UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K/A
AMENDMENT NO.1
Current Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
OCTOBER 1, 1998
Date of Report (Date of earliest event reported)
HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
OREGON
(State or other jurisdiction of incorporation)
0-21824 93-0981138
(Commission file number) (I.R.S. Employer Identification No.)
9275 S.W. PEYTON LANE, WILSONVILLE, OREGON 97070
(Address of principal executive office, including zip code)
(503) 570-1600
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired Page
The audited financial statements of Reel.Com LLC are included
in this Form 8-K/A as follows:
Report of Independent Accountants 5
Balance Sheet as of January 31, 1998 6
Statement of Operations for the period 7
July 1, 1997 (inception) to January 31, 1998
Statement of Members' Deficit for the 8
period July 1, 1997 (inception) to January 31, 1998
Statement of Cash Flows for the period 9
July 1, 1997 (inception) to January 31, 1998
Notes to Financial Statements 10 - 17
The unaudited interim financial statements of Reel.com, Inc. are included
in this Form 8-K/A as follows:
Condensed Balance Sheet as of September 30, 1998 18
Condensed Statements of Operations for the 19
eight months ended September 30, 1998 and three months
ended September 30, 1997
Condensed Statements of Cash Flows for the 20
eight months ended September 30, 1998 and three months
ended September 30, 1997
Notes to Unaudited Condensed Financial Statements 21
(b) Pro Forma Financial Information (unaudited)
The following unaudited pro forma financial information is contained on
pages 22 to 27 of this report:
Introduction to Pro Forma Condensed Consolidated Financial22 - 23
Information
Pro Forma Condensed Consolidated Balance Sheet as of 24
September 30, 1998
2
Pro Forma Condensed Consolidated Statement of Operations 25
for the year ended December 31, 1997
Pro Forma Condensed Consolidated Statement of Operations 26
for the nine months ended September 30, 1998
Notes to Unaudited Pro Forma Condensed Consolidated 27
Financial Information
(c) Exhibits
Exhibit No. Description
----------- ------------
23.1 Consent of PricewaterhouseCoopers LLP 28
3
HOLLYWOOD ENTERTAINMENT CORPORATION
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to its report of Form 8-K to be
signed on its behalf by the undersigned, hereunto duly authorized.
HOLLYWOOD ENTERTAINMENT CORPORATION
-----------------------------------
(Registrant)
December 15, 1998 /s/ Jeffrey D. Jordan
- ------------------ --------------------------
(Date) Jeffrey D. Jordan
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer of the Registrant)
4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members and Board of Directors
of Reel.Com LLC:
In our opinion, the accompanying balance sheet and the related statements of
operations, of members' deficit and of cash flows present fairly, in all
material respects, the financial position of Reel.Com LLC, a Delaware limited
liability company, at January 31, 1998, and the results of its operations and
its cash flows for the period from July 1, 1997 (date of inception) to January
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
As more fully described in Note 7, the Company was dissolved and Reel.com, Inc.
was formed on April 30, 1998. On October 1, 1998, Reel.com, Inc. merged with
Hollywood Entertainment Corporation and ceased to exist as a separate
corporation.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
May 29, 1998, except for Note 7
as to which date is October 1, 1998
5
<TABLE>
<CAPTION>
REEL.COM LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEET
AS OF JANUARY 31, 1998
<S> <C>
ASSETS
Current assets:
Cash $ 20,872
Accounts receivable, net of allowance for returns of $20,000 76,544
Other current assets 69,798
----------
Total current assets 167,214
Videocassette rental inventory, net 696,141
Property and equipment, net 532,720
----------
Total assets $1,396,075
----------
----------
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 647,880
Accrued liabilities 178,504
Convertible notes payable to members 1,122,712
Note payable to member 107,599
Other current liabilities 17,011
----------
Total current liabilities 2,073,706
Commitments and contingencies (Note 4)
Members' deficit:
Capital contributions 2,063,192
Accumulated deficit (2,740,823)
----------
Total members' deficit (677,631)
----------
Total liabilities and members' deficit $1,396,075
----------
----------
The accompanying notes are an integral part of these financial statements
</TABLE>
6
<TABLE>
<CAPTION>
REEL.COM LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1997 (DATE OF INCEPTION)
TO JANUARY 31, 1998
<S> <C>
Revenues:
Sales revenue from online store $ 943,731
Rental revenue from retail store 588,662
-------------
Total revenues 1,532,393
Cost of revenues:
Cost of online store revenue 910,315
Cost of retail store revenue 520,569
-------------
Total cost of revenues 1,430,884
-------------
Gross profit 101,509
Operating expenses:
General and administrative 1,515,604
Sales and marketing 636,565
Product development 686,633
-------------
Total operating expenses 2,838,802
-------------
Loss from operations (2,737,293)
Interest expense (3,530)
-------------
Net loss $ (2,740,823)
--------------
--------------
The accompanying notes are an integral part of these financial statements
</TABLE>
7
<TABLE>
<CAPTION>
REEL.COM LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF MEMBERS' DEFICIT
FOR THE PERIOD FROM JULY 1, 1997 (DATE OF INCEPTION)
TO JANUARY 31, 1998
Class A Class B
------------------ ------------------ Accumulated
Units $ Units $ Deficit Total
--------- ------- ------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capital
contributions
of Reel LLC on
July 1, 1997 4,700,000 $(521,666) - - - (521,666)
Capital
contributions,
net of financing
costs of 40,142 - - 2,625,000 $2,584,858 - 2,584,858)
Net loss - - - - $(2,740,823) (2,740,823)
Balance at --------- ---------- --------- ---------- ------------ ------
January 31, 1998 4,700,000 $(521,666) 2,625,000 $2,584,858 $(2,740,823) $(677,631)
--------- ---------- --------- ---------- ------------ ------
--------- ---------- --------- ---------- ------------ -----
The accompanying notes are an integral part of these financial statements
</TABLE>
8
<TABLE>
<CAPTION>
REEL.COM LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 1, 1997 (DATE OF INCEPTION)
TO JANUARY 31, 1998
<S> <C>
Cash flows from operating activities:
Net loss $(2,740,823)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 226,747
Allowance for sales returns 20,000
Allowance for videocassette rental inventory obsolescence 31,300
Changes in operating assets and liabilities:
Increase in accounts receivable (96,544)
Increase in other current assets (34,289)
Increase in accounts payable 486,678
Decrease in accrued liabilities (115,223)
Increase in other current liabilities 15,778
------------
Net cash used in operating activities (2,206,376)
------------
Cash flows from investing activities:
Purchase of videocassette rental inventory (616,574)
Purchase of property and equipment (315,061)
------------
Net cash used in investing activities (931,635)
------------
Cash flows from financing activities:
Proceeds from transfer of assets and liabilities 15,739
Proceeds from issuance of convertible notes payable 1,122,712
Repayment of promissory notes (564,426)
Proceeds from issuance of Class B units 2,625,000
Payment of financing costs (40,142)
------------
Net cash provided by financing activities 3,158,883
------------
Net increase in cash 20,872
Cash at beginning of period -
------------
Cash at end of period $ 20,872
------------
------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 10,733
------------
------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of Class A units for transfer of net liabilities $ (521,666)
------------
------------
The accompanying notes are an integral part of these financial statements
</TABLE>
9
REEL.COM LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements present the financial position and
results of operations of Reel.Com LLC (the Company). The Company is the
founder of the Reel.Com website, that enables movie enthusiasts to buy, rent
or research films. It also features free movie matching services to help
users discover films that match their tastes. The Company also operates a
retail store in Berkeley, California. Both the retail and online stores
specialize in classic, hard-to-find, foreign, and art-house movies, as well
as mainstream Hollywood films.
Upon the formation of the Company on July 1, 1997, Reel LLC, a company under
common control, assigned $(521,666) in net liabilities to the Company in
exchange for 4,700,000 Class A units of the Company. The net liabilities
were transferred at historical cost basis.
BASIS OF PRESENTATION:
As more fully described in Note 7, the Company was dissolved and Reel.com,
Inc. (the Corporation) was formed on April 30, 1998. On October 1, 1998,
Reel.com, Inc. merged with a direct wholly-owned subsidiary of Hollywood
Entertainment Corporation and ceased to exist as a separate corporation.
RISKS AND USE OF ESTIMATES:
The Company operates in the online retail industry, which is new, rapidly
evolving and intensely competitive. The Company competes primarily with
traditional retail outlets and other entities that maintain similar
commercial web sites. There can be no assurance that the Company will
achieve sufficient online traffic to realize economies of scale that
justify the significant investments by third parties.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION:
Online revenue primarily consists of sales of videocassettes over the
internet website. The Company also rents videocassettes online, however,
online rental revenue is not material. Retail revenue primarily consists of
videocassette rentals from the Company store. The Company also sells
videocassettes from the store, however, these sales are not material.
The Company recognizes revenue from the online store, net of any discounts,
when the videocassettes are shipped to customers. Outbound shipping and
handling charges are included in net sales. Revenue from gift certificates
is recognized upon product shipment following redemption. The Company
provides an allowance for sales returns based on historical experience.
Revenue from the retail store is recognized at time of rental or sale.
10
COST OF REVENUE:
Cost of revenue includes cost of videocassettes sold, shipping costs,
amortization of videocassette rental inventory, and payroll costs.
PRODUCT DEVELOPMENT:
Product development expenses consist primarily of payroll and related
expenses for web site development, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure. To date, all product development costs have been
expensed as incurred.
VIDEOCASSETTE RENTAL INVENTORY:
Videocassettes are recorded at average cost and amortized over their
estimated economic life with no provision for salvage value.
Videocassettes that are considered base stock are amortized over thirty-
six months on a straight-line basis. Videocassettes that are considered
new release feature films, frequently ordered in large quantities to
satisfy initial demand, are amortized over nine months.
As videocassette rental inventory is sold or retired, the applicable cost
and accumulated amortization are eliminated from the accounts and any
gain or loss thereon is recognized in operations.
The Company purchases a majority of its videocassette rental inventory
from an independent third party distributor. The Company has no long-
term contracts or arrangements with this vendor that guarantees the
availability of merchandise, the continuation of particular payment terms
or the extension of credit limits. There can be no assurance that the
distributor will continue to sell merchandise to the Company on current
terms or that the Company will be able to establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner on acceptable commercial terms. If the Company were
unable to develop and maintain relationships with its vendor that would
allow it to obtain sufficient quantities of merchandise on acceptable
commercial terms, such inability could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of those assets. Computer equipment is depreciated over an
estimated useful life of 3 years and office furniture and equipment is
depreciated over 5 years. Leasehold improvements are amortized over
their estimated useful life and term of the lease, which is 10 years.
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss
is included in operations. Maintenance and repairs are charged to
operations as incurred.
11
INCOME TAXES:
The Company is not subject to income taxes as the members are
individually liable for their own income tax payments. Accordingly, no
provision has been made for income taxes in the financial statements of
the Company.
ADVERTISING EXPENSE:
Advertising and promotional costs are expensed as incurred. Advertising
expense was $276,851 for the period ended January 31, 1998 and is
included in sales and marketing expense in the accompanying statement of
operations.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which establishes standards for reporting comprehensive income.
The Company is required to adopt this statement in fiscal year 1998. The
Company does not expect the impact of this statement to be material.
2. VIDEOCASSETTE RENTAL INVENTORY:
Videocassette rental inventory and related amortization at January 31, 1998
are as follows:
<TABLE>
<S> <C>
Videocassette rental inventory $ 895,328
Accumulated amortization (167,887)
Allowance for obsolescence (31,300)
---------------
$ 696,141
---------------
---------------
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment at January 31, 1998 consists of the following:
<TABLE>
<S> <C>
Computer equipment $ 249,541
Furniture and office equipment 158,115
Leasehold improvements 204,091
------------
611,747
Less accumulated depreciation (79,027)
------------
Property and equipment, net $ 532,720
------------
------------
</TABLE>
12
4.COMMITMENTS AND CONTINGENCIES:
The Company leases its retail store, office facility, and warehouse under
operating leases which expire on March 18, 2007, August 31, 2000, and August
31, 2000, respectively. Future minimum obligations under non-cancelable
operating leases at January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Minimum
Rental
Payments
----------
<S> <C>
For period ending January 31,
1999 $ 260,226
2000 237,676
2001 206,106
2002 206,106
2003 206,106
Thereafter 858,774
----------
Total minimum lease payments $1,974,994
-----------
-----------
</TABLE>
Rent expense under operating leases for the period ended January 31, 1998
was $196,411.
As of January 31, 1998 the Company has entered into various marketing
agreements with third parties whereby the third parties provide advertising
services and database links to the Company's website. Fees to be paid by
the Company for these services are determined as fixed monthly payments, or
are calculated on a per "click-through" basis, or as a percentage of net
revenues, as defined in the related agreements.
From time to time, the Company is involved in various legal proceedings and
other matters arising in the normal course of business, none of which are
considered material.
5. NOTES PAYABLE TO MEMBERS:
Reel.Com LLC issued $1,122,712 in convertible promissory notes with
detachable warrants, to several investors in December 1997 and January 1998.
Interest accrues from the date of the notes on the unpaid principal amount
at a rate equal to 5.6% annum, compounded semi-annually. Principal and
unpaid interest are due and payable upon demand by the holders of a majority-
in-interest of the aggregate principal amount of the notes at any time after
June 30, 1998.
The entire principal amount of the convertible promissory notes and any
unpaid interest shall be automatically converted into shares of the Company
or its successor's equity securities at the closing of the Company's or its
successor's next equity financing yielding gross proceeds to the Company or
its successor of at least $2.0 million. The number of shares of equity
securities to be issued upon such conversion shall be equal to the entire
principal amount of notes plus accrued interest divided by the price per
share of the equity securities at the time of the next equity financing.
Warrants issued with the convertible promissory notes entitle holders to
purchase the number of shares of equity securities equal to 15% of the
original principal amount of the convertible promissory note divided by the
price per share of the equity securities at the time of the next equity
financing. The warrants terminate upon the earliest of five years after the
date of issuance of the warrants, the sale of the Company's assets, or upon
filing for an initial public offering.
13
On December 31, 1997, the Company issued a nonconvertible $107,599 note
payable to a founder. The note bears interest of 5.68% per annum. This
promissory note is due and payable upon the closing of the Company's or its
successor's next round of equity financing yielding gross proceeds to the
Company or its successor of at least $2.0 million.
As more fully described in Note 7, the Company was dissolved and Reel.com,
Inc. was formed on April 30, 1998. In May 1998, the Corporation issued
7,140,096 shares of Series C preferred stock at $2.12 per share. Upon the
closing of the Series C preferred stock financing, the convertible
promissory notes and accrued interest were automatically converted into
shares of Series C preferred stock.
6. MEMBERS' DEFICIT:
The members have made capital contributions to the Company in exchange for
either Class A units or Class B units. Subject to the approval of the Board
of Directors, additional investors may be admitted to the Company as either
Class A members or Class B members upon making capital contributions. No
member shall be required to make additional capital contributions or loans
to the Company.
ALLOCATION OF OPERATING INCOME AND LOSSES:
Before any allocation of operating income or loss can be made, special
allocations may be made by the Company, as further described in the
Limited Liability Company Agreement of Reel.Com LLC. Operating income is
first allocated to the members in proportion to and to the extent of the
amount of operating loss and capital loss previously allocated, net of
allocated capital profit and prior operating income. Then, operating
income is allocated to the Class B members, in proportion to cumulative
distributions made, until the Class B members have received allocations of
operating income and capital profits equal to such cumulative
distributions. Lastly, operating income is allocated to the members in
proportion to their member percentages.
Operating loss is first allocated to the members in proportion to their
positive capital account balances until the members' capital accounts have
been reduced to zero. Then, operating loss is allocated to the members in
proportion to their member percentages.
ALLOCATION OF CAPITAL PROFIT AND LOSS:
Before any allocation of operating income or loss can be made, special
allocations may be made by the Company, as further described in the
Agreement. Capital profits are first allocated to the members in
proportion to and to the extent of the amount of capital loss and
operating loss previously allocated, net of allocated operating income and
prior capital profit. In the event that a dividend contingency has been
triggered, capital profits are then allocated to Class B members, in
proportion to the cumulative distributions made, until such time that the
Class B members have received cumulative allocations of operating income
and capital profit equal to such cumulative distributions. Lastly,
capital profits are allocated to the Class A and Class B members in
proportion to their respective unit percentages, and within each class in
proportion to their class percentages.
Capital loss is first allocated to the members in such amounts and
proportions in which they have previously been allocated capital profit
until all such prior allocations of capital profit have been reversed.
Then, capital loss is allocated to the members in proportion to their
positive capital account balances until the members' capital accounts have
been reduced to zero. Lastly, capital loss is allocated to the members in
proportion to their member percentages.
14
CASH FLOW:
Cash flow shall be determined and used in the sole discretion of the Board
of Directors (i) to pay the expenses of the Company, (ii) to expand the
business and operations of the Company and (iii) to establish and maintain
reasonable operating and capital reserves. Cash flow in excess of the
amounts required pursuant to the prior sentence may be distributed from
time to time if approved by the Board of Directors and by Class B members
and Class A members each of whose class percentages exceed 50%; such
distributions shall be made to the members in proportion to their member
percentages. Class B members shall be entitled to receive in any fiscal
year, when, as and if, declared by the Board of Directors, out of any
assets at the time legally available therefor, a cash distribution equal
to an annual compounded return of 9%, calculated on the Class B members'
capital contributions from the date of such Class B members' admission to
the Company. Such amounts shall be payable in preference and priority to
any distributions above. The right to such distribution shall be
cumulative.
CAPITAL PROCEEDS:
Capital proceeds shall be determined and used in the sole discretion of
the Board of Directors to pay the expenses of the Company and to establish
and maintain reasonable operating and capital reserves. Capital proceeds
in excess of those amounts required shall be distributed by the Company as
follows: first, to Class B members, in proportion to their respective
class percentages, until the Class B members have received from
distributions an amount equal to their capital contributions; second, in
the event that a dividend contingency has been triggered, to Class B
members in proportion to their respective class percentages, until the
Class B members have received from distributions an amount equal to an
annual compounded return of nine percent (9%) of Class B members' capital
contributions; third, to Class A members in an amount equal to their
capital contributions; and fourth, to Class A and Class B members in
proportion to their unit percentages.
15
LIQUIDATION:
After the allocation of operating income or loss, and capital profit or
loss, the assets of the Company shall first be distributed in one or more
installments in the following order of priority: (i) to the payment of the
expenses of the winding-up, liquidation and dissolution of the Company;
(ii) to creditors of the Company, including one or more members, in
satisfaction of liabilities of the Company other than liabilities for
distributions to the members and (iii) to the establishment of reserves
necessary or desirable to fund known or contingent liabilities to
creditors. The remaining assets of the Company shall first be distributed
to the members in accordance with the positive balances in their capital
accounts, and then in proportion to their respective member percentages.
CONVERSION RIGHTS:
At the request of a majority in interest of each of the Class A and Class
B units then outstanding (each voting separately as separate classes), the
Company shall change its form of organization from a limited liability
company to a corporation. Upon the conversion of the Company from a
limited liability company to a corporation, each Class A unit will be
exchanged for one share of Series A preferred stock of the corporation,
and each Class B unit will be exchanged for one share of Series B
preferred stock of the corporation.
As more fully described in Note 7, the Company was dissolved and Reel.com,
Inc. was formed on April 30, 1998.
7. SUBSEQUENT EVENTS:
In February and March 1998, the Company issued $900,000 of convertible
promissory notes to several investors, of which $370,497 was issued to
existing members. Terms of these notes are consistent with the terms of
the convertible loans described in Note 5.
On April 30, 1998, Reel.Com LLC was dissolved and Reel.com, Inc. was
formed. The members of Reel.Com LLC were issued preferred stock of
Reel.com, Inc. in exchange for their membership interest. Each Class A
unit was exchanged for one share of Series A preferred stock, and each
Class B unit was exchanged for one share of Series B preferred stock of the
Corporation.
On April 30, 1998, the 1998 Stock Option Plan (the Plan) was created, and
2,048,874 shares of common stock were reserved for the issuance of options.
In May 1998, the Corporation issued 7,140,096 shares of Series C preferred
stock. 4,153,036 shares of Series C preferred stock were issued at
$2.11512 per share, for $8,784,169 in cash. $2,050,503 in convertible
notes payable (principal and accrued interest), and $4,267,496 in Series A
preferred stock were converted into 2,987,060 shares of Series C preferred
stock.
On June 5, 1998, the number of shares of common stock reserved under the
1998 Stock Option Plan was increased to 2,732,641. At September 30, 1998,
2,732,641 options were issued and outstanding with an exercise price
of between $0.30 and $0.43.
16
On June 12, 1998, the Corporation moved its office to a new location and
signed a one year lease agreement. Initial base rent is $7,250 with
additional monthly operating costs of approximately $1,800.
In September 1998, the Company entered into two marketing agreements with
third parties whereby the third parties provide advertising services and
database links to the Company's website. Fixed fees to be paid by the
Company for these services are as follows:
<TABLE>
<S> <C>
For Period ending January 31,
1999 $ 1,318,333
2000 3,460,000
2001 1,971,667
--------------
$ 6,750,000
--------------
--------------
</TABLE>
As of September 29, 1998, the Corporation was authorized to issue two
classes of stock, designated as common stock and preferred stock. The total
number of shares which the Corporation was authorized to issue was
36,406,869 shares. 20,000,000 shares were designated common stock and
16,406,869 shares were designated preferred stock. The Corporation was
authorized to issue three series of preferred stock, one of which was
designated Series A preferred stock and consisted of 4,781,869 shares, one
of which was designated Series B preferred stock and consisted of 2,625,000
shares, and one of which was designated Series C preferred stock and
consisted of 9,000,000 shares. Each share of preferred stock was
convertible, at the option of the holder, into one share of common stock.
As of September 29, 1998, there were issued and outstanding (i) no shares of
common stock, (ii) 2,648,121 shares of Series A preferred stock, (iii)
2,625,000 shares of Series B preferred stock, and (iv) 7,140,096 shares of
Series C preferred stock. The Corporation had (i) reserved 2,732,641 shares
of its common stock for issuance under the Corporation's 1998 Stock Option
Plan, (ii) reserved 16,406,869 shares of its common stock for issuance upon
conversion of the Series A, Series B, and Series C preferred stock to common
stock, and (iii) reserved 143,445 shares of its Series C preferred stock for
issuance upon exercise of outstanding warrants.
On October 1, 1998, Reel.com, Inc. merged with Hollywood Entertainment
Corporation, and ceased to exist as a separate corporation. Upon signing of
the merger agreement with Hollywood Entertainment Corporation but before the
effective date of October 1, 1998, Reel.com, Inc. accelerated vesting of not
more than 25% of outstanding company stock options, and optionees were
required to exercise such options and other previously vested options. On
October 1, 1998, each stock option and Series C warrant outstanding,
unexercised or unvested, was converted into an option or warrant to purchase
shares of Hollywood Entertainment Corporation common stock at a rate of
0.537608239 for each Reel.com, Inc. stock option or Series C warrant. Each
issued and outstanding share of the Corporation's capital stock was
converted into the following: (i) for each share of capital stock with
respect to which an election to receive cash was made, stockholders received
an amount based on a formula (as defined in the merger agreement), and (ii)
for each share of capital stock not paid in cash, stockholders received a
number of fully paid and non-assessable shares of Hollywood Entertainment
Corporation based on a formula (as defined in the merger agreement). As of
October 1, 1998, all shares of the Corporation's capital stock were no
longer outstanding and automatically cancelled.
17
<TABLE>
<CAPTION>
REEL.COM, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
September 30, 1998
------------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,048,174
Accounts receivable, net 605,430
Inventory, net 295,638
Prepaid expenses and other current assets 856,492
-------------
Total current assets 3,805,734
Videocassette rental inventory, net 497,324
Property and equipment, net 1,473,196
Other assets 333,340
-------------
Total assets $ 6,109,594
-------------
-------------
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 7,348,595
Accrued expenses 1,608,436
Advances from Hollywood Entertainment 1,719,038
-------------
Total current liabilities 10,676,069
Shareholders' deficit:
Contributed capital 13,163,815
Accumulated deficit (17,730,290)
-------------
Total shareholders' deficit (4,566,475)
-------------
Total liabilities and shareholders' deficit $ 6,109,594
-------------
-------------
See notes to condensed financial statements
</TABLE>
18
<TABLE>
<CAPTION>
REEL.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Eight Months Three Months
Ended Ended
September 30, September 30,
1998 1997
--------------- -------------
<S> <C> <C>
REVENUE:
Rental revenue $ 1,025,526 $ 135,724
Product sales 8,510,837 145,489
--------------- -------------
9,536,363 281,213
OPERATING COSTS AND EXPENSES:
Cost of product sales 8,808,328 315,864
Operating and selling 8,449,108 357,587
General and administrative 6,924,475 815,941
--------------- -------------
24,181,911 1,489,392
--------------- -------------
LOSS FROM OPERATIONS (14,645,548) (1,208,179)
Nonoperating income (expense):
Interest income 63,348 3,397
Interest expense (377,986)
-------------- -------------
Loss before income taxes (14,960,186) (1,204,782)
Income taxes 29,281
-------------- -------------
NET LOSS $(14,989,467) $(1,204,782)
-------------- -------------
-------------- -------------
See notes to condensed financial statements
</TABLE>
19
<TABLE>
<CAPTION>
REEL.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Eight Months Three Months
Ended Ended
September 30, September 30,
1998 1997
---------------- --------------
<S> <C> <C>
Operating activities:
Net loss $ (14,989,467) $ (1,204,782)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation and amortization 211,814 21,762
Allowance for doubtful accounts 85,708
Allowance for returns 165,601
Allowance for obsolescence 302,718 30,190
Warrants 325,364
Changes in assets and liabilities:
Accounts receivable (780,195)
Inventory (570,638)
Other assets (1,120,033) (163,561)
Accounts payable 6,700,715 145,319
Accrued liabilities 1,412,902 (140,515)
------------ ------------
Net cash used in operations (8,255,511) (1,311,587)
------------ ------------
Investing activities:
Sales (purchases) of videocassette rental
inventory, net 171,100 (351,998)
Purchases of property and equipment, net (1,152,290) (205,723)
------------ ------------
Net cash used in investing
activities (981,190) (557,721)
------------ ------------
Financing activities:
Advances from Hollywood Entertainment 1,719,038
Repayments of notes payable (1,230,311) (561,670)
Issuance of preferred stock 10,775,276 2,605,503
------------ ------------
Net cash provided by financing
activities 11,264,003 2,043,833
------------ ------------
Increase in cash and cash equivalents 2,027,302 174,525
Cash and cash equivalents:
Beginning of period 20,872 15,739
-------------- -------------
End of period $ 2,048,174 $ 190,264
-------------- -------------
-------------- -------------
See notes to condensed consolidated financial statements
</TABLE>
20
REEL.COM, INC.
NOTE TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Basis of Financial Statements
The accompanying unaudited condensed financial statements of
Reel.com, Inc. have been prepared in accordance with Article 10 of
Regulation S-X and do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. The information furnished reflects
all adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods
presented, and which are of a normal, recurring nature.
21
HOLLYWOOD ENTERTAINMENT CORPORATION
INTRODUCTION TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
On October 1, 1998, Hollywood Entertainment Corporation ("Hollywood")
completed the merger of Reel.com, Inc. ("Reel.com") with and into Hollywood.
As a result, Hollywood acquired all the outstanding shares of Reel.com for
approximately $30 million in cash, 4,000,000 shares of Hollywood Common Stock
and 1,000,000 shares of Hollywood Series A Redeemable Preferred Stock.
Concurrent with the purchase of Reel.com, Hollywood sold 1,982,537 shares of
Common Stock and 1,380,263 of Shares A Redeemable Preferred Stock at a purchase
price of $13.50 per share to certain shareholders and affiliates of Reel.com.
The Series A Redeemable Preferred Stock will be converted to Hollywood Common
Stock on a one for one basis upon shareholder approval, for which a meeting has
been scheduled on December 30, 1998.
The pro forma financial information has been prepared as if the
acquisition of Reel.com had taken place at September 30, 1998 for the pro forma
condensed balance sheet and at January 1, 1997 for the pro forma condensed
statements of operations for the year ended December 31, 1997 and nine months
ended September 30, 1998. Although Reel.com's fiscal year ends on January 31,
January 1998 results have been included in the pro forma statement of
operations for the nine months ended September 30, 1998 to represent a nine
month reporting period. Reel.com's sales and net loss for the month of January
1998 were $367,302 and $472,579, respectively.
The acquisition of Reel.com has been accounted for as a purchase, whereby
the basis for accounting of the assets and liabilities have been based upon
their estimated fair market values at the date of the acquisition. Pro forma
adjustments represent Hollywood's preliminary determination of these values and
are based upon estimates and certain assumptions considered reasonable under
the circumstances. Any purchase price or fair market value adjustments will be
made within one year from the acquisition date and are not expected to be
material to the pro forma financial information taken as a whole.
These pro forma financial statements are provided for illustrative
purposes only and are not necessarily indicative of the results that would have
occurred if the acquisition had occurred on the dates indicated or which may be
obtained in the future. All information contained herein should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included in Hollywood's Annual Report on Form 10-K for the year ended
December 31, 1997, the Financial Statements and Notes thereto of Reel.com
included in this Form 8-K/A and the Notes to the unaudited pro forma condensed
financial information.
DETERMINATION AND ALLOCATION OF PURCHASE PRICE
The following table sets forth the purchase price (in thousands) for Reel.com,
Inc.:
<TABLE>
<S> <C>
Market value of Hollywood stock issued $ 53,450
Cash 29,533
Value of Hollywood stock options issued 10,840
Transaction costs 3,808
------------
Pro forma purchase price $ 97,631
------------
------------
</TABLE>
22
The preliminary allocations of the pro forma purchase price is estimated as
follows (in thousands):
<TABLE>
<S> <C>
Cash $ 2,048
Fixed assets 1,473
Other current and non-current assets 2,589
Liabilities assumed (10,676)
Goodwill and other identifiable intangibles 100,297
Purchased research and development 1,900
----------
Total $ 97,631
----------
----------
</TABLE>
23
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
Pro Forma Condensed Consolidated Balance Sheets (unaudited)
(In thousands)
Historical
-------------------- Pro Forma
September 30, 1998 -------------------------
Hollywood Reel.com Adjustments Combined
---------- --------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash
equivalents $ 2,130 $ 2,048 $ 45,398 (a)
(29,533) (b) $ 20,043
Accounts receivable 44,601 605 (1,719) (h) 43,487
Merchandise inventories 53,289 296 53,585
Prepaid expenses and
other current assets 9,186 857 10,043
-------- ------- --------- --------
Total current assets 109,206 3,806 14,146 127,158
Videocassette rental
inventory, net 301,112 497 301,609
Property and equipment,
net 299,177 1,473 300,650
Goodwill and other
intangibles, net 93,858 102,197 (f)
(1,900) (g) 194,155
Deferred income taxes 10,228 10,228
Other assets, net 13,412 334 13,746
---------- -------- --------- ---------
Total assets $ 826,993 $ 6,110 $ 114,443 $ 947,546
---------- -------- --------- ----------
---------- -------- --------- ----------
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of
long-term debt $ 2,341 $ 1,719 $ (1,719) (h) $ 2,341
Accounts payable 102,171 7,349 109,520
Accrued expenses 22,740 1,608 3,808 (b) 28,156
Accrued interest 3,362 3,362
Income taxes payable 11,922 11,922
--------- -------- -------- ---------
Total current
liabilities 142,536 10,676 2,089 155,301
Long-term debt 351,377 351,377
Other liabilities 26,543 26,543
---------- -------- --------- ----------
Total liabilities 520,456 10,676 2,089 533,221
---------- -------- --------- ----------
Mandatorily redeemable
convertible preferred
stock 18,634 (a)
10,690 (c) 29,324
---------- --------- --------- ---------
Shareholders' Equity:
Contributed capital
245,078 13,164 26,764 (a)
42,760 (c)
10,840 (d)
(13,164)(e) 325,442
Retained earnings
(deficit) 63,387 (17,730) 17,730 (e)
(1,900)(g) 61,487
Intangible assets, net (1,928) (1,928)
---------- --------- --------- ---------
Total shareholders'
equity (deficit) 306,537 (4,566) 83,030 385,001
---------- --------- --------- ---------
Total liabilities,
mandatorily redeemable
convertible preferred
stock and shareholders
equity $ 826,993 $ 6,110 $114,443 $ 947,546
---------- -------- -------- ---------
---------- -------- -------- ---------
See notes to pro forma condensed consolidated financial statements
</TABLE>
24
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
Pro Forma Condensed Consolidated Statements of Operations (unaudited)
(in thousands except per share amounts)
-----------------------
Hollywood Reel.com
Year Ended Seven Months Pro Forma
December 31, January 31, -----------------------
1997 1998 Adjustments Combined
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Rental revenue $418,527 $ 588 $ $ 419,115
Product sales 81,974 944 82,918
---------- -------- ---------- ---------
500,501 1,532 502,033
OPERATING COSTS AND EXPENSES: ---------- -------- ---------- ---------
Cost of product sales 53,471 910 54,381
Operating and selling 366,960 1,847 368,807
General and administrative 31,698 1,516 33,214
Amortization of intangibles 6,691 50,149 (i) 56,840
---------- --------- ---------- --------
458,820 4,273 50,149 513,242
---------- --------- ---------- --------
INCOME (LOSS) FROM OPERATIONS 41,681 (2,741) (50,149) (11,209)
Nonoperating income (expense):
Interest income 342 342
Interest expense (13,806) (13,806)
Litigation settlement (18,874) (18,874)
---------- --------- ---------- ---------
Income (loss) before income
taxes from continuing
operations 9,343 (2,741) (50,149) (43,547)
Income taxes 3,784 (1,110)(j) 2,674
---------- ---------- --------- ---------
Net income (loss) (1) $ 5,559 $ (2,741) $ (49,039) $(46,221)
---------- ---------- --------- ---------
---------- ---------- --------- ---------
- --------------------------------------------------------------------------------
NET INCOME (LOSS)
PER SHARE (1):
Basic $ 0.15 $ (1.03)
Diluted 0.15 (1.03)
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 36,659 8,363 (k) 45,022
Diluted 37,718 8,363 (k)
(1,059)(l) 45,022
- --------------------------------------------------------------------------------
(1) For Hollywood, excludes extraordinary loss from early extinguishment of
debt.
See notes to pro forma condensed consolidated financial statements
</TABLE>
25
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
(in thousands except per share amounts)
-----------------------
Nine Months Ended Pro Forma
September 30, 1998 ---------------------------
Hollywood Reel.com Adjustments Combined
---------- -------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental revenue $438,944 $ 1,161 $ $440,105
Product sales 81,810 8,743 90,553
-------- --------- ---------- --------
520,754 9,904 530,658
-------- --------- ---------- --------
OPERATING COSTS
AND EXPENSES:
Cost of product sales 52,777 9,080 61,857
Operating and selling 382,933 8,670 391,603
General and
administrative 24,405 7,272 31,677
Amortization of
intangibles 5,556 37,612 (i) 43,168
--------- --------- --------- ---------
465,671 25,022 37,612 528,305
--------- --------- --------- ---------
INCOME (LOSS) FROM
OPERATIONS 55,083 (15,118) (37,612) 2,353
Nonoperating income
(expense):
Interest income 89 64 153
Interest expense (22,569) (378) (22,947)
--------- --------- --------- ---------
Income (loss) before
income taxes 32,603 (15,432) (37,612) (20,441)
Provision for income
taxes 13,204 29 (6,250)(j) 6,983
---------- --------- --------- ----------
NET INCOME (LOSS) $ 19,399 $(15,461) $(31,362) $(27,424)
---------- --------- --------- ----------
---------- --------- --------- ----------
- --------------------------------------------------------------------------------
NET INCOME PER SHARE
Basic $ 0.53 $ (0.61)
Diluted 0.52 (0.61)
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 36,904 8,363 (k) 45,267
Diluted 37,622 8,363 (k)
(718)(l) 45,267
- --------------------------------------------------------------------------------
See notes to pro forma condensed consolidated financial statements
</TABLE>
26
HOLLYWOOD ENTERTAINMENT CORPORATION
Notes to Pro Forma Condensed Consolidated Financial Statements
Pro Forma Balance Sheet Adjustments
(a) Records sale of 1,982,537 shares of Common Stock and 1,380,263 shares of
Series A Redeemable Preferred Stock for aggregate proceeds of $45,397,800
($13.50 per share).
(b) Records cash paid to shareholders of Reel.com and transaction costs in
connection with the acquisition.
(c) Records issuance of 4,000,000 shares of Common Stock and 1,000,000 shares
of Series A Preferred Stock at the fair market value of $10.69 per share.
(d) Records the fair market value of stock options issued in connection with
the assumption of Reel.com's incentive stock option plan. The stock options
have been valued using the Black-Scholes stock option pricing model.
(e) Eliminates the equity accounts of Reel.com.
(f) Records the pro forma purchase price allocations to goodwill and other
identifiable intangibles.
(g) Reflects the write-off of purchased research and development identified in
the purchase price allocation. The pro forma statements of operations
exclude the write-off of purchased research and development due to its
non-recurring nature.
(h) Eliminates loans from Hollywood to Reel.com.
Statement of Operations Pro Forma Adjustments
(i) Reflects the amortization of goodwill and other intangibles associated
with the purchase of Reel.com. Amortization is over the estimated useful
life of two years.
(j) Reflects the income tax benefit at Hollywood's effective tax rate of 40.5%
as the Company would have been able to realize the tax benefits of the
losses generated by Reel.com. Amortization of goodwill is not deductible
for tax purposes.
(k) Reflects the additional shares issued and sold in connection with Reel.com
acquisition. The amount shown here does not include the dilutive effect
of the stock options issued in connection with the Reel.com acquisition
because doing so would be anti-dilutive.
(l) Eliminates the dilutive effect of Hollywood stock options since the
combined group has a net loss and including the stock options would be
anti-dilutive.
27
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (No. 33-80080, No. 33-
81844, No. 333-03524, and No. 333-40229) of Hollywood
Entertainment Corporation of our report dated May 29, 1998,
except as to Note 7 which is as of October 1, 1998, relating
to the financial statements of Reel.Com LLC which appears in
this Current Report on Form 8-K/A of Hollywood Entertainment
Corporation.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
December 14, 1998
