HLYW Hollywood Entertainment (MM)

Dolphin-I Cautions Hollywood Special Committee That Auction Process Must be Disinterested STAMFORD, Conn., Nov. 22 /PR Newswire/ -- Dolphin Limited Partnership I, L.P., a Stamford, CT based private investment partnership that beneficially holds 1.9 million shares of Hollywood Entertainment, Inc. (NASDAQ:HLYW), today released the following open letter to the chairman of the special committee of the Company's board of directors that is conducting the process for the sale of the Company. In the letter, Dolphin explains why it believes the actions of the committee to date have been suspect and cautions that the committee must now conduct an auction process that is totally fair and disinterested. November 22, 2004 Mr. S. Douglas Glendenning Chairman, Special Committee, Board of Directors Hollywood Entertainment, Inc. 9275 S.W. Peyton Lane Wilsonville, OR 97070 Dear Mr. Glendenning: With Friday's announcement by Movie Gallery, Inc. that it too has delivered an acquisition proposal to your committee, there are now two bids competing with the undervalued buyout by Leonard Green & Partners ("LGP") and top management. We may never know the damage shareholders have suffered because the committee entered into an exclusive arrangement with LGP and the Company's chairman, Mr. Mark Wattles, earlier this year rather than having conducted an auction. The pretext given for initially not seeking an auction -- that it would somehow damage the Company by leading to "leaks" -- now appears to have evaporated. With each new bona fide bid for the Company, suspicions grow that the committee's decision to deal exclusively with LGP and Mr. Wattles was not made in the best interests of shareholders. We caution the committee that consideration of all acquisition proposals must be conducted in a fair and evenhanded manner, with no advantage whatsoever given to the transaction sponsored by LGP and top management. This includes providing ample time for all bidders to conduct diligence, as LGP has had over nine months to examine the Company. Now the objective of the committee must be to obtain the best and highest possible transaction value for all shareholders. Thus far, we believe the committee has failed to demonstrate its allegiance to all of its shareholders. We say this because of the initially flawed process by which the committee approved the March LGP buyout and the serious questions that arise from the revised proxy materials in support of the reduced October buyout. The committee appears to have accepted the revised fairness report which, even upon a casual comparison to the July $14/share transaction, reveals obvious flaws. Nearly every aspect of the October analysis-an over reliance on top management's dramatically cut projections, the utilization of unsupported reduced terminal exit multiples, the introduction of factors to discount the market value of the Company's shares to its comparable competitors and the absence of a control premium analysis-appears to have been adapted to support a 27% cut to $10.25. How could the committee also fail to appreciate what the Company's competitors were saying about the depressed second-half industry results? During this timeframe there has been a "perfect storm" - the Olympics; the presidential election; the highly competitive fall baseball season; the private release of the Passion and Fahrenheit 9/11 that drew large audiences but whose store appearance has been delayed; the extreme weather in the Southeast; and the generally weak movie release calendar. The unbelievable $67 million drop in top management's 2005 EBITDA projections -- that occurred in a span of just three months -- appears predicated on these anomalies. Yet there is no evidence in the revised proxy materials that the committee was properly focused on the confluence of these likely one-time circumstances, let alone applied them to a critical analysis of top management's revised projections. With this background, we are carefully watching the committee for any hint that the auction process is not being conducted in a thoroughly disinterested manner. Only a process that yields the highest and best value for all shareholders, a solid merger agreement -- as opposed to the two Swiss cheese agreements in the LGP/top management buyouts -- and appropriate and timely information to all shareholders will demonstrate that the committee has indeed lived up to its fiduciary responsibilities. Despite the questionable history of this transaction, we expect that you and your colleagues on the committee will now do so. Very truly yours, /s/ Donald T. Netter Donald T. Netter Senior Managing Director cc: J. Feuer, Esq. (Gibson Dunn & Crutcher, Counsel to the Special Committee) J. K. Layne, Esq. (Gibson Dunn & Crutcher, Counsel to the Special Committee) R.J. Moorman, Esq. (Stoel Rives LLP, Counsel to the Company) DATASOURCE: Dolphin Limited Partnership I, L.P. CONTACT: L. Bolster of Dolphin Limited Partnership I, L.P., +1-203-358-8000

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