company was incorporated in Oregon on June 2, 1988 and opened its first
store in October 1988. As of December 31, 1996 and 1995, the Company
operated 551 stores in 29 states and 305 stores in 23 states, respectively.
Basis of Presentation
The consolidated financial statements include the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated. Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to be consistent with the 1996
presentation. The reclassifications had no effect on previously reported
net income or shareholders' equity.
Certain Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers highly liquid investment instruments, with an
original maturity of three months or less, to be cash equivalents.
Construction and Other Receivables
Construction and other receivables consist primarily of leasehold
improvements paid by the Company, which will be reimbursed by the lessor.
Merchandise Inventories
Merchandise inventories, consisting primarily of prerecorded video
cassettes, concessions, and other accessories held for resale, are stated
at the lower of cost or market value. Cost is determined on a first-in,
first-out basis.
F-7
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
Videocassette Rental Inventory
Videocassette rental inventory, which includes video games and audio books,
is stated at cost and amortized over its estimated useful life to a $6 per
videocassette salvage value. See note 2 for a discussion of the
amortization policy applied to videocassette rental inventory and a
discussion of the change in amortization method effective January 1, 1995.
Videocassette rental inventory and related accumulated amortization at
December 31 for each of the last two years are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
<S> <C> <C>
Videocassette rental inventory $ 201,444 $ 119,135
Less: accumulated amortization (57,180) (32,246)
-------------- ---------------
$ 144,264 $ 86,889
============== ===============
</TABLE>
Amortization expense related to videocassette rental inventory was $67.1
million, $37.6 million and $16.1 million in 1996, 1995 and 1994,
respectively, and is included in operating and selling expenses. As
videocassette rental inventory is sold, the applicable cost and accumulated
amortization are eliminated from the accounts, determined on a first-in,
first-out basis applied in the aggregate based on monthly purchases. Any
gain or loss thereon is recorded in the Company's consolidated statement of
operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
which range from approximately five to ten years. Leasehold improvements
are amortized over the lesser of the lease term or the estimated useful
life of the improvement. Property and equipment at December 31 consist of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Fixtures and equipment $43,428 $24,059
Leasehold improvements 91,648 46,978
Equipment under capital leases 3,525 3,525
----------- -----------
138,601 74,562
Less: accumulated depreciation and
amortization (22,789) (8,604)
-----------
$115,812 $65,958
=========== ===========
</TABLE>
F-8
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
Depreciation and amortization expense related to property and equipment was
$14.2 million, $5.9 million and $2.0 million in 1996, 1995 and 1994,
respectively. Accumulated amortization of equipment under capital leases
was $3.0 million and $2.3 million at December 31, 1996 and 1995,
respectively.
Additions to property and equipment are capitalized and include
acquisitions of property and equipment, costs incurred in the development
and construction of new stores, major improvements to existing property and
major improvements in management information systems. As property and
equipment is sold or retired, the applicable cost and accumulated
depreciation and amortization are eliminated from the accounts and any gain
or loss thereon is recorded.
Intangible Assets
Intangible assets primarily consist of the cost of acquired businesses in
excess of the market value of net identifiable assets acquired (goodwill).
Goodwill is amortized on a straight-line basis over 20 years. The Company
annually reviews the realizability of recorded goodwill based upon
expectations of nondiscounted cash flows and operating income. As of
December 31, 1996, the Company believes that there are no materially
impaired intangible assets. Accumulated amortization of intangible assets
at December 31, 1996 and 1995 was $11.6 million and $5.6 million,
respectively.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets". This
pronouncement requires long-lived assets to be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. This new standard is required
for fiscal years beginning after December 15, 1995. The Company adopted the
new standard and it had no impact on the Company's consolidated financial
position or results of operations.
Deferred Rent
Many of the Company's operating leases contain predetermined fixed
increases of the minimum rental rate during the initial lease term. For
these leases, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the amount charged
to expense and the rent paid as deferred rent.
Advertising
Advertising costs, net of cooperative reimbursements from vendors, are
expenses when incurred.
F-9
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
Store Pre-opening Costs
Store pre-opening costs, including store employee labor costs and
advertising, incurred prior to the opening of a new store are expenses
during the first full month of a store's operation. Incremental costs
incurred by existing stores to prepare and train new employees are expenses
as incurred.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109. Accordingly, deferred income taxes
are provided at the current statutory rates for the difference between the
financial statement and tax basis of assets and liabilities and are
classified in the consolidated balance sheet as current or long-term,
consistent with the classification of the related asset or liability giving
rise to the deferred income taxes.
Net Income per Common Share
Net income per share of common stock is computed using the weighted average
number of common and common equivalent shares (if dilutive) outstanding
during each period, as adjusted for stock splits through December 31, 1996
(35,158,846 shares in 1996, 32,961,806 shares in 1995 and 25,578,240 shares
in 1994).
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, construction and other
receivables, accounts payable, accrued liabilities, debt and mandatorily
redeemable common stock approximate fair value at December 31, 1996 and
1995 because these financial instruments bear interest at competitive rates
or have a short maturity.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standards Number 123
(SFAS 123) "Accounting for Stock-Based Compensation", in 1996. SFAS 123 was
issued by the Financial Accounting Standards Board in October 1995 and
allows companies to choose whether to account for stock-based compensation
under the current method as prescribed in accounting Principles Board
Opinion Number 25 (APB 25) or use the fair value method described in SFAS
123. The Company continues to follow the measurement provisions of APB 25.
F-10
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
(2) Change in Amortization Method for Videocassette Rental Inventory
Effective January 1, 1995, the Company adopted an accelerated method of
amortizing its videocassette rental inventory. Under this new method,
videocassette rental inventory, which includes video games and audio books,
is stated at cost, including the related costs to prepare such video
cassettes for rent, and amortized, beginning on the date video cassettes
are placed into service, to its salvage value ($6 per videocassette during
1995 and 1996) over an estimated useful life of 36 months. All copies of
new release video cassettes are amortized on an accelerated basis during
their first four months to an average net book value of $15 and then on a
straight-line basis to their salvage value of $6 over the next 32 months.
The method for calculating amortization of videocassette rental inventory
in 1994 and prior years was as follows: base stock video cassettes,
together with the related costs to prepare such video cassettes for rent,
were amortized over 36 months on a straight-line basis. New release video
cassettes were amortized as follows: the tenth and succeeding copies of
each title per store were amortized over nine months on a straight-line
basis; the fourth through ninth copies of each title per store were
amortized 40% in the first year and 30% in each of the second and third
years; and copies one through three of each title per store were amortized
as base stock. Under the old method, no provision for salvage value was
established.
The new method of amortization was adopted because the Company believes
accelerating expense recognition for new release video cassettes during the
first four months more closely matches the typically higher revenue
generated following a title's release, and believes $15 represents a
reasonable average carrying value for tapes to be rented or sold after four
months and $6 represents a reasonable salvage value for all tapes after 36
months.
The new method of amortization has been applied to videocassette rental
inventory that was held at January 1, 1995. The cumulative effect of the
change as of January 1, 1995 was to reduce net income by $2.6 million after
income taxes of $1.6 million. The application of the new method of
amortizing videocassette rental inventory increased 1995 amortization
expense by $2.6 million and reduced net income by $1.6 million and earnings
per share by $0.05.
F-11
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
(3) Acquisitions
The Company made no acquisitions in 1996. The following acquisitions were
made in 1995:
Title Wave
In March 1995, the Company purchased all of the outstanding capital stock
of Title Wave Stores, Inc. ("Title Wave"), an operator of 14 music and
video retail superstores located in Minneapolis, Minnesota. The aggregate
purchase price, including the assumption of Title Wave's liabilities, was
$15.7 million. The Company closed two Title Wave stores immediately
following the acquisition.
Video Watch
In August 1995, the Company acquired, in two separate transactions, the
assets of 42 video retail superstores operating under the name of "Video
Watch". The aggregate purchase price was approximately $60.3 million,
including 2,127,452 shares of the Company's common stock. The Company
granted the sellers an option to sell any of the shares issued in
connection with the Video Watch acquisition to the Company on January 27,
1996 at the original issuance price of $25.50 per share, for a maximum
repurchase obligation of $54.3 million. Consequently, the common shares
issued in connection with the Video Watch acquisitions are classified as
"Mandatorily Redeemable Common Stock" at December 31, 1995.
Pursuant to the option described above, in January 1996 the Company
repurchased all of the shares issued in the Video Watch acquisition. Of the
aggregate purchase price of $54.3 million, $50.0 million was provided by
borrowings under the Company's revolving credit line, and the remainder was
provided by then existing cash balances.
Other Acquisitions
In addition to the acquisitions discussed above in 1995, the Company
acquired six video retail superstores operated under the name "Video Watch"
for $7.0 million and acquired 10 other video retail superstores in eight
separate transactions for an aggregate purchase price of $4.8 million. The
purchase price for the Video Watch stores was paid in the form of a note
bearing interest at 5.75% per annum and paid January 4, 1996.
All of the acquisitions consummated by the Company during 1995 were
accounted for as purchases. Accordingly, the results of operations of the
acquired stores subsequent to the date acquired are included in the results
of operations of the Company.
F-12
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
The excess of cost over net identifiable assets acquired for the above
acquisitions totaling $72.1 million is being amortized over 20 years.
The Company's consolidated results of operations for the years ended
December 31 on an unaudited pro forma basis assuming the acquisitions of
Title Wave and Video Watch had occurred as of January 1, 1995 and assuming
the new method of amortizing videocassette rental inventory was in effect
during each period are as follows (in thousands, except per share amounts):
1995 1994
-------------- ------------
Total revenue $ 166,028 $ 136,848
Net income $ 12,275 $ 6,443
Net income per share $ 0.36 $ 0.23
The unaudited pro forma results of operations are not necessarily
indicative of actual results that would have occurred had the acquisitions
been completed as of January 1, 1995 or of the results which may occur in
the future.
(4) Leases
The Company leases all of its stores, corporate office and distribution
center under noncancelable operating leases and leases certain fixtures and
equipment under capital leases. All of the Company's stores have an initial
operating lease term of five to 15 years and options to renew for between
five and 15 additional years. Most operating leases require payment of
property taxes, utilities, common area maintenance and insurance. Total
rent expense, including related lease-required costs, incurred during 1996,
1995 or 1994 was $54.1 million, $25.3 million and $9.3 million,
respectively.
At December 31, 1996, the future minimum annual rental commitments under
all noncancelable leases were as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year Leases Leases
---- --------------- -------------
<S> <C> <C>
1997 $ 65,842 $ 218
1998 65,396 131
1999 63,295 --
2000 60,568 --
2001 58,974 --
Thereafter 300,396 --
--------------- -------------
Total $ 614,471 349
===============
Less: interest 27
-------------
Present value 322
Less: current maturities 205
-------------
Long-term obligations $ 117
=============
</TABLE>
F-13
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
(5) Employee Benefit Plans
The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual claims in excess of $50,000 and for annual Company claims which
exceed $1.0 million in the aggregate. While the ultimate amount of claims
incurred are dependent on future developments, in management's opinion,
recorded reserves are adequate to cover the future payment of claims.
Adjustments, if any, to recorded estimates resulting from ultimate payments
will be reflected in operations in the period in which such adjustments are
known.
The Company does not maintain any retirement plans nor offer any form of
post-retirement benefits.
(6) Long-term Debt
Long-term debt consisted of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Borrowings under bank
revolving credit agreement $ 82,000 $ --
Notes payable, bearing interest
at 5.75%, due January 4,
1996. Secured by assets of
six acquired stores 7,000
Capital lease obligations 322 905
Other 39 66
----------- ------------
Total long-term debt 82,361 7,971
Less: current maturities 205 7,616
----------- ------------
Long-term debt, less current
maturities $ 82,156 $ 355
=========== ============
</TABLE>
The Company's $19 million revolving line of credit with Bank of America
Oregon expired on July 2, 1995. Borrowings under the line were repaid by
the expiration date. Interest expense related to borrowings under the
expired line of credit was $251,000 in 1995 at an average interest rate
equal to 9.8%.
In December 1995, the Company executed a new $75 million revolving credit
agreement with a syndicate of banks led by Bank of America National Trust &
Savings Association. This facility had a maturity date of December 28, 1998
and was increased to $100 million in July of 1996. The borrowings bore
interest, at the Company's option, at the bank's base rate or LIBOR plus
approximately 1.25%, depending on the borrowing levels. The Company paid a
fee of 0.2% per annum on the available and unused portion of the credit
facility. Among other things, the revolving credit agreement required the
Company to maintain a specified level of net worth, a cash flow coverage
ratio, a funded debt to adjusted EBITDA ratio and minimum quarterly average
per store revenue amounts and restricted the Company from incurring certain
additional debt. The credit
F-14
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
facility was secured by substantially all assets of the Company. There were
no borrowings outstanding at any time during 1995 under this credit
facility.
At December 31, 1996, the Company had a $100 million revolving credit
agreement with a syndicate of banks. In January 1997 the Company replaced
its existing revolving credit agreement with a new $150.0 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 December 31, 1996, $82.0 million was outstanding under the
revolving credit agreement that was in place at that time. Of this amount,
approximately $50.0 million was borrowed to fund the share repurchase
described in Note 3 above.
The Company's maturities of long-term debt for years subsequent to 1996 are
as follows: 1997 - $205,000; 1998 - $82,123,000; 1999 - $13,000; 2000 -
$15,000; and 2001 - $5,000.
(7) Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Current:
Federal $ 8,052 $ 2,521 $ 2,652
State 2,250 456 437
------------- ------------- ------------
Total current 10,302 2,977 3,089
------------- ------------- ------------
Deferred:
Federal 2,757 3,302 1,128
State 593 596 142
------------- ------------- ------------
Total deferred 3,350 3,898 1,270
------------- ------------- ------------
Total provision $ 13,652 $ 6,875 $ 4,359
============= ============= ============
</TABLE>
F-15
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- --------------
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 34.0%
State income taxes, net of
federal income tax benefit 4.6 3.9 3.4
Tax exempt interest income (0.3) (2.6) (1.9)
Other, net 0.5 0.5 (0.6)
-------------- --------------- --------------
39.8% 36.8% 34.9%
============== =============== ==============
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effects of temporary differences
that give rise to significant portions of deferred tax assets and
liabilities at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Stock option exercises $ -- $ 96
Difference between assigned
value and tax basis of
acquired entities 591 1,249
Tax loss carry forwards 192 752
------------- ------------
783 2,097
Less: valuation allowance -- (752)
------------- ------------
$ 783 $ 1,345
============= ============
Deferred tax liabilities:
Depreciation $ 6,165 $ 2,162
Capital leases 1,091 822
Deferred Rent (1,225) --
Other (287) (28)
------------- ------------
$ 5,744 $ 2,956
============= ============
</TABLE>
During 1995, the Company established a valuation allowance related to the
net operating loss carry forwards of Title Wave, a company acquired during
1995 through a stock purchase. The valuation allowance was reversed during
the year ended December 31, 1996 for the recognition of a deferred asset
that was previously reserved. At December 31, 1996, the Company has
approximately $0.5 million of operating loss carry forwards available to
reduce future income taxes which expire in varying amounts commencing in
year 2009.
F-16
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
(8) Shareholders' Equity
Preferred Stock
At December 31, 1996, the Company is authorized to issue 25,000,000 shares
of preferred stock in one or more series. The Board of Directors has
authority over the designations, preferences, special rights, limitations
or restrictions thereof as it may determine. No shares of preferred stock
have been issued.
Common Stock
In December 1996, the Company completed a public offering of 2,000,000
shares of its common stock. The net proceeds from the offering were
approximately $34.7 million. Additionally, in January 1997, the
underwriters purchased an additional 300,000 shares pursuant to the
overallotment option for net proceeds to the Company of approximately $4.7
million.
In July 1995, the Board of Directors and the Company's shareholders
approved an increase in the number of authorized shares of common stock to
100,000,000 and effected a 2-for-1 split in the form of a stock dividend.
All share and per share amounts have been given retroactive recognition in
each period in the accompanying financial statements.
In July 1995, the Company completed a public offering of 4,600,000 shares
of its common stock. The net proceeds from the offering were approximately
$95.4 million.
During 1994, the Company completed two public offerings resulting in the
sale of 10,152,750 shares of its common stock. The combined net proceeds
were approximately $87.2 million.
In March 1994, in connection with the Video Central acquisition, the
Company issued stock options to purchase 339,000 shares of common stock at
a price of $0.005 per share which were immediately exercisable and expire
March 2, 2003. The stock options had a fair market value on the date of
issuance of approximately $2.6 million, of which $2.5 million was allocated
to excess of cost over net assets acquired and $100,000 was allocated to
covenant not to compete. The excess of cost over net assets acquired is
being amortized over 20 years and the covenant not to compete was amortized
over two years. Amortization expense for the years ended December 31, 1996,
1995 and 1994 totaled $171,000, $171,000 and $143,000, respectively.
F-17
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
In July 1993, the Company sold 5,175,000 shares of its common stock in an
initial public offering registered under the Securities Act of 1933. The
net proceeds from this offering were approximately $10.4 million. In
connection with this offering, the Company issued to underwriters warrants
to purchase up to an aggregate 450,000 shares of common stock at an initial
exercise price of $2.80 per share. The warrants were exercised during 1994.
In September 1992, the Company issued a warrant to purchase 300,000 shares
of common stock for $0.035 per share effective as of the closing of the
Company's initial public offering. The warrant relates to a prepaid
ten-year rental contract with a supplier executed in September 1992. The
original estimated value of this warrant of $350,000 and the related shares
are included in common stock. The value is being amortized on a
straight-line basis over 60 months. Upon completion of the Company's
initial public offering, certain terms of the warrant and the related
contract were amended, thereby increasing the estimated value by $350,000
which is also being amortized over 60 months. The warrant was exercised in
July 1993. Amortization expense for the years ended December 31, 1996, 1995
and 1994 totaled $140,000, $140,000 and $140,000, respectively.
Stock Option Plan
In May 1993, the Board of Directors adopted, and the shareholders of the
Company approved, the 1993 Stock Incentive Plan (the "Plan"). The Plan
provides for the award of non-qualified stock options, stock appreciation
rights, bonus rights and other incentive grants to employees, independent
contractors and consultants. In November 1995, the Board of Directors and
the Company's stockholders approved an increase in the number of shares
reserved for issuance under the Plan to 5,200,000. As of December 31, 1996,
options for a total of 599,687 shares were exercisable. The options are
granted at fair market value as determined by the Company's Board of
Directors at the date of grant. The options are exercisable over a period
of up to nine years from the date of the grant. The vesting schedules for
the options are from zero to five years.
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation", which defines a fair value based
method of accounting for an employee stock option or similar equity
instrument and encouraged all entities to adopt that method of accounting
for all compensation cost related to stock options issued to employees
under these plans using the method of accounting prescribed by the
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting
APB 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value based method of accounting defined in this
Statement has been applied.
F-18
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
The Company has elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25; however, as required by SFAS
123 the Company has computed for pro forma disclosure purposes the value of
options granted during 1995 and 1996 using the Black-Scholes option pricing
model. The weighted average assumptions used for stock option grants for
1995 and 1996 were:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Risk free interest rate 6.4% 5.4%
Expected dividend yield 0% 0%
Expected lives 5 years 5 years
Expected volatility 60% 60%
</TABLE>
Options were assumed to be exercised over the five-year expected life for
purposes of this valuation. Adjustments are made for options forfeited
prior to vesting. For the years ended December 31, 1995 and 1996, the total
value of the options granted was computed as the following approximate
amounts of $6.4 million and $12.4 million, respectively, which would be
amortized on a straight line basis over the vesting period of the options.
The weighted average fair value per share of the options granted in 1995
and 1996 are $7.93 and $4.84, respectively.
If the Company had accounted for these stock options issued to employees in
accordance with SFAS 123, the Company's net income and pro forma net income
(in thousands) and net income per share and pro forma net income per share
would have been reported as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------------------------ ----------------------------------
Net Income Earnings per Share Net Income Earnings per Share
<S> <C> <C> <C> <C>
As Reported $20,630 $0.59 $9,226 $0.28
Pro Forma 18,252 0.52 8,556 0.26
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosure for
1995 and 1996 are not likely to be representative of the effects on
reported net income and earnings per share for future years since options
vest over several years and additional awards are made each year.
F-19
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
Activity in the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1993 618,000 $ 2.47
Granted 1,194,500 5.89
Exercised (230,600) 0.20
Cancelled (34,200) 3.35
-------------
Outstanding at December 31, 1994 1,547,700 5.38
Granted 1,297,594 15.21
Exercised (296,144) 4.55
Cancelled (375,500) 8.17
-------------
Outstanding at December 31, 1995 2,173,650 6.57
Granted 2,858,150 10.24
Exercised (126,463) 6.62
Cancelled (865,150) 15.29
-------------
Outstanding at December 31, 1996 4,040,187 $ 9.25
=============
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at December 31, 1996:
<TABLE>
<CAPTION>
Weighted Average
Number of Options Contractual Life
Exercise Price Outstanding Exercisable Remaining
-------------- ----------- ----------- ----------------
<S> <C> <C> <C>
$2.34-$5.67 563,250 186,750 5.96 years
6.50 1,130,337 86,837 8.05
6.66-9.67 686,600 212,000 7.30
10.00-15.00 1,221,500 114,100 8.07
15.50-19.87 438,500 -0- 8.82
</TABLE>
(9) Legal Proceedings
In January 1995, Viacom, Inc. filed a lawsuit against the Company alleging
unfair competition, misappropriation of trade secrets and intentional
interference with contracts in connection with the hiring of five former
Blockbuster Entertainment employees. In addition, Viacom filed a separate
lawsuit against two of the employees, both of whom are officers of the
Company, in a Florida court alleging breach of employment agreements and
misappropriation of trade secrets. In April 1996, the Company and its
affected employees settled the litigation and, although the settlement
required the Company and Viacom to keep the terms confidential, the effect
of the settlement on the Company's results of operations and financial
condition was insignificant.
F-20
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
In December 1995 three complaints were filed against the Company, certain
of the Company's directors and officers and certain other parties and
consolidated in a single action entitled Murphy v. Hollywood Entertainment
Corporation et al., case no. C95-1926-MA, U.S. District Court for the
District of Oregon. The consolidated case is a class action encompassing
persons who purchased common stock of the Company between June 20 through
December 6, 1995. The plaintiffs alleged violation of certain federal
securities laws with respect to statements made to the public and losses
allegedly suffered by plaintiffs as a result of the decline in the trading
price of the Company's stock. In May 1996 the court certified the class but
dismissed claims based on violations of sections 11, 12(2) and 15 of the
Securities Act of 1933. The remaining claims dealt with alleged violations
of the Securities Exchange Act of 1934. Prior to trial, in March 1997 the
parties reached a settlement, which is subject to court approval. See Note
11.
(10) Quarterly Financial Data
The following table sets forth certain selected quarterly financial data as
previously reported, adjustments thereto to reflect the effects of the
accounting changes set forth in note (1) below and as adjusted.
<TABLE>
<CAPTION>
Selected Quarterly Financial Data (Unaudited)
(In thousands, except per share data)
Quarter Ended
-----------------------------------------------------
1996 March June September December Full Year
- ------------------------------------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 65,073 $ 63,949 $ 75,696 $ 97,624 $ 302,342
Operating income 6,631 5,985 10,957 14,845 38,418
Net income 3,727 3,005 5,842 8,056 20,630
Net income per share 0.11 0.09 0.17 0.23 0.59
Quarter Ended
-----------------------------------------------------
1995 March June September December Full Year
- ------------------------------------------- ------------ ------------ ------------- ------------ ------------
Total revenue $ 27,088 $ 29,110 $ 39,290 $ 53,942 $ 149,430
============ ============ ============= ============ ============
Operating Income:
As previously reported $ 4,084 $ 4,421 $ 5,926
Adjustments (1) (309) (20) (166)
------------ ------------ -------------
As adjusted $ 3,775 $ 4,401 $ 5,760 $ 3,601 $ 17,537
============ ============ ============= ============ ============
Income before cumulative effect of a
change in accounting principle:
As previously reported $ 2,789 $ 2,740 $ 4,227
Adjustments (1) (286) (45) (134)
------------ ------------ -------------
As adjusted $ 2,503 $ 2,695 $ 4,093 $ 2,495 $ 11,786
============ ============ ============= ============ ============
Net income (loss)
As previously reported $ 2,789 $ 2,740 $ 4,227
Adjustments (1) (2,846) (45) (134)
------------ ------------ -------------
As adjusted $ (57) $ 2,695 $ 4,093 $ 2,495 $ 9,226
============ ============ ============= ============ ============
F-21
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
Earnings per common share:
Income before cumulative effect of a
change in accounting principle:
As previously reported $ 0.09 $ 0.09 $ 0.12
Adjustments (0.01) -- (0.01)
------------ ------------ -------------
As adjusted (2) $ 0.08 $ 0.09 $ 0.11 $ 0.07 $ 0.36
============ ============ ============= ============ ============
Net income (loss):
As previously reported $ 0.09 $ 0.09 $ 0.12
Adjustments 0.09 -- (0.01)
------------ ------------ -------------
As adjusted (2) $ 0.00 $ 0.09 $ 0.11 $ 0.07 $ 0.28
============ ============ ============= ============ ============
- --------------
(1) During the fourth quarter of 1995, the Company changed its method of
amortizing videocassette rental inventory, effective January 1, 1995. In
addition, the Company changed the estimated life of the excess of cost over
net assets acquired for store acquisitions completed in 1995 from 40 years
to 20 years. The impact of these changes, including related income tax
effects, was to reduce previously reported net income by $2.8 million,
$45,000 and $134,000 for the quarters ended March, June and September 1995,
respectively. A charge of $2.6 million, net of tax, relating to the
cumulative effect on prior years of the change in amortization method for
videocassette rental inventory was made effective as of January 1, 1995 and
is included in the March 1995 change in net income described above.
(2) As adjusted earnings per share for the full year exceed the sum of as
adjusted earnings per share for the four fiscal quarters therein because of
rounding.
</TABLE>
(11) Subsequent Events
Settlement of Securities Litigation
In March 1997 the Company reached a settlement of the securities litigation
initiated in December 1995. See Note 9. The settlement, which is subject to
court approval, consists of warrants valued at $9 million to purchase
Hollywood common stock and $6 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 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 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
F-22
<PAGE>
Hollywood Entertainment Corporation
Notes to Consolidated Financial Statements (Continued)
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.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of March 22, 1997.
Hollywood Entertainment Corporation
By: FORREST MARK WOLFINGER
---------------------------------------
Forrest Mark Wolfinger
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated as of March 22, 1997.
Signatures Title
MARK J. WATTLES Chairman of the Board of Directors,
- ----------------------------- President and Chief Executive Officer
Mark J. Wattles
FORREST MARK WOLFINGER Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
Forrest Mark Wolfinger
DONALD J. EKMAN Director
- -----------------------------
Donald J. Ekman
JAMES N. CUTLER Director
- -----------------------------
James N. Cutler
RICHARD A. GALANTI Director
- -----------------------------
Richard A. Galanti
<PAGE>
Exhibit Index
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
3.1 1993 Restated Articles of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Rights of Security Holders - See Article II of Exhibit 3.1
and Articles I and V of Exhibit 3.2.
10.1 1993 Stock Incentive Plan, as amended. (2)
10.2 Employment Agreement of Mark J. Wattles, dated February 1,
1994. (3)
10.3 Tax Indemnification Agreement dated as of February 3, 1994
between the Registrant and Mark J. Wattles and Scott D.
South. (2)
10.4 Amended and Restated Revolving Credit Agreement, dated
February 12, 1997, among the Registrant and a syndicate of
banks led by Bank of America National Trust & Savings
Association. (5)
10.5 Purchase and Sale Agreement, dated July 27, 1995, among the
Registrant, Video Watch Inc., Ray Sumon and Mahmood
Sohrabi. (4)
23.1 Consent of Price Waterhouse LLP (5)
23.2 Consent of Coopers & Lybrand L.L.P. (5)
- -------------
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Company (File No. 33-63042).
(2) Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1995.
(3) Incorporated by reference to the Registration Statement on Form S-1 of the
Company (File No. 33-73966).
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 23, 1995.
(5) Filed herewith.
================================================================================
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
among
HOLLYWOOD ENTERTAINMENT CORPORATION
as Borrower
and
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION
UNITED STATES NATIONAL BANK OF OREGON
UNION BANK OF CALIFORNIA, N.A.
KEY BANK OF WASHINGTON
BANQUE NATIONALE DE PARIS
SOCIETE GENERALE
THE SUMITOMO BANK, LIMITED
as Lenders,
and
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION
d/b/a SEAFIRST BANK
as Agent for the Lenders
---------------------------------------------------------------------
February 12, 1997
---------------------------------------------------------------------
$150,000,000
---------------------------------------------------------------------
Arranged by BancAmerica Securities, Inc.
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS........................................................ 2
Section 1.01 Certain Defined Terms...................................... 2
Section 1.02 General Principles Applicable to
Definitions......................................................... 8
Section 1.03 Accounting Terms........................................... 9
ARTICLE II THE LOANS......................................................... 9
Section 2.01 Loans...................................................... 9
Section 2.02 Manner of Borrowing a Loan.................................10
Section 2.03 Reduction of Commitments...................................10
Section 2.04 Repayment of Principal.....................................10
Section 2.05 Agent's Right to Fund......................................10
Section 2.06 Interest on Loans..........................................11
(a) General Provisions.............................................11
(b) Selection of Alternative Rate..................................11
(c) Applicable Days for Computation of Interest....................13
(d) Unavailable IBOR Rate..........................................13
Section 2.07 Compensation for Increased Costs...........................13
Section 2.08 Prepayments................................................15
Section 2.09 Notes......................................................15
Section 2.10 Manner of Payments.........................................15
Section 2.11 Fees.......................................................17
(a) Unused Commitment Fees.........................................17
(b) Loan Fee.......................................................17
(c) Agency Fees....................................................17
Section 2.12 Sharing of Payments, Etc. .................................17
Section 2.13 Withholding Taxes..........................................18
ARTICLE III CONDITIONS OF LENDING............................................18
Section 3.01 Notice of Borrowing, Promissory Notes,
Etc. ...............................................................18
Section 3.02 Corporate Authority........................................18
Section 3.03 Legal Opinion..............................................19
Section 3.04 Defaults, Etc. ............................................19
Section 3.05 Perfected Security Interests...............................19
Section 3.06 Payment of Amounts Under Prior Credit
Agreement...........................................................19
Section 3.07 Payment of Fees............................................19
Section 3.08 Other Information..........................................19
ARTICLE IV REPRESENTATIONS AND WARRANTIES....................................20
Section 4.01 Corporate Existence and Power..............................20
Section 4.02 Borrower's Corporate Authorization.........................20
Section 4.03 Government Approvals, Etc. ................................20
Section 4.04 Binding Obligations, Etc. .................................20
Section 4.05 Litigation.................................................20
i
<PAGE>
Section 4.06 Financial Condition........................................21
Section 4.07 Title and Liens............................................21
Section 4.08 Taxes......................................................21
Section 4.09 Laws, Orders; Other Agreements.............................22
Section 4.10 Lien Priority..............................................22
Section 4.11 Federal Reserve Regulations................................22
Section 4.12 ERISA......................................................22
Section 4.13 Patents, Licenses, Franchises..............................23
Section 4.14 Not Investment Company, Etc. ..............................23
Section 4.15 Insurance..................................................24
Section 4.16 Representations as a Whole.................................24
ARTICLE V AFFIRMATIVE COVENANTS..............................................24
Section 5.01 Use of Proceeds............................................24
Section 5.02 Payment....................................................24
Section 5.03 Preservation of Corporate Existence, Etc. .................24
Section 5.04 Visitation Rights..........................................25
Section 5.05 Keeping of Books and Records...............................25
Section 5.06 Maintenance of Property, Etc. .............................25
Section 5.07 Compliance With Laws, Etc. ................................25
Section 5.08 Other Obligations..........................................25
Section 5.09 Insurance..................................................25
Section 5.10 Financial Information......................................26
(a) Annual Audited Financial Statements............................26
(b) Quarterly Unaudited Financial Statements.......................26
(c) Quarterly Compliance Certificates..............................26
(d) Quarterly Store Financial Statements...........................27
(e) Annual Budget; Financial Projections...........................27
(f) Shareholder, SEC and Government Reports........................27
(g) Other Information..............................................27
Section 5.11 Notification...............................................27
Section 5.12 Additional Payments; Additional Acts.......................28
Section 5.13 Net Worth..................................................28
Section 5.14 Fixed Charge Coverage Ratio................................28
Section 5.15 Funded Debt to Cash Flow Ratio.............................29
Section 5.16 Average Quarterly Per Store Revenue........................29
ARTICLE VI NEGATIVE COVENANTS................................................30
Section 6.01 Liquidation, Merger, Sale of Assets........................30
Section 6.02 Funded Debt................................................30
Section 6.03 Guaranties, Etc............................................30
Section 6.04 Liens......................................................30
Section 6.05 Location of Inventory......................................30
Section 6.06 Investments................................................31
Section 6.07 Operating Lease Obligations................................31
Section 6.08 Company Asset Acquisitions.................................32
Section 6.09 Limitations on Prepayment of Subordinated
Debt................................................................32
Section 6.10 ERISA Compliance...........................................32
Section 6.11 Transactions with Affiliates...............................33
Section 6.12 Change in Business.........................................33
ii
<PAGE>
Section 6.13 Accounting Change..........................................33
ARTICLE VII EVENTS OF DEFAULT................................................33
Section 7.01 Events of Default..........................................33
(a) Loan Payment Default...........................................33
(b) Other Payment Default..........................................33
(c) Breach of Warranty.............................................33
(d) Breach of Certain Covenants....................................33
(e) Breach of Other Covenants......................................33
(f) Material Adverse Changes; Extraordinary
Situation......................................................34
(g) Cross-default..................................................34
(h) Voluntary Bankruptcy, Etc. ....................................34
(i) Involuntary Bankruptcy, Etc. ..................................34
(j) Insolvency, Etc. ..............................................35
(k) ERISA..........................................................35
(l) Judgment.......................................................35
(m) Government Approvals, Etc. ....................................35
(n) Change of Control..............................................36
Section 7.02 Consequences of Default....................................36
ARTICLE VIII THE AGENT.......................................................36
Section 8.01 Authorization and Action...................................36
Section 8.02 Duties and Obligations.....................................37
Section 8.03 Dealings Between Agent and Borrower........................39
Section 8.04 Lender Credit Decision.....................................39
Section 8.05 Indemnification............................................39
Section 8.06 Successor Agent............................................39
ARTICLE IX MISCELLANEOUS.....................................................40
Section 9.01 No Waiver; Remedies Cumulative.............................40
Section 9.02 Governing Law..............................................41
Section 9.03 Mandatory Arbitration......................................41
Section 9.04 Notices....................................................41
Section 9.05 Assignment and Participations..............................41
Section 9.06 Borrower's Indemnity.......................................42
Section 9.07 Severability...............................................43
Section 9.08 Survival...................................................43
Section 9.09 Conditions Not Fulfilled...................................43
Section 9.10 Entire Agreement; Amendment................................44
Section 9.11 WAIVER OF JURY TRIAL.......................................44
Section 9.12 Headings...................................................44
Section 9.13 Counterparts...............................................44
iii
<PAGE>
SCHEDULES
- ---------
Schedule 1 Calculations of Margins
Schedule 2 Prepayment Fees
Schedule 3 Participation Fees
iv
<PAGE>
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
--------------------------
THIS AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ("Agreement") is made
as of February 12, 1997, by and among BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION, UNITED STATES NATIONAL BANK OF OREGON, UNION BANK OF CALIFORNIA,
N.A., KEY BANK OF WASHINGTON, BANQUE NATIONALE DE PARIS, SOCIETE GENERALE, and
THE SUMITOMO BANK, LIMITED, (each individually a "Lender" and collectively the
"Lenders"), Bank of America National Trust & Savings Association d/b/a "SEAFIRST
BANK" as agent for the Lenders (the "Agent"), and HOLLYWOOD ENTERTAINMENT
CORPORATION (d/b/a "Hollywood Video"), an Oregon corporation (the "Borrower").
RECITALS
--------
A. Borrower, Seattle-First National Bank, as agent, and Seattle-First
National Bank, United States National Bank of Oregon and Bank of America Oregon,
as lenders entered into that certain Revolving Credit Agreement dated as of
December 22, 1995 providing for a total revolving credit facility in the amount
of $75,000,000 (the "Revolving Credit Agreement").
B. On January 8, 1996, the parties to the Revolving Credit Agreement
entered into an Amendment Number One to Revolving Credit Agreement and Amendment
to Loan Documents.
C. Pursuant to the terms of the Revolving Credit Agreement as so amended,
certain "Additional Lenders" were to be added and the amount of the credit
facility was to be increased to $100,000,000. On July 18, 1996, the Borrower,
Seattle-First National Bank, as agent, Seattle First National Bank, Bank of
America Oregon, United States National Bank of Oregon, Union Bank of California,
N.A. and Key Bank of Washington entered into an Amendment Number Two to
Revolving Credit Agreement and Amendment to Loan Documents pursuant to which
Union Bank of California and Key Bank of Washington were added as "Additional
Lenders" and the total committed amount of the facility was increased to
$100,000,000. The Revolving Credit Agreement as amended by Amendment Number One
to Revolving Credit Agreement and Amendment Number Two to Revolving Credit
Agreement is referred to herein as the "Prior Credit Agreement."
D. Thereafter, both Seattle-First National Bank and Bank of America Oregon
were merged into Bank of America National Trust & Savings Association.
<PAGE>
E. The parties hereto now desire to further amend and restate the Prior
Credit Agreement in order to provide for, among other things, an increase in the
amount of the committed facility and the addition of new lenders.
F. The Borrower's obligations under the Prior Credit Agreement are secured
by a first lien on the accounts receivable, inventory, equipment, general
intangibles, investment property and certain other personal property of the
Borrower. The parties hereto desire to amend and restate the Prior Credit
Agreement in accordance with the terms hereof. The parties hereto further intend
that the security interests and liens previously granted shall continue as liens
of first priority as security for all obligations of the Borrower under this
Agreement and specifically disclaim any intent to release any security interest
or lien or to satisfy any obligations secured thereby.
NOW, THEREFORE, the parties hereto hereby agree to amend and restate the
Prior Credit Agreement as follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.01 Certain Defined Terms. As used in this Agreement, the
following terms have the following meanings:
"Adjusted Base Rate" means a per annum rate of interest equal to the
Base Rate (changing as such Base Rate changes) plus the Margin (changing as such
Margin changes).
"Agent" means Bank of America National Trust & Savings Association
d/b/a "Seafirst Bank" and any successor agent selected pursuant to Section 8.06
hereof.
"Applicable Interest Period" means, with respect to any Loan accruing
interest at an IBOR Rate, the period commencing on the first day the Borrower
elects to have such IBOR Rate apply to such Loan and ending on a day one, two,
three or six months thereafter, as specified in the Interest Rate Notice given
in respect of such Loan or as otherwise determined pursuant to Section 2.06(b)
provided, however, that no Applicable Interest Period may be selected for a Loan
if it extends beyond the Maturity Date.
"Applicable Interest Rate" means for each Loan, the Adjusted Base Rate
or IBOR Rate as designated by the Borrower in an Interest Rate Notice given with
respect to such Loan (or portion thereof) or as otherwise determined pursuant to
Section 2.06(b).
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"Base Rate" means, for any day, the higher of: (a) 0.50% per annum
above the latest Federal Funds Rate; and (b) the rate of interest in effect for
such day as publicly announced from time to time by Bank of America National
Trust & Savings Association in San Francisco, California, as its "reference
rate." (The "reference rate" is a rate set by Bank of America National Trust &
Savings Association based upon various factors including its costs and desired
return and general economic conditions, and is used as a reference point for
pricing some loans, which may be priced at, above, or below such announced
rate.)
"Base Rate Loan" means a Loan or portion thereof bearing interest at
the Adjusted Base Rate.
"Borrower" means Hollywood Entertainment Corporation, an Oregon
corporation, and any permitted Successor or assign pursuant to Section 9.05.
"Business Day" means any day other than Saturday, Sunday or another
day on which banks are authorized or obligated to close in Seattle, Washington
or San Francisco, California except in the context of the selection of a Loan
accruing interest at the IBOR Rate or the calculation of the IBOR Rate for any
Applicable Interest Period, in which event "Business Day" means any day other
than Saturday or Sunday on which dealings in foreign currencies and exchange
between banks may be carried on in Grand Cayman, British West Indies, and
Seattle, Washington.
"Capital Leases" means for any person, all obligations of such person
under leases which are, or in accordance with GAAP, should be recorded as
capital leases.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" means the property in which the Security Agreement
creates or purports to create a security interest or other lien.
"Commitment" has the meaning given in Section 2.01.
"Company Asset Acquisitions" has the meaning given in Section 6.08.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Code.
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"Default" means any event which but for the passage of time or the
giving of notice or both would be an Event of Default.
"EBITDA" means, for any period, net income (or net loss), excluding
any extraordinary gains or losses and taxes associated therewith, plus the sum
of (a) interest expense, (b) income tax expense, (c) depreciation expense and
(d) amortization expense, in each case determined in accordance with GAAP for
such period.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Event of Default" has the meaning given in Section 7.01.
"Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by Agent from three federal funds brokers of recognized
standing selected by it.
"Financing Statements" means those Uniform Commercial Code financing
statements satisfactory in form and substance to the Agent, naming the Agent as
secured party, executed by the Borrower as debtor, in form acceptable for filing
in each of the fifty states and identifying by item or type the Collateral
described in the Security Agreement.
"Funded Debt" means for any person (a) all indebtedness or liability
of such person, without duplication, for borrowed money and all indebtedness or
liability for borrowed money secured by a Lien on the assets of such person,
whether or not such indebtedness or liability has been assumed by such person,
(b) all indebtedness and liability of such person for Capital Leases and (c) all
indebtedness or liability for borrowed money or for Capital Leases for which
such person is directly or contingently liable as obligor, guarantor, or
otherwise, or in respect of which such person otherwise assures a creditor
against loss.
"GAAP" shall have the meaning given in Section 1.03.
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"Government Approval" means an approval, permit, license,
authorization, certificate, or consent of any Governmental Authority.
"Governmental Authority" means the government of the United States or
any State or any foreign country or any political subdivision of any thereof or
any branch, department, agency, instrumentality, court, tribunal or regulatory
authority which constitutes a part or exercises any sovereign power of any of
the foregoing.
"IBOR Loan" means a Loan or portion thereof bearing interest at an
IBOR Rate.
"IBOR Rate" means, with respect to any Loan for any Applicable
Interest Period, an interest rate per annum equal to the sum of (a) the Margin
(changing effective as of the date of each change in the Margin) and (b) the
product of (i) the Offshore Rate; and (ii) the Eurodollar Reserves in effect on
the first day of such Applicable Interest Period. As used herein the "Offshore
Rate" means the rate of interest per annum determined by the Agent as the rate
at which dollar deposits in the approximate amount of such Loan for such
Applicable Interest Period would be offered by Bank of America NT & SA's Grand
Cayman Branch, Grand Cayman B.W.I. (or such other office as may be designated
for such purpose by Bank of America NT & SA), to major banks in the offshore
dollar interbank market at their request at approximately 11:00 a.m. (New York
City time) two (2) Business Days prior to the commencement of such Applicable
Interest Period. As used herein "Eurodollar Reserves" means a fraction
(expressed as a decimal), the numerator of which is the number one and the
denominator of which is the number one minus the aggregate of the maximum
reserve percentages (including, without limitation, any special, supplemental,
marginal or emergency reserves) expressed as a decimal established by the Board
of Governors of the Federal Reserve System or any other banking authority to
which the Lenders are subject for Eurocurrency Liability (as defined in
Regulation D of such Board of Governors). It is agreed that for purposes hereof,
each Loan accruing interest at the IBOR Rate shall be deemed to constitute a
Eurocurrency Liability and to be subject to the reserve requirements of
Regulation D, without benefit of credit or proration, exemptions or offsets
which might otherwise be available to the Lenders from time to time under such
Regulation D. Eurodollar Reserves shall be adjusted automatically on and as of
the effective date of any change in any reserve percentage and shall apply to
Applicable Interest Periods commencing after the effective date of change.
"Indebtedness" means for any person (a) all items of indebtedness or
liability (except capital, surplus, deferred
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credits and reserves, as such) which, in accordance with GAAP, would be included
in determining total liabilities as shown on the liability side of a balance
sheet as of the date as of which indebtedness is determined, (b) indebtedness
secured by any Lien, whether or not such indebtedness shall have been assumed,
(c) any other indebtedness or liability for borrowed money or for the deferred
purchase price of property or services for which such person is directly or
contingently liable as obligor, guarantor, or otherwise, or in respect of which
such person otherwise assures a creditor against loss, and (d) any other
obligations of such person under Capital Leases.
"Interest Rate Notice" shall have the meaning given in Section
2.06(b).
"Lenders" means Bank of America National Trust & Savings Association,
United States National Bank of Oregon, Union Bank of California, N.A., Key Bank
of Washington, Banque Nationale de Paris, Societe Generale, The Sumitomo Bank,
Limited, and any Successors thereto or permitted assigns thereof.
"Lien" means, for any person, any security interest, pledge, mortgage,
charge, assignment, hypothecation, encumbrance, attachment, garnishment,
execution or other voluntary or involuntary lien upon or affecting the revenues
of such person or any real or personal property in which such person has or
hereafter acquires any interest, except (i) liens for Taxes which are not
delinquent or which remain payable without penalty or the validity or amount of
which is being contested in good faith by appropriate proceedings upon stay of
execution of the enforcement thereof with appropriate reserves having been
established therefor; (ii) liens imposed by law (such as mechanics' liens)
incurred in good faith in the ordinary course of business which are not
delinquent or which remain payable without penalty or the validity or amount of
which is being contested in good faith by appropriate proceedings upon stay of
execution of the enforcement thereof with, in the case of liens on property of
the Borrower, provision having been made to the satisfaction of the Agent for
the payment thereof in the event the contest is determined adversely to the
Borrower; and (iii) deposits or pledges under worker's compensation,
unemployment insurance, social security or other similar laws or made to secure
the performance of bids, tenders, contracts (except for repayment of borrowed
money), or leases, or to secure statutory obligations or surety or appeal bonds
or to secure indemnity, performance or other similar bonds given in the ordinary
course of business.
"Loan Documents" means this Amended and Restated Revolving Credit
Agreement, the Notes, the Security Agreement and all other certificates,
instruments and other documents executed
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in connection with this Agreement or the transactions contemplated
hereby.
"Majority Lenders" means at any time Lenders having an aggregate
Percentage Interest of at least sixty-six and two thirds percent (66 2/3%).
"Margin" means a per annum rate determined in accordance with Schedule
1 hereto.
"Maturity Date" means December 28, 1998.
"Net Income" means for any accounting period the net income of the
Borrower for such period, determined in accordance with GAAP.
"Net Worth" means the excess of total assets over total liabilities
determined in accordance with GAAP.
"Notes" has the meaning given in Section 2.09.
"Officer's Certificate" means a certificate signed in the name of the
Borrower by its Chairman, its President, its Executive Vice President or its
Vice President and Controller.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" means an "employee pension benefit plan" (as such term
is defined in ERISA) from time to time maintained by the Borrower or a member of
the Controlled Group.
"Percentage Interest" means for any Lender, at any time, the
percentage that such Lender's Commitment bears to the Total Commitment.
"Plan" shall mean, at any time, an employee pension benefit plan which
is covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code and is either (a) maintained by the Borrower or
any member of a Controlled Group for employees of the Borrower or any member of
such Controlled Group or (b) maintained pursuant to a collective bargaining
agreement or any other arrangement under which more than one employer makes
contributions and to which the Borrower or any member of a Controlled Group is
then making or accruing an obligation to make contributions or has within the
preceding five (5) plan years made contributions.
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"Rental Items" means videotapes, videogames, audiotapes and related
equipment to the extent that such items were acquired by Borrower for rental to
its customers.
"Required Notice of Borrowing" means a written request for a Loan
executed by the Borrower, delivered to the Agent and containing the information
set forth in Section 2.02 which shall be delivered prior to 10:00 a.m. (Seattle,
Washington time), one Business Day prior to the requested date of borrowing
provided, however, if the Borrower shall elect to have interest accrue on such
Loan at an IBOR Rate, the Required Notice of Borrowing shall be given prior to
10:00 a.m. (Seattle, Washington time), on a Business Day at least three (3)
Business Days before the requested date of borrowing. Requests for borrowing
received after the designated hour will be deemed received on the next
succeeding Business Day.
"Security Agreement" means an Amended and Restated Security Agreement
executed by the Borrower in favor of the Agent substantially in the form
attached hereto as Exhibit B.
"Successor" means, for any corporation or banking association, any
successor by merger or consolidation, or by acquisition of substantially all of
the assets of the predecessor.
"Tax" means for any person any tax, assessment, duty, levy, impost or
other charge imposed by any Governmental Authority on such person or on any
property, revenue, income, or franchise of such person and any interest or
penalty with respect to any of the foregoing.
"Total Commitment" means One Hundred Fifty Million Dollars
($150,000,000) as the same may be reduced or terminated pursuant to Sections
2.03 or 7.02.
"Unfunded Vested Liabilities" shall mean, with respect to any Plan, at
any time, the amount (if any) by which (a) the present value of all vested
nonforfeitable benefits under such Plan exceeds (b) the fair market value of all
Plan assets allocable to such benefits, all determined as of the then most
recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of the Borrower or any member of the Controlled
Group to the PBGC or the Plan under Title IV of ERISA.
Section 1.02 General Principles Applicable to Definitions. Definitions
given in Section 1.01 shall be equally applicable to both singular and plural
forms of the terms therein defined and references herein to "he" or "it" shall
be applicable to persons whether masculine, feminine or neuter. References
herein to any
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document including, but without limitation, this Agreement shall be deemed a
reference to such document as it now exists, and as, from time to time
hereafter, the same may be amended. References herein to a "person" or "persons"
shall be deemed to be references to an individual, corporation, partnership,
trust, unincorporated association, joint venture, joint-stock company,
government (including political subdivisions), Governmental Authority or agency
or any other entity.
Section 1.03 Accounting Terms. Except as otherwise provided herein,
accounting terms not specifically defined shall be construed, and all accounting
procedures shall be performed, in accordance with generally accepted United
States accounting principles consistently applied ("GAAP") and as in effect on
the date of application.
ARTICLE II
THE LOANS
---------
Section 2.01 Loans. Each Lender severally agrees on the terms and
conditions of this Agreement to make loans ("Loans") to the Borrower from time
to time on Business Days during the period beginning on the date hereof and
ending on the Maturity Date, in an aggregate principal amount not exceeding at
any one time the principal amount set forth opposite such Lender's name below
(such Lender's "Commitment").
Lender Commitment
------ ----------
Bank of America NT & SA $ 40,000,000
United States National Bank $ 25,000,000
of Oregon
Union Bank of California, N.A. $ 20,000,000
Key Bank of Washington $ 20,000,000
Banque Nationale de Paris $ 15,000,000
Societe Generale $ 15,000,000
The Sumitomo Bank, Limited $ 15,000,000
------------
Total $150,000,000
Amounts advanced under the Prior Credit Agreement (as such term is defined in
the "Recitals" hereto) which are outstanding as of the date hereof shall be
deemed to have been advanced hereunder. The line of credit extended hereunder is
a revolving line of credit and, subject to the terms and conditions hereof, the
Borrower may borrow, repay and reborrow up the maximum principal amount of the
Total Commitment at any time on or before the Maturity Date.
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Section 2.02 Manner of Borrowing a Loan. The Borrower shall give the Agent
the Required Notice of Borrowing specifying the date of the borrowing of any
Loan and the amount thereof, which shall be in an amount which is an integral
multiple of One Million Dollars ($1,000,000) and not less than Two Million
Dollars ($2,000,000). Such notice shall be irrevocable and shall be deemed to
constitute a representation and warranty by the Borrower that as of the date of
the notice, the statements set forth in Article IV hereof are true and correct
and that no Default or Event of Default has occurred and is continuing. On
receipt of such notice, the Agent shall promptly notify each Lender by telephone
(confirmed immediately by telex, facsimile transmission or cable), telex,
facsimile transmission, or cable of the date of the borrowing. Each Lender shall
before 12:00 noon (Seattle, Washington time), on the date of the borrowing, pay
the lesser of (a) such Lender's Percentage Interest of the aggregate principal
amount of the requested borrowing identified in the Required Notice of Borrowing
or (b) the maximum amount such Lender is committed to advance pursuant to the
terms of Section 2.01 hereof in immediately available funds to the Agent at its
Commercial Loan Processing Center, Seattle, Washington. Upon fulfillment to the
Agent's satisfaction of the applicable conditions set forth in Article III, and
after receipt by the Agent of such funds, the Agent will promptly make such
immediately available funds available to the Borrower by depositing them to the
ordinary checking account maintained by the Borrower with Bank of America
National Trust & Savings Association.
Section 2.03 Reduction of Commitments. Upon not less than five (5) Business
Days' written notice to the Agent, the Borrower may terminate the Total
Commitment, in whole or in part, provided that each partial reduction of the
Total Commitment shall be in an amount not less than Five Million Dollars
($5,000,000) and, provided, further, that in no event may the Total Commitment
be reduced to an amount less than the then-outstanding aggregate principal
balance of the Loans. Any reduction in the Total Commitment shall be deemed to
be a proportionate reduction in each Lender's Commitment therein such that after
making such reduction, each Lender's Commitment will be in an amount equal to
its Percentage Interest (calculated immediately before the reduction of the
Total Commitment) of the then-reduced Total Commitment.
Section 2.04 Repayment of Principal. The Borrower shall repay to the Agent
for the account of the Lenders the principal amount of each Loan on or before
the Maturity Date.
Section 2.05 Agent's Right to Fund. Unless the Agent shall have received
notice from a Lender prior to 12:00 noon (Seattle, Washington time) on the date
of any Loan that such Lender will
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not make available to the Agent such Lender's Percentage Interest of the
requested borrowing, the Agent may assume that such Lender has made such funds
available to the Agent on the date of such Loans in accordance with Section 2.02
hereof and the Agent may, in reliance upon such assumption, make available to
the Borrower on such date a corresponding amount. If and to the extent that such
Lender shall not have so made such portion available to the Agent and if the
Agent shall have advanced such portion to the Borrower, such Lender and the
Borrower severally agree to pay to the Agent forthwith on demand such
corresponding amount, together with interest thereon for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent, at (a) in the case of the Borrower, the Applicable Interest
Rate (b) in the case of such Lender, the Federal Funds Rate. Any such repayment
by the Borrower shall be without prejudice to any rights it may have against the
Lender that has failed to make available its funds for any requested borrowing.
Section 2.06 Interest on Loans.
(a) General Provisions. The Borrower agrees to pay to Agent for the
account of each Lender interest on the unpaid principal amount of each Loan from
the date of such Loan until such Loan shall be due and payable at a per annum
rate equal to the Applicable Interest Rate, and, if default shall occur in the
payment when due of any such Loan, from the maturity of that Loan until it is
paid in full at a per annum rate equal to two percentage points (2%) above the
Base Rate (changing as the Base Rate changes). Accrued but unpaid interest on
each Loan accruing interest at an IBOR Rate shall be paid on the last day of
each Applicable Interest Period, on the date of any principal payment (to the
extent accrued on the principal amount paid), at the Maturity Date and,
additionally, in the case of such a Loan for which the Applicable Interest
Period is six months, on the day that is three months after the commencement of
such Applicable Interest Period. Accrued but unpaid interest on each Base Rate
Loan shall be paid on the last Business Day of each calendar quarter commencing
on March 31, 1997 and continuing on the last Business Day of each calendar
quarter thereafter and on the date of any principal payment (to the extent
accrued on the principal amount paid) and at the Maturity Date. Unpaid interest
accruing on amounts in default shall be payable on demand.
(b) Selection of Alternative Rate. The Borrower may, subject to the
requirements of this Section 2.06(b), on at least three (3) Business Days' prior
written notice elect to have interest accrue on any Loan or any portion thereof
at an IBOR Rate for an Applicable Interest Period. Such notice (herein, an
"Interest Rate Notice") shall be deemed delivered on receipt by Agent except
that an Interest Rate Notice received by the Agent
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after 10:00 a.m. (Seattle, Washington time) on any Business Day shall be deemed
to be received on the immediately succeeding Business Day. Such Interest Rate
Notice shall identify, subject to the conditions of this Section 2.06(b), the
Loan or portions thereof and the Applicable Interest Period which the Borrower
selects. Any such Interest Rate Notice shall be irrevocable and shall constitute
a representation and warranty by the Borrower that as of the date of such
Interest Rate Notice, the statements set forth in Article IV are true and
correct and that no Event of Default or Default has occurred and is continuing.
On receipt of such Interest Rate Notice, the Agent shall promptly notify each
Lender by telephone (confirmed promptly by telex or facsimile transmission) of
the information set forth in the Interest Rate Notice. Borrower's right to
select an IBOR Rate to apply to a Loan or any portion thereof shall be subject
to the following conditions: (i) the aggregate of all Loans or portions thereof
to accrue interest at a particular IBOR Rate for the same Applicable Interest
Period shall be an integral multiple of One Million Dollars ($1,000,000) and not
less than Two Million Dollars ($2,000,000); (ii) the Borrower shall not have
selected more than twelve (12) different IBOR Rates or Applicable Interest
Periods to be applicable to portions of the Loans at any one time; (iii) an IBOR
Rate may not be selected for any Loan or portion thereof which is already
accruing interest at an IBOR Rate unless such selection is only to become
effective at the maturity of the Applicable Interest Period then in effect; (iv)
the Agent or any Lender shall not have given notice pursuant to Section 2.06(d)
that the IBOR Rate selected by Borrower is not available; (v) no Default or
Event of Default shall have occurred and be continuing and (vi) if the Borrower
elects to have some portion (but less than all) of the Loans accrue interest at
a designated IBOR Rate, the Borrower shall select a portion of each Lender's
Loans to accrue interest at such rate in proportion to their respective
Percentage Interests. In the absence of an effective request for the application
of an IBOR Rate, the Loans or remaining portions thereof shall accrue interest
at the Adjusted Base Rate. Any Interest Rate Notice which specifies an IBOR Rate
but fails to identify an Applicable Interest Period shall be deemed to be a
request for the designated IBOR Rate for an Applicable Interest Period of one
(1) month. The Interest Rate Notice may be given with and contained in any
Required Notice of Borrowing. If the Borrower delivers an Interest Rate Notice
with any Required Notice of Borrowing for a Loan and the Borrower thereafter
declines to take such Loan or a condition precedent to the making of such Loan
is not satisfied or waived, Borrower shall indemnify the Agent and each Lender
for all losses and any costs which the Agent or any Lender may sustain as a
consequence thereof including, without limitation, the costs of redeployment of
funds at rates lower than the cost to the Lenders of such funds. A certificate
of the Agent or any Lender setting forth the amount due to it pursuant to this
subparagraph (b) and
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the basis for, and the calculation of, such amount shall, absent manifest error,
be conclusive evidence of the amount due pursuant to this subparagraph (b).
Payment of the amount owed shall be due within fifteen (15) days after the
Borrower's receipt of such certificate.
(c) Applicable Days for Computation of Interest. Computations of
interest accruing at an IBOR Rate shall be made on the basis of a year of three
hundred sixty (360) days, for the actual number of days (including the first day
but excluding the last day) occurring in the period for which such interest is
payable. Computations of interest accruing at an Adjusted Base Rate or at a rate
of interest applicable after default shall be made on the basis of a year of
three hundred sixty-five or three hundred sixty-six (365 or 366) days, as the
case may be, in each case, for the actual number of days (including the first
day but excluding the last day) occurring in the period for which such interest
is payable.
(d) Unavailable IBOR Rate. If any Lender determines that for any
reason fair and adequate means do not exist for establishing a particular IBOR
Rate or that accruing interest on any Loan at an IBOR Rate by such Lender has
become unlawful, such Lender may give notice of that fact to the Agent and the
Borrower and such determination shall be conclusive and binding absent manifest
error. After such notice has been given and until such Lender notifies the
Borrower and the Agent that the circumstances giving rise to such notice no
longer exist, such IBOR Rate shall no longer be available in respect of Loans.
Thereafter, any request by the Borrower to have interest accrue on a Loan at
such an IBOR Rate shall be deemed to be a request for interest to accrue at the
Adjusted Base Rate. If the circumstances giving rise to the notice described
herein no longer exist, the Lender shall notify the Borrower and Agent in
writing of that fact, and the Borrower shall then once again become entitled to
request that such an IBOR Rate apply to the Loans in accordance with Section
2.06(b) hereof.
Section 2.07 Compensation for Increased Costs. In the event that after the
date hereof any change occurs in any applicable law, regulation, guideline,
treaty or directive or interpretation thereof by any authority charged with the
administration or interpretation thereof, or any condition is imposed by any
authority after the date hereof or any change occurs in any condition imposed by
any authority on or prior to the date hereof which:
(a) subjects any Lender to any Tax, or changes the basis of taxation
of any payments to any Lender on account of principal of or interest on any IBOR
Loan, such Lender's Note (to the extent such Note evidences IBOR Loans) or other
amounts
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payable with respect to IBOR Loans (other than a change in the rate of tax based
solely on the overall net or gross income of such Lender); or
(b) imposes, modifies or determines applicable any reserve, deposit or
similar requirements against any assets held by, deposits with or for the
account of, or loans or commitments by, any office of any Lender in connection
with its IBOR Loans to the extent the amount of which is in excess of, or was
not applicable at the time of computation of, the amounts provided for in the
definition of such IBOR Rate; or
(c) affects the amount of capital required or expected to be
maintained by banks generally or corporations controlling banks and any Lender
determines the amount by which such Lender or any corporation controlling such
Lender is required or expected to maintain or increase its capital is increased
by, or based upon, the existence of this Agreement or of such Lender's Loans or
Commitment hereunder;
(d) imposes upon any Lender any other condition with respect to its
IBOR Loans or its obligation to make IBOR Loans;
which, as a result thereof, (i) increases the cost to any Lender of making or
maintaining its IBOR Loans or its Commitments hereunder, or (ii) reduces the net
amount of any payment received by any Lender in respect of its IBOR Loans
(whether of principal, interest, commitment fees or otherwise), or (iii)
requires any Lender to make any payment on or calculated by reference to the
gross amount of any sum received by it in respect of its IBOR Loans, in each
case by an amount which any such Lender in its sole judgment deems material,
then and in any such case the Borrower shall pay to the Agent for the account of
such Lender on demand such amount or amounts as will compensate such Lender (on
an after-tax basis) for any increased cost, deduction or payment actually
incurred or made by such Lender. The demand for payment by any Lender shall be
delivered to both the Agent and the Borrower and shall state the subjection or
change which occurred or the reserve or deposit requirements or other conditions
which have been imposed upon such Lender or the request, direction or
requirement with which it has complied, together with the date thereof, the
amount of such cost, reduction or payment and the manner in which such amount
has been calculated. The statement of any Lender as to the additional amounts
payable pursuant to this Section 2.07 shall, absent manifest error be conclusive
evidence of the amounts payable hereunder.
The protection of this Section 2.07 shall be available to each Lender
regardless of any possible contention of invalidity or inapplicability of the
relevant law, regulation, guideline, treaty, directive, condition or
interpretation thereof. In the
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event that the Borrower pays any Lender the amount necessary to compensate such
Lender for any charge, deduction or payment incurred or made by such Lender as
provided in this Section 2.07, and such charge, deduction or payment or any part
thereof is subsequently returned to such Lender as a result of the final
determination of the invalidity or inapplicability of the relevant law,
regulation, guideline, treaty, directive or condition, then such Lender shall
remit to the Borrower the amount paid by the Borrower which has actually been
returned to such Lender (together with any interest actually paid to Lender on
such returned amount), less such Lender's costs and expenses incurred in
connection with such governmental regulation or any challenge made by such
Lender with respect to its validity or applicability.
Section 2.08 Prepayments. Base Rate Loans may be repaid at any time without
penalty or premium. If a Loan (or portion thereof) accruing interest at an IBOR
Rate is paid prior to the end of the Applicable Interest Period a fee computed
in the manner set out in Schedule 2 shall be assessed and paid at the time of
such payment. Such fee shall apply in all circumstances where such a Loan (or
portion thereof) is paid prior to the end of the Applicable Interest Period,
regardless of whether such payment is voluntary, mandatory, or the result of the
Agent's or Lenders' collection efforts.
Section 2.09 Notes. The Loans shall be evidenced by promissory notes of the
Borrower substantially in the form of Exhibit A hereto, with appropriate
insertions, payable to the order of the Lenders, dated as of the date hereof,
and for each Lender in the face amount of such Lender's Commitment (the
"Notes"). Each Lender is hereby authorized to record the date and amount of
Loans it makes and the date and amount of each payment of principal and interest
thereon on a schedule annexed to its Note or maintained in connection therewith.
Any such recordation by any Lender shall constitute prima facie evidence of the
accuracy of the information so recorded; provided, however, that the failure to
make any such recordation or any error in any such recordation shall not affect
the obligations of the Borrower hereunder or under the Notes.
Section 2.10 Manner of Payments.
(a) All payments and prepayments of principal and interest on any Loan
and all other amounts payable hereunder by the Borrower to the Agent or any
Lender shall be made by paying the same in United States Dollars and in
immediately available funds to the Agent at its Commercial Loan Service Center,
Seattle, Washington not later than 10:00 o'clock a.m. (Seattle, Washington time)
on the date on which such payment or prepayment shall become due.
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(b) On each date when the payment of any interest is due hereunder or
under any Note (each, a "Due Date"), the Borrower covenants to maintain on
deposit in its ordinary checking account maintained at Bank of America Oregon,
an amount sufficient to pay such interest in full. The Borrower irrevocably
authorizes the Agent to deduct automatically all interest due on each such
interest payment date from such account. The Borrower agrees to execute such
other documents and instructions as may be reasonably necessary or desirable to
give effect to the terms of this Section 2.10(b). In addition, the Borrower
hereby authorizes the Agent and each Lender, if and to the extent any payment is
not promptly made pursuant to this Agreement or any other Loan Document, to
charge from time to time against any or all of the accounts of the Borrower with
the Agent or any Lender or any affiliate of the Agent or any Lender any amount
due hereunder or under any other Loan Document.
(c) Approximately ten (10) days prior to each Due Date, the Agent
shall give written notice (which may be by telegram, facsimile transmission,
cable or telex) of the amounts that will be due on such Due Date. The
calculation of the amounts due will be made on the assumption that no new
extensions of credit or payments will be made between the date of such notice
and the Due Date, and that there will be no changes in the applicable interest
rate. Notwithstanding the foregoing to the contrary, amounts due on any Due Date
shall be calculated in accordance with this Agreement and the failure of the
Agent to give notice as provided in this Section 2.10(c) shall not affect the
obligations of the Borrower hereunder or under any other Loan Document.
(d) Whenever any payment hereunder or under any other Loan Document
shall be stated to be due or whenever the last day of any interest period would
otherwise occur on a day other than a Business Day, such payment shall be made
and the last day of such interest period shall occur on the next succeeding
Business Day and such extension of time shall in such case be included in the
computation and payment of interest or facility fees, as the case may be, unless
such extension would cause such payment to be made or the last day of such
interest period to occur in the next following calendar month, in which case
such payment shall be due and the last day of such interest period shall occur
on the next preceding Business Day.
(e) Any payment made by the Borrower hereunder shall be applied first,
against fees, expenses and indemnities due hereunder; second, against interest;
and thereafter, against Loan principal.
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Section 2.11 Fees.
(a) Unused Commitment Fees. At all times prior to the Maturity Date,
Borrower agrees to pay to the Agent for the account of the Lenders in proportion
to their Percentage Interests an unused commitment fee computed daily at the
rate of .30% per annum on the unused portion of the Total Commitment payable in
arrears on the last Business Day of each calendar quarter, on the Maturity Date,
and on demand after default. Computations of unused commitment fees shall be
made on the basis of a year of three hundred sixty (360) days for the actual
number of days (including the first day but excluding the last day) occurring in
the period for which such fees are payable.
(b) Loan Fee. On the date of this Agreement, the Borrower agrees to
pay to the Agent for the account of the Lenders a participation fee which shall
be in a total amount and shall be allocated among the Lenders as set forth on
the attached Schedule 3.
(c) Agency Fees. The Borrower shall pay to the Agent, for its own
account, agency fees in such amounts and at such times as are set forth in that
certain letter agreement dated November 27, 1996, by and between the Agent, the
Borrower, and BA Securities, Inc. On the date of this Agreement, the Borrower
shall also pay to BancAmerica Securities, Inc. an arrangement fee in accordance
with the terms of such letter agreement.
Section 2.12 Sharing of Payments, Etc. Each borrowing of Loans from the
Lenders under Section 2.01 will be made pro rata in accordance with each
Lender's Percentage Interest. Each payment and prepayment of the Loans and each
payment of interest on the Loans will be made pro rata to each Lender in
accordance with its Percentage Interest. If any Lender shall obtain any payment
in respect of the Borrower's obligations under this Agreement or the Notes
(whether voluntary or involuntary, through the exercise of any right of set-off
or otherwise) in excess of the share which it would have been entitled to
receive had such payment been made to the Agent, such Lender shall forthwith
notify the Agent and purchase from the other Lenders such participations in the
Loans made by them as shall be necessary to cause such purchasing Lender to
share the excess payment ratably with each of them, but if any of such excess
payment is afterward recovered from such purchasing Lender, the purchase shall
be rescinded and the purchase price restored, without interest, to the extent of
such recovery. The Borrower authorizes the purchase of such participations and
agrees that any Lender so purchasing a participation from another Lender may
exercise all its rights to payment (including the right of set off) with respect
to such participation as fully as if such Lender were the
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direct creditor of the Borrower in the amount of such
participation.
Section 2.13 Withholding Taxes. If the Borrower shall be required by law to
deduct or withhold any Taxes or other amounts from or in respect of any sum
payable hereunder to any Lender or the Agent, then:
(a) the sum payable shall be increased as necessary so that, after
making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section), such
Lender or the Agent, as the case may be, receives and retains an amount equal to
the sum it would have received and retained had no such deductions or
withholdings been made;
(b) the Borrower shall make such deductions and withholdings;
(c) the Borrower shall pay the full amount deducted or withheld to the
relevant taxing authority or other authority in accordance with applicable law;
and
(d) the Borrower shall also pay to each Lender or the Agent for the
account of such Lender, at the time interest is paid, such further amounts as
the respective Lender specifies as necessary to preserve the after-tax yield the
Lender would have received if such taxes or other withholding amounts had not
been imposed.
ARTICLE III
CONDITIONS OF LENDING
---------------------
The obligations of each Lender to deliver its Loan proceeds to the Agent
and the obligation of the Agent to disburse such proceeds to the Borrower are
subject to the fulfillment of the following conditions:
Section 3.01 Notice of Borrowing, Promissory Notes, Etc. The Agent shall
have received the Required Notice of Borrowing and the Security Agreement and
the Lenders shall have received their Notes, in each case duly executed and
delivered by the Borrower.
Section 3.02 Corporate Authority. The Agent shall have received in form and
substance satisfactory to it a certified copy of a resolution adopted by the
Board of Directors of the Borrower authorizing the execution, delivery and
performance of the Loan Documents together with evidence of the authority and
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specimen signatures of the persons who have signed such Loan Documents and such
other evidence of corporate authority as the Agent or any Lender shall
reasonably require.
Section 3.03 Legal Opinion. The Agent and the Lenders shall have received a
written legal opinion in form and substance satisfactory to the Agent addressed
to the Agent and the Lenders, of counsel for the Borrower, who shall be selected
by the Borrower and approved by the Agent.
Section 3.04 Defaults, Etc. At the date of each Loan no Default or Event of
Default shall have occurred and be continuing or will have occurred as a result
of the making of the Loan; and the representations and warranties of the
Borrower in Article IV shall be true on and as of such date.
Section 3.05 Perfected Security Interests. The Agent shall have received
evidence satisfactory to it that the security interests created by the Security
Agreement have been duly perfected by the filing of all Financing Statements and
the taking of all such other or additional acts as the Agent may deem necessary
or advisable to create a valid and perfected lien in the Collateral enforceable
against all third parties in all jurisdictions to secure all obligations of the
Borrower to the Agent and the Lenders under this Agreement or the other Loan
Documents. The Agent shall have also received such evidence as it may require
that its security interests in the Collateral have priority over any and all
other security interests or other Liens therein except purchase money Liens
covering only assets purchased by the Borrower in the ordinary course of
business and that the Collateral is free and clear of all Liens, except as
permitted by this Agreement.
Section 3.06 Payment of Amounts Under Prior Credit Agreement. All accrued
interest, fees and other amounts owing under the Prior Credit Agreement (as such
term is defined in the "Recitals" hereto) other than the outstanding principal
balance of the loans made thereunder shall have been fully paid prior to the
date of this Agreement.
Section 3.07 Payment of Fees. The Borrower shall have paid all accrued and
unpaid fees, costs and expenses due hereunder and under that certain letter
agreement referred to in Section 2.11(c) hereof.
Section 3.08 Other Information. The Agent and each Lender shall have
received such other statements, opinions, certificates, documents and
information with respect to the matters contemplated by this Agreement as it may
reasonably request.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Agent and each Lender as
follows:
Section 4.01 Corporate Existence and Power. The Borrower is a corporation
duly incorporated, validly existing and in good standing under the laws of the
state of Oregon. The Borrower is duly qualified to do business in each other
jurisdiction where the nature of its activities or the ownership of its
properties requires such qualification. The Borrower has full corporate power,
authority and legal right to carry on its business as presently conducted, to
own and operate its properties and assets, and to execute, deliver and perform
the Loan Documents.
Section 4.02 Borrower's Corporate Authorization. The execution, delivery
and performance by the Borrower of this Agreement and the other Loan Documents
and any borrowing hereunder or thereunder have been duly authorized by all
necessary corporate action of the Borrower, do not require any shareholder
approval or the approval or consent of any trustee or the holders of any
Indebtedness of the Borrower, except such as have been obtained (certified
copies thereof having been delivered to the Agent), do not contravene any law,
regulation, rule or order binding on it or its Articles of Incorporation or
Bylaws and do not contravene the provisions of or constitute a default under any
indenture, mortgage, contract or other agreement or instrument to which the
Borrower is a party or by which the Borrower or any of its properties may be
bound or affected.
Section 4.03 Government Approvals, Etc. No Government Approval or filing or
registration with any Governmental Authority is required for the execution,
delivery and performance by the Borrower of the Loan Documents or in connection
with any of the transactions contemplated thereby, except such as have been
heretofore obtained and are in full force and effect (certified copies thereof
having been delivered to the Agent).
Section 4.04 Binding Obligations, Etc. This Agreement has been duly
executed and delivered by the Borrower and constitutes, and the other Loan
Documents when duly executed and delivered will constitute, the legal, valid and
binding obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms.
Section 4.05 Litigation. Except as reflected in the financial statements
referred to in Section 4.06, there are no actions, proceedings, investigations,
or claims against or
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affecting the Borrower now pending before any court, arbitrator or Governmental
Authority (nor to the knowledge of the Borrower has any thereof been threatened
nor does any basis exist therefor) which if determined adversely to the Borrower
would be likely to have a material adverse effect on (a) the business,
operations or financial condition of the Borrower; or (b) the ability of the
Borrower to perform its obligations under this Agreement and the other Loan
Documents.
Section 4.06 Financial Condition. The balance sheet of the Borrower as at
September 30, 1996, and the related statements of income and retained earnings
for the period then ended, copies of which have been furnished to the Agent and
each Lender, fairly present the financial condition of the Borrower as at such
date, all determined in accordance with GAAP. The Borrower did not have on such
date any contingent liabilities for Taxes, unusual forward or long-term
commitments or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in the balance
sheet and in the related notes. Since the date of such financial statements
there has been no material adverse change in the financial condition,
operations, or business of the Borrower.
Section 4.07 Title and Liens. The Borrower has good and marketable title to
each of the properties and assets reflected in the balance sheet referred to in
Section 4.06 (except such as have been since sold or otherwise disposed of in
the ordinary course of business). No assets or revenues of the Borrower are
subject to any Lien except as permitted by this Agreement. All properties of the
Borrower and its use thereof comply in all material respects with applicable
zoning and use restrictions and with applicable laws and regulations relating to
health, safety and the environment. Without limiting the foregoing, the Borrower
is in material compliance with all laws and regulations relating to pollution,
hazardous substances and environmental control in all jurisdictions in which the
Borrower is doing business. The Borrower conducts in the ordinary course of
business a review of the effect of existing laws pertaining to the environment
and existing claims advanced under or in respect of environmental laws on its
business, operations and properties, and, as a result thereof, the Borrower has
reasonably concluded that such environmental laws and claims could not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the financial condition, operations, or business of the
Borrower.
Section 4.08 Taxes. The Borrower has filed all tax returns and reports
required of it, has paid all Taxes which are due and payable, and has provided
adequate reserves for payment of any Tax whose payment is being contested. The
charges, accruals and reserves on the books of the Borrower in respect of Taxes
for all
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fiscal periods to date are accurate. There are no questions or disputes between
the Borrower and any Governmental Authority with respect to any Taxes except as
disclosed in the balance sheet referred to in Section 4.06 or otherwise
disclosed to the Agent in writing prior to the date of this Agreement.
Section 4.09 Laws, Orders; Other Agreements. The Borrower is not in
violation of or subject to any contingent liability on account of any laws,
statutes, rules, regulations and orders of any Governmental Authority and is not
in material breach of or default under any agreement to which it is a party or
which is binding on it or any of its assets.
Section 4.10 Lien Priority. On the date of any Loan (i) Financing
Statements will have been duly filed in all places where filing is necessary,
and all other or additional acts will have been taken as are necessary to
perfect the Agent's security interest in the Collateral; (ii) the Security
Agreement constitutes a valid and perfected lien in the Collateral enforceable
against all third parties in all jurisdictions to secure all obligations of the
Borrower to the Agent and the Lenders under this Agreement or any other Loan
Documents; and (iii) the Agent's security interest in the Collateral has
priority over any and all other security interests or other Liens therein except
purchase money Liens on assets purchased by the Borrower in the ordinary course
of business and the Collateral is free and clear of all Liens except for Liens
permitted hereunder.
Section 4.11 Federal Reserve Regulations. The Borrower is not engaged
principally or as one of its important activities in the business of extending
credit for the purpose of purchasing or carrying any margin stock (within the
meaning of Federal Reserve Regulation U), and no part of the proceeds of any
Loan will be used to purchase or carry any such margin stock or to extend credit
to others for the purpose of purchasing or carrying any such margin stock or for
any other purpose that violates the applicable provisions of any Federal Reserve
Regulation. The Borrower will furnish to the Agent or any Lender on request a
statement conforming with the requirements of Regulation U.
Section 4.12 ERISA.
(a) The present value of all benefits vested under all Pension Plans
did not, as of the most recent valuation date of such Pension Plans, exceed the
value of the assets of the Pension Plans allocable to such vested benefits by an
amount which would represent a potential material liability of the Borrower or
affect materially the ability of the Borrower to perform the Loan Documents.
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(b) No Plan or trust created thereunder, or any trustee or
administrator thereof, has engaged in a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) which could
subject such Plan or any other Plan, any trust created thereunder, or any
trustee or administrator thereof, or any party dealing with any Plan or any such
trust to the tax or penalty on prohibited transactions imposed by Section 502 of
ERISA or Section 4975 of the Code.
(c) No Pension Plan or trust has been terminated, except in accordance
with the Code, ERISA, and the regulations of the Internal Revenue Service and
the PBGC as applicable to solvent plans in which benefits of participants are
fully protected. No "reportable event" as defined in Section 4043 of ERISA has
occurred for which notice has not been waived or for which alternative notice
procedures are permitted.
(d) No Pension Plan or trust created thereunder has incurred any
"accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA) whether or not waived, since the effective date of ERISA.
(e) The required allocations and contributions to Pension Plans will
not violate Section 415 of the Code.
(f) The Borrower has no withdrawal liability to any trust created
pursuant to a multi-employer pension or benefit plan nor would it be subject to
any such withdrawal liability in excess of One Million Dollars ($1,000,000) if
it withdrew from any such plan or if its participation therein were otherwise
terminated.
Section 4.13 Patents, Licenses, Franchises. The Borrower owns or possesses
all the patents, trademarks, service marks, trade names, copyrights, licenses,
franchises, permits and rights with respect to the foregoing necessary to own
and operate its properties and to carry on its business as presently conducted
and presently planned to be conducted without conflict with the rights of others
except as disclosed in writing to the Agent prior to the date of this Agreement.
Section 4.14 Not Investment Company, Etc. The Borrower is not now, and
after the application by the Borrower of the proceeds of any Loan will not be,
subject to regulation under the Investment Company Act of 1940, the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Interstate
Commerce Act, any state public utilities code or any federal or state statute or
regulation limiting its ability to incur Indebtedness.
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Section 4.15 Insurance. The properties of the Borrower are insured with
financially sound and reputable insurance companies which are not affiliates of
the Borrower, in such amounts, with such deductibles and covering such risks as
are customarily carried by companies engaged in similar businesses and owning
similar properties in localities where the Borrower operates.
Section 4.16 Representations as a Whole. This Agreement, the other Loan
Documents, the financial statements referred to in Section 4.06, and all other
instruments, documents, certificates and statements furnished to the Agent or
any Lender by the Borrower, taken as a whole, do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements contained herein or therein not misleading. The
Borrower has disclosed to the Lenders in writing any and all facts which have a
material adverse effect on the business, operations or financial condition of
the Borrower or the ability of the Borrower to perform its obligations under the
Loan Documents.
ARTICLE V
AFFIRMATIVE COVENANTS
---------------------
So long as any Lender shall have any Commitment hereunder and, until
payment in full of each Loan and the Notes and performance of all other
obligations of the Borrower under this Agreement and the other Loan Documents,
the Borrower agrees to do all of the following unless the Agent (with the
consent of the Majority Lenders) shall otherwise consent in writing.
Section 5.01 Use of Proceeds. The Borrower shall use the proceeds of the
Loans for interim funding of new store growth and acquisitions and for its
general working capital needs.
Section 5.02 Payment. The Borrower will pay the principal of and interest
on the Loans in accordance with the terms of this Agreement and the Notes and
will pay when due all other amounts payable by the Borrower hereunder and under
any other Loan Document.
Section 5.03 Preservation of Corporate Existence, Etc. The Borrower will
preserve and maintain its corporate existence, rights, franchises and privileges
in the jurisdiction of its formation and will qualify and remain qualified as a
foreign corporation in each jurisdiction where such qualification is necessary
or desirable in view of its business and operations or the ownership of its
properties.
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Section 5.04 Visitation Rights. At any reasonable time, and from time to
time, the Borrower will permit the Agent or any Lender to examine and make
copies of and abstracts from its records and books of account, to visit its
properties and to discuss the affairs, finances and accounts of the Borrower
with any of its officers, directors or employees.
Section 5.05 Keeping of Books and Records. The Borrower will keep adequate
records and books of account in which complete entries will be made, in
accordance with GAAP, reflecting all of its financial transactions.
Section 5.06 Maintenance of Property, Etc. The Borrower will maintain and
preserve all of its properties in good working order and condition, ordinary
wear and tear excepted, and will from time to time make all needed repairs,
renewals, or replacements so that the efficiency of such properties shall be
fully maintained and preserved.
Section 5.07 Compliance With Laws, Etc. The Borrower will comply in all
material respects with all laws, regulations, rules, and orders of Governmental
Authorities, except any thereof whose validity is being contested in good faith
by appropriate proceedings upon stay of execution of the enforcement thereof and
with provision having been made to the satisfaction of the Agent for the payment
of any fines, charges, penalties or other costs in respect thereof in the event
the contest is determined adversely to the Borrower. Without limiting the
foregoing, Borrower shall conduct its operations and keep and maintain its
property in compliance with all environmental laws, regulations, rules and
orders except to the extent that noncompliance would not result in a material
adverse effect on the business, finances or operations of the Borrower.
Section 5.08 Other Obligations. The Borrower will pay and discharge all
Indebtedness, Taxes, and other obligations for which the Borrower is liable or
to which its income or property is subject and all claims for labor and
materials or supplies which, if unpaid, might become by law a Lien upon assets
of the Borrower, except (a) any thereof whose validity or amount is being
contested in good faith by appropriate proceedings upon stay of execution of the
enforcement thereof and with provision having been made to the satisfaction of
the Agent for the payment thereof in the event the contest is determined
adversely to the Borrower; and (b) any trade payables, arising from the purchase
of inventory, which are paid in accordance with industry practice and prior to
the time any collection proceeding is commenced by any vendor.
Section 5.09 Insurance. The Borrower will keep in force upon all of its
properties and operations policies of insurance
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carried with responsible companies in such amounts and covering all such risks
as shall be customary in the industry and as shall be reasonably satisfactory to
the Agent. From time to time, on request, the Borrower will furnish to the Agent
certificates of insurance or, at Agent's request, duplicate policies evidencing
such coverage.
Section 5.10 Financial Information. The Borrower will deliver to the Agent
and the Lenders:
(a) Annual Audited Financial Statements. As soon as available and in
any event within ninety (90) days after the end of each fiscal year of the
Borrower, the balance sheet of the Borrower as of the end of such fiscal year
and the related statement of revenue and expenses, statement of shareholder's
equity and statement of cash flow for such year, accompanied by the audit report
thereof by independent certified public accountants selected by the Borrower and
approved by the Agent (which approval shall not be unreasonably withheld or
delayed, and the Agent's consent to Price Waterhouse L.L.P. being hereby given)
which report shall be prepared in accordance with GAAP and shall not be
qualified by reason of restricted or limited examination of any material portion
of the Borrower's records and shall contain no disclaimer of opinion.
(b) Quarterly Unaudited Financial Statements. As soon as available and
in any event within forty-five (45) days after the end of each of the first
three fiscal quarters of the Borrower, the unaudited balance sheet and statement
of revenues and expenses, statement of shareholder's equity and statement of
cash flow of the Borrower as of the end of such fiscal quarter (including the
fiscal year to the end of such fiscal quarter), accompanied by an Officer's
Certificate to the effect that such unaudited balance sheet and related
statements have been prepared in accordance with GAAP and present fairly the
financial position and results of operations of the Borrower as of the end of
and for such fiscal quarter and that since the fiscal year-end report referred
to in clause (a) there has been no material adverse change in the financial
condition or operations of the Borrower as shown on the balance sheet as of said
date.
(c) Quarterly Compliance Certificates. As soon as available and in any
event within sixty (60) days after the close of each of the first three fiscal
quarters of the Borrower and within one hundred twenty (120) days after the
close of each of the Borrower's fiscal years, a compliance certificate of
Borrower in form reasonably acceptable to Agent that as of the close of such
fiscal quarter no Default or Event of Default had occurred and was continuing,
and, further, setting forth calculations demonstrating compliance as of the end
of such fiscal quarter
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with the financial covenants set forth in Sections 5.13 through 5.16 and
Sections 6.02, 6.04, 6.06 and 6.07 hereof.
(d) Quarterly Store Financial Statements. As soon as available and in
any event within sixty (60) days after the close of each of the Borrower's
fiscal quarters, the unaudited statement of financial performance for the
Borrower's stores for such fiscal quarter together with same store sales
comparisons accompanied by an Officer's Certificate all in form reasonably
acceptable to Agent.
(e) Annual Budget; Financial Projections. As soon as available and in
any event within ninety (90) days after the close of each of the Borrower's
fiscal years (after the fiscal year ending in 1996), the Borrower's annual
operating budget and financial projections (presented in a quarterly format) for
the succeeding fiscal year in form reasonably acceptable to the Agent.
(f) Shareholder, SEC and Government Reports. As soon as available, all
reports sent by the Borrower to its shareholders and all quarterly and annual
reports filed by the Borrower with the Securities and Exchange Commission and
each other Governmental Authority having jurisdiction over the Borrower. Without
limiting the foregoing, the Borrower shall provide its 10-K's and 10-Q's to the
Agent and the Lenders on a date not later than ninety (90) days after the fiscal
year end and forty-five (45) days after the end of each of the first three
fiscal quarters, respectively.
(g) Other Information. All other statements, reports and other
information as the Agent or any Lender may reasonably request concerning the
financial condition and business affairs of the Borrower.
Section 5.11 Notification. Promptly after learning thereof, the Borrower
will notify the Agent and Lenders of (a) the details of any action, proceeding,
investigation or claim against or affecting the Borrower, instituted before any
court, arbitrator or Governmental Authority or, to the Borrower's knowledge
threatened to be instituted, which, if determined adversely would be likely to
have a material adverse effect on the business, operations or financial
condition of the Borrower; (b) any substantial dispute between the Borrower and
any Governmental Authority; (c) any labor controversy which has resulted in or,
to the Borrower's knowledge, threatens to result in a strike which would
materially affect the business operations of the Borrower; (d) if the Borrower
or any member of the Controlled Group gives or is required to give notice to the
PBGC of any "reportable event" (as defined in subsections (b)(1), (2), (5) or
(6) of ss. 4043 of ERISA) with respect to any Plan (or the
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Internal Revenue Service gives notice to the PBGC of any "reportable event" as
defined in subsection (c)(2) of ss. 4043 of ERISA and Borrower obtains knowledge
thereof) which might constitute grounds for a termination of such Plan under
Title IV of ERISA, or knows that the plan administrator of any Plan has given or
is required to give notice of any such reportable event, the notice of such
reportable event given or required to be given to the PBGC; and (e) the
occurrence of any Default or Event of Default.
Section 5.12 Additional Payments; Additional Acts. From time to time and
upon demand by the Agent, the Borrower will (a) pay or reimburse Agent and the
Lenders for all Taxes imposed on this Agreement and any other Loan Document and
for all expenses including reasonable out-of-pocket legal fees (including
allocated charges of internal legal counsel) incurred in connection with the
enforcement by judicial proceedings or otherwise of any of the rights of the
Agent or the Lenders under this Agreement or any other Loan Document, (b) pay or
reimburse the Agent for all expenses, including reasonable legal fees, actually
incurred by the Agent in connection with the preparation of this Agreement and
the other Loan Documents, the making of any Loan or the perfection of the
security interests created by the Security Agreement; (c) obtain and promptly
furnish to the Agent evidence of all such Government Approvals as may be
required to enable the Borrower to comply with its obligations under the Loan
Documents; and (d) execute and deliver all such other instruments and perform
all such other acts as the Agent or any Lender may reasonably request to carry
out the transactions contemplated by this Agreement and the other Loan
Documents.
Section 5.13 Net Worth. The Borrower shall maintain at all times a Net
Worth equal to or greater than the sum of (a) Two Hundred Twenty Million Dollars
($220,000,000), and (b) seventy-five percent (75%) of the cumulative Net Income
of the Borrower for all fiscal quarters ended after September 30, 1996, in which
the Borrower's Net Income was greater than zero, and (c) one hundred percent
(100%) of the amount, if any, by which the shareholders' equity of the Borrower
has increased since September 30, 1996 as a result of the issuance of common
stock or the conversion of debt securities into common stock in connection with
the acquisition of another company (or some or all of the assets of another
company), and (d) ninety percent (90%) of the amount, if any, by which the
shareholders' equity of the Borrower has increased since September 30, 1996 as a
result of all other issuances of common stock or conversions of debt securities
into common stock.
Section 5.14 Fixed Charge Coverage Ratio. At the end of each fiscal quarter
of the Borrower, the Borrower shall maintain a Fixed Charge Coverage Ratio of
not less than 2.5 to 1.0. As
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used herein, "Fixed Charge Coverage Ratio" means, for any period, the ratio of
(i) EBITDA of the Borrower for the preceding four consecutive fiscal quarters
less cash income tax expense during such period; less thirty percent (30%) of
all revenues received from the rental of Rental Items during such period; and
plus all lease expense (other than the rent and other obligations owing in
respect of Borrower's lease of stores) for such period to (ii) the sum of all
interest expense for such period; the current portion of any Funded Debt of the
Borrower (determined in accordance with GAAP) on the last date of such period;
and all lease expense for such period (other than the rent and other obligations
owing in respect of Borrower's lease of stores).
Section 5.15 Funded Debt to Cash Flow Ratio. The Borrower shall maintain
for each period of four consecutive fiscal quarters a ratio of Funded Debt to
Cash Flow of no greater than:
Period Ratio
------ -----
From the date hereof through and 2.50 to 1
including the four consecutive fiscal
quarters ending December 31, 1997
For the four consecutive fiscal 2.00 to 1
quarters ending March 31, 1998 and
thereafter
As used herein, "Cash Flow" shall mean for any four quarter period, EBITDA for
such period less thirty percent (30%) of all revenues received from the rental
of Rental Items during such period plus the proceeds from sales of used Rental
Items for such period to the extent that such sales proceeds are not already
included in EBITDA for such period.
Section 5.16 Average Quarterly Per Store Revenue. The Borrower shall
maintain for each fiscal quarter an Average Quarterly Per Store Revenue of
$160,000 for stores opened by the Borrower during the four consecutive fiscal
quarters then ended, and an Average Quarterly Per Store Revenue of $185,000 for
all other stores of the Borrower. As used herein "Average Quarterly Per Store
Revenue" means, for any fiscal quarter of the Borrower, and for any
classification of the Borrower's stores, the total revenue of the Borrower
derived from such stores (excluding "Hollywood Video Express" locations) divided
by the time-weighted average number of such stores of the Borrower open during
such fiscal quarter.
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ARTICLE VI
NEGATIVE COVENANTS
------------------
So long as any Lender shall have any Commitment hereunder and until payment
in full of each Loan and the Notes and performance of all other obligations of
the Borrower under this Agreement and the other Loan Documents, the Borrower
agrees that it will not do any of the following unless the Agent (with the
consent of the Majority Lenders) shall otherwise consent in writing.
Section 6.01 Liquidation, Merger, Sale of Assets. The Borrower shall not
merge (except mergers where the Borrower is the surviving entity) or liquidate,
dissolve or enter into any consolidation, joint venture, partnership or other
combination nor sell, lease or dispose of all or any portion of its assets other
than sales of inventory in the ordinary course of business.
Section 6.02 Funded Debt. The Borrower shall not create, incur or become
liable for any Funded Debt except (a) the Loans, (b) existing Funded Debt
reflected in the balance sheets referred to in Section 4.06, (c) Funded Debt
incurred in the acquisition of Rental Items to the extent incurred in the
ordinary course of Borrower's business and secured solely by a purchase money
Lien on the Rental Items so acquired and (d) additional Funded Debt not
exceeding at any one time an amount equal to five percent (5%) of the Borrower's
Net Worth.
Section 6.03 Guaranties, Etc. The Borrower shall not assume, guaranty,
endorse or otherwise become directly or contingently liable for, nor obligated
to purchase, pay or provide funds for payment of, any obligation or Indebtedness
of any other person, except by endorsement of negotiable instruments for deposit
or collection or by similar transaction in the ordinary course of business.
Section 6.04 Liens. The Borrower shall not create, assume or suffer to
exist any Lien on any of its assets, except (a) existing Liens reflected in the
balance sheets referred to in Section 4.06, or otherwise previously disclosed to
the Agent and Lenders in writing, (b) Liens in favor of the Agent under the
Security Agreement; (c) purchase money Liens covering videotapes or videogames
purchased by the Borrower in the ordinary course of business; (d) Liens securing
Indebtedness under Capital Leases; and (e) additional Liens which do not at any
one time secure Indebtedness exceeding an amount equal to five percent (5%) of
the Borrower's Net Worth.
Section 6.05 Location of Inventory. The Borrower will not move the location
of its inventory except in the ordinary course
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of its business and will not move its inventory to any location outside of the
United States.
Section 6.06 Investments. The Borrower shall not make or permit to remain
outstanding any loan or advance to any person or purchase or otherwise acquire
the capital stock, shares, voting trust certificates, bonds, debentures, notes
or instruments or other securities or evidences of indebtedness or obligations
of or any interest in or make any capital contribution to any person, except
that Borrower may:
(a) Own, purchase or acquire (i) time deposits maturing within one
year at commercial banks organized or licensed to conduct a banking business
under the laws of the United States of America or any state thereof having
capital, surplus and undivided profits of not less than One Hundred Million
Dollars ($100,000,000); (ii) marketable general obligations of the United States
or a state thereof or marketable obligations fully guaranteed by the United
States; and (iii) short-term commercial paper with the highest rating of a
generally recognized rating service;
(b) Subject to Section 6.02, own, purchase or acquire stock,
obligations or securities of any person (other than debt securities or
obligations of any subsidiary of the Borrower) provided, however, that the
purchase price or acquisition price (including any assumption of Indebtedness in
connection with such purchase or acquisition) of all stock, obligations or
securities purchased or acquired by the Company after the date hereof, in the
aggregate, shall not exceed an amount equal to (a) twelve and one-half percent
(12.5%) of the Borrower's Net Worth (determined as of the date of each such
purchase or acquisition) less (b) the purchase or acquisition price paid or to
be paid in connection with all Company Asset Acquisitions entered into by the
Borrower after the date hereof; and
(c) Make or permit to remain outstanding loans to affiliates,
officers, stockholders or employees provided, however, that all loans made or
permitted to remain outstanding pursuant to this Section 6.06(c) shall not, in
the aggregate, exceed at any one time outstanding the sum of Five Hundred
Thousand Dollars ($500,000).
Section 6.07 Operating Lease Obligations. The Borrower shall not create or
suffer to exist any obligations for the payment of rent for any property under
any operating lease or agreement to lease, (a) except for rent due in respect of
Borrower's lease of its stores and (b) except for rent due under operating
leases (other than leases for stores) entered into in the ordinary course of
business where the aggregate undiscounted
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rental obligations (calculated on the assumption that each such lease continues
until its stated termination date and without giving effect to any renewal
option unless such option has been exercised) for all such leases outstanding at
any time does not exceed at such time an amount equal to ten percent (10%) of
the Borrower's Net Worth.
Section 6.08 Company Asset Acquisitions. The Borrower shall not enter into
any Company Asset Acquisition where the purchase or acquisition price of the
assets (including any assumption of Indebtedness in connection with such
purchase or acquisition) when taken together with (a) the purchase or
acquisition price paid or to be paid in connection with all other Company Asset
Acquisitions entered into by the Borrower since the date of this Agreement; and
(b) the purchase or acquisition price of all stock, obligations or securities
purchased or acquired by the Borrower after the date of this Agreement, would
exceed an amount equal to twelve and one-half percent (12.5%) of the Borrower's
Net Worth (determined as of the date of such Company Asset Acquisition). As used
herein, "Company Asset Acquisition" shall mean the purchase or acquisition in
bulk (or the agreement to purchase or acquire in bulk) of some or all of the
assets of a person engaged in a business similar to the business of the
Borrower.
Section 6.09 Limitations on Prepayment of Subordinated Debt. The Borrower
shall not make any payments on any Funded Debt where the payment of such Funded
Debt has been subordinated in whole or in part to the payments due to Lenders
hereunder or to payments due in respect of any other Indebtedness unless the
payments on such subordinated Funded Debt are (a) expressly permitted under the
terms of any applicable subordination or comparable agreement; (b) expressly
permitted by the terms of any agreement or instrument evidencing the
subordinated Funded Debt; and (c) due and payable under the terms of the
agreements or instruments evidencing the subordinated Funded Debt.
Section 6.10 ERISA Compliance. Neither Borrower nor any member of the
Controlled Group nor any Plan of any of them will (a) engage in any "prohibited
transaction" (as such term is defined in ss. 406 of ERISA or ss. 4975 of the
Code; (b) incur any "accumulated funding deficiency" (as such term is defined in
ss. 302 of ERISA) whether or not waived; (c) terminate any Pension Plan in a
manner which could result in the imposition of a Lien on any property of
Borrower or any member of the Controlled Group pursuant to ss. 4068 of ERISA; or
(d) violate state or federal securities laws applicable to any Plan.
Section 6.11 Transactions with Affiliates. The Borrower shall not enter
into any transaction with any affiliate of the Borrower except upon fair and
reasonable terms no less favorable
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to the Borrower than would obtain in a comparable arm's-length transaction with
a person not an affiliate of the Borrower.
Section 6.12 Change in Business. The Borrower shall not engage in any
material line of business substantially different from those lines of business
carried on by the Borrower on the date hereof.
Section 6.13 Accounting Change. The Borrower shall maintain a fiscal year
ending on December 31 and shall not make any significant change in accounting
policies or reporting practices other than changes required by GAAP or otherwise
required by law.
ARTICLE VII
EVENTS OF DEFAULT
-----------------
Section 7.01 Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default" hereunder.
(a) Loan Payment Default. The Borrower shall fail to pay when due any
amount of principal of or interest on any Loan; or
(b) Other Payment Default. The Borrower shall fail to pay any other
amount payable by it hereunder or under any Loan Document and such failure shall
remain unremedied for five (5) days; or
(c) Breach of Warranty. Any representation or warranty made or deemed
made by the Borrower under or in connection with this Agreement, the other Loan
Documents, or other statements executed in connection herewith or therewith
shall prove to have been incorrect in any material respect when made or deemed
made; or
(d) Breach of Certain Covenants. The Borrower shall fail to perform or
observe any covenant set forth in Sections 5.11(e), 5.13 through 5.16 and 6.01
through 6.13 hereof or Sections 6 and 9 of the Security Agreement; or
(e) Breach of Other Covenants. The Borrower shall fail to perform or
observe any other covenant, obligation or term of this Agreement or any other
Loan Document and such failure shall remain unremedied for thirty (30) days
after written notice thereof shall have been given to the Borrower by the Agent;
or
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(f) Material Adverse Changes; Extraordinary Situation. An event shall
occur which results in a material adverse change in the Borrower's financial
condition or operations or an extraordinary situation shall occur which gives
the Lenders reasonable grounds to believe that the Borrower may not, or will be
unable to, perform or observe in the normal course its obligations under the
Loan Documents; or
(g) Cross-default. The Borrower shall fail (i) to pay when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) any Indebtedness in excess of Two Million Dollars ($2,000,000) or any
interest or premium thereon and such failure shall continue after the applicable
grace period, if any, specified in the agreement or instrument relating to such
Indebtedness, or (ii) to perform any term or covenant on its part to be
performed under any agreement or instrument relating to any such Indebtedness
and required to be performed and such failure shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such failure to perform is to accelerate or to legally and in
accordance with the applicable documents permit the acceleration of the maturity
of such Indebtedness; provided, however, mere allegations of a default by the
Borrower under any such agreement or instrument shall not, without more, be an
Event of Default hereunder; or
(h) Voluntary Bankruptcy, Etc. The Borrower shall: (i) file a petition
seeking relief for itself under Title 11 of the United States Code, as now
constituted or hereafter amended, or file an answer consenting to, admitting the
material allegations of or otherwise not controverting, or fail timely to
controvert a petition filed against it seeking relief under Title 11 of the
United States Code, as now constituted or hereafter amended; or (ii) file such
petition or answer with respect to relief under the provisions of any other now
existing or future applicable bankruptcy, insolvency, or other similar law of
the United States of America or any state thereof or of any other country or
jurisdiction providing for the reorganization, winding-up or liquidation of
corporations or an arrangement, composition, extension or adjustment with
creditors; or
(i) Involuntary Bankruptcy, Etc. An order for relief shall be entered
against the Borrower under Title 11 of the United States Code, as now
constituted or hereafter amended, which order is not stayed; or upon the entry
of an order, judgment or decree by operation of law or by a court having
jurisdiction in the premises which is not stayed adjudging the Borrower a
bankrupt or insolvent under, or ordering relief against it under, or approving
as properly filed a petition seeking relief against it under the provisions of
any other now existing or future applicable bankruptcy, insolvency or other
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similar law of the United States of America or any state thereof or of any other
country or jurisdiction providing for the reorganization, winding-up or
liquidation of corporations or any arrangement, composition, extension or
adjustment with creditors, or appointing a receiver, liquidator, assignee,
sequestrator, trustee or custodian of the Borrower or of any substantial part of
its property, or ordering the reorganization, winding-up or liquidation of its
affairs, or upon the expiration of sixty (60) days after the filing of any
involuntary petition against the Borrower seeking any of the relief specified in
Section 7.01(h) or this Section 7.01(i) without the petition being dismissed
prior to that time; or
(j) Insolvency, Etc. The Borrower shall (i) make a general assignment
for the benefit of its creditors or (ii) consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, or custodian of all or
a substantial part of the property of the Borrower, or (iii) admit its
insolvency or inability to pay its debts generally as they become due, or (iv)
fail generally to pay its debts as they become due, or (v) take any action (or
suffer any action to be taken by its directors or shareholders) looking to the
dissolution or liquidation of the Borrower; or
(k) ERISA. The Borrower or any member of the Controlled Group shall
fail to pay when due an amount or amounts aggregating in excess of Five Hundred
Thousand Dollars ($500,000) which it shall have become liable to pay to the PBGC
or to a Plan under Section 515 of ERISA or Title IV of ERISA; or notice of
intent to terminate a Plan or Plans (other than a multi-employer plan, as
defined in Section 4001(3) of ERISA), having aggregate Unfunded Vested
Liabilities in excess of Five Hundred Thousand Dollars ($500,000) shall be filed
under Title IV of ERISA by the Borrower, any member of the Controlled Group, any
plan administrator or any combination of the foregoing; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate any such Plan or
Plans; or
(l) Judgment. A final judgment or order for the payment of money in
excess of One Million Five Hundred Thousand Dollars ($1,500,000) or its
equivalent in another currency shall be rendered against the Borrower and such
judgment or order shall continue unsatisfied and in effect for a period of
thirty (30) consecutive days; or
(m) Government Approvals, Etc. Any Government Approval or registration
or filing with any Governmental Authority now or hereafter required in
connection with the performance by the Borrower of its obligations set forth in
this Agreement, the Security Agreement or the Notes is revoked, withdrawn or
withheld or shall fail to remain in full force and
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effect, or any act of any Governmental Authority which, in the reasonable
opinion of the Agent, deprives the Borrower of any substantial right, privilege
or franchise or substantially restricts the exercise thereof, and such act shall
not be revoked or rescinded within thirty (30) days after it shall have become
effective; or
(n) Change of Control. Mark J. Wattles shall cease to be the record
and beneficial owner of at least fifteen percent (15%) of each class of the
outstanding voting stock of the Borrower.
Section 7.02 Consequences of Default. If any of the Events of Default
described in Section 7.01(h) or Section 7.01(i) shall occur, the Total
Commitment and the Lenders' respective Commitments shall immediately terminate,
the principal of and the interest on the Loans and all other sums payable by
Borrower hereunder, under the Notes and under the other Loan Documents shall
become immediately due and payable all without protest, presentment, notice or
demand, all of which the Borrower expressly waives. If any other Event of
Default shall occur and be continuing, then in any such case and at any time
thereafter so long as any such Event of Default shall be continuing, the Agent
shall at the request, or may with the consent, of the Majority Lenders
immediately terminate the Total Commitment and the Lenders' respective
Commitments and, if Loans shall have been made, the Agent shall at the request,
or may with the consent, of the Majority Lenders declare the principal of and
the interest on the Loans and the Notes and all other sums payable by the
Borrower hereunder or under the Notes or any other Loan Document to be
immediately due and payable, whereupon the same shall become immediately due and
payable all without protest, presentment, notice, or demand, all of which the
Borrower expressly waives. Also, regardless of whether the Borrower's
obligations to repay the Loans shall have been accelerated pursuant to the
preceding sentences, the Agent may, at its option, realize on any or all of the
collateral described in the Security Agreement by exercising any remedies
provided in the Security Agreement or otherwise provided by law.
ARTICLE VIII
THE AGENT
---------
Section 8.01 Authorization and Action. Each Lender hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto. The
Agent shall have no duties or responsibilities except those expressly
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set forth in this Agreement. The duties of the Agent shall be mechanical and
administrative in nature; the Agent shall not have by reason of this Agreement a
fiduciary relationship in respect of any Lender; and nothing in this Agreement
or the other Loan Documents, expressed or implied, is intended to or shall be so
construed as to impose upon the Agent any obligations in respect of this
Agreement or the other Loan Documents except as expressly set forth herein. As
to any matters not expressly provided for by this Agreement, including
enforcement or collection of the Loans, the Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining)
upon the instructions of the Majority Lenders, and such instructions shall be
binding upon all Lenders and any holders of any Note provided that the Agent
shall not be required to take any action which exposes the Agent to personal
liability or which is contrary to the Loan Documents or applicable law and
provided, further, that without the consent of all Lenders, the Agent shall not
release any collateral securing the Borrower's obligations under the Loan
Documents or change or modify the Total Commitment (other than changes made
pursuant to Section 2.03), any Lender's Commitment (other than changes made
pursuant to Section 2.03), the definition of "Majority Lenders", the conditions
precedent set forth in Article III, the timing or rates of interest payments,
the timing or amount of fees or the timing or amounts of principal payments due
in respect of Loans, and provided, further, that the terms of Section 2.05,
Section 2.11(c) and this Article VIII shall not be amended without the prior
written consent of the Agent (acting for its own account). In the absence of
instructions from the Majority Lenders, the Agent shall have authority (but no
obligation), in its sole discretion, to take or not to take any action, unless
this Agreement specifically requires the consent of the Lenders or the consent
of the Majority Lenders and any such action or failure to act shall be binding
on all the Lenders and on all holders of the Notes. Each Lender and each holder
of any Note shall execute and deliver such additional instruments, including
powers of attorney in favor of the Agent, as may be necessary or desirable to
enable the Agent to exercise its powers hereunder.
Section 8.02 Duties and Obligations.
(a) Neither the Agent nor any of its directors, officers, agents or
employees shall be liable for any action taken or omitted to be taken by it or
any of them under or in connection with this Agreement except for its or their
own gross negligence or willful misconduct. Without limiting the generality of
the foregoing, the Agent (i) may treat each Lender which is a party hereto as
the party entitled to receive payments hereunder until the Agent receives
written notice of the assignment of such Lender's interest herein signed by such
Lender
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and made in accordance with the terms hereof and a written agreement of the
assignee that it is bound hereby as it would have been had it been an original
party hereto, in each case in form satisfactory to the Agent; (ii) may consult
with legal counsel (including counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by it in accordance with the
advice of such experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations made in or in connection with this Agreement, the other Loan
Documents or in any instrument or document furnished pursuant hereto or thereto;
(iv) shall not have any duty to ascertain or to inquire as to the performance of
any of the terms, covenants, or conditions of the Loan Documents on the part of
the Borrower or as to the use of the proceeds of any Loan or as to the existence
or possible existence of any Default or Event of Default; (v) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, effectiveness, or value of this Agreement or of any
instrument or document furnished pursuant hereto; and (vi) shall incur no
liability under or in respect to this Agreement by acting upon any oral or
written notice, consent, certificate or other instrument or writing (which may
be by telegram, facsimile transmission, cable or telex) believed by it to be
genuine and signed or sent by the proper party or parties or by acting upon any
representation or warranty of the Borrower made or deemed to be made hereunder.
The Agent may execute any of its duties under this Agreement or any other Loan
Document by or through agents, employees or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
The Agent shall not be responsible for the negligence or misconduct of any agent
or attorney-in-fact that it selects with reasonable care.
(b) The Agent will account to each Lender for its Percentage Interest
of payments of principal of, interest on and fees in respect of the Loans (other
than fees payable to the Agent for its own account) which are received by the
Agent from the Borrower and will promptly remit to the Lenders entitled thereto
all such payments. The Agent will transmit to each Lender copies of all
documents received from the Borrower pursuant to the requirements of this
Agreement other than documents which by the terms of this Agreement the Borrower
is obligated to deliver directly to the Lenders.
(c) Each Lender or its assignee organized outside of the United States
shall furnish to the Agent in a timely fashion such documentation (including,
but not by way of limitation, IRS Forms Nos. 1001 and 4224) as may be required
by applicable law or
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regulation to establish such Lender's status for tax withholding
purposes.
Section 8.03 Dealings Between Agent and Borrower. With respect to its
Commitment and the Loans made by it, the Agent shall have the same rights and
powers under this Agreement and the other Loan Documents as any other Lender and
may exercise the same as though it were not the Agent, and the term "Lender"
shall unless otherwise expressly indicated include the Agent in its individual
capacity. The Agent may accept deposits from, lend money to, act and generally
engage in any kind of business with the Borrower and any person which may do
business with the Borrower, all as if the Agent were not the Agent hereunder and
without any duty to account therefor to the Lenders.
Section 8.04 Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
upon such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based upon such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
Section 8.05 Indemnification. The Lenders agree to indemnify the Agent (to
the extent not reimbursed by the Borrower) ratably according to their respective
Percentage Interests from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by or asserted against the Agent in any way relating to or arising out of this
Agreement or any other Loan Document or any action taken or omitted by the Agent
under this Agreement or any other Loan Document, except any such as result from
the Agent's gross negligence or willful misconduct. Without limiting the
foregoing, each Lender agrees to reimburse the Agent promptly on demand in
proportion to its Percentage Interest for any out-of-pocket expenses, including
legal fees, incurred by the Agent in connection with the administration or
enforcement of or the preservation of any rights under this Agreement or any
other Loan Document (to the extent that the Agent is not reimbursed for such
expenses by the Borrower).
Section 8.06 Successor Agent. The Agent may give written notice of
resignation at any time to the Lenders and the Borrower and may be removed at
any time with cause by the Majority Lenders. Upon any such resignation or
removal, the Majority Lenders shall have the right to appoint a successor Agent.
If no successor Agent shall have been so appointed by the Majority
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Lenders and shall have accepted such appointment within thirty (30) days after
the Agent's giving of notice of resignation or the Majority Lenders' removal of
the Agent, then the Agent may on behalf of the Lenders, appoint a successor
Agent, which shall be a bank organized under the laws of the United States or of
any state thereof, or any affiliate of such bank, and having a combined capital
and surplus of at least Five Hundred Million Dollars ($500,000,000). Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under this Agreement.
Until the acceptance by such a successor Agent, the retiring Agent shall
continue as "Agent" hereunder. Notwithstanding any retiring Agent's resignation
or removal hereunder as Agent, the provisions of this Article VIII shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement. Any company into which the Agent may be merged or
converted or with which it may be consolidated or any company resulting from any
merger, conversion or consolidation to which it shall be a party or any company
to which the Agent may sell or transfer all or substantially all of its agency
relationships shall be the successor to the Agent without the execution or
filing of any paper or further act, anything herein to the contrary
notwithstanding.
ARTICLE IX
MISCELLANEOUS
-------------
Section 9.01 No Waiver; Remedies Cumulative. No failure by the Agent or any
Lender to exercise, and no delay in exercising, any right, power or remedy under
this Agreement or any other Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or remedy under this
Agreement or any other Loan Document preclude any other or further exercise
thereof or the exercise of any other right, power, or remedy. The exercise of
any right, power, or remedy shall in no event constitute a cure or waiver of any
Event of Default under this Agreement or any other Loan Document nor prejudice
the rights of the Agent or any Lender in the exercise of any right hereunder or
thereunder. The rights and remedies provided herein and therein are cumulative
and not exclusive of any right or remedy provided by law.
Section 9.02 Governing Law. This Agreement and the other Loan Documents
shall be governed by and construed in accordance with the laws of the State of
Washington, U.S.A.
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Section 9.03 Mandatory Arbitration. Any controversy or claim between or
among the parties, including those arising out of or relating to this Agreement
or Loan Documents and any claim based on or arising from an alleged tort, shall
at the request of any party be determined by arbitration. The arbitration shall
be conducted in accordance with the United States Arbitration Act (Title 9, U.S.
Code), notwithstanding any choice of law provision in this Agreement, and under
the Commercial Rules of the AAA. The arbitrator(s) shall give effect to statutes
of limitation in determining any claim. Any controversy concerning whether an
issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the
arbitration award may be entered in any court having jurisdiction. No provision
of this Section 9.03 shall limit the right of any party to this Agreement to
exercise self-help remedies such as setoff, foreclosure against or sale of any
collateral or security, or to obtain provisional or ancillary remedies from a
court of competent jurisdiction before, after, or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy does not waive
the right of either party to resort to arbitration.
Section 9.04 Notices. All notices and other communications provided for in
this Agreement shall be in writing or (unless otherwise specified) by telex,
facsimile transmission, telegram or cable and shall be mailed (with first class
postage prepaid) or sent or delivered to each party at the address set forth
under its name on the signature pages hereof, or at such other address as shall
be designated by such party in a written notice to each other party. Except as
otherwise specified all notices sent by mail, if duly given, shall be effective
three (3) Business Days after deposit into the mails, all notices sent by a
nationally recognized overnight courier service, if duly given, shall be
effective one (1) Business Day after delivery to such courier service, and all
other notices and communications if duly given or made shall be effective upon
receipt.
Section 9.05 Assignment and Participations. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective Successors and
assigns, provided that the Borrower may not assign or otherwise transfer all or
any part of its rights or obligations hereunder or under any other Loan Document
without the prior written consent of the Agent and all the Lenders, and any such
assignment or transfer purported to be made without such consent shall be
ineffective. Any Lender may at any time sell participation interests in its
Loans and Commitment to another bank or financial institution. Such sales may be
made without the consent of the Agent, the Borrower or any other Lender
provided, however, (a) that the selling Lender shall have provided the Borrower
and the Agent with prior written notice of the proposed sale of any
participation interest in any Loan or in such Lender's Commitment; and (b) that
the selling
41
<PAGE>
Lender retains the right to vote as a Lender hereunder in respect of the
interest sold without being bound to obtain the consent of its participant or to
exercise its rights in accordance with instructions received from its
participant (except that the participant's consent can be required for proposed
changes to the timing or amount of principal payments or changes to the timing,
rate or amount of payments of interest or fees). Any Lender may pledge or assign
all or any part of its interest under the Loan Documents for security purposes
to any Federal Reserve Bank. Any Lender may assign or otherwise transfer all or
any part of its interest under the Loan Documents to another bank or financial
institution with the prior written consent of the Borrower and Agent which
consent will not be unreasonably withheld or delayed provided, that any
assignment by a Lender which assigns less than all of its Commitment shall
assign at least Five Million Dollars ($5,000,000) of its Commitment and provided
further that in the case of an assignment or transfer by any Lender to any
affiliate of such Lender, the Borrower's consent shall not be required and the
Agent's consent shall be required only as to the form of the documents under
which such assignment or transfer is made). The assignee of any permitted sale
or assignment (including assignments for security and sales of participations)
shall have the same rights and benefits against the Borrower and otherwise under
the Loan Documents (excepting however, in the case of sales of participations,
the right to grant or withhold consents or otherwise vote in respect thereof)
including the right of setoff, and in the case of any outright assignment (as
distinguished from an assignment for security or the sale of a participation)
the same obligations in respect thereof, as if such assignee were an original
Lender. Except to the extent otherwise required by the context of this
Agreement, the word "Lender" where used in this Agreement shall mean and include
any holder of a Note originally issued to a Lender hereunder, and each such
holder shall be bound by and have the benefits of this Agreement the same as if
such holder had been a signatory hereto. Any outright assignment of a Lender's
interest hereunder to another Lender made in conformance with the terms of this
Section 9.05 shall result in a corresponding adjustment to the selling and
purchasing Lenders' Commitments and Percentage Interests.
Section 9.06 Borrower's Indemnity. Whether or not the transactions
contemplated hereby shall be consummated, the Borrower shall pay, indemnify and
hold each Lender, the Agent and each of their respective officers, directors,
employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person")
harmless from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, charges, expenses or disbursements
(including reasonable attorney's fees, which may include the allocated charges
of internal legal counsel) of any kind or nature whatsoever which may at any
time (including at any time following repayment of the
42
<PAGE>
Loans and the termination, resignation or replacement of the Agent or
replacement of any Lender) be imposed on, incurred by or asserted against any
such Indemnified Person in any way relating to or arising out of this Agreement
or any other Loan Document, or the transactions contemplated hereby or thereby,
or the use of any Loan proceeds, or any action taken or omitted by any such
Indemnified Person under or in connection with any of the foregoing (all of the
foregoing, collectively the "Indemnified Liabilities"); provided, that the
Borrower shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities arising from the negligence or willful
misconduct of such Indemnified Person. All amounts owing under this Section 9.06
shall be paid promptly upon demand. At the election of any Indemnified Person,
the Borrower shall defend such Indemnified Person in respect of any Indemnified
Liabilities using legal counsel reasonably satisfactory to such Indemnified
Person at the sole cost and expense of the Borrower.
Section 9.07 Severability. Any provision of this Agreement or any other
Loan Document which is prohibited or unenforceable in any jurisdiction shall as
to such jurisdiction be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by applicable law, the parties waive any
provision of law which renders any provision hereof prohibited or unenforceable
in any respect.
Section 9.08 Survival. The representations, warranties and indemnities of
the Borrower in favor of the Agent and the Lenders and the representations,
warranties and indemnities of the Lenders in favor of the Agent shall survive
indefinitely and, without limiting the foregoing, shall survive the execution
and delivery of this Agreement and the other Loan Documents, the making of any
Loan, the expiration of the Total Commitment and the repayment of all Loans and
other amounts due hereunder.
Section 9.09 Conditions Not Fulfilled. If the Commitments are not borrowed
owing to nonfulfillment of any condition precedent specified in Article III, no
party hereto shall be responsible to any other party for any damage or loss by
reason thereof, except that the Borrower shall in any event be liable to pay the
fees, Taxes, and expenses for which it is obligated hereunder. If for any other
reason the Commitment of any Lender is not borrowed neither the Agent nor any
other Lender shall be responsible to the Borrower for any damage or loss by
reason thereof, nor shall any other Lender or the Borrower be excused from its
performance hereunder.
Section 9.10 Entire Agreement; Amendment. This Agreement, together with the
Exhibits and Schedules hereto and the letter
43
<PAGE>
agreement referred to in Section 2.11(c) hereof, comprise the entire agreement
of the parties and may not be amended or modified except by written agreement of
the Borrower and the Agent executed in conformance with the terms of Section
8.01 hereof. No provision of this Agreement may be waived except in writing and
then only in the specific instance and for the specific purpose for which given.
Section 9.11 WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER
OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP
EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, AND AGREE
THAT (A) ANY SUCH ACTION OR PROCEEDING SHALL NOT BE TRIED BEFORE A JURY AND (B)
ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY. NOTHING IN THIS SECTION 9.11 IS
INTENDED TO LIMIT THE TERMS OF SECTION 9.03.
Section 9.12 Headings. The headings of the various provisions of this
Agreement are for convenience of reference only, do not constitute a part
hereof, and shall not affect the meaning or construction of any provision
hereof.
Section 9.13 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same Agreement.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
44
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers or agents thereunto duly authorized as of
the date first above written.
BORROWER:
HOLLYWOOD ENTERTAINMENT CORPORATION
By DONALD J. EKMAN
--------------------------------------
Its Senior Vice President
-------------------------------------
Address: 25600 S.W. Pkwy. Ctr. Dr.
Wilsonville, OR 97070
Attn: Donald J. Ekman
Telefax: (503) 677-1680
AGENT:
BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION d/b/a "SEAFIRST
BANK"
By DORA A. BROWN
--------------------------------------
Its A.V.P.
-------------------------------------
By RONALD R. PARSONS
--------------------------------------
Its Vice President
-------------------------------------
Address: 701 Fifth Avenue
Floor 16
Seattle, WA 98104
Attn: Dora A. Brown
Telefax: (206) 358-0971
45
<PAGE>
LENDERS:
BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION
By GORDON H. GRAY
--------------------------------------
Its VP
-------------------------------------
By ROBERT COUNTRYMAN
--------------------------------------
Its Vice President
-------------------------------------
Address: 701 Fifth Avenue
Floor 12
Seattle, WA 98104
Attn: Gordon H. Gray
Telefax: (206) 358-3113
AND TO
121 S.W. Morrison
Suite 1700
Portland, OR 97204
Attn: Robert Countryman
Telefax: 503) 275-1391
UNITED STATES NATIONAL BANK OF
OREGON
By DEREK RIDGLEY
--------------------------------------
Its Vice President
-------------------------------------
Address: 555 S.W. Oak Street
Suite 400
Portland, OR 97204
Attn: Derek W. Ridgley
Telefax: (503) 275-5428
46
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By ALISON AMONETTE
--------------------------------------
Its Vice President
-------------------------------------
Address: 400 California Street
Floor 17
San Francisco, CA 94104
Attn: Alison Amonette
Telefax: (415) 765-3146
KEY BANK OF WASHINGTON
By KEVIN MCBRIDE
--------------------------------------
Its Vice President
-------------------------------------
Address: 700 Fifth Avenue
Floor 48
Seattle, WA 98109
Attn: Kevin McBride
Telefax: (206) 684-6035
BANQUE NATIONALE DE PARIS
By KATHERINE WOLFE
--------------------------------------
Its Vice President
-------------------------------------
By DEBRA H. WRIGHT
--------------------------------------
Its Vice President
-------------------------------------
Address: 180 Montgomery Street
San Francisco, CA 94104
Attn: Katherine Wolfe
Telefax: (415) 296-8954
47
<PAGE>
SOCIETE GENERALE
By J. BLAINE SHAUM
--------------------------------------
Its Regional Manager
-------------------------------------
Address: One Montgomery Street
Suite 3220
San Francisco, CA 94104
Attn: Alec Neville
Telefax: (415) 989-9922
THE SUMITOMO BANK, LIMITED
By J. WILLIAM BLOORE
--------------------------------------
Its Vice President
-------------------------------------
By CAROLE A. DALEY
--------------------------------------
Its Vice President
-------------------------------------
Address: Pine Street Center
100 Pine St., Ste. 3300
San Francisco, CA 94111
Attn: J. William Bloore
Telefax: (415) 394-9797
48
<PAGE>
SCHEDULE 1
CALCULATION OF MARGINS
----------------------
The "Margin" shall be adjusted as of the first day of the first full
calendar month occurring after each date on which the Borrower provides the
quarterly compliance certificates required under Section 5.10(c) of the
Agreement and shall be computed in accordance with the following chart:
Pricing Margin for use Margin for use
Levels in IBOR Rate in Adjusted Base Rate
- ------ ------------ ---------------------
I 1.250% 0.250%
II 1.500% 0.500%
III 1.750% 0.750%
Rates expressed in the foregoing chart are set forth on a per annum basis.
From the date of the Agreement through the first day of the first full
calendar month occurring after the date on which the Borrower provides the
quarterly compliance certificates required under Section 5.10(c) of the
Agreement in respect of the fiscal quarter ending March 31, 1997, Pricing Level
I shall apply. At all times thereafter, the appropriate pricing level shall be
determined in accordance with the following chart where the pricing level for
each period is established based upon the ratio of Funded Debt to Cash Flow
determined as of the last day of the immediately preceding fiscal quarter:
Ratio of Funded Debt to
Cash Flow as of End
of Preceding Fiscal Quarter ("FDCFR") Pricing Level
- ------------------------------------- -------------
FDCFR less than 1.75 I
FDCFR greater than or equal to 1.75
but less than 2.25 II
FDCFR greater than or equal to 2.25 III
49
<PAGE>
SCHEDULE 2
PREPAYMENT FEES
---------------
The amount of the fee to be paid pursuant to Section 2.08 of the Revolving
Credit Agreement shall depend on the following:
(1) The amount by which interest rates have changed between the Reference
Date and the Prepayment Date. As used herein, "Reference Date" shall
mean the date the IBOR Rate first became applicable. As used herein,
"Prepayment Date" shall mean the date the Borrower, either voluntarily
or involuntarily prepays any Loan or portion thereof accruing interest
at the IBOR Rate. Certain U.S. Treasury rates are used as a benchmark
to measure changes in interest rate levels.
(a) A "reference rate" equal to the average interest rate yield at
Reference Date for U.S. Government Securities having maturities
of approximately ninety (90) days will be determined in the
manner described below for determining applicable rates but will
be established as of the Reference Date for the Applicable
Interest Period. This rate represents interest rate levels at the
time an IBOR Rate is selected.
(b) An "applicable rate," determined as described below, represents
interest rate levels as of the Prepayment Date.
(2) The amount of principal paid.
(3) A payment fee factor (see "payment fee factor schedule" below). The
factor represents the economic loss to the Agent and Lenders resulting
from a one dollar payment if rates were to drop by one percent from
the time the rate was fixed.
CALCULATION OF PAYMENT FEE
--------------------------
If the reference rate is lower than or equal to the applicable rate, there
is no payment fee.
If the applicable rate is lower than the reference rate, the payment fee
shall be equal to the difference between the reference rate and the applicable
rate (expressed as a decimal), multiplied by the appropriate factor from the
payment fee factor schedule, multiplied by the principal amount of the Loan
which is prepaid.
1
<PAGE>
Example:
--------
A Loan accruing interest at an IBOR Rate with principal of $2,000,000
is fully prepaid with 2 months remaining prior to the expiration of
the Applicable Interest Period. A reference rate of 7% was assigned to
the Loan when the rate was fixed. The applicable rate (as determined
by current 2-month U.S. Treasury rates) is 6.5%. Rates are therefore
judged to have dropped by .5% since the rate was fixed, and a payment
fee applies.
A payment fee factor of .20 is determined from the table below, and
the payment fee is computed as follows:
Payment Fee = (.07 -.065) x (.20) x ($2,000,000) = $2,000
APPLICABLE RATES
----------------
The applicable rate is equal to the average interest rate yield at the time
of payment or refinancing for U.S. Government Securities having maturities
equivalent to the remaining portion of the Applicable Interest Period.
The applicable rate shall be determined from the Federal Reserve
Statistical Release (Publication H.15(519)) in the "This Week" (most recent
week) column under the heading U.S. Government Securities - Treasury Bills -
Secondary Market, interpolated to the nearest month.
Rates listed in the Federal Reserve Statistical Release for maturities of
less than one year are on a discount rate basis, and these rates shall be
converted to a coupon equivalent basis, based upon a 360-day year. The
Statistical Release published on Monday shall be used for calculation of payment
fees payable on the following Tuesday through the following Monday, with
appropriate adjustment if the day of publication changes.
2
<PAGE>
PAYMENT FEE FACTOR SCHEDULES
----------------------------
Months Remaining in the
Applicable Interest Period
--------------------------
0 1 2 3 6
--- --- --- --- ---
Factors 0 .10 .20 .31 .61
If the remaining Applicable Interest Period or time prior to the scheduled
maturity of the Loan is between any two time periods in the above table,
interpolate between the corresponding factors to the closest month.
The Agent and Lenders are not required to actually reinvest the paid
principal in any U.S. Government Treasury obligations as a condition to
receiving a payment fee as calculated above.
3
<PAGE>
SCHEDULE 3
PARTICIPATION FEES
------------------
Bank of America National Trust
& Savings Association $160,000
United States National Bank of Oregon $ 75,000
Union Bank of California, N.A. $ 40,000
Key Bank of Washington $ 60,000
Banque Nationale de Paris $ 30,000
Societe Generale $ 30,000
The Sumitomo Bank, Limited $ 30,000
---------
TOTAL PARTICIPATION FEE $425,000
1
<PAGE>
EXHIBIT A
REVOLVING LOAN NOTE
$______________ February 7, 1997
Seattle, Washington
FOR VALUE RECEIVED, the undersigned, HOLLYWOOD ENTERTAINMENT CORPORATION
(d/b/a "Hollywood Video"), an Oregon corporation (the "Borrower"), hereby
promises to pay to the order of ____________ ____________, a
__________________________ (the "Lender") on the Maturity Date the unpaid
principal balance of all Loans made by the Lender under this Note, in a maximum
amount not to exceed ___________ Million Dollars ($__________), together with
interest thereon from the date hereof until maturity at a per annum rate equal
to the Interest Rate as defined below (changing as the Interest Rate changes),
and, if default shall occur in the payment when due (whether by acceleration or
otherwise) of any principal amount hereunder, from the maturity of that amount
until it is paid in full at a per annum rate equal to the Base Rate (changing as
the Base Rate changes), plus two percent (2%). Notwithstanding anything herein
to the contrary, interest shall not accrue at a rate in excess of the maximum
rate permitted by applicable law.
The Borrower further agrees as follows:
1. All payments of principal and interest on this Note shall be made in
immediately available funds to Bank of America National Trust and Savings
Association, as the Agent for the Lender, at the Agent's Commercial Loan Service
Center, Fifth Avenue Plaza Building, 13th Floor, 800 Fifth Avenue, Seattle,
Washington 98104, or such other address as the Agent shall from time to time
designate.
2. As used herein "Interest Rate" shall mean the Adjusted Base Rate unless
the Borrower shall elect to have some or all of the loans made hereunder accrue
interest at an IBOR Rate as provided in Section 2.06(b) of the Credit Agreement
(as defined below). Accrued but unpaid interest on each Loan accruing interest
at an IBOR Rate shall be paid on the last day of each Applicable Interest
Period, on the date of any principal payment (to the extent accrued on the
principal amount paid), at the Maturity Date and, additionally, in the case of
such a Loan for which the Applicable Interest Period is six months, on the day
that is three months after the commencement of such Applicable Interest Period.
Accrued but unpaid interest on each Base Rate Loan shall be paid on the last
Business Day of each calendar quarter commencing on March 31, 1997 and
continuing on the last
<PAGE>
Business Day of each calendar quarter thereafter and on the date of any
principal payment (to the extent accrued on the principal amount paid) and at
the Maturity Date. Unpaid interest accruing on amounts in default shall be
payable on demand.
3. This Note is issued under and is subject to the terms of an Amended and
Restated Revolving Credit Agreement dated as of the date hereof, among Bank of
America National Trust and Savings Association, as "Agent", the Lender and
certain other banks as "Lenders" and the undersigned as "Borrower" (as amended
from time to time, the "Restated Credit Agreement"). Capitalized terms not
defined herein have the meanings set forth in the Restated Credit Agreement.
4. It is expressly provided that if any of the Events of Default defined in
Sections 7.01(h) or (i) of the Restated Credit Agreement shall occur, the entire
unpaid balance of the principal and interest hereunder shall be immediately due
and payable in accordance with the terms of the Restated Credit Agreement. It is
also expressly provided that upon the occurrence of any other Event of Default,
the entire remaining unpaid balance of the principal and interest may be
declared by the Agent to be immediately due and payable in accordance with the
terms of the Restated Credit Agreement.
5. The Borrower may repay Base Rate Loans at any time without penalty or
premium. Prepayment of any Loan bearing interest at an IBOR Rate, whether
voluntary, mandatory, or as the result of the Agent's or Lender's collection
efforts, shall be subject to the payment of fees as described in Section 2.08 of
the Restated Credit Agreement.
6. The unpaid principal balance of the Loans made hereunder shall be the
total amount advanced hereunder, less the amount of the principal payments made
hereon. This Note is given to avoid the execution of an individual note for each
Loan by the Lender to the Borrower. This Note evidences a revolving credit and,
within the limits and on the conditions set forth in the Restated Credit
Agreement, prior to the Maturity Date the Borrower may borrow, repay and
reborrow hereunder. The Lender is hereby authorized to record the date and
amount of each Loan it makes hereunder and the date and amount of each payment
of principal and interest thereon on a schedule annexed hereto and constituting
a part of this Note or maintained in connection herewith. Any such recordation
by the Lender shall constitute prima facie evidence of the accuracy of the
information so recorded; provided, however, that the failure to make any such
recordation or any error in any such recordation shall not affect the
obligations of the Borrower hereunder.
2
<PAGE>
7. Each maker, surety, guarantor and endorser of this Note expressly waives
all notices, demands for payment, presentations for payment, notices of
intention to accelerate the maturity, protest and notice of protest.
8. In the event this Note is placed in the hands of an attorney for
collection, or suit is brought on the same, or the same is collected through
bankruptcy or other judicial proceedings, the Borrower agrees and promises to
pay reasonable attorneys' fees and collection costs, including all out-of-pocket
expenses and the allocated costs and disbursements of internal counsel, incurred
by the Lender or the Agent.
9. This Note has been executed and delivered in and shall be governed by
and construed in accordance with the internal laws of the State of Washington.
The Borrower hereby irrevocably submits to the nonexclusive jurisdiction of any
state or federal court sitting in Seattle, King County, Washington, in any
action or proceeding brought to enforce or otherwise arising out of or relating
to this Note, and hereby waives any objection to venue in any such court and any
claim that such forum is an inconvenient forum.
HOLLYWOOD ENTERTAINMENT CORPORATION
By ________________________________
Its ____________________________
3
<PAGE>
Schedule 1
to Hollywood Entertainment Corporation
Revolving Loan Note
- --------------------------------------------------------------------------------
Applicable Amount of Unpaid
Amount of Interest Interest Principal Principal Notation
Date Loan Option Period Paid Balance By
- --------------------------------------------------------------------------------
4
<PAGE>
EXHIBIT B
AMENDED AND RESTATED SECURITY AGREEMENT
THIS AMENDED AND RESTATED SECURITY AGREEMENT (this Agreement") is made as
of this 12th day of February, 1997, by HOLLYWOOD ENTERTAINMENT CORPORATION
(d/b/a "Hollywood Video"), an Oregon corporation (the "Debtor"), in favor of
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION as agent for itself, United
States National Bank of Oregon, Union Bank of California, N.A., Key Bank of
Washington, Banque Nationale de Paris, Societe Generale, and The Sumitomo Bank,
Limited (the "Secured Party").
RECITALS
A. Debtor, Seattle-First National Bank, as agent, and Seattle-First
National Bank, United States National Bank of Oregon and Bank of America Oregon,
as lenders entered into that certain Revolving Credit Agreement dated as of
December 22, 1995 providing for a total revolving credit facility in the amount
of $75,000,000 (the "Revolving Credit Agreement").
B. In connection with the Revolving Credit Agreement, Debtor executed and
delivered a Security Agreement in favor of Seattle-First National Bank, as
agent, dated December 22, 1995 (the "Prior Security Agreement"), pursuant to
which Debtor granted Seattle-First National Bank, as agent (for the benefit of
itself and the other lenders under the Revolving Credit Agreement) a security
interest in certain assets to secure its obligations owing to Seattle-First
National Bank, as agent, and Seattle-First National Bank, United States National
Bank of Oregon and Bank of America Oregon, as lenders.
C. On January 8, 1996, the parties to the Revolving Credit Agreement
entered into an Amendment Number One to Revolving Credit Agreement and Amendment
to Loan Documents.
D. Pursuant to the terms of the Revolving Credit Agreement as so amended,
certain "Additional Lenders" were to be added and the amount of the credit
facility was to be increased to $100,000,000. On July 18, 1996, the Borrower,
Seattle-First National Bank, as agent, Seattle First National Bank, Bank of
America Oregon, United States National Bank of Oregon, Union Bank of California,
N.A. and Key Bank of Washington entered into an Amendment Number Two to
Revolving Credit Agreement and Amendment to Loan Documents pursuant to which
Union Bank of California and Key Bank of Washington were added as "Additional
Lenders" and the total committed amount of the facility was increased to
$100,000,000. The Revolving Credit Agreement as amended by Amendment Number One
to Revolving Credit Agreement and Amendment
<PAGE>
Number Two to Revolving Credit Agreement is referred to herein as the "Prior
Credit Agreement."
E. Thereafter, both Seattle-First National Bank and Bank of America Oregon
were merged into Bank of America National Trust & Savings Association.
F. The Debtor and the Secured Party have entered into an Amended and
Restated Revolving Credit Agreement dated as of the date hereof (the "Restated
Credit Agreement") which amends and restates the Prior Credit Agreement. The
agreements, documents, instruments and undertakings entered into in connection
with the Restated Credit Agreement, together with the Restated Credit Agreement,
as the same may be amended, renewed, modified or supplemented from time to time
are referred to herein as the "Restated Loan Documents."
G. Pursuant to the terms of the Restated Credit Agreement, the execution
and delivery of this Agreement is a material condition precedent to the Lenders'
and the Agent's obligations to make and disburse loans to the Debtor thereunder.
This Agreement amends and restates (but does not release) the Prior Security
Agreement.
NOW, THEREFORE, in consideration of the foregoing the undersigned agrees as
follows:
1. Defined Terms. Capitalized terms not otherwise defined herein shall have
the meanings given in the Restated Credit Agreement.
2. Continuance of Prior Security Agreement. This Agreement is intended to
amend and restate the Prior Security Agreement and to continue the security
interests granted thereunder and continued thereby.
3. Grant of Security Interest. The Debtor hereby confirms its prior grant
of a security interest and hereby grants to the Secured Party a security
interest in all its now owned or hereafter acquired goods and other personal
property, including all tangible and intangible items and including without
limitation the following:
(a) Equipment, Etc. All of the Debtor's right, title and interest in
equipment, supplies, fittings, furnishings and other items of any kind ordered,
obtained, or possessed by the Debtor or for its account, whether held by the
Debtor, by sellers under any contracts for the purchase of equipment or by
others, together with any product into which such equipment may be processed,
manufactured or assembled and together with all substitutions for said equipment
and all parts, instruments,
2
<PAGE>
accessories, alterations, modifications, replacements, additions and accessions
to said equipment.
(b) Inventory, Etc. All of the Debtor's right, title and interest in
inventory and stock in trade of the Debtor including without limitation,
videotapes, videogames, raw materials, work in progress, materials used or
consumed in the Debtor's business, finished goods, returned goods and goods
traded in.
(c) Accounts, Contract Rights, Etc. All of the Debtor's right, title
and interest in (i) all accounts, (ii) all contract rights, (iii) all chattel
paper, (iv) all documents, documents of title, drafts, checks, acceptances,
bonds, letters of credit, notes or other negotiable and non-negotiable
instruments, bills of exchange, deposits, certificates of deposit, insurance
policies and any other writings evidencing a monetary obligation or security
interest in or a lease of personal property, (v) all licenses, leases, contracts
or agreements, (vi) all general intangibles, including without limitation all
judgments, choses in action, patents, trademarks, trade names, service marks,
licenses, copyrights and the like whether registered or not, and whether or not
used or to be used by the Debtor, including, with respect to all of said
property, without limitation, all rights corresponding thereunder throughout the
world, all renewals thereof, all license royalties with respect thereto, all
claims for damages, profits and proceeds by reason of past, present and future
infringements, and all rights to sue therefor, and (vii) all guarantees and
other personal property securing the payment or performance of any of the
foregoing.
(d) Deposits and Documents. All of the Debtor's right, title, and
interest in and to books, correspondence, credit files, records, invoices, and
other documents, including without limitation all tapes, disks, cards, computer
runs and other papers or documents in the possession or control of the Debtor;
and all balances, credits, deposits, accounts or monies of or in the name of the
Debtor in the possession or control of, or in transit to, the Secured Party or
any Lender.
(e) Fixtures. All of the Debtor's right, title, and interest in and to
all fixtures affixed to or to become affixed to any real property owned, leased
or operated by the Debtor or otherwise used in connection with the business or
operations of the Debtor.
(f) Investment Property. All of the Debtor's right, title and interest
in investment property, including without limitation, all stocks, bonds,
debentures, notes, bills, certificates, options, rights, shares, or other
securities now or
3
<PAGE>
hereafter owned or acquired, all dividends or distributions in respect thereof
and all brokerage or commodities accounts.
(g) Proceeds and Products. All proceeds (including rents, royalties,
and insurance proceeds) and products of any of the Debtor's now owned or
hereafter acquired goods and other personal property including without
limitation the items of property described in paragraphs (a) through (f) above.
The items of property described in this paragraph 2 are hereinafter referred to
collectively as the "Collateral."
4. Transfer of Instruments, Etc. The Debtor agrees to transfer to the
Secured Party on the date hereof all instruments (including without limitation
all securities) and chattel paper now owned and to transfer to the Secured Party
promptly upon receipt thereof, all instruments (including without limitation all
securities) and chattel paper hereafter acquired. Without limiting the
foregoing, if the Debtor shall become entitled to receive or shall receive, in
connection with any of its securities, any: (i) stock certificate, including
without limitation any certificate representing a stock dividend or in
connection with any increase or reduction of capital, reclassification, merger,
consolidation, sale of assets, combination of shares, stock split, spin-off,
split-off or split-up; (ii) option, warrant, or right, whether as an addition to
or in substitution or in exchange for any of its securities, or otherwise; (iii)
dividend or distribution payable in property, including securities issued by
other than the issuer of any of its securities; or (iv) dividends or
distributions of any sort; then the Debtor shall accept the same as the Secured
Party's agent, in trust for the Secured Party, and shall deliver them forthwith
to the Secured Party in the exact form received, with, as applicable, the
Debtor's endorsement when necessary, or appropriate stock powers duly executed
in blank, to be held by the Secured Party, subject to the terms hereof, as part
of the Collateral. This Security Agreement does not grant the Secured Party
power to control the voting or disposition of the securities prior to default.
5. Obligations Secured. The security interest in the Collateral is given to
secure the full and timely performance by the Debtor of all indebtedness,
liabilities and obligations of the Debtor owing to the Secured Party or any
Lender arising under or in any way in connection with the Restated Credit
Agreement, the other Restated Loan Documents or any of the transactions
contemplated thereby now existing or hereafter incurred (all of the foregoing
are referred to collectively as the "Obligations").
6. Ownership and Liens. The Debtor represents and warrants to the Secured
Party that (a) the Debtor owns the
4
<PAGE>
Collateral and is not prohibited by contract or otherwise from subjecting the
same to the security interest created hereby; and (b) to the best of Debtor's
knowledge, there are no material offsets or counterclaims or defenses to payment
which may be asserted against the Debtor by the Debtor's account debtors or
payment obligors in respect of the Collateral. Except as expressly permitted by
the Restated Credit Agreement, the Debtor will not create or suffer to exist any
Lien on the Collateral other than Liens created hereunder. The Debtor will not
sell, transfer, lease or otherwise dispose of any item of Collateral except in
the ordinary course of business. The Debtor will fully and punctually perform
any duty required of it in connection with the Collateral and will not take any
action which will impair, damage or destroy the Secured Party's rights with
respect to the Collateral or hereunder or the value thereof.
7. Appointment of Agent. So long as any Obligation remains unpaid or the
Lenders have any Commitments under the Restated Credit Agreement, the Debtor
does hereby designate and appoint Secured Party its true and lawful attorney
with power irrevocable, for it and in its name, place and stead, after an Event
of Default has occurred and is continuing, to ask, demand, receive, receipt and
give acquittance for any and all amounts which may be or become due or payable
to the Debtor with respect to the Collateral, and in Secured Party's sole
discretion to file any claim or take any action or proceeding, or either, in its
own name or in the name of the Debtor, or otherwise, which the Secured Party
deems necessary or desirable in order to collect or enforce payment of any and
all amounts which may become due or owing with respect to the Collateral. The
acceptance of this appointment by the Secured Party shall not obligate it to
perform any duty, covenant or obligation required to be performed by the Debtor
under or by virtue of the Collateral or to take any action in connection
therewith. The Secured Party may also execute, on behalf of the Debtor, any
financing statements or other instruments which in its opinion may be necessary
or desirable to perfect or protect its position with respect to the Collateral.
Without limiting the generality of the foregoing, the Secured Party is
authorized at any time to exercise any right of the Debtor, or enforce any
obligation owed to the Debtor pursuant to the terms of any agreements to which
the Debtor is a party or in which it has any beneficial interest. The Secured
Party may, in its sole discretion, perform any obligation of the Debtor under
any of the Debtor's contracts or in respect of any of the Debtor's accounts, and
any expenses incurred in such performance shall bear interest from the date
incurred until repaid by the Debtor at a per annum rate equal to the interest
rate applicable under the Restated Credit Agreement for amounts in default (the
"Default Rate"). Any such amounts shall be secured hereby and shall be repaid by
the Debtor on demand.
5
<PAGE>
8. Taxes. The Debtor will pay before delinquency any Taxes which are or may
become through assessment or distraint or otherwise a lien or charge on the
Collateral and will pay any Tax which may be levied on any Obligation secured
hereby, except any Tax whose validity or amount is being contested in good faith
by appropriate proceedings upon stay of execution of the enforcement thereof and
with provision having been made to the satisfaction of the Agent for the payment
thereof in the event the contest is determined adversely to the Debtor.
9. Debtor's Place of Business; Location of Records and Collateral. The
Debtor represents that the address set forth below its signature to this
Agreement is and will remain its principal place of business and the location of
its chief executive offices and the address at which it will keep its records
concerning the Collateral. The Debtor represents that it has not done business
under any name other than those assumed names disclosed on Schedule 1 attached
hereto. From time to time, promptly upon request, the Debtor will advise the
Secured Party of each location where any tangible Collateral is located. The
Debtor will not move the location of its chief executive offices, and will not
do business under any assumed name not disclosed on Schedule 1 hereto unless the
Debtor shall have given prior written notice of such a move to the Secured Party
and unless the Secured Party's security interest therein continues at all times
to be perfected as a lien of first priority (subject only to purchase money
Liens and statutory liens imposed by law (such as mechanics' liens) incurred in
good faith in the ordinary course of business which are not delinquent or which
remain payable without penalty or the validity or amount of which is being
contested in good faith by appropriate proceedings upon stay of execution of the
enforcement thereof with, in the case of liens on property of the Borrower,
provision having been made to the satisfaction of the Agent for the payment
thereof in the event the contest is determined adversely to the Borrower)
enforceable against all third parties in all jurisdictions as security for full
and timely performance of the Obligations.
10. Books and Records; Inspection. The Debtor agrees to maintain full and
accurate books of account prepared and maintained in accordance with GAAP, to
the extent applicable, covering the Collateral and to deliver, upon request, to
Secured Party such of the books and records as relate to the Collateral
including, without limitation, all of the invoices, shipping documents,
contracts, orders, order acknowledgments, correspondence and other instruments,
electronically stored materials and papers in the Debtor's possession relating
to the Collateral. Secured Party (and any Lender) shall at all reasonable times
have free access to the Debtor's ledgers, books of account and other written or
electronic records evidencing or relating to the Collateral and the right to
make and retain
6
<PAGE>
copies or memorandum of same, and shall after the occurrence and during the
continuation of an Event of Default have the right to be present at the Debtor's
place of business to receive all communications and remittances relating to the
Collateral.
11. Collections of Accounts. Until contrary notice is given by the Secured
Party, the Debtor is specifically authorized to enforce and collect the
Collateral described in Section 3(c) above in such manner as shall be
commercially reasonable, to accept the return of goods and to reclaim, withhold
or repossess goods as an unpaid seller. Until receipt of such notice, the Debtor
agrees to collect the payments upon or from said Collateral, at the Debtor's
expense, with due diligence. Upon notification by the Secured Party to the
Debtor after the occurrence and during the continuation of an Event of Default
to cease collecting upon said Collateral, the Secured Party will proceed to
collect said Collateral in a commercially reasonable manner and may deduct from
the proceeds its reasonable expenses of collection. Secured Party is authorized
to receive in full satisfaction of any obligor's obligation to the Debtor a
commercially reasonable sum less than the face amount thereof. The Debtor agrees
that if any sums are received by it in respect to the Collateral after such
notification by the Secured Party, such sums shall be received in trust by the
Debtor and immediately shall be paid over by the Debtor to the Secured Party.
The Debtor agrees to hold the Secured Party harmless from any claim, loss or
damage caused by any failure to collect any obligation or to enforce any
contract or by any act or omission on the part of the Secured Party, its agents
and employees, relating to the Collateral except for Secured Party's willful
misconduct or gross negligence. The covenant set forth in the preceding sentence
shall survive the termination of this Agreement.
12. Maintenance of Collateral; Insurance. The Debtor will keep the tangible
Collateral in good repair and the Secured Party may inspect the Collateral at
reasonable times and intervals and may for this purpose enter any premises upon
which the Collateral is located, including, but not limited to, the Debtor's
facilities. The Debtor will continuously maintain, or cause to be continuously
maintained, insurance on all tangible Collateral by an insurer approved by the
Secured Party against such risks, in such amounts, and with such terms as are
required of the insurance to be maintained by the Debtor under the Restated
Credit Agreement.
13. Compliance With Laws. The Debtor will ensure that its use of the
Collateral will comply in all material respects with all applicable laws,
ordinances, and regulations of Governmental Authorities.
7
<PAGE>
14. Waivers. This Agreement shall not be qualified or supplemented by
course of dealing. No waiver or modification by Secured Party of any of the
terms and conditions hereof shall be effective unless in writing signed by the
Secured Party. No waiver or indulgence by the Secured Party as to any required
performance by the Debtor shall constitute a waiver as to any required
performance or other obligations of the Debtor hereunder.
15. Release of Collateral, Etc. The obligations of the Debtor shall not be
affected by the release or substitution of any collateral or by the release of
or any renewal or extensions of time to any party to any instrument, obligation
or liability secured hereby or to which the Debtor is a party. The Secured Party
shall not be bound to resort to or exhaust its recourse or to take any action
against other parties or other collateral. The Debtor hereby waives presentment,
demand, protest, notice of protest and notice of non-acceptance or non-payment
with respect to any indebtedness, obligation or liability secured hereby.
16. Further Assurances. The Debtor, at its sole cost and expense, will at
any time and from time to time hereafter (a) execute such financing statements
and other instruments and perform such other acts as may be necessary or as
Secured Party may reasonably request to establish and maintain the security
interests herein granted by the Debtor to the Secured Party and the priority and
continued perfection thereof; (b) obtain and promptly furnish to Secured Party
evidence of all such Government Approvals as may be required to enable the
Debtor to comply with its obligations under this Security Agreement; and (c)
execute and deliver all such other instruments and perform all such other acts
as Secured Party may reasonably request to carry out the transactions
contemplated by this Security Agreement.
17. Expenses Incurred by Secured Party. The Secured Party is not required
to, but may, at its option, pay any Tax, insurance premium, filing or recording
fees, or other charges payable by the Debtor hereunder and any such amount shall
bear interest from the date of payment until repaid at the Default Rate. Such
amounts shall be repayable by the Debtor on demand and the Debtor's obligation
to make such repayment shall constitute an additional Obligation secured hereby.
18. Assignment. Secured Party may transfer as collateral security the whole
or any part of the Collateral to any successor Agent under the Restated Credit
Agreement and all obligations, rights, powers and privileges herein provided
shall inure to the benefit of the assignee to the extent of such assignment.
19. General Remedies. If an Event of Default shall occur, Secured Party
shall have all remedies provided by law and,
8
<PAGE>
without limiting the generality of the foregoing or the remedies provided in any
other paragraph hereof, shall have the following remedies:
(a) The remedies of a secured party under the Uniform Commercial Code;
and
(b) The right to make notification and pursue collection or, at
Secured Party's option, to sell all or part of the Collateral and make
application of all proceeds or sums due on the Collateral in accordance with the
Restated Credit Agreement; and
(c) The right to enter any premises where any of the Collateral is
situated and take possession of such Collateral without notice or demand and
without legal proceedings; and
(d) The right to exercise and enforce all of the Debtor's rights under
any contracts or any other agreement to which the Debtor is a party or of which
the Debtor is a beneficiary; and
(e) All other remedies which may be available in law or equity.
At the request of Secured Party, the Debtor will assemble the tangible
Collateral and make it available to Secured Party at a place designated by the
Secured Party. To the extent that notice of sale shall be required by law to be
given, the Debtor agrees that a period of ten (10) days from the time the notice
is sent shall be a reasonable period of notification of a sale or other
disposition of Collateral by the Secured Party, and that any notice or other
communication from the Secured Party to the Debtor pursuant to this Agreement or
required by any statute may be given to the Debtor as provided in the Restated
Credit Agreement. The Debtor agrees to pay on demand the amount of all expenses
incurred by the Secured Party in protecting and realizing on the Collateral and
the Debtor further agrees that if this Agreement or any Obligation is referred
to an attorney for protecting or defending the priority of the Secured Party's
interest in the Collateral or for collecting or realizing thereon, the Debtor
shall pay all of Secured Party's expenses, including without limitation,
reasonable attorneys' fee and costs and expenses of title search and all court
costs and costs of public officials and the Debtor further agrees that its
obligation to pay such amounts shall bear interest from the date such
expenditures are made by Secured Party until repaid at the Default Rate and
shall be secured hereby. The Debtor agrees to pay any deficiency remaining after
collection or realization by the Secured Party on the Collateral.
9
<PAGE>
20. Securities Remedies. If an Event of Default shall occur and if the
Secured Party shall elect to exercise its right to sell or otherwise dispose of
all or any part of the Collateral constituting securities, the Debtor recognizes
that the Secured Party may be unable or may deem it unadvisable to effect a
public sale of all or a part of the securities and may be compelled to resort to
one or more private sales to a restricted group of purchasers who will be
obligated to agree, among other things, to acquire the securities for their own
account, for investment and not with a view to the distribution or resale
thereof. The Debtor acknowledges that any such private sales may be at prices
and on terms less favorable to the Secured Party than those of public sales, and
agrees that such private sales shall be deemed to have been made in a
commercially reasonable manner and that the Secured Party shall have no
obligation to delay sale of any securities to permit the issuer thereof to
register such securities for public sale under the Securities Act. The Debtor
will promptly deliver to the Secured Party all written notices, and will
promptly give the Secured Party written notice of any other notices, received by
it with respect to the securities. Following the occurrence of an Event of
Default hereunder and upon request of Secured Party, the Debtor will deliver to
Secured Party irrevocable proxies with respect to the securities in form
satisfactory to the Secured Party. Until receipt thereof, this Agreement shall
constitute the Debtor's proxy to the Secured Party or its nominee to vote all
shares of the securities then registered in the Debtor's name following the
occurrence of such an Event of Default.
21. Hold Harmless. The Debtor will indemnify and hold the Secured Party and
the Lenders harmless from all liability, loss, damage or expense, including
reasonable attorneys' fees and costs, that the Secured Party may incur resulting
from, arising out of or relating to Secured Party's good faith efforts to comply
with or enforce the terms of this Agreement or the Obligations. The covenants
set forth in this Section 21 shall survive the termination of this Agreement.
22. Severability. In case any one or more of the provisions contained in
this Agreement is invalid, illegal or unenforceable in any respect in any
jurisdiction, the validity, legality and enforceability of such provision or
provisions will not in any way be affected or impaired thereby in any other
jurisdiction; and the validity, legality and enforceability of the remaining
provisions contained herein will not in any way be affected or impaired thereby.
23. Governing Law and Venue. This Agreement shall be construed and enforced
in accordance with the internal laws of the State of Washington except where the
location of Collateral requires that the creation, validity, perfection, or
enforcement
10
<PAGE>
of the security interests provided for herein may be governed by the laws of the
jurisdiction where such Collateral is located. The Debtor hereby irrevocably
submits to the jurisdiction of any state or federal court sitting in Seattle,
Washington, in any action or proceeding brought to enforce or otherwise arising
out of or relating to this Agreement.
24. Successors. This Agreement inures to the benefit of the Secured Party
and its successors and assigns, and shall bind the successors and assigns of the
Debtor. The Debtor may not assign its rights and obligations hereunder without
the prior written consent of the Secured Party.
25. Release of Security Interests. Upon the termination of each Lender's
Commitment, payment in full of each Loan and the Notes and performance of all
other obligations of the Borrower under this Agreement and the other Restated
Loan Documents, then the Secured Party shall, upon the written request of the
Debtor and at the sole cost and expense of the Debtor, execute and deliver to
the Debtor change statements terminating all Financing Statements filed
hereunder and shall deliver to the Debtor possession of all Collateral held by
the Secured Party. As used herein "all other obligations of the Borrower" shall
not include the obligation to indemnify the Agent, the Lenders, or any other
indemnified party, unless (a) facts and circumstances are then known which in
the reasonable opinion of the Indemnified Person, as the case may be, could
reasonably be expected to give rise to an obligation owing by Borrower to make
an indemnity payment; and (b) Borrower has not bonded its indemnity obligations
or otherwise provided for the payment thereof in a manner satisfactory to the
Indemnified Person.
IN WITNESS WHEREOF, the Debtor has executed this Security Agreement as of
the date and year first above written.
DEBTOR:
HOLLYWOOD ENTERTAINMENT CORPORATION
By DONALD J. EKMAN
Its Senior Vice President
Address: 25600 S.W. Pkwy. Ctr. Dr.
Wilsonville, OR 97070
Attn: Donald J. Ekman
Telefax: (503) 677-1680
SCHEDULE
- --------
Schedule 1 Assumed Business Names
11
<PAGE>
SCHEDULE 1
ASSUMED BUSINESS NAMES
1. Hollywood Video
2. Hollywood Video Super Stores
3. Hollywood Video Express
4. Video Watch
5. Video Central
6. Video Park
7. Eastman Video
1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-80080, No. 33-81844, and No. 333-03524) of our
report dated February 20, 1997, except as to Note 11, which is as of March 15,
1997 appearing on page F-1 of Hollywood Entertainment Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996.
PRICE WATERHOUSE LLP
Portland, Oregon
March 28, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Hollywood Entertainment Corporation on Form S-8 (File No. 333-03524, File No.
33-81844 and File No. 33-80080) of our report, dated February 14, 1995, except
for Note 3 as to which the date is March 29, 1995 on our audit of the statements
of operations, changes in shareholders' equity and cash flows of Hollywood
Entertainment Corporation for the year ended December 31, 1994, which report is
included in this Annual Report on Form 10-K for the year ended December 31,
1996.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,849
<SECURITIES> 0
<RECEIVABLES> 25,785
<ALLOWANCES> 0
<INVENTORY> 45,255
<CURRENT-ASSETS> 87,121
<PP&E> 115,812
<DEPRECIATION> 87,115
<TOTAL-ASSETS> 449,783
<CURRENT-LIABILITIES> 80,728
<BONDS> 0
0
0
<COMMON> 238,021
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 449,783
<SALES> 49,717
<TOTAL-REVENUES> 302,342
<CGS> 30,707
<TOTAL-COSTS> 263,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,136
<INCOME-PRETAX> 34,282
<INCOME-TAX> 13,652
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,630
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
