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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission file number 0-21824
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HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0981138
-----------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
9275 SW Peyton Lane, Wilsonville, OR 97070
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 570-1600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class Name of Each Exchange on
- ----------------------- Which Registered
--------------------------
Common Stock Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than 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
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
On March 13, 2000, the registrant had 46,145,892 shares of Common Stock
outstanding, and on such date, the aggregate market value of the shares of
Common Stock held by non-affiliates of the Registrant was $266,148,273 based
upon the last sale price reported for such date on the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of registrant's Proxy Statement which is anticipated to be
filed within 120 days after the end of the registrant's fiscal year ended
December 31, 1999.
HOLLYWOOD ENTERTAINMENT CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
Item Page
PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
4A. Executive Officers and Key Employees of the Registrant 14
PART II
5. Market for Registrant's Common Stock and Related
Shareholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
10. Directors and Executive Officers of the Registrant 26
11. Executive Compensation 26
12. Security Ownership of Certain Beneficial Owners and
Management 26
13. Certain Relationships and Related Transactions 26
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 27
PART I
ITEM 1. BUSINESS
GENERAL
Hollywood Entertainment owns and operates 1,615 Hollywood Video retail
superstores in 44 states as of December 31, 1999 and is the second largest
retailer of rentable home videocassettes, DVDs and video games in the United
States. Based on 2000 industry estimates from Paul Kagan Associates, Inc.
("Paul Kagan"), we estimate that our video stores attained a U.S. market share
of approximately 10%. Our customer transaction database contains information
on about 27 million U.S. member accounts. Hollywood Video revenue increased
from $17.3 million in 1993 to $1.1 billion in 1999. We added 355 stores in
1999 and intend to add approximately 200 to 250 stores in each of 2000 and
2001.
In addition, with the acquisition of Reel.com, Inc. ("Reel.com") in
October 1998, we became the premier online destination for film-related
content and commerce and began implementing a strategy to electronically
deliver entertainment products directly into the homes of our customers via the
internet. Reel.com's annual on-line revenue increased from $15.0 million in
1998 to $40.2 million in 1999.
INDUSTRY OVERVIEW
Video Retail Industry
According to Paul Kagan, the videocassette and DVD rental industry was
expected to grow by approximately 8%, reaching $8.7 billion in revenue in 1999.
We believe this growth will continue in 2000 and possibly beyond, driven in
part by greater availability of new release videocassettes as a result of
revenue sharing arrangements and increased advertising by movie studios and
video retailers. According to Paul Kagan, the U.S. videocassette industry
(comprised of both rental and sales) has grown from $9.8 billion in revenue in
1990 to $18.5 billion in 1999, and is expected to reach $21.5 billion in 2002.
Paul Kagan estimates that in 1999, 85.9 million, or 85.9% of the 100 million
television households, owned a VCR. According to Paul Kagan, 20.5 million
VCR's were estimated to be sold in the U.S. in 1999 which represents the
largest number of VCR's sold in any single year. In addition, Paul Kagan
estimates that about 2.5 million DVD players were sold in the U.S. in 1999, an
increase of 178% over the prior year. According to Paul Kagan, the VCR and DVD
markets will continue to grow as the number of multi-VCR households is expected
to increase from 37.4 million in 1998 to 46.0 million by 2002 and the number of
VCR's and DVD players sold in 2002 is expected to reach 23.2 million.
The home video industry is highly fragmented but has experienced consolidation
in recent years as video store chains have gained significant market share from
single store operators. Based upon information disclosed by Video Store
Magazine and Paul Kagan, the five largest video store chains had a 41% market
share of all U.S. consumer video rentals in 1998. Dun & Bradstreet, as cited
by the Video Software Dealers Association, estimated that by the first quarter
of 1999 there were about 24,590 independent video stores in the United States,
down from about 26,960 in the first quarter of 1998. About 49% of all
locations that rent video titles are currently operated by single store owners.
In addition, according to the Video Software Dealers Association, more than
14,000 of these single store operators generate annual revenues of less than
$220,000. We believe that there are several competitive advantages in being a
large home video chain, including marketing efficiencies, brand recognition,
access to more copies of each videocassette through direct revenue sharing
agreements, sophisticated information systems, greater access to prime real
estate locations, greater access to capital, and competitive pricing made
possible by size and operating efficiencies. Even if there is significant
consolidation, however, we expect that the home video industry will remain
fragmented.
Movie Studio Dependence on Video Retail Industry
According to Paul Kagan, the video retail industry is the single largest
source of revenue to movie studios and represented approximately $7.3 billion,
or 48.3%, of the $15.1 billion of estimated domestic studio revenue in 1999.
Of the hundreds of movies produced by the major studios each year in the U.S.,
relatively few are profitable for the movie studios based on box office revenue
alone. According to the Motion Picture Association of America (the "MPAA"),
between 1990 and 1998 only 7.2% of all movies released generated in excess of
$20 million in U.S. theater revenue for studios. Over the same period, members
of the MPAA reported that the average production, advertising and distribution
cost per movie increased from $38.8 million to $78.0 million. We believe the
customer is more likely to view "non-hit" movies on rented videocassette or DVD
than in any other medium because video retail stores provide an inviting
opportunity to browse and make an impulse choice among a very broad selection
of new releases. As a result, video retail stores, including those operated by
us, acquire movies on videocassette and DVD regardless of whether the movies
were successful at the box office, thus providing movie studios a reliable
source of revenue for almost all of the hundreds of movies produced each year.
Consequently, we believe movie studios are highly motivated to protect this
unique and significant source of revenue.
Historically, movie studios have sought to generate incremental sources of
revenue through the addition of new distribution channels. To maximize revenue,
the studios have implemented a strategy of sequential release "windows," giving
each distribution channel the rights to its movies for a limited time before
making them available to the next sequential channel. The studios have
determined the sequential order in which they release movies to each
distribution channel based upon the order they believe will maximize their
total revenue from all distribution channels combined. These distribution
channels generally include the following, in release date order:
Order of Sequential Release Windows to Primary Channels of Distribution
- Movie theaters
- Video retail stores
- Pay-per-view television (including DBS)
- Premium channels (HBO, Showtime, etc.)
- Basic cable television
- Network television
- Syndicated television
Trends in Video Rental and Sales
Studios have historically sold videocassettes to video retailers under two
pricing structures, "rental" and "sell-through." Rental titles are initially
sold at relatively high prices (typically $60 to $65 wholesale) and promoted
primarily for rental, and then later re-released for sale to consumers at a
lower price (typically $10 to $15 wholesale). Certain high-grossing box office
films, generally with box office revenue in excess of $100 million, are
targeted at the sell-through market. These titles are released on
videocassette at a relatively low initial price (approximately $12 to $17
wholesale) and are both promoted as a rental title by video stores and sold
directly to consumers through a broad array of retailers including video
stores. Studios elect to release a title either as rental or sell-through
based on which would optimize their income from the title.
More recently, the major studios and several large video retailers have
entered into revenue sharing agreements as an alternative to the historical
rental pricing structures. Studios began offering retailers more
videocassettes for an individual title at substantially lower initial cost in
exchange for a share of the rental revenue that those copies generate over
their initial release window. The additional copies have contributed to
improved consumer satisfaction early in a title's release because the supply of
titles better matches demand. This has led to higher rental revenues for the
video store industry as well as for studios. Revenue sharing also gives the
studios an incentive to market these titles because they share in the revenue
generated by increased transactions.
DVDs are an alternative format to VHS tapes that offer consumers digital
picture and sound and additional features such as enhanced content and
interactivity. According to the Electronics Industry Association, for the
seven months ended July 1999, factories had shipped 1.6 million DVD players to
dealers representing a 346% increase over the same period in 1998. The Company
introduced DVDs in all its stores in November 1998, resulting in the most
successful introduction of a new format in the Company's history. DVDs are the
fastest growing new category introduced by the Company due to increased
interest in older movie titles as a result of the substantial improvement in
picture and sound quality over VHS.
Home Video Game Industry
The home video game industry has historically been affected by changing
technology, limited hardware platform life cycles and hit-or-miss software
titles. In addition, video games typically generate most of their rental
revenue during the first twelve months after their release. Hollywood believes
that during this time period, the differential between the retail price and the
rental price of a new video game is typically high enough to make rentals an
attractive alternative to the customer. According to Gerard Klauer Mattison &
Co., Inc., the total domestic home video game market generated about $3.9
billion in software sales in 1998 and is expected to grow to about $5.8 billion
in 1999, which represents a 49% increase.
Based upon estimates of Gerard Klauer Mattison & Co., Inc., Hollywood believes
that most of the recent growth in the home video game industry has been fueled
by the success of the Sony PlayStation-TM and Nintendo 64-TM and their
respective video games. As of March 31, 1999, the installed base of Sony
PlayStation and Nintendo 64 within the United States was about 15.7 million and
10.6 million units, respectively. The game industry has benefited from the
recent successful launch of the Sega Dreamcast, and should continue to grow
with the anticipated U.S. introduction of the Sony PlayStation II-TM,
Nintendo's Dolphin system, and Microsoft's X-Box.
BUSINESS STRATEGY
Our goal is to build a strong national brand which consumers will identify
with the entertainment industry. We have developed an effective superstore
format that distinguishes us from competitors. We attempt to quickly establish
a leadership position in each of the markets in which we open stores. We
successfully compete in both well-developed and relatively untapped markets. We
are also investing in technologies that enable us to deliver entertainment
directly into the homes of our customers. Our business strategy includes the
following key elements:
Focus on Company-Built Superstores and Excellent Locations. Unlike many video
retailers who have grown through acquisitions, Hollywood has focused on
controlled organic growth. Of Hollywood's 1,000 video superstores opened since
1995, over 90% of these stores have been opened as new stores where Hollywood
chose the site through a rigorous selection process. We believe that this
control over site selection and discipline in the real estate process have been
among Hollywood's key competitive advantages.
Broad Selection and Superior Availability. We strive to provide our customers
with the broadest selection of movies and video games. Our superstores
typically carry approximately 8,000 titles and 15,000 videocassettes, DVDs and
video games. Our goal is to offer more copies of popular new video releases and
more titles than our competitors. In part because of our new revenue sharing
arrangements with studios, we have increased the availability of most new
releases and typically acquire 100 to 175 copies of "hit" movies for each
Hollywood Video store.
Exciting, Enjoyable and Convenient Shopping Experience. Our superstores are
designed to capture the bright lights, energy and excitement of the motion
picture industry. We focus on creating an inviting atmosphere that encourages
browsing and generates repeat customers. Our superstores are typically located
in high traffic, high-visibility locations. We believe excellent customer
service, a bright, clean and friendly shopping environment and convenient store
locations are important to our success.
Excellent Entertainment Value. We offer consumers the opportunity to rent new
releases, video games and any of our catalog movie titles for five days in most
of our stores. New release movies typically rent for $3.79 and catalog movies
typically rent for $1.99. We believe movie rental in general, and our pricing
structure and rental terms in particular, provide consumers convenient
entertainment and excellent value.
Electronic Commerce. Having established our superstores as physical "portals"
linking consumers to the movie studios, we have begun through the acquisition
of Reel.com in October 1998 to establish an electronic "portal," linking
customers in their homes to movies and movie related entertainment. We intend
to build on our relationships with movie studios, internet businesses such as
America Online and MSN and our more than 27 million physical store members to
enhance our electronic commerce business.
Expanding Product Opportunities. We regularly explore opportunities to enhance
entertainment experiences of our customers. We are in the early stages of
rolling out a new business initiative that sells, buys and trades video games,
as an expansion of our traditional video game rental business. This
initiative, called "Game Crazy", is designed as a store-within-a-store concept,
leveraging a portion of our existing superstore real estate. As of December
31, 1999, the Company had opened 67 of these departments, and plans to add an
additional 30 to 50 departments in 2000. While the initial capital required to
add a Game Crazy department to an existing video store is approximately
$80,000, the outlay yields an estimated $400,000 in incremental revenue per
store. Another significant product opportunity is DVD. We believe DVD is a
format that complements our existing VHS business and is well suited
to rental or sale. We introduced DVD for rental in the majority of our
stores in the fourth quarter of 1998, generating the highest revenues of any
new format in our history, and we plan to continue to expand our DVD
offerings in 2000.
Focus on Cash Generation and Return on Investment. The Company has increased
its focus on maximizing cash generation and return on invested capital. After
being a net user of cash since its inception as a result of rapid store growth,
the Company expects to become a net generator of cash in the fourth quarter of
2000. Because of its large and highly profitable base of stores, the Company's
cash from operations is expected to be large enough to pay interest, cash taxes
and all growth and maintenance capital expenditures, and have significant cash
remaining to reduce the Company's debt or make investments. To accelerate this
free cash flow milestone, the Company has announced that it is slowing growth
of its superstore base from a historical 350 new stores per year, down to 200
to 250 stores per year. This single decision brings an additional $40 to $60
million in annual free cash flow to the Company. Additionally, the Company
continues to focus on the return on investment of its stores. The Company has
brought the cost to build a store down from over $500,000 in 1998 to
approximately $400,000 today, thereby shortening the payback period to
approximately 3 years, and increasing return on investment.
HOLLYWOOD VIDEO STORE DESIGN
Hollywood Video superstores average approximately 7,200 square feet and
are substantially larger than the stores of most of our competitors. The store
exteriors generally feature large Hollywood Video signs and colors, which make
our stores easily visible to and recognizable by consumers. The interior of
each store is clean and brightly lit. Our superstores are decorated with
colorful neon murals depicting popular screen stars and walls of video monitors
with hi-fi audio accompaniment to create an exciting Hollywood environment.
Movies are organized into 28 categories, and videocassettes are arranged
alphabetically by title within each category to assist customers in locating
the movies. New releases are prominently displayed in easily recognizable
locations within the store. Videocassettes are displayed with the box cover
facing the customer for ease of selection and visual impact. We use wall-
mounted and free- standing shelves arranged in wide aisles to provide access to
products and to encourage the movement of customers throughout the store.
EXPANSION STRATEGY
Video Store Openings and Flexible Store Format
We opened our first video superstore in October 1988 and grew to 25 stores
in Oregon and Washington by the end of 1993. In 1994 we significantly
accelerated our store expansion program, adding 88 stores and expanding into
California, Texas, Nevada, New Mexico, Virginia and Utah. In 1995 we added 192
stores and entered major new markets in the midwest, southwest, east and
southeast regions of the United States. Our expansion strategy is to continue
to open stores in regions where we have existing operations. We opened 246
stores in 1996, 356 stores in 1997, 353 stores in 1998 and 355 stores in 1999.
We plan to add 200 to 250 stores in each of 2000 and 2001.
We have been rolling out a smaller superstore format that reduces the
target size of new stores from 7,500 square feet to 5,000 square feet, which
lowers our per-store annual rent and initial build-out costs. These smaller
stores are able to carry the same amount of video and video game inventory as
larger stores due to a new store design and shelving system, and we believe
they retain a "superstore" look to consumers. This efficient design also
allows us greater flexibility in locating new stores. We have found that these
smaller, less expensive stores are generating similar revenue volumes as larger
units in comparable locations, thus increasing our financial return on new
stores. We are rolling out these smaller stores in most of our new locations.
We believe the selection of locations for our stores is critical to the
success of our operations. We have assembled a new store development team with
broad and significant experience in retail tenant development. The majority of
our new store development personnel are located in the geographic area for
which they are responsible, but all final site approval takes place at the
corporate office, where new sites are approved by a committee of senior
management personnel. Final approval of all new sites is the responsibility of
the Chairman of the Real Estate Committee of the Board of Directors. Important
criteria for the location of a Hollywood Video superstore include density of
local residential population, traffic count on roads immediately adjacent to
the store location, visibility and accessibility of the store and availability
of ample parking. We generally seek what we consider the most desirable
locations, typically locating our stores in high-visibility stand-alone
structures or in prominent locations in multi-tenant shopping developments. We
typically compete for these prime sites with other retailers, banks,
restaurants and gas stations. All of our stores are in leased premises; we do
not own any real estate.
Our expansion is dependent on a number of factors, including our ability
to hire, train and assimilate management and store level employees, the
adequacy of our financial resources and our ability to identify and
successfully compete in certain markets, to locate suitable store sites and
negotiate acceptable lease terms and to adapt its purchasing, management
information and other systems to accommodate expanded operations. See "Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." Our expansion is also dependent
on the timely fulfillment by landlords and others of their contractual
obligations to us, the maintenance of construction schedules and the speed at
which local zoning and construction permits can be obtained.
There is no assurance that we will be able to achieve our planned
expansion or that expansion will be profitable. Our planned expansion,
including possible growth through acquisitions, could place pressure on our
management controls. A failure to manage successfully our planned expansion
would adversely affect our business. There is also no assurance that our new
stores will achieve sales and profitability comparable to our existing stores.
HOLLYWOOD'S INTERNET STRATEGY
On October 1, 1998, the Company acquired Reel.com, the premier online
destination for film-related content and commerce for approximately $96.9
million. Concurrent with the acquisition of Reel.com, a group of strategic
Reel.com stockholders purchased an equity interest in the Company. The group
of investors consists of CMGI, Inc. (Nasdaq: CMGI); Intel Corporation (Nasdaq:
INTC); Paul Allen's Vulcan Ventures, Incorporated and Scott Beck. Reel.com
offers an extensive selection of approximately 50,000 titles on videocassette
and DVD's for sale. The website, located at http://www.Reel.com, offers
proprietary information about movies including descriptions, ratings, critics'
reviews, recommendations and links to star filmographies that entertain
consumers and help them select and purchase movies online. Consumers can also
search through Reel.com's proprietary, hyperlinked database and can preview
selected videos. These offerings position Reel.com to provide a valuable
marketing platform for film studios, advertisers and merchants. In addition,
Hollywood's more than 27 million members provide Reel.com with substantial
marketing opportunities.
Reel.com was rated one of the top 10 most recognized Internet commerce brands
by Opinion Research Corporation International in August 1999, and was recently
named "the best place to buy movies" by Yahoo! Internet Life. According to
Media Metrix, the number of unique visitors to Reel.com increased from 848,000
in January 1999 to approximately 1.7 million in January 2000. In addition,
Reel.com was recently named the most popular web site for gathering information
about films playing in movie theaters, based on a consumer survey conducted by
Greenfield Online and ASI Entertainment in March, 2000. The survey also
revealed the internet's significant role in helping consumers make filmed
entertainment decisions. Approximately 40% of wired consumers use the
internet to search for information about films prior to going to the theater.
In addition to an in depth database of information of 100,000 movies,
Reel.com's staff of movie experts create regular editorial features designed to
help movie-goers decide what to see in the theaters. The following editorial
section of the Reel.com site provides examples of these features:
In Theaters - Exclusive reviews and summary ratings of new films
released theatrically each week as well as previews and trailers of
films that will be released in the weeks ahead.
Movie News - Up-to-the-minute news and buzz about films that are in
production, in theatrical release and available on DVD and
videocassette.
Features - Interviews with actors and directors, movie trends and
coverage of top film festivals.
Screening Room - Approximately 900 on-demand movie trailers and
original video programming.
Hollywood Confidential - Insider movie news, buzz, scoops, and
opinion by Jeffrey Wells, a well-known entertainment industry
pundit.
Top Ten Lists - "Hot" movies at the box office.
Reel.com also provides us with a new distribution channel and we believe
it complements our superstores in many ways:
Reel.com currently sells both new and previously viewed
videocassettes. From our physical superstores, we intend to provide
Reel.com with a continuous supply of previously viewed videos, which
are Reel.com's highest margin product. In addition, as DVD inventory
levels increase at our physical superstores we expect to be able to
supply Reel.com with previously viewed DVDs to sell on Reel.com's
website.
While both businesses serve video retail customers, our stores
generate most video-related business through rentals, while our
online site generates virtually all of its commerce revenue through
product sales. Consequently, we believe there are substantial
opportunities to add to our current on-line customer base of over
900,000 customer households by promoting the Reel.com brand to our
more than 27 million superstore customers.
Reel.com's existing and developing expertise in using its
intellectual property to help consumers browse through and select
movie titles that fit their preferences can be leveraged in Hollywood
Video stores to increase rentals of videos, particularly highly
profitable catalog titles. In the future we plan to combine
Reel.com's intellectual property with our database of store customer
rental history to provide personalized video recommendations.
We believe Reel.com will also help position us for the eventual evolution
of the video business from physical delivery (through videocassettes and DVDs)
to electronic delivery directly to the home (through video-on-demand (V.O.D)).
We believe widespread electronic delivery of movies to the home at acceptable
quality levels will not occur for a number of years due to economic and
technological limitations. If it becomes feasible in the future, we believe
Reel.com will position us to participate in that business. In the second
quarter of 2000, Reel.com intends to launch Reel on Demand, a V.O.D. trial in
conjunction with Sprint. We expect the Sprint trial to demonstrate Reel.com's
ability to distribute content through the V.O.D medium and in turn spark the
interest of other V.O.D. enablers. See "Competition."
We are evaluating strategic alternatives to maximize the value of Reel.com
to our shareholders and to provide additional financing sources for the
Reel.com business. These alternatives include a public offering of a minority
position in Reel.com combined with a sale of an equity interest in Reel.com to
a strategic partner.
Our ability to achieve and manage growth of our online business is subject to
a number of risks and uncertainties, including those associated with
acquisitions generally and those related to the internet in particular. We
will expend financial, operational, and management resources in operating this
new business and integrating operations with our existing business. If we are
unable to do this cost-effectively, it could have a material adverse effect on
this new business and also be detrimental to the Company as a whole. Internet
retailing is highly competitive and is characterized by rapid technological
change and changes in user and customer requirements and preferences. In
addition, internet-based businesses are susceptible to technical difficulties,
including viruses, security breaches or other computer system interruptions,
which can reduce the availability of products and services, disrupt or delay
order fulfillment, and reduce customer satisfaction. Customer satisfaction may
also be adversely affected by poor performance of those parties we contract
with to handle order fulfillment. Our efforts to build recognition as an
internet retailer and to enhance website content and promote ease of use,
reliability and support for customers will require us to make additional
investments in this business segment going forward, and these investments may
not be profitable. The risks described in this paragraph will be greater if the
Reel.com business continues to grow rapidly.
PRODUCTS
Video Rental. Our primary source of revenue is the rental of
videocassettes, DVDs and videogames. Our superstores typically carry
approximately 8,000 movie titles and 15,000 videocassettes, DVDs and video
games. Excluding new releases, movie titles are classified into 28 categories,
such as "Action," "Drama," "Family" and "Children," and are displayed
alphabetically within those categories. We do not rent or sell adult movies in
our superstores. We are committed to offering more copies of popular new
releases than our competitors.
Video Sales. We offer new and previously viewed videos for sale.
Video Games. In addition to video rentals and sales, we rent and to a
lesser extent sell video games licensed by Nintendo, Sega and Sony. Each mature
Hollywood Video store offers between 1,200 and 4,000 video games. See
"Business Strategy."
Other Products. We rent audio books, and for the convenience of our
customers we rent videocassette and video game players and sell blank
videocassettes, video cleaning equipment, confectionery and other items.
REVENUE SHARING
In the fourth quarter of 1998, the Company entered into revenue sharing
agreements directly with major studios. Under these new agreements, video
stores share with the studios an agreed upon percentage of the video store's
rental revenue for a limited period of time, usually up to 26 weeks. This
percentage generally declines over a period of weeks following the initial
release of the movie. The revenue sharing agreements, in many cases, also
allow the video stores to sell the previously viewed tapes to their customers.
The Company believes that Hollywood is one of the few retailers who has
revenue sharing agreements with all the major studios. These revenue sharing
agreements provide a major competitive advantage for the Company and have the
following significant benefits:
They provide the opportunity to substantially increase the quantity and
selection of newly released video titles in stock and decrease the in-store
copy depth problems that have plagued the industry for years;
They increase revenues as a result of the increase in total number of
transactions per store and number of videocassettes rented per transaction;
They allow for significantly increased availability of new release
movies; and
They align the studios' economic interest more closely with the interest
of the video stores.
In addition, the Company believes that revenue sharing has increased the
revenues received on an annual basis by the studios through increased rental
activity of new releases as well as greater distribution and revenues on non-
hit movies through minimum output provisions.
ADVERTISING AND MARKETING
To further our goal of having a strong national brand that consumers will
identify with the entertainment industry, we advertise primarily using
television, radio, direct mail and the internet. We frequently use cooperative
movie advertising funds made available by studios and suppliers to promote
certain videos. We intend to increase our advertising expenditures in the
future.
PRICING
Revenue sharing arrangements significantly increased the number of new
release videocassettes acquired by the Company, thereby allowing the Company to
introduce a 5-day rental program on all product in the majority of the stores.
In exchange for this added convenience to our customers, the Company increased
its prices in the majority of the stores in the fourth quarter of 1998 from
$1.49 to $1.99 for catalog titles and from $2.99 to $3.49 for new releases. In
the fourth quarter of 1999, the Company increased its pricing on new releases
from $3.49 to $3.79 in the majority of its stores. The Company believes that
the pricing structure and rental terms provide consumers convenient
entertainment and excellent value.
INVENTORY AND INFORMATION MANAGEMENT
Inventory Management. We maintain detailed information on inventory
utilization. We track rental activity by individual videocassette, DVD and
video game to determine appropriate buying, distribution and disposition of
videocassettes and video games. The system provides information allowing us to
determine when to sell excess videocassettes, DVDs and video games, and when to
redistribute to new stores. Our inventory of videocassettes, DVDs and video
games for rental is prepared according to uniform standards. Each new
videocassette, DVD and video game is removed from its original carton and
placed in a rental case with a magnetic security device and bar coding is
affixed to each videocassette, DVD and video game.
Information Management. We use a scalable client-server system and
maintain two distinct system areas: a point-of-sale ("POS") system and a
corporate information system. We maintain information, updated daily, regarding
revenue, current and historical rental and sales activity, demographics of
store membership, individual customer history, and videocassette, DVD and video
game rental patterns. This system allows us to compare current performance
against historical performance and the current year's budget, manage inventory,
make purchasing decisions on new releases and manage labor costs. We believe
our system has the ability to continue to improve customer service, operational
efficiency, and management's ability to monitor critical performance factors.
COMPETITION
The video retail industry is highly competitive. We compete with local,
regional and national video retail stores, including Blockbuster, and with
supermarkets, pharmacies, convenience stores, bookstores, mass merchants, mail
order operations and other retailers, as well as with noncommercial sources
such as libraries. Some of our competitors have significantly greater financial
and marketing resources, market share and name recognition than we have.
We believe the principal competitive factors in the video retail industry
are title selection, rental period, the number of copies of popular titles
available, store location and visibility, customer service and employee
friendliness and convenience of store access and parking. Substantially all of
our stores compete with stores operated by Blockbuster, most in very close
proximity. In addition to competing with other video retailers, we compete
with all leisure-time activities, especially entertainment activities such as
movies, sporting events and network and cable television programs.
We compete with cable, satellite and pay-per-view television systems, in
which subscribers pay a fee to see a movie selected by the subscriber. Existing
pay-per-view services offer a limited number of channels and movies and are
only available to households with a direct broadcast satellite receiver or a
cable converter to unscramble incoming signals. Digital compression technology
and other developing technologies are enabling cable companies, direct
broadcast satellite companies, telephone companies and other telecommunications
companies to transmit a much greater number of movies to homes at more
frequently scheduled intervals throughout the day. Certain cable and other
telecommunications companies have tested V.O.D service in some markets. V.O.D
service would allow a viewer to pause, rewind and fast forward movies. Based on
publicly available information, we believe these tests have shown that the
V.O.D. technology and service is still many years away from being able to
deploy on a large scale in a profitable manner. We also believe movie studios
have a significant interest in maintaining a viable movie rental business
because their sale of videocassettes to stores represents the largest source of
their revenue. According to Paul Kagan, in 1998 video stores represented
approximately 43% of the studios domestic and international revenue, while pay-
per-view represented only 1%. In addition, home video provides the only
reliable source of revenue on "non-hit" or "B-title" movies which make up the
majority of movies produced by the major studios each year. As a result, we
believe movie studios will continue to make movie titles available to cable
television, satellite services or other distribution channels only after
revenues have been derived from the sale of videos to video stores. Currently,
video stores receive product approximately two months earlier than pay per
view, cable and satellite distribution companies. The window provided to video
stores by the studios has lengthened significantly over the last two years.
In addition, we believe substantial technological developments will be
necessary to allow pay-per-view television to match the viewing convenience and
selection available through video rental, and substantial capital expenditures
will be necessary to implement these systems. In contrast, according to Adams
Media Research, 85.9 million, or 85.9%, of all U.S. television households own a
VCR and more VCR's were sold in 1999 than in any previous year. Although we do
not believe cable television, V.O.D or other distribution channels represent a
near-term competitive threat to our business, technological advances or changes
in the manner in which movies are marketed, including in particular the earlier
release of movie titles to pay-per-view, including DBS, cable television or
other distribution channels, could make these technologies more attractive and
economical, which could have a material adverse effect on our business.
SEASONALITY
The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs. The Company believes these
seasonality trends will continue.
EMPLOYEES
As of December 31, 1999, the Company had approximately 22,200 employees,
of which 21,370 were in the retail stores and zone offices and the remainder in
the Company's corporate administrative, and warehousing operations.
Store managers report to district managers who supervise the operations of
the stores. The district managers report to regional managers, who report
directly to the Vice President or Senior Vice President of Operations for each
zone office. The corporate support staff periodically has meetings with zone
personnel, regional managers, district managers and store managers to review
operations. None of the Company's employees are covered by collective
bargaining agreements and employee relations are considered to be excellent.
SERVICE MARK
The Company owns United States federal registrations for its service marks
"Hollywood Video", "Hollywood Video Superstores" and "Reel". The Company
considers its service marks important to its continued success.
ITEM 2. PROPERTIES
Store Locations
As of December 31, 1999, the Company's stores by location are as follows:
HOLLYWOOD ENTERTAINMENT
NUMBER OF VIDEO STORES BY STATE
Alabama 12 Nebraska 11
Arizona 51 Nevada 22
Arkansas 8 New Hampshire 1
California 271 New Jersey 27
Colorado 31 New Mexico 7
Connecticut 12 New York 63
Delaware 1 North Carolina 25
Florida 70 North Dakota 3
Georgia 36 Ohio 73
Idaho 11 Oklahoma 20
Illinois 83 Oregon 58
Indiana 32 Pennsylvania 65
Iowa 10 Rhode Island 7
Kansas 13 South Carolina 10
Kentucky 16 South Dakota 3
Louisiana 12 Tennessee 32
Maine 1 Texas 166
Maryland 24 Utah 29
Massachusetts 35 Virginia 34
Michigan 61 Washington 70
Minnesota 38 Washington, D.C. 2
Mississippi 4 Wisconsin 29
Missouri 26
Total Stores 1615
Total States (excluding District of Columbia) 44
All of the Company's stores are located in leased premises with an initial
lease term of five to 15 years and most have options to renew for between five
and 15 additional years. Most of the store leases are "triple net," requiring
the Company to pay all taxes, insurance and common area maintenance expenses
associated with the properties. The Company anticipates that future new stores
will also be located in leased premises.
The Company's corporate headquarters are located at 9275 Southwest Peyton
Lane, Wilsonville, Oregon, and consists of approximately 123,000 square feet of
leased space. The Company's warehouse facility is located at 25600 Southwest
Parkway Center Drive, Wilsonville, Oregon and consists of approximately 175,000
square feet of leased space. These facilities are leased pursuant to
agreements that expire November 2008 and November 2005, respectively. On March
15, 2000, the Company announced plans to lease a new 98,000 square foot
distribution and light assembly facility in Laverne, Tennessee starting in
June, 2000. This facility is leased pursuant to an agreement that expires on
June, 2010.
ITEM 3. LEGAL PROCEEDINGS
During 1999, the Company was named as a defendant in three complaints which
the Company anticipates will be consolidated into a single class action
entitled WOODS V. HOLLYWOOD ENTERTAINMENT, ET AL, Case No. CV779511, in the
Superior Court of the State of California in and for the County of Santa Clara.
The plaintiffs are seeking to certify a class made up of certain exempt
employees which they claim are owed overtime payments in certain stores in
California. The case is in the early stages of discovery. A class has not
been certified. The Company is unable to determine that the likelihood of an
unfavorable outcome of the litigation is either probable or remote. The
Company intends to vigorously defend the action.
On January 24, 2000, the Company settled the case filed in April 1998
entitled RENTRAK CORPORATION V. HOLLYWOOD ENTERTAINMENT, ET AL, Case No. 98-04-
02811, Circuit Court for the County of Multnomah, Portland, Oregon. The
plaintiff, Rentrak, had alleged that the Company was contractually obligated
until December 31, 2011 to deal exclusively with Rentrak whenever it obtained
videocassettes on a revenue sharing basis. Rentrak had claimed the Company
violated its obligations by obtaining videocassettes on a revenue sharing basis
directly from the movie studios. Rentrak also claimed that the Company
violated alleged audit and reporting obligations under contractual
arrangements. The complaint was seeking injunctive relief and monetary damages
in the amount of approximately $200.0 million. Under the terms of the
settlement, the Company paid Rentrak approximately $14.0 million, which
included Rentrak's attorney fees. The Company also issued to Rentrak 200,000
shares of the Company's Common Stock as part of the settlement. All claims
between the parties were settled, including the release of the Company from any
exclusivity claim. In the settlement, the Company specifically disclaimed and
denied any liability or wrongdoing.
On November 2, 1999, the Company settled the case filed in July 1998,
entitled TWENTIETH CENTURY FOX HOME ENTERTAINMENT, INC. V. HOLLYWOOD
ENTERTAINMENT, ET AL, Case No. SC 053 551, in the Superior Court of the County
of Los Angeles, Los Angeles, California. The plaintiff, Fox, had sought
damages for lost revenue claiming the Company had reported inaccurate
transaction-related data concerning Fox titles to Rentrak Corporation. The
settlement resulted in the dismissal of all claims against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4(A). EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The following table sets forth information with respect to our executive
officers and certain other key employees as of March 15, 2000.
Name Age Positions with the Company
Mark J. Wattles* 39 Chairman of the Board and Chief Executive Officer
Jeffrey B. Yapp* 41 President and Chief Operating Officer
David G. Martin* 34 Executive Vice President and Chief Financial Officer
Donald J. Ekman* 47 Senior Vice President, General Counsel, Secretary
and Director
Alex M. Bond 30 Chief Financial Officer/Reel.com
Eric O. English 42 Senior Vice President of Legal Affairs
F. Bruce Giesbrecht 40 Senior Vice President of Strategic Planning
Glenn E. Hahn 48 Senior Vice President of Logistics
Dale A. Naftzger 54 Senior Vice President of Operations
J. Patrick O'Malley 49 Senior Vice President of Information Systems
Roger J. Osborne 47 Senior Vice President of Operations
Mark A. Perkins 38 Senior Vice President of Store Development
Silvio D. Piccini 37 Senior Vice President of Product Planning and
Allocation
David Rochlin 36 Chief Operating Officer/Reel.com
William E. Shull III 41 Senior Vice President of Operations
William M. Spae 48 Senior Vice President of Operations Administration
Michelle VanHoose 43 Senior Vice President of Human Resources
MARK J. WATTLES founded the Company in June 1988 and has served as Chairman of
the Board and Chief Executive Officer since that time. Mr. Wattles served as
President of the Company from June 1988 to September 1997. Mr. Wattles has
been an owner and operator in the video rental industry since 1985. He has been
a participant and key speaker in several entertainment industry panels and
conferences and currently serves as a member of the Video Software Dealers
Association (VSDA) Board of Directors.
JEFFREY B. YAPP was appointed President and Chief Operating Officer of the
Company in September 1997. Prior to joining the Company, Mr. Yapp served as
President Worldwide of Twentieth Century Fox Home Entertainment, Inc. from May
1997 until September 1997, and as President of Fox International from October
1994 to May 1997. Previously, Mr. Yapp was Vice President of Marketing for
Pizza Hut, Inc. from October 1992, and International Vice President of Ernest
and Julio Gallo Winery from April 1986 to October 1992.
DAVID G. MARTIN was appointed Executive Vice President and Chief Financial
Officer, in February 1999. From 1996 until he joined the Company, Mr. Martin
worked for NationsBanc Montgomery Securities LLC, most recently as a Managing
Director of high yield finance specializing in retail and consumer products.
From 1991 to 1996, he was a Vice President of high yield finance and merchant
banking at Nomura Securities International, Inc. Prior to 1991, Mr. Martin was
an investment banker with Salomon Brothers, Inc, specializing in mergers and
acquisitions.
DONALD J. EKMAN became a director of the Company in June 1993, became Vice
President and General Counsel in March 1994 and became Senior Vice President in
1995. Mr. Ekman was a partner in Ekman & Bowersox from January 1992 until March
1994, and from August 1990 until December 1991 he practiced law with Foster
Pepper & Shefelman.
ALEX M. BOND has been the Chief Financial Officer of Reel.com since April 1999.
Mr. Bond joined Hollywood Entertainment in March 1999 and served as its Senior
Vice President of Internet Development until April 1999. From January 1997 to
February 1999, he was Executive Vice President of Strategic Development for
Just for Feet, Inc., a retail company. From January 1995 until January 1997,
he was employed by Hollywood Entertainment as Vice President of Strategic
Development. From February 1993 until January 1995, he was an investment
banker with Montgomery Securities, currently Banc of America Securities LLC,
specializing in growth retail.
ERIC O. ENGLISH was appointed Senior Vice President of Legal Affairs in August,
1999. Prior to joining the Company, Mr. English served as Assistant General
Counsel for Louisiana Pacific Corporation from April 1997 to August 1999.
Previously, Mr. English was Chief Litigation Counsel for Baker Hughes
Incorporated. Mr. English was formerly a partner with the law firm of
Strasberger & Price, L.L.P.
F. BRUCE GIESBRECHT was named Senior Vice President of Product Management in
January 1996 and became Senior Vice President of Strategic Planning in January
1998. He joined the Company in May 1993 as Vice President of Corporate
Information Systems and Chief Information Officer. Mr. Giesbrecht was a founder
of RamSoft, Inc., a software development company specializing in management
systems for the video industry, and served as its President.
GLENN E. HAHN joined the Company in April 1996 as Senior Vice President of
Operations and in January 1997 became Senior Vice President of Human Resources.
In January 2000 Mr. Hahn was named Senior Vice President of Logistics. From
1993 to 1996 Mr. Hahn was Senior Vice President Director of Stores for
Fayva/Parade of Shoes (a specialty retail footwear division of J. Baker),
overseeing approximately 400 stores. From 1979 to 1993 Mr. Hahn worked for
Payless Shoesource (a division of May Department Stores) in various capacities.
From 1987 to 1993 Mr. Hahn worked as Division Operations Manager for Payless
Shoesource, overseeing approximately 580 specialty retail footwear stores at
the time of his departure.
DALE A. NAFTZGER joined the Company in April 1996 as Senior Vice President of
Operations. Mr. Naftzger is currently responsible for the Company's Game Crazy
departments. From March 1995 to December 1995 Mr. Naftzger was Chief Operating
Officer of Caribou Coffee Company, a privately owned specialty coffee retailer.
From 1994 to 1995 Mr. Naftzger was President and Chief Executive Officer of
Chop Chop Chinese to You, a Chinese food delivery business. From 1992 to 1994
Mr. Naftzger was Senior Vice President Operations for Checkers Drive-In
Restaurants, overseeing all 248 company-owned and 200 franchised units.
J. PATRICK O'MALLEY joined the Company in October 1995 as Senior Associate
General Counsel. In May 1998, Mr. O'Malley was promoted to Senior Vice
President of Asset Management. In January 1999, Mr. O'Malley became the Senior
Vice President of Information Systems. Prior to joining the Company, Mr.
O'Malley practiced law for over 17 years and was most recently the senior
partner in O'Malley & Antell.
ROGER J. OSBORNE is a Senior Vice President of Operations. Prior to joining
the Company in January 1999, he was the Executive Vice President of J. Baker,
Corporation, an apparel and footwear retailer, and President of its Work `N
Gear Division since June 1997. Before joining J. Baker Corporation, Mr.
Osborne was Senior Vice President and Zone Director for Mid-West and East coast
markets for the Company from November 1996 until May of 1997, and from January
1995 to November 1996, he served as the Senior Vice President of J. Baker, Inc.
and Director of its licensed shoe department business. From 1988 until January
1995, Mr. Osborne was employed as Senior Vice President and Director of Store
Operations for Pic `n Pay Stores, Inc., a chain of discount footwear stores.
MARK A. PERKINS joined the Company in September 1994 as Vice President of Real
Estate, and in April 1998 was promoted to Senior Vice President of Development.
From 1993 to 1994 Mr. Perkins worked for Blockbuster in various capacities
within the Real Estate Department. From 1989 to 1993 Mr. Perkins worked in the
Real Estate Dept. for Jack In The Box, Inc.
SILVIO D. PICCINI joined the Company in October 1996 as Vice President of
Operations and became Senior Vice President of Product Planning and Allocation
in November 1999. Prior to joining the Company, Mr. Piccini was President of
Tex-Chex, a fast food franchise. From 1987 to 1993 he served in various
management roles with Taco Bell Corporation, most recently as its Director of
Operations, overseeing 100 restaurants.
DAVID ROCHLIN has been the Chief Operating Officer of Reel.com since April
1999. Mr. Rochlin previously served as Vice President of Marketing of Reel.com
from June 1998 to April 1999. From 1996 to 1998, Mr. Rochlin was Director of
Marketing for NETCOM Online Communications, a telecommunications company. From
1994 to 1996, he was Senior Director of Market Development at DNA Plant
Technology, a consumer biotechnology company. From 1992 to 1994, he was a
brand and category manager at Del Monte Foods. Mr. Rochlin is a regular
speaker on Internet retailing practices and is active in a variety of online
commerce industry groups, including shop.org and the GII Initiative.
WILLIAM B. SHULL III joined the Company in February 1998 as Senior Vice
President of Operations. Mr. Shull previously served in various capacities at
AutoZone, most recently as the Regional Vice President overseeing the
operations and development for 250 stores.
WILLIAM M. SPAE joined the Company in July 1996 as Senior Vice President of
Operations, and in 1997 became Senior Vice President of Operations
Administration. From 1991 to June 1996 Mr. Spae worked for Wendy's
International as Divisional Vice President, overseeing the development of
approximately 130 new units during this period and the overall operations of
more than 100 company-owned and 150 franchised units at the time of his
departure. From 1987 to 1991 Mr. Spae was a Zone Vice President for Taco Bell
Corporation, overseeing more than 160 company-owned and approximately 100
franchised units.
MICHELLE VanHOOSE became Senior Vice President of Human Resources on December
1, 1999. Ms. VanHoose joined Hollywood as Vice President of Human Resources on
May 10, 1999. Prior to joining Hollywood, she was Vice President of Human
Resources at Gymboree from 1995 to 1999, and was Director of Human Resources at
H2Oplus, a Chicago based manufacturer and retailer of beauty, skin care and
fragrance products from 1993 to 1995.
*Executive officers
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company has not paid any cash dividends on its common stock since its
initial public offering in July 1993 and anticipates that future earnings will
be retained for the development of its business. The payment of any future
dividends will be at the discretion of the Company's Board of Directors. Loan
covenants contained in its senior subordinated notes limit the amount of
dividends the Company may pay and the amount of stock it may repurchase. As of
December 31, 1999, these covenants effectively prohibit any dividends or stock
repurchases. The Company's common stock is traded on the Nasdaq National
Market ("Nasdaq") under the symbol "HLYW". The following table sets forth the
quarterly high and low last sale prices per share, as reported on Nasdaq.
1999 1998
----------------------------------------
Quarter High Low High Low
------- ------- ------ -------- -------
First $34.50 18.38 $14.81 $8.03
Second 27.50 17.69 15.00 10.13
Third 19.50 12.00 20.00 9.75
Fourth 17.44 13.38 29.88 8.75
As of December 31, 1999, there were 203 holders of record of the Company's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
OPERATING RESULTS:
Revenue $1,096,841 $763,908 $500,501 $302,342 $149,430
---------- --------- --------- --------- ---------
Income (loss) from
operations (2,513) (36,451) 23,303 38,418 17,537
---------- --------- --------- --------- ---------
Interest expense 45,691 33,355 14,302 4,339 490
---------- --------- --------- --------- ---------
Income (loss) before
extraordinary
item and cumulative
effect of a change
in accounting
principle (49,858) (50,464) 5,559 20,630 11,786
---------- ---------- -------- --------- --------
Net income (loss) (51,302) (50,464) 4,996 20,630 9,226
---------- ---------- -------- --------- --------
- -----------------------------------------------------------------------------
Net Income (Loss)
Per Share Before
Extraordinary Item
and Cumulative
Effect of a Change
in Accounting
Principle:
Basic $(1.09) $(1.30) $0.15 $0.60 $0.37
Diluted (1.09) (1.30) 0.15 0.59 0.36
---------- ---------- -------- --------- --------
Net Income (Loss)
Per Share:
Basic $(1.13) $(1.30) $0.14 $0.60 $0.28
Diluted (1.13) (1.30) 0.13 0.59 0.28
---------- ---------- -------- --------- --------
BALANCE SHEET DATA:
Rental inventory,
net $339,912 $259,255 $226,051 $144,264 $86,889
Property and
equipment, net 382,345 328,182 234,497 115,812 65,958
Total assets 1,080,177 936,330 691,165 453,605 337,244
Long-term
obligations(1) 533,906 392,145 233,496 82,361 7,971
Mandatorily
redeemable
Common stock - - - - 54,250
Shareholders' equity 304,529 347,591 291,938 277,013 220,367
OPERATING DATA:
Number of stores at
year end 1,615 1,260 907 551 305
Weighted average stores
open during the year 1,405 1,074 694 398 188
Comparable store
revenue increase (2) 12% 8% 3% 7% 1%
- -----------------------------------------------------------------------------
OTHER DATA
Hollywood superstores
EBITDA 265,787 168,158 162,445 125,534 62,269
Add special
charges (4) 26,885 99,910 26,320 - 2,560
Add non-cash
expenses (5) 49,627 51,143 18,022 7,994 3,855
Less existing store
investment in new
release inventory (137,794) (189,814) (125,301) (75,788) (37,168)
--------- --------- -------- ------- --------
Adjusted EBITDA
superstores (5) 204,505 129,397 81,486 57,740 31,516
Reel.com EBITDA (3) (46,902) (7,322) - - -
--------- --------- -------- -------- --------
Consolidated Adjusted
EBITDA 157,603 122,075 81,486 57,740 31,516
========= ========= ======== ======== ========
Cash flows generated
from (used in):
Operating activities 173,303 244,078 174,956 115,798 57,407
Investing activities (320,338) (438,411) (338,120) (189,085)(157,529)
Financing activities 150,001 194,399 154,224 56,156 91,085
- ----------------------------------------------------------------------------
(1) Includes the current portion of long-term obligations.
(2) 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 store design is removed from the comparable store base when the
conversion process is initiated and returned 12 full months after
reopening.
(3) EBITDA consists of net income (loss) before interest, taxes, depreciation
and amortization. Reel.com EBITDA excludes the $1.9 million non-cash charge
in 1998 related to purchased in-process R&D (see Note 15 to the
Consolidated Financial Statements). EBITDA should not be viewed as a
measurement 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 uniform definition of EBITDA by all
companies.
(4) These one-time special charges include:
-1999: Litigation settlement charges of $25.4 million related to the
settlement of the Fox and Rentrak lawsuits (see Note 15 to the
Consolidated Financial Statements) and a $1.4 million charge for the
cumulative effect of a change in accounting principle (see Note 1 to the
Consolidated Financial Statements);
-1998: an inventory write-down of $99.9 million (see Note 4 to the
Consolidated Financial Statements);
-1997: a litigation settlement of $18.9 million, an inventory write-down
of $2.3 million, $4.6 million related to a failed self-tender offer, and
$.6 million from a loss on early extinguishment of debt (See Note 15 to
Consolidate Financial Statements);
-1995: $2.6 million relating to a change in the Company's method of
amortizing the cost of videocassette rental inventory.
(5) Adjusted EBITDA represents income (loss) from operations before
depreciation and amortization plus non-cash expenses that reduced EBITDA,
less the cost of acquiring new release videocassettes and game inventory
which are capitalized. The non-cash expenses represent the cost of goods
sold on previously viewed videocassettes and inventory shrink. Adjusted
EBITDA is consistent with the calculation specified in the covenants in
the Company's bank 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 liquidity. Our
calculation of EBITDA is not necessarily comparable to other companies
due to lack of uniform definitions of EBITDA by all companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary Results of Operations
The Company's net loss for 1999 was $51.3 million, compared to net loss of
$50.5 million in 1998 and net income of $5.0 million in 1997.
The following table sets forth, (i) results of operations data expressed
as a percentage of total revenue, (unless otherwise indicated); and (ii) the
number of stores open at the end of each such period.
Year Ended December 31,
----------------------------
1999 1998 1997
-------- ------- -------
Revenue:
Rental revenue 81.5% 82.9% 83.6%
Product sales 18.5% 17.1% 16.4%
-------- ------- -------
100.0% 100.0% 100.0%
-------- ------- -------
Cost of revenue:
Cost of rental 25.4% 35.6% 24.4%
Cost of product 14.1% 11.5% 10.7%
-------- ------- -------
39.5% 47.1% 35.1%
-------- ------- -------
Gross margin 60.5% 52.9% 64.9%
Operating costs and expenses:
Operating and selling 47.7% 50.1% 48.9%
General and administrative 7.8% 4.9% 10.1%
Amortization of intangibles 5.2% 2.4% 1.3%
Purchased in-process research
and development - 0.3% -
-------- ------- -------
60.7% 57.7% 60.3%
-------- ------- -------
Income (loss) from operations (0.2%) (4.8%) 4.6%
Nonoperating expense (4.2%) (4.3%) (2.8%)
-------- -------- ------
Income (loss) before income taxes,
extraordinary item and cumulative
effect adjustment (4.4%) (9.1%) 1.8%
(Provision for) benefit from income
taxes (0.2%) 2.5% (0.7%)
-------- -------- ------
Income (loss) before extraordinary
item and cumulative effect
adjustment (4.6%) (6.6%) 1.1%
Extraordinary loss on extinguishment
of debt - - (0.1%)
Cumulative effect of a change in
accounting principle (0.1%) - -
-------- ------- ------
Net income (loss) (4.7%) (6.6%) 1.0%
======== ======= ======
- ----------------------------------------------------------------------
Other data:
Rental gross margin (1) 68.8% 57.1% 70.8%
Product gross margin (2) 23.8% 32.9% 34.8%
Number of superstores - end of period 1,615 1,260 907
- ----------------------------------------------------------------------
(1) Rental gross margin as a percentage of rental revenues.
(2) Product gross margin as a percentage of product revenues.
REVENUE
Revenue increased by $332.9 million, or 44%, in 1999 compared to 1998,
primarily due to the addition of 355 new superstores in 1999. Revenue was also
favorably impacted by an increase of 12% in comparable store revenue in the
current year, combined with the full year impact of Reel.com revenue. Reel.com
added $42.0 million in revenue (on-line revenue of $40.2 million) in 1999.
Revenue increased by $263.4 million, or 53%, in 1998 compared to 1997, due to
the addition of 353 new superstores in 1998 combined with an increase of 8% in
comparable store revenue. In addition, Reel.com, which was acquired in October
1998, added $7.3 million in revenue in 1998. The Company ended 1999 with 1,615
superstores operating in 44 states, compared to 1,260 stores operating in 42
states at the end of 1998 and 907 stores operating in 42 states at the end of
1997. The Company increased its prices at most stores in the fourth quarter of
1998 from $1.49 to $1.99 for catalog titles and from $2.99 to $3.49 for new
releases. In the fourth quarter of 1999, the Company increased prices at most
stores from $3.49 to $3.79 for all new rental releases.
GROSS MARGIN
Rental Margins
Rental gross margin as a percentage of rental revenue increased to 68.8% in
1999 from 57.1% in 1998. In the fourth quarter of 1998, the Company
significantly changed its business model. In order to increase the quantity
and selection of newly released video titles and satisfy the customer's demand
while trying to mitigate the Company's risk, we entered into revenue sharing
agreements with major studios. Prior to these revenue sharing agreements, the
Company paid approximately $60 to $65 per videocassette for major theatrical
releases that were priced for rental in the United States. The Company was
seldom able to fully satisfy its customer's demand for new releases under this
fixed price model. The Company expected that the revenue sharing model would
have a significant impact on the Company's cost of rental as it changed its
business model from a primarily fixed to a primarily variable cost approach.
Starting in the fourth quarter of 1998, revenue sharing payments became a
significant component of the Company's cost of rental. The revenue sharing
agreements made it necessary for the Company to make adjustments to its
inventory valuation as of October 1, 1998 in order to account for the shorter
rental lives that videocassettes have in the revenue sharing business model
because initial customer demand is satisfied significantly sooner. As a result
of this change, the Company recorded a $99.9 million one time charge to reflect
a reduction in the carrying value of rental inventory in the fourth quarter of
1998. Excluding this charge, rental margins decreased as a percentage of
rental revenues from 72.9% in 1998 to 68.8% in 1999. This decrease was
primarily due 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 are expensed net of $4 salvage value
per tape and rental tape amortization is accelerated. During the current year,
payments made pursuant to the revenue sharing agreements increased by $136.6
million, partially offset by a decrease in rental tape amortization of $28.0
million and reduced inventory loss of $1.9 million.
In the fourth quarter of 1997, the Company recorded a $4.5 million special
charge associated with the write-off of obsolete video game rental inventory
and related accessories caused by advancements in video game technology (see
Note 15 to the Consolidated Financial Statements). Rental gross margin as a
percentage of rental revenue, excluding the special charges noted above,
increased slightly to 72.9% in 1998 from 71.9% in 1997.
Product Margins
Excluding Reel.com, product margin as a percentage of product revenue decreased
from 34.8% in 1998 to 31.8% in 1999. The decline in product margin in 1999 is
primarily due to pricing pressure on sell-through video merchandise from mass
merchant retailers, which use video sales as a loss leader to drive customer
traffic and due to the impact of on-line sales where both VHS and DVD titles
can be purchased at or below their wholesale cost in many cases. Product
margin, as a percentage of product revenue, including Reel.com, was 23.8% in
1999, compared to 32.9% in 1998.
Excluding Reel.com, product margin as a percentage of product revenue decreased
from 37.6% in 1997 before the game inventory write-off discussed below, to
34.8% in 1998. The decline in product margin in 1998 was primarily due to
pricing pressure from mass-merchant retailers and e-commerce companies.
Product margin as a percentage of product revenue, including Reel.com was 32.9%
in 1998. In the fourth quarter of 1997 the Company wrote-off obsolete video
game inventory and related accessories of $2.3 million caused by advancements
in video game technology (see Note 15 to the Consolidated Financial
Statements).
Operating Costs and Expenses
Operating and Selling
Total operating and selling expenses of $522.7 million in 1999 increased $140.0
million from $382.7 million in 1998. Total operating expenses as a percentage
of total revenues decreased to 47.7% in 1999 from 50.1% in 1998. The increase
in total operating expenses was due to increases in depreciation expense of
$15.7 million, store wages of $35.1 million, occupancy costs of $45.9 million
and other store operating expenses of $10.2 million. Additionally, the Company
incurred $38.9 million in operating and selling expenses in 1999, an increase
of $33.0 million over the prior year, due to Reel.com. The increase in
Reel.com expenses was primarily due to operating Reel.com, for the entire year
in 1999 compared to only the fourth quarter in 1998. All of the above
increases, with the exception of Reel.com were due to the increase in the
number of superstores operated by the Company. The Company operated 1,615
superstores at December 31, 1999 compared with 1,260 superstores at the end of
1998. Operating and selling expense decreased as a percentage of total revenue
in 1999 primarily due to higher average revenue per store in 1999 compared to
1998.
Total operating expenses of $382.7 million in 1998 increased $137.8 million
from $244.9 million in 1997. Total operating expenses as a percentage of total
revenues increased to 50.1% in 1998 from 48.9% in 1997. The increase in total
operating expenses was due to increases in depreciation expense of $20.5
million, store wages of $36.9 million, occupancy costs of $58.2 million and
other store operating expenses of $16.6 million. Additionally, with the
acquisition of Reel.com in October 1, 1998, the Company added $5.8 million in
selling and operating expenses. All of the above increases, with exception of
Reel.com, were due to the increase in the number of superstores operated by the
Company. The Company operated 1,260 superstores at December 31, 1998 compared
with 907 superstores at the end of 1997. Operating and selling expense
increased as a percentage of total revenue primarily due to lower average
revenue per store in 1998 compared to 1997.
General and Administrative
Total general administrative expenses of $85.9 million increased $48.4 million
from $37.5 million in 1998. Total general and administrative expenses as a
percentage of total revenue increased to 7.8% in 1999 compared to 4.9% in 1998.
Included in general and administrative expenses in 1999 is a special charge of
$25.4 million for legal and settlement charges associated with the settlement
of the Fox and Rentrak lawsuits (see Note 15 to the Consolidated Financial
Statements). Excluding this charge, general and administrative expenses
increased by $23.0 million in 1999, primarily due to an increase in payroll and
related costs, higher legal costs, due to the Fox and Rentrak lawsuits, and
increased overhead costs of $5.3 million associated with Reel.com. The
increase in Reel.com expenses was primarily due to the full year impact of
operating Reel.com in 1999 compared to only the fourth quarter of 1998.
Total general and administrative expenses of $37.5 million in 1998 decreased
$13.1 million from $50.6 million in 1997. Total general and administrative
expenses as a percentage of total revenue decreased to 4.9% in 1998 compared to
10.1% in 1997. The following two special charges are included in general and
administrative expenses in 1997. First, the Company recorded a $4.6 million
charge in the fourth quarter of 1997 for costs related to the Company's failed
self tender offer (see Note 15 to the Consolidated Financial Statements).
Second, the Company recorded an $18.9 million charge in the first quarter of
1997 for the settlement of the securities litigation (see Note 15 to the
Consolidated Financial Statements). Excluding the special charges noted above,
general and administrative expenses increased $10.4 million in 1998 to $37.5
million from $27.1 million in 1997, primarily due to an increase in payroll and
related costs and occupancy costs combined with the acquisition of Reel.com in
October 1998.
Amortization of Intangibles
Amortization of intangibles increased by $38.3 million in 1999 compared to
1998, primarily due to the full year impact of amortizing goodwill associated
with the Reel.com acquisition, as discussed in Note 7 to the Consolidated
Financial Statements.
Amortization of intangibles increased by $12.4 million in 1998 compared to 1997
due to the Reel.com acquisition.
Other Operating Charges
The Company incurred a non-cash charge of $1.9 million in 1998 to write-off the
value of purchased in-process research and development costs in connection with
the acquisition of Reel.com (see Note 7 to the Consolidated Financial
Statements).
Nonoperating Income (Expense), Net
Interest expense, net of interest income, increased in 1999 compared to 1998
and 1997 due to increased levels of borrowings associated with the issuance of
senior subordinated notes in August 1997 and June 1999 (see Note 10 to the
Consolidated Financial Statements), combined with increased borrowings under
the revolving credit facility.
INCOME TAXES
The Company's effective tax rate was a provision of 3.9% in 1999 compared to a
benefit of 27.6% in 1998 and a provision of 40.5% in 1997, given the Company's
net loss for financial reporting purposes versus net income for tax reporting
purposes as a result of the non-deductibility of goodwill amortization
associated with the Reel.com acquisition (see Note 7 to the Consolidated
Financial Statements).
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT
In August 1997, the Company issued $200.0 million principal amount of 10.625%
senior subordinated notes. The proceeds from the notes were then used to repay
the outstanding indebtedness under the existing bank loan. As a result, the
Company recorded a charge for the write-off of the remaining deferred financing
costs related to the indebtedness repaid as an extraordinary loss of $0.6
million, net of the related income tax benefit of $0.4 million.
CHANGE IN EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow because most of its
revenue is received in cash. The amount of cash generated from operations in
1999 significantly exceeded debt service requirements of the Company's long-
term obligations. The capital expenditures (including purchases of rental
inventory) of the Company are primarily funded by the excess operating cash
flow and through loans under a revolving line of credit. The Company currently
has a $300 million revolving line of credit available to address the timing of
certain working capital and capital expenditure disbursements. The Company is
negotiating to replace its current $300.0 million line of credit with a new
$375.0 million facility, consisting of a $175.0 million revolving line of
credit and $200.0 million term loan. The Company expects to close on the new
credit facility in April/May 2000. The Company believes cash flow from
operations, supplemented by the availability of the new credit facility, will
provide the Company with adequate liquidity and the capital necessary to
achieve its planned expansion for the foreseeable future. The Company has
increased its focus on maximizing cash generation and return on invested
capital. After being a net user of cash since its inception, the Company
expects to become a net generator of cash in the fourth quarter of 2000. Due
to its large and highly profitable base of stores, the Company's cash from
operations is expected to be large enough to pay interest, cash taxes, and all
growth and maintenance capital expenditures, and have significant cash
remaining to reduce the Company's debt. To accelerate this free cash flow
milestone, the Company has announced that it is slowing the growth of its
superstore base from a historical 350 stores per year, down to 200 to 250
stores per year.
At December 31, 1999, the Company had cash and cash equivalents of $6.9 million
and a working capital deficit of $65.7 million. Rental inventories are
accounted for as noncurrent assets under GAAP 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
noncurrent excludes them from the computation of working capital. The
acquisition cost of 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 rental inventory as a noncurrent asset, the Company may, from time
to time, operate with a working capital deficit.
Cash Provided by Operating Activities
During 1999, net cash generated by operations was $70.8 million lower than the
prior year. This decrease was due to lower depreciation and amortization
expenses, net of the non-cash inventory valuation charge and the write-off of
purchased in process research and development costs in 1998 (see "Results of
Operations"), combined with a net unfavorable change in certain working capital
accounts, partially offset by a net favorable change in deferred income taxes
(see Note 11 to the Consolidated Financial Statements).
Cash Used in Investing Activities
Net cash used in investing activities decreased by $118.1 million from the
prior year primarily due to reduced purchases of rental inventory for new and
existing stores (excluding product purchased under revenue sharing agreements),
a decrease in investment in businesses acquired and reduced capital
expenditures with respect to new store construction, remodeling of certain
existing stores and for the continued development of management information
systems (see "Capital Expenditures").
Cash Provided by Financing Activities
Net cash provided by financing activities decreased by $44.4 million from the
prior year. In the prior year, the Company sold 3.4 million shares of its
common and preferred stock in connection with the Reel.com acquisition for an
aggregate amount of $45.4 million (see Note 7 to the Consolidated Financial
Statements), partially offset by the repurchase of 850,000 shares of the
Company's common stock for approximately $10.5 million. In 1999, the Company
had an increase in indebtedness repaid resulting from the payment of the $6.0
million note due in April, 1999 (see Note 7 to the Consolidated Financial
Statements).
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 $130.0 million will be incurred in
2000, of which $110.0 million is anticipated to relate to new, relocated and
remodeled stores and the conversion of acquired stores. The remaining balance
relates to corporate capital expenditures. We expect the total investment per
new store to approximate $400,000, which includes rental and merchandise
inventory, leasehold improvements, signage, furniture, fixtures and equipment.
We have brought down the cost from over $500,000 per-store in 1998 through
improved construction and product efficiencies. 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 from operations, supplemented by the availability of a new senior
revolving line of credit or other forms of equipment financing and/or leasing,
if necessary.
YEAR 2000 ISSUES
The year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date sensitive software may recognize a date using "00" as the year 1900
rather than year 2000. To be in "Year 2000 compliance" a computer program must
be written using four digits to define years. As a result, computer systems
and/or software used by many companies may have required upgrading to comply
with such "Year 2000" ("Y2K") requirements.
The century rollover to January 1, 2000 went extremely well for Hollywood
Entertainment Corporation. All mission-critical systems performed as
anticipated. The thousands of programs and applications that had been
remediated continued to function without interruption or failure as we moved
into the Year 2000.
Hollywood continues to monitor date-related systems matters. Based upon the
performance of our programs, applications, and systems to date, we believe that
Y2K issues are no longer of any material concern to the Company and its
business. The cost of the Y2K effort was approximately $1.2 million.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY
The Company anticipates that its business will be affected by general economic
and other consumer trends. Future operating results may be affected by various
factors, including variations in the number and timing of new store openings,
the performance of new or acquired stores, the quality and number of new
release titles available for rental and sale, the expense associated with the
acquisition of new release titles, additional and existing competition,
marketing programs, weather, special or unusual events and other factors that
may affect retailers in general. In addition, any concentration of new store
openings and the related new store pre-opening costs and other expenses
associated with the opening of new stores near the end of a fiscal quarter
could have an adverse effect on the financial results for that quarter and
could, in certain circumstances, lead to fluctuations in quarterly financial
results.
The video retail industry generally experiences relative revenue declines in
April and May, due in part to the change in Daylight Savings Time and due to
improved weather, and in September and October, due in part to the start of
school and the introduction of new television programs. The Company believes
these seasonality trends will continue.
FORWARD LOOKING STATEMENTS
The information set forth in this report, including without limitation in Item
1, Business, under the caption "Industry Overview" with respect to industry
consolidation "Business Strategy" with respect to future relationships,
expanding product opportunities and generation and use of cash, "Hollywood's
Internet Strategy" with respect to the future of Reel.com and the future of
electronic delivery of video, "Advertising and Marketing" with respect to
future advertising expenditures, "Competition" with respect to the future
viability of the video industry, "Expansion Strategy" with respect to planned
new store openings and in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, under the caption "Liquidity and
Capital Resources" with respect to planned new store openings and the
sufficiency of financial resources includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and is subject to the safe harbors created by
those sections. Certain factors that could cause results to differ materially
from those projected in the forward-looking statements are set forth in Item 1,
Business, under the captions "Expansion Strategy", "Hollywood's Internet
Strategy", "Competition", in Item 7, Management's Discussions and Analysis of
Financial Conditions and Results of Operations, under the caption "General
Economic Trends, Quarterly Results and Seasonality" and in Item 3, Legal
Proceedings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to Item 14 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated by
reference from the Company's definitive proxy statement, under the caption
"Nomination and Election of Board of Directors," for its 2000 annual meeting of
shareholders (the "2000 Proxy Statement") to be filed pursuant to Regulation
14A promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed no later
than 120 days after the end of the Company's fiscal year ended December 31,
1999. Information with respect to executive officers of the Company is
included under Item 4(a) of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is hereby incorporated by reference
from the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is hereby incorporated by reference
from the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Listed below are all financial statements, notes, schedules and exhibits filed
as part of this Annual Report on Form 10-K:
(a)(1), (2) FINANCIAL STATEMENTS
The following financial statements of the Registrant, together with the Report
of Independent Accountants dated March 1, 2000, on pages F-1 to F-21 of this
report on Form 10-K are filed herewith:
(i) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
(ii) FINANCIAL SCHEDULES
All financial schedules are omitted as the required information is inapplicable
or the information is presented in the respective consolidated financial
statements or related notes.
(a) (3) Exhibits
The following exhibits are filed with or incorporated by reference into
this Annual Report:
EXHIBIT
NUMBER DESCRIPTION
3.1 1993B Restated Articles of Incorporation, as amended (incorporated
by reference to the Registrant's Registration Statement on Form S-1
(File No. 33-63042)(the "Form S-1"), by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-3 (File No. 33-96140),
and by reference to Exhibit 3.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
3.2 1999 Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (File No. 333-82937)
(the "1999 S-4")).
10.1 Indenture, dated August 13, 1997, between the Registrant and U.S.
Trust Company of California, N.A., as Trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4
(No.333-35351) (the "1997 S-4")), as supplemented by the First
Supplemental Indenture, dated as of June 24, 1999, between the
Registrant and the Trustee (incorporated by reference to Exhibit 4.2
of the 1999 S-4) and the Second Supplemental Indenture, dated as of
January 20, 2000, between the Registrant and the Trustee.
10.2 1993 Stock Incentive Plan, as amended (incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).
10.3 Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.1 of the Form S-1).
10.4 Form of Nonqualified Stock Option Agreement (incorporated by
reference to Exhibit 10.3 of the Form S-1).
10.5 Revolving Credit Agreement, dated as of September 5, 1997, among
the Registrant, as Borrower, and Societe Generale, DLJ Capital
Funding, Inc. Goldman Sachs Credit Partners L.P. and certain other
financial institutions, as Lenders, and Societe Generale, as Agent
for the Lenders, Donaldson, Lufkin & Jenrette Securities Corporation,
as Administrative Agent, Goldman Sachs Credit Partners, L.P., as
Documentation Agent, and Credit Lyonnais Los Angeles Branch, Barclays
Bank PLC, Deutsche Bank AG, New York Branch, U.S. Bank National
Association and KeyBank National Association, as Co-Agents
(incorporated by reference to Exhibit 10.1 of the 1997 S-4), as
amended by a Second Amendment Agreement dated as of March 1, 1999
(incorporated by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999),
the Fourth Amendment entered into as of November 22, 1999 and the
Fifth Amendment entered as of March 22, 2000.
10.6 Employment letter between the Registrant and Jeffrey B. Yapp,
dated July 31, 1997 (incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1997). *
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
None filed during the fourth quarter of 1999.
*Management Contract.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Hollywood Entertainment
Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Hollywood Entertainment Corporation and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 4 of the consolidated financial statements, the Company
changed its amortization method for videocassette rental inventory in 1998.
PricewaterhouseCoopers LLP
Portland, Oregon
March 1, 2000
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
---------------------------
December 31, December 31,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,941 $ 3,975
Accounts receivable 42,679 40,862
Merchandise inventories 84,373 58,083
Income taxes receivable 1,797 -
Prepaid expenses and other current
assets 10,377 12,138
------------ ----------
Total current assets 146,167 115,058
Rental inventory, net 339,912 259,255
Property and equipment, net 382,345 328,182
Goodwill, net 145,504 187,607
Deferred income tax asset 52,691 35,513
Other assets, net 13,558 10,715
------------ ----------
$ 1,080,177 $ 936,330
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 14,493 $ 8,418
Accounts payable 111,578 107,865
Accrued expenses 64,566 34,664
Accrued revenue sharing 9,402 13,500
Accrued interest 11,865 9,693
Income taxes payable - 5,739
----------- ----------
Total current liabilities 211,904 179,879
Long-term obligations, less current
portion 519,413 383,727
Other liabilities 44,331 25,133
----------- ----------
775,648 588,739
Shareholders' equity:
Preferred stock, 19,500,000 shares
authorized; no shares issued and
outstanding - -
Common stock, 100,000,000 shares
authorized; and 45,821,537 and
44,933,055 shares issued
and outstanding, respectively 362,307 354,067
Retained deficit (57,778) (6,476)
------------ ----------
Total shareholders' equity 304,529 347,591
------------ ----------
$ 1,080,177 $ 936,330
============ ==========
See notes to consolidated financial statements.
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Twelve Months Ended
December 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
Rental revenue $ 893,491 $ 633,140 $ 418,527
Product sales 203,350 130,768 81,974
----------- ---------- ----------
1,096,841 763,908 500,501
---------- ---------- ----------
Cost of Revenue:
Cost of rental 278,890 271,778 122,014
Cost of product 154,990 87,799 53,471
---------- ---------- ----------
433,880 359,577 175,485
---------- ---------- ----------
Gross Profit 662,961 404,331 325,016
Operating costs and expenses:
Operating and selling 522,682 382,728 244,946
General and administrative 85,873 37,543 50,572
Amortization of intangibles 56,919 18,611 6,195
Purchased in-process research
and development - 1,900 -
---------- ---------- ---------
665,474 440,782 301,713
---------- ---------- ---------
Income (loss) from operations (2,513) (36,451) 23,303
Nonoperating income (expense):
Interest income 214 141 342
Interest expense (45,691) (33,355) (14,302)
---------- ---------- ---------
Income (loss) before income taxes,
extraordinary loss
and cumulative effect adjustment (47,990) (69,665) 9,343
(Provision for) benefit from
income taxes (1,868) 19,201 (3,784)
---------- ---------- ---------
Income (loss) before cumulative
effect of a change in
accounting principle and
extraordinary loss on
extinguishment of debt (49,858) (50,464) 5,559
Cumulative effect of a change in
accounting principle
(net of income tax benefit
of $983) (1,444) - -
Extraordinary loss on
extinguishment of debt (net of
income tax benefit of $372) - - (563)
---------- ---------- ---------
Net income (loss) $ (51,302) $ (50,464) $ 4,996
========== ========== =========
- ------------------------------------------------------------------------
Net income (loss) per share
before cumulative effect of
a change in accounting principle
and extraordinary loss on
extinguishment of debt:
Basic $ (1.09) $ (1.30) $ 0.15
Diluted (1.09) (1.30) 0.15
- -------------------------------------------------------------------------
Net income (loss) per share:
Basic $ (1.13) $ (1.30) $ 0.14
Diluted (1.13) (1.30) 0.13
- -------------------------------------------------------------------------
Weighted average shares
outstanding:
Basic 45,592 38,844 36,659
Diluted 45,592 38,844 37,718
- -------------------------------------------------------------------------
See notes to consolidated financial statements.
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock Retained
--------------------- Earnings
Shares Amount (Deficit) Total
---------- -------- ------- --------
Balance at December 31, 1996 36,006,201 $238,021 $38,992 $277,013
Issuance of common stock:
Public offerings, net 300,000 4,695 - 4,695
Stock options exercised 480,195 3,712 - 3,712
Tax benefit from stock options - 1,522 - 1,522
Net income - - 4,996 4,996
---------- -------- ------- --------
Balance at December 31, 1997 36,786,396 247,950 43,988 291,938
---------- -------- ------- --------
Issuance of common stock:
Stock options exercised 633,859 4,376 - 4,376
Tax benefit from stock options - 2,563 - 2,563
Reel.com acquisition 4,000,000 42,760 - 42,760
Sold to Reel.com affiliates 1,982,537 26,764 - 26,764
Conversion of preferred stock
to common stock 2,380,263 29,324 - 29,324
Stock options issued for
Reel.com acquisition - 10,840 - 10,840
Common stock repurchases (850,000) (10,510) - (10,510)
Net loss - - (50,464) (50,464)
----------- -------- -------- --------
Balance at December 31, 1998 44,933,055 354,067 (6,476) 347,591
----------- -------- -------- --------
Issuance of common stock:
Stock options exercised 888,482 4,392 - 4,392
Tax benefit from stock options - 3,848 - 3,848
Net loss - - (51,302) (51,302)
---------- -------- --------- --------
Balance at December 31, 1999 45,821,537 $362,307 $(57,778) $304,529
========== ======== ========= ========
See notes to consolidated financial statements.
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
------------------------------------
Year Ended December 31,
1999 1998 1997
------------------------------------
Operating activities:
Net income (loss) $ (51,302) $(50,464) $ 4,996
Adjustments to reconcile net
income (loss) to cash provided
by operating activities:
Cumulative effect of a change
in accounting principle 1,444 - -
Extraordinary loss on
extinguishment of debt - - 563
Depreciation and amortization 222,842 195,387 139,705
Amortization of deferred financing
costs 1,936 1,462 496
Inventory valuation charge - 99,910 -
Write-off of purchased in-process
research and development - 1,900 -
Change in deferred rent 3,565 3,961 3,467
Change in deferred income taxes (1,545) (27,236) (1,985)
Net change in operating assets
and liabilities:
Accounts receivable (1,817) (1,071) (13,781)
Merchandise inventories (26,290) 3,749 (16,227)
Accounts payable 3,713 10,194 36,616
Accrued interest 2,172 1,437 7,843
Accrued revenue sharing (4,098) 13,500 -
Other current assets and
liabilities 22,683 (8,651) 13,263
-------- -------- --------
Cash provided by operating
activities 173,303 244,078 174,956
-------- -------- --------
Investing activities:
Purchases of rental inventory, net (185,877) (265,158) (194,273)
Purchase of property and
equipment, net (112,258) (132,122) (139,709)
Investment in businesses acquired (17,434) (40,804) -
Increase in intangibles and other
assets (4,769) (327) (4,138)
-------- -------- --------
Cash used in investing
activities (320,338) (438,411) (338,120)
-------- -------- --------
Financing activities:
Proceeds from the sale of
common stock, net - 45,398 4,695
Issuance of long-term obligations 90,162 - 203,159
Repayments of long-term obligations (8,401) (2,429) (1,864)
Repurchase of common stock - (10,510) -
Tax benefit from exercise of
stock options 3,848 2,563 1,522
Proceeds from exercise of stock
options 4,392 4,376 3,712
Increase (decrease) in revolving
loan, net 60,000 155,001 (57,000)
-------- --------- --------
Cash provided by financing
activities 150,001 194,399 154,224
-------- --------- ---------
Increase (decrease) in cash and
cash equivalents 2,966 66 (8,940)
Cash and cash equivalents at
beginning of year 3,975 3,909 12,849
-------- --------- --------
Cash and cash equivalents at end
of year $ 6,941 $ 3,975 $ 3,909
======== ========= ========
Other Cash Flow Information:
Interest expense paid $ 42,896 $ 31,562 $ 6,735
Income taxes paid (refunded), net 5,741 (706) 7,282
See notes to consolidated financial statements.
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Corporate Organization and Consolidation
The accompanying financial statements include the accounts of Hollywood
Entertainment Corporation and its wholly owned subsidiaries (the "Company").
The Company's subsidiaries include Hollywood Management Company and Reel.com,
Inc.. All significant intercompany transactions have been eliminated.
Nature of the Business
The Company operates a chain of video superstores ("Hollywood Video")
throughout the United States and an internet retailer of video only
products ("Reel.com"). The Company was incorporated in Oregon on June 2,
1988 and opened its first store in October 1988. As of December 31, 1999 and
1998, the Company operated 1,615 stores in 44 states and 1,260 stores in 42
states, respectively.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates relative to the Company include depreciation and
amortization policies.
Revenue Recognition
The Company recognizes rental and product revenue related to the Hollywood
Video segment at the point of rental or sale to the customer. Additional
fees on rentals are recognized when earned, net of allowances for
uncollectible amounts based on historical experience. The Company accrues
for revenue sharing expenses at contractual rates at the point videocassettes
are rented. Such expenses are included as cost of rental in the accompanying
statement of operations. Revenue from the Reel.com segment for product
sales, net of allowances and estimated returns, is recognized when the
product is shipped to the customer.
Cost of Rental
Cost of rental includes revenue sharing expense and amortization of
videocassettes.
Cash and Cash Equivalents
The Company considers highly liquid investment instruments, with an original
maturity of three months or less, to be cash equivalents.
Inventories
Merchandise inventories, consisting primarily of prerecorded videocassettes,
concessions, and other accessories held for resale, are stated at the lower
of cost or market. Cost of sales is determined using an average costing
method. Rental inventory, which includes videocassettes, video games, DVDs
and audio books, is stated at cost and amortized over its estimated useful
life to a specified salvage value. See Note 4 for a discussion of the
amortization policy applied to rental inventory and a discussion of the
change in amortization method effective October 1, 1998.
Property, Equipment, Depreciation and Amortization
Property is stated at cost and is depreciated on the straight-line method for
financial reporting purposes over the estimated useful life of the assets,
which range from approximately five to ten years. Leasehold improvements
are amortized primarily over the lesser of ten years or the
term of the lease.
Additions to property and equipment are capitalized and include
acquisitions of property and equipment, costs incurred in the development and
construction of new stores, major improvements to existing property and major
improvements in management information systems. As property and equipment is
sold or retired, the applicable cost and accumulated depreciation and
amortization are eliminated from the accounts and any gain or loss thereon is
recorded.
In 1998, the Company adopted Statement of Position 98-1 ("SOP 98-1"),
which defines the types of costs that may be capitalized for internally
developed computer software. Accordingly, the Company capitalized $.3
million and $1.5 million in 1999 and 1998, respectively.
Long-Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets." The statement
establishes accounting standards for the impairment of long-lived assets to
be held and used, and for long-lived assets to be disposed. Impairment of
long-lived assets is recognized when events or changes in circumstances
indicate that the carrying amount of the asset or related group of assets may
not be recoverable. Measurement of the amount of the impairment may be based
on the market values of similar assets or estimated discounted future cash
flows resulting from use and ultimate disposition of the asset. Management
has determined that there has been no material impairment to any long-lived
assets as of December 31, 1999 and 1998.
Treasury Stock
In accordance with Oregon law, shares are automatically retired and
classified as available for issuance upon the repurchase of common stock.
Income Taxes
The Company calculates income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements and tax returns.
Deferred Rent
Many of the Company's operating leases contain predetermined fixed
increases of the minimum rental rate during the initial lease term. For
these leases, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the amount charged to
expense and the rent paid as deferred rent.
Fair Value of Financial Instruments
In accordance with SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments", the Company has disclosed the fair value, related carrying
value and method for determining the fair value for the following financial
instruments in the accompanying notes as referenced: cash and cash
equivalents (see Note 1), accounts receivable (see Note 2), and long-term
obligations (see Note 10).
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. Comprehensive income is equal to net income (loss) for all
periods presented.
Advertising
The Company receives cooperative reimbursements from vendors as eligible
expenditures occur relative to the promotion of rental and sales product.
Advertising costs, net of these reimbursements, are expensed as incurred.
Segment Reporting
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998. This statement establishes
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. The Company
has disclosed the information required by SFAS 131 in Note 17 to the
Consolidated Financial Statements.
Store Preopening Costs
Store preopening costs, including store employee labor costs and
advertising, incurred prior to the opening of a new store had been expensed
during the first full month of a store's operation. In April 1998, Statement
of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities"
was finalized, which requires that costs 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.
2. ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 1999 and 1998 consists of:
-----------------------
1999 1998
---------- ----------
(in thousands)
Construction receivables $ 8,274 $ 9,234
Additional rental fees 15,218 17,884
Marketing allowances 8,863 10,677
Other 10,324 3,067
---------- ---------
$42,679 $40,862
========== =========
The carrying amount of accounts receivable approximates fair value because of
the short maturity of those receivables.
3. RENTAL INVENTORY
Rental inventory as of December 31, 1999 and 1998 consists of:
-------------------------
1999 1998
---------- ----------
(in thousands)
Rental inventory $ 571,460 $ 450,593
Less accumulated amortization (231,548) (191,338)
---------- ----------
$ 339,912 $ 259,255
========== =========
Amortization expense related to rental inventory was $107.6 million,
$135.3 million and $112.5 million in 1999, 1998 and 1997, respectively, and
is included in cost of rental. As rental inventory is transferred to
merchandise inventory and sold (previously viewed product), the applicable
cost and accumulated amortization are eliminated from the accounts,
determined on a first-in-first-out ("FIFO") basis applied in the aggregate
based on monthly purchases. Any gain or loss thereon is recorded in the
Company's consolidated statements of operations.
4. CHANGE IN AMORTIZATION METHOD FOR RENTAL INVENTORY
Effective October 1, 1998, Hollywood Video adopted a new method of
amortizing videocassette rental inventory. During the fourth quarter of
1998, Hollywood Video acquired a majority of new video releases under revenue
sharing arrangements with major studios, which the Company expects to
continue in the future. Revenue sharing allows the Company to acquire
videocassettes at a lower product cost than the traditional buying
arrangements, with a percentage of the net rental revenues shared with the
studios over a contractually determined period of time. The increased copy
depth under revenue sharing arrangements satisfies the initial consumer
demand for new releases over a shorter period of time. As the new business
model results in a significantly greater proportion of rental revenue
received over a shorter period of time, the Company has changed its method of
amortizing rental inventory in order to match expenses with the anticipated
revenues to be generated therefrom.
Post-October 1, 1998 policy
For tapes acquired under revenue sharing, as of October 1, 1998, it is the
Company's policy to expense the studio's share of the revenue net of an
estimated salvage value of $4 per videocassette. Revenue sharing expense is
included in cost of rental in the accompanying statements of operations.
Non-revenue sharing new release videocassettes acquired at a fixed price
are amortized on an accelerated basis to an average net book value of $8 over
four months and then to an estimated salvage value of $6 over the following
56 months.
Base stock videocassettes purchased at a fixed price for new store
openings and filler stock are amortized straight-line over 60 months to an
estimated $6 salvage value.
Pre-October 1, 1998 policy
Previous to October 1, 1998, non-revenue sharing new release videocassettes
were amortized on an accelerated basis over 4 months to an average net book
value of $15 and then on a straight-line basis to their estimated salvage
value of $6 over the next 32 months.
Base stock videocassettes were amortized on a straight-line basis to an
estimated salvage value of $6 over 36 months.
The new method of amortization has been applied to rental inventory held
as of October 1, 1998. The adoption of the new method of amortization has
been accounted for as a change in accounting estimate effected by a change in
accounting principle, and accordingly the Company recorded a pre-tax charge
of $99.9 million, or $1.53 per diluted share, in the fourth quarter of 1998.
The calculation of the change in operating expense attributable to
videocassettes for periods prior to October 1, 1998 would not be meaningful
because the new business model involving revenue sharing arrangements had not
been implemented. The change in estimate, effective October 1, 1998
decreased net loss by $1.0 million, or $.03 per diluted share net of tax in
the fourth quarter of 1998.
Video Games
Video games are amortized on an accelerated basis to approximately $14.50
over the first twelve months and then to an estimated salvage value of $7
over the following twelve months.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 and 1998 consists of:
---------------------
1999 1998
--------- ----------
(in thousands)
Fixtures and equipment $ 146,318 $ 123,068
Leasehold improvements 327,838 279,805
Equipment under capital lease 16,058 3,426
Leasehold improvements under
capital lease 35,258 7,167
--------- ----------
525,472 413,466
Less accumulated depreciation
and amortization (143,127) (85,284)
--------- ----------
$ 382,345 $ 328,182
========= ==========
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $8.0 million and
$3.0 million at December 31, 1999 and 1998, respectively.
6. GOODWILL
Goodwill as of December 31, 1999 and 1998 consists of:
--------------------
1999 1998
--------- ---------
(in thousands)
Goodwill $236,445 $222,004
Less accumulated
amortization (90,941) (34,397)
-------- ---------
$145,504 $187,607
======== ========
Goodwill represents the excess of cost over fair value of net assets
purchased and is being amortized on a straight-line basis over 2 or 20 years.
Goodwill in connection with store acquisitions is amortized over 20 years.
Goodwill from the Reel.com acquisition is being amortized over 2 years. The
Company assesses the recoverability of store acquisition intangibles by
determining whether the amortization of the goodwill over the remaining
lives can be recovered through projected future operating results on an
undiscounted basis. The Company believes that there are no impaired
intangible assets with respect to store acquisitions.
7. ACQUISITIONS
Reel.com
On October 1, 1998, the Company completed the merger of Reel.com with and
into Hollywood Entertainment Corporation. At the closing, the Company
acquired all the outstanding shares of Reel.com for $32.7 million in cash and
4,000,000 shares of Common Stock and 1,000,000 shares of Series A Redeemable
Preferred Stock. Both common and preferred shares were valued at $10.69 per
share, representing a 10% discount from the October 1, 1998 closing price.
In addition, the Company assumed Reel.com's incentive stock option plan and
converted all outstanding Reel.com stock options into options to acquire the
Company's Common Stock. Options for a total of 958,568 shares were assumed
in connection with the acquisition (the options granted were valued at $11.31
per share using the Black-Scholes option valuation model).
Concurrent with the acquisition of Reel.com, the Company sold 1,982,537
shares of Common Stock and 1,380,263 shares of Series A Redeemable Preferred
Stock at a price of $13.50 per share to certain shareholders and affiliates
of Reel.com.
The Series A Redeemable Preferred Stock was converted into Common Stock on
a one for one basis upon shareholder approval on December 30, 1998.
The acquisition of Reel.com for approximately $96.9 million has been
accounted for under the purchase method of accounting. The financial
statements reflect the allocation of the purchase price and assumption of
Reel.com's liabilities and include the operating results from the date of
acquisition.
The following sets forth the reconciliation of the cash paid (in
thousands) for Reel.com, Inc.:
Fair value of assets acquired $ 3,634
Goodwill 100,349
Purchased research and development 1,900
Value of stock issued (53,450)
Value of stock options issued (10,840)
Liabilities assumed (8,934)
---------
Cash paid, including transaction costs,
net of cash received $ 32,659
=========
The value of stock options issued was determined using the Black-Scholes
stock option pricing model. Goodwill is being amortized over the estimated
useful life of 2 years.
The following unaudited pro forma information presents the results of the
Company's operations assuming the Reel.com acquisition occurred at the
beginning of each period presented (in thousands, except per share data):
Year Ended December 31,
------------------------
1998 1997
---------- ----------
Total revenue $ 773,812 $ 502,033
Net loss (97,306) (46,247)
Net loss per share:
Basic (2.16) (1.03)
Diluted (2.16) (1.03)
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Reel.com acquisition been
consummated as of the beginning of each period, nor is it necessarily
indicative of future operating results.
Store Acquisitions
During 1999, the Company acquired the operations and assets of 49 video
superstores for an aggregate purchase price of $17.4 million. The
acquisitions were accounted for under the purchase method of accounting.
Approximately $14.6 million was allocated to Goodwill and is being amortized
over the estimated useful life of 20 years. The results of operations for
these acquisitions do not have a material effect on the consolidated
operating results and therefore are not included in the proforma data
presented.
During 1998, the Company acquired the operations and assets of 41 video
superstores located in New York (11) and Florida (30) for an aggregate
purchase price of $14.1 million. $6.0 million of the purchase price was paid
with a note payable bearing interest at 10.0% per annum due April 1, 1999,
and the remainder was paid in cash. The acquisitions were accounted for
under the purchase method of accounting. Approximately $9.8 million was
allocated to Goodwill and is being amortized over the estimated useful life
of 20 years. The results of operations for these acquisitions do not have a
material effect on the consolidated operating results and therefore are not
included in the pro forma data presented above.
8. 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 15 years and most have
options to renew for between five and 15 additional years. Most operating
leases require payment of property taxes, utilities, common area maintenance
and insurance. Total rent expense, including related lease-required costs,
incurred during 1999, 1998, and 1997 was $201.6 million, $154.8 million and
$96.0 million, respectively.
At December 31, 1999, the future minimum annual rental commitments under non-
cancelable operating leases were as follows:
------------------------------
Operating
Year Ending Leases
December 31, (in thousands)
------------------------------
2000 $194,626
2001 190,440
2002 186,587
2003 184,237
2004 178,631
Thereafter 742,234
9. EMPLOYEE BENEFIT PLANS
The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual claims in excess of $100,000 and for annual Company claims which
exceed approximately $3.0 million in the aggregate. While the ultimate
amount of claims incurred is dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future
payment of claims. Adjustments, if any, to recorded estimates resulting from
ultimate payments will be reflected in operations in the period in which such
adjustments are known.
Beginning January 1, 1998, the Company added a 401(k) plan in which
eligible employees may elect to contribute up to 15% of their earnings.
Eligible employees who are at least 21 years of age, have completed at least
one year of service and work at least 1,000 hours in a year. The Company did
not make any matching contributions to the 401(k) plan in 1999 or 1998.
The Company does not maintain any other retirement plans nor offer any
form of post-retirement benefits.
10. LONG-TERM OBLIGATIONS
The Company had the following long-term obligations as of December 31,
1999 and 1998:
------------------------
1999 1998
--------- -----------
(in thousands)
Senior subordinated notes $ 250,000 $ 200,000
Borrowings under bank
revolving credit agreement 240,000 180,000
Obligations under capital 43,886 6,111
leases
Other 20 6,034
--------- ----------
533,906 392,145
Less current obligations 14,493 8,418
--------- ----------
$ 519,413 $ 383,727
========= ==========
In August 1997, the Company issued $200 million principal amount of
10.625% senior subordinated notes (the "Notes") due August 15, 2004. The
proceeds received from the sale of the Notes, net of offering costs of $6.8
million, were used to repay the entire outstanding indebtedness under the
then existing bank revolving loan. The Company recorded a charge for the
write-off of the remaining deferred financing costs related to the
indebtedness repaid as an extraordinary loss of $0.6 million, net of related
income tax benefit of $0.4 million, in 1997.
In June 1999, the Company issued an additional $50 million principal amount
of 10.625% senior subordinated notes under substantially the same terms as
the original $200 million. Proceeds were used to repay a portion of its
indebtedness outstanding under its senior revolving credit agreement.
The Notes are redeemable, at the option of the Company, after August 14,
2001 at rates starting at 105.313% of principal amount reduced annually
through August 15, 2003, at which time they become redeemable at 100% of the
principal amount. In addition, at any time prior to August 15, 2000, the
Company may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more public equity offerings,
at a redemption price of 110.625% of principal amount. The terms of the Notes
may restrict, among other things, the payment of dividends and other
distributions, investments, the repurchase of capital stock and the making of
certain other restricted payments by the Company, the incurrence of
additional indebtedness by the Company or any of its subsidiaries, and
certain mergers, consolidations and disposition of assets. Additionally, if
a change of control occurs, as defined, each holder of the Notes will have
the right to require the Company to repurchase such holder's Notes at 101% of
principal amount thereof.
The Company is limited in the amount of cash dividends that it can pay and
the amount of common stock and subordinated indebtedness that it may
repurchase by applicable covenants contained in the Notes.
In September 1997, the Company entered into a senior revolving credit
agreement which provides for the availability of up to $300 million in
aggregate extension of credit. The outstanding balance is due and payable on
September 5, 2002. Revolving credit loans under the credit agreement bear
interest, at the Company's option, at an applicable margin over the bank's
base rate loan or the IBOR rate. The applicable margin is based upon the
ratio of consolidated indebtedness to consolidated adjusted EBITDA, as
defined below. The credit agreement also provides for a commitment fee of
1/2% of any unused portion of the credit agreement. Among other restrictions,
the credit agreement contains financial covenants relating to specified
levels of: indebtedness to income from operations before depreciation and
amortization plus non-cash expenses that reduced EBITDA, less the cost of
acquiring new release videocassettes and game inventory which are capitalized
(adjusted EBITDA); adjusted EBITDA less taxes paid in cash to interest
expense; maintenance of average store contribution levels; and the
maintenance of minimum tangible net worth. Amounts outstanding under the
credit agreement are collateralized by substantially all of the assets of the
Company.
The Company was not in compliance with the net leverage ratio as of
December 31, 1999 due to the $25.4 million charge associated with the
settlement of the Rentrak and Fox lawsuits (see Note 15 to the Consolidated
Financial Statements). The Company has however, obtained a waiver from the
banks with respect to this covenant specified in the revolving credit
agreement.
As of December 31, 1999, the fair value of the Notes was $231.6 million.
The fair value of the Notes was based on quoted market prices as of December
31, 1999. The revolving credit facility is a variable rate loan, and thus,
the fair value approximates the carrying amount as of December 31, 1999.
At December 31, 1999, maturities on long-term obligations for the next five
years were as follows:
-----------------------------
Year Ending
December 31, Amount
---------------------------
(in thousands)
2000 $ 14,493
2001 11,065
2002 254,749
2003 3,599
2004 250,000
Thereafter -
-----------
$ 533,906
===========
11. INCOME TAXES
The provision for (benefit from) income taxes for the years ended December
31, 1999, 1998 and 1997 consists of:
------------------------------
1999 1998 1997
---------- -------- --------
(in thousands)
Current:
Federal $ 2,802 - $ 1,581
State 1,064 983 218
---------- -------- --------
Total current provision 3,866 983 1,799
Deferred:
Federal (2,450) (17,281) 1,468
State 452 (2,903) 517
---------- -------- ---------
Total deferred liability
(benefit) (1,998) (20,184) 1,985
---------- -------- ---------
Total provision (benefit) $ 1,868 $(19,201) $ 3,784
========== ========= =========
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. These taxes are
included in the current provision for state and local income taxes. Certain
acquisitions in 1995 and the Reel.com acquisition in 1998 yielded
nondeductible goodwill which is reflected in the tax rate reconciliation
below. The tax impact of purchase accounting adjustments is reflected in
deferred taxes. A reconciliation of the statutory federal income tax rate
with the Company's effective income tax rate is as follows:
--------------------------
1999 1998 1997
-------- ------- -------
Statutory federal rate
(benefit) (34.0%) (34.0%) 34.0%
State income taxes, net of
federal income
tax benefit 2.1 (1.8) 5.5
Amortization of nondeductible
goodwill 35.7 6.9 -
Other, net .1 1.3 1.0
------- ------- -------
3.9% (27.6%) 40.5%
======= ======= =======
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The tax effects of temporary differences that
give rise to significant portions of deferred tax assets and liabilities at
December 31 are as follows:
----------------------
1999 1998
---------- ----------
Deferred tax assets:
Tax loss carryforward $ 29,428 $ 26,618
Deferred rent 7,037 5,589
Financial leases 5,903 3,883
Income deferred for financial
Statement purposes 1,861 2,308
Tax credit carryforward 4,031 1,906
Financial statement expenses
deferred
for tax purposes 676 784
Accrued legal settlement 9,835 -
Other 25 24
---------- --------
Total deferred tax assets 58,796 41,112
Valuation allowance (6,105) (5,599)
---------- --------
Net deferred tax assets 52,691 35,513
---------- ---------
Deferred tax liabilities:
Depreciation and amortization (22,894) (8,227)
Capitalized leases (3,745) (2,778)
Tax expenses deferred for
financial statement purposes (247) (248)
---------- --------
Total deferred tax liabilities (26,886) (11,253)
---------- --------
Net deferred tax asset (liability) $ 25,805 $ 24,260
========== =========
At December 31, 1999, the Company had approximately $73.6 million of net
operating loss carryforwards available to reduce future income taxes,
representing operating losses of Hollywood Entertainment, Reel.com and Title
Wave, a company acquired during 1995 through a stock purchase. The Company
expects to fully utilize Hollywood Entertainment, post acquisition Reel.com and
Title Wave losses in future years and thus no valuation allowance has been
recorded. The Company has provided a valuation allowance for pre-acquisition
losses of Reel.com. The carryforward periods expire in years 2009 through
2019. The Company has federal Alternative Minimum Tax ("AMT") credit
carryforwards of $4.0 million which are available to reduce future regular
taxes in excess of AMT. These credits have no expiration date.
The Company may realize tax benefits as a result of the exercise of certain
employee stock options. For financial reporting purposes, any reduction in
income tax obligations as a result of these tax benefits is credited to
shareholders' equity.
12. SHAREHOLDERS' EQUITY
Preferred Stock
At December 31, 1999 the Company is authorized to issue 19,500,000 shares
of preferred stock in one or more series. The Board of Directors has
authority over the designations, preferences, special rights, limitations or
restrictions thereof as it may determine. The Company issued and sold a
total of 2,380,263 shares of Series A Redeemable Preferred Stock in
connection with the Reel.com acquisition. These shares were converted into
Common Stock on a one for one basis upon shareholder approval on December 30,
1998.
Common Stock
During 1998, the Company repurchased 850,000 Common Shares on the open
market for $10.5 million.
In October 1998, the Company exchanged and sold a total of 8,362,800
shares of its Common Stock in connection with the acquisition of Reel.com as
discussed in Note 7. This amount includes the Preferred Shares converted to
Common Stock discussed above.
In December 1996, the Company completed a public offering of 2,000,000
shares of its common stock. The net proceeds from the offering were
approximately $34.7 million. Additionally, in January 1997, the
underwriters purchased an additional 300,000 shares pursuant to the
overallotment option for net proceeds to the Company of approximately $4.7
million.
13. STOCK OPTION PLANS
In general, the Company's stock option plans provide for the granting of
options to purchase Company shares at the market price of such shares as of
the option grant date. The options generally have a nine year term and
become exercisable on a pro rata basis over five years. The Company adopted
stock option plans in 1993 and 1997 providing for the granting of non-
qualified stock options, stock appreciation rights, bonus rights and other
incentive grants to employees up to an aggregate of 10,000,000 shares of
common stock. The 1997 plan provides for the granting of nonqualified stock
options to employees up to an aggregate of 2,000,000 shares of common stock.
The Company granted non-qualified stock options pursuant to the 1993 and the
1997 Plans totaling 2,804,925, 5,347,269 and 2,165,513 in 1999, 1998 and
1997, respectively.
The Company has elected to follow APB No. 25; "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting
for its employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized. Pro forma information regarding net income per share is required
by SFAS No. 123, "Accounting for Stock-Based Compensation", and has been
determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using Black-Scholes option pricing
model with the following weighted-average assumptions for 1999, 1998 and
1997:
-----------------------------
1999 1998 1997
-----------------------------
Risk free interest rate 6.33% 4.5% 5.7%
Expected dividend yield 0% 0% 0%
Expected lives 5 years 5 years 5 years
Expected volatility 85% 75% 65%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Because the Company's employee
stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the Company's opinion the
existing available models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
Using the Black-Scholes option valuation model, the weighted average grant
date value of options granted during 1999, 1998 (excluding the options
assumed in connection with the Reel.com acquisition) and 1997 was $9.95,
$6.77, and $10.10 per option, respectively. Options issued in connection
with the Reel.com acquisition totaled 958,568 and had an aggregate fair
market value of $10.8 million at the closing date using the Black-Scholes
option valuation model.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized over the option's vesting period. The value of options
issued in connection with the Reel.com acquisition are excluded from the
proforma disclosure as the value of these options was part of the acquisition
purchase price.
The Company's pro forma information is as follows:
December 31,
------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ------------------
Pro Pro Pro
Reported Forma Reported Forma Reported Forma
--------- --------- --------- --------- -------- ------
Net income
(loss) $(51,302) $(57,665) $(50,464) $(53,583) $4,996 $1,459
Earnings (loss)
per Share:
Basic (1.13) (1.26) (1.30) (1.38) 0.14 0.04
Diluted (1.13) (1.26) (1.30) (1.38) 0.13 0.04
Options to purchase 2,300,344 shares of common stock were not included in the
computation of pro forma diluted earnings per share for December 31, 1999, as
such shares were anti-dilutive.
The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1996.
A summary of the Company's stock option activity and related information for
1999, 1998 and 1997 is as follows (in thousands, except per share amounts):
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at December 31, 1996 4,040 9.25
Granted 2,165 16.35
Exercised (480) 7.74
Cancelled (587) 11.79
--------- --------
Outstanding at December 31, 1997 5,138 12.09
Granted (1) 5,347 8.55
Exercised (633) 7.39
Cancelled (2,392) 13.79
--------- --------
Outstanding at December 31, 1998 7,460 9.40
Granted 2,805 14.05
Exercised (889) 5.24
Cancelled (1,189) 9.13
--------- --------
Outstanding as December 31, 1999 8,187 11.49
========= ========
(1) Includes 958,568 stock options issued in connection with the Reel.com
acquisition. See Note 7.
A summary of options outstanding and exercisable at December 31, 1999 is as
follows (in thousands, except per share amounts):
--------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
- -------------------------------------------------------------------------
$ 0.56 - $6.50 852 5.74 $ 4.31 492 $ 4.50
6.84 - 9.25 1,363 6.64 8.35 460 8.06
9.50 - 10.44 1,416 7.58 10.14 402 10.17
10.50 - 15.00 3,474 7.98 12.71 529 12.65
15.06 - 28.625 1,082 7.05 18.98 273 18.62
-------- ------- -------- ------ -------
8,187 7.33 $11.49 2,156 $ 10.11
======== ======= ======== ====== =======
14. EARNINGS PER SHARE
A reconciliation of the basic and diluted per share computations for 1999,
1998 and 1997 is as follows (in thousands, except per share data):
------------------------------------
1999
------------------------------------
Weighted Per
Income Average Share
(Loss) Shares Amount
---------- --------- ---------
Income (loss) before
extraordinary item and
cumulative effect adjustment $ (49,858) 45,592 $ (1.09)
Extraordinary loss, net of tax - - -
Cumulative effect
adjustment, net of tax (1,444) - (0.04)
---------- -------- ---------
Income (loss) per common share $ (51,302) 45,592 $ (1.13)
Effect of dilutive securities:
Stock options - - -
---------- -------- ---------
Income (loss) per share-
assuming dilution $ (51,302) 45,592 $ (1.13)
========== ======== =========
------------------------------------
1998
------------------------------------
Weighted Per
Income Average Share
(Loss) Shares Amount
---------- --------- ---------
Income (loss) before
extraordinary item and
cumulative effect adjustment $ (50,464) 38,844 $ (1.30)
Extraordinary loss, net of tax - - -
Cumulative effect
adjustment, net of tax - - -
---------- -------- --------
Income (loss) per common share $ (50,464) 38,844 $ (1.30)
Effect of dilutive securities:
Stock options - - -
---------- -------- ---------
Income (loss) per share-
assuming dilution $ (50,464) 38,844 $ (1.30)
========== ======== =========
------------------------------------
1997
------------------------------------
Weighted Per
Income Average Share
(Loss) Shares Amount
---------- ---------- ---------
Income (loss) before
extraordinary item and
cumulative effect adjustment $ 5,559 36,659 $ 0.15
Extraordinary loss, net of tax (563) - (0.01)
Cumulative effect
adjustment, net of tax - - -
--------- ---------- ---------
Income (loss) per common share $ 4,996 36,659 $ 0.14
Effect of dilutive securities:
Stock options - 1,059 (0.01)
---------- -------- ---------
Income (loss) per share-
assuming dilution $ 4,996 37,718 $ 0.13
========== ======== =========
Due to the Company's loss in 1999 and 1998, a calculation of earnings per share
assuming dilution is not required. In 1999 and 1998 dilutive securities
consisted of options convertible into approximately 2.1 million and 1.3 million
shares of common stock, respectively, using the treasury stock method to
compute dilution.
15. SPECIAL AND/OR UNUSUAL ITEMS
The Company incurred the following special and/or unusual charges in 1999,
1998 and 1997.
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 the companies and dismisses all claims against the Company. The
Company incurred $23.1 million in settlement and legal costs. The settlement
included $8.0 million in cash to cover outstanding invoices and consideration
for business disruption to Rentrak; $6.0 million to cover Rentrak's legal
fees and costs; and finally, the Company issued 200,000 shares of its common
stock to Rentrak. Additionally, 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 dispute. 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.
In 1998, the Company recorded a $99.9 million charge related to the
valuation of its rental inventory (see Note 4). In addition, the Company
wrote off $1.9 million related to purchased research and development costs
associated with the Reel.com acquisition (see Note 7).
The Company recorded a $6.8 million charge in the fourth quarter of 1997
to write down video game inventory and related accessories to net realizable
value that had become obsolete due to advancements in video game technology.
Of the $6.8 million charge, $2.3 million was included in cost of product
sales and $4.5 million was included in cost of rental sales on the
consolidated statements of operations.
The Company recorded a $4.6 million charge in the fourth quarter of 1997
for costs related to the Company's self-tender offer to acquire shares of its
common stock at $11.00 per share, which failed because the minimum number of
shares required for the transaction were not tendered. This charge is
included in general and administrative expenses on the consolidated
statements of operations.
In March 1997, the Company recorded a $18.9 million charge for the
settlement of the securities litigation initiated in December 1995. The
charge consisted of $14.8 million in damages and $4.1 million in legal and
professional expenses. The Company agreed to the settlement to avoid further
litigation expense and inconvenience and to put an end to all controversy and
claims related to the subject of litigation.
16. COMMITMENTS AND CONTINGENCIES
During 1999, the Company was named as a defendant in three complaints which
the Company anticipates will be consolidated into a single class action
entitled WOODS V. HOLLYWOOD ENTERTAINMENT, ET AL, Case No. CV779511, in the
Superior Court of the State of California in and for the County of Santa
Clara. The plaintiffs are seeking to certify a class made up of certain
exempt employees which they claim are owed overtime payments in certain
stores in California. The case is in the early stages of discovery. A class
has not been certified. The Company is unable to determine that the
likelihood of an unfavorable outcome of the litigation is either probable or
remote. The Company intends to vigorously defend the action.
17. 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 1999 and 1998, the Company had 2 segments. At December 31, 1999, the
Hollywood Video segment consists of the Company's 1,615 retail stores located
in 44 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):
Year Ended December 31, 1999
---------------------------------------
Hollywood
Video Reel.com Total
----------- ---------- -----------
Revenues $1,054,879 $ 41,962 $1,096,841
Tape amortization 107,127 450 107,577
Other depreciation and
amortization 64,078 51,187 115,265
Operating income (loss) 96,025 (98,538) (2,513)
Interest expense, net 41,042 4,435 45,477
Total assets 1,010,773 69,404 1,080,177
Purchase of property and
equipment, net 108,804 3,454 112,258
Year Ended December 31, 1998
--------------------------------
Hollywood
Video Reel.com Total
----------- -------- --------
Revenues $ 756,658 $ 7,250 $763,908
Tape amortization 135,093 191 135,284
Other depreciation and
amortization 47,592 12,511 60,103
Operating income (loss) (14,527) (21,924) (36,451)
Interest expense, net 33,048 166 33,214
Total assets 842,212 94,118 936,330
Purchase of property and
equipment, net 131,364 758 132,122
There was only one segment, Hollywood Video, in 1997.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is as follows (in thousands, except per
share data):
Quarter Ended
---------------------------------------------
March June September December
--------- --------- ---------- -----------
1999
------------------------
Total revenue
As previously reported $266,529 $250,368 $266,319
Adjustments (1) (404) (905) (652)
--------- --------- ---------
As adjusted $266,125 $249,463 $265,667 $315,586
========= ========= ========= =========
Gross profit:
As previously reported $166,581 $155,382 $165,177
Adjustments (1) (371) (1,002) (873)
--------- --------- ---------
As adjusted $166,210 $154,380 $164,304 $178,067
========= ========= ========= =========
Income from operations
As previously reported $13,390 $ 5,707 $ 1,016
Adjustments (1) 204 (1,106) (1,375)
--------- --------- ---------
As adjusted $ 13,594 $ 4,601 $ (359) $(20,349)
========= ========= ========= ==========
Net income (loss)
As previously reported $ (4,221) $ (8,329) $(11,662)
Adjustments (1) 204 (1,106) (1,375)
--------- --------- ---------
As adjusted $ (4,017) $ (9,435) $(12,997) $(24,853)
========= ========= ========= ==========
Net income (loss) per
share:
Basic
As previously reported $ (0.09) $ (0.18) $ (0.25)
Adjustments (1) 0.00 (0.03) (0.03)
--------- --------- ---------
As adjusted $ (0.09) $ (0.21) $ (0.28) $ (0.54)
========= ========= ========= =========
Net income (loss) per
share:
Diluted
As previously reported $ (0.09) $ (0.18) $ (0.25)
Adjustments (1) 0.00 (0.03) (0.03)
--------- --------- ---------
As adjusted $ (0.09) $ (0.21) $ (0.28) $ (0.54)
========= ========= ========= =========
1998
-------------------------
Total revenue $169,952 $166,731 $184,072 $243,153
Gross profit 115,210 109,727 123,396 55,998
Income (loss) from
operations 19,797 17,403 18,982 (92,633)
Net income (loss) 7,663 5,654 6,082 (69,863)
Net income (loss)
per share:
Basic 0.21 0.15 0.16 (1.56)
Diluted 0.21 0.15 0.16 (1.56)
(1) During the fourth quarter of 1999, the Reel.com segment of the Company
recorded adjustments primarily related to advertising revenue and product
development costs. The impact of these changes, including related income
tax effects, was to increase previously reported net income by $204,000
for the quarter ended March 31, 1999 and to decrease net income by
$1,106,000 and $1,375,000 for the quarters ended June 30, 1999 and
September 30, 1999, respectively.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of March 30, 1999.
Hollywood Entertainment Corporation
By: /S/ DAVID G. MARTIN
---------------------------
David G. Martin
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated as of March 30, 1999.
Signatures Title
MARK J. WATTLES
- ----------------
Mark J. Wattles Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
DAVID G. MARTIN
- ---------------
David G. Martin Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
DONALD J. EKMAN
- ---------------
Donald J. Ekman Director
SCOTT A.BECK
- -------------
Scott A. Beck Director
WILLIAM P. ZEBE
- ---------------
William P. Zebe Director