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Hollywood Investors Seek $15M Loan Repayment; Alternative Buyout Strategy

23 Sep, 2004 By: Erik Gruenwedel

An investor group that holds 1.3 million shares of Hollywood Entertainment stock today asked the company to repay with interest a May 2000 loan to chairman/CEO Mark Wattles totaling about $21 million.

In addition, Stamford, Conn.-based Dolphin Limited Partnership issued an alternative to Wattles' stalled $14-per-share management buyout offer that would include issuing a $2.50 cash dividend or acquiring about 20 percent of Hollywood's 60.8 million outstanding shares for $12 a share.

Either option, which requires borrowing money, would generate about $75 million in cash flow, eliminate outstanding debt and elevate Hollywood's stock price, according to a financial expert familiar with these deals.

“[Dolphin is] saying that the money that they would borrow to do this dividend wouldn't cripple the company,” said the expert. “All Dolphin wants is for the stock to get up fast enough so they can sell their shares. It's like a home equity loan.”

Dolphin said that in light of Wattles' possession of stock and options exceeding $50 million, Hollywood's original $15 million loan to the CEO — written off by the board of directors seven months after its issuance — should be repaid, including $6 million in approximate accrued interest.

The investment group also criticized Hollywood for failing to address “40 questions contained in two letters” that allege numerous conflicts and governance flaws, including granting Wattles 3.5 million stock options at $1.09 per share, a $4 million cash/stock bonus; allowing Wattles to act as gatekeeper to a buyout deal to which he was the biggest benefactor, and allowing the CEO to operate 20 stores with working capital provided by Hollywood.

“They should have looked at Mark's past before they lent him $15 million,” said Dennis McAlpine, analyst with McAlpine & Associates.

Reiterated the financial expert, “Wattles has taken the company close to bankruptcy many times. It's his company. He started it. You have an independent board that made a loan, and they wrote it off. There is nothing untoward about it.”

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