UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10 Q/A
AMENDMENT NO.1
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
-------- --------
Cost of sales:
Cost of rental 68,514 36,294
Cost of product 31,434 18,448
-------- --------
99,948 54,742
Gross margin 166,581 115,210
Operating expenses:
Operating and selling 120,825 85,563
General and administrative 18,240 8,381
Amortization of intangibles 14,126 1,469
-------- --------
153,191 95,413
-------- --------
Income from operations 13,390 19,797
Nonoperating income (expense):
Interest income 7 84
Interest expense (9,619) (7,110)
-------- --------
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 175,142 187,607
Deferred income tax 36,161 35,513
Other assets, net 11,407 10,715
-------- --------
$970,881 $936,330
======== ========
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)
-------- --------
Total shareholders' equity 347,855 347,591
-------- --------
$970,881 $936,330
======== ========
</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/A
Amendment No.1 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/A Amendment No.1. 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
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
Net income ------------ ----------
Balance at March 31, 1999 45,409,693 $358,552
============ ==========
</TABLE>
<TABLE>
<CAPTION>
---------------------
Retained
(In thousands, except Deficit Total
share amounts) --------- ---------
<S> <C> <C>
Balance at December 31, 1998 $(6,476) $347,591
Issuance of common stock
under option plan 2,613
Tax benefit from exercise
of stock options 1,872
Net income (4,221) (4,221)
---------- ---------
Balance at March 31, 1999 $(10,697) $347,855
========== =========
</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 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 the first quarter of 1999, stock options accounted
for using treasury stock method would be antidilutive. Accordingly, 3.0
million shares have been excluded from dilutive net loss per share
calculation for the three months ended March 31, 1999.
(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):
<PAGE>
<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) 33,991 (20,601)(1) 13,390
Interest expense, net 9,045 567 9,612
Total assets 889,306 81,575 970,881
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.
(7) Subsequent Events
On January 24, 2000, the Company and Rentrak Corporation reached a
settlement of their dispute concerning revenue sharing videocassettes
Rentrak had provided to the Company. The settlement agreement resolves all
disputes between Rentrak and the Company and dismisses all claims against the
Company. The Company incurred $23.1 million in settlement and legal costs,
which includes $8.0 million in cash to cover outstanding invoices
and consideration for business disruption payable to Rentrak; $6.0 million to
cover Rentrak's legal fees and costs; and the issuance of 200,000 shares of the
Company's common stock to Rentrak. The Company also incurred $5.8 million in
legal fees related to the lawsuit.
On November 1, 1999, the Company and Twentieth Century Fox Home
Entertainment reached a settlement of their despute. Fox had filed suit
alleging fraud and interference with Fox's contract with Rentrak. The
Company incurred $2.3 million in settlement and related legal costs.
<PAGE>
ITEM 2 FINANCIAL HIGHLIGHTS
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, (i) selected results of operations data,
expressed as a percentage of total revenue; (ii) other financial data; and
(iii) selected operating data.
<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
GROSS MARGIN 62.5 67.8
OPERATING EXPENSES:
Operating and selling 45.3 50.3
General and administrative 6.9 4.9
Amortization of intangibles 5.3 1.0
------- -------
57.5 56.2
INCOME FROM OPERATIONS 5.0 11.6
Nonoperating income (expense), net (3.6) (4.1)
------- -------
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)
(1.6) 4.5
======== ========
- - ---------------------------------------------------------------------
Other finanical data:
Rental margin (1) 69.0 74.3
Product margin (2) 30.5 35.5
- - ---------------------------------------------------------------------
EBITDA (3)
Hollywood Superstores 74,459 62,613
Reel.com (7,839) -
--------- --------
Consolidated EBITDA 66,620 62,613
Add special charges (4) 1,444 -
Add non-cash expenses (5) 11,920 6,818
Less existing store investments for new
release rental inventory (5) (37,758) (42,409)
--------- --------
Adjusted EBITDA (5) (42,226) (27,022)
Cash flow from:
Operating activities 37,708 38,477
Investing activities (85,107) (83,404)
Financing activities 48,108 45,378
- - ---------------------------------------------------------------------
Operating data:
Number of stores at quarter end 1,322 995
Comparable store revenue increase (6) 18% 2%
- - ---------------------------------------------------------------------
</TABLE>
(1) Rental gross margin as a percentage of rental revenue.
(2) Product gross margin as a percentage of product revenue.
(3) EBITDA consists of operating income before interest tax, depreciation and
amortization. EBITDA should not be viewed as a measure of financial
performance under Generally Accepted Accounting Principles (GAAP) or as a
substitute for GAAP measurements such as net income or cash flow from
operations. EBITDA is not necessarily comparable to other companies due
to the lack of definition of EBITDA by all companies.
(4) The special charge relates the cumulative effect of a change in accounting
principle resulting from the adoption of SOP 98-5. See Note 5 to the
Consolidated Financial Statements.
(5) Adjusted EBITDA 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 is consistant with the calculation specified
in the Company's debt covenants in its bank revolving credit agreement.
Adjusted EBITDA should not be viewed as a measure of financial performance
under GAAP and should not be considered as an alternative to cash flows
from operating activities (as determined in accordance with GAAP) as
a measure of liguidity. Our calculation of adjusted EBITDA is not
necessarily comparable to other companies due to the lack of uniform
definitions of EBITDA by all companies.
(6) 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.
<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).
GROSS MARGIN
Rental margin, as a percentage of rental revenue, decreased in 1999 to
69.0% from 74.3% in 1998. The decreased margin primarily relates to
increased revenue sharing payments to studios and increased rental revenues.
Pursuant to the change in accounting method adopted on October 1, 1998,
revenue sharing payments were expensed and rental tape amortization was
accelerated. During the first quarter of 1999, payments made pursuant to
the revenue sharing agreements increased by $37.9 million as compared to the
first quarter of 1998. This increase was partially offset by a decrease in
rental tape amortization of $5.3 million. The Company was not operating
under the revenue sharing model during the first quarter of 1998.
Product margin as a percentage of product sales decreased from
35.5% in the prior year first quarter to 34.7% for the current year first
quarter, excluding Reel.com. The cost of product sales as a percentage of
product revenue, including Reel.com, was 30.5% 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.
Operating and Selling
Total operating expenses of $120.8 million for the first quarter of 1999
increased $35.3 million from $85.6 million in the prior year first quarter.
Operating and selling expenses decreased as a percentage of total revenue to
45.3% in 1999 compared to 50.3% in 1998, primarily due to an increase in the
average revenue generated per store. The increase in total operating expenses
resulted from an increase in store labor cost of $8.2 million, occupancy
costs of $12.6 million, other store operating expenses of $4.3 million and
Reel.com operating costs of $5.7 million. With the exception of Reel.com,
operating expenses increased due to the growth in the number of superstores
operated by the Company.
General Administrative
General and administrative expenses increased by $9.9 million to $18.2
million from $8.4 million in the prior year. The increase is due to higher
payroll and related expenses and an increase in legal expenses. In addition,
Reel.com incurred $2.8 million in general and administrative costs in the
first quarter of 1999.
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 primarily relates to the amortization of goodwill associated with
the Reel.com acquisition.
NONOPERATING INCOME (EXPENSE), NET
Interest expense, net of interest income increased by $2.6 million 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. The significant increase is due to the Company's net loss for
financial reporting purposes versus net income for tax reporting purposes.
This was primarily caused by 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 include product for stores, store
equipment and fixtures, remodeling a certain number of existing stores,
implementing and upgrading office and store technology and opening for 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. We currently
anticipate that capital expenditures of approximately $164.3 million will be
incurred in 1999, of which $153.7 million is anticipated to relate to new,
relocated and remodeled stores and conversion of acquired stores. The
remaining balance relates to corporate capital expenditures. We expect the
total investment per new store to approximate $450,000, which includes rental
and merchandise inventory, leasehold improvement, signage, furniture, fixtures
and equipment. However, the cost of opening a new store can vary based on
size, construction costs in a particular market, and other factors. These
capital expenditures will be funded primarily by cash generated by operations,
supplemented by the availability of the senior 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)
- - --------------- -------------------------------------
(Date) David G. Martin
Executive Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial and
Accounting Officer of the Registrant)
