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 June 30, 1999
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 of (I.R.S. Employer
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 August 11, 1999 there were 45,739,584 shares of the
registrant's Common Stock outstanding.
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
June 30, 1999
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations 3
Consolidated Balance Sheets 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4 Submission of Matters to vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
1999 1998 1999 1998
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE: (NOTE 7)
Rental revenue $205,628 $141,572 $426,943 $282,936
Product sales 44,740 25,159 89,954 53,746
--------- -------- ---------- ---------
250,368 166,731 516,897 336,682
--------- -------- ---------- ---------
OPERATING COSTS
AND EXPENSES:
Cost of product sales 31,886 16,227 63,320 34,675
Operating and selling 183,565 124,048 372,904 245,904
General and
administrative 15,020 7,585 33,260 15,966
Amortization of
intangibles 14,662 1,834 29,162 3,668
--------- -------- --------- --------
245,133 149,694 498,646 300,213
--------- -------- --------- --------
INCOME FROM OPERATIONS
(NOTE 7) 5,235 17,037 18,251 36,469
Nonoperating income
(expense):
Interest income 66 5 73 88
Interest expense (11,019) (7,431) (20,264) (14,175)
--------- -------- --------- --------
Income (loss) before
income taxes (Note7) (5,718) 9,611 (1,940) 22,382
Provision for income
taxes (2,611) (3,957) (9,166) (9,065)
--------- --------- --------- --------
Income (loss before
cumulative effect of
a change in accounting
principle (8,329) 5,654 (11,106) 13,317
Cumulative effect of
a change in accounting
principle (net of
income tax benefit
of $983) - - (1,444) -
--------- -------- --------- --------
NET INCOME (LOSS) $ (8,329) $ 5,654 $(12,550) $ 13,317
========= ======== ========= ========
- ------------------------------------------------------------------------
Net income (loss) per
share before cumulative
effect of a change in
accounting principle
Basic $ (0.18) $ 0.15 $ (0.24) $ 0.36
Diluted $ (0.18) $ 0.15 $ (0.24) $ 0.36
- --------------------------------------------------------------------------
Net income (loss)
per share:
Basic $ (0.18) $ 0.15 $ (0.28) $ 0.36
Diluted $ (0.18) $ 0.15 $ (0.28) $ 0.36
- --------------------------------------------------------------------------
Weighted average
shares outstanding:
Basic 45,612 36,928 45,412 36,885
Diluted 45,612 37,678 45,412 37,513
- --------------------------------------------------------------------------
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
-------------------------
June 30, December 31
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,148 $ 3,975
Accounts receivable 40,057 40,862
Merchandise inventories 56,819 58,083
Prepaid expenses and other current assets 10,150 12,138
---------- ---------
Total current assets 113,174 115,058
Videocassettes rental inventory, net 289,547 259,255
Property and equipment, net 346,706 328,182
Goodwill, net 169,543 185,711
Deferred income tax 42,597 35,513
Other assets, net 13,347 10,715
---------- ----------
$ 974,914 $ 934,434
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 9,218 $ 8,418
Accounts payable 65,663 107,865
Accrued expenses 29,590 34,664
Accrued revenue sharing 18,086 13,500
Accrued interest 8,974 9,693
Income taxes payable 6,354 5,739
--------- ---------
Total current liabilities 137,885 179,879
Long-term obligations, less current portion 462,815 383,727
Other liabilities 33,512 25,133
--------- ---------
634,212 588,739
Shareholders' equity:
Preferred stock, 19,500,000 shares authorized;
no shares issued and outstanding - -
Common stock, 100,000,000 shares authorized;
and 45,698,698 and 44,933,055 shares issued
and outstanding, respectively 361,562 354,067
Retained deficit (19,026) (6,476)
Intangible assets, net (1,834) (1,896)
---------- ---------
Total shareholders' equity 340,702 345,695
---------- ---------
$ 974,914 $934,434
========== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
-----------------------
1999 1998
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (12,550) $ 13,317
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Cumulative effect of a change in
accounting principle 1,444 -
Depreciation and amortization 110,863 96,083
Change in deferred rent 1,524 2,280
Change in deferred income taxes (229) 2,590
Net change in operating assets and liabilities:
Accounts receivable 805 (2,295)
Merchandise inventories 1,264 2,517
Accounts payable (42,202) (10,945)
Accrued interest (719) 263
Other current assets and liabilities 671 (274)
--------- ---------
Cash provided by operating activities 60,871 103,536
--------- ---------
INVESTING ACTIVITIES:
Purchases of videocassette rental inventory, net (82,885) (115,444)
Purchase of property and equipment, net (45,472) (60,332)
Investment in businesses acquired (14,072) -
Increase in intangibles and other assets (3,652) (212)
--------- ---------
Cash used in investing activities (146,081) (175,988)
--------- ---------
FINANCING ACTIVITIES:
Issuance of long-term obligations 56,800 -
Repayments of long-term obligations (6,912) (1,180)
Tax benefit from exercise of stock options 3,461 43
Proceeds from exercise of stock options 4,034 1,147
Increase in revolving loan, net 30,000 72,501
--------- --------
Cash provided by financing activities 87,383 72,511
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 2,173 59
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,975 3,909
--------- --------
CASH AND CASH EQUIVALENTS AT END OF SECOND QUARTER $ 6,148 $ 3,968
========= =========
</TABLE>
The accompanying cash notes are an integral part of this financial
statement.
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the
information presented not misleading. The information furnished
reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented, and which are of a normal, recurring nature. 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, 1998,
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, 1998 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) Statement of Changes in Shareholders' Equity
An analysis of the shareholders' equity amounts for the two
quarters ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Common Stock
--------------------------
(In thousands, except share amounts) Shares Amount
----------- -----------
<S> <C> <C>
Balance at December 31, 1998 44,933,055 $ 354,067
Issuance of common stock under option plan 765,643 4,034
Tax benefit from exercise of stock options 3,461
Amortization on intangible assets
Net loss ----------- -----------
Balance at June 30, 1999 45,698,698 $ 361,562
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Intangible Retained
(In thousands, except share amounts) Assets Deficit Total
----------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1998 $ (1,896) $ (6,476) $ 345,695
Issuance of common stock under option
plan 4,034
Tax benefit from exercise of stock
options 3,461
Amortization on intangible assets 62 62
Net loss (12,550) (12,550)
----------- ---------- ---------
Balance at June 30, 1999 $ (1,834) $ (19,026) $ 340,702
=========== ========== =========
</TABLE>
<PAGE>
(3) Long-term Obligations
In June 1999, the Company issued an additional $50 million
principal amount senior subordinated notes (the "1999 Notes") due
August 15, 2004. The 1999 Notes are substantially identical to the
$200 million 10.625 % senior subordinated notes due August 15, 2004.
The proceeds from the 1999 Notes, net of offering costs of
approximately $1.7 million, were used to repay a portion of the
amounts outstanding under the Company's revolving credit facility.
(4) Operating Leases
The Company leases all of its stores, corporate offices,
distribution center and zone offices under non-cancelable operating
leases. All of the Company's stores have an initial operating lease
term of five to fifteen years and most have options to renew for
between five and fifteen additional years. Most operating leases
require payment of property taxes, utilities, common area maintenance
and insurance. Total rent expense, including related lease-required
cost was $48,599 and $95,784 for the second quarter and current year
two quarters, respectively, compared with $36,606 and $70,778 for the
corresponding periods of the prior year.
(5) Earnings Per Share
Basic earnings per share is 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>
Six Months Ended
June 30,
(In thousands, except per share amounts)
-----------------------------------------------------------
1999 1998
--------------------------------------------------------
Per Per
Share Share
Income Shares Amounts Income Shares Amounts
--------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss) per
share: $(12,550) 45,412 $(0.28) $ 13,317 36,885 $0.36
Effect of dilutive
securities:
Stock options - - - 628
--------- ------- ------- -------
Diluted income (loss) per
share: $(12,550) 45,412 $(0.28) $13,317 37,513 $0.36
========= ======= ======= ======= ======= =====
</TABLE>
<PAGE>
Due to the Company's loss in 1999, stock options accounted for using
treasury stock method would be antidilutive. Accordingly, 2.6
million shares have been excluded from the 1999 dilutive net loss per
share calculation.
(6) Store Openings Cost
In April 1998, SOP 98-5, "Reporting on the Cost of Start-up
Activities" was finalized, which requires that cost incurred for
start-up activities, such as store openings, be expensed as incurred.
The Company adopted SOP 98-5 effective January 1, 1999. The
cumulative effect of the change in accounting principle was to
increase net loss by $1.4 million, net of tax benefit.
(7) Segment Reporting
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" effective for fiscal years
beginning after December 15, 1997. The Company adopted Statement No.
131 in 1998.
The Company identifies its segments based on management
responsibility. The Company has two segments, the Hollywood Video
segment, which consists of the Company's 1,403 retail stores located
in 43 states and the District of Columbia, and the Reel.com segment,
which is the leading video-only store on the internet. The Company
measures segment profit as operating profit, which is defined as
income before interest expense and income taxes. Information on
segments and a reconciliation to income before income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Three Months Ended, June 30, 1999Six Months Ended, June 30, 1999
----------------------------------------------------------
Hollywood Hollywood
Video Reel.com Total Video Reel.com Total
--------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $241,977 $ 8,391 $250,368 $ 502,151 $ 14,746 $ 516,897
Depreciation and
amortization 43,020 12,795 55,815 85,306 25,557 110,863
Operating income
(loss)(1) 25,860 (20,625) 5,235 59,477 (41,226) 18,251
Interest expense, net 10,062 891 10,953 18,733 1,458 20,191
Total assets 903,542 71,372 974,914 903,542 71,372 974,914
Purchase of property
and equipment, net 19,607 1,446 21,053 43,383 2,089 45,472
</TABLE>
(1) Reel.com's operating loss includes $12.5 million and $25.1
million in goodwill amortization for the second quarter and current
year two quarters, respectively. Excluding the goodwill
amortization, Reel.com's operating loss would have been $8.1 million
and $16.1 million for the second quarter and current year two
quarters, respectively.
There was only one segment, Hollywood Video in the prior year two
quarters ended June 30,1998.
<PAGE>
Item 2 Financial Highlights
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Rental revenue $ 205,628 $ 141,572 $ 426,943 $ 282,936
Product sales 44,740 25,159 89,954 53,746
---------- --------- --------- ---------
Total revenue 250,368 166,731 516,897 336,682
---------- --------- --------- ---------
Net income (loss) $ (8,329) $ 5,654 (12,550) 13,317
- --------------------------------------------------------------------------------
PRO FORMA STATEMENT OF
OPERATIONS DATA HOLLYWOOD
VIDEO SUPERSTORES:
Income from operations $ 25,860 $ 17,037 $ 59,477 $ 36,469
Income before cumulative effect
of a change in accounting
principle 9,400 5,654 24,243 13,317
Income before cumulative effect
of a change in accounting
principle per diluted share (1) 0.20 0.15 0.51 0.36
REEL.COM (2):
Loss from operations $ (8,082) $ - $ (16,140) $ -
- ------------------------------------------------------------------------------
OPERATING DATA:
Number of stores quarter end 1,403 1,066 1,403 1,066
Comparable store revenue increase (3) 18% 1% 18% 2%
OTHER DATA:
Weighted average shares
outstanding:
Basic 45,612 36,928 45,412 36,885
Diluted 45,612 37,678 45,412 37,513
- --------------------------------------------------------------------------------
Adjusted EBITDA (4):
Hollywood Superstores $ 54,781 $ 30,183 $ 104,846 $ 57,205
Reel.com (7,610) - (15,332) -
---------- ---------- ---------- ---------
Consolidated $ 47,171 $ 30,183 $ 89,154 $ 57,205
========== ========== ========== =========
- ------------------------------------------------------------------------------
</TABLE>
(1) Net income per diluted share for Hollywood Video Superstores was
computed by assuming a 40.5% effective tax rate and diluted weighted
average shares outstanding of 47.9 million and 48.0 million for the
second quarter and current year two quarters, respectively.
(2) Reel.com's loss from operations excludes goodwill amortization
of $12.5 million and $25.1 million in the second quarter and current
year two quarters, respectively. See Note 7 to the Consolidated
Financial Statements for the presentation of segment reporting.
(3) A store is comparable after it has been open and owned by the
Company for 12 full months. An acquired store converted to the
Hollywood Video name and store design is removed from the comparable
store base when the conversion process is initiated and returned 12
full months after reopening.
(4) Adjusted EBITDA is significant to the Company's calculation of
its financial covenants and represents income from operations before
depreciation and amortization plus non-cash expenses that reduce
EBITDA, less the cost of acquiring new release videocassettes and
game inventory which are capitalized. Adjusted EBITDA should not be
viewed as a substitute for Generally Accepted Accounting Principles
(GAAP) measurements such as net income or cash flow from operations.
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Summary Results of Operations
The Company's loss before cumulative effect of a change in
accounting principle was $8.3 million and $11.1 million for the
second quarter and current year two quarters, respectively, compared
with net income of $5.7 million and $13.3 million for the
corresponding periods of the prior year. The decrease in earnings
was primarily due to Reel.com goodwill amortization of $12.5 million
and $25.1 million for the second quarter and current year two
quarters, respectively.
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 Six Months Ended
June 30, June 30,
-----------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Rental revenue 82.1 84.9 82.6 84.0
Product sales 17.9 15.1 17.4 16.0
-------- ------- -------- -------
100.0 100.0 100.0 100.0
-------- ------- -------- -------
OPERATING COSTS AND EXPENSES:
Cost of product sales 12.7 9.7 12.3 10.3
Operating and selling 73.3 74.4 72.1 73.0
General and administrative 6.0 4.6 6.4 4.7
Amortization of intangibles 5.9 1.1 5.7 1.1
-------- ------- -------- -------
97.9 89.8 96.5 89.1
INCOME FROM OPERATIONS: 2.1 10.2 3.5 10.9
Nonoperating income (expense),
net (4.4) (4.4) (3.9) (4.2)
-------- ------- -------- -------
Income (loss) before income
taxes (2.3) 5.8 (0.4) 6.7
Provision for income taxes (1.0) (2.4) (1.8) (2.7)
Cumulative effect of a change
in accounting principle - - (0.3) -
-------- ------- -------- -------
NET INCOME (LOSS) (3.3) 3.4 (2.5) 4.0
-------- ------- -------- -------
Number of superstores 1,403 1,066 1,403 1,066
</TABLE>
<PAGE>
REVENUE
Revenue increased by $83.6 million, or 50%, in the second quarter
and $180.2 million , or 54%, in the current year two quarters
compared with the corresponding periods of the prior year,
respectively, primarily due to the addition of 337 superstores in the
twelve months ended June 30, 1999. Revenue was also favorably
impacted by an increase of 18% in comparable store revenue in the
second quarter and current year two quarters, respectively, and the
purchase of Reel.com in October 1998, which added $8.4 million and
$14.7 million in revenue in the second quarter and current year two
quarters, respectively, (of which $8.0 million and $13.9 million was
on-line revenue, respectively).
OPERATING COSTS AND EXPENSES
Cost of Product Sales
The cost of product sales as a percentage of product sales
increased from 64.5% for both the prior year second quarter and prior
year two quarters to 67.1% in the current year second quarter and
66.2% in the current year two quarters, excluding Reel.com. The
Company's gross margin on product sales has been affected by 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. The cost of product sales as a percentage of
product revenue, including Reel.com, was 71.3% and 70.4% in the
second quarter and current year two quarters, respectively,
Operating and Selling
Operating and selling expenses, which consist principally of all
store expenses, including payroll, occupancy, advertising,
depreciation and rental revenue sharing, decreased as a percentage of
total revenue from 74.4% and 73.0% in the prior year second quarter
and prior year two quarters, respectively, to 73.3% and 72.1% in the
current year second quarter and current year two quarters,
respectively. The decrease was primarily due to increased store
revenues without a proportionate increase in other store operating
expenses, mostly offset by an increase in rental product amortization
and revenue sharing expense.
General Administrative
General and administrative expenses increased as a percentage of
total revenue to 5.0% and 5.5% for the second quarter and current
year two quarters, respectively, excluding Reel.com, compared to 4.5%
and 4.7% for the corresponding periods of the prior year. This
increase as a percentage of total revenue was due to higher payroll
and related costs and an increase in legal costs. General and
administrative expenses as a percentage of total revenue, including
Reel.com, was 6.0% and 6.4% in the current year second quarter and
two quarters, respectively.
Amortization of Intangibles
Amortization of intangibles increased by $12.8 million and $25.5
million in the current year second quarter and current year two
quarters respectively, compared with the corresponding period of the
prior year, primarily due to the amortization of the costs associated
with the Reel.com acquisition.
Nonoperating Income (Expense), Net
Interest expense, net of interest income increased in the current
year second quarter and current year two quarters compared to the
corresponding period of the prior year due to increased levels of
borrowings under the Company's revolving credit facility.
Income Taxes
The Company's effective tax rate was a provision of 45.6% and
472.5% in the current year second quarter and current year two
quarters, respectively, compared to a provision of 41.2% and 40.5%
for the corresponding periods in the prior year, given the Company's
net loss for financial reporting purposes versus net income for tax
reporting purposes in the current year second quarter and two
quarters primarily due to the non-deductibility of goodwill
amortization associated with the Reel.com acquisition.
Liquidity and Capital Resources
The amount of cash generated from operations in the current year
two 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.
At June 30, 1999, the Company had cash and cash equivalents of
$6.1 million and a working capital deficit of $24.7 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 decreased by $42.7
million in the current year two quarters compared with the
corresponding period of the prior year, primarily due to lower
results of operations, net of the non-cash charge for the change in
accounting principle (see "Results of Operations"), combined with a
net unfavorable change in certain working capital accounts, partly
offset by an increase in depreciation and amortization expenses.
Cash Used in Investing Activities
Net cash used in investing activities decreased by $30 million in
the current year two quarters compared with the corresponding period
of the prior year, primarily due to reduced purchases of
videocassette rental inventory (excluding revenue sharing titles),
including DVD's and video game inventory.
Cash Provided by Financing Activities
Net cash provided by financing activities increased by $14.9
million in the current year two quarters compared with the
corresponding period of the prior year resulting from the issuance of
an additional $50 million of senior subordinated notes (see note 3 to
the Consolidated Financial Statements). The proceeds from the notes,
net of offerings costs were used to repay a portion of the amounts
outstanding under the Company's credit agreement. 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 June 30, 1999, $210 million was outstanding under the revolving
credit agreement.
Capital Expenditures
The Company's capital expenditures are principally for rental
product for stores, store equipment and fixtures, remodeling some
existing stores, implementing and upgrading office and store
technology and opening new store locations. 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 90% complete. The Company
estimates that all critical systems and applications will be year
2000 compliant by October 1999.
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. While the regional or national failure of a utilities or
communications supplier could have a significant impact if not restored,
the Company has evaluated the Y2K readiness of utility and communcation
links and believes that they are prepared. 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, if it, 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
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. Due to the general uncertainty
inherent in the year 2000 situation, which results in part from the
uncertainty of compliance by third parties, we are unable to determine
with certainty what effects the Year 2000 issue will be, although we
believe our compliance efforts have minimized the risks of third party
non-compliance.
The year 2000 project group has established contingency plans 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 plans address both operational and technical alternatives. This phase will
continue through the end of 1999. In addition, the Company is developing its
century rollover management procedure and command center which will monitor and
address any operational developments that may arise during the transition into
the year 2000.
Through June 30, 1999, the Company has expended approximately $0.7
million to address year 2000 compliance issues. The Company
estimates that it will incur an additional $0.4 million, for a total
of approximately $1.1 million, to address year 2000 compliance
issues, which includes the estimated costs of all modifications,
testing and consultant fees.
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual Meeting on May 27, 1999, the holders of
the Company's outstanding Common Stock took the action described
below. At the Annual Meeting 45,659,644 shares of Common Stock were
issued and outstanding and entitled to vote.
1) The shareholders elected each of Mark J. Wattles, Donald J.
Ekman, Scott A. Beck, and William P. Zebe to the Company's Board of
Directors, by the votes indicated below, to serve for the ensuing
year.
MARK J. WATTLES
41,532,364 Shares in favor
73,192 Shares against or withheld
0 Abstention
0 Broker non votes
DONALD J. EKMAN
41,541,564 Shares in favor
63,992 Shares against or withheld
0 Abstention
0 Broker non votes
SCOTT A. BECK
41,553,364 Shares in favor
52,192 Shares against or withheld
0 Abstention
0 Broker non votes
WILLIAM P. ZEBE
41,537,896 Shares in favor
67,660 Shares against or withheld
0 Abstention
0 Broker non votes
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial data schedule (electronic filing only
(b) Reports of Form 8-K.
1) Current Report on Form 8-K filed June 17,1999, announced that
the Company entered into an agreement to sell an additional $50
million aggregate principal amount of 10-5/8% senior subordinated
notes.
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
August 13,1999 /S/ DAVID G. MARTIN
---------------- ------------------------------------------
(Date) David G. Martin
Executive Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial and Accounting
Officer of the Registrant)
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