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 March 31, 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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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 May 7, 1999 there were 45,525,777 shares of the registrant's Common
Stock outstanding.
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
March 31, 1999
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 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PART 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
March 31,
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Rental revenue $221,315 $141,363
Product sales 45,214 28,589
-------- --------
266,529 169,952
-------- --------
Operating costs and expenses:
Cost of product sales 31,434 18,448
Operating and selling 189,339 121,857
General and administrative 18,240 8,381
Amortization of intangibles 14,500 1,834
-------- --------
253,513 150,520
-------- --------
Income from operations 13,016 19,432
Nonoperating income (expense):
Interest income 7 84
Interest expense (9,245) (6,745)
-------- --------
Income before income taxes 3,778 12,771
Provision for income taxes (6,555) (5,108)
-------- --------
Income (loss) before cumulative
effect of a change in accounting
principle (2,777) 7,663
Cumulative effect of a change in
accounting principle
(net of income tax benefit of $983) (1,444) -
-------- --------
Net income (loss) $(4,221) $ 7,663
======== ========
Net income (loss) per share before
cumulative effect of a
change in accounting principle
Basic $ (0.06) $ 0.21
Diluted $ (0.06) $ 0.21
Net income (loss) per share:
Basic $ (0.09) $ 0.21
Diluted $ (0.09) $ 0.21
Weighted average shares outstanding:
Basic 45,212 36,842
Diluted 45,212 37,377
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
-----------------------
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,684 $ 3,975
Accounts receivable 44,481 40,862
Merchandise inventories 59,224 58,083
Prepaid expenses and other current
assets 10,513 12,138
-------- --------
Total current assets 118,902 115,058
Videocassette rental inventory, net 289,741 259,255
Property and equipment, net 339,528 328,182
Goodwill, net 173,277 185,711
Deferred income tax 36,161 35,513
Other assets, net 11,407 10,715
-------- --------
$969,016 $934,434
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 2,418 $ 8,418
Accounts payable 90,217 107,865
Accrued expenses 36,444 34,664
Accrued revenue sharing 19,577 13,500
Accrued interest 3,059 9,693
Income taxes payable 10,695 5,739
-------- --------
Total current liabilities 162,410 179,879
Long-term obligations, less current
portion 433,350 383,727
Other liabilities 27,266 25,133
-------- --------
623,026 588,739
======== ========
Shareholders' equity:
Preferred stock, 22,619,737 shares
authorized; no shares issued
and outstanding - -
Common stock, 100,000,000 shares
authorized; and 45,409,693 and
44,933,055 shares issued and
outstanding, respectively 358,552 354,067
Retained deficit (10,697) (6,476)
Intangible assets, net (1,865) (1,896)
-------- --------
Total shareholders' equity 345,990 345,695
-------- --------
$969,016 $934,434
======== ========
</TABLE>
The accompanying notes are an integral part of this financial
statement.
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
-------------------
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(4,221) $7,663
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 55,048 43,181
Change in deferred rent 1,042 1,261
Change in deferred income taxes 443 712
Net change in operating assets and liabilities:
Accounts receivable (3,619) 3,227
Merchandise inventories (1,141) (1,504)
Accounts payable (17,648) (13,702)
Accrued interest (6,634) (5,145)
Other current assets and liabilities 12,994 2,784
--------- --------
Cash provided by operating activities 37,708 38,477
--------- --------
INVESTING ACTIVITIES:
Purchases of videocassette rental inventory, net (57,962) (50,467)
Purchases of property and equipment, net (24,419) (32,911)
Increase in intangibles and other assets (2,726) (26)
--------- --------
Cash used in investing activities (85,107) (83,404)
--------- --------
FINANCING ACTIVITIES:
Repayments of long-term obligations (6,377) (574)
Tax benefit from exercise of stock options 1,872 (47)
Proceeds from exercise of stock options 2,613 999
Increase in revolving loan, net 50,000 45,000
-------- --------
Cash provided by financing activities 48,108 45,378
-------- --------
Increase in cash and cash equivalents 709 451
Cash and cash equivalents at beginning of year 3,975 3,909
-------- --------
Cash and cash equivalents at end of the first quarter $ 4,684 $ 4,360
======== ========
</TABLE>
The accompanying 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) Statements of Changes in Shareholders' Equity
An analysis of the shareholders' equity amounts for the first quarter
ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
-------------------------
(In thousands, except Common Stock Intangible
share amounts) Shares Amount
------------ ----------
<S> <C> <C>
Balance at December 31, 1998 44,933,055 $354,067
Issuance of common stock
under option plan 476,638 2,613
Tax benefit from exercise
of stock options 1,872
Amortization on intangible
assets
Net income ------------ ----------
Balance at March 31, 1999 45,409,693 $358,552
============ ==========
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
Intangible Retained
(In thousands, except Assets Deficit Total
share amounts) ---------- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1998 $(1,896) $(6,476) $345,695
Issuance of common stock
under option plan 2,613
Tax benefit from exercise
of stock options 1,872
Amortization on intangible
assets 31 31
Net income (4,221) (4,221)
---------- ---------- ---------
Balance at March 31, 1999 $(1,865) $(10,697) $345,990
========== ========== =========
</TABLE>
<PAGE>
(3) 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 during the first quarter of 1999 and 1998 were $47,063
and $34,086, respectfully.
(4) 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)
----------------------------
Three Months Ended
March 31, 1999
(In thousands, except per
share amounts)
----------------------------
Per
Share
Income Share Amounts
--------- ------ --------
<S> <C> <C> <C>
Basic income (loss) per share: $ (4,221) 45,212 $ (0.09)
Effect of dilutive securities:
Stock options - -
--------- ------
Dilutive income (loss) per share: $(4,221) 45,212 $ (0.09)
========= ====== ========
</TABLE>
<TABLE>
<CAPTION>
----------------------------
Three Months Ended
March 31, 1998
(In thousands, except per
share amounts)
----------------------------
Per
Share
Income Share Amounts
--------- ------ --------
<S> <C> <C> <C>
Basic income (loss) per share: $ 7,663 36,842 $ 0.21
Effect of dilutive securities:
Stock options - 535
--------- ------
Dilutive income (loss) per share: $ 7,663 37,377 $ 0.21
========= ====== =======
</TABLE>
Due to the Company's loss in 1999, stock options accounted for using treasury
stock method would be antidilutive. Accordingly, 3.0 million shares have
been excluded from the 1999 dilutive net loss per share calculation.
(5) Store Preopening 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 was to
increase net loss by $1.4 million, net of tax benefit.
(6) 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.
In 1998, the Company had 2 segments, the Hollywood Video segment, which
consists of the Company's 1,322 retail stores located in 43 states, 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>
Quarter Ended March 31, 1999
----------------------------------
Hollywood
Video Reel.com Total
--------- -------- ---------
<S> <C> <C> <C>
Revenues $ 260,174 $ 6,355 $ 266,529
Depreciation and amortization 42,286 12,762 55,048
Operating income (loss) 33,617 (20,601)(1) 13,016
Interest expense, net 8,671 567 9,238
Total assets 887,441 81,575 969,016
Purchase of property and
Equipment, net 23,776 643 24,419
</TABLE>
(1) Reel.com's operating loss includes $12.5 million in goodwill
amortization. Excluding the goodwill amortization, Reel.com's operating
loss would have been $8.1 million.
There was only one segment, Hollywood Video in the first quarter of 1998.
<PAGE>
ITEM 2 FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1999 1998
---------- --------
(in thousands, except share amounts and other operating data)
<S> <C> <C>
Financial Data:
Rental revenue $ 221,315 $ 141,363
Product sales 45,214 28,589
---------- ---------
Total revenue $ 266,529 $ 169,952
---------- ---------
Net income (loss) $ (4,221) $ 7,663
PRO FORMA STATEMENT OF OPERATIONS DATA
Hollywood Video Superstores:
Income from operations $ 33,617 $ 19,432
Income before cumulative effect of a change
in accounting principle 14,843 7,663
Income before cumulative effect of a change
in accounting principle per diluted
share (1) 0.31 0.21
Reel.com (2):
Loss from operations $ (8,058) -
Operating Data:
Number of stores quarter end 1,322 995
Comparable store revenue increase (3) 18% 2%
Other Data:
Weighted average shares outstanding:
Basic 45,212 36,842
Diluted 45,212 37,377
Adjusted EBITDA (4):
Hollywood Superstores $ 45,436 $ 27,022
Reel.com (7,839) -
----------- ----------
Consolidated $ 37,597 $ 27,022
</TABLE>
<PAGE>
(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 48,221.
(2) Reel.com's loss from operations excludes goodwill amortization of $12.5
million. See Note 5 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 in the current year first quarter was $2.8 million compared with
income of $7.7 million for the corresponding period of the prior year. The
decrease in earnings was primarily due to the Reel.com goodwill amortization
of $12.5 million.
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.
<PAGE>
<TABLE>
<CAPTION>
---------------------
Three Months Ended
March 31,
1999 1998
------- -------
(Unaudited)
<S> <C> <C>
REVENUE:
Rental revenue 83.0 83.2
Product sales 17.0 16.8
------- -------
100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of product sales 11.8 10.9
Operating and selling 71.0 71.7
General and administrative 6.9 4.9
Amortization of intangibles 5.4 1.1
------- -------
95.1 88.6
INCOME FROM OPERATIONS 4.9 11.4
Nonoperating income (expense), net (3.5) (3.9)
------- -------
Income before income taxes 1.4 7.5
Provision for income taxes (2.5) (3.0)
-------- -------
Income (loss) before cumulative effect of
a change in accounting principle (1.1) 4.5
Cumulative effect of a change in accounting
principle (0.5) -
-------- --------
NET INCOME (LOSS)
4.5 (1.6)
======= =======
Number of superstores 1,322 995
</TABLE>
<PAGE>
REVENUE
Revenue increased by $96.6 million, or 57%, in the current year first
quarter compared with the corresponding period of the prior year primarily
due to the addition of 327 new superstores in the twelve months ended March
31, 1999. Revenue was also favorably impacted by an increase of 18% in
comparable store revenue in the current year first quarter and the purchase
of Reel.com in October 1998, which added $6.4 million in revenue (of which
$5.9 million was on-line revenue).
OPERATING COSTS AND EXPENSES
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from
64.5% in the prior year first quarter to 65.3% for the current year first
quarter, excluding Reel.com. The Company's gross margin on product sales has
been affected by continuing 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 69.5%.
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 71.7% in the
prior year first quarter to 71.0% in the current year first quarter. 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 5.9%, excluding Reel.com, compared to 4.9% for the corresponding
period 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 6.9%.
Amortization of Intangibles
Amortization of intangibles increased by $12.7 million in the current year
first quarter compared with the corresponding period of the prior year. The
increase is 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
first quarter 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 173% in the current
year first quarter compared to a provision of 40% in the prior year first
quarter, given the Company's net loss for financial reporting purposes versus
net income for tax reporting purposes in the current year first quarter
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 first
quarter 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 March 31, 1999, the Company had cash and cash equivalents of $4.7
million and a working capital deficit of $43.5 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 $0.8 million in the
current year first quarter 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,
mostly offset by an increase in depreciation and amortization expenses.
Cash Used in Investing Activities
Net cash used in investing activities increased by $1.7 million in the
current year first quarter compared with the corresponding period of the
prior year, primarily due to increased purchases of videocassette rental
inventory, including DVD's and video game inventory for new stores mostly
offset by decreased capital expenditures with respect to new store
construction, primarily due to fewer store additions in the current year
first quarter compared to the corresponding period of the prior year.
<PAGE>
Cash Provided by Financing Activities
Net cash provided by financing activities increased by $2.7 million in the
current year first quarter compared with the corresponding period of the
prior year resulting from additional borrowings under the Company's revolving
credit line combined with an increase in proceeds generated from the exercise
of stock options, mostly offset by an increase in repayments of long-term
debt. 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 March 31, 1999, $230 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.
<PAGE>
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 three-fourths complete. The Company estimates that all
critical systems and applications will be year 2000 compliant by June 30,
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. 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, 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.
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 June 30, 1999.
Through March 31, 1999, the Company has expended approximately $0.4
million to address year 2000 compliance issues. The Company estimates that
it will incur an additional $0.3 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.
<PAGE>
Part II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 Second Amendment to Revolving Credit Agreement
(b) Exhibit 27.1 Financial data schedule (electronic filing only)
(c) Reports of Form 8-K.
None filed during the quarter.
<PAGE>
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)
May 14, 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)
11
SECOND AMENDMENT AGREEMENT
THIS SECOND AMENDMENT AGREEMENT ("Second Amendment") is entered into as
of March 1, 1999, and is among HOLLYWOOD ENTERTAINMENT CORPORATION, an Oregon
corporation dba "Hollywood Video" (the "Borrower"), SOCIETE GENERALE, as
Agent, GOLDMAN SACHS CREDIT PARTNERS L.P., as Documentation Agent, the Co-
Agents named in the Credit Agreement referred to below, and each of the
Lenders, as defined therein, currently party to the Credit Agreement.
RECITALS:
A. The Borrower, Societe Generale, as Agent, Donaldson, Lufkin &
Jenrette Securities Corporation, as Administrative Agent, and Goldman Sachs
Credit Partners L.P., as Documentation Agent, the Co-Agents named therein and
the Lenders are (or, as described below, were) parties to that certain
Revolving Credit Agreement dated as of September 5, 1997, and amended by a
First Amendment Agreement dated as of March 31, 1998, providing for a
revolving credit facility in the maximum principal amount of $300,000,000 (as
from time to time amended, supplemented or restated, the "Credit Agreement").
Capitalized terms used herein without definition have the meanings ascribed
to them in the Credit Agreement.
B. Donaldson, Lufkin & Jenrette Securities Corporation and DLJ Capital
Funding, Inc. are no longer parties to the Credit Agreement.
C. The parties desire to amend the Credit Agreement to modify certain
of the terms and conditions of the Loan Documents.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Definitions.
1.1 Amendments to Definitions. The definition of each of the following
terms is hereby amended to read in its entirety as set forth below:
"Adjusted EBITDA" means, for any Person for any period, (a)
such Person's EBITDA for such period minus (b) all costs of
acquisition of Rental Items for Stores for such period, to the
extent that (i) such costs of acquisition are accounted for as
capital expenditures under GAAP and (ii) such Rental Items were
acquired for a particular Store (A) after its opening, or (B) in
the case of a Store acquired during such period, after it commences
to operate as a Store (i.e., excluding the cost of acquisition of
such Store's initial inventory, the intent of the parties being to
adjust EBITDA for the recurring costs of keeping a Store in stock,
and not for the initial cost of equipping a Store with inventory).
"Material Subsidiary" means, at any time, each Subsidiary of
the Borrower (i) that then has a Net Worth in excess of the lesser
of (A) $5,000,000 or (B) 3% of Borrower's Net Worth; but excluding
(ii) Reel.com, unless it (A) is wholly-owned by the Borrower or
one more Affiliates of the Borrower, and (B) has otherwise
qualified as a Material Subsidiary for a period of thirty (30)
consecutive days, exclusive of days on which Reel.com has on file
with the Securities and Exchange Commission a registration
statement for the public offering of its common stock that
contemplates gross proceeds, in a single closing, of at least
$5,000,000, provided that, within the 90 days preceding the date on
which the determination is being made, the Borrower has indicated
to the Agent in writing that it intends, in good faith, to complete
such offering within 90 days after the date of such notice.
"Rental Items" means videotapes, video discs (regardless of
format), videogames, audiotapes and related equipment to the extent
that such items were acquired by Borrower (or the relevant
Subsidiary) for sale or rental to its customers or are held by
Borrower (or the relevant Subsidiary) for rental to its customers.
"Rental Revenues" means revenues received by the Borrower (on
a consolidated basis) for the rental of Rental Items.
1.2 Additional Definitions. The Credit Agreement is hereby amended by
adding thereto, in appropriate alphabetical order, the definitions set forth
below:
"Reel.com" means, collectively, (a) Reel.com, Inc., a Delaware
corporation (and any successor corporation resulting from a
reincorporation of that Person for the purpose of changing its
state of incorporation); (b) any direct Subsidiary of Borrower of
which Reel.com, Inc. is a subsidiary (for purposes of this
definition only, the "Reel.com Parent"); and (c) any subsidiary of
the Reel.com Parent; provided, however, that (x) references to
"Reel.com" with respect to a registration statement filed with the
Securities and Exchange Commission ("Registration Statement") shall
mean such of the foregoing Persons as is identified in the
Registration Statement as the "issuer" of the securities covered
thereby; and (y) on and after the earlier of (i) the date as of
which any Registration Statement is filed, unless and until
Borrower elects to terminate, rather than consummate, the public
offering contemplated thereby, or (ii) any other transaction
consented to pursuant to Section 4 hereof is consummated,
"Reel.com" shall mean, collectively, only (1) the "issuer"
identified in the Registration Statement and its subsidiaries, or
(2) the Person whose shares are the subject of such other issuance
or disposition and its subsidiaries, as the case may be.
"Tangible Net Worth" means (a) Net Worth, less (b) all
components thereof attributable to intangible assets (determined in
accordance with GAAP).
2. Amendments to Other Provisions.
2.1 Amendment to Section 2.3.2. Section 2.3.2 of the Credit Agreement
is hereby amended to read in its entirety as follows:
2.3.2 Mandatory Reductions. (a) To the extent that,
by the date that is six (6) months after the Borrower's or any
Subsidiary's receipt of any Net Available Cash in respect of an
Asset Disposition, the Borrower has not reinvested (or caused to be
reinvested, by one or more Subsidiaries) such Net Available Cash in
Additional Similar Assets (determined on a first-in, first-out
basis), or (b) to the extent that such Net Available Cash, when
aggregated with all prior Permitted Acquisitions effected with Net
Available Cash during the fiscal year in which such Net Available
Cash is received, exceeds $50,000,000, on the date such excess Net
Available Cash is received (the amount of such unreinvested Net
Available Cash, or of such excess Net Available Cash, as the case
may be, the "Excess Disposition Proceeds"): the Total Commitment
shall be reduced by an amount equal to such Excess Disposition
Proceeds.
2.2 Amendment to Section 5.10.6. Section 5.10.6 of the Credit
Agreement is hereby amended to read in its entirety as follows:
5.10.6 Shareholder, SEC and Government Reports. As
soon as available, all reports sent by the Borrower, or any
Subsidiary, to its shareholders and all quarterly and annual
reports filed by the Borrower, or any Subsidiary, with the
Securities and Exchange Commission and each other Governmental
Authority having jurisdiction over the Borrower or such Subsidiary.
2.3 Amendment to Section 5.14. Section 5.14 of the Credit Agreement is
hereby amended to read in its entirety as follows:
5.14 Tangible Net Worth. The Borrower shall maintain at all
times a Tangible Net Worth equal to or greater than the sum of:
(a) One Hundred Seventy-Five Million Dollars
($175,000,000), plus
(b) Seventy-five percent (75%) of the Borrower's
cumulative Net Income for those fiscal quarters of the
Borrower ended after September 30, 1998, in which the
Borrower's Net Income was greater than zero (but excluding,
for purposes of determining Net Income for the fiscal quarter
ended December 31, 1998, the effect of the write-down referred
to in clause (e) below), plus
(c) one hundred percent (100%) of the amount, if any, by
which the Tangible Net Worth of the Borrower increases after
September 30, 1998 as a result of the issuance of common stock
or the conversion of debt securities into common stock in
connection with the acquisition of another Person (or of some
or all of the assets of another Person), plus
(d) ninety percent (90%) of the amount, if any, by which
the shareholders' equity of the Borrower increases after
September 30, 1998, as a result of all other issuances of
common stock or conversions of debt securities into common
stock; minus
(e) the lesser of (i) $100,000,000, and (ii) the amount
by which Borrower writes down the value of its inventory after
September 30, 1998, as reflected in Borrower's financial
statements for the year ended December 31, 1998.
2.4 Amendment to Section 6.4. Clause (c) of Section 6.4 of the Credit
Agreement is hereby amended to read in its entirety as follows:
(c) purchase money Liens covering videotapes, video discs or
videogames purchased by the Borrower or any Subsidiary in the
ordinary course of business, provided that such purchase money
Liens do not secure at any time an amount in excess of five percent
(5%) of the Borrower's Total Revenues for the period of four fiscal
quarters then most recently ended;
2.5 Amendment to Section 6.6.2. Section 6.6.2 of the Credit Agreement
is hereby amended to read in its entirety as follows:
6.6.2 Make or maintain Investments in Subsidiaries
(including Subsidiaries acquired as Permitted Acquisitions);
provided that (i) the Borrower's Aggregate Investments in
Subsidiaries, other than Reel.com, that are not Material
Subsidiaries do not exceed five percent (5%) of the Borrower's Net
Worth; (ii) the total assets of all Subsidiaries, determined (on a
consolidated basis, where applicable) in accordance with GAAP, but
excluding any value accorded under GAAP to the goodwill of
Reel.com, do not exceed thirty percent (30%) of Borrower's total
assets, determined on a consolidated basis in accordance with GAAP,
but excluding any value accorded under GAAP to the goodwill of
Reel.com; and (iii) the Borrower's Aggregate Investment in
Reel.com, exclusive of goodwill, shall not exceed $55,000,000;
2.6 Amendment to Section 9.9.2. Section 9.9.2 of the Credit Agreement
is hereby amended by adding the following to the end thereof:
Notwithstanding any other provision of any Loan Document, any
action or circumstance, otherwise permitted under the Loan
Documents, that requires any waiver, consent or amendment of any
documentation governing an issuance of Subordinated Debt shall be
prohibited unless such waiver, consent or amendment is obtained
prior to the taking or occurrence thereof.
3. Utilization Fee. In addition to the interest and fees heretofore
payable under the Loan Documents, the Borrower agrees to pay to the Agent,
for the account of the Lenders in proportion to their Percentage Interests, a
utilization fee, computed daily at the rate of 0.375% per annum for the
period commencing on the date of this Agreement and ending on the Maturity
Date, on the aggregate unpaid principal of the Loans, payable in arrears on
the last Business Day of each calendar quarter, on the Maturity Date, and on
demand after the occurrence of any Default or Event of Default but prior to
termination of the Commitments. Computations of the utilization fee shall be
made on the basis of a year of three hundred sixty (360) days for the actual
number of days (including the first day but excluding the last day) occurring
in the period for which such fee is payable. The utilization fee shall be
fully earned as of the day it is due hereunder, and shall be nonrefundable.
It shall be treated, for all purposes of the Loan Documents, as a "fee" that
accrues and becomes payable under the Credit Agreement.
4. Consent to Issuance or Sale of Common Stock of Reel.com. The Majority
Lenders hereby consent to the issuance by Reel.com, or the sale by Borrower,
of shares of the common stock of Reel.com, for purposes of Section 6.1(d) of
the Credit Agreement; provided that the first such issuance or sale takes
place in a single transaction and is for an aggregate consideration, in cash
or stock, having a fair market value of at least $5,000,000 and is otherwise
effected in compliance with the terms of the Credit Agreement.
5. Effectiveness. The amendments to the terms of the Credit Agreement
provided for herein shall become effective, as of March 1, 1999, immediately
upon the execution and delivery by the Borrower, the Agent and Majority
Lenders of counterparts hereof and payment by the Borrower to the Agent, for
the ratable account of the Lenders, of the amendment fee provided for in a
separate letter agreement among the Borrower, the Agent and the Documentation
Agent with respect to the amendments provided for herein; and each reference
herein to the effect that any provision of the Credit Agreement is "hereby
amended" shall mean that such provision is so amended, effective upon such
execution and delivery.
6. Representations and Warranties. The Borrower represents and warrants to
Agent and the Lenders as follows, which representations and warranties shall
survive the execution of this Second Amendment: except as set forth in the
Borrower Disclosure Letter (which indicates which sections of this Second
Amendment or the Credit Agreement are qualified by the disclosures set forth
therein, provided that inadvertent failure to indicate all sections of this
Second Amendment or the Credit Agreement that a particular disclosure is
intended to qualify shall not constitute a breach hereunder):
6.1 Binding Obligations, Etc. This Second Amendment has been duly
executed and delivered by the Borrower and constitutes (and the Credit
Agreement, as amended hereby constitutes), and the other Loan Documents when
duly executed and delivered will constitute, the legal, valid and binding
obligations of the Borrower enforceable against the Borrower in accordance
with their respective terms.
6.2 Other Representations and Warranties. Except as set forth in a
separate disclosure letter delivered by the Borrower to the Agent prior to
the date hereof, each of the representations and warranties of Borrower set
forth in Sections 4.1 through 4.17 of the Credit Agreement is true and
correct as if set forth herein in full and made on and as of the date hereof.
6.3 Absence of Defaults. As of the date hereof, no Event of Default or
Default has occurred and is continuing.
7. Miscellaneous.
7.1 Execution in Counterparts. This Second Amendment may be executed
in any number of counterparts, all of which taken together shall constitute a
single agreement, and shall not become effective until the parties described
in Section 5 hereof have executed and delivered this Second Amendment.
7.2 Limitation; Certain Acknowledgments.
7.2.1 Except as expressly provided herein, nothing in this
Second Amendment shall alter or affect any provision, condition or covenant
contained in the Credit Agreement or any other Loan Document, or limit or
impair any rights, powers or remedies of the Agent or any Lender thereunder,
it being the intent of the parties hereto that the provisions of the Loan
Documents shall continue in full force and effect except as expressly
modified hereby or pursuant to another Loan Document executed and delivered
in connection with the transactions contemplated hereby.
7.2.2 The Borrower acknowledges and agrees that the
Obligations, as amended pursuant hereto, are intended to, and shall, continue
to constitute "Designated Senior Indebtedness" for all purposes of the High
Yield Notes and the Indenture. The Borrower shall designate the Agent as the
"Representative" of the Lenders for purposes of the Indenture in accordance
with the procedures set forth therein, and shall take such action as may be
required from time to time under the Indenture to keep each such designation
in effect.
7.2.3 The Borrower's Obligations with respect to Loans made by
any Lender who surrenders its Note for cancellation without requesting the
issuance of a replacement Note, or to which no replacement Note is delivered,
for whatever reason, shall in no manner be impaired or otherwise adversely
affected by such surrender and cancellation, it being the intent of the
parties that such surrender shall not effect a release or other discharge of
any of such Obligations.
7.3 Entire Agreement. This Second Amendment, together with the letter
agreement referred to in Section 5 hereof, contains the entire agreement of
the parties with respect to the subject matter hereof and supersedes all
prior written or oral communications between the parties with respect
thereto.
7.4 Governing Law. This Second Amendment shall be governed by, and
construed in accordance with, the internal laws of the State of New York,
without reference to principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be executed by their respective officers or agents thereunto duly
authorized as of the date first written above.
BORROWER: HOLLYWOOD ENTERTAINMENT CORPORATION
By: /S/DONALD J. EKMAN
------------------
Name: Donald J. Ekman
Title: Senior Vice President
AGENT: SOCIETE GENERALE
By: MAUREEN E. KELLY
Name: Maureen E. Kelly
Title: Director
DOCUMENTATION
AGENT: GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /S/STEPHEN B. KING
-------------------
Name: Stephen B. King
Title: Authorized Signatory
LENDERS AND
CO-AGENTS: SOCIETE GENERALE
By: /S/MAUREEN E. KELLY
-------------------
Name: Maureen E. Kelly
Title: Director
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /S/STEPHEN B. KING
------------------
Name: Stephen B. King
Title: Authorized Signatory
CREDIT LYONNAIS LOS ANGELES BRANCH as a
Co-Agent and a Lender
By: /S/DIANNE M. SCOTT
------------------
Name: Dianne M. Scott
Title: First Vice President and Manager
DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR
CAYMAN ISLANDS BRANCH, as a Co-Agent and a Lender
By: /S/SUSAN M. O'CONNOR
--------------------
Name: Susan M. O'Connor
Title: Director
By: /S/JEAN HANNIGAN
----------------
Name: Jean Hannigan
Title: Vice President
KEYBANK NATIONAL ASSOCIATION,
as a Co-Agent and a Lender
By: /S/RICHARD J. AMENY, JR.
------------------------
Name: Richard J. Ameny, Jr.
Title: Assistant Vice President
U.S. BANK NATIONAL ASSOCIATION
By: /S/JANET E. JORDAN
------------------
Name: Janet E. Jordan
Title: Vice President
THE SUMITOMO BANK, LIMITED
By: /S/SURESH S. TATA
-----------------
Name: Suresh S. Tata
Title: Senior Vice President
By:__________________________________
Name:________________________________
Title:_______________________________
UNION BANK OF CALIFORNIA, N.A.
By: /S/HAGOP V. JAZMADARIAN
-----------------------
Name: Hagop V. Jazmadarian
Title: Vice President
VAN KAMPEN
PRIME RATE INCOME TRUST
By: /S/JEFFREY W. MAILLET
----------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
THE BANK OF NOVA SCOTIA
By: /S/DARYL K. HAGGE
-----------------
Name: Daryl K. Hagge
Title: Officer
By: M. BROWN
Name: M. Brown
Title: Vice President
MORGAN GUARANTY TRUST COMPANY
By:__________________________________
Name:________________________________
Title:_______________________________
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: /S/TOSHIHIRO HAYASHI
--------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
THE SAKURA BANK, LTD., SAN FRANCISCO AGENCY
By: /S/YOSHIKAZU NAGURA
-------------------
Name: Yoshikazu Nagura
Title: Vice President
SUNTRUST BANK CENTRAL FLORIDA, N.A.
By: /S/KIMBERLY S. EVANS
--------------------
Name: Kimberly S. Evans
Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /S/PERRY VAVOULES
-----------------
Name: Perry Vavoules
Title: Senior Vice President
CITY NATIONAL BANK
By: /S/PATRICK M. CASSIDY
---------------------
Name: Patrick M. Cassidy
Title: Vice President
BANQUE WORMS CAPITAL CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
GENERAL ELECTRIC CAPITAL CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
FLEET BUSINESS CREDIT CORPORATION
(FKA SANWA BUSINESS CREDIT CORPORATION)
By: /S/MARK D. NEWLIN
-----------------
Name: Mark D. Newlin
Title: S.V.P.
BANKBOSTON
By: /S/RENEE A. ROSS
----------------
Name: Renee A. Ross
Title: Managing Director Credit Derivatives
THE TORONTO-DOMINION BANK
By: /S/SONJA R. JORDAN
------------------
Name: Sonja R. Jordan
Title: Mgr. Cr. Admin
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,684
<SECURITIES> 0
<RECEIVABLES> 44,481
<ALLOWANCES> 0
<INVENTORY> 59,224
<CURRENT-ASSETS> 118,902
<PP&E> 946,356
<DEPRECIATION> 317,087
<TOTAL-ASSETS> 969,016
<CURRENT-LIABILITIES> 162,410
<BONDS> 200,000
0
0
<COMMON> 358,552
<OTHER-SE> (12,562)
<TOTAL-LIABILITY-AND-EQUITY> 969,016
<SALES> 266,529
<TOTAL-REVENUES> 266,529
<CGS> 31,434
<TOTAL-COSTS> 31,434
<OTHER-EXPENSES> 222,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,245
<INCOME-PRETAX> 3,778
<INCOME-TAX> (6,555)
<INCOME-CONTINUING> (2,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,444)
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