UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10 Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21824
-----------------
HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in charter)
OREGON 93-0981138
(State or other jurisdiction (I.R.S. Employer
Of incorporation or organization) 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of October 2, 1998 there were 42,273,123 shares of the registrant's Common
Stock outstanding.
- - --------------------------------------------------------------------------------
HOLLYWOOD ENTERTAINMENT CORPORATION
September 30, 1998
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. OTHER INFORMATION 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
ART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Rental revenue 156,008 106,096 438,944 290,811
Product sales 28,064 18,525 81,810 54,287
------- ------- ------- -------
184,072 124,621 520,754 345,098
------- ------- ------- -------
Operating costs and expenses:
Cost of product sales 18,103 11,586 52,777 34,015
Operating and selling 137,027 92,880 382,933 250,133
General and administrative 8,438 6,335 24,405 18,501
Amortization of intangibles 1,888 1,677 5,556 4,800
------- ------- ------- -------
165,456 112,478 465,671 307,449
------- ------- ------- -------
Income from operations 18,616 12,143 55,083 37,649
Nonoperating income (expense):
Interest income -- 177 89 285
Interest expense (8,394) (3,762) (22,569) (7,379)
Litigation settlement -- -- -- (18,874)
-------- -------- -------- --------
Income before income taxes 10,222 8,558 32,603 11,681
Provision for income taxes (4,140) (3,423) (13,204) (4,672)
-------- -------- -------- --------
Income before extraordinary item 6,082 5,135 19,399 7,009
Extraordinary loss on
Extinguishment of debt
(net of income tax benefit of $372) -- (563) -- (563)
-------- -------- -------- --------
Net income 6,082 4,572 19,399 6,446
======== ======== ======== ========
Net income per share before extraordinary
loss on extinguishment of debt
Basic 0.16 0.14 0.53 0.19
Diluted 0.16 0.14 0.52 0.19
Net income per share:
Basic 0.16 0.12 0.53 0.18
Diluted 0.16 0.12 0.52 0.17
Weighted average shares outstanding:
Basic 36,943 36,769 36,904 36,685
Diluted 37,907 37,694 37,622 37,873
The accompanying notes are an integral part of this financial statement.
</TABLE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
Sep. 30, Dec. 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,130 $ 3,909
Accounts receivable 44,601 39,566
Merchandise inventories 53,289 61,482
Prepaid expenses and other current assets 9,186 6,488
---------- ----------
Total current assets 109,206 111,445
Videocassette rental inventory, net 301,112 226,051
Property and equipment, net 299,177 234,497
Goodwill, net 93,858 93,760
Deferred income taxes 10,228 11,334
Other assets, net 13,41 12,036
---------- ----------
$ 826,993 $ 689,123
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 2,341 $ 2,341
Accounts payable 102,171 103,823
Accrued expenses 22,740 29,423
Accrued interest 3,362 8,256
Income taxes payable 11,922 --
---------- ----------
Total current liabilities 142,536 143,843
Long-term obligations, less current portion 351,377 231,155
Other liabilities 26,543 24,229
---------- ----------
520,456 399,227
Shareholders' equity:
Preferred stock, 25,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, 100,000,000 shares authorized;
and 36,630,121 and 36,786,396 shares issued
and outstanding, respectively 245,078 247,950
Retained earnings 63,387 43,988
Intangible assets, net (1,928) (2,042)
---------- ----------
Total shareholders' equity 306,537 289,896
---------- ----------
$ 826,993 $ 689,123
========== ==========
The accompanying notes are an integral part of this financial statement.
</TABLE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income 19,399 6,446
Adjustments to reconcile net income to cash
provided by operating activities:
Extraordinary loss on extinguishment of debt -- 563
Depreciation and amortization 149,684 95,846
Change in deferred rent 3,171 2,429
Change in deferred income taxes 249 (2,427)
Net change in operating assets and liabilities:
Accounts receivable (5,035) (3,169)
Merchandise inventories 8,193 (349)
Accounts payable (1,652) (8,110)
Accrued interest (4,894) 2,443
Other current assets and liabilities 2,541 (3,717)
--------- ---------
Cash provided by operating activities 171,656 89,955
--------- ---------
INVESTING ACTIVITIES:
Purchases of videocassette rental inventory, net (189,561) (137,630)
Purchases of property and equipment, net (94,309) (87,703)
Increase in intangibles and other assets (6,915) (4,512)
--------- ---------
Cash used in investing activities (290,785) (229,845)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock, net -- 4,695
Issuance of long-term obligations -- 204,000
Repayments of long-term obligations (1,779) (1,302)
Repurchase of common stock (6,185) --
Tax benefit from exercise of stock options 1,173 2,381
Proceeds from exercise of stock options 2,140 3,673
Increase (decrease) in revolving loan, net 122,001 (82,000)
--------- ---------
Cash provided by financing activities 117,350 131,447
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (1,779) (8,443)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,909 12,849
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE THIRD QUARTER 2,130 4,406
========= =========
The accompanying notes are an integral part of this financial statement.
</TABLE>
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The information furnished reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's annual report on Form 10-K for the current year ended December 31,
1997, filed with the Securities and Exchange Commission.
1. ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the December 31,
1997 audited consolidated financial statements included in the Company's Form
10-K. Certain prior year amounts have been reclassified to conform to the
presentation used for the current year.
2. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
An analysis of the shareholders' equity amounts for the three quarters ended
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Common Stock Intangible
(In thousands, except share amounts) Shares Amount Assets
--------- --------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997 36,786,396 247,950 (2,042)
Issuance of common stock under option plan 343,725 2,140
Tax benefit from exercise of stock options 1,173
Repurchase of common stock (500,000) (6,185)
Amortization on intangible assets 114
Net income
---------- --------- ----------
Balance at September 30, 1998 36,630,121 245,078 (1,928)
========== ========= ==========
Retained
Earnings Total
--------- ---------
Balance at December 31, 1997 43,988 289,896
Issuance of common stock under option plan 2,140
Tax benefit from exercise of stock option 1,173
Repurchase of common stock (6,185)
Amortization on intangible assets 114
Net income 19,399 19,399
--------- ---------
Balance at September 30, 1998 63,387 306,537
========= =========
</TABLE>
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS No. 128, "Earnings per
Share") requires current and retroactive presentation of basic and diluted
earnings per share. Basic earnings per share are calculated based on income
available to common shareholders and the weighted-average number of common
shares outstanding during the reported period. Diluted earnings per share
includes additional dilution from the effect of potential issuances of common
stock, such as stock issuable pursuant to the exercise of stock options,
warrants outstanding and the conversion of debt.
The following table is a reconciliation of the basic and diluted earnings per
share computations:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
(In thousands, except per share amounts)
--------------------------------------------------------
1998 1997
------------------------------- -----------------------
Per Per
Share Share
Income Shares Amounts Income Share Amounts
------- ------- --------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share: $ 19,399 36,904 $ 0.53 $ 6,446 36,685 $ 0.18
Effect of Dilutive
Securities:
Stock options -- 718 -- 1,188
--------- -------- ----- ------
Dilutive Earnings
per share: $ 19,399 37,622 $ 0.52 $ 6,446 37,873 $ 0.17
========= ======== ========= ======== ====== ======
</TABLE>
4. NEW ACCOUNTING STANDARDS
In June 1997, Financial Accounting Standards Board ("FASB") issued Statements
of Financial Accounting Standards, No. 130, "Reporting Comprehensive Income."
The Company has adopted the standard as of January 1, 1998. Total comprehensive
income was $6.1 million and $19.4 million for the third quarter and current year
three quarters, respectively, compared with $4.6 million and $6.4 million for
the corresponding periods of the prior year.
The Company implemented American Institute of Certified Public Accountants'
("AICPA") Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is required
to be adopted for fiscal years beginning after December 15, 1998 and defines
the types of costs that should be capitalized for computer software projects and
requires that all other costs be expensed in the period incurred. SOP 98-1
states that in order for costs to be capitalized they must be intended to create
a new system or add identifiable functionality to an existing system. Adoption
of this statement did not have a material impact on the Company's financial
statements.
5. Reel.com Acquisition
On October 1, 1998, the Company completed the acquisition of Reel.com, Inc.,
the leading video-only store on the Internet. The Company issued a total of
five million shares of restricted Common Stock and Redeemable Preferred Stock,
all of which are non-transferable for one year, and $30.0 million in cash to
stockholders of Reel.com. The Preferred Stock will convert on a one-for-one
basis into Common Stock upon approval by the Company's shareholders. The
Reel.com acquisition will be accounted for under the purchase method of
accounting. Accordingly, the future financial statements of the Company will
reflect the allocation of the purchase price and assumption of certain
liabilities and include the operating results of Reel.com from the date of
acquisition.
Separate and concurrent with the acquisition, several of Reel.com's
shareholders purchased 3,362,800 shares of restricted Common Stock from the
Company at a price per share of $13.50, and 637,200 shares in the open market
for a total of 4,000,000 shares. These shares, together with the shares issued
in the acquisition, will not be transferable until October 1, 1999. The newly
issued shares have certain piggyback registration rights one year after closing
and certain demand registration rights two years after closing.
6. Shares Repurchased
The Company repurchased 850,000 shares of its Common Stock in the open market
between September 19, 1998 and October 14, 1998 for an aggregate consideration
of $10.5 million. As of September 30, 1998, the Company had repurchased 500,000
of these shares for an aggregate consideration of $6.2 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY RESULTS OF OPERATIONS
The Company's net income was $6.1 million and $19.4 million for the third
quarter and current year three quarters, respectively, compared with $4.6
million and $6.4 million for the corresponding periods of the prior year.
The following table sets forth, for the periods indicated, (i) selected
statements of operations data expressed as a percentage of total revenue; and
(ii) the number of superstores open at the end of each period.
<TABLE>
<CAPTION>
Three Months Ended Nine Month Ended
September 30, September 30,
(Unaudited) (Unaudited)
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUE:
Rental revenue 84.8 85.1 84.3 84.3
Product sales 15.2 14.9 15.7 15.7
------ ------ ------ ------
100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of product sales 9.8 9.3 10.1 9.8
Operating and selling 74.4 74.5 73.5 72.5
General and administrative 4.6 5.1 4.7 5.4
Amortization of intangibles 1.1 1.4 1.1 1.4
----- ----- ----- -----
89.9 90.3 89.4 89.1
INCOME FROM OPERATIONS: 10.1 9.7 10.6 10.9
Nonoperating income (expense) (4.5) (2.8) (4.3) (7.5)
------ ------ ------ ------
Income before income taxes 5.6 6.9 6.3 3.4
Provision for income taxes (2.3) (2.8) (2.6) (1.4)
------ ------ ------ ------
Income before extraordinary item 3.3 4.1 3.7 2.0
Extraordinary loss on
extinguisment of debt -- (0.4) -- (0.1)
------ ------ ------ ------
NET INCOME 3.3 3.7 3.7 1.9
====== ====== ====== ======
NUMBER OF SUPERSTORES 1,134 782 1,134 782
</TABLE>
REVENUE
Revenue increased by $59.5 million, or 48%, in the third quarter and $175.7
million, or 51%, in the current year three quarters, compared with the
corresponding periods of the prior year, respectively, primarily due to the
opening of 352 new superstores in the twelve months ended September 30, 1998.
The Company ended the quarter with 1,134 stores in 42 states compared with 782
stores in 39 states at the end of the corresponding period of the prior year.
Revenue was also favorably impacted by an increase of 7% and 4% in comparable
store revenue in the third quarter and current year three quarters,
respectively.
OPERATING COSTS AND EXPENSES
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from
62.5% and 62.7%, in the prior year third quarter and prior year three quarters,
respectively, to 64.5% for both the current year third quarter and current year
three quarters. The Company's gross margin on product sales has been affected
by increasing pricing pressure on sell-through video merchandise from mass
merchant retailers, which use video sales as a loss leader in order to drive
customer traffic.
Operating and Selling
Operating and selling expenses, which consist principally of all store
expenses, including payroll, occupancy, advertising, depreciation and rental
revenue sharing, remained constant as a percentage of total revenue in the
current year third quarter as compared to the prior year third quarter.
Operating and selling expenses increased as a percentage of total revenue to
73.5% in the current year three quarters compared to 72.5% in the prior year
three quarters due to lower average revenues per store in 1998, resulting
primarily from the addition of 352 new superstores during the last twelve
months, which have lower revenue per store than mature Hollywood Video stores.
Since a portion of store-level operating expenses is fixed, new stores generally
have lower operating margins in the 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 and will continue to have an adverse impact on
the Company's margin.
General Administrative
General and administrative expenses decreased as a percentage of total
revenue to 4.6% and 4.7% for the third quarter and current year three quarters,
respectively, compared with 5.1% and 5.4% for the corresponding periods of the
prior year. This decrease as a percentage of total revenue was due to the
increase in total revenue without a proportionate increase in corporate
overhead.
Amortization of Intangibles
Amortization of intangibles increased by $0.2 million in the current year
third quarter, and increased by $0.8 million in the current year three quarters,
compared with the corresponding periods of the prior year. The increase is
primarily due to the amortization of deferred financing costs associated with
the Company's senior subordinated notes and revolving credit facility.
NONOPERATING INCOME (EXPENSE), NET
Interest expense, net of interest income, was $8.4 million and $22.5 million
for the third quarter and current year three quarters, respectively, compared
with $3.6 million and $7.1 million for the corresponding periods of the prior
year. The increase in interest expense, net, was primarily due to increased
levels of borrowings associated with the issuance of the senior subordinated
notes combined with increased borrowings under the Company's revolving credit
facility.
The Company incurred a charge of $18.9 million in the first quarter of 1997
for the settlement of securities litigation (see Note 15 of Notes to Financial
Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission).
INCOME TAXES
The effective tax rate for the Company was a provision of 40.5% for both the
third quarter and the current year three quarters, compared to a provision of
40.0% for both the prior year third quarter and three quarters.
LIQUIDITY AND CAPITAL RESOURCES
The amount of cash generated from operations in the current year three
quarters significantly exceeded the current debt service requirements of
the Company's long-term obligations. The capital expenditures
(including purchases of videocassette inventory) of the Company are primarily
funded by the excess operating cash flow and through loans under a revolving
line of credit. The Company has a $300 million revolving line of credit
available to address the timing of certain working capital and capital
expenditure disbursements. The Company believes cash flow from operations,
supplemented by the availability of a revolving line of credit, will provide the
Company with adequate liquidity and the capital necessary to achieve its planned
expansion through at least 1999.
At September 30, 1998, the Company had cash and cash equivalents of $2.1
million and a working capital deficit of $33.3 million. Videocassette rental
inventories are accounted for as non-current 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 non-current 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 non-current asset, the Company may, from
time to time, operate with a working capital deficit.
Cash Provided by Operating Activities
Net cash provided by operating activities increased by $81.7 million in the
current year three quarters compared with the corresponding period of the prior
year, primarily due to an increase in revenue and related depreciation and
amortization expenses, combined with improved results of operations in the
current year (see "Results of Operations"), and a net favorable change in
certain working capital and other balance sheet accounts.
Cash Used in Investing Activities
Net cash used in investing activities increased by $60.9 million in the
current year three quarters compared with the corresponding period of the prior
year, primarily due to increased purchases of videocassette rental inventory for
new stores, capital expenditures with respect to new store
construction, remodeling of certain existing stores, the continued
development of management information systems, and the relocation of the
Company's corporate headquarters, (see "Capital Expenditures").
Cash Provided by Financing Activities
Net cash provided by financing activities decreased by $14.1 million in the
current year three quarters compared with the corresponding period of the prior
year resulting particially from the $6.2 million repurchase of the Company's
common stock. The prior year included proceeds from the issuance of the
Company's common stock. The Company has the availability of up to $300
million in revolving credit loans. The Company may utilize the revolving
credit facility as needed for working capital, capital expenditures and
general corporate purposes. As of September 30, 1998, $147.0 million was
outstanding under the revolving credit agreement.
Capital Expenditures
The Company's capital expenditures include rental product, store
equipment and fixtures, remodeling a certain number of existing stores,
implementing and upgrading office and store technology, opening new store
locations, and relocating the Company's corporate headquarters. Each new
store opening requires initial capital expenditures, including leasehold
improvements, inventory, equipment and costs related to site location, lease
negotiations and construction permits, excluding leasehold improvements
that are customarily paid for by the property developer. These capital
expenditures will be funded primarily by cash generated from operations,
supplemented by the availability of a revolving line of credit or other forms of
equipment financing and/or leasing, if necessary.
Year 2000 Compliance
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications will be necessary to avoid
system failures and the temporary inability to process transactions or engage in
other normal business activities.
The Company's year 2000 project group has been coordinating the Company's
year 2000 compliance efforts and has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant. The Company is determining what
modifications or replacements will be necessary to achieve compliance;
implementing any necessary modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and transitioning
the compliant systems into the regular operations of the Company. The Company
estimates that these actions with respect to systems that we believe would have
a material effect on the business are approximately two-thirds complete. The
Company estimates that all critical systems and applications will be year 2000
compliant by June 30, 1998.
The year 2000 project group is also examining the Company's relationship with
certain key outside vendors and others with whom the Company has significant
business relationships to determine, to the extent practical, the degree of such
outside parties' year 2000 compliance. The project group has begun testing
procedures with certain vendors identified as having potential year 2000
compliance issues. The Company does not believe that its relationship with any
third party is material to the Company's operations and, therefore, does not
believe that the failure of any particular third party to be year 2000 compliant
would have a material adverse effect on the Company. The Company believes that
ifit, or any third party with whom the Company has a significant business
relationship, has a year 2000 related systems failure, the most significant
impact would likely be the inability, with respect to a group of stores, to
conduct operations due to a power failure, to deliver inventory in a timely
fashion, to receive certain products from vendors or to process electronically
customer sales at store level. The Company does not anticipate that any such
impact would be material to the Company's liquidity or results of operations.
The year 2000 project group is establishing and implementing a contingency
plan to provide for viable alternatives to ensure that the Company's core
business operations are able to continue in the event of a year 2000 related
systems failure. The Company expects to have a comprehensive contingency plan
established by March 31, 1999.
Through September 30, 1998, the Company has expended approximately $0.2
million to address year 2000 compliance issues. The Company estimates that it
will incur an additional $0.5 million, for a total of approximately $0.7
million, to address year 2000 compliance issues, which includes the estimated
costs of all modifications, testing and consultant fees.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.1 Articles of Amendment, dated September 14,
1998, to the Registrant's Articles of Incorporation
(b) Exhibit 27.1 Financial data schedule (electronic filing only)
(c) Reports of Form 8-K
On October 16, 1998, the Company filed a current Report on Form 8-K
stating under "Item 2. Acquisition or Disposition of Assets" that
the Company completed its acquisition of Reel.com, Inc.
HOLLYWOOD ENTERTAINMENT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD ENTERTAINMENT CORPORATION
(Registrant)
November 16, 1998 /S/ Jeffrey D. Jordan
- - ----------------- -----------------------------
(Date) Jeffrey D. Jordan
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer of the Registrant)
ARTICLES OF AMENDMENT TO
THE 1993B RESTATED ARTICLES OF INCORPORATION
OF HOLLYWOOD ENTERTAINMENT CORPORATION
1. The name of the corporation is Hollywood Entertainment
Corporation (the Corporation).
2. The text of the amendment is as follows:
a. The following paragraph D is appended and included
in Article II of the 1993B Restated Articles of
Incorporation (the Articles of Incorporation) of
the Corporation:
D. TERMS OF SERIES A REDEEMABLE PREFERRED STOCK
(1) DESIGNATION AND AMOUNT. There is hereby
established a series of Preferred Stock. The shares of such
series shall be designated as Series A Redeemable Preferred Stock
(the Series A Preferred Stock) and the number of shares
constituting the Series A Preferred Stock shall be five million
five hundred thousand (5,500,000), none of which have been issued
as of the date hereof. The Series A Preferred Stock shall rank,
with respect to the payment of dividends and the distribution of
assets, junior to all series of the Corporation's Preferred
Stock.
(2) DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the rights of the holders of any
shares of any series of Preferred Stock (or any similar stock)
ranking prior and superior to the Series A Preferred Stock with
respect to dividends, the holders of shares of Series A Preferred
Stock, in preference to the holders of the common stock of the
Corporation (the Common Stock), and of any other junior stock,
shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of
March, June, September and December in each year (each such date
being referred to herein as a Quarterly Dividend Payment Date),
commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share of Series A Preferred Stock, in an
amount per share equal to, subject to the provision for
adjustment hereinafter set forth, the aggregate per share amount
of all cash dividends, and the aggregate per share amount
(payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock
(by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share of Series A Preferred
Stock. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such
event under the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to
such event.
(b) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (a) of this Section 2 immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
(c) Dividends shall begin to accrue and be
cumulative on outstanding shares of Series A Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of
issue of such shares, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive payment
of a dividend or distribution declared thereon, which record date
shall be not more than 60 days prior to the date fixed for the
payment thereof.
(3) VOTING RIGHTS. Except as may be otherwise required by
law, holders of shares of Series A Preferred Stock shall no
voting rights.
(4) CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other
dividends or distributions payable on the Series A Preferred
Stock as provided in Section 2 are in arrears, thereafter and
until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred
Stock, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding
up) to the Series A Preferred Stock; or
(iv) except as permitted herein, redeem or purchase or
otherwise acquire for consideration any shares of
Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock,
except in accordance with a purchase offer made in
writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative
rights and preferences of the respective series and
classes, shall determine in good faith will result in
fair and equitable treatment among the respective
series or classes.
(b) The Corporation shall not permit any
subsidiary of the Corporation to purchase or otherwise acquire
for consideration any shares of stock of the Corporation unless
the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in
such manner.
(5) REACQUIRED SHARES. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any other articles of amendment thereto
creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
(6) LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $.0001 per share, plus an
amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Preferred Stock
shall thereafter be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set
forth, equal to the aggregate amount to be distributed upon
liquidation to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably
on the Series A Preferred Stock and all such parity stock in
proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding
up. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately
prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(7) CONSOLIDATION, MERGER, ETC. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common
Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case
each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject
to the provision for adjustment hereinafter set forth, equal the
aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for
which each share of Common Stock is changed or exchanged (subject
to applicable NASD regulations regarding shareholder approval).
In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(8) CONVERSION. The Series A Preferred Stock shall be
subject to conversion as follows:
(a) AUTOMATIC CONVERSION. Each share of Series A
Preferred Stock shall automatically be converted into one share
of Common Stock ("Conversion Ratio") on the date that Stockholder
Approval is obtained.
(b) MECHANICS OF AUTOMATIC CONVERSION. All
holders of record of shares of Series A Preferred Stock will be
given written notice of the actual date of such conversion within
ten days thereafter. Notice will be sent by mail, first class,
postage prepaid, to each record holder of Series A Preferred
Stock at such holder's address appearing on the stock register.
Each holder of shares of Series A Preferred Stock shall surrender
his or its certificate or certificates for all such shares to the
Corporation at the place designated in such notice, and shall
thereafter receive certificates for the number of shares of
Common Stock or other securities to which such holder is
entitled. On the date of conversion, all rights with respect to
the Series A Preferred Stock will terminate, except only (1) any
rights to receive declared but unpaid dividends with a record
date preceding the date of conversion, and (2) the rights of the
holders thereof, upon surrender of their certificate or
certificates therefor, to receive certificates for the number of
shares of Common Stock or other securities into which such Series
A Preferred Stock has been converted and cash for fractional
shares. If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by
written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered
holder or by his or its attorney duly authorized in writing. All
certificates evidencing shares of Series A Preferred Stock which
are required to be surrendered for conversion in accordance with
the provisions hereof shall, from and after the date such
certificates are so required to be surrendered, be deemed to have
been retired and cancelled and the shares of Series A Preferred
Stock represented thereby converted into Common Stock for all
purposes, notwithstanding the failure of the holder or holders
thereof to surrender such certificates on or prior to such date.
As soon as practicable after the conversion date and the
surrender of the certificate or certificates for Series A
Preferred Stock as aforesaid, the Corporation shall cause to be
issued and delivered to such holder, or to his or its written
order, a certificate or certificates for the number of full
shares of Common Stock or other securities issuable on such
conversion in accordance with the provisions hereof.
(c) ADJUSTMENTS FOR STOCK SPLITS, STOCK DIVIDENDS
AND COMBINATIONS OF COMMON STOCK. In the event the outstanding
shares of Common Stock shall, after September 16, 1998, be
further subdivided (split), or combined (reverse split), by
reclassification or otherwise, or in the event of any dividend or
other distribution payable on the Common Stock in shares of
Common Stock, the Conversion Ratio in effect immediately prior to
such subdivision, combination, dividend or other distribution
shall, concurrently with the effectiveness of such subdivision,
combination, dividend or other distribution, be proportionately
adjusted.
(d) STOCKHOLDER APPROVAL. For the purposes of
this Section 8 "Stockholder Approval" means approval by the
Stockholders of the Corporation of the conversion of the Series A
Preferred Stock into Common Stock at the Conversion Ratio
specified above at a duly-called meeting of the stockholders and
the day, if any, upon which the Corporation determines, in good
faith and based upon the written concurrence of the principal
securities exchange or quotation system upon which the
Corporation's Common Stock is then traded, that stockholder
approval is not required for such conversion in order for the
Corporation to be in compliance with the rules of such exchange
or system regarding stockholder approval.
(9) REDEMPTION.
(a) Subject to the rights of series of Preferred
Stock which may from time to time come into existence, at any
date after September 1, 1999, the Corporation shall redeem, on
the date which is forty-five (45) days (such day being the
"Redemption Date") after receipt by the Corporation of a written
request from the holders at least a majority of the then
outstanding Series A Preferred Stock that all or some of such
holders shares be redeemed, the shares specified in such request
by paying in cash therefor a sum per share equal to the greater
of (i) $16.20 per share and (ii) the closing price of the
Corporation's Common Stock on a securities exchange or the Nasdaq
National Market on the date on which the Corporation received
written notice pursuant to this subsection 9(a), if applicable,
plus with respect to (i) and (ii) all declared or accumulated but
unpaid dividends on such shares (the "Series A Redemption
Price").
(b) As used herein and in subsections (9)(c) and
(d) below, the term "Redemption Date" shall refer to each "Series
A Redemption Date" and the term "Redemption Price" shall refer to
each "Series A Redemption Price." At least five (5) days prior
to each Redemption Date, written notice shall be mailed, first
class postage prepaid, to each holder of record (at the close of
business on the business day next preceding the day on which
notice is given) of the Series A Preferred Stock to be redeemed,
at the address last shown on the records of the Corporation for
such holder, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from
such holder, the Redemption Date, the Redemption Price, the place
at which payment may be obtained and calling upon such holder to
surrender to the Corporation, in the manner and at the place
designated, his, her or its certificate or certificates
representing the shares to be redeemed (the "Redemption Notice").
Except as provided in subsection (9)(c), on or after the
Redemption Date, each holder of Series A Preferred Stock to be
redeemed shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the
Redemption Price of such shares shall be paid to the order of the
person whose name appears on such certificate or certificates as
the owner thereof and each surrendered certificate shall be
cancelled. In the event less than all the shares represented by
any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless
there shall have been a default in payment of the Redemption
Price, all rights of the holders of shares of Series A Preferred
Stock designated for redemption in the Redemption Notice as
holders of Series A Preferred Stock (except the right to receive
the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on
the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Series A Preferred Stock
on any Redemption Date are insufficient to redeem the total
number of shares of Series A Preferred Stock to be redeemed on
such Redemption Date, those funds which are legally available
will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed based
upon their holdings of Series A Preferred Stock. The shares of
Series A Preferred Stock not redeemed shall remain outstanding
and entitled to all the rights and preferences provided herein.
(d) Prior to each Redemption Date, the
Corporation shall deposit the Redemption Price of all shares of
Series A Preferred Stock designated for redemption in the
Redemption Notice and not yet redeemed or converted, with a bank
or trust corporation having aggregate capital and surplus in
excess of $100,000,000 as a trust fund for the benefit of the
respective holders of the shares designated for redemption and
not yet redeemed, with irrevocable instructions and authority to
the bank or trust corporation to public the notice of redemption
thereof and pay the Redemption Price for such shares to their
respective holders on or after the Redemption Date, upon receipt
of notification from the Corporation that such holder has
surrendered his, her or its share certificate to the Corporation
pursuant to subsection (9)(b) above. As of the date of any such
deposit (even if prior to the Redemption Date), the deposit shall
constitute full payment of the shares to the holders, and from
and after the date of the deposit the shares so called for
redemption shall be redeemed and shall be deemed to be no longer
outstanding, and the holders thereof shall cease to be
shareholders with respect to such shares and shall have no rights
with respect thereto except the rights to receive from the bank
or trust corporation payment of the Redemption Price of the
shares, without interest, upon surrender of their certificates
therefor. The balance of any monies deposited by the Corporation
pursuant to this subsection (9)(d) remaining unclaimed at the
expiration of one (1) year following the Redemption Date shall
thereafter be returned to the Corporation upon its request
expressed in a resolution of its Board of Directors.
(10) MISCELLANEOUS
(a) RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(i) The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock,
such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if
at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of the Series A
Preferred Stock, in addition to such other remedies as shall
be available to the holder of such Preferred Stock, the
Corporation will use its best efforts to take such corporate
action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for
such purposes, including, without limitation, engaging in
best efforts to obtain the requisite shareholder approval of
any necessary amendment to its Articles of Incorporation.
(ii) If any shares of Common Stock required to be
reserved for purposes of conversion of the Series A
Preferred Stock hereunder require registration with or
approval of any governmental authority under any Federal or
state law before such shares may be issued upon conversion,
the Corporation shall in good faith and as expeditiously as
possible endeavor to cause such shares to be duly registered
or approved, as the case may be. The Corporation will seek
to list the shares of Common Stock required to be delivered
upon conversion of the Series A Preferred Stock, prior to
the delivery, upon each national securities exchange or
national quotation system, if any, upon which the
outstanding shares of Common Stock are listed at the time of
delivery.
(b) TAXES. The Corporation will pay any documentary
stamp of similar issue or transfer taxes payable in respect of
the issue or delivery of shares of Common Stock on conversion of
Series A Preferred Stock; PROVIDED, HOWEVER, that the Corporation
will not be required to pay any tax which may be payable in
respect of any transfer involved in the issue or delivery of
shares of Common Stock in a name other than that of the holder
of record of the Series A Preferred Stock to be converted and no
such issue or delivery will be made unless and until the person
requesting the issue or delivery has paid to the Corporation the
amount of any such tax or has established, to the satisfaction of
the Corporation, that the tax has been paid.
(c) NOTICES. Any notice required by the provisions of
this Section 10 to be given to the holders of shares of Series A
Preferred Stock shall be deemed given if deposited in the United
States mail, postage prepaid, and addressed to each holder of
record at such holder's address appearing on the books of the
Corporation.
3. The amendment was adopted on July 29, 1998.
4. This amendment was duly adopted by the Board of
Directors pursuant to resolution at the July 29, 1998 meeting of
the Board.
5. The person to contact about this filing is Donald J.
Ekman at (503) 570-1600.
Dated: Portland, Oregon
September 14, 1998
HOLLYWOOD ENTERTAINMENT CORPORATION
By: /S/ Donald J. Ekman
--------------------------------
Donald J. Ekman
Senior Vice President and General Counsel
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