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Filed pursuant to Rule 424(b)(3)
Registration No. 333-35351
[LOGO]
OFFER FOR ALL OUTSTANDING
10 5/8% SENIOR SUBORDINATED NOTES DUE 2004
IN EXCHANGE FOR
10 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2004
OF
HOLLYWOOD ENTERTAINMENT CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON OCTOBER 24, 1997, UNLESS EXTENDED.
Hollywood Entertainment Corporation, an Oregon corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange an aggregate principal amount of up to
$200,000,000 of 10 5/8% Series B Senior Subordinated Notes due 2004 of the
Company (the "New Notes") for a like principal amount of the issued and
outstanding 10 5/8% Senior Subordinated Notes due 2004 of the Company (the "Old
Notes" and, together with the New Notes, the "Notes") with the holders thereof.
The terms of the New Notes are identical in all respects to the terms of the Old
Notes, except that the terms of the New Notes do not include certain transfer
restrictions and registration rights included in the terms of the Old Notes.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from August 13, 1997. Accordingly, if the relevant record date for
interest payment occurs after the consummation of the Exchange Offer, registered
holders of New Notes on such record date will receive interest accruing from the
most recent date to which interest has been paid or, if no interest has been
paid, from August 13, 1997. If, however, the relevant record date for interest
payment occurs prior to the completion of the Exchange Offer, registered holders
of Old Notes on such record date will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from August 13, 1997. Old Notes accepted for exchange will cease to accrue
interest from and after the date of completion of the Exchange Offer, except as
set forth in the immediately preceding sentence. Holders of Old Notes whose Old
Notes are accepted for exchange will not receive any payment in respect of
interest on such Old Notes otherwise payable on any interest payment date, the
record date for which occurs on or after consummation of the Exchange Offer.
The Old Notes were issued on August 13, 1997 (the "Old Note Offering") in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of
the Securities Act. Accordingly, the Old Notes may not be reoffered, resold,
pledged, hypothecated or otherwise transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. The Old Notes are, and the New Notes will
be, general unsecured obligations of the Company, subordinated in right of
payment to all existing and future Senior Indebtedness (as defined herein),
including borrowings under the New Credit Facility (as defined herein). The
Indenture (as defined herein) permits the Company to incur additional
indebtedness, including Senior Indebtedness, subject to certain limitations. As
of June 30, 1997, on a pro forma basis after giving effect to the sale of the
Old Notes and the application of the net proceeds therefrom, the Company would
have had $9.6 million of Senior Indebtedness outstanding.
The New Notes are being offered hereby to satisfy certain obligations of the
Company contained in the Registration Rights Agreement, dated August 13, 1997
(the "Registration Rights Agreement"), among the Company and the initial
purchasers of the Old Notes. The Company is making the Exchange Offer in
reliance upon interpretations of the staff of the Securities and Exchange
Commission (the "Commission") by which the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the New Notes are acquired in the ordinary
course of the holder's business and the holder has no arrangement or
understanding with any person to participate in the distribution of the New
Notes. If any holder of Old Notes is an affiliate of the Company, is engaged in
or intends to engage in or has any arrangement with any person to participate in
the distribution of the New Notes to be acquired pursuant to the Exchange Offer,
the holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of the New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where the Old Notes were acquired by the broker-dealer as
a result of market-making activities or other trading activities. The Company
has agreed that, for a period ending on the earlier of (i) 180 days after the
date of this Prospectus and (ii) the date on which a broker-dealer is no longer
required to deliver a prospectus in connection with market-making or other
trading activities, it will make this Prospectus (as amended and supplemented)
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date (as defined herein). If the Company terminates the Exchange
Offer and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the holders thereof. See "The Exchange Offer."
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automatic Linkages market (the "PORTAL Market") of the National
Association of Securities Dealers, Inc. Prior to this Exchange Offer, there has
been no public market for the New Notes. If a market for the New Notes develops,
the New Notes could trade at a discount from their principal amount. The Company
does not intend to list the New Notes on any securities exchange or to seek
approval for quotation on any automated quotation system. There is no assurance
that an active public market for the New Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES
OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus is September 24, 1997.
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THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
HOLLYWOOD ENTERTAINMENT CORPORATION, 25600 SW PARKWAY CENTER DRIVE, WILSONVILLE,
OREGON 97070, ATTENTION: MR. DONALD J. EKMAN, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL (TELEPHONE NUMBER (503) 570-1600). TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER THAN OCTOBER 17, 1997.
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND FINANCIAL STATEMENTS AND UNAUDITED
FINANCIAL DATA APPEARING ELSEWHERE OR INCORPORATED IN THIS PROSPECTUS.
THE COMPANY
Hollywood Entertainment owns and operates 661 video retail superstores in 33
states as of June 30, 1997 and is the second largest video retailer in the
United States, with revenue of $328.3 million for the twelve months ended June
30, 1997. According to video industry analyst Paul Kagan Associates, Inc. ("Paul
Kagan"), 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,
energy and excitement of the motion picture industry and enables the public to
easily identify and recognize Hollywood Video superstores.
The Company opened its first video superstore in October 1988 and operated
16 stores at the time of its initial public offering in July 1993. The Company
operated 551 stores as of December 31, 1996, opened 110 new stores in the six
months ended June 30, 1997, and plans to open approximately 240 new stores in
the second half of 1997 and approximately 400 new stores in 1998. The Company's
revenue increased from $11.0 million in 1992 to $328.3 million for the twelve
months ended June 30, 1997, and its Adjusted EBITDA (as defined herein)
increased from $2.2 million to $73.2 million over the same period. Comparable
store revenue increased 7% for the year ended December 31, 1996 and 5% for each
of the first and second quarters of 1997.
Hollywood Video superstores average approximately 7,500 square feet and
typically carry approximately 10,000 titles and 16,000 videocassettes and video
games, consisting of many copies of popular new releases and an extensive
selection of older or "catalog" movies. Hollywood Entertainment is a category
killer in its industry, offering more copies of popular new videocassette
releases and more titles than its competitors to achieve greater customer
satisfaction and encourage repeat visits. Hollywood Video stores are primarily
located in high traffic locations, in stand-alone buildings, at the end of
shopping strips or in other highly visible locations.
According to Paul Kagan, the U.S. videocassette rental and sales industry
has grown from $9.8 billion in revenue in 1990 to $15.6 billion in 1996, and is
expected to reach $18.6 billion in 2001. The video rental 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.
The video retail industry is the largest single source of revenue to movie
studios and represented approximately $4.5 billion, or 45%, of the $9.9 billion
of estimated domestic studio revenue in 1996 according to Paul Kagan. According
to the Motion Picture Association of America (the "MPAA"), between 1990 and 1996
only 7% of all movies released generated in excess of $20 million in U.S.
theater revenue for studios. Over the same period, members of the MPAA reported
that the average production, advertising and distribution cost per movie
increased from $38.8 million to $59.7 million. Video retail stores, including
those operated by the Company, purchase movies on videocassette regardless of
whether the movies were successful at the box office, thus providing the major
movie studios a reliable and substantial source of revenue for almost all of the
hundreds of movies produced each year. Consequently, the Company believes movie
studios are highly motivated to continue to protect the video retail industry as
a unique and significant source of revenue.
The Company was incorporated in Oregon in June 1988; its executive offices
are located at 25600 SW Parkway Center Drive, Wilsonville, Oregon 97070, and its
telephone number is (503) 570-1600. References
1
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in this Offering Memorandum to the "Company" or "Hollywood Entertainment" are to
Hollywood Entertainment Corporation and its wholly owned subsidiary.
THE NEW CREDIT FACILITY
In connection with the offering of the Old Notes, the Company (i) repaid in
full all of the outstanding indebtedness under its existing $150 million
revolving bank credit agreement (the "Existing Credit Facility"), (ii) has
terminated the Existing Credit Facility and (iii) has entered into a credit
agreement with Societe Generale, DLJ Capital Funding, Inc. and Goldman Sachs
Credit Partners L.P. (collectively, the "Arrangers") on behalf of themselves and
as agents for a syndicate of lenders to be determined (the "New Credit
Facility"), pursuant to which up to $300 million will be available for borrowing
on a revolving basis. The obligations under the New Credit Facility are secured
by substantially all of the assets of the Company. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain Other
Indebtedness."
THE EXCHANGE OFFER
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Securities Offered.................. $200,000,000 principal amount of 10 5/8% Series B
Subordinated Notes due 2004. The terms of the New
Notes and the Old Notes are identical in all
respects, except certain transfer restrictions and
registration rights relating to the Old Notes will
not be applicable with respect to the New Notes.
Issuance of Old Notes;
Registration Rights................. The Old Notes were issued on August 13, 1997 to
Montgomery Securities, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs & Co. and
Societe Generale Securities Corporation
(collectively, the "Initial Purchasers"), which
placed the Old Notes with "qualified institutional
buyers" (as that term is defined in Rule 144A
promulgated under the Securities Act), certain
foreign purchasers pursuant to Regulation S under the
Securities Act and a limited number of institutional
"accredited investors" (as defined in Rule
501(a)(1),(2), (3) or (7) under the Securities Act).
In connection therewith, the Company executed and
delivered for the benefit of the holders of Old Notes
the Registration Rights Agreement, pursuant to which
the Company agreed (i) to file a registration
statement (the "Registration Statement") no later
than 30 days after August 13, 1997 with respect to
the Exchange Offer and (ii) to use its best efforts
to cause the Registration Statement to be declared
effective by the Commission no later than 90 days
after August 13, 1997. In certain circumstances, the
Company will be required to file a shelf registration
statement (the "Shelf Registration Statement") to
cover resales of the Old Notes by the holders
thereof. If the Company does not comply with certain
of its obligations under the Registration Rights
Agreement, it will be required to pay Additional
Interest (as defined herein) to holders of the Old
Notes. See "The Exchange Offer--Registration Rights;
Additional Interest." Holders of the Old Notes do not
have any appraisal rights in connection with the
Exchange Offer.
The Exchange Offer.................. The New Notes are being offered in exchange of a like
principal amount of Old Notes. The issuance of the
New
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2
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Notes is intended to satisfy the obligations of the
Company contained in the Registration Rights
Agreement. Based upon the position of the staff of
the Commission set forth in no-action letters issued
in connection with other transactions substantially
similar to the Exchange Offer, the Company believes
the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) any
holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act,
(ii) an Initial Purchaser that acquired the Old Notes
directly from the Company solely in order to resell
pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act or
(iii) a broker-dealer that acquired the Old Notes as
a result of market-making or other trading
activities) without further compliance with the
registration and prospectus delivery requirements of
the Securities Act, provided that the New Notes are
acquired in the ordinary course of the holder's
business and the holder is not participating and has
no arrangement with any person to participate in a
distribution (within the meaning of the Securities
Act) of the New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of
the New Notes. Although there has been no indication
of any change in the staff's position, there is no
assurance that the staff of the Commission would make
a similar determination with respect to the resale of
the New Notes. See "Risk Factors."
Procedures for Tendering............ Tendering holders of Old Notes must complete and sign
the Letter of Transmittal in accordance with the
instructions contained therein and forward the same
by mail, facsimile or hand delivery, together with
any other required documents, to the Exchange Agent,
either with the Old Notes to be tendered or in
compliance with the specified procedures for
guaranteed delivery of Old Notes. Holders of the Old
Notes desiring to tender the Old Notes in exchange
for New Notes should allow sufficient time to ensure
timely delivery. Certain brokers, dealers, commercial
banks, trust companies and other nominees may also
effect tenders by book-entry transfer. Holders of Old
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish to
tender Old Notes pursuant to the Exchange Offer.
Letters of Transmittal and certificates representing
the Old Notes should not be sent to the Company.
These documents should only be sent to the Exchange
Agent. Questions regarding how to tender and requests
for information should also be directed to the
Exchange Agent. See "The Exchange Offer--Procedures
for Tendering the Old Notes."
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Tenders, Expiration Date; The Exchange Offer will expire the earlier of 5:00
Withdrawal........................ p.m., New York City time, on October 24, 1997 or (ii)
the date when all Old Notes have been tendered, or
such later date and time to which it is extended,
provided it may not be extended beyond December 11,
1997. The Company will accept for exchange any and
all Old Notes that are validly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The tender of Old Notes
pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Old Note
not accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer. See
"The Exchange Offer--Terms of the Exchange Offer;
Period for Tendering Old Notes" and "--Withdrawal
Rights."
Federal Income Tax Consequences..... For federal income tax purposes, the exchange
pursuant to the Exchange Offer will not result in any
income, gain or loss to the holders of Notes or the
Company. See "Certain United States Federal Income
Tax Considerations."
Use of Proceeds..................... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Appraisal Rights.................... Holders of Old Notes will not have dissenters' rights
or appraisal rights in connection with the Exchange
Offer.
Exchange Agent...................... Continental Stock Transfer & Trust Company is serving
as Exchange Agent in connection with the Exchange
Offer.
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CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
Holders of Old Notes who do not exchange Old Notes for New Notes pursuant to
the Exchange Offer will continue to be subject to the restrictions on transfer
of the Old Notes as set forth in the legend thereon as a consequence of the
issuance of the Old Notes pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not anticipate that it will register the
Old Notes for resale under the Securities Act. See "Risk Factors--Consequences
of Failure to Exchange Old Notes" and "The Exchange Offer--Consequences of
Failure to Exchange Old Notes."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all respects,
except that the terms of the New Notes do not include certain transfer
restrictions and registration rights relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest
has been paid on the Old Notes or, if no interest has been paid on the Old
Notes, from August 13, 1997. Accordingly, registered Holders of New Notes on the
relevant record date for the first interest payment date following the
completion of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from August 13, 1997. Old Notes accepted for exchange will cease to accrue
interest from and after the date of completion of the Exchange Offer. Holders of
Old Notes whose Old Notes are accepted for exchange will not receive any payment
in respect of interest on
4
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the Old Notes otherwise payable on any interest payment date that occurs on or
after completion of the Exchange Offer.
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Issuer............................ Hollywood Entertainment Corporation.
Notes............................. $200,000,000 principal amount of 10 5/8% Series B Senior
Subordinated Notes due 2004.
Maturity Date..................... August 15, 2004.
Interest Payment Dates............ Each February 15 and August 15, commencing on February
15, 1998.
Optional Redemption............... The Notes may be redeemed at the option of the Company,
in whole or in part, on or after August 15, 2001 at the
redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. In
addition, at any time prior to August 15, 2000, the
Company may redeem up to 35% of the initial principal
amount of the Notes originally issued with the net
proceeds of one or more Public Equity Offerings, at a
redemption price equal to 110.625% of the principal
amount of such Notes, plus accrued and unpaid interest,
if any, to the date of redemption; PROVIDED that at
least 65% of the principal amount of Notes originally
issued remains outstanding immediately after the
occurrence of each such redemption and that each such
redemption occurs within 60 days following the closing
of each such Public Equity Offering. See "Description of
Notes--Optional Redemption."
Mandatory Redemption.............. Except as set forth herein, the Company is not required
to make mandatory redemption or sinking fund payments
with respect to the Notes.
Ranking........................... The Notes will be general unsecured obligations of the
Company, subordinated in right of payment to all
existing and future Senior Indebtedness of the Company,
including borrowings under the $300 million New Credit
Facility. As of June 30, 1997, on a pro forma basis
after giving effect to the sale of the Old Notes and the
application of the net proceeds therefrom, the Company
would have had $9.6 million of Senior Indebtedness
outstanding. The Indenture will permit the incurrence of
additional Senior Indebtedness by the Company, subject
to certain limitations. See "Description of Notes--
Subordination" and "--Certain Covenants--Limitation on
Indebtedness."
Change of Control................. Upon a Change of Control, each Holder of Notes shall
have the right to require the Company to repurchase all
or any part of such Holder's Notes at a purchase price
equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, to the date of
purchase. The Company's ability to repurchase Notes upon
a Change of Control, however, may be restricted by the
terms of the New Credit Facility. See "Description of
Notes--Change of Control."
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Certain Covenants................. The Indenture will contain covenants including, but not
limited to, covenants limiting the Company and its
Restricted Subsidiaries (as defined herein) with respect
to the following: restricted payments, incurrence of
additional indebtedness, liens, payment restrictions
affecting subsidiaries, mergers and consolidations,
asset sales, transactions with Affiliates (as defined
herein), and issuances of capital stock of subsidiaries.
See "Description of Notes--Certain Covenants."
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RISK FACTORS
Holders of Old Notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before tendering their Old Notes in the Exchange Offer. The risk
factors set forth (other than "Risk Factors--Consequences of Failure to Exchange
Old Notes") are generally applicable to the Old Notes as well as the New Notes.
6
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SUMMARY FINANCIAL INFORMATION AND CERTAIN OPERATING DATA
(IN THOUSANDS, EXCEPT SELECTED STORE AND RATIO DATA)
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<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Rental................................... $ 9,762 $ 15,267 $ 61,941 $ 123,894 $ 252,625 $ 109,059 $ 184,715
Product sales............................ 1,282 2,072 11,347 25,536 49,717 19,963 35,762
Total.................................. 11,044 17,339 73,288 149,430 302,342 129,022 220,477
Operating income........................... 2,270 3,643 12,610 17,537 38,418 12,616 25,506
Interest expense........................... 333 322 795 490 4,339 1,625 3,617
Net income (2)(3).......................... 1,177 2,146 8,143 9,226 20,630 6,732 1,874
Cash flow from operations.................. 5,478 9,395 42,699 68,739 125,429 37,722 60,734
Cash used in investing activities.......... 4,089 9,093 102,339 168,861 198,716 61,623 135,408
Cash (used) provided by financing
activities............................... (793) 8,291 89,052 91,085 56,156 (1,382) 67,607
PRO FORMA STATEMENT OF OPERATIONS AND OTHER
DATA (4):
Pro Forma operating income................. $ 1,796 $ 2,795 $ 9,745 $ 17,537 $ 38,418 $ 12,616 $ 25,506
Pro Forma net income (2)(3)................ 892 1,647 6,277 11,786 20,630 6,732 13,198
EBITDAR (5)................................ 6,195 9,686 41,736 90,129 179,633 74,961 127,807
Rent expense............................... 1,469 2,107 9,300 25,300 54,100 22,934 40,490
EBITDA (6)................................. 4,726 7,579 32,436 64,829 125,533 52,027 87,317
Adjusted EBITDA (7)........................ 2,201 4,474 17,875 31,516 57,740 22,612 38,023
Capital expenditures (net) (8)............. 3,886 7,912 44,652 139,971 188,291 66,092 136,058
Ratio of Adjusted EBITDA to interest
expense (9)..............................
Ratio of total debt to Adjusted EBITDA.....
Ratio of net debt to Adjusted EBITDA.......
SELECTED STORE DATA:
Number of stores at beginning of period.... 10 15 25 113 305 305 551
Number of stores opened during period...... 5 10 33 122 250 77 110
Number of stores acquired during period.... 0 0 55 70 0 0 0
Number of stores closed during period...... 0 0 0 0 (4) 0 0
--------- --------- --------- --------- --------- --------- ---------
Number of stores at end of period.......... 15 25 113 305 551 382 661
Comparable store revenue increase (10)..... 27% 16% 7% 1% 7% 6% 5%
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<CAPTION>
AS OF JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED (1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Adjusted working capital (including rental inventory) (11)..................... $ 191,189 $ 254,689
Total assets................................................................... 521,389 591,389
Long-term debt (including current portion) (12)................................ 139,607 209,607
Shareholders' equity........................................................... 296,070 296,070
</TABLE>
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(1) Adjusted to reflect the sale of $200 million principal amount of Old Notes
(at an interest rate of 10.625% per annum), the receipt of the net proceeds
therefrom and the repayment of $130.0 million of outstanding indebtedness
under the Existing Credit Facility at June 30, 1997. See "Use of Proceeds"
and "Description of Certain Other Indebtedness."
(2) For 1992 and 1993, includes a pro forma income tax provision (benefit)
adjustment of $830,000 and ($140,000), respectively, to reflect the Company
as a C corporation rather than an S corporation for federal and state income
tax purposes for 1992 and for the period which commenced January 1, 1993 and
ended July 18, 1993.
(3) Net income for the six months ended June 30, 1997 includes, and Pro Forma
net income for the six months ended June 30, 1997 eliminates, a pre-tax
charge of $18.9 million relating to the settlement of a securities class
action lawsuit. See "Business--Legal Proceedings."
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(4) Effective January 1, 1995, the Company changed its method of amortizing the
cost of videocassette rental inventory. See 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 if the new method had been applied
retroactively to all videocassettes in service at that date. The Pro Forma
amounts shown herein reflect the effect on operating income and 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.
(5) EBITDAR represents EBITDA before rent expense. Such data are not a measure
of financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity.
(6) EBITDA represents operating income before depreciation and amortization.
Such data are not a measure of financial performance under generally
accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.
(7) Adjusted EBITDA represents EBITDA plus non-cash expenses that reduced
EBITDA, minus 30% of rental revenue for such period after deducting from
such 30% of rental revenue any cash charges associated with the acquisition
of new release videocassettes. The non-cash expenses represent the cost of
goods sold on previously viewed videocassettes (as derived from the
Company's internal point of sale systems) and losses on inventory shrink.
The Company believes 30% of rental revenue approximates amounts spent on
purchase of new release videocassettes, which are capitalized. Adjusted
EBITDA can be calculated from EBITDA as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, 1996
---------------------
(IN MILLIONS)
<S> <C>
EBITDA............................................................... $ 125.5
Non-cash expenses.................................................... 8.0
30% of rental revenue................................................ (75.8)
Associated cash charges.............................................. 0.0
------
Adjusted EBITDA...................................................... $ 57.7
------
------
</TABLE>
This measure of Adjusted EBITDA is used under the Indenture and the New
Credit Facility. See "Description of Notes." Adjusted EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to income from
operations, net income or cash flows from operating activities as an
indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity.
(8) Includes capital expenditures related to growth in new stores, purchases of
new release videocassettes for existing stores, expenditures to refurbish
existing stores and other items. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(9) For purposes of computing this ratio, interest expense excludes amortization
of deferred financing costs.
(10) A store becomes comparable after it has been open and owned by the Company
for one year. 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 one year after reopening.
(11) 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. The classification of these assets as noncurrent
typically excludes them from the computation of working capital. The Company
believes the inclusion of rental inventory in the computation of working
capital is meaningful to an understanding of the Company because this
inventory generates a substantial portion of the Company's revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(12) Long-term debt includes borrowings under the Existing Credit Facility.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
THE INFORMATION, INCLUDING INFORMATION CONCERNING THE COMPANY'S PLANNED
EXPANSION AND FINANCIAL RESOURCES, SET FORTH IN "SUMMARY" UNDER THE CAPTION "THE
COMPANY," IN "RISK FACTORS" UNDER THE CAPTION "UNCERTAIN ABILITY TO ACHIEVE AND
MANAGE PLANNED EXPANSION," IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" UNDER THE CAPTION "LIQUIDITY AND CAPITAL
RESOURCES" AND IN "BUSINESS" UNDER THE CAPTIONS "GENERAL," "INDUSTRY
OVERVIEW--VIDEO RETAIL INDUSTRY," "EXPANSION STRATEGY," "DECENTRALIZATION AND
CREATION OF ZONE OFFICES" AND "COMPETITION" 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 "RISK FACTORS," "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" AND IN "BUSINESS" UNDER THE CAPTION
"COMPETITION."
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS,
AS WELL AS ALL OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE TENDERING
THEIR OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW (OTHER
THAN "CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES") ARE GENERALLY APPLICABLE
TO THE OLD NOTES AS WELL AS THE NEW NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
the Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Holders of the Old Notes desiring to tender the
Old Notes in exchange for New Notes, therefore, should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange.
Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant
to the Exchange Offer will continue to be subject to the restrictions on
transfer of the Old Notes as set forth in the legend thereon. In general, the
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
anticipate that it will register the Old Notes under the Securities Act. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered, or tendered but unaccepted, Old Notes could
be adversely affected. See "The Exchange Offer--Consequences of Failure to
Exchange Old Notes."
Based on interpretations of the staff of the Commission, the Company
believes the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by a holder
thereof (other than (i) an "affiliate" of the Company within the meaning of Rule
405 of the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes
directly from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a broker-dealer who acquired the Old Notes as a result of market-making or
other trading activities) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that the New
Notes are acquired in the ordinary course of the holder's business and that the
holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of the New Notes. The Company has not, however, sought its own no-action
letter from the staff of the Commission. Although there has been no indication
of any change in the staff's position, there is no assurance that the staff of
the Commission would make a similar determination with respect to the resale of
the New Notes. Any holder that cannot rely upon these prior staff
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction,
9
<PAGE>
unless the sale is made pursuant to an exemption from these requirements. See
"The Exchange Offer--
Consequences of Failure to Exchange Old Notes."
LEVERAGE; INCURRENCE OF ADDITIONAL SENIOR INDEBTEDNESS
Upon completion of the offering of the Old Notes, the Company had
significant amounts of outstanding indebtedness and interest cost. The Company's
level of indebtedness presents risks to investors, including the possibility
that the Company may be unable to generate cash sufficient to pay the principal
of and interest on the indebtedness when due. At June 30, 1997, on a pro forma
basis after giving effect to the offering of Old Notes and the repayment of
amounts outstanding under the Existing Credit Facility, the Company would have
had total indebtedness of $209.6 million. In addition, under the New Credit
Facility, the Company is able to borrow up to an additional $300 million.
The Company's ability to make principal and interest payments on the Notes
will be dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which are out of the Company's
control. These factors include prevailing economic conditions and financial,
competitive, regulatory and other factors affecting the Company's business and
operations, and may be dependent on the availability of borrowings under the New
Credit Facility or other borrowings. Although the Company believes, based on
current levels of operations, its cash flow from operations, together with other
sources of liquidity, will be adequate to make required payments of principal
and interest on its debt (including the Notes), whether at or prior to maturity,
finance anticipated capital expenditures and fund working capital requirements,
there is no assurance in this regard. If the Company does not have sufficient
available resources to repay any indebtedness under the New Credit Facility (or
other indebtedness the Company may incur) when it becomes due and payable, the
Company may find it necessary to refinance such indebtedness, and there is no
assurance that refinancing will be available, or available on reasonable terms.
Additionally, the Company's level of indebtedness could have a material
adverse effect on the Company's future operating performance, including, but not
limited to, the following: (i) a significant portion of the Company's cash flow
from operations will be dedicated to debt service payments, thereby reducing the
funds available to the Company for other purposes; (ii) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes or other purposes may
be impaired; (iii) the Company's leverage may place the Company at a competitive
disadvantage; (iv) the Company's leverage may limit its ability to expand and
otherwise meet its growth objectives; and (v) the Company's leverage may hinder
its ability to adjust rapidly to changing market conditions and could make it
more vulnerable in the event of a downturn in general economic conditions or its
business. See "Description of Notes."
SUBORDINATION
The Notes are general unsecured obligations of the Company and will be
subordinate in right of payment to all Senior Indebtedness, including all
indebtedness under the New Credit Facility. As of June 30, 1997, on a pro forma
basis after giving effect to the sale of the Old Notes and the application of
the net proceeds therefrom, the Company would have had $9.6 million of Senior
Indebtedness outstanding. In addition, any borrowings under the $300 million New
Credit Facility will be Senior Indebtedness. The Indenture permits the Company
and (under limited circumstances) its subsidiaries to incur additional Senior
Indebtedness, subject to certain limitations, and the Company expects from time
to time to incur additional indebtedness, including Senior Indebtedness, subject
to such limitations. By reason of the subordination provisions of the Indenture,
in the event of the insolvency, liquidation, reorganization, dissolution or
other winding-up of the Company, the lenders under the New Credit Facility and
other creditors who are holders of Senior Indebtedness, as well as creditors
with secured obligations that are not defined as Indebtedness under the
Indenture, must be paid in full before payment of amounts due on the
10
<PAGE>
Notes. Accordingly, there may be insufficient assets remaining after such
payments to pay amounts due on the Notes.
In addition, the Company may not pay principal of, premium, if any, or
interest on, or any other amounts owing in respect of, the Notes, or purchase,
redeem or otherwise retire the Notes, or make any deposit pursuant to defeasance
provisions for the Notes, if Designated Senior Indebtedness (as such term is
defined in the Indenture) is not paid when due, unless such default is cured or
waived or has ceased to exist or such Designated Senior Indebtedness has been
repaid in full. Under certain circumstances, no payments may be made for a
specified period with respect to the principal of, premium, if any, and interest
on, and any other amounts owing in respect of, the Notes if a default, other
than a payment default, exists with respect to Designated Senior Indebtedness,
including indebtedness under the New Credit Facility, unless such default is
cured, waived or has ceased to exist or such indebtedness has been repaid in
full. See "Description of Notes--Subordination." If any Event of Default occurs
and is continuing, the Trustee (as defined herein) or the Holders of at least
25% in principal amount of the then outstanding Notes may declare all the Notes
to be due and payable immediately. Such a continuing Event of Default, however,
also would permit the acceleration of all outstanding obligations under the New
Credit Facility. In such an event, the subordination provisions of the Indenture
would prohibit any payments to Holders of the Notes unless and until such
obligations (and any other accelerated Senior Indebtedness) have been repaid in
full. See "Description of Notes--Subordination" and "--Defaults."
OBLIGATIONS IN THE EVENT OF A CHANGE OF CONTROL; RESTRICTIONS ON REPURCHASE OF
NOTES
Upon the occurrence of a Change of Control, the Company may be required to
purchase all or a portion of the Notes then outstanding at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of purchase. Prior to commencing such an offer to purchase,
the Company may be required to (i) repay in full all indebtedness of the Company
that would prohibit the repurchase of the Notes, including under the New Credit
Facility, or (ii) obtain any consent required to make the repurchase. If the
Company is unable to repay all of such indebtedness or is unable to obtain the
necessary consents, the Company will be unable to offer to purchase the Notes
and that failure will constitute an Event of Default under the Indenture. There
is no assurance that the Company will have sufficient funds available at the
time of any Change of Control to repurchase the Notes. The events that require a
repurchase upon a Change of Control under the Indenture may also constitute
events of default under the New Credit Facility or subsequently incurred
indebtedness of the Company. See "Description of Notes--Change of Control."
UNCERTAIN ABILITY TO ACHIEVE AND MANAGE PLANNED EXPANSION
The Company's future performance will depend on its ability to open new
stores and to operate these stores profitably. The Company has grown from 25
stores in two states at the end of 1993 to 661 stores in 33 states at June 30,
1997. The Company opened 110 new stores in the six months ended June 30, 1997
and plans to open approximately 240 new stores in the second half of 1997 and
approximately 400 new stores in 1998. Although the Company has identified all
sites for the balance of the 350 planned store openings in 1997 and has signed
leases for most of these locations, it has not yet specifically identified most
sites for the 1998 openings. The Company will continue to open stores in markets
where it has limited or no operating history. Additionally, the Company has been
decreasing the size of its acceptable trade areas primarily through the
increased opening of stores in small markets with populations under 40,000
people. The Company has a limited operating history in these smaller markets and
may experience lower than anticipated revenue and operating results. The
Company's expansion is dependent on a number of factors, including its ability
to hire, train and assimilate management and store-level employees, the adequacy
of the Company's financial resources and the Company's ability to identify and
successfully compete in new markets, to locate suitable store sites and
negotiate acceptable lease terms and to adapt its purchasing, management
information and other systems to accommodate expanded operations.
11
<PAGE>
The Company believes the amounts available for borrowing under the New
Credit Facility and the proceeds from the sale of the Old Notes will be
sufficient to fund its expansion through at least 1999. The Company's expansion,
however, is also dependent on the timely fulfillment by landlords and others of
their contractual obligations to the Company, the maintenance of construction
schedules and the speed at which local zoning and construction permits can be
obtained. There is no assurance that the Company will be able to achieve its
planned expansion or that expansion will be profitable. There is also no
assurance that the Company's new stores will achieve sales and profitability
comparable to the Company's existing stores.
The size of the Company's store base and the geographic scope of its
operations have expanded significantly over the last several years. This
expansion has placed and is expected to continue to place increasing pressure on
the Company's operating and management controls. The Company has hired a
significant number of additional senior management and other personnel to manage
this larger store base and has reorganized its operations into four geographic
zones, each of which is managed by a senior officer with responsibility for
store operations and new store development in the zone. This operating structure
is in the early stages of implementation, and there is no assurance it will be
effective for managing the Company's expanding operations. In addition, to
manage its larger store base and planned expansion, the Company will need to
continually evaluate the adequacy of its financial controls, management
information systems and distribution facilities. There is no assurance that the
Company will adequately anticipate or respond to all of the changing demands
that its planned expansion will impose on its infrastructure. See
"Business--Expansion Strategy" and "--Decentralization and Creation of Zone
Offices."
DEPENDENCE ON KEY PERSONNEL; RECENT MANAGEMENT ADDITIONS
The Company's future performance depends on the continued contributions of
certain key management personnel, including Mark J. Wattles, its founder, Chief
Executive Officer and principal shareholder. To support its planned expansion,
the Company has added a substantial number of senior management personnel. There
is no assurance that the Company will retain these new members of management or
that they will be able to successfully manage the Company's existing operations
or achieve its expansion plans. The Company's continued growth and profitability
also depend on its ability to attract and retain other management personnel,
including additional senior management and qualified store managers. See
"Management."
COMPETITION AND TECHNOLOGICAL OBSOLESCENCE
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"), the dominant
video retailer in the U.S., and with supermarkets, pharmacies, convenience
stores, bookstores, mass merchants, mail order operations and other retailers,
as well as with noncommercial sources such as libraries. According to the Video
Software Dealers Association, in 1996 there were approximately 27,000 video
specialty stores in the U.S. The Company believes approximately 7,200 of these
stores were video retail superstores. Some of the Company's competitors have
significantly greater financial and marketing resources, market share and name
recognition than the Company. Substantially all of the Company's stores compete
with stores operated by Blockbuster, most in very close proximity. As a result
of direct competition with Blockbuster, rental pricing of videocassettes may
become a more significant competitive factor in the Company's business, which
could have an adverse impact on the results of operations of the Company.
The Company also competes with cable, satellite and pay-per-view 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 available only to households with a direct broadcast
satellite receiver or a cable converter to unscramble incoming signals. Digital
compression technology and other developing technologies are expected eventually
to permit cable companies, direct broadcast satellite companies, telephone
companies and other telecommunications companies to transmit a much greater
12
<PAGE>
number of movies to homes at more frequently scheduled intervals throughout the
day on demand. Certain cable and other telecommunications companies have tested
and are continuing to test movie on demand services in some markets.
Technological advances or changes in the manner in which movies are marketed,
including in particular the earlier release of movie titles to pay-per-view,
including direct broadcast satellite, cable television or other distribution
channels, could make these technologies more attractive and economical, which
could have a material adverse effect on the business of the Company. See
"Business-- Industry Overview--Video Retail Industry" and "--Competition."
FLUCTUATIONS IN FUTURE OPERATING RESULTS
Future operating results may be affected by many factors, including
variations in the number and timing of store openings, the performance of new or
acquired stores, the quality and number of new release titles available for
rental and sale and the expense associated with the acquisition of new release
titles, acquisition by the Company of existing video stores, changes in
comparable store revenue, additional and existing competition, marketing
programs, weather, special or unusual events, seasonality and other factors that
may affect retailers in general. In addition, any concentration of new store
openings and the related new store pre-opening costs near the end of a fiscal
quarter could have an adverse effect on the financial results for that quarter
and could, in certain circumstances, lead to fluctuations in quarterly financial
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" and "--General Economic Trends, Quarterly
Results and Seasonality."
CONTROL BY PRINCIPAL SHAREHOLDER
The Company's founder, Mark J. Wattles, at June 30, 1997 beneficially owned
approximately 30% of the outstanding Common Stock. As a result, he may be able
effectively to control all matters requiring approval by the shareholders of the
Company, including the election of directors.
LACK OF PUBLIC MARKET FOR THE NOTES; VOLATILITY
The Old Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market. The New Notes will be new
securities, and there is no existing trading market for the New Notes.
Accordingly, there is no assurance regarding the future development of a trading
market for the New Notes or the ability of the holders, or the price at which
such holders may be able, to sell their New Notes. If such a market were to
develop, the New Notes could trade at prices that may be higher or lower than
the exchange tender price of the Old Notes. Prevailing market prices from time
to time will depend on many factors, including then existing interest rates, the
Company's operating results and cash flow and the market for similar securities.
Consequently, even if a trading market for the New Notes does develop, there is
no assurance as to the liquidity of that market. The Company does not intend to
apply for listing or quotation of the New Notes on any securities exchange or in
the over-the-counter market.
In addition, the liquidity of, and trading markets for, the New Notes may be
adversely affected by declines in the market for high-yield securities
generally. Such a decline may adversely affect liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
offered pursuant to the Exchange Offer. In consideration for issuing the New
Notes as contemplated in this Prospectus, the Company will receive in exchange
Old Notes in like principal amount, the terms of which are identical in all
respects to the New Notes except for certain transfer restrictions and
registration rights. The Old Notes surrendered in exchange for New Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the New
Notes will not result in any increase in the indebtedness of the Company.
13
<PAGE>
The net proceeds to the Company from the sale of the Old Notes were
approximately $193.5 million, after deduction of discounts, commissions and
offering expenses. The Company used the net proceeds in part to repay the
amounts outstanding under the Existing Credit Facility and the remainder will be
used to fund expansion and for working capital and other general corporate
purposes.
14
<PAGE>
SELECTED FINANCIAL DATA
The selected statement of operations, cash flow and balance sheet data
presented below for each of the years in the three-year period ended December
31, 1996 and as of December 31, 1995 and 1996 have been derived from the audited
financial statements of the Company incorporated by reference into this
Prospectus. The selected statement of operations, cash flow and balance sheet
data presented below as of December 31, 1992, 1993 and 1994 and for each of the
years in the two-year period ended December 31, 1993 have been derived from the
audited financial statements of the Company not incorporated by reference into
this Prospectus. The selected statement of operations, cash flow and balance
sheet data for the six months ended June 30, 1996 and 1997 and as of June 30,
1997 have been derived from the unaudited financial statements of the Company
incorporated by reference into this Prospectus. In the opinion of management of
the Company, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for those
periods. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997 or for any future period. This data should be read in
conjunction with the financial statements, pro forma financial statements,
related notes and other financial information included elsewhere in this
Prospectus or incorporated by reference herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, OTHER OPERATING AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental......................................... $ 9,762 $ 15,267 $ 61,941 $ 123,894 $ 252,625 $ 109,059 $ 184,715
Product sales.................................. 1,282 2,072 11,347 25,536 49,717 19,963 35,762
--------- --------- --------- --------- --------- --------- ---------
Total........................................ $ 11,044 $ 17,339 $ 73,288 $ 149,430 $ 302,342 $ 129,022 $ 220,477
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating income................................. $ 2,270 $ 3,643 $ 12,610 $ 17,537 $ 38,418 $ 12,616 $ 25,506
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of a change in
accounting principle(1)(2)..................... $ 1,177 $ 2,146 $ 8,143 $ 11,786 $ 20,630 $ 6,732 $ 1,874
Cumulative effect of a change in accounting
principle(3)................................... -- -- -- (2,560) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income(1)(2)................................. $ 1,177 $ 2,146 $ 8,143 $ 9,226 $ 20,630 $ 6,732 $ 1,874
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share(1)(2):
Net income per share before cumulative effect
of a change in accounting principle.......... $ 0.09 $ 0.14 $ 0.32 $ 0.36 $ 0.59 $ 0.19 $ 0.05
Cumulative effect per share of a change in
accounting principle......................... -- -- -- (0.08) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share.................... $ 0.09 $ 0.14 $ 0.32 $ 0.28 $ 0.59 $ 0.19 $ 0.05
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share calculations............ 12,936 15,357 25,578 32,962 35,159 34,916 37,465
Pro forma earnings per share(4):
Basic............................................ $ 0.09 $ 0.14 $ 0.33 $ 0.28 $ 0.60 $ 0.20 $ 0.05
Diluted.......................................... 0.09 0.14 0.32 0.28 0.59 0.19 0.05
CASH FLOW DATA:
Cash provided by operating activities............ $ 5,478 $ 9,395 $ 42,699 $ 68,739 $ 125,429 $ 37,722 $ 60,734
Cash used in investing activities................ 4,089 9,093 102,339 168,861 198,716 61,623 135,408
Cash (used) provided by financing activities..... (793) 8,291 89,052 91,085 56,156 (1,382) 67,607
PRO FORMA STATEMENT OF OPERATIONS DATA:
Pro forma operating income(3).................... $ 1,796 $ 2,795 $ 9,745 $ 17,537 $ 38,418 $ 12,616 $ 25,506
Pro forma net income(1)(2)(3).................... 892 1,647 6,277 11,786 20,630 6,732 13,198
Pro forma net income per share(1)(2)(3).......... $ 0.07 $ 0.11 $ 0.25 $ 0.36 $ 0.59 $ 0.19 $ 0.05
Shares used in per share calculations............ 12,936 15,357 25,578 32,962 35,159 34,916 37,465
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, OTHER OPERATING AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Number of stores at end of period................ 15 25 113 305 551 382 661
Comparable store revenue increase(5)............. 27% 16% 7% 1% 7% 6% 5%
OTHER FINANCIAL DATA:
EBITDAR(6)....................................... $ 6,195 $ 9,686 $ 41,736 $ 90,129 $ 179,633 $ 74,961 $ 127,807
Rent expense..................................... 1,469 2,107 9,300 25,300 54,100 22,934 40,490
EBITDA (as defined)(7)........................... 4,726 7,579 32,436 64,829 125,533 52,027 87,317
Adjusted EBITDA(8)............................... 2,201 4,474 17,875 31,516 57,740 22,612 38,023
Capital expenditures, net........................ 3,886 7,912 44,652 139,971 188,291 66,092 136,058
Ratio of earnings to fixed charges(9)............ 3.38x 4.33x 4.21x 3.09x 2.48x 2.18x 1.17x
Ratio of earnings to fixed charges as
adjusted(10)................................... 1.43x (10)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996 JUNE 30, 1997
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 1,013 $ 9,606 $ 39,017 $ 29,980 $ 12,849 $ 5,782
Total assets.......................................... 7,475 22,791 142,861 334,660 449,783 521,389
Long-term debt (including current portion)............ 1,873 2,399 3,505 7,971 82,361 139,607
Mandatorily redeemable common stock................... -- -- -- 54,250 -- --
Shareholders' equity.................................. 2,282 13,303 110,765 217,783 274,703 296,070
</TABLE>
- ------------------------------
(1) For 1992 and 1993, includes a pro forma income tax provision (benefit)
adjustment of $830,000 and ($140,000), respectively, to reflect the Company as a
C corporation rather than an S corporation for federal and state income tax
purposes for 1992 and for the period which commenced January 1, 1993 and ended
July 18, 1993.
(2) Net income for the six months ended June 30, 1997 includes, and Pro
Forma net income for the six months ended June 30, 1997 eliminates, a pre-tax
charge of $18.9 million relating to the settlement of a securities class action
lawsuit. See "Business--Legal Proceedings."
(3) Effective January 1, 1995, the Company changed its method of amortizing
the cost of videocassette rental inventory. See Note 2 of Notes to Consolidated
Financial Statements of Hollywood Entertainment Corporation. The change in
amortization method resulted in a charge to earnings in 1995 totaling $2.6
million, representing the cumulative effect as of January 1, 1995 if the new
method had been applied retroactively to all videocassettes in service at that
date. The Pro Forma amounts shown herein reflect the effect on operating income,
net income and net income per share 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.
(4) In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"). Accordingly, Pro Forma earnings per share have been presented in
accordance with SFAS 128 with regard to net income.
(5) A store becomes comparable after it has been open and owned by the
Company for one year. 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 one year after reopening.
(6) EBITDAR represents EBITDA before rent expense. Such data are not a
measure of financial performance under generally accepted accounting principles
and should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity.
(7) EBITDA represents operating income before depreciation and amortization.
Such data are not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity.
(8) Adjusted EBITDA represents EBITDA plus non-cash expenses that reduced
EBITDA, minus 30% of rental revenue for such period after deducting from such
30% of rental revenue any cash charges associated with the acquisition of new
release videocassettes. The non-cash expenses represent the cost of goods sold
on previously viewed videocassettes (as derived from the Company's internal
point of sale systems) and losses on inventory shrink. The Company believes 30%
of rental revenue approximates
16
<PAGE>
amounts spent on purchase of new release videocassettes, which are capitalized.
Adjusted EBITDA can be calculated from EBITDA as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-------------------
(IN MILLIONS)
<S> <C>
EBITDA......................................................................... $ 125.5
Non-cash expenses.............................................................. 8.0
30% of rental revenue.......................................................... (75.8)
Associated cash charges........................................................ 0.0
------
Adjusted EBITDA................................................................ $ 57.7
------
------
</TABLE>
This measure of Adjusted EBITDA is used under the Indenture and the New
Credit Facility. See "Description of Notes." Adjusted EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered as an alternative to income from operations, net income or
cash flows from operating activities as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.
(9) For purposes of computing this ratio, fixed charges consist of interest
expense, including amounts capitalized and the amortization of deferred
financing fees, and that portion of rental expense that management deems to be a
reasonable approximation of interest costs. For the six months ended June 30,
1997, the ratio of earnings to fixed charges for such period would have been
2.2x, excluding the effect of a pre-tax charge of $18.9 million relating to the
settlement of a securities class action lawsuit.
(10) The ratio of earnings to fixed charges as adjusted reflects adjustments
to interest expense to eliminate historical interest expense due to the partial
use of the proceeds of the Notes to extinguish outstanding borrowings and to
reflect interest expense related to the Notes as if the Notes had been issued at
the beginning of the respective period presented. For the six months ended June
30, 1997, earnings as adjusted were inadequate to cover fixed charges by $4.2
million; however, the ratio of earnings to fixed charges for such period would
have been 1.6x, excluding the effect of a pre-tax charge of $18.9 million
relating to the settlement of a securities class action lawsuit.
17
<PAGE>
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 stores in 29 states at the end of 1996 and to 661 stores
in 33 states at June 30, 1997. 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 and one-half years is summarized as follows:
<TABLE>
<CAPTION>
OPEN AT
BEGINNING OF OPEN AT END
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
1997 (through June 30)............................ 551 110 0 0 661
</TABLE>
The Company plans to open approximately 240 stores in the second half of
1997 and approximately 400 new stores in 1998. 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 revenue 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, at least in
the near term, an adverse impact on the Company's operating margins.
18
<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 and (ii)
the number of stores open at the end of each such period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental......................................................... 84.5% 82.9% 83.6% 84.5% 83.8%
Product sales.................................................. 15.5 17.1 16.4 15.5 16.2
--------- --------- --------- --------- ---------
100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Operating costs and expenses:
Cost of product sales.......................................... 9.9 9.9 10.2 9.4 10.2
Operating and selling.......................................... 64.6 70.6 69.1 71.9 71.3
General and administrative..................................... 6.0 5.3 6.0 6.6 5.5
Amortization of intangibles.................................... 2.3 2.5 2.0 2.3 1.4
--------- --------- --------- --------- ---------
82.8 88.3 87.3 90.2 88.4
--------- --------- --------- --------- ---------
Operating income................................................. 17.2 11.7 12.7 9.8 11.6
Interest (expense) income, net................................... (0.2) 0.8 (1.4) (1.2) (1.6)
Litigation settlement(1)......................................... -- -- -- -- (8.6)
--------- --------- --------- --------- ---------
Income before income taxes and cumulative effect of a change in
accounting principle........................................... 17.0 12.5 11.3 8.6 1.4
Provision (benefit) for income tax............................... 5.9 4.6 4.5 3.4 0.6
--------- --------- --------- --------- ---------
Income before cumulative effect of a change in accounting
principle...................................................... 11.1 7.9 6.8 5.2 0.8
Cumulative effect of a change in accounting principle(2)......... -- (1.7) -- -- --
--------- --------- --------- --------- ---------
Net income....................................................... 11.1% 6.2% 6.8% 5.2% 0.8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income assuming new accounting principle is applied
retroactively and excluding litigation settlement(1)(2)........ 8.6% 7.9% 6.8% 5.2% 6.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of stores at end of period................................ 113 305 551 382 661
</TABLE>
- ------------------------
(1) Pro forma net income for the six months ended June 30, 1997 excludes the
effect of a pre-tax charge of $18.9 million relating to the settlement of a
securities class action lawsuit. See "Business--Legal Proceedings."
(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 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.
19
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUE
Revenue increased $91.5 million, or 71%, in the six months ended June 30,
1997 compared to six months ended June 30, 1996 primarily due to the increase in
the number of stores operated by the Company. During the six months ended June
30, 1997, the Company added 110 new stores, ending the period with 661 stores in
33 states compared to 382 stores in 25 states at the end of the corresponding
period in 1996. Revenues were also favorably impacted by a 5% increase in
comparable store revenue. The Company's pricing of videocassette rentals and
merchandise for sale has not changed significantly compared to the six months
ended June 30, 1996.
OPERATING COSTS AND EXPENSES:
COST OF PRODUCT SALES
The cost of product sales as a percentage of product sales increased from
61.0% in the six months ended June 30, 1996 quarters to 62.7% in the six months
ended June 30, 1997. The Company's gross margin on product sales is affected by
the proportion of hit sell-through titles since the hit titles generally have a
lower gross margin markup. The Company's gross margin was negatively impacted
due to the Company selling more of the hit sell-through titles in the six months
ended June 30, 1997 as compared to the corresponding period of the prior year.
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 71.3% for the six months
ended June 30, 1997, compared to 71.9% for the same period last year. The
decrease in operating expenses was primarily due to the emphasis by the Company
on reducing operating costs incurred at the stores.
Depreciation expense combined with rental revenue sharing costs was 26.8% of
total revenue for the six months ended June 30, 1997 compared to 28.6% for the
same period in 1996. The combined decrease was primarily due to the Company's
decision to lease, rather than purchase, certain furniture, fixtures and
equipment during 1996. (The costs related to the leasing of furniture, fixtures
and equipment is contained in other operating expenses.) Also, improved budget
procedures in the purchase of new release videocassettes for existing stores and
lower revenue sharing expense caused a decrease in the combined cost for the
current period. All other operating and selling expenses accounted for the
remaining change in costs as a percentage of total revenue in the six months
ended June 30, 1997 compared to the same period last year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $8.5 million or 6.6% of
total revenue for the six months ended June 30, 1996 to $12.2 million, or 5.5%
of total revenue for the six months ended June 30, 1997. The dollar increase was
primarily due to the cost of managing additional stores and the ongoing staffing
of the Company's corporate and regional zone offices. The Company continues to
expect general and administrative expenses to decrease as a percentage of sales.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased slightly from $3.0 million, or 2.3% of
total revenue, for the six months ended June 30, 1996 to $3.1 million, or 1.4%
of total revenue, for the six months ended June 30, 1997.
20
<PAGE>
INTEREST EXPENSE
Interest expense increased from $1.6 million for the six months ended June
30, 1996 to $3.6 million for the six months ended June 30, 1997. This increase
was primarily attributable to the Company's higher level of borrowing under its
revolving line of credit in the current year first two quarters compared to the
corresponding period of the prior year.
LITIGATION SETTLEMENT
The Company recorded a $18.9 million charge in the six months ended June 30,
1997 relating to the settlement of class action litigation. The charge consists
of $15.0 million in damages and $3.9 million in expenses relating to the
settlement.
INCOME TAXES
The effective tax rate for the Company was 40% for both the six months ended
June 30, 1997 and the six months ended June 30, 1996.
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 and depreciation decreased as a
percentage of total revenue to 69.1% for 1996, compared to 70.6% for 1995. The
decrease was due to the implementation of improved budgeting procedures in the
purchase of new releases for existing stores. Depreciation expense was 27.0% of
total revenue for 1996, compared to 29.6% for 1995. 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.
21
<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 bank 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.
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 revenue from the rental and sale of video games, lower revenue 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 videocassettes 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.
22
<PAGE>
Depreciation expense, including 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.
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 new release 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 equity offerings and one non-public
debt offering, loans under the Company's revolving bank line of credit, trade
credit and equipment leases.
At June 30, 1997, the Company had cash and cash equivalents of approximately
$5.8 million and working capital of $8.4 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.
Net cash provided by operating activities was $60.7 million during the six
months ended June 30, 1997 compared to $37.7 million for the same period last
year. The increase in cash provided by operations was primarily due to higher
depreciation and amortization expenses and the accrual of warrants and expenses
23
<PAGE>
relating to the settlement of class action litigation. These increases were
offset by decreases in deferred income taxes, accounts payable and income taxes
payable.
Cash used in investing activities was $135.4 million for the six months
ended June 30, 1997 compared to $61.6 million for the same period last year.
During the six months ended June 30, 1997, cash used in investing activities
consisted primarily of purchases of videocassette rental inventory for new and
existing stores totaling $87.5 million, capital expenditures totaling $48.6
million offset by a reduction in construction and other receivables totaling
$2.0 million. Capital expenditures primarily included the costs to open new
stores, remodel certain existing stores and enhance information systems.
Cash provided by financing activities for the six months ended June 30, 1997
totaled $67.6 million and included additional proceeds of $4.7 million from the
exercise in January 1997 of the overallotment option for the Company's equity
offering in December 1996. In addition, the Company received $10.0 million under
long-term capital lease agreements. Also included are tax benefit and proceeds
from the exercise of stock options totaling $2.3 million and $3.4 million,
respectively. The Company repaid $0.8 million of long-term debt. Additional
borrowings under the Company's revolving bank line of credit were $48.0 million
during the period.
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
increases in landlord receivables totaling $73.7 million.
The Company's capital expenditures include both those related to the growth
of its business and those related to maintenance. Growth capital expenditures
include primarily the costs to open new stores. Maintenance capital expenditures
relate to existing stores and include purchases of new release videocassettes
and funds for refurbishment. The Company estimates that its purchases of new
release videocassettes approximate 30% of rental revenue, and, for purposes of
the data set forth in "Summary Financial Operating Data," such purchases have
been deducted from EBITDA to calculate Adjusted EBITDA. Refurbishment
expenditures for existing stores are generally low because most store
maintenance (such as cleaning, painting and repair) is included in operating
expenses as incurred and because of the young average age of the company's
stores (16 months at June 30, 1997). For 1996, capitalized refurbishment
expenditures for existing stores was approximately $2.3 million. The Company
anticipates such expenditures will be somewhat higher for 1997 as the Company
completes the conversion of certain acquired stores. Annual capitalized
refurbishment expenditures are expected to remain generally modest in the near
term.
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.
At December 31, 1996, the Company had a $100 million revolving credit
agreement with a syndicate of banks. In February 1997, the Company amended and
restated its then existing revolving credit agreement as the $150 million
Existing Credit Facility. As of June 30, 1997, $130 million was outstanding
under the Existing Credit Facility. The Company subsequently repaid all amounts
outstanding under the Existing Credit Facility with a portion of the net
proceeds from the sale of the Old Notes and the Existing Credit Facility was
terminated on September 4, 1997 in connection with the establishment of the New
Credit Facility. See "Description of Certain Other Indebtedness--Existing Credit
Facility."
24
<PAGE>
The Company established the New Credit Facility on September 5, 1997. The
New Credit Facility is a $300 million revolving credit facility collateralized
by substantially all of the Company's personal property, including accounts
receivable, videocassettes and other inventory and certain other assets. The New
Credit Facility contains financial and other restrictive covenants. Borrowings
under the New Credit Facility bear interest, at the Company's option, at the
lender's base rate plus up to 1.125% or a rate (the "IBOR Rate") consisting of
the lender's rate for offshore dollar deposits plus certain reserves plus up to
2.125%, depending on the Company's leverage ratio. See "Description of Certain
Other Indebtedness--New Credit Facility."
The Company believes the amounts available for borrowing under the New
Credit Facility and the proceeds from the offering of Old Notes, together with
projected cash flow from operations, cash on hand and equipment leases and trade
credit, will be sufficient to fund its expansion through at least 1999. See
"Risk Factors--Uncertain Ability To Achieve and Manage Planned Expansion."
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 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.
25
<PAGE>
BUSINESS
GENERAL
Hollywood Entertainment owns and operates 661 video retail superstores in 33
states as of June 30, 1997 and is the second largest video retailer in the
United States, with revenue of $328.3 million for the twelve months ended June
30, 1997. According to video industry analyst, Paul Kagan, the Company operates
the highest volume video stores in the country. 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. The
Company opened 110 new stores in the six months ended June 30, 1997 and plans to
open approximately 240 new stores in the second half of 1997 and approximately
400 new stores in 1998. Comparable store revenue increased 7% for the year ended
December 31, 1996 and 5% for each of the first and second quarters of 1997.
As part of its goal to build a strong national brand, Hollywood
Entertainment has developed a store format and design that captures the bright
lights, excitement and energy of the motion picture industry and enables the
public to easily identify and recognize Hollywood Video superstores. Hollywood
Video superstores average approximately 7,500 square feet and typically carry
approximately 10,000 titles and 16,000 videocassettes and video games,
consisting of many copies of popular new releases and an extensive selection of
older or "catalog" movies classified into 28 categories, such as "Adventure,"
"Comedy," "Drama," "Classics" and "Children," and displayed alphabetically
within those categories. Hollywood Entertainment's goal is to offer more copies
of popular new videocassette releases and more titles than its competitors to
achieve greater customer satisfaction and to encourage repeat visits. Each
Hollywood Video store rents videocassettes, video games and videocassette and
video game players and sells videocassettes, accessories and confectionary
items. 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.
INDUSTRY OVERVIEW
VIDEO RETAIL INDUSTRY
According to Paul Kagan, the U.S. videocassette rental and sales industry
has grown from $9.8 billion in revenue in 1990 to $15.6 billion in 1996, and is
expected to reach $18.6 billion in 2001. The video rental 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, a
video retailing industry association, the number of video specialty stores has
decreased from 31,500 in 1990 to 27,000 in 1996. The Company believes
approximately 7,200 of these stores were "superstores," including approximately
3,700 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 largest single
source of revenue to movie studios and represented approximately $4.5 billion,
or 45%, of the $9.9 billion of estimated domestic studio revenue in 1996. 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. According to the MPAA, between 1990 and 1996 only 7% of all movies
released generated in excess of $20 million in U.S. theater revenue for studios.
Over the same period, members of the MPAA reported that the average production,
advertising and distribution cost per movie increased from $38.8 million to
$59.7 million. The Company believes the customer is more likely to view
"non-hit" movies on rented videocassette than in any other medium because video
retail stores provide an inviting opportunity to browse and make an impulse
choice
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among a very broad selection of new releases. As a result, video retail stores,
including those operated by the Company, purchase movies on videocassette
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
distribution channel based upon the order they believe will maximize their total
revenue from all distribution channels combined. These distribution channels
generally include, in release date order, movie theaters, video retail stores,
pay-per-view television, including direct broadcast satellite ("DBS"), pay cable
television, basic cable television and, finally, network and syndicated
television.
ORDER OF SEQUENTIAL RELEASE WINDOWS TO PRIMARY CHANNELS OF DISTRIBUTION
First: Movie theaters
Second: Video retail stores
Third: Pay-per-view television (including DBS)
Fourth: Pay cable (HBO, Showtime, etc.)
Fifth: Basic cable television
Sixth: Network television
Seventh: Syndicated television
TRENDS IN VIDEO RENTALS AND SALES
The domestic video retail industry includes both rentals and sales. Movie
studios determine videocassette suggested retail prices to both consumers and
video rental stores and, through that pricing, influence the relative levels of
videocassette rentals and sales. 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 ("sell-through"). 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 sell-through.
The consumer market has historically been primarily a rental market.
According to Paul Kagan, video rental revenue has increased from $6.6 billion in
1990 to $7.7 billion in 1996 and is expected to increase to $8.2 billion in
2001. At the same time, consumers attracted by cross promotions and lower
videocassette prices have begun to spend more on purchasing videos. Video sales
have increased from $3.2 billion in 1990 to $7.9 billion in 1996 and are
expected to increase to $10.4 billion in 2001. As a result, video sales as a
percentage of total industry revenue have increased from approximately 32% in
1990 to approximately 50% in 1996.
The availability of "hit" sell-through movie titles, with their lower
initial prices, allows video retailers to stock more copies of these "hit"
movies for rental at a substantially lower aggregate cost. In addition, movie
studios typically spend substantial amounts to promote these "hit" sell-through
titles, which the Company believes creates extraordinarily high consumer
awareness. As a result, rental demand for these titles is much higher than for
comparable "hit" titles initially priced and promoted for rental. Because the
best selling sell-through titles are often among the leading rental titles, the
return on investment in rental
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inventory for those titles is typically much higher than for comparable titles
initially priced and promoted for rental.
BUSINESS STRATEGY
The Company'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. The Company's business strategy includes the following key elements:
- EXPANSION THROUGH COMPANY-BUILT STORES. Of the Company's 661 video
superstores at June 30, 1997, 535 stores had been opened as new stores by
the Company, and since December 31, 1995, all of the Company's expansion
has been through the opening of new stores rather than through
acquisitions.
- 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 offer 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.
- EXCITING, ENJOYABLE AND CONVENIENT SHOPPING EXPERIENCE. The Company's
superstores are designed to capture the bright lights, energy and
excitement 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 in most locations for only $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.
EXPANSION STRATEGY
The Company opened its first video superstore in October 1988 and had grown
to 25 stores in Oregon and Washington by the end of 1993. In 1994 the Company
significantly accelerated its store expansion program, adding 88 new stores (55
of which were acquired) and expanding into California, Texas, Nevada, New
Mexico, Virginia and Utah. In 1995 the Company opened 122 new stores, acquired
70 stores and entered major new markets in the midwest, southwest, east and
southeast regions of the United States. The Company's expansion strategy is to
continue to open stores in regions where it has existing operations and to
expand into new geographic regions where it believes it can become a dominant
video retailer. The Company opened 250 new stores and closed four stores in 1996
and opened 110 new stores in the six months ended June 30, 1997. The Company
plans to open approximately 240 new stores in the second half of 1997 and
approximately 400 new stores in 1998. At June 30, 1997, the Company had signed
leases for approximately 175 of the stores it expects to open in the balance of
1997.
The Company believes the selection of locations for its stores is critical
to the success of its operations. The Company has assembled a new store
development team with broad and significant experience in retail tenant
development. The majority of the Company's new store development personnel are
located in the geographic area for which they are responsible, but all final
site approval takes place at the corporate office, where new sites are approved
by a committee of senior management personnel. Final approval of all new sites
is the responsibility of the Company's Chief Executive Officer. Important
criteria for the location of a Hollywood Video superstore include density of
local residential population, traffic count on roads
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immediately adjacent to the store location, visibility and accessibility of the
store and availability of ample parking. The Company generally seeks what it
considers the most desirable locations, typically locating its stores in
high-visibility stand-alone structures or in prominent locations in multi-tenant
shopping developments. The Company typically competes for these prime sites with
other retailers, banks, restaurants and gas stations. All of the Company's
stores are in leased premises; the Company does not own any real estate.
The Company's expansion is dependent on a number of different factors and is
subject to various risks. See "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "--General Economic Trends, Quarterly Results and Seasonality" and
"Business--Competition."
PRODUCTS
VIDEOCASSETTE RENTAL. The Company's primary source of revenue is the rental
of videocassettes. Hollywood Video superstores typically carry approximately
10,000 movie titles and 16,000 videocassettes and video games. 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 Nintendo-TM-, Sega-TM- and Sony-TM-. 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.
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. The Company maintains detailed information on
inventory utilization. Rental activity is tracked by individual videocassette to
determine appropriate buying, distribution and disposition of videocassettes.
The system provides information allowing the Company to determine the
appropriate time to move videocassettes from new releases to catalog, when to
sell through, and when to redistribute to new stores.
MANAGEMENT INFORMATION SYSTEMS. The Company utilizes a scalable
client-server system and maintains two distinct system areas: a point-of-sale
("POS") system and a corporate information system. The system maintains
information, updated daily, regarding revenue, current and historical rental and
sales activity, demographics of store membership, individual customer history,
and videocassette rental patterns. This system allows the Company to compare
current performance against historical performance and the current year's
budget, manage inventory, make purchasing decisions on new releases and manage
labor
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costs. The Company believes that its system has the ability to continue to
improve customer service, operational efficiency, and management's ability to
monitor critical performance factors.
DECENTRALIZATION AND CREATION OF ZONE OFFICES
To support its larger superstore base and continued expansion, in the second
half of 1996 the Company reorganized its operations into four geographic zones.
At June 30, 1997, each zone included from 100 to 275 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
officer, 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. When the
decentralization is fully implemented, the senior officers 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 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 Video 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. See "Risk Factors--Uncertain Ability To
Achieve and Manage Planned Expansion."
COMPETITION
The video retail industry is highly competitive. The Company competes with
other local, regional and national video retail stores, including 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 1996 there were approximately 27,000 video specialty stores in
the U.S., of which the Company believes approximately 7,200 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, customer service and employee friendliness,
convenience of store access and parking and, to a lesser extent, pricing.
Substantially all of the Company's stores compete with stores operated by
Blockbuster, most in very close proximity. As a result of direct competition
with Blockbuster, rental pricing of videocassettes may become a more significant
competitive factor in the Company's business, which could have an adverse impact
on the results of operations of the Company. The Company believes it generally
offers more titles and more copies of popular titles than the majority of its
competitors and generally for longer rental periods than any of its major
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 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 enabling 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 telecommunications companies have tested "video on
demand" service in some markets. "Video on
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demand" service would allow a viewer to pause, rewind and fast forward movies.
Based on publicly available information, the Company believes these tests have
been unsuccessful. The Company also believes movie studios have a significant
interest in maintaining a viable movie rental business because the sale of
videocassettes to video retail stores represents the largest source of revenue
for the studios. In addition, home video provides the only reliable source of
revenue on "non-hit" or "B-title" movies which make up the majority of movies
produced by the major studios each year. As a result, the Company believes movie
studios will continue to make movie titles available to cable television or
other distribution channels only after revenues have been derived from the sale
of videocassettes to video stores.
In addition, the Company believes substantial technological developments
will be necessary to allow pay-per-view television to match the viewing
convenience and selection available through video rental, and substantial
capital expenditures will be necessary to implement these systems. In contrast,
according to Adams Media Research, 78.8 million, or 82%, of all U.S. television
households own a VCR. Although the Company does not believe cable television,
video on demand or other distribution channels represent a near-term competitive
threat to its business, technological advances or changes in the manner in which
movies are marketed, including in particular the earlier release of movie titles
to pay-per-view, including 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.
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., 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 Common 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 was approved by the court on July 31, 1997. Pursuant to the
settlement, the Company paid $14.8 million in cash to the plaintiffs.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY.
The following table sets forth information with respect to the Company's
directors, executive officers and certain other key employees as of the date of
this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ------------------------ --- ----------------------------------------------------------------------------------
<S> <C> <C>
Mark J. Wattles(1) 37 Chairman of the Board, President and Chief Executive Officer
Jeffrey B. Yapp(1) 38 President
F. Mark Wolfinger(1) 41 Chief Financial Officer
Donald J. Ekman(1) 45 Senior Vice President, General Counsel, Secretary and Director
Max G. Fratto(1) 54 Executive Vice President of Store Operations
F. Bruce Giesbrecht 37 Senior Vice President of Product Management
Douglas A. Gordon 30 Senior Vice President of Finance
Glen E. Hahn 45 Senior Vice President of Operations
John R. Hnanicek 33 Senior Vice President of Information Systems
Dale A. Naftzger 52 Senior Vice President of Operations (Western Zone)
William M. Spae 45 Senior Vice President of Operations (Southern Zone)
Scott Klein 39 Senior Vice President of Operations (Midwest and Eastern Zones)
William P. Zebe 39 Senior Vice President of Development
James N. Cutler, Jr. 45 Director
Richard A. Galanti 41 Director
</TABLE>
- ------------------------
(1) Executive officer.
MARK J. WATTLES founded the Company in June 1988 and has served as Chairman
of the Board, and Chief Executive Officer since that time. Mr. Wattles served as
President of the Company from June 1988 to September 1997. Mr. Wattles has been
an owner and operator in the video rental industry since 1985. He has been a
participant and key speaker in several entertainment industry panels and
conferences and currently serves as a member of the Video Software Dealers
Association (VSDA) Board of Directors.
JEFFREY B. YAPP was appointed President of the Company in September 1997.
Prior to joining the Company, Mr. Yapp served as President Worldwide of
Twentieth Century Fox Home Entertainment, Inc. from May 1997 until September
1997, and as President of Fox International from October 1994 to May 1997.
Previously, Mr. Yapp was Vice President of Marketing for Pizza Hut, Inc. from
October 1994, and International Vice President of Ernest and Julio Gallo Winery
from April 1986 to October 1992. Mr. Yapp also held marketing positions with
General Foods from September 1981 to April 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, Finance for Burger King.
DONALD J. EKMAN became a director of the Company in June 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
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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.
F. BRUCE GIESBRECHT was named Senior Vice President of 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 of 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) and in January 1997 became Senior Vice President of
Operations. 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 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 specialty
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.
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 specialty
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.
WILLIAM M. SPAE joined the Company in July 1996 as Senior 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.
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SCOTT KLEIN joined the Company as Senior Vice President of Operations
(Midwest and Eastern Zones) in April 1997. Mr. Klein previously worked for
Nordic Track, Inc., most recently as Senior Vice President of the Retail
Division, overseeing the operations of approximately 350 retail stores.
WILLIAM P. ZEBE was named Senior Vice President of 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.
JAMES N. CUTLER, JR. became a director of the Company in July 1993. Since
1980 Mr. Cutler has been President and Chief Executive Officer of The Cutler
Corporation, a holding company for various private businesses, and, since 1982,
he has been a director of Arrow Transportation Company of Delaware, a trucking
company. Mr. Cutler also serves as an officer or a director of a number of other
private corporations.
RICHARD A. GALANTI became a director of the Company in April 1996. Mr.
Galanti has been a director of Costco Companies, Inc. since January 1995 and
Executive Vice President-Finance and Chief Financial Officer of Costco
Companies, Inc. since October 1993. From January 1985 to October 1993, Mr.
Galanti was Senior Vice President, Chief Financial Officer and Treasurer of
Costco Wholesale Corporation, which he joined in March 1984 as Vice
President-Finance. From 1978 to February 1984, Mr. Galanti was an investment
banker with Donaldson, Lufkin & Jenrette Securities Corporation. In March 1995
Mr. Galanti settled an action brought by the Commission alleging a five-year-old
violation of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder that
was unrelated to Mr. Galanti's positions with Costco Companies, Inc. or Costco
Wholesale Corporation. Without admitting or denying the allegations of the
Commission's complaint, Mr. Galanti agreed to pay $64,408 and entered into an
order requiring him to comply with the relevant sections of the federal
securities laws and rules.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
The Old Notes were sold by the Company on August 13, 1997 to the Initial
Purchasers pursuant to a Purchase Agreement dated August 7, 1997 by and among
the Company and the Initial Purchasers. Upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the Company will accept for exchange any and all Old Notes that are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on October 24, 1997; provided, however, that if the Company, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date set forth on the cover
page to all holders of Old Notes at the addresses set forth in the security
register with respect to Old Notes maintained by the Trustee. The Company's
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth under "--Certain Conditions to the
Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by mailing written
notice of such extension to the holders thereof as described below. During any
extension, all Old Notes previously tendered will remain subject to the Exchange
Offer and may be accepted for exchange by the Company. Any Old Notes not
accepted for exchange for any reason will be
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<PAGE>
returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be $1,000 in principal amount
or any integral multiple thereof.
The Company will mail written notice of any extension, amendment,
non-acceptance or termination to the holders of the Old Notes as promptly as
practicable, such notice to be mailed to the holders of record of the Old Notes
no later than 9:00 a.m. New York City time, on the next business day after the
previously scheduled Expiration Date or other event giving rise to such notice
requirement.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
Pursuant to the Registration Rights Agreement, the Company has agreed with
the Initial Purchasers, for the benefit of the holders of the Old Notes, that
the Company will, at its cost, (i) not later than 30 days after the closing of
the sale of the Old Notes (the "Closing Date"), file the Registration Statement
with the Commission and (ii) cause the Registration Statement to be declared
effective under the Securities Act not later than 90 days after the Closing
Date. The Registration Statement of which this Prospectus is a part constitutes
the Registration Statement.
If applicable interpretations of the staff of the Commission do not permit
the Company to effect the Exchange Offer, or if for any reason the Exchange
Offer is not completed within 120 days after the Closing Date, or if the Initial
Purchasers so request with respect to Old Notes not eligible to be exchanged for
New Notes in the Exchange Offer, or if any holder of Old Notes is not eligible
to participate in the Exchange Offer or participates in but does not receive
freely tradeable (except for prospectus delivery requirements) New Notes in the
Exchange Offer, the Company will, at its cost, (a) as promptly as practicable,
file a Shelf Registration Statement covering resales of the Notes, (b) use its
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act by the 120th day after the Closing Date and (c) keep
the Shelf Registration Statement effective until two years after its effective
date (or shorter period that will terminate when all Notes covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement). The Company will, in the event a Shelf Registration Statement is
filed, among other things, provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A holder selling such
Notes pursuant to the Shelf Registration Statement generally would be required
to be named as a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such holder (including certain indemnification obligations).
If (i) within 30 days after the Closing Date, neither the Registration
Statement nor the Shelf Registration Statement has been filed with the
Commission; (ii) within 90 days after the Closing Date, the Registration
Statement has not been declared effective; (iii) within 120 days after the
Closing Date, the Exchange Offer has not been completed; (iv) within 120 days
after the Closing Date, the Shelf Registration Statement has not been declared
effective if a Shelf Registration Statement is required to be filed; or (v)
after either the Registration Statement or the Shelf Registration Statement has
been declared effective, such Registration Statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with resales
of Notes in accordance with and during the periods specified in the Registration
Agreement (each such event referred to in clauses (i) through (iv), a
"Registration Default"), interest ("Additional Interest") will accrue on the
Notes (in addition to the stated interest on the Notes) from and including the
date on which any such Registration Default shall occur to but excluding the
date on which all Registration Defaults have been cured. Additional Interest
will accrue at a rate of 0.25% per annum during the 90-day period immediately
following the occurrence of any Registration Default and shall
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<PAGE>
increase by 0.25% per annum at the end of each subsequent 90-day period, but in
no event shall such rate exceed 1.00% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus constitutes a part.
PROCEDURE FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, together with all other
documents required by such Letter of Transmittal, to Continental Stock Transfer
& Trust Company (the "Exchange Agent") at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date. In addition, (i)
certificates for the Old Notes must be received by the Exchange Agent along with
the Letter of Transmittal or (ii) a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") of the Old Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF THE DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED IN ALL CASES.
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined herein). If signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, the guarantees must be by a firm that is an eligible guarantor
institution (bank, stockbroker, national securities exchange, registered
securities association, savings and loan association or credit union with
membership in a signature medallion program) pursuant to Exchange Act Rule
17Ad-15 (collectively, "Eligible Institutions"). If Old Notes are registered in
the name of a person other than the person signing the Letter of Transmittal,
the Old Notes surrendered for exchange must be endorsed by, or be accompanied by
a written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes if acceptance might, in the judgment of the Company or its
counsel, be unlawful. The Company also reserves the absolute right in its sole
discretion to waive any defects or irregularities or conditions of the Exchange
Offer as to any particular Old Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Notes in the Exchange Offer). The interpretation of the terms and
conditions of the Exchange Offer as to any particular Old Notes either before or
after the
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Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within a reasonable period of time that the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give any notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, the Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted with the Letter of Transmittal.
By tendering Old Notes, each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If any holder of Old Notes is an "affiliate" of the
Company, as defined under Rule 405 of the Securities Act, or is engaged in or
intends to engage in or has any arrangement with any person to participate in
the distribution of the New Notes to be acquired pursuant to the Exchange Offer,
the holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
The Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. For each Old Note accepted for exchange, the holder of the Old Note
will receive a New Note having a principal amount equal to that of the
surrendered Old Note. The New Notes will bear interest from the most recent date
to which interest has been paid on the Old Notes or, if no interest has been
paid on the Old Notes, from August 13, 1997. Accordingly, if the relevant record
date for interest payment occurs after the completion of the Exchange Offer,
registered holders of New Notes on the record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from August 13, 1997. If, however, the relevant record
date for interest payment occurs prior to the completion of the Exchange Offer,
registered holders of Old Notes on the record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from August 13, 1997. Old Notes accepted for exchange
will cease to accrue interest from and after the date of completion of the
Exchange Offer, except as set forth in the immediately preceding sentence.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of interest on the Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after completion of
the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for the Old Notes or a timely
Book-Entry Confirmation of the Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility, (ii) a properly completed and duly executed
Letter of Transmittal and (iii) all
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<PAGE>
other required documents. If any tendered Old Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer or if
certificates representing Old Notes are submitted for a greater principal amount
than the holder desires to exchange, certificates representing the unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described below, the non-exchanged Old Notes will
be credited to an account maintained with the Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer the Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility in accordance with the Book-Entry
Facility's procedures for transfer. ALTHOUGH DELIVERY OF OLD NOTES MAY BE
EFFECTED THROUGH BOOK-ENTRY TRANSFER AT THE BOOK-ENTRY TRANSFER FACILITY, THE
LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF, WITH ANY REQUIRED SIGNATURE
GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS, MUST, IN ANY CASE, BE TRANSMITTED
TO AND RECEIVED BY THE EXCHANGE AGENT AT THE ADDRESS SET FORTH BELOW UNDER
"EXCHANGE AGENT" ON OR PRIOR TO THE EXPIRATION DATE OR THE GUARANTEED DELIVERY
PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Old Notes desires to tender the Old Notes and the
Old Notes are not immediately available, or time will not permit the holder's
Old Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if (i) the tender is made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent
receives from the Eligible Institution a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written or facsimile notice of
withdrawal must be received by the Exchange Agent at the address set forth below
under "--Exchange Agent." Any notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amounts of such Old Notes), and (where
certificates for Old Notes
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<PAGE>
have been transmitted) specify the name in which such Old Notes are registered,
if different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless the holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of the facility. All questions as to the validity,
form and eligibility (including time of receipt) of the notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Certificates for any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes that have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to the holder (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, the Old Notes will be credited to an account
maintained with the Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedure for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
EXCHANGE AGENT
Continental Stock Transfer & Trust Company has been appointed as the
Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at the address set forth below.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent, addressed as
follows:
By Mail or by Hand:
Continental Stock Transfer & Trust Company, Exchange Agent
2 Broadway
New York, New York 10004
By Facsimile:
(212) 509-5150
Confirm Facsimile by Telephone:
(212) 509-4000
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer tax in connection therewith, except that Holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person
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<PAGE>
other than the registered tendering Holder will be responsible for the payment
of any applicable transfer tax thereon.
APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company does not
anticipate that it will register Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission issued to third parties, New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the New
Notes are acquired in the ordinary course of the holders' business and the
holders have no arrangement with any person to participate in the distribution
of the New Notes. Each holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If any holder is an affiliate of the Company, is engaged in or intends to
engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer, the
holder (i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes must acknowledge that the Old Notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities and that it
will deliver a prospectus in connection with any resale of the New Notes. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, if applicable, it may be necessary to qualify for sale or
to register the New Notes prior to offering or selling the New Notes. The
Company does not intend to take any action to register or qualify the New Notes
for resale in any of these jurisdictions.
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<PAGE>
DESCRIPTION OF NOTES
GENERAL
As used below in this "Description of Notes" section, references to the
"Notes" refer to the Old Notes and the New Notes, unless the context otherwise
requires.
The Old Notes were issued and the New Notes will be issued pursuant to an
Indenture (the "Indenture") dated as of August 13, 1997 between the Company and
U.S. Trust Company of California, N.A. (the "Trustee").
The following is a summary of certain provisions of the Indenture and the
Notes, a copy of which Indenture and the form of Notes are available upon
request to the Company at the address set forth under "Available Information."
The following summary of certain provisions of the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act of 1939,
as amended. Capitalized terms used herein and not otherwise defined have the
meanings set forth in the section "--Certain Definitions." As used in this
section, the term "Company" refers to Hollywood Entertainment Corporation, but
not any of its subsidiaries.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company, which, unless otherwise provided by the Company, will be the offices of
the Trustee. At the option of the Company, payment of interest may be made by
check mailed to the addresses of the Holders as such addresses appear in the
Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000; PROVIDED, that
certificated Notes originally purchased by or transferred to Institutional
Accredited Investors who are not also "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) ("QIBs") will be subject to a
minimum denomination of $250,000. No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be unsecured senior subordinated obligations of the Company,
limited to $200 million aggregate principal amount and will mature on August 15,
2004. The Indenture provides for the issuance of up to an additional $50 million
aggregate principal amount of additional notes having identical terms and
conditions as the Notes (the "Additional Notes"). Any Additional Notes will be
part of the same issue of Notes and will vote on all matters with the Notes.
Holders of any Additional Notes will be entitled to all the benefits of the
Indenture granted to Holders of Notes. Additional Notes, if any, will be treated
for all purposes as "Securities" under the Indenture. The Notes will bear
interest at 10 5/8% per annum from August 13, 1997, or from the most recent date
to which interest has been paid or provided for, payable semi-annually to
Holders of record at the close of business on the February 1 or August 1
immediately preceding the interest payment date on February 15 and August 15 of
each year, commencing February 15, 1998. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. The Company will pay
interest on overdue principal at the same rate per annum borne by the Notes and
it will pay interest on overdue installments of interest at such rate to the
extent lawful.
The interest rate on the Notes is subject to increase in certain
circumstances if the Company does not file a registration statement relating to
the Registered Exchange Offer on a timely basis, if the registration statement
is not declared effective on a timely basis or if certain other conditions are
not satisfied. All references herein to the interest accrued and payable on the
Notes includes Additional Interest that may become payable on the Notes. See
"The Exchange Offer--Registration Rights; Additional Interest."
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OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to August 15, 2001. Thereafter,
the Notes will be redeemable, at the Company's option, in whole or in part, at
any time or from time to time, upon not less than 30 nor more than 60 days'
prior notice mailed by first-class mail to each Holder's registered address, at
the following redemption prices (expressed in percentages of principal amount),
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
commencing on August 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2001............................................................................. 105.313%
2002............................................................................. 102.656
2003 and thereafter.............................................................. 100.000
</TABLE>
In addition, at any time and from time to time prior to August 15, 2000, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Public Equity Offerings, at a
redemption price (expressed as a percentage of principal amount) of 110.625%
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date); PROVIDED, HOWEVER, that at least 65% of
the original aggregate principal amount of the Notes must remain outstanding
after each such redemption; and PROVIDED FURTHER however, that such redemption
shall occur within 60 days of the closing date of such Public Equity Offering.
SELECTION
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
although no Note of $1,000 in original principal amount or less will be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
SUBORDINATION
The indebtedness evidenced by the Notes will be senior subordinated
obligations of the Company. The payment of the principal of, premium, if any,
and interest on, and all other Obligations in respect of the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness of the Company, whether outstanding
on the Issue Date or thereafter incurred, including the obligations of the
Company under the Senior Credit Facility. The Notes will also be effectively
subordinated to any Secured Indebtedness of the Company to the extent of the
value of the assets securing such Indebtedness and to any liabilities of
Subsidiaries.
As of June 30, 1997, on a pro forma basis after giving effect to the sale of
the Old Notes and the application of the net proceeds therefrom, the Company
would have had $9.6 million of Senior Indebtedness outstanding. In addition, any
borrowings under the New Credit Facility will be Senior Indebtedness. Although
the Indenture contains limitations on the amount of additional Indebtedness that
the Company and its Restricted Subsidiaries may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "--Certain
Covenants--Limitation on Indebtedness."
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Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank PARI PASSU with all other senior subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness that is subordinate or
junior in ranking in right of payment to its Senior Indebtedness unless such
Indebtedness is PARI PASSU with or is expressly subordinated in right of payment
to the Notes. Unsecured Indebtedness is not deemed to be subordinated or junior
merely because it is unsecured.
The Company may not pay principal of, premium, if any, or interest on, or
any other Obligations in respect of the Notes or make any deposit pursuant to
the provisions described under "--Defeasance" below and may not repurchase,
redeem or otherwise retire any Notes (collectively, "pay the Notes") if (i) any
Senior Indebtedness is not paid when due or (ii) any other default on any such
Senior Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived and any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full. However, the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the Senior Indebtedness
with respect to which either of the events set forth in clause (i) or (ii) of
the immediately preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in clauses (i) and
(ii) of the second preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the holders of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter (or earlier if
such Payment Blockage Period is terminated (i) by written notice to the Trustee
and the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence,
unless the holders of such Designated Senior Indebtedness or the Representative
of such holders has accelerated the maturity of such Designated Senior
Indebtedness, the Company may resume payments on the Notes after the end of such
Payment Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 365-day period, irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of such Senior Indebtedness before the
Noteholders are entitled to receive any payment, and, until the Senior
Indebtedness is paid in full, any payment or distribution to which Noteholders
would be entitled but for the subordination provisions of the Indenture will be
made to holders of such Senior Indebtedness as their interests may appear. If a
payment or distribution is made to Noteholders that, due to the subordination
provisions, should not have been made to them, such Noteholders are required to
hold it in trust for the holders of Senior Indebtedness and pay it over to them
as their interests may appear.
By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the Noteholders, and
creditors of the Company who are not holders of Senior Indebtedness may recover
less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Noteholders.
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The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "--Defeasance."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require that the Company repurchase all or a portion (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of repurchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date), in accordance with the provisions of the next paragraph.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount outstanding at the repurchase date plus accrued and unpaid
interest, if any, to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest on the relevant interest
payment date); (2) the circumstances and relevant facts and relevant financial
information regarding such Change of Control; (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed); and (4) the instructions determined by the Company,
consistent with the covenant described hereunder, that a Holder must follow in
order to have its Notes repurchased.
On the Change of Control repurchase date, the Company will, to the extent
lawful (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the immediately preceding paragraph, (ii) deposit with the Trustee
(or other paying agent appointed pursuant to the Indenture) an amount equal to
the Change of Control payment in respect of all Notes or portions thereof
tendered and (iii) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an officer's certificate from the Company stating the
aggregate principal amount of Notes or portions thereof being repurchased by the
Company. The Trustee (or paying agent) will promptly mail to each Holder of
Notes so tendered the Change of Control payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; PROVIDED, HOWEVER, that each such new Note
will be in a principal amount of $1,000 or an integral multiple thereof.
The Indenture will provide that, prior to complying with the provisions of
this covenant, but in any event within 90 days following a Change of Control,
the Company will either repay all outstanding Senior Indebtedness or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Indebtedness to permit the repurchase of the Notes required by this covenant.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Senior Credit Facility. Future
Senior Indebtedness of the Company may contain prohibitions of certain events
which would constitute a Change of Control or require such Senior Indebtedness
to be repurchased upon a Change of Control. Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Senior Indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the
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Company. Finally, the Company's ability to pay cash to the Holders upon a
repurchase may be limited by the Company's then existing financial resources.
There is no assurance that sufficient funds will be available when necessary to
make any repurchases required in connection with a Change of Control. The
Company's failure to purchase the Notes in connection with a Change in Control
would result in a default under the Indenture which would, in turn, constitute a
default under the Senior Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payment to the
Holders of the Notes. See "Description of Certain Other Indebtedness--The New
Credit Facility."
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes sold will be issued in
the form of a Global Note. The Global Note will be deposited with, or on behalf
of, the Depository and registered in the name of the Depository or its nominee.
Except as set forth below, the Global Note may be transferred, in whole and not
in part, only to the Depository or another nominee of the Depository. Investors
may hold their beneficial interests in the Global Note directly through the
Depository if they have an account with the Depository or indirectly through
organizations which have accounts with the Depository.
Notes that are (i) originally issued to Institutional Accredited Investors
who are not QIBs or (ii) issued as described below under "--Certificated Notes"
will be issued in definitive form. Upon the transfer of a Note in definitive
form, such Note will, unless the Global Note has previously been exchanged for
Notes in definitive form, be exchanged for an interest in the Global Note
representing the principal amount of Notes being transferred.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934 (the "Exchange Act"). The Depository was created to hold securities
of institutions that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. The Depository's participants include securities
brokers and dealers (which may include the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by such Global Note to the accounts of participants. The accounts to
be credited shall be designated by the Initial Purchasers of such Notes.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer of
those ownership interests will be effected only through, records maintained by
the Depository (with respect to participants' interest) and such participants
(with respect to the owners of beneficial interests in the Global Note other
than participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the
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related Notes for all purposes of such Notes and the Indenture. Except as set
forth below, owners of beneficial interests in the Global Note will not be
entitled to have the Notes represented by the Global Note registered in their
names, will not receive or be entitled to receive physical delivery of
certificated Notes in definitive form and will not be considered to be the
owners or holders of any Notes under the Global Note. The Company understands
that under existing industry practice, in the event an owner of a beneficial
interest in the Global Note desires to take any action that the Depository, as
the holder of the Global Note, is entitled to take, the Depository would
authorize the participants to take such action, and that the participants would
authorize beneficial owners owning through such participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Payment of principal of, and interest on, Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of, or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole by
the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of
U.S.$1,000 and integral multiples thereof if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for the Global
Note or if at any time the Depository ceases to be a clearing agency registered
under the Exchange Act, (ii) the Company in its discretion at any time
determines not to have all of the Notes represented by the Global Note or (iii)
a default entitling the Holders of the Notes to accelerate the maturity thereof
has occurred and is continuing. Any Note that is exchangeable pursuant to the
preceding sentence is exchangeable for certificated Notes issuable in authorized
denominations and registered in such names as the Depository shall direct.
Subject to the foregoing, the Global Note is not exchangeable, except for a
Global Note of the same aggregate denomination to be registered in the name of
the Depository or its nominee. Holders of certificated Notes may only transfer
their Notes (i) to the Company or (ii) to a QIB; PROVIDED, HOWEVER, that the
agreement of such Holder is subject to any requirement of law that the
disposition of such Holder's property shall at all times be and remain within
its control.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur, directly or indirectly, any Indebtedness unless, immediately after
giving effect to such Incurrence, the Consolidated Coverage Ratio exceeds 2.25
to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to the New Credit Facility; to the
extent that, after giving effect to any such Incurrence, the aggregate
principal amount of such Indebtedness then outstanding does not exceed $300
million;
(2) Indebtedness represented by the Old Notes (and the New Notes) other
than Additional Notes;
(3) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1) of this paragraph);
(4) Indebtedness of the Company owed to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by
the Company or a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock which results in any
such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or a
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(5) Refinancing Indebtedness, the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund Indebtedness that was
permitted by the Indenture to be Incurred pursuant to paragraph (a) or
pursuant to clause (1), (2), (3) or this clause (5) of this paragraph (b);
(6) Indebtedness in respect of performance bonds, bankers' acceptances,
letters of credit and surety or appeal bonds entered into by the Company and
the Restricted Subsidiaries in the ordinary course of their business;
(7) Hedging Obligations consisting of Interest Rate Agreements entered
into in the ordinary course of business and not for the purpose of
speculation; PROVIDED, HOWEVER, that such Interest Rate Agreements do not
increase the Indebtedness of the Company outstanding at any time other than
as a result of fluctuations in interest rates or by reason of fees,
indemnities and compensation payable thereunder;
(8) Indebtedness Incurred by the Company or any Restricted Subsidiary in
connection with the purchase or improvement of property (real or personal)
or other capital expenditures in the ordinary course of business (including
for the purchase of assets or stock of any Related Business) or consisting
of Capital Lease Obligations Incurred, in either case subsequent to the
Issue Date in an aggregate principal amount which does not exceed 5% of
aggregate total revenue of the Company and its Restricted Subsidiaries
during the most recently completed four fiscal quarter period on a
consolidated basis (measured at the time of Incurrence);
(9) Guarantees of Indebtedness Incurred pursuant to the New Credit
Facility; and
(10) Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than
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Indebtedness permitted by clauses (1) through (9) above or paragraph (a)),
does not exceed $10 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Restricted Subsidiary to, Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance (i) any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Notes to at least the same extent as
such Subordinated Obligations or (ii) any Senior Subordinated Indebtedness
unless such Indebtedness shall be Senior Subordinated Indebtedness or shall be
subordinated to the Notes.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company shall not, and shall not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation on
Indebtedness"; or
(3) the aggregate amount of such Restricted Payment together with all
other Restricted Payments (the amount of any payments made in property other
than cash to be valued at the fair market value of such property, as
determined in good faith by the Board of Directors) declared or made since
the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net
Income accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the fiscal quarter in
which the Issue Date occurs to the end of the most recent fiscal quarter
prior to the date of such Restricted Payment for which financial statements
are available (or, in case such Consolidated Net Income accrued during such
period (treated as one accounting period) shall be a deficit, minus 100% of
such deficit); (B) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company); (C) the amount by which Indebtedness of the
Company or its Restricted Subsidiaries is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date, of any Indebtedness of the Company or
its Restricted Subsidiaries convertible or exchangeable for Capital Stock
(other than Disqualified Stock) of the Company (less the amount of any cash,
or the fair value of any other property, distributed by the Company or any
Restricted Subsidiary upon such conversion or exchange; (D) an amount equal
to the sum of (i) the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, repayments of loans or advances or
other transfers of assets subsequent to the Issue Date, in each case to the
Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and
(ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; PROVIDED, HOWEVER, that the foregoing sum shall not
exceed, in the case of any Unrestricted Subsidiary, the amount of
Investments previously made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary; and
(E) $5 million.
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(b) The provisions of the foregoing paragraph (a) shall not prohibit,
without duplication:
(1) any acquisition of any shares of Capital Stock or the repurchase,
redemption, defeasance or repayment of any Subordinated Obligations of the
Company or any Restricted Subsidiary made in exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary of the Company); PROVIDED, HOWEVER, that the Net
Cash Proceeds that are utilized for any such acquisition, repurchase,
redemption, defeasance or repayment shall be excluded from the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from such
sale shall be excluded from the calculation of amounts under clause (3)(B)
of paragraph (a) above;
(2) any purchase or redemption of (A) Subordinated Obligations of the
Company made in exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of the Company which is permitted to be
Incurred pursuant to paragraphs (b) and (c) of the covenant described under
"--Limitation on Indebtedness" or (B) Subordinated Obligations of a
Restricted Subsidiary made in exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness of such Restricted Subsidiary
or the Company which is permitted to be Incurred pursuant to paragraphs (b)
and (c) of the covenant described under "--Limitation on Indebtedness";
PROVIDED, HOWEVER, that such purchase or redemption shall be excluded from
the calculation of the amount of Restricted Payments;
(3) any purchase or redemption of (A) Disqualified Stock of the Company
made in exchange for, or out of the proceeds of the substantially concurrent
sale of, Disqualified Stock of the Company or (B) Disqualified Stock of a
Restricted Subsidiary made in exchange for, or out of the proceeds of the
substantially concurrent sale of, Disqualified Stock of such Restricted
Subsidiary or the Company; PROVIDED, HOWEVER, that (i) at the time of such
exchange, no Default or Event of Default shall have occurred and be
continuing or would result therefrom and (ii) such purchase or redemption
will be excluded from the calculation of the amount of Restricted Payments;
and
(4) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; PROVIDED, HOWEVER, that at the time of such dividend, no Default
shall have occurred and be continuing (or would result therefrom); PROVIDED,
FURTHER, HOWEVER, that such dividend shall be included in the calculation of
the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary:
(a) to pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed
to the Company;
(b) to make any loans or advances to the Company; or
(c) to transfer any of its property or assets to the Company or any
Restricted Subsidiary,
except: (i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date; (ii) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary which was entered into on or
prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than as consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
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Restricted Subsidiary or was acquired by the Company) and outstanding on such
date; (iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) of this covenant (or effecting a Refinancing of such
Refinancing Indebtedness pursuant to this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) of this covenant or
this clause (iii); PROVIDED, HOWEVER, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no more restrictive in any material respect than the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (iv) any such encumbrance or restriction
consisting of customary non-assignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
the property leased thereunder; (v) in the case of clause (c) above,
restrictions contained in security agreements or mortgages securing Indebtedness
of a Restricted Subsidiary to the extent such restrictions restrict the transfer
of the property subject to such security agreements or mortgages; (vi) any
restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; (vii) any encumbrance or restriction pursuant to the
New Credit Facility and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
PROVIDED that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings contain encumbrances and
restrictions with respect to such Restricted Subsidiary that are no more
restrictive in any material respect than the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in the New Credit Facility; and
(viii) any restriction imposed by applicable law.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
The Company shall not, and shall not permit any Restricted Subsidiary to,
consummate any Asset Disposition unless the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents. For the purposes of this covenant, the
following are deemed to be cash: (x) the assumption of Indebtedness of the
Company or any Restricted Subsidiary and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are immediately converted by the
Company or such Restricted Subsidiary into cash.
With respect to any Asset Disposition occurring on or after the Issue Date
from which the Company or any Restricted Subsidiary receives Net Available Cash,
the Company or such Restricted Subsidiary shall:
(i) within 360 days after the date such Net Available Cash is received
and to the extent the Company or such Restricted Subsidiary elects (or is
required by the terms of any Senior Indebtedness) to (A) apply an amount
equal to such Net Available Cash to prepay, repay or purchase Senior
Indebtedness of the Company or such Restricted Subsidiary, in each case
owing to a Person other than the Company or any Affiliate of the Company, or
(B) invest an equal amount, or the amount not so applied pursuant to clause
(A), in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary); and
(ii) apply such excess Net Available Cash (to the extent not applied
pursuant to clause (i)) as provided in the following paragraphs of the
covenant described hereunder; PROVIDED, HOWEVER, that in connection with any
prepayment, repayment or purchase of Senior Indebtedness pursuant to clause
(A) above, the Company or such Restricted Subsidiary shall retire such
Senior Indebtedness
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and shall cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased. The amount of Net Available Cash required to be applied pursuant
to clause (ii) above and not theretofore so applied shall constitute "Excess
Proceeds." Pending application of Net Available Cash pursuant to this
provision, such Net Available Cash shall be invested in Temporary Cash
Investments.
If at any time the aggregate amount of Excess Proceeds not theretofore
subject to an Excess Proceeds Offer (as defined below) totals at least $10
million, the Company shall, not later than 30 days after the end of the period
during which the Company is required to apply such Excess Proceeds pursuant to
clause (i) of the immediately preceding paragraph (or, if the Company so elects,
at any time within such period), make an offer (an "Excess Proceeds Offer") to
purchase from the Holders on a pro rata basis an aggregate principal amount of
Notes equal to the Excess Proceeds (rounded down to the nearest multiple of
$1,000) on such date, at a purchase price equal to 100% of the principal amount
of such Notes, plus, in each case, accrued interest (if any) to the date of
purchase (the "Excess Proceeds Payment"). Upon completion of an Excess Proceeds
Offer the amount of Excess Proceeds remaining after application pursuant to such
Excess Proceeds Offer (including payment of the purchase price for Notes duly
tendered), may be used by the Company for any corporate purpose (to the extent
not otherwise prohibited by the Indenture) and the amount of Excess Proceeds
shall thereafter be reset at zero. The Indenture will provide that, prior to
complying with the provisions of this paragraph, but in any event within 30 days
following the date on which the aggregate amount of Excess Proceeds not
theretofore subject to an Excess Proceeds Offer totals at least $10 million, the
Company will either repay all outstanding Senior Indebtedness or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Indebtedness to permit the repurchase of the Notes required by this paragraph.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in the event that such Excess Proceeds are received by the Company
under the covenant described hereunder and the Company is required to repurchase
Notes as described above. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
covenant described hereunder by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, enter into or permit to exist any transaction or series of related
transactions (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof:
(1) are no less favorable to the Company or such Restricted Subsidiary
than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate;
(2) if such Affiliate Transaction (or series of related Affiliate
Transactions) involve aggregate payments in an amount in excess of $1
million in any one year, (i) are set forth in writing, (ii) comply with
clause (1) and (iii) have been approved by a majority of the disinterested
members of the Board of Directors; and
(3) if such Affiliate Transaction (or series of related Affiliate
Transactions) involve aggregate payments in an amount in excess of $5
million in any one year, (i) comply with clause (2) and (ii) have been
determined by a nationally recognized consulting, accounting, appraisal or
investment banking firm to be fair, from a financial standpoint, to the
Company and its Restricted Subsidiaries.
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(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any Restricted Payment permitted to be paid pursuant to the covenant
described under "--Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise, pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans in the ordinary course
of business and approved by the Board of Directors;
(3) the grant of stock options or similar rights to employees and
directors of the Company in the ordinary course of business and pursuant to
plans approved by the Board of Directors;
(4) loans or advances to employees in the ordinary course of business of
the Company or its Restricted Subsidiaries;
(5) fees, compensation or employee benefit arrangements paid to and
indemnity provided for the benefit of directors, officers or employees of
the Company or any Subsidiary in the ordinary course of business; or
(6) any Affiliate Transaction between the Company and a Restricted
Subsidiary or between Restricted Subsidiaries in the ordinary course of
business (so long as the other stockholders of any participating Restricted
Subsidiaries which are not Wholly Owned Restricted Subsidiaries are not
themselves Affiliates of the Company).
LIMITATION ON THE ISSUANCE OR SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company shall not (i) sell, pledge, hypothecate or otherwise dispose of
any shares of Capital Stock of a Restricted Subsidiary (other than pledges of
Capital Stock securing Senior Indebtedness) or (ii) permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock other than (A) to the Company or a Wholly Owned
Subsidiary, (B) directors' qualifying shares or (C) if, immediately after giving
effect to such issuance or sale, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary.
LIMITATION ON LIENS
Except for Permitted Liens, the Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any property of the Company or any Restricted
Subsidiary (including Capital Stock of a Restricted Subsidiary), whether owned
at the Issue Date or thereafter acquired which secures Indebtedness that ranks
PARI PASSU with or is subordinated to the Notes unless (i) if such Lien secures
Indebtedness that ranks PARI PASSU with the Notes, the Notes are secured on an
equal and ratable basis with the obligation so secured until such time as such
obligation is no longer secured by a Lien or (ii) if such Lien secures
Indebtedness that is subordinated to the Notes, such Lien shall be subordinated
to a Lien granted to the Holders on the same collateral as that securing such
Lien to the same extent as such subordinated Indebtedness is subordinated to the
Note.
MERGER AND CONSOLIDATION
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of related transactions, all
or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the Notes and the Indenture;
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(ii) immediately after giving effect to such transaction on a pro forma
basis (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Subsidiary as a result of such transaction as
having been Incurred by such Successor Company or such Subsidiary at the
time of such transaction), no Default shall have occurred and be continuing;
(iii) except in the case of a merger with or into a Wholly Owned
Restricted Subsidiary or a merger, the sole purpose of which is to change
the Company's jurisdiction of incorporation, immediately after giving effect
to such transaction on a pro forma basis, the Successor Company would be
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
of the covenant described under "--Limitation on Indebtedness";
(iv) immediately after giving effect to such transaction on a pro forma
basis, the Successor Company shall have Consolidated Net Worth in an amount
that is not less than the Consolidated Net Worth of the Company immediately
prior to such transaction; and
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture. Notwithstanding the foregoing clauses (ii), (iii) and (iv), any
Restricted Subsidiary may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
FUTURE GUARANTORS
The Company shall cause each Restricted Subsidiary that at any time becomes
an obligor or guarantor with respect to any obligations under the New Credit
Facility to execute and deliver to the Trustee a supplemental indenture pursuant
to which such Restricted Subsidiary will Guarantee payment of the Notes on the
same terms and conditions as those set forth in the Indenture. Any such
Guarantee will be subordinated in a manner similar to that of the Notes. Each
Subsidiary Guaranty will be limited in amount to an amount not to exceed the
maximum amount that can be Guaranteed by the applicable Subsidiary Guarantor
without rendering such Subsidiary Guaranty voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Notwithstanding the foregoing, any
such Guarantee by a Restricted Subsidiary of the Notes shall provide by its
terms that it shall be automatically and unconditionally released and discharged
upon either (i) the release or discharge of such Guarantee of such Indebtedness,
except a discharge by or as a result of payment under such Guarantee, or (ii)
any sale, exchange or transfer, to any Person not an Affiliate of the Company,
of all of the Company's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary, which sale, exchange or transfer is made in
compliance with the applicable provisions of the Indenture. The form of such
Guarantee will be attached as an exhibit to the Indenture.
SEC REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the SEC, so long as any Notes are outstanding, the Company will
furnish to Holders of Notes (i) all quarterly and annual financial information
that would be required to be contained in a filing with the SEC on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the SEC on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the SEC, the Company
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will file a copy of all such information and reports with the SEC for public
availability (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, it will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
DEFAULTS
An Event of Default is defined in the Indenture as:
(i) a default in the payment of interest on the Notes when due (whether
or not such payment is prohibited by the provisions described under
"Subordination" above), continued for 30 days;
(ii) a default in the payment of principal, or premium, if any, of any
Note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise (whether or not such
payment is prohibited by the provisions described under "Subordination"
above);
(iii) the failure by the Company to comply with any of its obligations
under the covenants described under "--Change in Control," "--Certain
Covenants--Limitation on Indebtedness," "--Limitation on Restricted
Payments," "--Limitation on Sales of Assets and Subsidiary Stock" and
"--Merger, Consolidation and Sale of Assets" for 30 days after notice;
(iv) the failure by the Company to comply with any of its other
covenants or other agreements of the Indenture for 60 days after notice;
(v) Indebtedness of the Company or any Restricted Subsidiary is not paid
within any applicable grace period after final maturity or is accelerated by
the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5 million and in either case,
such default is not cured or waived and such acceleration, if any, rescinded
or the Indebtedness is not paid in 30 days (the "cross-acceleration
provision");
(vi) certain events of bankruptcy, insolvency or reorganization of the
Company or a Restricted Subsidiary (the "bankruptcy provisions"); or
(vii) any judgment or decree for the payment of money in excess of $5
million is rendered against the Company or a Restricted Subsidiary, remains
outstanding following such judgment and is not discharged, waived or stayed
within 60 days after entry of such judgment or decree (the "judgment default
provision").
However, a default under clauses (iii) or (iv) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clause (iii) or (iv) hereof, as
the case may be, after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holders of the Notes. Under certain
circumstances, the Holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
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Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless:
(i) such Holder has previously given the Trustee notice that an Event of
Default is continuing;
(ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy;
(iii) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(iv) the Trustee has not complied with such request within 60 days after
the receipt thereof and the offer of security or indemnity; and
(v) the Holders of a majority in principal amount of the outstanding
Notes have not given the Trustee a direction inconsistent with such request
within such 60-day period. Subject to certain restrictions, the Holders of a
majority in principal amount of the outstanding Notes are given the right to
direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that
would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any Note, the Trustee may withhold notice if and
so long as a committee of its trust officers determines that withholding notice
is not opposed to the interest of the Holders. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the Holders of a majority in principal amount of the
Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected thereby, no amendment may, among other things, (i)
reduce the amount of Notes whose Holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note, (iii)
reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce
the premium payable upon the redemption of any Note or change the time at which
any Note may be redeemed as described under "--Optional Redemption" above, (v)
make any Note payable in money other than that stated in the Note, (vi) impair
the right of any Holder to institute suit for the enforcement of any payment on
or with respect to such Holder's Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions, or
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the Noteholders.
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Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for the issuance of Additional Notes, to provide
for uncertificated Notes in addition to or in place of certificated Notes
(provided that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add
guarantees with respect to the Notes, to secure the Notes, to add to the
covenants of the Company for the benefit of the Holders or to surrender any
right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any Holder or to comply with any requirement of
the SEC in connection with the qualification of the Indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
their Representative) consents to such change.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment. However,
the failure to give such notice to all Holders, or any defect therein, will not
impair or affect the validity of the amendment.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "--Change of
Control" and under the covenants described under "--Certain Covenants" (other
than the covenant described under "--Merger and Consolidation"), the operation
of the cross-acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" above and the limitations contained in clauses (iii) and (iv) under
"--Certain Covenants Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iii), (iv), (v) (with respect only to
Significant Subsidiaries) or (vi) under "--Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "--Certain
Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain
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other conditions, including delivery to the Trustee of an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
U.S. Trust Company of California, N.A., is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent person in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any Holder of
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; or (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary; PROVIDED,
HOWEVER, that any such Restricted Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain Covenants--Limitation on
Restricted Payments," "--Limitation on Affiliate Transactions" and
"--Limitations on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall
also mean any beneficial owner of Capital Stock representing 10% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares and, to the
extent required by local ownership laws in foreign countries, shares owned by
foreign shareholders), (ii) all or substantially all the assets of any division,
business segment or comparable line of business of the Company or any Restricted
Subsidiary or (iii) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such Restricted
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Subsidiary. Notwithstanding the foregoing, the term "Asset Disposition" shall
not include (x) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (y) for
purposes of the covenant described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock," a disposition that constitutes a
Permitted Investment or a Restricted Payment permitted by the covenant described
under "--Certain Covenants--Limitation on Restricted Payments," and (z) a
disposition of assets having a fair market value of less than $1 million. For
purposes hereof, "ordinary course of business" for the Company shall be deemed
to include, without limitation, (i) the sale of rental inventory, consistent
with past practice, and (ii) sales or closures of stores; PROVIDED, HOWEVER,
that the Company or a Restricted Subsidiary acquires or opens another store
within 90 days thereof for each such store sold or closed.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Senior Credit Facility, including principal, premium, if any, interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization, whether or not a claim for post-filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, Guarantees and all other amounts and Obligations payable thereunder
or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) (other than one or more Permitted Holders),
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that for purposes of this clause such person
or group shall be deemed to have "beneficial ownership" of all shares that
any such person or group has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the Voting Stock
of the Company; PROVIDED, HOWEVER, a Change in Control shall not be deemed
to have occurred if (A) such beneficial ownership is shared with one or more
Permitted Holders who hold the sole power to vote
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such Voting Stock; or (B) one or more Permitted Holders possess the right
(by contract or otherwise) to elect, or cause the election of, a majority of
the members of the Company's Board of Directors; or
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
vote of at least 66 2/3% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors then in
office.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Operating Cash Flow for the period of the
most recent four consecutive fiscal quarters ending at least 45 days (or, if
less, the number of days after the end of such fiscal quarter as the
consolidated financial statements of the Company shall be available) prior to
the date of such determination to (ii) Consolidated Interest Expense for such
four fiscal quarters; PROVIDED, HOWEVER, that (1) if the Company or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of such
period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Operating Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period (except that, in the case of Indebtedness used to finance working capital
needs incurred under a revolving credit or similar arrangement, the amount
thereof shall be deemed to be the average daily balance of such Indebtedness
during such four-fiscal-quarter period), (2) if since the beginning of such
period the Company or any Restricted Subsidiary shall have made any Asset
Disposition, the Operating Cash Flow for such period shall be reduced by an
amount equal to the Operating Cash Flow (if positive) directly attributable to
the assets which are the subject of such Asset Disposition for such period, or
increased by an amount equal to the Operating Cash Flow (if negative) directly
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased, assumed by a third person (to the
extent the Company and its Restricted Subsidiaries are no longer liable for such
Indebtedness) or otherwise discharged with respect to the Company and its
continuing Restricted Subsidiaries in connection with such Asset Disposition for
such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company shall
have consummated a Public Equity Offering, Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its Restricted Subsidiaries in connection with such
Public Equity Offering for such period, (4) if since the beginning of such
period the Company or any Restricted Subsidiary (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of assets, which acquisition
constitutes all or substantially all of an operating unit of a business,
including any such Investment or acquisition occurring in connection with a
transaction requiring a calculation to be made hereunder, Operating Cash Flow
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness)
as if such Investment or acquisition occurred on the first day of such period
and (5) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged
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with or into the Company or any Restricted Subsidiary since the beginning of
such period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(3) or (4) above if made by the Company or a Restricted Subsidiary during such
period, Operating Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount,
(iii) capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, and (viii) interest actually paid on any Indebtedness
of any other Person that is Guaranteed by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income: (i) any net income (or loss) of
any Person if such Person is not the Company or a Restricted Subsidiary, except
that, subject to the exclusion contained in clause (iv) below, the Company's
equity in the net income of any such Person for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below); (ii) for purposes of subclause
(a)(3)(A) of the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" only, any net income (or loss) of any Person acquired by
the Company or a Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition; (iii) any net income of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed by such Restricted Subsidiary consistent with such
restriction during such period to the Company or another Restricted Subsidiary
as a dividend or other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation contained
in this clause) and (B) the Company's equity in a net loss of any such
Restricted Subsidiary for such period shall be included in determining such
Consolidated Net Income; (iv) any gain (or loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated Subsidiaries
(including pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain (or loss)
realized upon the sale or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; (vi) the cumulative effect of a change in
accounting principles; and (vii) with respect to any period that includes the
three months ended March 31, 1997, the nonrecurring $18.9 million pre-tax
expense related to the settlement in such period of a securities class action
lawsuit, MURPHY V. HOLLYWOOD ENTERTAINMENT CORPORATION ET AL., case no.
C95-1926-MA, U.S. District Court for the District of Oregon. Notwithstanding the
foregoing, for the purposes of the covenant described under "--Certain Covenants
Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the
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Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend up to,
at least $10 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable, at the option of the holder thereof, for
Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to the first
anniversary of the Stated Maturity of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Credit Facility" means the Amended and Restated Revolving Credit
Agreement, 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, as Lenders, and Bank of America
National Trust & Savings Association d/b/a "Seafirst Bank," as agent for the
Lenders, and Hollywood Entertainment Corporation as Borrower.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board and (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession.
"Guarantee" means any obligation, contingent or other, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or other, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
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"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary; PROVIDED, FURTHER, HOWEVER, that
in the case of a discount security, neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness, but the entire face amount of such security shall be deemed
Incurred upon the issuance of such security. The term "Incurrence" when used as
a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property or
services, all conditional sale obligations of such Person and all obligations of
such Person under any title retention agreement (but excluding trade accounts
payable and accrued liabilities arising in the ordinary course of business and
which are not more than 90 days past due and not in dispute), which purchase
price or obligation is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services (provided that, in the case of obligations of an acquired Person
assumed in connection with an acquisition of such Person, such obligations would
constitute Indebtedness of such Person); (iv) all obligations of such Person for
the reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit); (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, any Preferred Stock
(but excluding, in each case, any accrued dividends); (vi) all obligations of
the type referred to in clauses (i) through (v) of other Persons and all
dividends of other Persons for the payment of which, in either case, such Person
is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee; (vii) all obligations of the
type referred to in clauses (i) through (vi) of other Persons secured by any
Lien on any property or asset of such Person (whether or not such obligation is
assumed by such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the obligation
so secured; and (viii) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations as
described above at such date; PROVIDED, HOWEVER, that the amount outstanding at
any time of any Indebtedness issued with original issue discount shall be deemed
to be the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such time as
determined in conformity with GAAP.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
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"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
by the Company or any of its Subsidiaries therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received, but
excluding any other consideration received in the form of assumption by the
acquiring Person of Indebtedness or other obligations relating to such
properties or assets or received in any other noncash form) in each case net of
(i) all legal, title and recording tax expenses, commissions and other fees and
expenses incurred, and all Federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or Joint
Ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition, including without limitation
liabilities under any indemnification obligations associated with such Asset
Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys fees and
disbursements, accountants fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"New Credit Facility" means the Revolving Credit Agreement, dated as of
September 5, 1997, by and among Hollywood Entertainment Corporation, as
Borrower, and Societe Generale, DLJ Capital Funding, Inc., Goldman Sachs Credit
Partners L.P. and certain other financial institutions, as Lenders, and Societe
Generale, as Agent for the Lenders, Donaldson, Lufkin & Jenrette Securities
Corporation, as
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Administrative Agent, Goldman Sachs Credit Partners, L.P., as Documentation
Agent, and Credit Lyonnais Los Angeles Branch, Barclays Bank PLC, Deutsche Bank
AG, New York Branch, U.S. Bank National Association and KeyBank National
Association, as Co-Agents.
"Obligations" means all present and future obligations for principal,
premium, interest (including, without limitation, any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law), penalties, fees, indemnifications,
reimbursements (including, without limitation, all reimbursement and other
obligation pursuant to any letters of credit, bankers acceptance or similar
instruments or documents), damages and other liabilities payable under the
documentation at any time governing any indebtedness.
"Operating Cash Flow," means, for any Person and for any period, the sum of
Consolidated Net Income plus (A) Consolidated Interest Expense, plus (B) the
following to the extent deducted in calculating such Consolidated Net Income,
without duplication: (i) income tax expense, (ii) depreciation expense, (iii)
amortization expense, (iv) all other non cash items reducing Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be made), plus (C) any cash
charges associated with the acquisition of new release videocassettes (including
any fees in connection with revenue sharing arrangements with respect to rental
inventory) and other media and game inventory purchases to the extent such cash
charges have been included in the operating expenses used to calculate
Consolidated Net Income, minus (D) 30% of rental revenue for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute Operating Cash Flow
only to the extent (and in the same proportion) that the net income of such
Subsidiary was included in calculating Consolidated Net Income.
"Permitted Holder" means (i) Mark J. Wattles, (ii) an employee benefit plan
of the Company, or any of its subsidiaries or any participant therein, (iii) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries or (iv) any Permitted Transferee of any
of the foregoing persons.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, (ii) a Restricted Subsidiary or a Person that
will, upon the making of such Investment, become a Restricted Subsidiary;
PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a
Related Business; PROVIDED FURTHER that no such Investment shall constitute
assets owned by the Company as of the issue date (or any substitute or
replacement assets therefor); (iii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; PROVIDED, HOWEVER, that such Person's primary business is
a Related Business; PROVIDED FURTHER that no such Investment shall constitute
assets owned by the Company as of the issue date (or any substitute or
replacement assets therefor); (iv) Temporary Cash Investments; (v) receivables
owing to the Company or any Restricted Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; PROVIDED, HOWEVER, that such trade items may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (vi) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vii) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary; (viii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (ix) any
Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock"; and (x) Persons other than the Company and Restricted
Subsidiaries, in an aggregate amount after the
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Issue Date of up to $15 million; PROVIDED, HOWEVER, the amount of any dividends,
repayment of loans or transfers of assets as a return on such Permitted
Investments will reduce the amount of such $15 million amount used (but not
below $0).
"Permitted Liens" means (i) Liens in favor of the Company or such Restricted
Subsidiary, (ii) Liens on property or assets of a Person existing at the time
such Person is merged into or consolidated with the Company or any Restricted
Subsidiary; PROVIDED that such Liens were in existence prior to the merger or
consolidation and were not created or incurred in contemplation of such merger
or consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company or such Restricted Subsidiary prior
to such merger; and (iii) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary; PROVIDED that the Liens
were in existence prior to the acquisition and were not created or incurred in
contemplation of such acquisition.
"Permitted Transferees" means, with respect to any person, (i) any Affiliate
of such person, (ii) the heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership, the stockholders or
general or limited partners of which, include only such person or his or her
spouse or lineal descendants, in each case to whom such person has transferred
the beneficial ownership of any securities of the Company, (iv) any investment
account whose investment managers and investment advisors consist solely of such
person and/ or Permitted Transferees of such person, and (v) any investment fund
or investment entity that is a subsidiary of such person or Permitted Transferee
of such person.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement, other purchase money obligations and
obligations in respect of industrial revenue bonds or similar Indebtedness, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Restricted Subsidiary of such asset,
including additions and improvements; PROVIDED, HOWEVER, that any Lien arising
in connection with any such Indebtedness shall be limited to the specified asset
being financed or, in the case of real property or fixtures, including additions
and improvements, the real property on which such asset is attached; and
PROVIDED, FURTHER, HOWEVER, that such Indebtedness is Incurred within 90 days
after such acquisition of such asset by the Company or Restricted Subsidiary.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture; PROVIDED, HOWEVER, that (i)
other than Refinancing Indebtedness in respect of the Senior Credit Facility,
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such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) other than Refinancing
Indebtedness in respect of the Senior Credit Facility, such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs and, solely in the case of Bank Indebtedness, Obligations)
under the Indebtedness being Refinanced; PROVIDED FURTHER, HOWEVER, that
Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that
Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means any business related, ancillary or complementary
(as determined in good faith by the Board of Directors) to the businesses of the
Company and the Restricted Subsidiaries.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" means, with respect to any Person, (i) the declaration
or payment of any dividends or any other distributions on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the holders of its
Capital Stock, except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable solely to the Company or a Restricted Subsidiary (and, if such
Restricted Subsidiary is not wholly owned, to its other shareholders on a pro
rata basis or on a basis that results in the receipt by the Company or a
Restricted Subsidiary of dividends or distributions of greater value than it
would receive on a pro rata basis), (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company held by
any Person or of any Capital Stock of a Restricted Subsidiary held by any
Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment, of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means, at any time, any Subsidiary of the Company
that is not an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon the
occurrence of any Unrestricted Subsidiary ceasing to be an Unrestricted
Subsidiary, such Subsidiary shall be included in the definition of "Restricted
Subsidiary."
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Facility" means one of (i) until the Existing Credit Facility
is terminated and all Obligations (other than in respect of contingent,
unliquidated or disputed indemnification obligations) in respect thereof due and
payable thereunder have been paid, the Existing Credit Facility or (ii) upon the
termination of the Existing Credit Facility, the payment of all Obligations
(other than in respect of
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contingent, unliquidated or disputed indemnification obligations) thereunder and
the initial closing under the New Credit Facility, the New Credit Facility, in
each case as the same may be amended, waived, modified, replaced or Refinanced
from time to time (except to the extent that any such amendment, waiver,
modification, replacement or Refinancing would be prohibited by the terms of the
Indenture).
"Senior Indebtedness" of the Company means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, including the
Guarantees by the Company of all Bank Indebtedness, (ii) accrued and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
the Company is responsible or liable unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes, and
(iii) all Obligations of the Company in respect of any of the foregoing,
PROVIDED, HOWEVER, that Senior Indebtedness shall not include (1) any obligation
of the Company to any Subsidiary, (2) any liability for federal, state, local or
other taxes owed or owing by the Company, (3) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of the Company (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect (other than as a result
of the Indebtedness being unsecured) to any other Indebtedness or other
obligation of the Company, including any Senior Subordinated Indebtedness and
any Subordinated Obligations, (5) any obligations with respect to any Capital
Stock or (6) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" of the Company means the Notes and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank PARI PASSU with the Notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally
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recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America, any State thereof or the District of Columbia or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's
Ratings Group, and (v) investments in securities with maturities of six months
or less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED, HOWEVER, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "--Certain Covenants--Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be notified by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
and/or one or more Wholly Owned Subsidiaries.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The following is a summary of certain terms and provisions of certain debt
instruments to which the Company is or will become a party. This summary does
not purport to be complete.
EXISTING CREDIT FACILITY
The Company established the Existing Credit Facility as of February 12, 1997
with a syndicate of banks. The Existing Credit Facility established a $150
million revolving line of credit, the proceeds of which were used for interim
funding of new store growth and acquisitions and for general working capital
purposes. In connection with the offering of the Old Notes, the Company repaid
in full all of the outstanding indebtedness under the Existing Credit Facility.
The Existing Credit Facility was terminated on September 4, 1997.
NEW CREDIT FACILITY
The Company established the New Credit Facility on September 5, 1997. The
following is a summary of certain terms and provisions contained in the proposed
New Credit Facility.
The New Credit Facility is a five-year $300 million revolving credit
facility collateralized by substantially all of the Company's personal property,
including (i) accounts receivable; (ii) videocassettes and other inventory;
(iii) equipment, machinery and fixtures; (iv) patents, trademarks, trade names
and other general intangibles; and (v) investment property of the Company. The
proceeds of the facility are anticipated to be used for general working capital
purposes, including refinancing existing indebtedness, new store expansion and
acquisitions. The maximum available amount of $300 million will be reduced by
$37.5 million per quarter beginning with the first quarter after the third
anniversary of the establishment of the New Credit Facility and will also be
reduced by the amount of proceeds of certain asset dispositions.
The New Credit Facility contains financial and other restrictive covenants,
including a minimum interest coverage ratio; a maximum leverage (total funded
debt to Adjusted EBITDA) ratio; a minimum average per store contribution to
profit requirement; a minimum net worth requirement; and restrictions on mergers
and other business combinations, asset sales, additional indebtedness,
guaranties, liens, investments, operating lease obligations and acquisitions.
The New Credit Facility also contains customary events of default and other
provisions, including an event of default due to a change of control (as
described therein) of the Company. Upon the occurrence of an event of default,
the lenders may terminate their commitments to lend and declare all amounts
owing under the New Credit Facility to be immediately due and payable (except
that, upon the occurrence of an event of default triggered by certain events of
bankruptcy, the commitments to lend will automatically terminate and borrowings
under the New Credit Facility IPSO FACTO will become due and payable), whereupon
the banks may initiate proceedings to realize on the collateral with respect to
the New Credit Facility.
Borrowings under the New Credit Facility bear interest, at the Company's
option, at the lender's base rate plus up to 1.125% or the IBOR Rate. The New
Credit Facility also provides for the payment by the Company of a commitment fee
of 0.5% per annum on the available and unused portion of the credit line and
certain other fees.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain U.S. federal income tax
consequences associated with the exchange of the Old Notes for the New Notes
pursuant to the Exchange Offer. The discussion below does not purport to
consider all aspects of U.S. federal income taxation that may be relevant to
particular holders in the context of their specific investment circumstances or
certain types of holders subject to special treatment under such laws (e.g.,
financial institutions, tax-exempt organizations, foreign corporations and
individuals who are not citizens or residents of the U.S.). This summary is
based upon the United
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States federal tax laws and regulations as now in effect and as currently
interpreted and does not take into account possible changes in such tax laws or
such interpretations, any of which may be applied retroactively. It does not
include any description of the tax laws of any state, local or foreign
government that may be applicable to the Notes or a holder thereof.
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer will not be treated as an "exchange" for federal income tax purposes
because the New Notes do not differ materially in either kind or extent from the
Old Notes and because the exchange will occur by operation of the terms of the
Old Notes. Rather, the New Notes received by a holder will be treated as a
continuation of the Old Notes in the hands of the holder. As a result, there
generally will be no federal income tax consequences to holders exchange Old
Notes for the New Notes pursuant to the Exchange Offer. In addition, any "market
discount" on the Old Notes should carry over to the New Notes. Holders should
consult their tax advisors regarding the application of the market discount
rules to the New Notes received in exchange for the Old Notes pursuant to the
Exchange Offer.
Interest accruing throughout the term of the New Notes at a rate of 10 5/8%
per annum will be includable in gross income in accordance with a holder's
regular method of accounting. If Additional Interest is paid (in addition to the
accrual of interest at a rate of 10 5/8% per annum) on the Old Notes as
described above under "The Exchange Offer--Registration Rights; Additional
Interest," such Additional Interest payments generally should be includable in a
holder's gross income as ordinary income when such payment is made.
THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF THE NOTES IN LIGHT OF
HIS, HER OR ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER
OF THE NOTES SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OR OLD NOTES FOR NEW NOTES AND THE
OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS OR CHANGES THEREOF.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
the Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period ending on the
earlier of (i) 180 days after the date of this Prospectus and (ii) the date on
which a broker-dealer is no longer required to deliver a prospectus in
connection with market-making or other trading activities, it will make
available and provide promptly upon reasonable request this Prospectus (as
amended or supplemented), in a form meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any such resale.
The Company will receive no proceeds in connection with the Exchange Offer.
New Notes received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or through brokers or dealers who may receive compensation in the
form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Notes may be
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deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver, and by delivering, a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. The Company has agreed to indemnify such broker-dealers against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the New Notes will be passed upon for the
Company by Stoel Rives LLP, Portland, Oregon and by Latham & Watkins, San
Francisco, California.
EXPERTS
The financial statements of Hollywood Entertainment Corporation for the year
ended December 31, 1994 incorporated by reference into this Prospectus have been
audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K of Hollywood Entertainment Corporation as of December
31, 1996 and 1995 and for each of the two years in the period ended December 31,
1996 have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. The Company has also filed with the Commission a Registration
Statement under the Securities Act with respect to the New Notes offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the New Notes offered hereby,
reference is made to such Registration Statement, exhibits and schedules.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement and the
reports and other information filed pursuant to the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at Suite 1300, Seven World Trade Center, New
York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies of all or any part of the Registration Statement
and the reports and other information filed pursuant to the Exchange Act may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon the payment of the fees prescribed by the
Commission. The Commission maintains an Internet Web Site at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated in this Prospectus by reference:
(a) The Company's Annual Report on Form 10-K for the year ended December 31,
1996 (and Amendment No. 1 thereto on Form 10-K/A);
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(b) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997;
(d) The Company's Current Report on Form 8-K, dated July 21, 1997;
(e) The Company's Current Report on Form 8-K, dated July 22 1997;
(f) The Company's Current Report on Form 8-K, dated August 8, 1997; and
(g) The description of the Company's Common Stock contained in the Company's
registration statement on Form 8-A filed under Section 12 of the Exchange
Act, dated July 15, 1993, including any amendment or report updating such
description.
In addition, all documents filed by the Company pursuant to sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after September 24, 1997 and prior to the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents (such documents, and the documents enumerated above, being hereinafter
referred to as "Incorporated Documents"). Any statement contained in an
Incorporated Document shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed Incorporated Document modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, including any beneficial
owner, on the written or oral request of any such person, a copy of any or all
of the Incorporated Documents, other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Requests shall
be directed to Hollywood Entertainment Corporation, 25600 SW Parkway Center
Drive, Wilsonville, Oregon 97070, Attention: Mr. Donald J. Ekman, Senior Vice
President and General Counsel (telephone number (503) 570-1600). The information
relating to the Company contained in this Prospectus does not purport to be
comprehensive and should be read together with the information contained in the
Incorporated Documents.
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NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES
OTHER THAN THE NOTES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 13
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 26
Management................................................................ 32
The Exchange Offer........................................................ 34
Description of Notes...................................................... 41
Description of Certain Other Indebtedness................................. 69
Certain United States Federal Income Tax Consequences..................... 69
Plan of Distribution...................................................... 70
Legal Matters............................................................. 71
Experts................................................................... 71
Available Information..................................................... 71
Incorporation of Certain Documents by Reference........................... 71
</TABLE>
$200,000,000
HOLLYWOOD ENTERTAINMENT
CORPORATION
10 5/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2004
[LOGO]
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PROSPECTUS
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SEPTEMBER 24, 1997
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