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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
______________
BLOWOUT ENTERTAINMENT, INC.
(Exact name of registrant as specified in Its charter)
Delaware 87-0498950
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
7227 NE 55th Avenue 97218
Portland, Oregon (Zip Code)
(Address of principal executive offices)
(503) 331-2729
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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CROSS REFERENCE SHEET
---------------------
Except for Items 10, 14 and 15(b) below, the information required by each Item
listed below is contained under the sections of the attached Information
Statement indicated below and such section or sections are incorporated into
such Items by reference. The information required by Items 10 and 15(b) is
contained in the Section of this Form 10 entitled "Additional Information".
Item 14 is not applicable.
Item No. Location in Information
in Form 10 Statement/Registration Statement
- ---------- --------------------------------
Item 1. Business Summary of Certain Information;
The Company; Business
Item 2. Financial Information Selected Historical and Pro Forma
Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Properties Business
Item 4. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
Item 5. Directors and Executive Officers Management
Item 6. Executive Compensation Management
Item 7. Certain Relationships and Related Related Party Transactions
Transactions
Item 8. Legal Proceedings Business
Item 9. Market Price of and Dividends on Description of Company Capital
the Registrant's Common Equity Stock; Management; The Distribution;
and Related Stockholder Matters Risk Factors
Item 10. Recent Sales of Unregistered Additional Information
Securities
Item 11. Description of Registrant's Description of Company Capital Stock
Securities to be Registered
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Item 12. Indemnification of Directors Management; Description of Company
and Officers Capital Stock
Item 13. Financial Statements and Index to Financial Statements
Supplementary Date
Item 14. Changes in and Disagreements Not Applicable
with Accountants on Accounting
and Financial Disclosure
Item 15(a) Financial Statements Index to Financial Statements
Item 15(b) Exhibits Additional Information
3
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[LETTERHEAD OF RENTRAK CORPORATION]
[DATE]
Dear Shareholder:
The Board of Directors of Rentrak Corporation ("Rentrak") has approved the
distribution (the "Distribution") to holders of Rentrak Common Stock, through a
special dividend, of the Common Stock of BlowOut Entertainment, Inc.
("BlowOut"). The enclosed Information Statement contains information about the
Distribution and about BlowOut.
If you are a holder of Rentrak Common Stock of record at the close of
business on _______________, 1996, you will receive as a dividend one share of
BlowOut Common Stock for every ten (10) shares of Rentrak Common Stock you hold.
We expect to mail the BlowOut Common Stock certificates starting on or about
_______________, 1996. Fractional shares will be paid in cash.
The completion of the Distribution will permit BlowOut and Rentrak each to
concentrate on its core business with separate experienced and focused
management teams. Rentrak believes that the Distribution will also allow
financial markets to better understand and recognize the merits of the two
businesses.
After the Distribution, Rentrak will continue its primary business as a
wholesale distributor of video cassettes to home video specialty stores under
its Pay Per Transaction system.
After the Distribution, BlowOut will continue to be engaged in the business
of operating "store within a store" retail video outlets which rent and sell
video cassettes, video games, computer games and programs on CD-ROMs in Wal-Mart
and Wal-Mart Super Centers, Super Kmart Centers, Ralphs grocery stores and Food
4 Less grocery stores. BlowOut will continue to participate in the Pay Per
Transaction System.
In connection with the Distribution, the shareholders of Rentrak on the
record date will retain their Rentrak share certificates. Since Rentrak will
continue forward, your share certificates of Rentrak must be retained. You will
automatically receive new BlowOut share certificates. NO FURTHER ACTION ON YOUR
PART IS REQUIRED.
We are excited about this separation and the growth opportunities it will
create for each company and its shareholders.
Sincerely,
Ron Berger
Chairman, President and
Chief Executive Officer
Rentrak Corporation
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INFORMATION STATEMENT
BLOWOUT ENTERTAINMENT, INC.
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, par value $.001
per share ("Rentrak Common Stock"), of Rentrak Corporation ("Rentrak") of
1,214,219 shares of common stock, par value $.01 per share (the "BlowOut Common
Stock"), of BlowOut Entertainment, Inc. ("BlowOut" or the "Company") owned by
Rentrak pursuant to the terms of a Distribution Agreement between the Company
and Rentrak, dated as of September __, 1996. The BlowOut Common Stock being
distributed will represent approximately 50% of the total issued and outstanding
shares of BlowOut Common Stock. Immediately after the Distribution, Rentrak
will continue to own 484,723 shares of BlowOut Common Stock (approximately 19.9%
of the total issued and outstanding shares of such stock). See "The
Distribution" and "Principal Stockholders."
Shares of BlowOut Common Stock will be distributed to holders of record of
Rentrak Common Stock as of the close of business on _______________, 1996 (the
"Record Date"). Each such holder will receive one share of BlowOut Common Stock
for every 10 shares of Rentrak Common Stock held on the Record Date. The
Distribution is scheduled to occur on ______________, 1996 (the "Distribution
Date") or as soon thereafter as practicable. No consideration will be paid by
holders of Rentrak Common Stock for shares of BlowOut Common Stock.
There is no current trading market for BlowOut Common Stock, although a
"when issued" market is expected to develop prior to the Distribution Date. The
Company has received approval to list the shares of BlowOut Common Stock on the
NASDAQ Small Cap Market ("NASDAQ/SCM"). See "The Distribution -- Listing and
Trading of the BlowOut Common Stock."
SEE "RISK FACTORS" HEREIN FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY SHAREHOLDERS OF RENTRAK IN CONNECTION WITH THE DISTRIBUTION.
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_________________________
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
_________________________
Shareholders of Rentrak with inquiries related to the Distribution should
contact F. Kim Cox, Corporate Secretary, Rentrak Corporation, 7227 NE 55th
Avenue, Portland, Oregon 97218-0888, telephone (503) 284-7581, or the Company's
stock transfer agent, U.S. Stock Transfer Corporation, 1745 Gardena Avenue,
Glendale, California 91204, telephone (818) 502-1404. U.S. Stock Transfer
Corporation is also acting as Distribution Agent for the Distribution.
THE DATE OF THIS INFORMATION STATEMENT IS _______________, 1996.
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INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY OF CERTAIN INFORMATION.......................................... 1
RISK FACTORS............................................................ 6
THE DISTRIBUTION........................................................ 12
RELATED PARTY TRANSACTIONS.............................................. 21
FINANCING............................................................... 24
CAPITALIZATION.......................................................... 26
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA........................ 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 29
THE COMPANY............................................................. 36
BUSINESS................................................................ 37
MANAGEMENT.............................................................. 43
PRINCIPAL STOCKHOLDERS.................................................. 50
DESCRIPTION OF COMPANY CAPITAL STOCK.................................... 51
AVAILABLE INFORMATION................................................... 54
INDEX TO FINANCIAL STATEMENTS........................................... F-1
</TABLE>
ANNEX I OPINIONS OF HOULIHAN LOKEY HOWARD & ZUKIN
ANNEX II AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BLOWOUT
ENTERTAINMENT, INC.
ANNEX III AMENDED AND RESTATED BYLAWS OF BLOWOUT ENTERTAINMENT, INC.
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SUMMARY OF CERTAIN INFORMATION
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Information Statement, which should be read in its entirety. For purposes
of this Information Statement, unless the context otherwise requires, the term
"Company" or "BlowOut" includes BlowOut Entertainment, Inc., its subsidiaries
(including W-One, Incorporated; K-One, Incorporated; and Entertainment One,
Inc.) and their predecessors and subsidiaries and the term "Rentrak" includes
Rentrak Corporation and its subsidiaries except for BlowOut. Except for share
information contained in the historical financial statements listed in the Index
to Financial Statements herein and under the caption "Selected Historical and
Pro Forma Financial Data," as otherwise set forth herein or as the context
otherwise requires, all share information regarding BlowOut Common Stock
reflects a 1.01491 for one stock split, effected as a stock dividend on
_____________, 1996. See "Description of Company Capital Stock-Stock Dividend."
THE DISTRIBUTION
Distributing Company............ Rentrak Corporation, an Oregon corporation.
Distributed Company............. BlowOut Entertainment, Inc., a Delaware
corporation, approximately 70% of the issued
and outstanding common stock of which is
owned, directly or indirectly, by Rentrak,
and 30% of which is owned by other parties
(the "BlowOut Minority") immediately prior
to the Distribution.
Distribution Ratio.............. One share of BlowOut Common Stock for every
10 shares of Rentrak Common Stock held on
the Record Date.
Securities to be Distributed.... Based on approximately 12,142,189 shares of
Rentrak Common Stock outstanding on August
31, 1996, approximately 1,214,219 shares of
BlowOut Common Stock. The BlowOut Common
Stock to be distributed will constitute
approximately 50% of the issued and
outstanding shares of BlowOut Common Stock
immediately after the Distribution.
Immediately after the Distribution, Rentrak
will continue to own approximately 19.9% of
the issued and outstanding shares of BlowOut
Common Stock and the BlowOut Minority will
continue to own approximately 30.1% of the
outstanding BlowOut Common Stock.
Fractional Share Interests...... Fractional shares of the BlowOut Common
Stock will not be distributed. Fractional
shares of BlowOut Common Stock will be
aggregated and sold in the public market by
the Distribution Agent and the aggregate net
cash proceeds will be distributed ratably to
those stockholders entitled to fractional
interests. See "The Distribution --Manner of
Effecting the Distribution."
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Record Date..................... _______________, 1996 (5:00 p.m. Eastern
Daylight Time).
Distribution Date............... _______________, 1996.
Mailing Date.................... Certificates representing the shares of
BlowOut Common Stock to be distributed
pursuant to the Distribution will be
delivered to the Distribution Agent on the
Distribution Date. The Distribution Agent
will send certificates representing the
shares of BlowOut Common Stock to holders of
Rentrak Common Stock on the Distribution
Date or as soon as practicable thereafter.
HOLDERS OF RENTRAK COMMON STOCK SHOULD NOT
SEND STOCK CERTIFICATES TO RENTRAK, THE
COMPANY OR THE DISTRIBUTION AGENT. See "The
Distribution --Manner of Effecting the
Distribution."
Conditions to the Distribution.. The Distribution is conditioned upon, among
other things, declaration of the special
dividend by the Board of Directors of
Rentrak (the "Rentrak Board"). The Rentrak
Board has reserved the right to waive any
condition to the Distribution, subject to
certain rights of the Board of Directors of
the Company (the "Company Board") or, even
if the conditions to the Distribution are
satisfied, to abandon, defer or modify the
Distribution at any time prior to the
Distribution Date. See "The Distribution --
Conditions; Termination."
Reasons for the Distribution.... To permit BlowOut and Rentrak each to
concentrate on its core business without
regard to objectives of the other company,
to offer more attractive incentives for key
employees of each company, to improve the
ability of the capital markets to follow
each company and its business, and to
improve access to capital for each company.
Tax Consequences................ The Distribution will be a taxable
distribution for federal income tax purposes
and may also be a taxable transaction for
state, local and other tax purposes. It is
currently expected that holders of Rentrak
Common Stock will recognize dividend income
with respect to the Distribution estimated
to be $0.55 per each share of Rentrak Common
Stock. This estimate is based on a value of
$5.50 per share of BlowOut Common Stock and
becomes the basis of the shares of BlowOut
Common Stock to the holder of the shares of
Rentrak Common Stock. Such valuation is not
necessarily indicative of the prices at
which the BlowOut Common Stock will trade.
Neither Rentrak nor BlowOut, nor any of
their advisors or any other person makes any
representation as to the present or future
value of BlowOut Common Stock. See "The
Distribution -- Federal Income Tax Aspects
of the Distribution," and Risk Factors -- No
Current Market for the BlowOut Common
Stock."
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Trading Market.................. There is currently no public market for the
BlowOut Common Stock. The Company will file
for qualification of shares of the Company
Common Stock on the NASDAQ Small Cap Market
("NASDAQ /SCM"). A "when issued" market is
expected to develop prior to the
Distribution Date. See "The Distribution --
Listing and Trading of the BlowOut Common
Stock" and "Risk Factors -- No Current
Market for BlowOut Common Stock."
Trading Symbol.................. BLWT
Distribution and Transfer Agent
for BlowOut Common Stock........ U.S. Stock Transfer Corporation.
Dividends....................... The Company's dividend policy will be
established by the Company Board from time
to time based on the results of operations
and financial condition of the Company, such
other business considerations as the Company
Board deems relevant, and restrictions and
limitations imposed under financing
documents binding upon the Company. The
Company currently intends to retain
earnings, if any, for use in the operation
and expansion of its business and,
therefore, does not anticipate paying any
cash dividends on the BlowOut Common Stock
in the foreseeable future. See "Risk
Factors - No Dividends."
Anti-Takeover Provisions........ The Amended and Restated Certificate of
Incorporation (the "Certificate of
Incorporation") and By-Laws of the Company,
as well as Delaware statutory law, contain
provisions that may have the effect of
discouraging an acquisition of control of
the Company not approved by the Company
Board. These provisions have been designed
to enable the Company to develop its
business and foster its long-term growth
without disruptions caused by the threat of
a takeover not deemed by the Company Board
to be in the best interests of the Company
and its stockholders. Such provisions may
also have the effect of discouraging third
parties from making proposals involving an
acquisition or change of control of the
Company, although such proposals, if made,
might be considered desirable by a majority
of the Company's stockholders. Such
provisions could further have the effect of
making it more difficult for third parties
to cause the replacement of the current
management of the Company without the
concurrence of the Company Board. See "Risk
Factors--Anti-Takeover Provisions" and
"Description of the Company Capital Stock."
Risk Factors.................... See "Risk Factors" herein for a discussion
of factors that should be considered in
connection with the BlowOut Common Stock
received in the Distribution.
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Equity Financing................ The Company recently converted two
promissory notes having outstanding
principal amounts of $1.0 million each,
previously issued by the Company to Bill
LeVine, a director of the Company and
Rentrak, and to Culture Convenience Club
("CCC"), an affiliate of Muneaki Masuda, a
director of the Company and Rentrak, into
121,789 shares of BlowOut Common Stock
(representing approximately 5% of the
outstanding shares of BlowOut Common Stock
for each such note). The Company also
recently issued 362,931 shares of BlowOut
Common Stock (representing approximately
14.9% of the outstanding shares of BlowOut
Common Stock) to CCC for $2.98 million in
cash. See "Financing" and "Description of
Company Capital Stock."
Debt Financing.................. The Company has recently obtained two
separate credit facilities making available
a total of up to $7.0 million of secured
debt financing, consisting of a $2.0 million
secured loan and a $5.0 million revolving
credit facility. See "Financing" and
"Capitalization."
Relationship with Rentrak
after the Distribution.......... Rentrak will continue to hold 484,723 shares
of BlowOut Common Stock (approximately
19.9%). Certain directors and an officer of
Rentrak are also currently, and after the
Distribution will continue to be, directors
of BlowOut. One such director of the
Company, F. Kim Cox, intends to resign upon
the selection by the other members of the
Company Board of a replacement. See
"Management."
Rentrak is the principal creditor of the
Company and has agreed to guarantee certain
indebtedness of the Company. See "Related
Party Transactions."
BlowOut is and will continue to be a
participant in the Rentrak "Pay Per
Transaction" video distribution system (the
"PPT System"). BlowOut currently leases and
will continue to lease office and warehouse
space from Rentrak. Rentrak will own and
license to the Company the "BlowOut" name
and mark. See "Distribution --Relationship
Between the Company and Rentrak After the
Distribution" and "Related Party
Transactions."
NO ACTION IS REQUIRED OF OR SOUGHT BY RENTRAK SHAREHOLDERS IN CONNECTION WITH
THE DISTRIBUTION.
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THE COMPANY
The Company is engaged in the business of operating "store within a store"
retail video outlets which rent and sell video cassettes, video games, computer
games and programs on CD-ROMs in Wal-Mart stores and Wal-Mart SuperCenters
operated by Wal-Mart Stores, Inc. ("Wal-Mart"), Super Kmart Centers operated by
Kmart Corporation ("Kmart"), Ralphs grocery stores and Food 4 Less grocery
stores (together referred to herein as "Ralphs") pursuant to individual leases
with each of these retailers. As of August 31, 1996, the Company operated 151
stores in Wal-Mart and in Wal-Mart SuperCenters, 35 stores in Super Kmart
Centers, and six in Ralphs under the name "BlowOut Video" pursuant to a license
with Rentrak, and six additional stores in Ralphs, under the name "Videos &
More." The principal executive offices of the Company are located at 7227 NE
55th Avenue, Portland, Oregon 97218-0888, telephone (503) 331-2729.
The Company was formed by Rentrak in 1992 as SMM, Inc., a Delaware
corporation and thereafter changed its name to SVI, Inc. ("SVI"). During the
past year the business and operations of two wholly-owned subsidiaries of
Rentrak, W-One, Incorporated, an Oregon corporation ("W-1"), and K-One,
Incorporated an Oregon corporation ("K-1"), and the assets (subject to assumed
liabilities) of Entertainment One, Inc., a Delaware corporation ("E-1"), of
which Rentrak owned approximately 93% of the issued and outstanding common
stock, were consolidated with the Company, and the Company changed its name to
BlowOut Entertainment, Inc. All such corporations were engaged in the "store-
within-a-store" retail video rental and sales business. See "Company -- History
of the Company."
Information contained in this Information Statement contains "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, which can be identified by the use of forward-looking
terminology such as "may," "will," "except," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The matters set forth under the caption "Risk Factors" in this
Information Statement constitute cautionary statements identifying important
factors with respect to such forward-looking statements, including certain risks
and uncertainties, that could cause actual results to differ materially from
those in such forward-looking
statements.
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RISK FACTORS
Shareholders of Rentrak should be aware that the Distribution and
ownership of the BlowOut Common Stock involves certain risk factors, including
those described below and elsewhere in this Information Statement, which could
adversely affect the value of their holdings. Neither the Company nor Rentrak
makes, nor is any other person authorized to make, any representation as to the
future market value of the BlowOut Common Stock. Any forward-looking statements
contained in this Information Statement should not be relied upon as predictions
of future events. Such statement are necessarily dependent on assumptions, data
or methods that may be incorrect or imprecise and that may be incapable of being
realized.
RECENTLY FORMED ENTITY WITH LIMITED COMBINED OPERATING HISTORY; SEPARATION FROM
RENTRAK.
The Company was formed in 1992, but only recently expanded its
operations through the consolidations of SVI with W-1, K-1 and E-1. The
Company's management has limited experience operating the Company as a combined
entity. There can be no assurance that problems, expenses, complications and
delays will not arise from this consolidation or as the Company's management
attempts to grow the Company.
In addition, since the consolidation, the Company has operated as a
majority-owned subsidiary of Rentrak. The Company has relied upon Rentrak for
substantial financial support. As of July 31, 1996, the Company was indebted to
Rentrak in the amount of approximately $7.4 million. In addition, Rentrak has
guaranteed up to $7.0 million of borrowings under the Company's credit
facilities provided by Phoenix Leasing Incorporated ("Phoenix") and Coast
Business Credit ("CBC"). After the Distribution, Rentrak will have a continuing
monetary guaranty for the Phoenix credit facility. After the Distribution,
Rentrak has agreed, under certain circumstances in the event of a default under
the credit facility with CBC, to repurchase BlowOut's video cassette inventory
in an amount not to exceed the lesser of the amount owed under the CBC facility
or $5.0 million. Rentrak has no current intention to provide any additional
financial support to the Company following the Distribution. The Company, to a
lesser extent, has also relied on Rentrak for assistance with personnel
management, capital formation, and administration. Upon completion of the
Distribution, the Company will no longer be able to rely on Rentrak for such
administrative assistance and will need to manage itself as a separate business
entity, including obtaining independent sources of financing and successfully
replacing administrative capability previously provided by Rentrak. See "The
Distribution -- Relationship Between the Company and Rentrak After the
Distribution" and "Financing."
DEPENDENCE ON HOST STORES
The Company is highly dependent on its relationships with its host
stores, particularly its relationships with Wal-Mart and Kmart, in whose stores
currently 94% of the Company's outlets are located. There can be no assurance
that the host stores will open additional stores in locations which are
commercially viable for retail video operations, or that the number of future
stores opened by the host stores will meet the Company's expansion plans. Any
host store could change its development or operation plans at any time. The
Company's management believes that the strategy of both Wal-Mart and Kmart is to
have more than one vendor operating "store within a store" video rental and
sales outlets. For example, Wal-Mart has leased space in certain Wal-Mart
stores to Blockbuster Video. The Company has an exclusive arrangement to
operate video retail outlets in Ralphs. The Company believes that neither Kmart
nor Ralphs has opened additional video rental and sales outlets in its host
stores since May 31, 1996, and, as a result, the Company has not opened
additional stores in such period with such host stores. Moreover, there can be
no assurance that host stores will not operate their own video rental and sale
outlets.
The Company is party to master leases with Wal-Mart and Kmart,
respectively, for its stores. The Wal-Mart master lease expires on November 18,
1999 and the Kmart master lease expires on September 20, 1999. Each of these
master leases provides for an initial five-year term for each new store, with an
additional five-year optional renewal term. Either party to the Wal-Mart lease
can elect
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to close stores which fail to generate a minimum level of revenues. Although
there currently are stores operated by the Company in both Wal-Mart and Kmart
locations that are not performing at such minimum levels, neither Wal-Mart nor
Kmart has exercised its right to close such stores. However, the Company has
elected to close 24 stores (consisting of 23 stores in Wal-Marts and 1 store in
Kmart) during the past three (3) months, and has given Kmart notice of its
intention to close 10 additional under-performing stores in April 1997. The
Company has no exclusive right to open stores in Wal-Mart and Kmart stores and
no control over the geographic area or market in which the new stores will be
located. The master leases also allow Wal-Mart or Kmart, under certain
conditions, to restrict the ability of the Company to sell video cassette titles
which are being sold in particular Wal-Mart or Kmart stores, respectively.
There can be no assurance that the Company will be able to operate stores within
either Wal-Mart or Kmart stores for any period of time following the terms
provided in the master leases. Furthermore, although the Company plans to seek
to open video retail outlets in other mass retail and grocery stores, if either
Wal-Mart or Kmart terminates its relationship with the Company, there can be no
assurance that the Company could find a suitable local, regional or national
retail mass merchant with sufficient stores to support its "store within a
store" retail concept.
EXPANSION STRATEGY
The Company intends to implement expansion and growth strategies for
opening additional "store within a store" outlets in Wal-Mart SuperCenters, and,
to a much lesser extent, in Super Kmart Centers and Ralphs. As part of the
Company's expansion strategy, it plans to seek to open video retail outlets in
other mass retail and grocery stores. The Company typically is offered store
locations by Wal-Mart and Kmart six months in advance of the target store
opening date. The Company currently expects to open 10 new stores in Wal-Mart
SuperCenters during the remainder of fiscal year 1996 and 17 new stores in Wal-
Mart SuperCenters during fiscal year 1997. The Company currently does not
believe that it will be opening a significant number of stores in Super Kmart
Centers or Ralphs in 1997. The actual number of store openings will depend upon
a number of factors outside the Company's control including the expansion plans
of Wal-Mart, Kmart and Ralphs, the number of store locations offered to the
Company and the opportunities to open stores in other mass retail and grocery
stores. Thus, the actual number of store openings could vary significantly
from plan.
Substantial capital outlays of approximately $100,000 will be required
to open each new store. The Company believes that its existing operating cash
flow and credit facilities will provide the capital necessary to open the new
stores that are planned. If the Company determines to open additional stores
during fiscal 1997, the Company may have to obtain other debt or equity
financing or expand more slowly than desired. There can be no assurance that
the Company will be able to obtain any such additional financing on reasonable
terms. Failure to meet the expansion schedule of the host stores could have a
material adverse effect on the Company. Additional management resources will be
required to expand Company operations. There can be no assurance that the
Company will be able to attract and retain a sufficient number of skilled store
managers to implement this growth strategy.
HISTORY OF OPERATING LOSSES; HIGH LEVEL OF INDEBTEDNESS
The Company and its predecessors have experienced significant
operating losses in recent years. As of June 30, 1996, the Company's balance
sheet reflects an accumulated deficit of approximately $9.5 million.
Furthermore, to date neither the Company nor its consolidating subsidiaries has
operated at a profit, and there can be no assurance that the Company will be
able to meet the demands of a growth strategy and operate at a profit at any
time in the foreseeable future. The Company's ability to achieve profitability
depends upon its ability successfully to open additional stores and to increase
revenues at new and existing stores. See "Selected Historical and Pro Forma
Financial Data" and the Financial Statements, including the Notes thereto, and
other financial data included elsewhere herein.
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Following the Distribution, BlowOut will be highly leveraged. At June
30, 1996, the Company had current assets of $4.1 million and current liabilities
of $8.8 million. The Company has also entered into two credit facilities with
maximum aggregate allowable borrowings of $7.0 million of which $965,000 is
currently outstanding. The Company's leveraged position poses certain risks,
including the risk that such position may adversely affect its ability to obtain
additional financing in the future and may make the Company more vulnerable to
economic downturns, and may limit its ability to withstand competitive pressure.
QUARTERLY FLUCTUATIONS
The Company's future operating results may be affected by the number
and timing of store openings, the quality of new release titles available for
rental and sale, weather and other special and unusual events all of which are
outside the control of the Company. Spending on entertainment items such as
video rentals and purchases is discretionary and may be particularly susceptible
to regional and national economic conditions. In addition, any concentration of
new store openings and related new store preopening costs near the end of a
fiscal quarter could have an adverse effect on the financial results for that
quarter. Operating results for the Company's retail video operations may also
be affected by seasonal fluctuations in the release of home video titles and
customer traffic patterns in the host stores.
GEOGRAPHIC DIVERSITY; EFFICIENCIES OF OPERATIONS
The Company operates "store within a store" outlets in 28 states.
Most of the stores are in rural communities. The geographic diversity of these
outlets present special challenges with respect to store management, inventory
controls and communications. The opening of additional stores in new states or
regions could lead to redundancies and inefficiencies in operations.
COMPETITION
The video cassette rental and sales industry is highly competitive,
with numerous national, regional and local video store operators. Competitors
such as Blockbuster Video have substantially greater financial resources and
marketing capabilities than those of the Company. The Company believes that
Wal-Mart has already entered into an agreement with Blockbuster Video to operate
video "store within a store" outlets in certain SuperCenters. Because a
majority of the Wal-Mart and Kmart stores in which the Company operates are
located in rural areas, the video operations also face competition from other
supermarket rental operations, a growing segment of the business. In addition,
the Company competes with a number of other leisure and retail entertainment
providers, including television, movie theaters, bowling alleys and sporting
events.
ALTERNATIVE DELIVERY TECHNOLOGIES
In addition to the direct competition from video retailers described
above, the Company faces indirect competition from alternative delivery
technologies which are intended to provide video entertainment directly to the
consumer. These technologies include: (i) direct broadcast satellite
transmission systems, which broadcast movies in digital form direct from
satellites to small antennas in the home; (ii) cable systems, which may transmit
digital format movies to the home over cable systems employing fiber optic
technology; and (iii) pay cable television systems, which may employ digital
data compression techniques to increase the number of channels available and
hence the number of movies which can be transmitted. Another source of indirect
competition comes from program suppliers releasing titles intended for "sell-
through" rather than rental to consumers at prices of approximately $10 to $30
per video cassette. To date, such "sell-through" pricing has generally been
limited to certain newly released hit titles with wide general family appeal.
As the Company's business is dependent upon the existence of a home video rental
market, a substantial shift in the video business to alternative technologies or
"sell-through" policies could have a material adverse effect on the Company's
future
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operations. Such growth in sell-through video tapes has been influenced, in
part, by sales from discount merchants, including Wal-Mart.
DEPENDENCE UPON KEY PERSONNEL
The Company's growth and success have been largely dependent upon the
services of its president, Steve Berns. The Company is dependent for its future
success upon the continued services of its senior management, particularly
Messrs. Steve Berns, Karl Wetzel, and Harold Heyer. See "Management." The
Company believes the unexpected loss of the services of one or more of these key
employees could have a material adverse effect upon the Company. The Company
has entered into employment agreements for initial terms ending between August
30, 1998 and January 31, 1999 with its executive officers. The Company intends
to maintain $12 million dollars of life insurance on the life of Steve Berns.
See "Management -- Employment Agreements."
The Company believes that its future growth will also depend in large
part upon its continued ability to attract, retain and motivate additional
branch managers. There can be no assurance that the Company will be able to
attract and retain sufficiently qualified managers to support its growth
strategy.
CONTROL BY CERTAIN STOCKHOLDERS
Based on information available to the Company, including filings made
with the Securities and Exchange Commission, immediately following the
Distribution, Rentrak and two Rentrak directors who also are directors of the
Company will own beneficially in the aggregate approximately 50.7% of the issued
and outstanding shares of BlowOut Common Stock. Accordingly, if such persons
opt to act as a group, they may exercise control over matters presented to the
BlowOut stockholders. However, such persons have no agreement, arrangement or
understanding with respect to their respective interest in the Company and have
no current intention to enter into any such agreement, arrangement or
understanding. See "Related Party Transactions," "Financing" and "Principal
Stockholders."
POSSIBLE CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS
Certain persons who are directors of the Company are also directors or
officers of Rentrak. Accordingly, conflicts of interest could arise for such
persons. As part of its ongoing business and operations, the Company regularly
engages in transactions with Rentrak. For example, the Company participates in
Rentrak's PPT System, and the fees and payments made by the Company in
connection with the PPT System will be similar to those currently paid by
unaffiliated third parties participating in the PPT System. Due to the
relationship between Rentrak and the Company, the terms on which certain
services have been provided to the Company by Rentrak or its affiliates have not
been necessarily determined by arm's-length negotiations. Certain contractual
arrangements which are currently in place will remain in effect after the
Distribution. See "The Distribution -- Relationship Between the Company and
Rentrak After the Distribution." All such transactions will be subject to
review by the Board of Directors of the Company. Rentrak is currently the
principal creditor of the Company.
NO CURRENT MARKET FOR THE BLOWOUT COMMON STOCK
There is not currently a public market for the BlowOut Common Stock
and there can be no assurance that a public market will develop, or as to the
prices at which trading in the BlowOut Common Stock will occur, after the
Distribution. Until the BlowOut Common Stock is fully distributed and an
orderly market develops, the prices at which trading in such stock occurs may
fluctuate significantly. Rentrak has received the opinion of Pennsylvania
Merchant Group Ltd. with respect to the valuation of the shares of BlowOut
Common Stock to be distributed in the Distribution. Such valuation is not
necessarily indicative of the prices at which BlowOut Common Stock will trade.
Neither Rentrak nor BlowOut, nor any of their advisors or any other person makes
any representation as to the present or future value of BlowOut Common Stock.
The Company has received approval of qualification of shares of the BlowOut
Common Stock on the NASDAQ/SCM following the Distribution. See "The
Distribution -- Listing and Trading of BlowOut Common Stock."
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CHANGES IN TRADING PRICES OF RENTRAK COMMON STOCK
It is expected that Rentrak Common Stock will continue to be listed
and traded on the NASDAQ National Market System after the Distribution. As a
result of the Distribution, the trading price range of Rentrak Common Stock
could change, perhaps significantly from the trading price range of Rentrak
Common Stock prior to the Distribution. The combined trading prices of the
BlowOut Common Stock and Rentrak Common Stock held by stockholders after the
Distribution may be less than, equal to or greater than the trading prices of
Rentrak Common Stock prior to the Distribution.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
To satisfy a condition to the consummation of the Distribution, the
Rentrak Board has received the opinion of Houlihan Lokey Howard & Zukin, Inc.
("Houlihan Lokey") regarding the solvency of the Company and Rentrak after
giving effect to the Distribution and, in reliance thereon, the opinion of
Rentrak's counsel regarding the permissibility of the Distribution under Section
60.181 of the Oregon Business Corporation Act. See "The Distribution -- Opinions
of Financial Advisors -- Solvency Opinion." Opinions, by their very nature are
based upon various facts, assumptions and analysis and, therefore, are not
binding upon any court or third party. Accordingly, there can be no assurance
that third party creditors of Rentrak will not attempt to contest the
distribution on the basis that it is a fraudulent transfer of Rentrak assets or
an illegal distribution of assets to Rentrak shareholders.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time
Rentrak effected the Distribution, the Company or Rentrak, as the case may be,
(i) was insolvent; (ii) was rendered insolvent by reason of the Distribution;
(iii) was engaged in a business or transaction for which the Company's or
Rentrak's remaining assets, as the case may be, constituted unreasonably small
capital; or (iv) intended to incur, or believed it would incur, debts beyond its
ability to pay as such debts as they mature, such court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and require that
the shareholders return the dividend (in whole or in part) to Rentrak, or
require the Company to fund certain liabilities for the benefit of creditors.
The measure of insolvency for purposes of the foregoing will vary depending upon
the jurisdiction whose law is being applied. Generally, however, the Company or
Rentrak, as the case may be, would be considered insolvent if the fair value of
their respective assets were less than the amount of their respective
liabilities or if they incurred debt beyond their ability to repay such debt
when due in the usual course of business.
The Rentrak Board and management believe that, in accordance with the
Solvency Opinions, the Company and Rentrak each will be solvent at the time of
the distribution (in accordance with the foregoing definitions), will be able to
repay its debts when due in the usual course of business following the
Distribution and will have sufficient capital to carry on its businesses.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
1,000,000 shares of Preferred Stock in one or more series and to determine the
price, rights, preferences and privileges of the shares of each such series
without any further vote or action by the stockholders. The rights of the
holders of BlowOut Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any shares of Preferred Stock that may
be issued in the future. The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change of control of the Company. In addition, certain provisions
in the Company's Certificate of Incorporation, and By-laws (the "By-laws")
relating to classification of the Board of Directors, restrictions on calling
special meetings of stockholders, and requirements of timely notice for
nominations of persons for election to the Board of Directors and for business
to be acted on at annual or special meetings of stockholders, and requirements
of timely notice for nominations of persons for election to the Board of
Directors and for business to be acted on
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at annual or special meetings of stockholders may discourage or make more
difficult any attempt by a person or group of persons to obtain control of the
Company.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of a corporation's voting stock. See "Description of Company Capital Stock
- -- Preferred Stock" and "-- Certain Provisions of the Certificate of
Incorporation, By-laws and Delaware Corporation Law."
NO DIVIDENDS
The Company's dividend policy will be established by the Company Board
from time to time based on the results of operations and financial condition of
the Company, such other business considerations as the Company Board deems
relevant and restrictions and limitations imposed under financing documents
binding upon the Company. The Company currently intends to retain earnings, if
any, for use in the operation and expansion of its business and, therefore, does
not anticipate paying any cash dividends on BlowOut Common Stock in the
foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Distribution, the Company will have 2,433,333
shares of BlowOut Common Stock outstanding of which 1,219,125 shares, including
shares owned by Rentrak, CCC, and Mr. LeVine, will be "restricted securities."
The shares of BlowOut Common Stock that are "restricted securities" within the
meaning of the Securities Act cannot be sold other than pursuant to an effective
registration statement or an exemption from registration, including Rule 144
promulgated under the Securities Act. Immediately following the Distribution,
425,574 shares of BlowOut Common Stock held by Rentrak or a subsidiary of
Rentrak will be available for sale under Rule 144 of the Securities Act of 1933,
as amended (the "Securities Act"), subject to the volume and other restrictions
of Rule 144. An additional 121,789, 121,789, 187,042 and 362,931 shares of
BlowOut Common Stock will become available for sale under Rule 144, subject in
certain cases to volume restrictions, in each of March, April, May and August of
1998, respectively. Rentrak, CCC and Mr. LeVine hold certain demand and
"piggyback" registration rights with respect to the 1,091,232 shares of
"restricted securities" held by them which would require the Company to register
such shares for resale under the Act in certain circumstances. In addition, the
Company has granted the former stockholders of E-1 who currently hold BlowOut
Common Stock (the "E-1 Minority") "piggyback" registration rights with respect
to the remaining 127,893 shares of "restricted securities," which generally
grant the E-1 Minority the right to request registration of their shares of the
Company's common stock in connection with the filing by the Company of a
Registration Statement with respect to an offering of any equity securities by
the Company for its own account or for the account of any of its equity holders
(other than any registration filed in connection with the Distribution, a
registration statement filed on Form S-4 or S-8 or any other registration
statement filed in connection with the offer or sale to the management of the
Company of securities pursuant to an employee stock plan or other employee
benefit plan arrangement). Rentrak, CCC and Levine have each informed the
Company that they have no present plan or intention to dispose of their shares
of the Company, however, as a result of market conditions or other
considerations, each of their intentions may change. The sale of a substantial
number of shares of the BlowOut Common Stock by Rentrak, CCC, Mr. LeVine or the
E-1 Minority could adversely affect the market price of the BlowOut Common
Stock. See "Financing -- Registration Rights" and "Description of Company
Capital Stock -- Shares Eligible for Future Sale."
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<PAGE>
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Rentrak Board has determined that it is in the best interests of
Rentrak and its stockholders to undertake the Distribution for various reasons.
Among these are: (i) focusing the management of each of Rentrak and the Company
on the core business of each company without regard to the corporate objectives
and policies of the other company, (ii) improving the likelihood that each of
Rentrak and the Company would have greater access to capital than would
otherwise be the case, (iii) offering incentives more attractive and appropriate
for the motivation and retention of key employees of each company, and (iv)
improving the ability of the capital markets to follow and analyze the operating
performance of Rentrak and the Company by separating the different businesses of
each company. The Rentrak Board believes that separating the businesses of
Rentrak and the Company will enhance Rentrak's ability to attract additional
customers for its PPT System. The BlowOut Board believes that separating the
business of Rentrak and the Company will enhance the Company's access to video
supply channels.
DISTRIBUTION AGENT
The distribution agent is U.S. Stock Transfer Corporation
("Distribution Agent"), 1745 Gardena Avenue, Glendale, California 91204,
telephone (818) 502-1404.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set
forth in the Distribution Agreement (the "Distribution Agreement") that will be
executed on or prior to the Distribution Date between Rentrak and the Company.
Rentrak will effect the Distribution on the Distribution Date by
delivering 1,214,219 shares of the 1,698,942 shares of the BlowOut Common Stock
owned by it to the Distribution Agent for distribution to the holders of record
of Rentrak Common Stock as of the close of business on the Record Date. The
Distribution will be made on the basis of one share of the BlowOut Common Stock
for every ten (10) shares of Rentrak Common Stock held as of the close of
business on the Record Date. The shares of the BlowOut Common Stock will be
fully paid and nonassessable, and the holders thereof will not be entitled to
preemptive rights. See "Description of Company Capital Stock." It is expected
that certificates representing shares of the BlowOut Common Stock will be mailed
to holders of Rentrak Common Stock on the Distribution Date or as soon as
practicable thereafter.
HOLDERS OF RENTRAK COMMON STOCK SHOULD NOT SEND CERTIFICATES TO THE
---
COMPANY, RENTRAK OR THE DISTRIBUTION AGENT. THE DISTRIBUTION AGENT WILL MAIL
THE STOCK CERTIFICATES REPRESENTING SHARES OF BLOWOUT COMMON STOCK ON THE
DISTRIBUTION DATE OR AS SOON AS PRACTICABLE THEREAFTER . RENTRAK STOCK
CERTIFICATES WILL CONTINUE TO REPRESENT SHARES OF RENTRAK COMMON STOCK AFTER THE
DISTRIBUTION IN THE SAME AMOUNT SHOWN ON THE CERTIFICATES.
No certificates or scrip representing fractional interests in shares
of the BlowOut Common Stock ("Fractional Shares") will be issued to holders of
Rentrak Common Stock as part of the Distribution. The Distribution Agent,
acting as agent for holders of Rentrak Common Stock otherwise entitled to
receive in the Distribution certificates representing Fractional Shares, will
aggregate and sell in the open market all Fractional Shares at then prevailing
prices and distribute the net proceeds to the stockholders entitled thereto.
Rentrak will pay the fees and expenses of the Distribution Agent in connection
with such sales.
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<PAGE>
No holder of Rentrak Common Stock will be required to pay any cash or
other consideration to Rentrak for the shares of the BlowOut Common Stock to be
received in the Distribution or to surrender or exchange shares of Rentrak
Common Stock or to take any action in order to receive the BlowOut Common Stock
pursuant to the Distribution.
CONDITIONS; TERMINATION
The Rentrak Board has conditioned the Distribution upon, among other
things, (i) Rentrak having modified its existing stock option plans and/or
adjusted option grants thereunder to ensure that the Distribution does not
adversely affect the current holders of options under those plans; (ii) Rentrak
having taken all action required under all outstanding warrants to purchase
Rentrak Common Stock; (iii) the BlowOut Common Stock having been approved for
listing on NASDAQ/SCM; (iv) the Registration Statement on Form 10 with respect
to the BlowOut Common Stock (the "Form 10 Registration Statement") having become
effective under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); and (v) receipt of all necessary consents to the Distribution from third
parties. The Company believes that there are no individual consents which are
material to the continuing operation of the business of BlowOut or Rentrak that
are required to be obtained but which have not been obtained. Any of these
conditions may be waived by the Rentrak Board; provided, however, that certain
of the conditions, including (iii), (iv) and (v) above, may only be waived with
the consent of the Company. Even if all of the above conditions are satisfied,
the Rentrak Board has reserved the right to abandon, defer or modify the
Distribution or the elements of the Distribution at any time prior to the
Distribution Date. See "The Distribution -- Relationship Between the Company
and Rentrak After the Distribution -- Distribution Agreement."
RESULTS OF THE DISTRIBUTION
After the Distribution, BlowOut will be a separate public company
which will own and operate the business conducted by it prior to the
Distribution. Immediately after the Distribution, the Company expects to have
approximately 440 holders of record of BlowOut Common Stock and to have
approximately 2,433,333 shares of BlowOut Common Stock outstanding, in each case
based on the number of record shareholders and outstanding shares of Rentrak
Common Stock as of the close of business on August 31, 1996, the distribution
ratio of one share of BlowOut Common Stock for every 10 shares of Rentrak Common
Stock, the retention by Rentrak of 484,723 shares (approximately 19.9%) of
BlowOut Common Stock, and the continued holding by other BlowOut shareholders of
737,402 shares (approximately 30.1%) of BlowOut Common Stock. The Distribution
will not affect the number of outstanding shares of Rentrak Common Stock or any
rights of Rentrak shareholders.
RELATIONSHIP BETWEEN THE COMPANY AND RENTRAK AFTER THE DISTRIBUTION
For the purpose of governing certain of the ongoing relationships
between the Company and Rentrak after the Distribution and to provide mechanisms
for an orderly transition, the Company and Rentrak have entered or will enter
into the various agreements, and will adopt policies, as described in this
section.
Distribution Agreement. Prior to the Distribution Date, the Company
and Rentrak will enter into the Distribution Agreement which provides for, among
other things, the principal corporate transactions required to effect the
Distribution and certain other agreements governing the relationship between
BlowOut and Rentrak with respect to or in consequence of the Distribution.
The Distribution Agreement provides for assumptions of liabilities and
cross-indemnities designed to allocate, effective as of the Distribution Date,
financial responsibility for the liabilities arising out of or in connection
with the business of the operating "store within a store" retail video outlets
that rent and sell video cassettes, video games and other related products
("BlowOut Business") to the Company and its subsidiaries, and financial
responsibility for the liabilities arising out of or in connection with
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<PAGE>
Rentrak's other business, including distributing video cassettes to home video
specialty stores under the PPT System ("Rentrak Business") to Rentrak and its
subsidiaries.
The indemnities described above will be limited to the extent that the
indemnitee receives insurance proceeds or a tax benefit with respect to the
claimed loss. The Distribution Agreement sets forth procedures for enforcing
the indemnification provisions described above.
Certain Employee Benefit Plan Matters. In connection the certain
employee compensation and benefit matters, the Distribution Agreement provides
that, with certain exceptions, BlowOut and its subsidiaries will be responsible
for all liabilities to any employee of Rentrak or its subsidiaries as of the
Distribution Date (including BlowOut) who is or will become an employee of
BlowOut or its subsidiaries after the Distribution ("Separated Employees").
Further, except as specifically provided therein, the Distribution Agreement
will not affect any employee benefit plan or compensation arrangement (i) of
Rentrak in respect of employees of Rentrak and its subsidiaries who are not
Separated Employees or (ii) of BlowOut or its subsidiaries which were maintained
by BlowOut or its subsidiaries prior to the Distribution Date.
The Distribution Agreement generally provides that the exercise price
of options to purchase Rentrak Common Stock (including those held by Separated
Employees) and the number of shares of Rentrak Common Stock subject to such
options, will be adjusted by Rentrak to reflect the change in the value of
Rentrak's assets attributable to the Distribution. Options to purchase Rentrak
Common Stock that are held by Separated Employees will continue to vest so long
as such Separated Employees are employed by BlowOut or its subsidiaries as if
the Distribution had not occurred.
The Distribution Agreement requires BlowOut to establish a 401(k) plan
on behalf of employees of BlowOut and its subsidiaries. Following the
Distribution Date, Rentrak will cause the Rentrak 401(k) Plan to transfer to the
BlowOut 401(k) Plan assets with a value equal to the value of the account
balances of, and liabilities with respect to, the Separated Employees, and
thereafter the Separated Employees will cease to participate in the Rentrak
401(k) plan.
The Distribution Agreement provides that through December 31, 1996,
Separated Employees and all other employees of Rentrak and its subsidiaries will
continue to be covered by existing health, dental, life and workers'
compensation insurance programs. Thereafter, Rentrak and BlowOut will maintain
separate insurance programs for their respective employees.
Rentrak is the sponsor of an employee stock purchase plan ("ESPP")
under which employees may purchase Rentrak Common Stock through an arrangement
with a brokerage firm. Employees may make such purchases on a monthly basis
through payroll deduction. Rentrak's only connection with the plan was to
arrange the program with the brokerage firm and Rentrak pays the brokerage
commissions on the purchases of stock by employees and performs certain
administrative functions. The ESPP will continue in effect after the
Distribution. Participants in the ESPP will receive the Distribution in the
same manner as all other Rentrak shareholders. Participants in the ESPP who
become Separated Employees will no longer participate in the ESPP and may
withdraw their investments from the ESPP after the Distribution Date.
Tax Sharing Agreement. The Company and Rentrak will allocate between
themselves the rights and obligations with respect to deficiencies and refunds
of federal, state and other income or franchise taxes relating to the Company's
business for tax years prior to the Distribution and with respect to certain tax
attributes of the Company after the Distribution. All tax refunds and net
operating loss carry forwards, if any, will be allocated solely to Rentrak. In
general, with respect to periods ending on or before the last day of the year in
which the Distribution occurs, Rentrak is responsible for (i) filing both
consolidated federal tax returns for the Rentrak affiliated group and combined
or consolidated state tax returns for any group that includes a member of the
Rentrak affiliated group, including in each case the Company and its
subsidiaries for the relevant periods of time that such companies were members
of the applicable group; and (ii) paying the taxes relating to such returns
(including any subsequent adjustments
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<PAGE>
resulting from the redetermination of such tax liabilities by the applicable
taxing authorities). The Company will reimburse Rentrak for a defined portion
of such taxes relating to the Company. The Company is responsible for filing
returns and paying taxes related to the Company for subsequent periods. The
Company and Rentrak have agreed to cooperate with each other and to share
information in preparing such tax returns and in dealing with other tax matters.
Services Agreement. The Company and Rentrak will agree to provide
certain services to each other for a transitional period of at least six months
on an as-needed basis. The fee for such services will be based on rates
designed to reflect the cost for providing such services, including
reimbursement of certain direct out of pocket expenses. The Company and Rentrak
will be free to procure such services from outside vendors or may develop an in-
house capability in order to provide such services internally. The transitional
services to be provided to the Company pursuant to such agreement may include
store audit services, computer services, financial modelling services, insurance
coverage, or any other similar services that the Company may require. The
transitional services to be provided to Rentrak pursuant to such agreement
include payroll processing services and management of employee benefit programs.
Such services will be provided as needed beyond the general transition period
set forth above.
LISTING AND TRADING OF THE BLOWOUT COMMON STOCK
There is not currently a public market for the BlowOut Common Stock.
Prices at which the BlowOut Common Stock may trade prior to the Distribution on
a "when-issued" basis or after the Distribution cannot be predicted. Until the
BlowOut Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which the BlowOut Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others, the
depth and liquidity of the market for the BlowOut Common Stock, investor
perception of the Company and the industry in which the Company participates,
the Company's dividend policy and general economic and market conditions. Such
prices may also be affected by certain provisions of the Company's Certificate
of Incorporation and Bylaws, as each will be in effect following the
Distribution, which may have an anti-takeover effect. See "Risk Factors -- No
Dividends" and "--Anti-Takeover Provisions."
The Company has received approval of qualification of the BlowOut
Common Stock on the NASDAQ/SCM and will trade under the symbol BLWT. The
Company initially will have approximately 440 stockholders of record including
Rentrak, the Rentrak stockholders receiving shares in the Distribution and the
BlowOut Minority. For certain information regarding options to purchase the
BlowOut Common Stock that will be outstanding after the Distribution, see "The
Distribution --Relationship Between the Company and Rentrak After the
Distribution -- Certain Employee Benefit Plan Matters."
Rentrak filed a request for a no-action letter with the staff of the
Securities and Exchange Commission (the "Commission Staff") on August 28, 1996,
setting forth, among other things, Rentrak's view that the Distribution of the
BlowOut Common Stock does not require registration under the Securities Act of
1933, as amended (the "Securities Act"). On ____________, 1996, Rentrak
received a favorable decision from the Commission Staff. It is the Company's
belief that the BlowOut Common Stock distributed to Rentrak's shareholders in
the Distribution will be freely transferable, except for (i) securities received
by persons who may be deemed to be "affiliates" of Rentrak within the meaning of
Rule 144, in which case such persons may not publicly offer or sell the BlowOut
Common Stock received in connection with the Distribution except pursuant to a
registration statement under the Securities Act or pursuant to Rule 144, and
(ii) securities received by persons that were holders of restricted shares of
Rentrak Common Stock in which case such holders will receive BlowOut Common
Stock containing the same such restrictions.
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<PAGE>
OPINIONS OF FINANCIAL ADVISORS
Solvency Opinion. The Company Board has engaged Houlihan Lokey to
render an opinion as to whether, assuming the Distribution has been consummated
as proposed, immediately after and giving effect to the Distribution: (a) on a
pro forma basis, the fair value and present fair saleable value of BlowOut's
assets would exceed BlowOut's stated liabilities and identified contingent
liabilities; (b) BlowOut should be able to pay its debts as they become absolute
and mature and due in the usual course of business; and (c) the capital
remaining in BlowOut after the Distribution would not be unreasonably small for
the business in which BlowOut is engaged, as management has indicated it is now
conducted and is proposed to be conducted following the consummation of the
Distribution, (the "BlowOut Solvency Opinion").
The Rentrak Board also has engaged Houlihan Lokey to render an opinion
as to whether, assuming the Distribution has been consummated as proposed,
immediately after and giving effect to the Distribution: (a) on a pro forma
basis, the fair value and present fair saleable value of Rentrak's assets would
exceed Rentrak's stated liabilities and identified contingent liabilities; (b)
Rentrak should be able to pay its debts as they become absolute and mature and
due in the usual course of business; and (c) the capital remaining in Rentrak
after the Distribution would not be unreasonably small for the business in which
Rentrak is engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the Distribution, (the
"Rentrak Solvency Opinion," and together with the BlowOut Solvency Opinion, the
"Solvency Opinions").
Houlihan Lokey is a nationally recognized investment banking firm that
is continually engaged in the providing of financial advisory services in
connection with mergers and acquisitions, leveraged buyouts, business valuations
for a variety of regulatory and planning purposes, recapitalizations, financial
restructurings, and private placements of debt and equity securities. Houlihan
Lokey has no material prior relationship with Rentrak, BlowOut, or their
affiliates.
In connection with the Distribution, BlowOut has paid Houlihan Lokey a
fee of $30,000 and will pay an additional fee of $15,000 upon delivery of the
BlowOut Solvency Opinion, and Rentrak has paid Houlihan Lokey a fee of $5,000
and will pay an additional $45,000 upon delivery of the Rentrak Solvency
Opinion. No portion of Houlihan Lokey's fees were contingent upon its rendering
the Solvency Opinion(s), or the successful completion of the Distribution or any
related transaction. BlowOut has also agreed to indemnify Houlihan Lokey and
related persons against certain liabilities, including liabilities under Federal
securities laws, arising out of the engagement of Houlihan Lokey, and reimburse
Houlihan Lokey for certain expenses. No restrictions or limitations were
imposed by BlowOut or Rentrak upon Houlihan Lokey with respect to its
investigation made or the procedures followed by Houlihan Lokey in rendering the
Solvency Opinions.
A copy of each of the Solvency Opinions, which sets forth the
assumptions made, the matters considered and certain limitations on the scope of
review undertaken by Houlihan Lokey, is attached as Annex I to this Information
Statement. The summary of the Solvency Opinions set forth in this Information
Statement is qualified in its entirety by reference to the full text of the
Solvency Opinions attached as Annex I hereto.
Valuation Opinion. The Rentrak Board of Directors has retained
Pennsylvania Merchant Group Ltd ("PMG") as its financial advisor in connection
with the Distribution. As its financial advisor, PMG provided a valuation of
BlowOut as a separate public company. PMG is a national investment banking and
financial advisory firm with experience in the valuation of businesses and their
securities in connection with divestitures, mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate or other purposes. The Rentrak Board selected PMG as
its financial advisor based upon PMG's expertise in such matters.
16
<PAGE>
In arriving at their valuation, PMG relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all of the
financial and other information that was provided to them by Rentrak and the
Company. With respect to the financial projections supplied to them, PMG
assumed that they had been reasonably prepared on a basis reflecting the best
currently available estimates and judgements of the management of the Company as
to the future operating and financial performance of the Company. PMG did not
make any independent evaluation of the assets or liabilities of the Company nor
did they verify any of the information reviewed by them.
As compensation for PMG's services as financial advisor in connection
with the Distribution, PMG is entitled to receive a fee of $250,000 (the
"Distribution Fee") upon the successful completion of the Distribution. PMG
also is entitled to a $10,000 monthly advisory fee, the payment of which is not
conditioned upon the successful completion of the Distribution, provided that,
if the Distribution is completed, 50% of the aggregate amount of the monthly
advisory fees will be credited against the Distribution Fee owed to PMG. To
date, PMG has been paid an aggregate of $50,000 in monthly advisory fees. PMG
also is entitled to reimbursement for its reasonable out-of-pocket expenses
incurred in connection with the Distribution. Rentrak or a subsidiary has
agreed to pay PMG substantially the same fees for financial advisory services in
connection with, and upon the successful completion of, the proposed divestiture
of such subsidiary of Rentrak. Other than services provided in connection with
the foregoing, PMG has not had any material relationship with either Rentrak or
the Company during the past two years. In 1991, in connection with an
unrelated transaction, Rentrak granted PMG a warrant to purchase 147,500 shares
of Rentrak Common Stock at an exercise price of $8.90 per share that expires in
1997. Such warrant is not being adjusted in connection with the Distribution.
It is possible that either Rentrak or the Company may engage PMG to provide
financial advisory services in connection with future transactions. No
restrictions or limitations were imposed by BlowOut or Rentrak upon PMG with
respect to its investigation made or the proceedures followed by PMG in
rendering its valuation of BlowOut as a separate company.
The following is a summary of the financial analyses
performed by PMG in arriving at its valuation.
Analysis of Certain Other Publicly Traded Companies. PMG compared
----------------------------------------------------
certain historical earnings and operating and financial ratios of BlowOut to the
corresponding data and ratios of certain other companies in the video rental
business with publicly traded securities. The companies considered were
Hollywood Entertainment Corporation, Moovies, Movie Gallery, Video Update and
West Coast Entertainment. The data and ratios considered by PMG included market
capitalization as a multiple of the latest twelve month revenues and operating
profit and price to earnings ratios. Multiples of market capitalization to
revenues ranged from 1.1x to 2.3x for the companies reviewed, compared to 0.6x
for BlowOut. Multiples of market capitalization to operating profit for the
companies reviewed ranged from 3.7x to 17.4x, and price to earnings ratios for
the companies reviewed from 10.0x to 29.0x. Since the Company's operating
profit and earnings for the latest twelve months were negative, these multiples
were not meaningful.
While the companies used in this analysis are similar in some respect
to BlowOut, none of them are directly comparable to BlowOut, making a direct
comparison of trading multiples for valuation purposes less meaningful than
would be the case in industries where there are a number of similar competitors.
In addition, BlowOut's historical financial performance has been significantly
below the financial results of these companies. In particular, all of the
comparable companies have experienced substantial revenue growth over the past
few years due to an aggressive store growth and acquisition strategy and all
have positive operating margins. In comparison, BlowOut has experienced slower
revenue growth and has not been profitable to date. As a result, PMG discounted
the financial ratios of the comparable public companies by 50% to reflect their
superior revenue growth and profitability. In addition, PMG applied a 20% spin-
off discount to reflect the lack of liquidity and lack of new institutional
sponsorship of BlowOut Common Stock. As a result of the foregoing analysis, the
implied public equity valuation of BlowOut is approximately $13.3 million.
Discounted Cash Flow Analysis. PMG performed a discounted cash flow
------------------------------
analysis using certain financial projections of the Company prepared by the
Company. However, due to the fact that the Company is projecting negative cash
flow until 1997, PMG concluded that the discounted cash flow approach is not
meaningful.
17
<PAGE>
Other Analyses. In addition to the valuation methods discussed above,
--------------
PMG also reviewed the Company's equity investments to date. The Company
recently converted two promissory notes having outstanding principal amounts of
$1.0 million each, previously issued to Bill Levine, a director of the Company
and Rentrak, and to Culture Convenience Club ("CCC"), an affiliate of Muneaki
Masuda, a director of the Company and Rentrak, into 121,789 shares of BlowOut
Common Stock, representing approximately 5.0% of the outstanding shares of
BlowOut Common Stock for each note. The Company also recently issued 362,931
shares of BlowOut Common Stock, representing approximately 14.9% of the
outstanding shares of BlowOut Common Stock, to CCC for $2.98 million in cash.
At the time of these investments, BlowOut was valued at approximately $20.0
million. PMG believes that BlowOut's current valuation has declined from this
valuation, due to the fact that the Company has slowed the growth in new store
openings which ultimately impacts revenue growth and profitability.
Although PMG relied on all of the above analyses in arriving at its
valuation, it put greater weight on the comparable company analysis. Based on
the foregoing, PMG's valuation of the Company is approximately $13.3 million.
WARRANTS TO PURCHASE RENTRAK COMMON STOCK
As of August 31, 1996, Rentrak had issued outstanding warrants to
purchase an aggregate of 4,746,889 shares of Rentrak Common Stock at exercise
prices ranging from $7.13 to $9.50 per share (including warrants which, by their
terms, become exercisable only upon the satisfaction of certain conditions),
with a weighted average exercise price of $7.31. The provisions of the warrant
agreements with respect to such warrants require that certain adjustments to the
number of shares subject to the warrants and to the exercise price be made to
reflect the Distribution. As a result of such adjustments, and based on a value
of BlowOut Common Stock of $5.50 per share, immediately following the
Distribution and a market price of Rentrak Common Stock of $4.25 per share (the
closing price on September 5, 1996), such warrants would represent the right to
purchase an aggregate of 5,393,208 shares of Rentrak Common Stock at exercise
prices ranging from $6.20 to $8.90, with a weighted average exercise price of
$6.44. The adjustments will be made based upon the value of BlowOut Common
Stock at the Distribution. See "The Distribution - Opinions of Financial
Advisors." All other terms of the warrants, including the expiration date, will
continue in effect as if the Distribution had not occurred.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The following discussion summarizes the principal United States
federal income tax consequences of the Distribution to Rentrak, the holders of
Rentrak Common Stock and the Company, but does not purport to be a complete
analysis of all of the potential tax consequences thereof. The following
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations, judicial decisions and administrative rulings
thereunder, all as in effect on the date hereof. There can be no assurance that
future changes in applicable law or administrative and judicial interpretations
thereof will not alter the tax consequences described below or that the Internal
Revenue Service (the "IRS") will agree with the tax consequences described
herein. Neither Rentrak nor the Company currently intends to request a ruling
from the IRS concerning tax effects of the Distribution.
The following summary is for general information only and does not
address tax considerations relevant to persons or entities in special tax
situations, such as dealers in securities, foreign corporations and persons who
are not citizens or residents of the United States, or any persons or entities
subject to special tax rules such as tax-exempt entities, insurance companies
and financial institutions, nor does this summary address the effect of any
applicable foreign, state, local or other tax laws.
EACH PERSON SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE PARTICULAR
TAX CONSEQUENCES OF THE DISTRIBUTION AND RELATED TRANSACTIONS, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE,
18
<PAGE>
LOCAL OR FOREIGN TAX LAWS AND ANY PROPOSED CHANGES IN APPLICABLE TAX LAWS.
Tax Consequences to Holders of Rentrak Common Stock. The Distribution
will constitute a taxable distribution to the holders of Rentrak Common Stock.
Each holder of Rentrak Common Stock will be treated as receiving a taxable
distribution in the amount of the fair market value, as of the Distribution
Date, of the BlowOut Common Stock received by such holder. This amount will be
treated as (i) a dividend, taxable as ordinary income, to the extent paid from
Rentrak's current and accumulated earnings and profits; then (ii) the amount of
the Distribution, if any, in excess of the amount described in clause (i) will
be applied as a reduction (but not below zero) to the tax basis of the Rentrak
Common Stock held by such holder, and this portion of the Distribution will not
result in the holder recognizing current taxable income; and (iii) if the amount
of the Distribution exceeds the amounts described in clauses (i) and (ii) above,
such excess will be treated as taxable gain from the exchange of Rentrak Common
Stock. Any gain referred to in clause (iii) above will constitute capital gain,
provided the Rentrak Common Stock is held by the recipient of the Distribution
as a capital asset. It is currently expected that Rentrak will have positive
earnings and profits for purposes of the Distribution which exceed the value of
the Distribution. If this is the case, then the Distribution will constitute a
dividend for federal income tax purposes, and the entire amount of the
Distribution will be taxable as described in clause (i) above.
It is currently expected that holders of Rentrak Common Stock will
recognize dividend income with respect to the Distribution estimated to be $0.55
per each share of Rentrak Common Stock. This estimate is based on a value of
$5.50 per share of BlowOut Common Stock. Such valuation is not necessarily
indicative of the prices at which the BlowOut Common Stock will trade. Neither
Rentrak nor BlowOut, nor any of their advisors or any other person makes any
representation as to the present or future value of BlowOut Common Stock. See
"Risk Factors -- No Current Market for the BlowOut Common Stock." Based on the
foregoing, each holder of Rentrak Common Stock would have an initial tax basis
in the shares of BlowOut Common Stock received in the Distribution equal to
$5.50 per share of BlowOut Common Stock. Promptly following the end of calendar
year 1996, Rentrak will provide each shareholder of Rentrak as of the record
date for the Distribution a Form 1099 that includes the value assigned to the
shares of BlowOut Common Stock subject to the Distribution.
Tax Consequences to Rentrak. The Distribution is to be made using
shares of BlowOut Common Stock owned beneficially by Rentrak. Such shares are
owned by Rentrak and by a wholly owned subsidiary of Rentrak. Immediately prior
to the Distribution, the subsidiary will transfer to Rentrak at least that
number of shares of BlowOut Common Stock that together with shares held directly
by Rentrak will equal the shares of BlowOut Common Stock needed to effect the
Distribution. The transfer of shares of BlowOut Common Stock to Rentrak could
result in a deferred taxable gain to the distributing entity to the extent, if
any, that the fair market value of the BlowOut Common Stock that is distributed
exceeds the subsidiary's adjusted tax basis in the distributed BlowOut Common
Stock. To the extent a deferred gain existed it would be triggered upon the
Distribution of such shares to the shareholders. It is currently expected that
the fair market value of the BlowOut Common Stock to be distributed will not
exceed the subsidiary's tax basis therefor. See "The Distribution - Opinions of
Financial Advisors."
Upon the Distribution, Rentrak will recognize taxable gain to the
extent, if any, that the fair market value of the BlowOut Common Stock that is
distributed exceeds Rentrak's adjusted tax basis of the distributed BlowOut
Common Stock. If on the Distribution Date the fair market value of the BlowOut
Common Stock is less than Rentrak's tax basis for this stock, Rentrak will not
recognize any taxable gain but will not be entitled to any deductible loss. It
is currently expected that the fair market value of the BlowOut Common Stock to
be distributed will not exceed Rentrak's tax basis therefor.
Tax Consequences to the Company. Although the BlowOut Common Stock
will be distributed pursuant to the Distribution, the Company itself will not
directly engage in any transactions. Accordingly, the Distribution should not
result in recognition of any income or loss for federal tax purposes by the
Company.
19
<PAGE>
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Rentrak solely to
provide information to Rentrak shareholders who will receive the BlowOut Common
Stock in the Distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of Rentrak or the
Company. The information contained in this Information Statement is believed by
Rentrak and the Company to be accurate as of the date set forth on its cover.
Changes may occur after that date, and neither the Company nor Rentrak will
update the information except in the normal course of their respective public
disclosure practices.
REGULATORY APPROVALS
The Company does not believe that any material federal or state
regulatory approvals must be obtained in connection with the Distribution.
ACCOUNTING TREATMENT
The historical financial statements of the Company present its
financial position, results of operations and cash flows as if it were a
separate entity for all periods presented. The financial statements also
reflect (from the date of acquisition) two acquisitions made by Rentrak which
were subsequently contributed to the Company, utilizing "entities under common
control" accounting. Footnote 1 of the Company's audited financial statement
for the year ended December 31, 1995 contained elsewhere in this Information
Statement contains additional information on the basis of presentation.
20
<PAGE>
RELATED PARTY TRANSACTIONS
PPT AGREEMENT
The Company currently is participating in the PPT System under an
agreement with Rentrak dated March 15, 1996 (the "PPT Agreement"). The Company
has been a participant in Rentrak's PPT System since January 1993. Under the
PPT System, participating video retailers ("Retailers") lease to consumers video
cassettes which, in turn, are leased to the Retailer by Rentrak for a one-time
fee plus a percentage of the revenues generated by the Retailer from rental or
sales of the video cassettes to consumers. The Company incurred fees and costs
of approximately $2.7 million to Rentrak in connection with the PPT System for
the year ended December 31, 1995 and approximately $2.1 million for the six
months ended June 30, 1996.
The PPT Agreement provides that Rentrak is the exclusive supplier of
product on a revenue sharing basis to the Company. Rentrak has a right of first
refusal on any non-video cassette merchandise that the Company proposes to
obtain from another supplier. Moreover, the Company is obligated to purchase
enough merchandise from Rentrak that the fees payable by the Company under the
PPT Agreement are at least 11% of the Company's annual gross retail rental
revenues. The Company must pay any deficiency plus a percentage of such
deficiency as a penalty. Rentrak may terminate the PPT Agreement at any time
upon notice to the Company. The Company may terminate the PPT Agreement upon a
breach by Rentrak and failure to cure within 30 days after receipt of written
notice. The PPT Agreement has a term of 20 years beginning in March 1996.
Under the PPT Agreement, the Company's stores install and/or maintain Rentrak
software to be able to participate in the PPT System. Rentrak and the Company
believe the terms of the PPT Agreement are substantially similar to Rentrak's
PPT arrangements with other retail video stores in which Rentrak has made
sizable investments.
LICENSE AGREEMENT
The Company currently operates most of its stores under the name
"BlowOut Video" pursuant to a license arrangement with Rentrak. The Company
and Rentrak entered into a new license agreement ("License") for the name
"BlowOut Video" on March 15, 1996, which was subsequently amended on June 25,
1996. Rentrak granted the Company a twenty year nonexclusive, nontransferable
license to use the name "BlowOut Video" for a royalty of 1.667% of aggregate net
revenues from all of the Company's stores, but not to exceed 20% of the
Company's pre-tax net income through March 31, 2001; thereafter, the royalty
would be an amount equal to the greater of (i) 1.667% of such aggregate net
revenues, but not to exceed 20% of the Company's pre-tax net income, or (ii) one
percent of the aggregate net revenues from all of the Company's stores without
regard to such pre-tax net income. If such royalties fail to meet specified
levels during the first five years of the term of the License, Rentrak, at its
sole option, could terminate the License. Rentrak currently uses and intends to
continue using the name "BlowOut Video" in connection with a separate video
cassette resale business that it operates through wholly-owned subsidiaries. No
royalty has accrued or is payable through June 30, 1996, under this License
Agreement.
SUBLEASES
In March 1996, the Company entered into a sublease with Rentrak for
approximately 2,000 square feet of office space at Rentrak's current Portland,
Oregon headquarters. The sublease expires on December 31, 1996. Rentrak is
scheduled to move its headquarters to a new office building in Portland, Oregon
by January 1, 1997. The Company will sublease office space for a period of 10
years in the new facility at a rent of approximately $7,100 per month for the
first five years, and approximately $7,650 per month for the last five years.
Upon taking occupancy of the new subleased space, Rentrak will release the
Company from all of its obligations relating to space in the old facility under
the March 1996 sublease. Both the Company Board and the Rentrak Board believe
these rental terms to be competitive with those in the Portland, Oregon rental
market.
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<PAGE>
The Company has also entered into a sublease for warehouse space at
Rentrak's Wilmington, Ohio warehouse (approximately 15,000 square feet). This
sublease is on a month to month basis with a monthly rent, varying according to
use, of approximately $___ on average.
RENTRAK INDEBTEDNESS
Effective as of December 31, 1995, Rentrak contributed to the capital
of the Company approximately $6.5 million, thereby reducing the amount owed by
the Company from $9.3 million to $2.8 million. The $2.8 million of such
indebtedness accrues interest at the rates 9.0% per annum and is due in April
1999. At August 31, 1996, the total outstanding balance of the debt, including
accrued interest, was $2.947 million.
NOTES
In March and April 1996, the Company issued $1.0 million in
convertible subordinated notes to each of Mr. Bill LeVine and to CCC, a Japanese
corporation of which Mr. Muneaki Masuda is President and Chairman (the "Notes").
Messrs. LeVine and Masuda are Directors of Rentrak and the Company. These Notes
were guaranteed by Rentrak, accrued interest at a rate of 9.0% per annum, and
had a maturity date of August 31, 1997. On August 30, 1996, each of Mr. LeVine
and CCC converted their Notes into 121,789 shares of BlowOut Common Stock. See
"Financing" and "Principal Stockholders".
CCC STOCK PURCHASE
On August 30, 1996, CCC purchased 362,931 shares of BlowOut Common
Stock for $2.98 million in cash in a private placement. See "Financing" and
"Principal Stockholders".
RENTRAK GUARANTEE
On June 26, 1996, the Company entered into an agreement with Rentrak
pursuant to which Rentrak, on the terms and subject to the conditions contained
in such agreement, will guarantee up to $12.0 million in indebtedness of the
Company ("Rentrak Guarantee"). As of the date hereof, the Rentrak Board has
authorized Rentrak to guarantee $7.0 million under the Rentrak Guarantee. The
obligation of Rentrak to issue such guarantee is subject to a number of
conditions such as being current on all monetary obligations owed to Rentrak and
being in compliance with all agreements between Rentrak and the Company. The
Rentrak Guarantee expires on the earlier of (i) December 31, 1997 or (ii) such
time as the total indebtedness of the Company subject to the Rentrak Guarantee
is equal to $12.0 million. Under the Rentrak Guarantee, the Company must
maintain $12.0 million of key man insurance on Steve Berns. Rentrak may
terminate its obligation to issue new guarantees on 30-days' prior written
notice to the Company. The Company can also terminate such agreement on 30
days' prior written notice, provided that the Company provides evidence that all
indebtedness subject to the Rentrak Guarantee has been paid off and the Company
obtains an unconditional release of Rentrak. The Company has also agreed that
(i) during the term of the agreement, as long as any Rentrak Guarantee is
outstanding and for 24 months thereafter, the Company will not convey any of its
stores to a third party unless such third party agrees to assume and be bound by
the PPT Agreement and the License Agreement, and (ii) during the term of the
agreement or as long as any Rentrak Guarantee is outstanding, the Company will
pay all amounts received from a sale or closure of a store either to: (a)
finance new Company stores or (b) to pay down indebtedness subject to the
Rentrak Guarantee. During the term of the Agreement, and/or as long as any
Rentrak Guarantee is outstanding, the Company shall pay Rentrak a weekly fee at
a rate equal to .02% per week of then-currently outstanding indebtedness subject
to a Rentrak Guarantee.
Rentrak has agreed to guarantee amounts outstanding under the Phoenix
Facility and the CBC Line of Credit up to an aggregate of $7.0 million. After
the Distribution, Rentrak will have a continuing monetary guaranty for amounts
outstanding under the Phoenix Facility. After the Distribution, Rentrak has
agreed, under certain circumstances in the event of a default under the credit
facility with CBC, to repurchase BlowOut's video cassette inventory in an amount
not to exceed the lesser of the amount owed
22
<PAGE>
under the CBC facility or $5.0 million. Rentrak is also guaranteeing certain
trade payables of the Company and amounts owed under promissory notes to certain
of the Company's suppliers. At September 3, 1996, the total amount of
obligations of the Company subject to the Rentrak Guarantee was approximately
$2.5 million.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationships between the Company and Rentrak may present
certain conflict situations for Mr. Bill LeVine and Mr. Muneaki Masuda, each of
whom serves as a director of the Company and of Rentrak and for Mr. F. Kim Cox,
who serves as a director and Secretary of the Company and as the Executive Vice
President and Chief Financial Officer of Rentrak. Mr. Cox, as well as other
executive officers and directors of Rentrak and the Company also own (or have
options or other rights to acquire) shares of common stock in Rentrak. Rentrak
and the Company will adopt, prior to the Distribution, appropriate policies and
procedures to be followed by the Board of Directors of each company to limit the
involvement of Messrs. Cox, LeVine and Masuda in conflict situations, including
matters relating to contractual relationships or litigation between the Company
and Rentrak. Such procedures include requiring Messrs. Cox, LeVine and Masuda
to abstain from voting as directors of each company with respect to matters that
present a significant conflict of interest between the companies. Whether or
not a significant conflict of interest situation exists will be determined on a
case-by-case basis depending on factors as the dollar value of the matter, the
degree of personal interest of Messrs. Cox, LeVine and Masuda in the matter and
the likelihood that resolution of the matter has significant strategic,
operational or financial implications for the business of the Company and
Rentrak.
23
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FINANCING
PHOENIX CREDIT FACILITY
By agreement dated as of July 23, 1996, Phoenix agreed to provide to
the Company a credit facility (the "Phoenix Facility") in an aggregate principal
amount of $2.0 million for a five-year term. Amounts outstanding under the
Phoenix Facility will bear interest at a fixed rate per annum equal to 13.98%.
The proceeds of the Phoenix Facility are to be used to construct and open
(including acquisition of inventory) new Company stores in Wal-Mart Stores and
Wal-Mart SuperCenters. The Phoenix Facility is secured by (i) a continuing
guaranty of Rentrak (which Phoenix, in its sole discretion, may release once at
least 36 payments of amounts outstanding under the Phoenix Facility have been
made or the Company's financial condition is, in Phoenix's sole opinion,
sufficient to justify such release), and (ii) the Company's grant of a first
continuing security interest in all assets at each location to be financed with
funds from the Phoenix Facility. Under the Phoenix Facility, the Company cannot
borrow more than $100,000 per store location, with a minimum draw of $30,000 per
store location. See "Related Party Transactions -- Rentrak Guarantee."
CBC FACILITY
In August 1996, CBC agreed to provide to the Company a revolving line
of credit (the "CBC Line of Credit") in the maximum principal amount at one time
outstanding of $5.0 million. Under the CBC Line of Credit, the Company may only
draw up to 80% of the Orderly Liquidation Value (as defined by the CBC Line of
Credit) of eligible new and used video cassette inventory. Advances under the
CBC Line of Credit will bear interest at a floating rate per annum equal to the
Bank of America Reference Rate plus 2.75% (11% as of August 31, 1996). The term
of the CBC Line of Credit is three years. The CBC Line of Credit will be
guaranteed by Rentrak until the Company is "spun-off" to the shareholders of
Rentrak and the shares of BlowOut Common Stock are publicly traded (i.e., the
completion of the Distribution); thereafter, Rentrak has agreed, under certain
circumstances in the event of default under the CBC Line of Credit, to
repurchase BlowOut's video cassette inventory at specified amounts. See
"Related Party Transactions - Rentrak Guarantee."
COMMON STOCK TRANSACTIONS
On August 30, 1996, each of Mr. Bill LeVine and CCC converted
individually held $1.0 million principal amount Notes made by the Company into
121,789 shares (or $8.21 per share) of BlowOut Common Stock. Mr. LeVine and Mr.
Muneaki Masuda, Chairman, President and principal stockholder of CCC, are
directors of the Company and of Rentrak. The converted Notes were originally
issued in March and April 1996 to evidence sums advanced to the Company by Mr.
LeVine and CCC, accrued interest at the rate of 9% per annum, were convertible
into shares of BlowOut Common Stock, and had a maturity date of August 31, 1997.
The shares of BlowOut Common Stock issued to Mr. LeVine and CCC are not
registered and are subject to usual and customary restrictions on
transferability.
Payment under the Notes at the Maturity Date was guaranteed by
Rentrak, with any payment under the guaranty subject to a 20% premium. At its
option, Rentrak had the right to repay the Notes in cash or, subject to certain
conditions, in shares of Rentrak Common Stock or in a combination of cash and
shares of Rentrak Common Stock. In connection with the conversion of the Notes
into shares of BlowOut Common Stock, the Note holders released Rentrak of its
obligations under this guaranty. Similarly, the Company has been released of
its undertaking to issue warrants to purchase BlowOut Common Stock to the Note
holders under specified circumstances that did not occur.
On August 30, 1996, CCC purchased from the Company for $2.98 million a
total of 362,931 shares of BlowOut Common Stock at a purchase price of
approximately $8.21 per share. The shares issued to CCC are not registered and
are subject to usual and customary restrictions on transferability, but are
subject to registration rights. See "Financing -- Registration Rights."
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REGISTRATION RIGHTS
Rentrak, CCC and Bill LeVine have been granted the rights to cause the
Company to register under the Securities Act certain of the shares of BlowOut
Common Stock held by them for sale to the public. The registration rights
extend to all 484,723 shares of BlowOut Common Stock held by Rentrak after the
Distribution, the 484,720 shares of BlowOut Common Stock acquired by CCC in its
recent purchase and upon the conversion of the Note discussed above, and the
121,789 shares of BlowOut Common Stock acquired by Mr. LeVine upon the
conversion of the Note described above. Each of Rentrak, CCC and Mr. LeVine has
the right to make two demands to cause the Company to register the shares of
BlowOut Common Stock held by them. Rentrak has agreed that it will not make
such a demand within six months after the Distribution Date.
In addition, the Company has granted the E-1 Minority "piggyback"
registration rights, which generally grant the E-1 Minority the right to request
registration of their shares of the Company's common stock in connection with
the filing by the Company of a Registration Statement with respect to an
offering of any equity securities by the Company for its own account or for the
account of any of its equity holders (other than any registration filed in
connection with this spin-off, a registration statement filed on Form S-4 or S-8
or any other registration statement filed in connection with the offer or sale
to the management of the Company of securities pursuant to an employee stock or
other employee benefit plan arrangement). All shares of the Company's common
stock held by the E-1 Minority (127,893 shares after the Distribution) will be
subject to such "piggyback" registration rights. The Company has agreed to pay
all expenses incident to any such registration.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1996 (i) on a historical basis, and (ii) on an adjusted basis to
reflect the Distribution and the transactions set forth in the notes below. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's Financial
Statements and Notes thereto included elsewhere in this Prospectus. See
"Financing".
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
INDEBTEDNESS:
<S> <C> <C>
Note Payable to Rentrak.................................... $ 2,800 $ 2,800
Other short-term debt and current portion of
long-term debt........................................... 329 329
Long-term debt, less current portion....................... 2,336 919(a)(b)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 per share par value; 1,000 shares
authorized; no shares issued and outstanding............. -- --
Common stock, $.01 per share par value; 10,000 shares
authorized; 1,800 shares issued and outstanding; 2,433
shares issued and outstanding as adjusted................ 18 24(b)(c)
Additional paid-in capital................................. 16,974 21,968(b)(c)
Accumulated deficit........................................ (9,498) (9,498)
------ ------
Total stockholders' equity............................. 7,494 12,494
------ ------
Total capitalization.............................. $ 12,959 $ 16,542
====== ======
</TABLE>
(a) This amount gives effect to the borrowing of $583 under the Phoenix
Facility described above under "Financing".
(b) This amount gives effect to the issuances of shares of BlowOut Common Stock
pursuant to the conversion of the Notes and recent equity investment
described above under "Financing".
(c) This amount gives effect to a 1.01491 for one stock split effected as a
stock dividend on _________, 1996.
26
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
In thousands, except for per share data
The financial and operating data set forth herein should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements, including the Notes
thereto, and other financial data included elsewhere herein. It is expected
that the Board of Directors of the Company will authorize a 1.01491-for-1 split
of the Company's Common Stock, to be effected as a stock dividend, prior to the
distribution. Share and per share data set forth on this Table do not give
effect to such split.
BLOWOUT ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
As of and for the Six
As of and for the Year Ended December 31 Months Ended June 30
Actual (1) Proforma (2) Actual (3)
------------------------------ ------------ ---------------------
1993 1994 1995 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net Revenues:
Rental $ 467 $ 1,115 $ 7,689 $13,021 $1,030 $11,269
Product Sales 69 178 3,030 4,706 227 2,882
------ ------- ------- ------- ------ -------
Total Net Revenue 536 1,293 10,719 17,727 1,257 14,151
Cost of Sales 281 563 5,220 9,131 839 6,474
------ ------- ------- ------- ------ -------
Gross Margin 255 730 5,499 8,596 418 7,677
Operating Expenses 632 852 6,275 11,367 812 8,119
Selling and Administrative 329 309 3,278 4,726 497 1,994
Other Income (Expense) (156) (413) (931) (201) 571 (171)
------ ------- ------- ------- ------ -------
Net Loss $ (862) $ (844) $(4,985) $(7,698) (320) $(2,607)
====== ======= ======= ======= ====== =======
Net Loss Per Common
Share $(0.96) $ (0.94) $(3.46) $(4.28) $(0.35) $ (1.45)
Weighted Average Shares
Outstanding 900 900 1,441 1,800 1,050 1,800
BALANCE SHEET DATA
Working Capital (Deficit) $ 97 $ (415) $ (823) $(4,672)
Total Assets 1,201 893 18,536 21,441
Long-term Debt 1,120 1,375 3,441 5,136
Stockholders' Equity (194) (1,038) 10,095 7,494
(Deficit)
</TABLE>
(1) The selected data as of and for the years ended December 31, 1993,
1994 and 1995 are derived from the audited financial statements of the Company.
Results for such years are not comparable because of the Company's acquisitions
and store expansions that occurred in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "The Company."
(2) The unaudited pro forma statement of income for the year ended
December 31, 1995 for the Company reflects the Company's acquisitions of E-1 and
the SCE Business as if they had been completed on January 1, 1995. See "The
Company -- History of the Company." No pro forma balance sheet has been
presented as such acquisitions are already reflected in the balance sheet data
as of December 31, 1995 and June 30, 1996. No pro forma statement of operations
data has been presented for the six-month period ended June 30, 1996 as such
acquisitions were effected prior to January 1, 1996. See "Unaudited Pro Forma
Combined Consolidated Financial Data".
(3) The selected financial data as of and for the six-month periods ended
June 30, 1995 and June 30, 1996 are derived from financial statements which have
not been audited by independent public accountants, but which reflect, in the
opinion of management, all adjustments, which include normal recurring
adjustments, necessary to present fairly all information set forth therein. The
results of operation for the six-month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1996.
27
<PAGE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
"Selected Historical and Pro Forma Financial Data" and the Company's Financial
Statements and the Notes thereto and the other financial data included elsewhere
in this Information Statement. The financial information provided below has
been rounded in order to simplify its presentation. However, the ratios and
percentages provided below are calculated using the detailed financial
information contained in the Financial Statements, the Notes thereto and the
other financial data included elsewhere in this Information Statement.
OVERVIEW
General. The Company operates retail "store within a store" video outlets
located in large discount and grocery chain stores throughout the United States.
The Company was formed in 1992, and opened its first store within a store in
January 1993. At year end 1993 and 1994, respectively, the Company operated
seven stores. During these periods, all of the Company's stores were located in
grocery stores.
During 1995, the Company experienced accelerated growth in retail stores
and revenue, primarily through (i) Rentrak's acquisition on May 26, 1995, of a
controlling interest in E-1, a company whose primary business was the operation
of retail video outlets in Wal-Mart SuperCenters, (ii) Rentrak's acquisition on
August 31, 1995, of certain assets and assumption of certain liabilities which
constituted SCE's retail video business and consisted of retail video outlets in
Wal-Marts, Wal-Mart SuperCenters and Super Kmart Centers (the "SCE Business")
and (iii) new store openings in Wal-Mart SuperCenters and, to a lesser extent,
in Super Kmart Centers and Ralphs. See "The Company -- History of the Company"
for a more detailed description of the foregoing acquisitions and store
openings. Because of acquisitions and store openings, comparisons among the
years ended December 31, 1993, 1994 and 1995 are not meaningful. At year end
1995, Rentrak's store within a store retail video operations consisted of 128
stores located in Wal-mart and Wal-Mart SuperCenters, 25 stores located in Super
Kmart Centers, and four stores located in Ralphs grocery stores.
At December 31, 1995, Rentrak's store with a store retail video outlets
were operated through four corporations: the Company, E-1 and two wholly owned
subsidiaries, W-1 and K-1, which operated the SCE Business. In May 1996, all of
these operations were consolidated into the Company. See "The Company --
History of the Company". During the first eight months of 1996, the Company
continued to expand the number of stores it operates, and as of August 31, 1996,
the Company operated 198 retail video stores, including 151 stores located in
Wal-mart and Wal-Mart SuperCenters, 35 stores located in Super Kmart Centers and
12 stores located in Ralphs grocery stores.
The Company's revenue consists of rental revenue and product sales. Rental
revenue includes rental of pre-recorded video cassettes, video games and
computer games and programs on CD-ROMS. Product sales are derived from sale of
prerecorded video cassettes and excess rental inventory.
The Company acquires video cassettes using two types of supplier
arrangements -- purchase and revenue sharing under the PPT System. Video
cassettes purchased for basic stock rental are stated at cost and amortized over
36 months with a provision for a $6 salvage value. New release video cassettes
purchased for more than $20 per cassette are amortized to a value of $15 per
cassette over the first four months then to a $6 salvage value over the next 32
months. New release video cassettes purchased for less than $20 per cassette
are amortized to $8 per cassette over the first four months, and to a $6 salvage
value over the next 32 months. All cassettes are amortized on a straightline
basis.
Since 1993, the Company has obtained a significant amount of its new
release titles through Rentrak under the PPT System. Under this system, Rentrak
provides to the Company video cassettes released by certain studios. The
Company pays a handling fee ($8 to $10) for each video cassette.
29
<PAGE>
During the revenue sharing period, which does not exceed two years, the studio
owns the video cassette, and the rental revenue is shared by the studio, Rentrak
and the Company on a predetermined basis. The Company may also sell excess
copies of a video title and share the sale proceeds with Rentrak and the studio
on a predetermined basis. At the end of the revenue sharing period for a title,
the Company may purchase remaining copies of that title in the Company's
inventory, generally for less than $5 per video cassette. The handling fee per
video cassette is amortized on a straightline basis over 36 months to a $6
salvage value. The cost of video cassettes purchased at the end of the revenue
sharing period is expensed at the time such cost is incurred. Revenue sharing
payments are expensed when incurred.
As a result of the acquisitions of E-1 and the SCE business, the Company
recorded approximately $5.1 million in intangibles which are being amortized
over 10 to 15 years.
Results of Operations. The following table sets forth for the period
indicated (i) statement of operations data expressed as a percentage of total
revenue, (ii) the percentage change from the prior period in this data and (iii)
the number of stores open at the end of each period.
<TABLE>
<CAPTION>
PERCENTAGE
CHANGE IN PERCENTAGE
YEAR YEAR YEAR DOLLAR AMOUNT CHANGE IN DOLLAR
STATEMENT OF ENDED ENDED ENDED FROM AMOUNT FROM
OPERATING DATA: 12/31/93 12/31/94 12/31/95 1993 TO 1994 1994 TO 1995
- ---------------- -------- --------- --------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Rental revenue 87.2% 86.3% 71.7% 138.7% 589.4%
Product Sales 12.8 13.7 28.3 158.0 1606.2
------ ----- ----- ----- ------
Total revenue 100.0 100.0 100.0 141.3 729.1
Cost of product sales 52.5 43.6 48.7 100.4 827.2
Operating expenses 117.9 65.9 58.6 34.9 636.5
Selling, general and
administrative 61.3 23.9 30.6 (6.0) 960.8
------ ----- ----- ----- ------
Revenue in excess
(less than) of expenses (131.7%) (33.4%) (37.8%) (38.9%) 837.4%
====== ===== ===== ===== ======
Number of stores
open at end of period 7 7 157 -- --
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company's results of operations for the six-month period ended June 30,
1995 included the operations of seven retail video outlets for the entire six-
month period, one store that was open for a portion of that period, as well as
E-1's operations (43 stores) for the one-month period following Rentrak's
acquisition of a controlling interest in E-1 in May 1995. The Company's results
of operations for the six-month period ended June 30, 1996 included the
operations of twelve retail video outlets located in Ralphs grocery stores, the
operations of E-1 and the W-1 and K-1 outlets for the entire six-month period.
Because of acquisitions and store openings, comparisons between the six-month
period ended June 30, 1995 and the six-month period ended June 30, 1996 are not
meaningful.
30
<PAGE>
Results of Operations. The following table sets forth, for the periods
indicated, (i) statement of operations data expressed as a percentage of total
revenue, (ii) the percentage change from the prior period in this data and (iii)
the number of stores open at the end of each period.
<TABLE>
<CAPTION>
Percentage
Change in
Six Months Six Months Dollar
Ended Ended Amount From
6/30/95 6/30/96 1995 to 1996
---------- ---------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Rental revenue 81.9% 79.6% 994.5%
Product sales 18.1 20.4 1,168.7
------- ------- -------
Total revenue 100.0 100.0 1,026.0
Cost of product sales 66.8 45.7 671.3
Operating expenses 64.6 57.4 900.3
Selling, general and administrative 39.5 14.1 301.1
------- ------- -------
Revenue in excess (less than) of expenses (70.9)% (17.2)% 173.3%
======= ======= =======
Number of stores open at end of period 50 203 --
======= ======= =======
</TABLE>
Revenue. Revenue for the first six months of 1996 increased $12.9 million,
or 1,026.0%, to $14.2 million from $1.3 million for the first six months of
1995. The increase resulted from an increase in the number of stores in
operation, from seven at May 1995, to 50 after the E-1 acquisition at June 30,
1995 to 203 at June 30, 1996.
Cost of Product Sales. Cost of product sales increased from $.8 million,
or 66.8% of revenue, for 1995 to $6.5 million, or 45.7% of revenue, for the
first six months of 1996. The increase in gross margin on sales resulted from a
decrease in product acquisition costs and efficiencies created by the
combination of the buying departments of the Company, SCE and E-1.
Operating Expenses. Operating Expenses increased from $0.8 million, or
64.6% of revenue, for the first six months of 1995 to $8.1 million, or 57.4% of
revenue, for the first six months of 1996. The increase resulted primarily from
an increase in the number of stores in operation. Significant components of
operating expenses include compensation, occupancy and fixed asset depreciation.
Compensation and related expenses increased from $0.4 million, or 34.7% of
revenue, for the first six months of 1995 to $4.7 million, or 33.2% of revenue
for the first six months of 1996. Occupancy expense increased from $0.1
million, or 8.3% of revenue, for the first six months of 1995 to $1.5 million,
or 10.9% of revenue, for the first six months of 1996. The increase in
occupancy expense as a percentage of revenue was primarily due to the E-1 and
SCE stores' lease agreements having lease payments calculated at a higher
percentage of sales than compared to the original BlowOut retail stores.
Depreciation increased from $0.1 million, or 8.3% of revenue, for the first six
months of 1995, to $0.5 million, or 3.4% of revenue, for the first six months of
1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $0.5 million, or 39.6% of revenue, for
the first six months of 1995, to $2.0 million, or 14.1% of revenue, for the
first six months of 1996. The increase in selling, general and administrative
31
<PAGE>
expenses as a percentage of revenue was primarily the result of the growth in
the number of stores from 7 at December 31, 1994 to 157 stores at December 31,
1995, as well as the costs associated with operating the separate accounting and
administrative departments of the Company, SCE and E-1 (which have since been
consolidated).
Nonoperating Expenses, Net. Nonoperating expenses/income, decreased from
nonoperating income of $0.6 million, or 45.5% of revenue, for the first six
months of 1995, to nonoperating expense of $0.2 million, or 1.0% of revenue, for
the first six months of 1996. The nonoperating income for the first six months
of 1995 was primarily due to the $0.5 million gain on the sale of five E-1 stand
alone stores in June 1995. The nonoperating expense for the first six months of
1996 was primarily interest expense.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The audited consolidated financial statements of the Company included
elsewhere in this Information Statement include the results of operations of the
Company for each of the three years in the period ended December 31, 1995. The
Company opened its first store within a store outlet in January, 1993. For the
year ended December 31, 1993, the Company's results of operations included the
operation of eight retail video outlets, located in grocery stores, which the
Company opened during 1993. For the year ended December 31, 1994, the Company's
results of operations included the operation of the seven retail video outlets
in grocery stores which were open for the entire year. For the year ended
December 31, 1995, the Company's results of operations included (i) the
operations of the Company's retail video outlets in grocery stores, (ii) the
operations of E-1 for the seven-month period ended December 31, 1995 and (iii)
the SCE Business for the four-month period ended December 31, 1995. Because of
acquisitions and store openings, comparisons among the years ended December 31,
1993, 1994 and 1995 are not meaningful.
Revenue. Revenue for fiscal year 1995 increased $9.4 million, or 729.1%,
to $10.7 from $1.3 million for fiscal year 1994. The increase resulted from an
increase in the number of stores in operation, from four at December 31, 1994 to
157 at December 31, 1995, due to the acquisitions of E-1 and the SCE Business.
The $10.7 million in 1995 revenue included $6.1 million from E-1 and $3.5
million from the SCE Business.
Cost of Product Sales. Cost of product sales increased from $0.6 million,
or 43.6% of revenue, for fiscal 1994 to $5.2 million, or 48.7% of revenue, for
fiscal year 1995. The decrease in gross margin on sales resulted from an
increase in product acquisition costs, and increased emphasis of sales from sell
through products which carry lower margins than rental product. The $5.2
million in fiscal year 1995 cost of sales included $3.1 million from E-1 and
$1.7 million from the SCE Business.
Operating Expense. Operating expenses increased from $0.9 million, or
65.9% of revenue, for fiscal 1994 to $6.3 million, or 58.5% of revenue, for
fiscal year 1995. The increase resulted primarily from the significant increase
in the number of stores in operation. The primary components of operating
expenses include compensation, occupancy and fixed asset depreciation.
Depreciation and amortization increased from $0.2 million, or 14.4% of revenue,
for fiscal year 1994, to $0.7 million, or 6.8% of revenue, for fiscal year 1995.
The increase was the result of the acquisitions of E-1 and the SCE Business.
Also, beginning in May and September 1995, the goodwill acquired from the
acquisitions of E-1 and the SCE Business began to be amortized.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $0.3 million, or 23.9% of revenue, for
fiscal year 1994, to $3.3 million, or 30.6% of revenue, for fiscal year 1995.
The decrease in selling, general and administrative expenses as a percentage of
revenue was primarily the result of efficiencies gained by combining the
accounting and administrative departments of the Company, E-1 and SCE.
32
<PAGE>
Net Nonoperating Expenses. Net nonoperating expenses increased from $0.4
million, or 31.9% of revenue, for fiscal year 1994, to $0.9 million, or 8.7% of
revenue, for fiscal year 1995. The increase is primarily attributable to the
loss on closing a number of the video retail stores and increase in interest
expense.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenue. Revenue for fiscal year 1994 increased $0.8 million, or 141.3%,
to $1.3 million from $0.5 million for fiscal 1993. The increase resulted from
an increase in the average number of stores in operation for the full year of
1994 as compared to 1993. The Company opened four stores during the year ended
December 31, 1993 and an additional three stores during the year ended December
31, 1994. In addition, higher revenue generating stores were opened in Southern
California.
Cost of Product Sales. Cost of product sales increased from $0.3 million,
or 52.5% of revenue, for fiscal 1993 to $0.6 million, or 43.6% of revenue, for
fiscal year 1994. The increase in gross margin on sales resulted from improved
inventory controls, a shift in sales to products with higher margins, a
reduction in product acquisition costs and increased rental transactions per
video cassette.
Operating Expenses. Operating expenses increased from $0.6 million, or
117.9% of revenue, for fiscal 1993 to $0.9 million, or 65.9% of revenue, for
fiscal year 1994. The increase resulted primarily from an increase in the
number of stores in operation. Significant components of operating expenses
include compensation, occupancy and fixed asset depreciation. Compensation and
related expense increased from $0.2 million, or 42.1% of revenue, for fiscal
year 1993 to $0.4 million or 34.6% of revenue, for fiscal year 1994. The
increase was the result of the continued expansion of the Company's business
through the opening of video retail stores. The decrease in compensation
related expenses as a percentage of revenue was primarily due to increased same
store revenue. Occupancy expense increased from $0.1 million, or 18.6% of
revenue, for fiscal year 1993 to $0.12 million, or 9.3% of revenue, for fiscal
year 1994. The increase was the result of the continued expansion of the
Company's business through the opening of video retail stores. The decrease in
occupancy expense as a percentage of revenue was primarily due to increased
average store revenue. Depreciation and amortization increased from $0.1
million, or 21.1% of revenue, for fiscal year 1993, to $0.2 million, or 14.4% of
revenue, for fiscal year 1994. The increase was the result of the Company's
continued investment in capital additions, particularly capital equipment for
new store openings.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $0.33 million, or 61.3% of revenue, for
fiscal year 1993, to $0.31 million, or 23.9% of revenue, for fiscal year 1994.
The decrease in selling, general and administrative expenses as a percentage of
revenue was primarily the result of economies of scale with the continued
expansion of the Company's business through the opening of video retail stores.
Net Nonoperating Expenses. Net nonoperating expenses increased from $0.2
million, or 29.2% of revenue, for fiscal year 1993, to $0.4 million, or 31.9% of
revenue, for fiscal year 1994. The increase is primarily attributable to the
loss on closing a number of the video retail stores and an increase in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs are for the opening of new stores.
To date, the Company has funded its operations primarily through cash from
operations, advances from Rentrak, the Notes from Mr. LeVine and CCC and trade
credit from suppliers.
For the six months ended June 30, 1996, net cash used in investment
activities was $6.1 million, consisting primarily of a $4.2 million investment
in retail inventory and a $1.7 million investment in capital expenditures.
During that period, cash provided by operations was $3.3 million and the Company
received $1.7 million of advances from Rentrak and $2.0 million upon issuance of
the Notes. In August,
33
<PAGE>
1996, the Notes were converted into shares of BlowOut Common Stock representing
10% of the issued and outstanding shares of BlowOut Common Stock.
In August 1996, Phoenix agreed to provide the Phoenix Facility in an
aggregate principal amount of $2.0 million for a five-year term. Amounts
outstanding under the Phoenix Facility will bear interest at a fixed rate per
annum equal to 13.98%. The proceeds of the Phoenix Facility are to be used to
construct and open (including acquisition of inventory) new Company stores in
Wal-Mart Stores and Wal-Mart SuperCenters. The Phoenix Facility is secured by
(i) a continuing guaranty of Rentrak (which Phoenix, in its sole discretion, may
release once at least 36 payments of amounts outstanding under the Phoenix
Facility have been made or the Company's financial condition is, in Phoenix's
sole opinion, sufficient to justify such release), and (ii) the Company's grant
of a first continuing security interest in all assets at each location to be
financed with funds from the Phoenix Facility. Under the Phoenix Facility, the
Company cannot borrow more than $100,000 per store location, with a minimum draw
of $30,000 per store location. As of September 3, 1996, the Company had
borrowed $583,000 under the Phoenix Facility.
In August 1996, CBC agreed to provide the CBC Line of Credit which provides
for a revolving line of credit ("CBC Line of Credit") in the maximum principal
amount at one time outstanding of $5.0 million. Under the CBC Line of Credit,
the Company may only draw up to 80% of the Orderly Liquidation Value (as defined
by the CBC Line of Credit) of eligible new and used video cassette inventory.
Advances under the CBC Line of Credit will bear interest at a floating rate per
annum equal to the Bank of America Reference Rate plus 2.75% (11% as of August
31, 1996). The term of the CBC Line of Credit is three years. The CBC Line of
Credit will be guaranteed by Rentrak until the Company is "spun-off" to the
shareholders of Rentrak and the shares of BlowOut Common Stock are publicly
traded (i.e., the completion of the Distribution); thereafter, Rentrak has
agreed, under certain circumstances in the event of a Default under the CBC Line
of Credit, to repurchase BlowOut's video cassette inventory at specified
amounts. See "Related Party Transactions - Rentrak Guarantee." As of August
31, 1996, the Company had not borrowed any amounts under the CBC Line of Credit.
On July 22, 1996, the Company entered into an agreement with Star Video to
provide the Company with video cassettes for rental and sale and with video
games for sale ("Star Video Agreement"). Star Video paid off the balance of a
promissory note in the amount of $240,974.75 made by the Company to its previous
supplier. As a result, the Company executed a new promissory note to Star
Video, pursuant to which the Company is obligated to pay Star Video $120,487.37
on each of May 27, 1997 and 1998. Under the Star Video Agreement, Star Video
became the Company's exclusive supplier of new video cassettes for rental and
sale not purchased from Rentrak until the later of (i) July 21, 1997, or (ii)
repayment of such promissory note. This promissory note is secured by a
guaranty of Rentrak. In addition, to secure all amounts owed under the Star
Video Agreement, the Company has granted to Star Video a first priority security
interest in all of the Company's existing inventory, which security interest
Star Video will release, in exchange for a subordinated security interest on
such inventory upon (i) consummation of any secured financing (see "Financing"),
and (ii) the Company being current in its payments to Star Video under the Star
Video Agreement at such time.
On August 30, 1996, CCC purchased from the Company for $2.98 million a
total of 362,931 shares of BlowOut Common Stock at a purchase price of
approximately $8.21 per share.
During the first eight months of 1996, the Company opened 57 stores,
primarily in Wal-Mart SuperCenters. The Company expects to open an additional
10 stores during the remainder of 1996. The Company does not know the number of
new Wal-Mart SuperCenter, Super Kmart Center or Ralphs grocery store locations
which will be available to the Company for the opening of video outlets in 1997.
Based solely upon discussions with Wal-Mart, management currently believes that
it will have the opportunity to open at least 17 new outlets in Wal-Mart
SuperCenters in 1997, although there can be no assurance as to the number of
locations that Wal-Mart will make available to the Company. The Company is
aware of one other retailer, Blockbuster, which operates store within a store
video outlets
34
<PAGE>
in Wal-Mart stores. The Company currently does not believe that it will be
opening a significant number of stores in Super Kmart Centers or Ralphs in 1997.
Also, during the first eight months of 1996, the Company closed 16 stores
which did not meet certain performance levels, and expects to close an
additional 8 under performing stores during September 1996 (consisting of 23
stores in Wal-Mart and 1 store in Kmart). The Company has notified Kmart of its
intention to close 10 additional underperforming stores in April 1997.
As a result of the equity investment by CCC and cash from operations as of
August 31, 1996, the Company had cash and cash equivalents of $4.3 million. The
Company expects to meet its short-term liquidity requirements through net cash
provided by operations, cash on hand and advances under the Phoenix Facility
and CBC Line of Credit. Management believes that these sources of cash, as well
as additional availability under the Phoenix Facility and CBC Line of Credit,
will be sufficient to meet its operating needs for at least the next 12 months.
See "Risk Factors - Expansion Strategy." There can be no assurance that funds
will be available in sufficient amounts to finance the acquisition or opening of
enough video outlets to sustain the Company's recent rates of growth or that
funds will be available to satisfy the Company's liquidity needs beyond the next
12 months.
At June 30, 1996, the Company had a working capital deficit of $4.7
million. Video cassette rental inventories are treated as noncurrent assets
under generally accepted accounting principles because they are not assets which
are reasonably expected to be completely realized in cash or sold in the normal
business cycle. Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of these assets as
noncurrent excludes them from the computation of working capital. The
acquisition cost of video cassette 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 video cassette rental inventory as a noncurrent asset. The Company
expects to operate with a working capital deficit as it expands its store base.
IMPACT OF NEW ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will
become effective for the Company's year ending December 31, 1996. The Company
has studied the implications of SFAS 121 and, based on its initial evaluation,
does not expect it to have a material impact on the Company's financial
condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123 disclosures will be effective for
fiscal years beginning after December 31, 1995.
35
<PAGE>
THE COMPANY
GENERAL
The Company is engaged in the business of operating "store within a store"
retail video outlets which rent and sell video cassettes, video games, computer
games and programs on CD-ROMs in Wal-Mart and Wal-Mart SuperCenters, Super Kmart
Centers, and Ralphs pursuant to master leases with each retailer. As of August
31, 1996, the Company operated 151 stores in Wal-Mart and Wal-Mart SuperCenters,
35 stores in Super Kmart Centers, and six stores in Ralphs under the name
"BlowOut Video" pursuant to a license with Rentrak, and six additional stores in
Ralphs under the name "Videos & More."
HISTORY OF THE COMPANY
Formation of the Company. The Company was incorporated in July 1992 as
SMM, Inc., a Delaware corporation, and shortly thereafter changed its name to
SVI.
Acquisition of SCE. On August 31, 1995, Rentrak formed W-1 and K-1. On
the same date, through W-1 and K-1, Rentrak acquired the Wal-Mart and Kmart
"store within a store" retail video operations from SCE (the "SCE Business").
In consideration for such acquisition, Rentrak issued to SCE 878,000 shares of
Rentrak Common Stock with an aggregate value of approximately $5.2 million
(based upon a market price of Rentrak Common Stock of $5.94 per share on the
date of issuance). As part of the acquisition, the leases pursuant to which SCE
operated its retail video outlets in Wal-Mart and Kmart stores were assigned to
W-1 and K-1, respectively. Effective September 1, 1995, Rentrak assigned to W-
1, as a capital contribution, all of the former SCE assets and liabilities
related to the operations of its Wal-Mart stores, and Rentrak assigned to K-1,
as a capital contribution, all of the former SCE assets and liabilities related
to the operation of its Kmart stores. In addition, on February 13, 1996, K-1
acquired certain assets of nine video retail "store within a store" outlets
located in Super Kmart Centers from Record Town, Inc. for a total purchase price
of $135,000.
Consolidation of SVI, W-1 and K-1. In May 1996, Rentrak consolidated the
businesses and operations of the Company, W-1 and K-1. To effect consolidation,
Rentrak contributed all of the outstanding capital stock of W-1 and K-1 to SVI
as a capital contribution. Following this contribution, SVI amended its
Certificate of Incorporation to (i) change its name to BlowOut Entertainment,
Inc., (ii) effect a reverse stock split of its outstanding capital stock, and
(iii) increase the authorized capital stock to 11,000,000 shares, of which
10,000,000 shares were authorized for issuance as common stock and 1,000,000
shares were authorized for issuance as preferred stock. W-1 and K-1 were then
merged into the Company in June 1996 and September 1996, respectively.
Acquisition of E-1. Between July 1994 and December 1995, Rentrak and two
of its wholly-owned subsidiaries acquired 92.6% of the issued and outstanding
common stock of E-1, with the remaining 7.4% of E-1's common stock being held by
individuals unrelated to Rentrak and entities controlled by such individuals
(collectively, the "E-1 Minority"). E-1 operated "store within a store" video
outlets in Wal-Marts and Wal-Mart SuperCenters and was also engaged in the same
line of business as SVI, W-1 and K-1.
In May 1996, the Company acquired all of E-1's tangible and intangible
assets and assumed all of its liabilities in exchange for shares of BlowOut
Common Stock. Following such sale of assets, E-1 dissolved and liquidated its
assets pursuant to a Plan of Liquidation that provided for the distribution of
the shares of BlowOut Common Stock to Rentrak and the E-1 Minority on a basis
such that, as a result, Rentrak and the E-1 Minority, as a group, owned 93% and
7% of the then-issued and outstanding BlowOut Common Stock.
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<PAGE>
BUSINESS
THE VIDEO RETAIL INDUSTRY
According to the Video Investor newsletter published by Paul Kagan
--------------
Associates, Inc., video retail industry revenues are believed by the Company to
have been approximately $14.8 billion in 1995, with industry revenues projected
to grow to $20.5 billion by 2005. Of the total video retail industry revenues
in 1995, video rental revenues were approximately $7.5 billion and video sales
revenues were approximately $7.3 billion.
The industry is characterized by a high degree of fragmentation, with
only five chains in 1995 operating in excess of 100 video specialty stores and
the average chain operating fewer than 50 stores. The Company believes that in
recent years the video retail industry has begun to consolidate as regional
chains and smaller video specialty store operations are acquired by operators
with greater access to capital.
The Company believes that the home video market has become the single
largest source of revenues for motion picture distributors, providing
approximately 53% of total revenues in 1995. Due to the high production cost of
films today, the Company believes that without home video revenues, most films
would be unprofitable. Furthermore, in order to quickly recoup the large
theatrical marketing budgets that often exceed the film's production cost, most
films are released simultaneously in a large number of theaters. This broad
exposure usually results in most theaters only playing the film for a few weeks
before replacing it with another release.
Movie studios seek to maximize their revenues in sequential release
date windows to various movie distribution channels. These distribution
channels currently include in release date order first and second tier movie
theaters, video specialty stores, Pay-Per-View, pay television, basic cable
television, and network and syndicated television. The Company believes that
this method of sequential release has allowed movie studios to increase their
total revenues with relatively little adverse effect on the revenue derived from
previously established channels and that movie studios will continue the
practice of sequential release as new distribution channels become available.
In the Company's experience, the movie studios typically set the
initial wholesale price of prerecorded videos at between $60 and $75, which
encourages rental rather than sale. To maximize revenues to the studios, after
approximately six to twelve months the studios will often lower the selling
price of these same videos to between $10 and $20. In addition, a relatively
small number of titles that are believed to have broader consumer appeal, such
as Pocahontas, Mission Impossible and Twister, are wholesaled initially by the
----------- ------------------ -------
studios at between $12 and $17 to encourage their purchase rather than rental.
While much of this type of product is heavily promoted as "sell-through" titles
by all types of mass market retailers, the video specialty stores offer this
product both for sale and rental and thus also attract the customer who prefers
to rent rather than buy despite a title's relatively low purchase price.
Video specialty stores typically purchase a majority of the films that
were released in theaters regardless of their success in attracting viewers.
The Company believes that many of its customers are predisposed to view a
specific film as a result of its marketing campaign, but due to its short
playing time at a local theater, they will often rent or purchase the
prerecorded home video version of that film. In addition, the Company believes
consumers are more apt to view films that were not box office hits on rented
videos than on any other medium because video specialty stores provide the
opportunity to browse and make an impulse choice among a very broad selection of
film titles at a low price. Therefore, video specialty stores represent a
reliable revenue source for a majority of the film output of the major movie
studios.
The Company believes that the major studios will begin to release
their films on a new digital video disc ("DVD") format within the next 12 to 18
months. To the extent that this format becomes popular with consumers, the
video retail industry is likely to also carry film titles in this format for
both
37
<PAGE>
rental and sale. Although new technologies have historically led to the
creation of new distribution channels, it is likely that films will be released
on DVD and video cassettes simultaneously. As movies in this format are
expected to offer superior image and sound quality to that of video cassettes,
the rental and purchase of home videos should become even more attractive to
consumers than at present.
BUSINESS STRATEGY
The Company's current business strategy is based on three key
advantages management believes the Company enjoys: (i) its position in the
retail video rental industry with its "store within a store" concept; (ii) its
ability to "piggyback" on what management believes will be the continued success
of Wal-Mart SuperCenters, Super Kmart Centers and Ralphs; and (iii) its existing
relationship with each of Wal-Mart, Kmart and Ralphs. In addition, it is the
Company's strategy to seek to open video retail outlets in other mass retail and
grocery stores. To capitalize on these points, the Company has taken or intends
to take the following steps: (a) increase the number of video cassettes each
store sells; (b) increase the video cassette inventory of new releases that each
store carries; (c) change the mix of inventory of each store to increase the
number of video games and family and children's movies available; (d) continue
to utilize market research to improve the inventory mix of video cassettes, CD-
ROM programs and games; (e) endeavor to hold down marketing costs by using
common advertising for all locations; (f) use its centralized computer system to
track overnight reporting of results from individual stores; and (g) use a
common store design to reduce construction costs.
The Company has opened 57 new stores during the eight-month period
ended August 31, 1996 and currently intends to open a total of 10 additional
stores during the remainder of calendar year 1996. The Company currently
anticipates opening 17 additional stores in 1997, all of which have been
identified by Wal-Mart. The Company currently does not believe that it will be
opening a significant number of stores in Super Kmart Centers or Ralphs in 1997.
However, to achieve this goal, the Company will be required to use substantially
all of the debt and equity capital described under the caption "Financing"
above. Failure to have available a substantial portion of capital will
materially adversely affect the Company's ability to implement its business
strategy and expansion plan.
SUPERCENTERS
Wal-Mart SuperCenters and Super Kmart Centers are large stores that
feature a full line of general merchandise and groceries as well as a variety of
ancillary services provided by independent third parties including video
rentals, dry cleaning, hair care, optical and floral shops, all intended to
provide customers with "one stop" shopping.
Wal-Mart. According to Wal-Mart, Wal-Mart SuperCenters average
181,000 square feet in size. Wal-Mart opened its first SuperCenter in 1988.
Wal-Mart was operating 143 SuperCenters in 19 states by January 31, 1995 and 239
SuperCenters by January 31, 1996. The majority of the SuperCenters are located
in Texas, Tennessee, Georgia and Missouri, and the Company expects Wal-Mart to
continue to concentrate store openings in small towns in the southeastern,
southwestern, and midwestern United States. The Company believes that it and
Blockbuster Entertainment, Inc. are currently the only two providers of "store
within a store" retail video outlets to Wal-Mart.
Kmart. According to Kmart, Super Kmart Centers range in size from
135,000 to 185,000 square feet. Kmart opened its first SuperCenter in 1991.
Kmart was operating 67 Super Kmart Centers at January 25, 1995 and 87 such
stores at January 31, 1996. The Company believes that it is currently the sole
provider of "store within a store" retail video outlets to Kmart, although it
believes that Kmart's strategy is to have more than one such provider.
Ralphs. Ralphs operates approximately 300 supermarkets, principally
on the west coast of the U.S. Through an agreement with Ralphs entered into on
May 1, 1995, the Company is the exclusive operator of "store within a store"
retail video outlets for Ralphs.
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<PAGE>
STORES
At August 31, 1996, the Company operated a total of 198 stores in Wal-
Mart and Wal-Mart SuperCenters, Super Kmart Centers and Ralphs. BlowOut Video
stores in Wal-Mart stores and Wal-Mart SuperCenters range from 840 square feet
to approximately 1,300 square feet in size. Stores within Super Kmart Centers
average approximately 1,000 square feet in size. Locations within Ralphs occupy
between 800 and 2,800 square feet. In all locations, stores do not have
separate outside entryways, but open within the store in which they are located.
The majority of the Company's stores have "drop boxes" located outside the
building so that customers may return video cassettes without having to come
into the store.
The following table sets forth the store development activities of the
Company during the periods indicated:
<TABLE>
<CAPTION>
Eight Months
Year Ended Year Ended Ended
12/31/94 12/31/95 8/31/96
-------- -------- -------
<S> <C> <C> <C>
Stores open beginning 7 7 157
of period
Stores opened or 0 154 57
acquired in period
Stores closed in period 0 4 16
Stores open at end of 7 157 198
period
</TABLE>
BlowOut Video stores use a common store design to control construction
costs. The Company contracts with third parties to build out BlowOut Video
Stores across the United States. Space in Wal-Mart SuperCenters, Kmart and
Ralphs is constructed on a "turn-key" basis. The cost to construct and open a
typical BlowOut Video store, including inventory, fixtures (including any
outside drop boxes at Wal-Mart SuperCenters, Super Kmart Centers and Ralphs),
and computers averages approximately $100,000.
OPERATIONS
General operations of the Company's business are administered by the
Vice President of Operations with the assistance of an Assistant Director of
Operations. The Vice President of Operations reports directly to the President.
Individual BlowOut Video stores are organized into districts
consisting of 16 locations and each district is, in turn, organized into areas
of four locations. One store manager in each area is appointed as Area Manager
to oversee his or her store and the other three stores in the area. One Area
Manager in the district is selected by the Company to serve as the District
Manager.
While the typical Wal-Mart SuperCenter and Super Kmart Center operates
24 hours per day every day of the year except Christmas Day, BlowOut Video
stores are typically open from 9:00 a.m. to 11:00 p.m., with a total of 135
"employee hours" required on all but a few of the busiest weeks of the year.
All stores use a Ketec anti-theft security system, with all
merchandise inventories labeled to deter pilferage. Stores record rental and
sale transactions on a personal computer which uses an off-the-shelf point-of-
sale video inventory management system. Each store has a telephone modem which
is
39
<PAGE>
programmed to down load rental and sales information daily to the Company
headquarters, where the data is processed to provide inventory tracking,
employee performance, and financial statements to management.
Each BlowOut Video store has in inventory an average of 3,500
cassettes for rental at any given time. Rental rates are based upon a tiered
system: (i) "new releases" are rented at rates ranging from $2.50 to $3.00 for
two days, (ii) "catalogue" items are rented at a rate of $1.50 for five days,
and (iii) "children's" videos are rented at rates ranging from $0.98 to $1.50
for five days, subject to adjustment for local conditions. After 60 days, some
of the cassettes may be made available for sale as "previously viewed" at prices
ranging from $3.88 to $14.95. The Company promotes sales by advertising,
principally through local newspapers and promotional techniques such as
selecting one to three of the most popular titles each month and guaranteeing
the availability of such titles or the customer's ability to rent any other
video in stock for free.
SUPPLIERS
Orders for merchandise are placed to Star Video Entertainment L.P.
("Star Video"), for traditional rental and new sale video cassettes, and Rentrak
for PPT rental cassettes, games, and CD/ROM. Used cassettes are purchased from
a number of vendors. The Company believes it could replace any of these
suppliers, except Rentrak, with suppliers whose pricing and availability would
be comparable. The Company directs virtually all of its suppliers of
merchandise, supplies, and fixtures to deliver the material directly to each of
its retail locations.
On July 22, 1996, the Company entered into the Star Video Agreement
with Star Video to provide the Company with video cassettes for rental and sale
and with video games for sale. Star Video paid off the balance of a promissory
note in the amount of $240,974.75 made by the Company to its previous supplier.
As a result, the Company executed a new promissory note to Star Video, pursuant
to which the Company is obligated to pay Star Video $120,487.37 on each of May
27, 1997 and 1998. Under the Star Video Agreement, Star Video became the
Company's exclusive supplier of new video cassettes for rental and sale not
purchased from Rentrak until the later of (i) July 21, 1997, or (ii) repayment
of such promissory note. This promissory note is secured by a guaranty of
Rentrak. In addition, to secure all amounts owed under the Star Video
Agreement, the Company has granted to Star Video a first priority security
interest in all of the Company's existing inventory, which security interest
Star Video will release, in exchange for a subordinated security interest on
such inventory upon (i) consummation of any secured financing (see
"Financing"), and (ii) the Company being current in its payments to Star Video
under the Star Video Agreement at such time.
Under the PPT System, the Company leases video cassettes from Rentrak
under a revenue sharing arrangement. Pursuant to this arrangement, the Company
pays a fixed "handling fee" for each cassette leased from Rentrak and a
"transaction fee" each time a cassette is rented. See "Certain Transactions and
Relationship Between the Company and Rentrak after the Distribution."
STORE LEASES
Wal-Mart. In January 1993, the Company entered into a non-exclusive
master lease with Wal-Mart, which was amended on May 15, 1995 and May 14, 1996
(as amended, the "Wal-Mart Master Lease"), under which the Company, as it opens
each store, executes a standard lease with Wal-Mart. Each such lease is for a
five-year period, with one option to renew for an additional five-year period.
Rent is calculated as a percentage of revenues generated by the store. The
Company is also liable for its pro rata share of real estate taxes. If the
volume of gross sales from a given store that has been opened at least 12 months
is less than a predetermined amount in any consecutive 12-month period, either
the Company or Wal-Mart, on 60 days' written notice to the other, may terminate
the standard lease with respect to the store. Since January 1, 1996, the
Company has exercised its option to close 23 stores in Wal-Mart Stores for
failure to achieve minimum sales volume. No stores have been closed at the
election of Wal-Mart.
40
<PAGE>
Kmart. Effective September 21, 1994, the Company entered into a non-
exclusive master sublease agreement with Kmart, which was amended on April 1,
1995 and January 21, 1996 (as amended, the "Kmart Master Lease"), under which
the Company, as it opens each store, executes a rider for a specified term with
Kmart. The Kmart Master Lease has a term of five years, with one option to
renew for an additional five-year term. The Company pays an annual minimum rent
of $3.75 per square foot, and additional rent calculated as a percentage of
gross revenues. If the volume of annual gross revenues from a given store that
has been open at least 12 months is less than certain predetermined amounts,
either the Company or K-Mart, on written notice to the other within 180 days
following the anniversary date of that store's rider, terminate the lease with
respect to that store. The Company has not opened any new stores under the
Kmart Master Lease in fiscal 1996. Since January 1, 1996, the Company has
exercised its option to close one store in Kmart for failure to achieve minimum
sales volume, and has given Kmart notice of its intention to close 10 additional
underperforming stores in April 1997. No stores have been closed at the
election of Kmart.
Ralphs. The Company entered into a master license agreement with
Ralphs ("Ralphs Master License") effective May 1, 1995, pursuant to which the
Company has the right to operate retail video sales and rental departments in
Ralphs at locations to be agreed upon by both parties. The Ralphs Master
License has a term of four years with respect to each location commencing on the
date such location opens for business. The Agreement may be renewed for two
successive three-year periods for a given location provided that such location
realizes a predetermined level of revenues. The Company pays a license fee to
Ralphs calculated as a percentage of gross revenues received in a given four-
week period. The Company has agreed not to operate a video store in any retail
outlet (including Wal-Mart SuperCenters and Super Kmart Centers) within a three-
mile radius of a Ralphs store in which the Company is operating a video
department. The Company has a right of first refusal to operate a video store
in all Ralphs locations. Ralphs has the right, subject to the Company's right
of first refusal, to lease space to another video rental operation having a
separate entrance. Upon 60 days' written notice and payment to the Company of a
predetermined termination fee, Ralphs may terminate the Ralphs Master License.
Ralphs may also terminate the Ralphs Master License if the Company fails to meet
minimum revenue levels. As of July 31, 1996, to the best of its knowledge, the
Company has met such minimum revenue levels. The Company may terminate the
Ralphs Master License on 60 days' written notice. There has been no such
termination of the Ralphs Master License to date.
MARKETING AND ADVERTISING
With advertising credits and market development funds that it receives
from its video suppliers and movie studios, the Company uses radio advertising,
direct mail, newspaper advertising, discount coupons and promotional materials
to promote new releases, its video stores and its tradename. Using copy
prepared by the Company and Star Video, advertising is primarily placed by the
distributor. Expenditures for marketing and advertising above the amount of the
Company's advertising credits from its suppliers and movie studios have been
minimal. The Company anticipates that marketing and advertising expenditures,
net of credits from its suppliers and allowances from movie studios, will remain
minimal after the consummation of the Distribution. The Company also benefits
from the advertising and marketing by studios and theatres in connection with
their efforts to promote films and increase box office revenues.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws,
including the Federal Videotape Privacy Protection Act and similar state laws
that govern the disclosure and destruction of video rental records. The Company
also must comply with various regulations affecting its business, including
state and local licensing, zoning, land use, construction and environmental
regulations.
41
<PAGE>
LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, currently pending legal proceedings and
claims against the Company will not, individually or in the aggregate, have a
material adverse effect on the Company's financial condition or results of
operations.
PROPERTIES
The Company leases space for each of its BlowOut Video stores pursuant
to various master leases described under the caption "Leases" above. The Company
leases approximately 6,124 sq. ft. of space for its principal executive offices
from Rentrak pursuant to a lease described herein under the caption "Related
Party Transactions - Office Leases." The Company also leases warehouse space
from Rentrak on a month-to-month basis in size and for rental rates that adjust
monthly. The average cost of warehouse space leased from Rentrak in fiscal 1996
has been approximately $3,000 per month. See "Related Party Transactions."
EMPLOYEES
As of July 31, 1996, the Company employed approximately 286 persons
full-time and 716 persons part time. None of the Company's employees is covered
by a collective bargaining agreement; however, in three Ralphs locations, all
non-management employees will be part of a collective bargaining agreement. The
Company does not expect to have more than nine employees subject to this
agreement. The Company provides medical insurance and other benefits for
eligible employees. The Company generally considers its relationships with its
employees to be good.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company, their ages and
their present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ---------------------- --- ----------------------------
<S> <C> <C>
Steve Berns 38 President and Director
Karl D. Wetzel 47 Chief Financial Officer
Harold Heyer 36 Vice President of Operations
F. Kim Cox 44 Director
Eugene F. Giaquinto 54 Director
Bill LeVine 75 Director
Muneaki Masuda 46 Director
</TABLE>
The Board of Directors is divided into three classes, as nearly equal
in number as possible. The initial three classes have been elected for one-,
two-, or three-year terms, and one class will be elected at each annual meeting
of stockholders thereafter for a three-year term. The Company's officers are
elected annually by and serve at the discretion of the Board of Directors.
There are no family relationships among directors or executive officers of the
Company.
The Company has determined to pay fees to its directors who are not
officers of the Company annual fees equal to $10,000 per annum of which $5,000
per year is to be paid currently and $5,000 is to be deferred and not paid until
the Company has achieved profitability. In addition, pursuant to the Company's
1996 Equity Participation Plan, each director who is not an employee of the
Company will automatically receive an option to purchase 1,000 shares of BlowOut
Common Stock on the date of each annual meeting of stockholders after the
Distribution, each current non-employee member of the Company Board will
automatically receive an option to purchase 5,000 shares of BlowOut Common Stock
on the Distribution, and each new non-employee member of the Company Board will
receive an option to purchase 5,000 shares of BlowOut Common Stock upon such
person's initial election to the Company Board. See "Management - 1996 Equity
Incentive Plan."
The Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee is comprised of Bill LeVine and Eugene
Giaquinto and is responsible for evaluating the performance of the Company's
management, determining the method of compensating the Company's salaried
employees and for administering and granting options under the Company's 1996
Equity Incentives Plan.
The Audit Committee is comprised of Eugene Giaquinto and Bill LeVine
and is responsible for evaluating the integrity of the Company's financial
reporting. The Board does not have a nominating committee.
Steve Berns has been president of the Company since its inception in
July 1992, and has been a director of the Company since ___________. Mr. Berns
was President of RKO Warner from 1986 to 1992, during which period RKO Warner
grew into the largest video retailer in the New York/New Jersey market and one
of the largest video retailers in the United States. From 1979 until 1986, Mr.
Berns held various positions with Video Shack, eventually becoming its executive
vice president of operations prior to its acquisition by RKO Warner. From 1990
to 1992, Mr. Berns also served as a member of the Board
43
<PAGE>
of Directors of the Video Software Dealers Association. Mr. Berns' term as a
director is scheduled to expire in 1999.
Karl D. Wetzel has served as Chief Financial Officer of the Company
since February 1, 1996. He served as Chief Accounting Officer of Rentrak from
February 1, 1995 until February 1, 1996. From June 1, 1991, until February 1,
1995, Mr. Wetzel served as Vice President of Finance and Chief Financial Officer
of Rentrak. Prior to joining Rentrak in February of 1990, Mr. Wetzel was Vice
President of Finance and Chief Financial Officer for Safeguard Security Systems,
Inc.
Harold Heyer has served as Vice President of Operations of the Company
since September 1995. From 1994 through August 31, 1995, Mr. Heyer served as
vice president of sales and retail operations for SCE where he managed the
growth of SCE to 70 units inside Wal-Mart and Kmart. From 1982 until 1994, Mr.
Heyer served in a number of management positions with SuperClub, Blockbuster and
Major Video. Prior thereto, he served as general manager of Video 22, a six
story video specialty chain.
F. Kim Cox has served as a director of the Company since July 1992.
Mr. Cox currently serves as the Executive Vice President -- Chief Financial
Officer, Secretary and Treasurer of Rentrak. Beginning in 1985, Mr. Cox has
served and is currently serving in a variety of senior management positions at
Rentrak, including Chief Financial Officer and Vice President Finance, and, from
June 1991 to May 1995, Senior Vice President -- Strategic Planning. Prior to
joining Rentrak in 1985, Mr. Cox was a practicing attorney. Mr. Cox's term as a
director is scheduled to expire in 1997. Mr. Cox intends to resign upon the
selection by the other members of the Company Board of a replacement.
Eugene F. Giaquinto has served as a director of the Company since
March 1996. Mr. Giaquinto is a founder and has been Chairman of the Board of
R&G Communications, a producer of independent films, since April 1989. From
1960 to 1989, Mr. Giaquinto served in various positions in finance, sales and
administration with MCA/Universal, including President of MCA Home
Entertainment. Mr. Giaquinto is a member of the Academy of Motion Picture Acts
& Sciences and a Commissioner for the Motion Picture Council. Mr. Giaquinto's
term as a director is scheduled to expire in 1999.
Bill LeVine has served as a director of the Company since March 1996.
Mr. LeVine is the founder, and has been President, of LeVine Enterprises, Inc.,
an investment firm, since its inception in January 1988. Mr. LeVine is a past
member of the Board of Directors of the International Franchise Association. He
has served as a director of Rentrak since April 1985. He also serves as a
director of First Business Bank, Los Angeles, California; B.C.T. Inc., Fort
Lauderdale, Florida; Fast Frame, Los Angeles, California; and California Closet,
Los Angeles, California. Mr. LeVine's term as a director is scheduled to expire
in 1998. See "Financing."
Muneaki Masuda has served as a director of the Company since July
1992. Mr. Masuda has been the President and Chairman of Culture Convenience
Club, Co., Ltd., a Japanese corporation principally engaged in the video, music
and book retail business, since December 1988. In 1990, he founded Rentrak
Japan, a joint venture of CCC and Rentrak. He has served as a director of
Rentrak since August 1990. Mr. Masuda's term as a director is scheduled to
expire in 1998. See "Financing."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In March 1996, the Company issued a $1.0 million convertible
subordinated note to Mr. Levine, a director of the company and a member of the
Compensation Committee. This note was guaranteed by Rentrak, accrued interest
at a rate of 9.0% per annum, and had a maturity date of August 31, 1997. On
August 30, 1996, Mr. LeVine converted his Note into 121,789 Shares of BlowOut
Common Stock.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the
years indicated concerning the compensation awarded to, earned by, or paid to
Steve Berns, the only executive officer of the Company whose salary and bonus
exceeded $100,000 during the most recent fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
COMPENSATION(1)
NAME AND --------------- OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(2)
- ------------------- ---- ------ ------ ---------------
<S> <C> <C> <C> <C>
Steve Berns 1995 $131,625 $5,000 --
President and Chief 1994 $142,961 -- --
Officer 1993 $140,000 -- --
</TABLE>
__________________________
(1) Annual compensation does not include the cost to the Company of certain
benefits. The aggregate amount of such benefits, as to any executive
officer, did not exceed $13,662.
(2) The Company has not granted any options for shares of BlowOut Common Stock;
however, Mr. Berns has been granted options for shares of Rentrak Common
Stock pursuant to the Company's 1986 Second Amended and Restated Stock
Option Plan ("Rentrak Plan") as follows: in calendar year 1995, options for
10,000 shares of Rentrak Common Stock at an exercise price of $5.00 per
share and options for 25,000 shares of Rentrak Common Stock at an exercise
price of $5.75 per share and, in calendar year 1996, options for 10,000
shares of Rentrak Common Stock at an exercise price of $4.625 per share.
No options for Rentrak Common Stock were granted to Mr. Berns in 1993 and
1994. At December 31, 1995, Mr. Berns held options to purchase 2,500
shares of Rentrak Common Stock which were then exercisable and options to
purchase 32,500 shares of Rentrak stock which were then unexercisable.
Based on the closing price of Rentrak Common Stock at December 31, 1995, of
$4-15/16 per share, none of such options were "in-the-money," and therefore
had no value at December 31, 1995. The Rentrak Plan is administered by the
Compensation Committee of the Rentrak Board which determines to whom
options are granted, the number of shares subject to each option, the
vesting schedule and the exercise price. Prior to March 26, 1996, the
Stock Option Committee, a Subcommittee of the Compensation Committee of the
Rentrak Board, administered the Rentrak Plan Options. The options expire
10 years after the date of grant and vest in equal annual installments over
four years. The options may be exercised for a period of one month
following termination of employment, except that under certain
circumstances options expire at the time of termination.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into an amended and restated employment agreement dated
as of March 1, 1996 (the "Berns Agreement") with Steve Berns, pursuant to which
Mr. Berns will serve as President of the Company until October 31, 1998, or
until otherwise terminated pursuant to the terms thereof. During the term of
the Agreement, Mr. Berns is to receive a base annual salary of $150,000 (the
"Berns Base Salary"). The Berns Base Salary shall automatically be increased by
the percentage increase over the preceding 12 month period, if any, and the
Consumer Price Index for all Urban Consumers, U.S. City Average beginning on
October 1, 1996 and annually thereafter. The Berns Agreement provides that the
Company may pay Mr. Berns a bonus or other additional compensation above the
Base Salary at its discretion. Under the Berns Agreement, the Company will
provide Mr. Berns with vacation and holiday pay comparable to that provided by
Rentrak to its executives pursuant to policies in effect on the date of the
Berns Agreement, medical and life insurance under the Company's then-current
terms, a car allowance of $500 per month, and reimbursement for relocation
expenses to Portland, Oregon. If, during the term of the Berns Agreement, more
than 70% of the stock of the Company is sold by Rentrak in a public offering, or
more than 50% of the stock of the Company is sold by Rentrak in a private sale,
the Company shall pay to Mr. Berns the greater of $100,000 or 1% of the gross
revenues realized from such stock sale. Under this provision, Mr. Berns is to
be paid a $100,000 bonus upon completion of the Distribution.
The Berns Agreement may be terminated with or without reason by either the
Company or Mr. Berns upon 30 days' written notice to the other party. If
termination is due to Mr. Berns' death or disability, the Company will pay a
lump sum severance payment of an amount equal to the Berns Base Salary accrued
through and including the date of termination. If termination is by the Company
for other than for cause by employer or death or disability of Mr. Berns, the
Company will pay him severance payments in an amount six months of the annual
Base Salary, subject to demonstration by Mr. Berns that he is using his best
efforts to find other employment. The Agreement also contains a nonsolicitation
covenant and agreement not to disclose confidential information. On October 26,
1995, Mr. Berns and the Company entered into a non-competition agreement, which
was subsequently amended on December 12, 1995. Under such agreement, during the
period of his employment with the Company, and for 24 months after such
employment shall have terminated, Mr. Berns will not engage in any business
involving video store departments which are inside either mass market or grocery
retailers anywhere in the United States or other geographical area where the
Company conducts its business or sells or distributes its products or services.
Effective February 1, 1996, the Company entered into an employment
agreement with Karl Wetzel, pursuant to which Mr. Wetzel will serve as Chief
Financial Officer of the Company until January 31, 1999 or until otherwise
terminated pursuant to the terms thereof (the "Wetzel Agreement"). During the
term of the Wetzel Agreement, Mr. Wetzel is to receive a base annual salary of
$100,000 (the "Wetzel Base Salary"), payable in equal semi-monthly installments.
Commencing May 1, 1996, and on each May 1st during the term of the agreement
thereafter, the Company has agreed to review the Wetzel Base Salary and may, at
such time and in its discretion, increase the Wetzel Base Salary. The Wetzel
Agreement further provides that Mr. Wetzel will participate in any bonus plan
adopted by the Company, including any cash bonus pools established by the
Company from time to time for its corporate executives. In addition, the
Company has agreed to pay Mr. Wetzel a $50,000 bonus within 10 days after the
date, if any, on which the Company's common stock commences trading on any
national stock exchange or on NASDAQ. The Wetzel Agreement also requires the
Company to pay Mr. Wetzel a severance payment of an amount equal to the Wetzel
Base Salary accrued through and including the date of termination if Mr.
Wetzel's employment is terminated due to his death or disability. If
termination is by the Company other than for cause or Mr. Wetzel's death or
disability, the Company will pay him severance payments in an amount equal to
six months of the annual Wetzel Base Salary, subject to the demonstration by Mr.
Wetzel that he is using his best efforts to find other employment. The Wetzel
Agreement provides that any unvested options granted to Mr. Wetzel by Rentrak
relating to Mr. Wetzel's service as an officer of Rentrak Home Entertainment
("RHE"), a division of Rentrak, shall continue to vest pursuant to their terms
as if Mr. Wetzel were still employed by RHE. Pursuant to the Wetzel
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<PAGE>
Agreement, Mr. Wetzel and the Company entered into a non-competition agreement
pursuant to which during the period of his employment with the Company, and for
24 months after such employment shall have terminated, Mr. Wetzel will not
engage in any business involving video store departments which are inside either
mass market or grocery retailers anywhere in the United States or other
geographical area where the Company conducts its business or sells or
distributes its products or services.
Effective April 22, 1996, the Company entered into an employment agreement
(the "Heyer Agreement") with Harold Heyer, pursuant to which Mr. Heyer will
serve as Vice President of Operations of the Company until August 30, 1998 or
until otherwise terminated pursuant to the terms thereof. During the term of
the Heyer Agreement, Mr. Heyer receives an annual base salary of $90,000 (the
"Heyer Base Salary"). The Company has agreed to reimburse Mr. Heyer for
expenses in relocating to Portland, Oregon in a maximum amount of $30,000. The
Company has agreed to employ Mr. Heyer for at least 12 months following his
relocation to Portland, Oregon, or, if Mr. Heyer is involuntarily terminated
within such twelve-month period, but not for cause, the Company will pay Mr.
Heyer an amount equal to 90 days of the Heyer Base Salary. If Mr. Heyer's
employment is terminated due to Mr. Heyer's death or disability, the Company
will pay Mr. Heyer a lump sum severance payment in an amount equal to the Heyer
Base Salary accrued through and including the date of termination. If, within
two years after a Change of Control (as defined in the Heyer Agreement)
termination is by the Company without cause, or by Mr. Heyer for Good Reason (as
defined in the Heyer Agreement) the Company shall pay to Mr. Heyer a lump sum
payment in an amount equal to the lesser of (i) the Heyer Base Salary through
August 30, 1998, or (ii) six months of the Heyer Base Salary. If termination is
by the Company other than for cause or Mr. Heyer's death or disability, the
Company will pay him severance payments in an amount equal to six months of the
annual Heyer Base Salary, subject to the demonstration by Mr. Heyer that he is
using his best efforts to find other employment, and further subject to
reduction by the amount of remuneration in any form received from such other
employment during such six month period. The Heyer Agreement also contains Mr.
Heyer's agreement not to disclose confidential information and a non-competition
agreement, pursuant to which, during the period of his employment with the
Company and for 24 months after such employment shall have terminated, Mr. Heyer
will not engage in any business (i) involving the revenue sharing method of
wholesale distribution of home video cassettes, (ii) which is substantially
similar to leased store video operations, or (iii) which competes with any
business then engaged in by the Company or its affiliates any where in the
United States or other geographical area where the Company conducts its business
or sells or distributes its products or services.
INDEMNITY AGREEMENTS
BlowOut and each present director and officer of BlowOut have executed an
indemnity agreement (collectively, the "Indemnity Agreements"). The Board of
Directors of BlowOut and Rentrak, as the sole stockholder of BlowOut at the time
the Indemnity Agreements were executed and delivered, approved the form of such
Indemnity Agreements. BlowOut intends to enter into similar Indemnity
Agreements with all of its future directors and officers.
In general, the Indemnity Agreements seek to afford such directors and
officers the maximum indemnification protection allowed under Delaware law.
Below is a summary of the general provisions of the Indemnity Agreements.
Indemnification in Third-Party Proceedings. Pursuant to the Indemnity
Agreements, BlowOut will indemnify the directors and officers of BlowOut who are
parties to the Indemnity Agreements against all expenses of investigations,
judicial or administrative proceedings or appeals, whether threatened, pending
or completed, and amounts paid in settlement and attorneys' fees actually and
reasonably incurred in defense or settlement of any civil, criminal or
administrative proceedings relating to actions taken by such director or officer
in his capacity as such director or officer, provided only that the director or
officer acted in good faith and in a manner that he or she reasonably believed
to be in or not opposed to the best interests of BlowOut. In addition, if the
director or officer is involved in a criminal proceeding, BlowOut will indemnify
the director or officer if he or she had no reasonable cause to believe that the
conduct was unlawful. A settlement or judgment or plea of nolo contendere will
not, by itself, create
47
<PAGE>
a presumption that the director or officer is not entitled to be indemnified.
No indemnification is permitted for any acts or omissions or transactions from
which directors may not be relieved of liability under Delaware law as referred
to above.
Derivative Suits. BlowOut will indemnify BlowOut's directors and officers
who are parties to the Indemnity Agreements against similar expenses and
settlement payments incurred in similar actions brought in the name or the right
of BlowOut and arising from the director's or officer's service to BlowOut. No
indemnification is provided where the director or officer is ultimately held
liable to BlowOut unless a court should so determine, nor will indemnification
be made for any action not taken in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of BlowOut, as the case
may be, and their respective stockholders. Furthermore, no indemnification is
permitted for any acts or omissions or transactions from which directors may not
be relieved of liability under Delaware law. Sections 145(a) and 145(b) of the
DGCL, which grant corporations the power to indemnify directors and officers,
specifically authorize lesser indemnification in connection with derivative
claims than in connection with third-party claims. The distinction is that
Section 145(a), concerning third-party claims, authorizes indemnification of
expenses and judgments and amounts paid in settlement (as provided in the
Indemnity Agreements), but Section 145(f) expressly provides that the
indemnification and advancement of expenses provided by or granted pursuant to
the other subsections of Section 145 shall not be exclusive of any other rights
to which those seeking indemnification may be entitled under any agreement. No
Delaware case directly answers the question of whether Delaware's public policy
would support this aspect of the Indemnity Agreements under the authority of
Section 145(f), or would cause its invalidation because it did not conform to
the distinctions contained in Sections 145(a) and 145(b).
Procedure for Indemnification. BlowOut promptly will indemnify any
director or officer of BlowOut pursuant to the Indemnity Agreements unless it is
determined by a majority of disinterested directors or by independent counsel
that the actions of the director or officer did not meet the relevant standard
for indemnification. If such disinterested directors or independent counsel
determines that the requisite standard of conduct has not been met in a
particular instance, the director or officer seeking indemnification may
petition the court for an independent determination. In any such action,
BlowOut will have the burden of proving that indemnification is not proper. The
failure of the disinterested directors to make a determination that the director
or officer failed to meet the applicable standard of conduct. The indemnitee's
right to indemnification under the Indemnity Agreement will continue even though
he or she may have ceased to be a director or officer and will inure to the
benefit of the indemnitee's heirs and personal representatives.
Advance of Expenses. BlowOut will advance to any such director or officer
expenses of the defense of any proceeding if the director or officer undertakes
to repay any amount advanced in the event it is determined that he or she is not
entitled to indemnification and certifies to BlowOut that the director or
officer has met the relevant standards for indemnification.
Partial Indemnity. If the director or officer is not entitled to
indemnification of all expenses but is entitled to indemnification of some
expenses, BlowOut will indemnify the director or officer for that portion of the
expenses to which he or she is otherwise entitled to indemnification.
Insurance. The Indemnity Agreements provide that BlowOut may obtain and
maintain in effect directors' and officers' insurance.
Pursuant to their terms, the Indemnity Agreements will cover acts or
omissions that occurred prior to BlowOut's execution and delivery of the
Indemnity Agreements. There is no recent, pending or, to the best knowledge of
BlowOut, threatened litigation involving any director or officer of BlowOut,
where indemnification under the Indemnity Agreement would be required or
permitted.
48
<PAGE>
1996 EQUITY PARTICIPATION INCENTIVE PLAN
In April 1996, the Company adopted an equity incentive plan (the "1996
Equity Incentive Plan"). Under the 1996 Equity Incentive Plan, the Company may
grant incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and nonstatutory stock options to key
employees, officers and consultants to allow them to participate in the
ownership and growth of the Company. The Compensation Committee (consisting of
persons who are "disinterested persons" within the meaning of Rule 16b-3 under
the Exchange Act and "outside directors" within the meaning of Section 162(m) of
the Code) of the Company Board has discretion, within the limits of the 1996
Equity Incentive Plan, to designate recipients, amounts, exercise prices and
other terms and conditions of the stock options to key employees (including
employees who may also be officers and directors of the Company), officers and
consultants of the Company. The 1996 Equity Incentive Plan also provides for
automatic grants of options for predetermined numbers of shares of Common Stock
to non-employee directors of the Company. Upon the occurrence of a change of
control or certain corporate transactions, any option granted under the 1996
Equity Incentive Plan to non-employee directors shall become fully exercisable
and vested, subject to certain conditions, including compliance with Section
16(b) of the Exchange Act, while the Compensation Committee will have the
discretion to accelerate vesting or take other action with respect to all other
options granted under the 1996 Equity Incentive Plan. Under the 1996 Equity
Incentive Plan, not more than 500,000 shares of BlowOut Common Stock be reserved
for issuance under the 1996 Equity Incentive Plan, although no options to
purchase any shares under the Equity Incentive Plan are currently outstanding.
Furthermore, the maximum number of shares which may be subject to options
granted under the 1996 Equity Incentive Plan to any individual in any fiscal
year cannot exceed $150,000.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the BlowOut Common Stock as of August 31, 1996, and as adjusted to
reflect the Distribution, by (i) all stockholders known by the Company to be
beneficial owners of more than 5% of the outstanding BlowOut Common Stock
immediately prior to the Distribution, (ii) each director of the Company, (iii)
each of the Named Executive Officers, and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Before Distribution Post Distribution Shares
----------------------------------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
STOCKHOLDER/(1)/(2)
- --------------------------------------------
Steve Berns................................. -0- * -0- *
F. Kim Cox.................................. -0- * 200 *
Eugene F. Giaquinto......................... -0- * -0- *
Bill LeVine................................. 121,789 5.0% 164,872 6.8%
Muneaki Masuda/(3)/......................... 484,720 19.9 584,720 24.0
Rentrak Corporation......................... 1,698,942 69.8 484,723 19.9
All directors and executive officers as a
group (7 persons)........................... 606,509 24.9 1,234,643 50.7
</TABLE>
- ---------------------
* Less than 1%.
(1) The address of Rentrak and of all executive officers is 7227 NE 55th
Avenue, Portland, Oregon 97218.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Shares of
BlowOut Common Stock subject to options or warrants exercisable or
convertible within 60 days are deemed outstanding for computing the
percentage of the person or group holding such options or warrants, but are
not outstanding for computing the percentage of any other person. Except
as indicated in the footnotes to this table and subject to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of BlowOut Common Stock
beneficially owned.
(3) These shares are held of record by CCC. Mr. Masuda, as president and
principal shareholder of CCC is deemed to be the beneficial owner of shares
of BlowOut Common Stock owned by CCC.
50
<PAGE>
DESCRIPTION OF COMPANY CAPITAL STOCK
The Company's authorized capital stock consists of (i) 10,000,000 shares of
common stock, par value $.01 per share (the "BlowOut Common Stock"), of which
2,433,333 shares are issued and outstanding, and (ii) 1,000,000 shares of
preferred stock (the "BlowOut Preferred Stock"), of which no shares are
currently issued and outstanding.
BLOWOUT PREFERRED STOCK
Pursuant to the Certificate of Incorporation of the Company, the Company
Board by resolution may establish one or more series of BlowOut Preferred Stock
having such number of shares, designation, relative voting rights, dividend
rates, liquidation and other rights, preferences and limitations as may be fixed
by the Company Board without any further stockholder approval. Such rights,
preferences, privileges and limitations as may be established could have the
effect of impeding the acquisition of control of the Company. As of the date
hereof, there are no shares of BlowOut Preferred Stock issued and outstanding.
BLOWOUT COMMON STOCK
Each holder of BlowOut Common Stock is entitled to one vote per share on
all matters, including the election of directors, and does not have the right to
cumulate his votes in the election of directors, subject only to certain matters
involving only the rights of holders of any subsequently issued Preferred Stock.
Each holder of BlowOut Common Stock will be entitled to such dividends as the
Company Board may declare from time to time from funds legally available
therefor, subject to the preferential rights of any outstanding shares of any
BlowOut Preferred Stock and the requirements of the Delaware General Corporation
Law. Upon liquidation, each holder of BlowOut Common Stock will be entitled to
share in the assets of the Company pro rata and in accordance with his holdings,
after payment and satisfaction of all debts, allowances, expenses, costs and
liens, and subject to the preferential rights of holders of any subsequently
issued BlowOut Preferred Stock. The BlowOut Common Stock has no preemptive,
redemption, conversion or subscription rights. Shares of BlowOut Common Stock
outstanding on the date of this Information Statement are fully paid and
nonassessable.
PRE-DISTRIBUTION STOCK DIVIDEND
Effective as of ______________, 1996, the Company's Board of Directors
declared a stock dividend pursuant to which each holder of record of BlowOut
Common Stock on _____________, 1996 received .01491 shares of BlowOut Common
Stock in respect of each share of BlowOut Common Stock outstanding on such date.
The purpose of the stock dividend was to adjust the number of outstanding shares
of BlowOut Common Stock in order to minimize fractional shares (i.e., so that in
the Distribution Rentrak would distribute one share of BlowOut Common Stock for
every ten issued and outstanding shares of Rentrak Common Stock). Assuming that
the number of outstanding shares of Rentrak Common Stock on the Record Date is
12,142,189, the same number outstanding on August 31, 1996, the Company's Board
of Directors will not make any further adjustment in the number of shares of
BlowOut Common Stock. However, if the number of shares of BlowOut Common Stock
at the Record Date is more or less than 12,142,189, the Board of Directors of
the Company may make a further adjustment in the number of shares of BlowOut
Common Stock in order to minimize fractional shares in the Distribution. See
"The Distribution -- Manner of Effecting the Distribution."
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
CORPORATION LAW
Directors
The Bylaws provide that the number of directors constituting the Board of
Directors shall be not less than five nor more than nine, with the exact number
to be fixed by resolution of the Board of
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<PAGE>
Directors, and that vacancies on the Board of Directors (including vacancies
created by an increase in the number of directors) may be filled by the Board of
Directors, acting by a majority of the remaining directors then in office. As
permitted by Delaware law, the Board of Directors is divided into three classes,
as nearly equal in number as possible. The initial three classes have been
elected for one-, two-, or three-year terms, and one class will be elected at
each annual meeting of stockholders thereafter for a three-year term.
Stockholders may remove directors only for cause.
The Bylaws of the Company also contain provisions, requiring advance notice
of nominations for directors and items to be placed on the agenda of meetings by
stockholders, and requiring that persons desiring to call a special meeting of
stockholders holding at least 10% of the outstanding capital stock. These
provisions are designed to prevent a hostile acquiror of the Company's
securities from presenting proposals to the stockholders without giving adequate
notice, thereby permitting the Board of Directors to consider and prepare a
response to such proposals. These provisions do not give the Board of Directors
any power to approve or disapprove of stockholder proposals. They may have the
effect, however, of precluding the consideration of such business at a meeting
if the procedures established are not followed, any may discourage a third party
from submitting a proposal without regard to whether this might be harmful or
beneficial to the Company and its stockholders.
Limitation of Liability and Indemnification
As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derives an improper
personal benefit. In addition, the Bylaws provide that the Company shall, to
the fullest extent authorized by the Delaware General Corporation Law, as
amended from time to time, indemnify all directors and officers and may, at the
election of the Company as determined by the Board of Directors, indemnify all
other persons serving at the request of the Company as a director, officers,
employee or agent of another corporation or of a partnership, trust or other
enterprise.
Delaware Business Combination Statute
Section 203 of the Delaware General Corporation Law ("Section 203")
provides that, subject to certain exceptions specified therein, an interested
stockholder of a Delaware corporation shall not engage in any business
combination with the corporation for a three-year period following the time that
such stockholder becomes an interested stockholder unless (i) prior to such
time, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares) or
(iii) on or subsequent to such time, the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66-2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Except as otherwise specified in Section 203, an interested stockholder is
defined to include (x) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation, and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude the Company from
the restrictions imposed under
52
<PAGE>
Section 203. The provisions of Section 203 may encourage companies interested
in acquiring the Company to negotiate in advance with the Board of Directors
since the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
Such provisions also may have the effect of preventing changes in the management
of the Company. It is possible that such provisions could make it more
difficult to accomplish transactions which stockholders may otherwise deem to be
in their best interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the BlowOut Common Stock is U.S. Stock
Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Distribution, the Company will have outstanding
2,433,333 shares of BlowOut Common Stock. Of such shares, the Company believes
that the 1,214,219 shares distributed in this Distribution will be freely
transferrable without restrictions or further registration under the Securities
Act, unless acquired by an affiliate of the Company, in which case those shares
will be subject to the resale limitations of Rule 144 or unless such shares were
received by persons who were holders of restricted shares of Rentrak Common
Stock, in which case such holders will receive BlowOut Common Stock containing
the same such restrictions. The remaining 1,219,125 shares of BlowOut Common
Stock are "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares").
Except as provided below, the Restricted Shares will be eligible for sale
in the public market, in accordance with Rule 144. Immediately following the
Distribution, 425,574 shares of BlowOut Common Stock held by Rentrak or a
subsidiary of Rentrak will be available for sale under Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), subject to the volume
and other restrictions of Rule 144. An additional 121,789, 121,789, 187,042 and
362,931 shares of BlowOut Common Stock will become available for sale under Rule
144, subject in certain cases to volume restrictions, in each of March, April,
May and August of 1998, respectively.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, including persons who may be deemed to be "affiliates" of the
Company, as that term is defined under Rule 144, may sell within any three-month
period a number of Restricted Shares that does not exceed the greater of one
percent of the then outstanding shares of BlowOut Common Stock (approximately
24,333 shares) or the average weekly trading volume of BlowOut Common Stock on
the open market during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain manner-of-sale limitations, notice
requirements, and the availability of current public information about the
Company. Pursuant to Rule 144(k), a person (or persons whose shares are
aggregated) who is deemed not to have been an "affiliate" of the Company at any
time during the three months preceding a sale, and who has beneficially owned
Restricted Shares for at least three years, would be entitled to sell such
shares under Rule 144 without regard to volume limitations, manner-of-sale
provisions or notice requirements. Restricted Shares properly sold in reliance
upon Rule 144 are thereafter freely tradeable without restrictions or
registration under the Securities Act, unless thereafter held by an "affiliate"
of the Company.
Prior to this Distribution there has been no market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of Restricted
Shares, or availability of Restricted Shares for sale, by existing stockholders
in reliance upon Rule 144 or otherwise will have on the market price of BlowOut
Common Stock. The sale by the Company or the stockholders referred to above of
a substantial number of shares of BlowOut Common Stock after this Distribution
could adversely affect the market price for the BlowOut Common Stock. A total
of 1,091,232 shares of BlowOut Common Stock issued to Mr. LeVine and to CCC upon
conversion of Notes, issued to CCC for cash, and held by Rentrak following the
Distribution, are subject to Registration Rights Agreements which provide demand
and
53
<PAGE>
"piggyback" registration rights. In addition, the Company has granted the E-1
Minority "piggyback" registration rights with respect to the 127,893 shares of
"restricted securities," which generally grant the E-1 Minority the right to
request registration of their shares of the Company's common stock in connection
with the filing by the Company of a Registration Statement with respect to an
offering of any equity securities by the Company for its own account or for the
account of any of its equity holders (other than any registration filed in
connection with the offer or sale to the management of the Company of securities
pursuant to an employee stock plan or other employee benefit plan arrangement).
See "Financing - Registration Rights."
AVAILABLE INFORMATION
The Company has filed with the Commission the Form 10 Registration
Statement under the Exchange Act with respect to the BlowOut Common Stock. This
Information Statement does not contain all of the information set forth in the
Form 10 Registration Statement. For further information with respect to the
Company and the Securities offered hereby, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Information Statement as to the contents of any contract or
any other document referred to are not necessarily complete. With respect to
each such contract or other document filed as an exhibit to the Form 10
Registration Statement reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Following the consummation of the offering, the Company will be subject to
the informational requirements of the Exchange Act and in accordance therewith
will be required to file reports and other information with the Commission. The
Company intends to furnish its stockholders with annual reports containing
audited financial statements reported on by independent public accountants
following the end of each fiscal year, and quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year
following the end of each such fiscal quarters. A copy of the Form 10
Registration Statement, including exhibits and schedules thereto, filed by the
Company with the Commission may be inspected without charge at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10007; and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 upon the payment of fees prescribed by the
Commission. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<S> <C>
BlowOut Entertainment, Inc. F-2
Report of Independent Public Accountants............................................... F-2
Balance Sheets of Blowout Entertainment, Inc. (audited) as of
December 31, 1995 and 1994............................................................ F-3
Statements of Operations of BlowOut Entertainment, Inc. (audited) for
the three years ended December 31, 1995, 1994 and 1993................................ F-4
Statements of Stockholders' Equity (Deficit) of BlowOut Entertainment,
Inc. (audited) for the three years ended December 31, 1995, 1994 and 1993............. F-5
Statements of Cash Flows of BlowOut Entertainment, Inc. (audited) for
the three years ended December 31, 1995, 1994 and 1993................................ F-6
Notes to Financial Statements.......................................................... F-7
SuperCenter Entertainment Corporation - Retail Division..................................... F-17
Report of Independent Public Accountants............................................... F-17
Balance Sheets of SuperCenter Entertainment Corporation - Retail Division
(the predecessor of W-1 Incorporated and K-1 Incorporated) (audited) as of
December 31, 1994, 1993 and 1992..................................................... F-18
Statements of Operations of SuperCenter Entertainment Corporation -
Retail Division (audited) for the years ended December 31, 1994, 1993 and 1992........ F-19
Notes to Financial Statements.......................................................... F-20
Entertainment One, Inc. - Wal-Mart Stores Business.......................................... F-24
Report of Independent Public Accountants............................................... F-24
Statement of Assets and Liabilities of Entertainment One, Inc. - Wal-Mart
Stores Business (audited) as of July 31, 1994 and 1993................................ F-25
Statements of Revenues and Expenses of Entertainment One, Inc. - Wal-Mart
Stores Business (audited) for the year ended July 31, 1994 and 10 months
ended July 31, 1993................................................................... F-26
Notes to Financial Statements.......................................................... F-27
BlowOut Entertainment, Inc. - Interim Period Financial Statements (unaudited)............... F-31
Balance Sheet of BlowOut Entertainment, Inc. (unaudited) as
of June 30, 1996 and 1995............................................................. F-31
Statement of Operations of BlowOut Entertainment, Inc. (unaudited)
for the quarters ended June 30, 1996 and 1995......................................... F-32
Statement of Operations of BlowOut Entertainment, Inc. (unaudited)
for the six month periods ended June 30, 1996 and 1995................................ F-33
Statement of Cash Flows of BlowOut Entertainment (unaudited) for the
quarter ended June 30, 1996........................................................... F-34
Notes to Financial Statements.......................................................... F-35
BlowOut Entertainment, Inc. - Pro Forma Financial Data (unaudited)
Introduction to Pro Forma Financial Data............................................... F-39
Statement of Operations of BlowOut Entertainment, Inc. (unaudited)
for the year ended December 31, 1995.................................................. F-40
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To BlowOut Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of BlowOut
Entertainment, Inc. and subsidiaries (a Delaware corporation) as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BlowOut Entertainment, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Portland, Oregon,
May 28, 1996
F-2
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
---------------------------
CONSOLIDATED BALANCE SHEETS - AS OF DECEMBER 31, 1995 AND 1994
--------------------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,493,541 $ 66,162
Restricted cash 113,297 -
Trade receivables 65,585 42,979
Other receivables 276,324 -
Merchandise inventory 984,894 18,000
Other current assets 244,426 13,837
----------- -----------
Total current assets 4,178,067 140,978
RENTAL INVENTORY, net 5,715,093 323,379
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 3,481,308 424,345
INTANGIBLE ASSETS, net of accumulated
amortization of $260,208 4,896,092 -
OTHER ASSETS, net of accumulated
amortization of $12,713 265,935 4,446
----------- -----------
Total assets $18,536,495 $ 893,148
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,278,553 $ 17,260
Accrued liabilities 1,150,174 233,842
Accrued payroll 178,310 8,743
Other current liabilities 67,719 -
Current portion of long-term debt 326,287 -
Current portion of payable to parent - 296,166
----------- -----------
Total current liabilities 5,001,043 556,011
LONG-TERM DEBT 640,789 -
PAYABLE TO PARENT 2,800,000 1,375,000
----------- -----------
Total liabilities 8,441,832 1,931,011
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.01 par value; 1,000,000
shares authorized) - -
Common stock ($.01 par value; 10,000,000 and
1,000,000 shares authorized in 1995 and 1994,
respectively; 1,800,000 and 900,000 shares
issued and outstanding in 1995 and 1994,
respectively) 18,000 9,000
Additional paid-in capital 16,974,200 866,000
Retained deficit (6,897,537) (1,912,863)
----------- -----------
Total stockholders' equity
(deficit) 10,094,663 (1,037,863)
----------- -----------
Total liabilities and
stockholders' equity $18,536,495 $ 893,148
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE:
Rental revenue $ 7,689,018 $1,115,316 $ 467,247
Product and other sales 3,029,471 177,516 68,641
----------- ---------- ----------
10,718,489 1,292,832 535,888
----------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of rental revenue 3,268,629 408,566 225,428
Cost of product and other sales 1,951,132 154,750 56,054
Operating expenses 6,274,661 852,208 631,822
Selling, general and administrative 3,277,818 308,813 328,632
----------- ---------- ----------
14,772,240 1,724,337 1,241,936
----------- ---------- ----------
LOSS FROM OPERATIONS (4,053,751) (431,505) (706,048)
OTHER INCOME (EXPENSE):
Interest income 3,540 - 172
Interest expense (532,836) (161,700) (50,825)
Other, net (401,627) (250,819) (105,668)
----------- ---------- ----------
Total other income (expense) (930,923) (412,519) (156,321)
----------- ---------- ----------
LOSS BEFORE INCOME TAXES (4,984,674) (844,024) (862,369)
INCOME TAXES - - -
----------- ---------- ----------
NET LOSS $(4,984,674) $ (844,024) $ (862,369)
=========== ========== ==========
NET LOSS PER COMMON SHARE $ (3.46) $ (.94) $ (.96)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
---------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------------
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
------------------- Paid-In Retained Equity
Shares Amount Capital Deficit (Deficit)
--------- ------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992 900,000 $ 9,000 $ 516,000 $ (206,470) $ 318,530
Capital contributed
by parent - - 350,000 - 350,000
Net loss - - - (862,369) (862,369)
--------- ------- ----------- ----------- -----------
BALANCE, December 31,
1993 900,000 9,000 866,000 (1,068,839) (193,839)
Net loss - - - (844,024) (844,024)
--------- ------- ----------- ----------- -----------
BALANCE, December 31,
1994 900,000 9,000 866,000 (1,912,863) (1,037,863)
Capital contributed
for Entertainment
One, Inc.
acquisition 900,000 9,000 4,369,260 - 4,378,260
Capital contributed
for Supercenter
Entertainment
Corporation
acquisition - - 5,213,125 - 5,213,125
Conversion of
borrowings and
accrued interest
due to parent to
equity - - 6,525,815 - 6,525,815
Net loss - - - (4,984,674) (4,984,674)
--------- ------- ----------- ----------- -----------
BALANCE, December 31,
1995 1,800,000 $18,000 $16,974,200 $(6,897,537) $10,094,663
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,984,674) $(844,024) $ (862,369)
Adjustments to reconcile net loss to
net cash used in operating activities-
Amortization of videocassette rental inventory 1,528,640 179,293 148,852
Depreciation 456,293 166,545 98,730
Amortization of intangible and other assets 272,921 - -
Changes in assets and liabilities accounts, net
of effect of acquisitions of businesses:
Restricted cash (113,297) - -
Receivables, net (270,007) (12,360) (30,619)
Merchandise inventory (886,546) (3,898) (14,102)
Other assets (176,660) 783 (13,703)
Accounts payable 1,247,835 (58,343) 75,603
Accrued liabilities 1,129,831 183,017 50,825
Accrued payroll 68,833 (4,903) 13,646
----------- --------- -----------
Net cash used in operating activities (1,726,831) (393,890) (533,137)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes, net of tapes
acquired in acquisitions (4,322,348) (202,545) (481,818)
Capital expenditures, net of acquisitions (1,012,631) (10,438) (689,706)
Disposals of rental inventory, net 564,450 30,382 8,689
Disposals of equipment and leasehold improvements,
net 290,554 107,420 -
Cash acquired in Entertainment One, Inc. acquisition 64,235 - -
Proceeds from disposal of assets acquired in
Entertainment One, Inc. acquisition 1,099,714 - -
----------- --------- -----------
Net cash used in investing activities (3,316,026) (75,181) (1,162,835)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent 7,008,935 416,422 1,540,535
Additional borrowings 461,301 - -
----------- --------- -----------
Net cash provided by financing activities 7,470,236 416,422 1,540,535
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH 2,427,379 (52,649) (155,437)
CASH AND CASH EQUIVALENTS, beginning of year 66,162 118,811 274,248
----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,493,541 $ 66,162 $ 118,811
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1995, 1994 AND 1993
--------------------------------
1. NATURE OF BUSINESS, FORMATION OF COMPANY AND SIGNIFICANT ACCOUNTING
-------------------------------------------------------------------
POLICIES:
---------
Nature of Business
- ------------------
BlowOut Entertainment, Inc. and subsidiaries (the Company), a 93 percent owned
subsidiary of Rentrak Corporation (Rentrak), is engaged in the business of
operating "store within a store" retail video outlets which rent and sell motion
picture videocassettes, video games, computer games and programs on CD-ROMs in
Wal-Mart and Wal-Mart SuperCenters, Super Kmart Centers and Ralph's grocery
stores pursuant to individual leases with each retailer. As of December 31,
1995, the Company operated 123 stores in Wal-Mart and Wal-Mart SuperCenters, and
25 stores in Super Kmart Centers under the name "BlowOut Video" and 4 stores in
Ralph's grocery stores under the name "Videos and More."
Formation of Company
- --------------------
In April 1996, Rentrak consolidated the businesses and operations of three
direct or indirect wholly owned subsidiaries to form the Company. Prior
thereto, Rentrak operated its wholly owned "store within a store" retail video
outlets through those subsidiaries.
In July 1992, Rentrak formed SVI, Inc. (SVI) to operate "store within a store"
retail video outlets. On August 31, 1995, Rentrak formed W-One Incorporated (W-
1) and K-One Incorporated (K-1) to facilitate the acquisition of Supercenter
Entertainment Corporation (SEC). On the same date, Rentrak acquired the Wal-
Mart and Kmart "store within a store" retail video operations from SEC. As part
of the acquisition, the leases, pursuant to which SEC operated the Wal-Mart and
Kmart stores, were assigned to W-1 and K-1, respectively. Effective September
1, 1995, Rentrak assigned to W-1, as a capital contribution, all of the former
SEC assets and liabilities related to the operations of its Wal-Mart stores, and
Rentrak assigned to K-1, as a capital contribution, all of the former SEC assets
and liabilities related to the operation of its Kmart stores.
To effect the consolidation of the Company, in March 1996 Rentrak contributed
all of the outstanding capital stock of W-1 and K-1 to a wholly owned subsidiary
of Rentrak, which then contributed the stock of W-1 and K-1 to SVI as a capital
contribution. W-1 and K-1 then became wholly owned subsidiaries of SVI.
Following this contribution, SVI changed its name to BlowOut Entertainment, Inc.
and increased the authorized capital stock to 11,000,000 shares, of which
10,000,000 shares were authorized for issuance as common stock and 1,000,000
shares were authorized for issuance as preferred stock.
Between July 1994 and December 1995, Rentrak and a wholly owned subsidiary
acquired 92.6 percent of the issued and outstanding common stock of
Entertainment One, Inc. (E-1), with the remaining 7.4 percent of E-1's common
stock being held by persons unrelated to Rentrak.
In May 1996, the Company acquired all of E-1's tangible and intangible assets
and assumed all of its liabilities in exchange for shares of its common stock.
Following such sale of assets, E-1 will dissolve and liquidate its assets
pursuant to a Plan of Liquidation that provides for the distribution of the
Company shares to Rentrak and the remaining stockholders on a basis such that,
as a result, Rentrak and the remaining stockholders, as a group, own 93 percent
and 7 percent, respectively, of the issued and outstanding common stock of the
Company.
F-7
<PAGE>
The above reorganization was accounted for as a reorganization of entities under
common control, restating the Company's financial statements similar to
accounting for a pooling of interests and reflecting the elimination of all
intercompany transactions (see Note 2).
Operations and Subsequent Financing
- -----------------------------------
To meet its growth objectives, the Company expects to invest up to $10 million
during the current year to finance store expansion and purchase merchandise and
rental inventory. Without this financing, growth objectives will need to be
scaled back accordingly.
Subsequent to year-end, the Company signed Convertible Exchangeable Subordinated
Promissory Notes (the "Notes") with two investors, obtaining $1 million from
each of the investors for a total of $2 million. Both of the investors are
members of Rentrak's Board of Directors. The Notes are payable on August 31,
1997 and bear interest at 9 percent, payable quarterly. Upon maturity, if a
public market for the Company's shares exists, the investors have the option to
convert the Notes into shares of common stock of the Company at a conversion
price equal to 80 percent of the average daily closing price per share measured
over the 15 consecutive trading day period ending on the trading date next
preceding the maturity date. In addition, if the Company's shares become
publicly traded, the Company has the option to convert the Notes into shares of
common stock at any time, using the same pricing formula discussed above.
The Company needs additional financing to accomplish its current business plan.
The Company plans to negotiate lines of credit with financial institutions to
obtain the balance of its working capital needs. However, if additional funding
sources are necessary, Rentrak has agreed to guarantee up to $5 million of
additional financing to the Company which may require Rentrak to renegotiate its
line of credit. Rentrak has also agreed to provide extended payment terms to
the Company for fees incurred under the revenue sharing agreement between
Rentrak and the Company (see Note 8).
The Company is highly dependent on its relationships with Wal-Mart and Kmart.
There can be no assurance that Wal-Mart or Kmart will open additional stores in
locations which are commercially viable for retail operations.
Management Estimates
- --------------------
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 at 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.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are defined as short-term highly liquid investments
with original maturities of three months or less.
Restricted cash maintained at South Trust Bank of Alabama, N.A. represents funds
held in escrow. The original balance of $110,000 was deposited in June 1995 and
earns interest at a variable rate. The Company may withdraw the balance in June
1996.
Financial Instruments
- ---------------------
A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation or right, to deliver, or receive, cash or another
financial instrument. The fair value of all material financial instruments
approximated their carrying values at December 31, 1995 and 1994.
F-8
<PAGE>
Merchandise Inventory
- ---------------------
Merchandise inventories, consisting primarily of previously viewed
videocassettes, are stated at the lower of cost or market. Cost is determined
using the last three months rolling average of purchases which approximates the
first-in, first-out method.
Videocassette Rental Inventory
- ------------------------------
Videocassettes purchased for basic stock rental use are stated at cost and
amortized straight line over 36 months with a provision for a $6 salvage value.
The amortization methods used reflect the anticipated revenue stream.
Accordingly, new release videocassettes purchased for more than $20 per tape are
amortized straight-line to $15 per tape over the first four months, then to a $6
salvage value over the next 32 months. New release videocassettes purchased for
less than $20 per tape are amortized straight-line to $8 per tape over the first
four months, then to a $6 salvage value over the next 32 months.
Since 1992, the Company has obtained new release titles under a revenue sharing
agreement with Rentrak. Under this agreement, Rentrak provides the Company with
videocassettes released by certain studios. Pursuant to the agreement, if
Rentrak carries a particular new release the Company is obligated, if it elects
to offer that release at its stores, to obtain all of its copies of that release
from Rentrak. The Company pays and capitalizes a handling fee of $8 to $10 for
each videocassette. The handling fee per videocassette is amortized on a
straight-line basis over 36 months to a $6 salvage value. During the revenue
sharing period, which does not exceed two years, the studio owns the
videocassette, and the rental revenue is shared by the studio, Rentrak and the
Company on a predetermined basis. Subsequent to year-end, this agreement was
amended and extended (see Note 8).
The Company may sell excess copies of a video title obtained from Rentrak and
share the sale proceeds with Rentrak and the studio on a predetermined basis.
At the end of the revenue sharing period for a title, the Company may purchase
remaining copies of that title in the Company's inventory, generally for less
than $5 per copy.
At December 31, 1995 and 1994, the Company's videocassette rental inventory
consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Cost $7,152,838 $611,978
Less- Accumulated amortization 1,437,745 288,599
---------- --------
Videocassette rental
inventory, net $5,715,093 $323,379
========== ========
</TABLE>
As videocassette rental inventory is sold or retired, the applicable cost and
accumulated amortization are eliminated from the accounts and any related gain
or loss is recognized through cost of rental and product sales.
Equipment and Leasehold Improvements
- ------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful life. The following
table represents the estimated useful life of each category of fixed asset:
Leasehold improvements 5 years
Furniture and fixtures 5 years
Computers 3-5 years
Equipment and vending machines 3-5 years
F-9
<PAGE>
Expenditures for repairs and maintenance are charged to current operations, and
costs related to renewals and improvements that add significantly to the useful
life of an asset are capitalized. When depreciable properties are retired or
otherwise disposed of, the cost and related depreciation are removed from the
accounts and the resulting gain or loss is reflected in income.
Intangible Assets
- -----------------
As a result of the SEC and E-1 acquisitions, the Company has recorded intangible
assets consisting of goodwill and favorable lease contracts. The goodwill of
approximately $1,656,300 is amortized by the straight-line basis over 15 years.
The Company believes this useful life is appropriate based on the factors
influencing acquisition decisions. These factors include location of stores,
profitability and general industry outlook. The favorable lease contract of
approximately $3,500,000 is being amortized over the term of the lease, 10
years.
The Company reviews its intangible assets for asset impairment at the end of
each quarter, or more frequently when events or changes in circumstances
indicate that the carrying amount of intangibles may not be recoverable. To
perform that review, the Company will estimate the sum of expected future
undiscounted cash flows from operating activities. If the estimated net cash
flows are less than the carrying amount of intangibles, the Company would
recognize an impairment loss in an amount necessary to write the intangibles
down to fair value as determined by the expected discounted future cash flows.
Income Taxes
- ------------
For income tax return purposes, the Company is included in the consolidated tax
return of Rentrak. The current and deferred taxes in the accompanying financial
statements approximate what the income taxes would have been on a separate tax
return basis.
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
the liability method specified by SFAS 109, deferred tax assets and liabilities
are determined based on the temporary differences between the financial
statement basis and tax basis of assets and liabilities as measured by the
enacted tax rates for the years in which the taxes are expected to be paid.
Revenue Recognition
- -------------------
Revenue is recognized at the time of rental or sale of the videocassettes.
Advertising Expense
- -------------------
Advertising expense, net of cooperative advertising reimbursements, totaled
$432,627, $33,183 and $23,652 for the years ended December 31, 1995, 1994 and
1993, respectively.
Store Opening Costs
- -------------------
Store opening costs, which consist of payroll, advertising and supplies are
expensed as incurred.
Per Share Data
- --------------
Loss per share is computed based on the weighted average number of common shares
outstanding during the periods presented.
F-10
<PAGE>
Statement of Cash Flows
- -----------------------
The Company made the following cash payments for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----- --------
<S> <C> <C> <C>
Interest $ 44,316 $ - $ -
</TABLE>
Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ------ ------
<S> <C> <C> <C>
Acquisition of E-1 as contribution from
Parent $4,378,260 $ - $ -
Acquisition of SEC as contribution from
Parent 5,213,125 - -
Conversion of borrowings and accrued
interest due to Parent to equity 6,525,815 - -
Capital contributed by Parent - - 350,000
</TABLE>
Recent Pronouncements
- ---------------------
During March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's year ending December 31, 1996. The Company has
studied the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which establishes
a fair value-based method of accounting for stock-based compensation plans and
requires additional disclosures for those companies that elect not to adopt the
new method of accounting. The Company will continue to account for employee
purchase rights and stock options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123 disclosures will be effective for fiscal
years beginning after December 31, 1995.
2. ACQUISITIONS:
-------------
As noted in Note 1, Rentrak consolidated the businesses and operations of SVI,
SEC, and E-1. This reorganization was accounted for as entities under common
control, restating the Company's financial statements similar to accounting for
a pooling of interests. Accordingly, the acquisitions of E-1 and SEC by
Rentrak, as described below, are reflected in these financial statements.
E-1 Acquisition
- ---------------
On August 31, 1994, Rentrak acquired 169,230 newly issued shares of common stock
of E-1 valued at $338,460 in lieu of a financing fee associated with $1,700,000
of financing provided by Rentrak to E-1. On December 1, 1994, Rentrak acquired
500,000 newly issued shares of common stock in E-1 at $2.00 per share.
Following the acquisition, Rentrak owned approximately 9.6 percent of the
outstanding shares of E-1. On May 26, 1995, Rentrak purchased 3,200,000 shares
of common stock of E-1 from an E-1 stockholder at $.004 per share. Following
the acquisition, Rentrak owned approximately 57 percent of the outstanding
shares of E-1.
In connection with this acquisition, the five "stand-alone" video stores owned
by E-1 were sold in June 1995 for approximately $1,100,000. These assets were
valued at their net realizable value when allocating the purchase price to the
assets acquired and liabilities assumed.
F-11
<PAGE>
On October 20, 1995, Rentrak purchased from E-1 $985,591 principal amount of
convertible debentures, all of which were converted into 13,798,275 shares of
common stock of E-1 on December 15, 1995. Also on December 15, 1995, Rentrak
converted a $2 million line of credit that it had provided to E-1 into
28,000,000 shares of common stock of E-1. Following these transactions, Rentrak
owned 93 percent of the outstanding shares of E-1.
The results of operations of the acquired stores have been included in the
results of operations of the Company for the seven-month period ended December
31, 1995.
SEC Acquisition
- ---------------
On August 31, 1995, Rentrak acquired certain assets and assumed certain
liabilities of SEC which constituted the Wal-Mart and K-Mart "store within a
store" video retail operations of SEC.
The total cost of the SEC acquisition of $5.2 million was provided by issuing
878,000 shares of Rentrak common stock with an aggregate market value of
approximately $5.2 million.
The results of operations of the acquired stores are included in the results of
operations of the Company for the four-month period ended December 31, 1995.
The purchase method of accounting was used to record both the E-1 and SEC
acquisitions.
The following table presents the unaudited pro forma results of operations for
the years ended December 31, 1995 and 1994 as if the E-1 acquisition and the SEC
acquisition had occurred at the beginning of the respective periods. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made at the beginning of the respective periods or of results which may occur in
the future.
<TABLE>
<CAPTION>
Year Ended
December 31
------------------------
1995 1994
----------- -----------
(Unaudited)
<S> <C> <C>
Revenue $17,727,477 $ 6,092,995
Net loss (6,702,846) (4,384,855)
Net loss per common share (3.72) (2.44)
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
------------------------------------
Equipment and leasehold improvements as of December 31, 1995 and 1994, consist
of:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Leasehold improvements $ 360,254 $ 345,083
Furniture, fixtures and computers 3,615,869 305,397
---------- ---------
Total 3,976,123 650,480
Less- Accumulated depreciation (494,815) (226,135)
---------- ---------
Equipment and leasehold improvements,
net $3,481,308 $ 424,345
========== =========
</TABLE>
Maintenance and repair expenditures are expensed as incurred and amounted to
$36,481, $10,017 and $414 for the years ended December 31, 1995, 1994 and 1993,
respectively.
F-12
<PAGE>
4. LONG-TERM DEBT:
---------------
Long-term debt as of December 31, 1995:
<TABLE>
<S> <C>
Note payable to Ingram Entertainment, due May 1998, imputed
interest at 11.00% $287,973
Note payable to JD Store Equipment, Inc., due May 1998, imputed
interest at 11.00% 203,411
Mortgage payable to Crossroads Bank, due January 1997, bearing
interest at 8.00%, secured by building 154,854
Note payable to Movies 4 Sale, due June 1997, imputed interest
at 11.00% 107,038
Note payable to Softplay, due July 1996, bearing interest at
24.00% 67,105
Note payable to Star Video, due May 1998, imputed interest at
11.00% 50,625
Note payable to Sight & Sound, due May 1998, imputed interest
at 11.00% 45,088
Notes payable to Ford Motor Company, due December 1998, bearing
interest at 2.90%, secured by vehicle 19,538
Note payable to Illinois Consolidated, due June 1999, bearing
interest at 14.7% 17,693
Note payable to shareholder, due January 1996 12,800
Note payable to Ford Motor Company, due January 1996, bearing
interest at 8.75%, secured by vehicle 951
--------
Total long-term debt 967,076
Current portion of long-term debt 326,287
--------
Long-term debt, less current portion $640,789
========
</TABLE>
Principal payments on long-term debt as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $326,287
1997 407,229
1998 228,460
1999 5,100
--------
$967,076
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company leases its office and retail facilities under operating leases, the
majority of which contain renewal options.
The Company's office facilities are operated under operating leases. Subsequent
to year-end, the Company entered into an eleven-year lease agreement with
Rentrak. Through December 31, 1996, rental payments under this agreement are
calculated as 3.71 percent of all of Rentrak's expenses of occupying their
facility. Beginning January 1, 1997, the Company has a fixed monthly payment.
Future minimum lease payments required under leases as of December 31, 1995,
including the agreement with Rentrak as described above, are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1996 $ 14,000
1997 42,584
1998 42,584
1999 42,584
2000 42,584
Thereafter 273,546
--------
Total lease payments $457,882
========
</TABLE>
F-13
<PAGE>
As discussed in Note 1, the majority of the Company's retail facilities are
operated under master lease agreements with Wal-Mart and Kmart. Each of these
master leases provides for an initial five-year term for each new store, with an
additional five-year optional renewal term.
Rental expense for the Wal-Mart, Kmart and Ralph's locations is computed as a
percentage of retail store revenue plus additional charges for maintenance,
property taxes and other common area charges.
Lease expense was $1,167,827, $120,014 and $99,452 and included $1,071,032,
$94,543 and $57,211 of rents based on retail store revenues for the years ended
December 31, 1995, 1994 and 1993, respectively.
Under the Wal-Mart lease, either the Company or Wal-Mart can elect to terminate
the lease with respect to stores which fail to generate a minimum level of
revenues. Currently, substantially all of the Company's stores are operating in
excess of the minimum revenue requirement.
Also under the Wal-Mart lease, all assets of the Company are pledged to secure
payment of all rentals due to Wal-Mart.
6. INCOME TAXES:
-------------
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Benefit computed at statutory rates (34.0)% (34.0)% (34.0)%
Change in valuation allowance 33.8 33.7 33.5
Other .2 .3 .5
----- ----- -----
- % - % - %
===== ===== =====
</TABLE>
Deferred tax assets at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets-
Current:
Inventory reserve $ 4,167 $ 4,807
Vacation accrual 6,720 -
----------- ---------
Total current deferred tax assets 10,887 4,807
Noncurrent:
Depreciation 185,873 34,872
Amortization of intangible assets 919,144 -
Net operating loss carryforward 1,228,597 678,033
----------- ---------
Total noncurrent deferred tax assets 2,333,614 712,905
Valuation allowance (2,344,501) (717,712)
----------- ---------
Total deferred tax assets, net of
valuation allowance $ - $ -
=========== =========
</TABLE>
The increase in the valuation allowance during the years ended December 31,
1995, 1994 and 1993 was $1,626,789, $317,932 and $322,700, respectively.
F-14
<PAGE>
Due to the uncertainty of future income, the Company has provided a valuation
allowance for the entire amount of the deferred tax asset.
At December 31, 1995, for federal tax return reporting purposes, the Company has
approximately $3,233,000 of tax loss carryovers that expire at various dates
through 2010.
7. STOCKHOLDERS' EQUITY:
---------------------
In December 1995, Rentrak contributed intercompany payables and accrued interest
due from the Company to Rentrak of $6,520,690 as a capital contribution to the
Company.
8. RELATED PARTY TRANSACTIONS:
---------------------------
The Company receives certain administrative support services from Rentrak,
including administration of benefits and insurance programs, computer system
support, and cash management. The statements of operations include costs and
expenses for the Company's allocated share from Rentrak. Such allocated costs
were $138,593 $140,532 and $102,401 for 1995, 1994 and 1993, respectively.
As noted in Note 1, the Company entered into a revenue sharing agreement with
Rentrak on December 9, 1992, which was amended and extended on March 15, 1996.
Under the agreement, Rentrak provides a portion of the videocassette rental
inventory to each of the Company's stores and in return, the Company pays a
fixed "handling fee" for each cassette and a "transaction fee" each time a
Rentrak cassette is rented. Also, the Company is required to use Rentrak
approved computer hardware as well as specific point-of-sale software for
purposes of monitoring Rentrak related transactions. Under the terms of the
amended agreement, the Company, for a period of 20 years, must obtain from
Rentrak a sufficient volume of rental priced feature film video titles necessary
to cause the Company to pay Rentrak transaction and handling fee payments for
each calendar year equal to at least 11 percent of the Company's gross rental
revenues.
The Company's cost of sales related to handling, transaction and sell-through
charges from Rentrak was $2,730,620, $144,499 and $72,812 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Subsequent to year-end, the Company entered into a 20-year license agreement
with Rentrak granting the Company a nonexclusive, nontransferable license to use
the service mark "BlowOut Video." In consideration for this right, the Company
must pay to Rentrak a 1.667 percent royalty, not to exceed 20 percent of the
Company's income before taxes.
As discussed in Note 1, subsequent to year-end two members of Rentrak's Board of
Directors loaned the Company a total of $2 million in exchange for Convertible
Exchangeable Subordinated Promissory Notes.
As indicated in the statements of cash flows, Rentrak has provided significant
advances to the Company to fund ongoing operations. Interest expense related to
advances and other borrowings from Rentrak was $433,189, $161,700 and $50,825
for the years ended December 31, 1995, 1994 and 1993, respectively, and is
included in the accompanying statement of operations.
The payable to Parent balances of $2,800,000 and $1,671,166 as of December 31,
1995 and 1994, respectively, also relate to advances provided by Rentrak. The
payable to Parent balance of $2,800,000 as of December 31, 1995 is the remaining
balance of advances payable to Parent after contribution of $6,525,815 of
advances, payables and accrued interest to equity in December 1995, as discussed
above. This amount is due in March 1999 and bears interest at 9 percent.
Rentrak has guaranteed the Company's liabilities to a major video tape supplier
for video tape purchases made by E-1 stores.
F-15
<PAGE>
9. LITIGATION:
----------
The Company has several legal actions pending incidental to the ordinary course
of business. In the opinion of management, the expected outcome of these
matters in the aggregate will not have a material adverse effect on the
financial position or results of operations of the Company.
10. SUBSEQUENT EVENTS:
-----------------
Subsequent to year-end, the Company's Board of Directors approved an Equity
Participation Plan. This plan authorizes up to 500,000 shares to be issued to
employees and directors. The plan will be administered by the Compensation
Committee of the Board of Directors, which will have the authority to approve
the issuance of nonqualified and incentive stock options subject to the
requirements of the plan.
Refer to Note 1 for discussion of the Notes issued by the Company subsequent to
year-end.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Supercenter Entertainment Corporation -
Retail Division:
We have audited the accompanying balance sheets of Supercenter Entertainment
Corporation - Retail Division as of December 31, 1994, 1993, and 1992, and the
related statements of operations for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Supercenter Entertainment
Corporation - Retail Division as of December 31, 1994, 1993, and 1992, and the
results of its operations for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas,
October 16, 1995
F-17
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION - RETAIL DIVISION
-------------------------------------------------------
BALANCE SHEETS--DECEMBER 31, 1994, 1993, AND 1992
-------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1994 1993 1992
------ ---------- -------- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 151,431 $ 43,260 $ 53,802
Receivables 7,667 - 100
Merchandise inventories 322,686 34,434 3,510
Other current assets 83,081 8,856 9,679
---------- -------- --------
Total current assets 564,865 86,550 67,091
RENTAL INVENTORIES, net 1,410,230 292,994 209,064
PROPERTY AND EQUIPMENT, net 1,555,294 151,289 87,252
OTHER ASSETS 15,391 - -
---------- -------- --------
Total assets $3,545,780 $530,833 $363,407
========== ======== ========
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES:
Accounts payable $ 947,061 $117,745 $ 39,198
Accrued expenses 321,256 14,535 10,688
---------- -------- --------
Total current liabilities 1,268,317 132,280 49,886
COMMITMENTS
EQUITY 2,277,463 398,553 313,521
---------- -------- --------
Total liabilities and equity $3,545,780 $530,833 $363,407
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION - RETAIL DIVISION
-------------------------------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
-----------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------------ ---------- ---------
<S> <C> <C> <C>
REVENUES:
Rental revenue, net $ 2,954,640 $ 539,764 $ 69,093
Product sales 498,281 211,382 7,267
----------- --------- --------
3,452,921 751,146 76,360
OPERATING COSTS AND EXPENSES:
Cost of product sales 1,535,853 329,010 13,702
Selling and administrative 4,176,476 847,853 157,198
----------- --------- --------
OPERATING LOSS (2,259,408) (425,717) (94,540)
INTEREST (INCOME) EXPENSE 3,766 32 (90)
----------- --------- --------
LOSS BEFORE INCOME TAXES (2,263,174) (425,749) (94,450)
PROVISION FOR INCOME TAXES - - -
----------- --------- --------
NET LOSS $(2,263,174) $(425,749) $(94,450)
=========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION - RETAIL DIVISION
-------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1994, 1993, AND 1992
---------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------------------
General
- -------
The accompanying financial statements relate to the accounts of the retail
division (retail video centers located in Kmart and Wal-Mart) of Supercenter
Entertainment Corporation (the "Retail Division"). Supercenter Entertainment
Corporation (the "Company") was incorporated in December 1991 and operated under
the name CEVAXS U.S. Corporation through August 1994, at which time the name was
changed to Supercenter Entertainment Corporation. From December 1991 through
October 1992, the Company's sole operation was in wholesale video services to
the supermarket industry. Beginning in October 1992, the Company expanded its
operation to include Company-owned retail video centers located in stores owned
by Wal-Mart Stores, Inc. In early 1994, the Company expanded its host retailer
relationships to include Kmart Corporation.
At December 31, 1994, 1993, and 1992, the Retail Division had 56, 7, and 3
locations, respectively.
Revenue Recognition
- -------------------
Revenues are recognized at the time of rental or sale of video cassettes.
Merchandise Inventories
- -----------------------
Merchandise inventories consist of prerecorded video cassettes and games and are
stated at the lower of cost or market; cost is determined on the first-in,
first-out method.
Rental Inventories
- ------------------
Rental inventories are stated at the lower of amortized cost or market and
consist of prerecorded video cassettes classified as new release, catalog stock,
and video games. New release video cassettes are amortized over ten months
using a declining percentage basis to a $6 salvage value. Catalog stock video
cassettes are amortized over 36 months on a straight-line basis to a $6 salvage
value. Video games are amortized over 24 months on a straight-line basis to an
$8 salvage value.
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Depreciation is calculated using the
straight-line method based on the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line method over the shorter
of the estimated useful lives or the respective lease terms. The estimated
useful lives are as follows:
Furniture and fixtures 5 years
Computer equipment 3 years
Leasehold improvements 3 years
F-20
<PAGE>
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be reversed or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
2. RENTAL INVENTORIES:
-------------------
Rental inventories at December 31, 1994, 1993, and 1992, consisted of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- ---------
<S> <C> <C> <C>
New release video cassettes $1,036,162 $211,334 $ 15,470
Catalog stock video cassettes 578,796 82,054 201,588
Video games 503,490 44,493 -
---------- -------- --------
2,118,448 337,881 217,058
Less- Accumulated amortization (708,218) (44,887) (7,994)
---------- -------- --------
$1,410,230 $292,994 $209,064
========== ======== ========
</TABLE>
The Company maintained a centralized warehouse to process inventory for all of
the Company's operations, including the Retail Division. Included in the above
rental inventory amounts for 1994 is $68,538 of rental inventory which was
located in the Company's warehouse at year-end and allocated to the Retail
Division based upon the pro rata portion of inventory subsequently shipped to
the Retail Division. At December 31, 1993 and 1992, no inventory in the
Company's warehouse was allocated to the Retail Division due to the amount being
insignificant.
3. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment at December 31, 1994, 1993, and 1992, consisted of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- ---------
<S> <C> <C> <C>
Furniture and fixtures $ 976,618 $122,861 $ 50,595
Computer equipment 619,323 89,020 49,198
Leasehold improvements 240,264 - -
---------- -------- --------
1,836,205 211,881 99,793
Less- Accumulated depreciation
and amortization (280,911) (60,592) (12,541)
---------- -------- --------
$1,555,294 $151,289 $ 87,252
========== ======== ========
</TABLE>
4. INCOME TAXES:
-------------
The Company and the Retail Division have had cumulative losses since inception.
Also, as discussed further in Note 9, the assets of the Retail Division have
been sold subsequent to year-end. All differences between the financial
statement carrying amount and the tax basis in these assets prior to the sale
are eliminated at the time of the sale. Due to the above and the lack of
earnings history for the Retail Division, no current or deferred taxes have been
reflected in the accompanying financial statements.
F-21
<PAGE>
5. EQUITY:
-------
Equity represents the sole shareholder's net investment in the Retail Division.
The following table reflects the activity in the equity account for the three
years ended December 31, 1994:
<TABLE>
<S> <C>
Owner investments $ 407,971
Losses (94,450)
-----------
Equity, December 31, 1992 313,521
Owner investments 1,272,469
Transfers to owner (761,688)
Losses (425,749)
-----------
Equity, December 31, 1993 398,553
Owner investments 7,479,167
Transfers to owner (3,337,083)
Losses (2,263,174)
-----------
Equity, December 31, 1994 $ 2,277,463
===========
</TABLE>
6. CORPORATE ALLOCATIONS:
----------------------
As discussed in Note 1, the accompanying financial statements relate to the
Retail Division of the Company. The Retail Division shares common corporate
functions/activities with the rest of the Company. The corporate costs
primarily include general management, finance, data processing, logistics, and
marketing. Corporate costs have been allocated to the Retail Division based
upon the relation of Retail Division net revenues to total Company net revenues.
Management believes this allocation method is reasonable and reflects the
utilization of corporate costs. The allocation percentages and allocated costs
for the Retail Division were 61% and $977,381 in 1994, 18% and $179,487 in 1993,
and 4% and $42,823 in 1992. All allocated corporate costs are included in
selling and administrative expenses in the accompanying financial statements.
7. RELATED-PARTY TRANSACTIONS:
---------------------------
The sole shareholder of the Company funds the operations of the Company and is
closely involved in the daily activities of the Company. The sole shareholder
does not draw a salary for his services, and the accompanying balance sheet does
not include any amounts owing to the sole shareholder.
A substantial portion of the Retail Division's purchases and other transactions
are made by the Company on behalf of the Retail Division.
In August 1994, the sole shareholder of the Company sold his 100% ownership in a
company which is one of the Retail Division's major vendors. Subsequent to the
sale and until August 1995, the Company had a revenue sharing arrangement with
this vendor whereby it leased video cassettes from the vendor for a six-month
term for an up-front payment of up to $10 per unit. The video cassettes were
rented by the Company to customers and the rental revenues generated were
distributed evenly between the Company and the vendor. The Company had an
option to purchase the video cassettes for $8 per unit at the conclusion of the
lease term. Amounts due to this vendor and included in accounts payable at
December 31, 1994, 1993, and 1992, are $370,710, $19,703, and $34,162,
respectively.
F-22
<PAGE>
8. LEASES:
-------
The Company has several noncancelable operating leases, primarily for the rental
of its retail video center locations. The leases are typically for an initial
five-year term and one five-year renewal option exercisable by the Company,
subject to the fulfillment of certain conditions.
Future minimum lease payments under noncancelable operating leases for the
Retail Division as of December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1995 $1,617,000
1996 1,655,000
1997 1,600,000
1998 1,496,000
1999 877,000
----------
Total future minimum lease payments $7,245,000
==========
</TABLE>
Rent expense for the Retail Division was $793,910, $135,290, and $27,260 for the
years ended December 31, 1994, 1993, and 1992.
9. SUBSEQUENT EVENTS:
------------------
On August 31, 1995, substantially all of the Retail Division's assets were
purchased by Rentrak Corporation. The sole shareholder received 878,000 shares
of Rentrak Corporation's common stock as consideration for the acquisition.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BlowOut Entertainment, Inc.:
We have audited the accompanying statements of assets and liabilities of The
Wal-Mart Stores Business of Entertainment One, Inc. (the Business) as of July
31, 1994 and 1993, and the related statements of revenues and expenses for the
year ended July 31, 1994, and the 10 months ended July 31, 1993. These
financial statements are the responsibility of Entertainment One's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The statements have been prepared as a presentation of the continuing business
of Entertainment One and are not intended to be a complete presentation of the
Business' financial position and cash flows.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of the Business as of July 31,
1994 and 1993, and the revenues and expenses for the year ended July 31, 1994,
and the 10 month period ended July 31, 1993, in conformity with generally
accepted accounting principles.
/S/ Arthur Andersen LLP
Arthur Andersen LLP
Portland, Oregon,
April 19, 1996
F-24
<PAGE>
THE WAL-MART STORES
-------------------
BUSINESS OF ENTERTAINMENT ONE, INC.
-----------------------------------
STATEMENTS OF ASSETS AND LIABILITIES- AS OF JULY 31, 1994 AND 1993
------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
---------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 50,131 $ 3,565
Other assets - 13,599
Merchandise inventory 3,812 220
---------- --------
Total current assets 53,943 17,384
VIDEOCASSETTE INVENTORY, net 602,213 60,824
PROPERTY, PLANT AND EQUIPMENT, net 400,841 153,585
---------- --------
Total assets $1,056,997 $231,793
========== ========
LIABILITIES
-----------
CURRENT LIABILITIES:
Trade accounts payable $ 526,701 $158,518
Current portion of long-term debt 214,051 119,134
Accrued payroll and other 42,527 -
---------- --------
Total current liabilities 783,279 277,652
LONG-TERM DEBT 1,008,465 280,819
---------- --------
Total liabilities 1,791,744 558,471
---------- --------
Net liabilities $ 734,747 $326,678
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
THE WAL-MART STORES
-------------------
BUSINESS OF ENTERTAINMENT ONE, INC.
-----------------------------------
STATEMENTS OF REVENUES AND EXPENSES
-----------------------------------
FOR THE YEAR ENDED JULY 31, 1994, AND THE
-----------------------------------------
10 MONTHS ENDED JULY 31, 1993
-----------------------------
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
NET SALES $ 913,431 $255,874
COST OF SALES 331,600 55,128
---------- --------
Gross margin 581,831 200,746
SELLING AND GENERAL ADMINISTRATIVE
EXPENSES 1,183,700 363,512
---------- --------
Net loss $ 601,869 $162,766
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
THE WAL-MART STORES
-------------------
BUSINESS OF ENTERTAINMENT ONE, INC.
-----------------------------------
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
---------------------------------------------
AND STATEMENTS OF REVENUE AND EXPENSES
--------------------------------------
JULY 31, 1994 AND 1993
----------------------
1. BASIS OF PRESENTATION:
---------------------
C&M Video, Inc. (C&M), the wholly owned subsidiary of Entertainment One, Inc.
(the Company), was founded in 1983. Entertainment One, Inc. was incorporated in
June of 1994 and serves as the parent company for C&M and future related
business ventures. Since its establishment, C&M has offered retail
entertainment services such as rental and sale of VCR equipment, videocassettes
and video game cartridges. C&M has retail stores located in Wal-Mart stores and
supercenters as well as several locations operating as stand-alone entities. At
July 31, 1994, C&M operated 16 Wal-Mart locations and 5 stand-alone locations.
The accompanying statements of assets and liabilities and statements of revenue
and expenses relate to the accounts of The Wal-Mart Stores Business of
Entertainment One, Inc. (the Business).
The Business' financial information was derived from the historical books and
records of The Wal-Mart Stores Business of Entertainment One, Inc., and
represent assets and liabilities, and revenue and expenses of the Business. The
historical operating results may not be indicative of the results of the
Business on a separate basis.
The Business shares common corporate functions/activities with the rest of the
Company. The corporate costs primarily include general management, finance,
data processing, logistics and marketing. Corporate costs have been allocated
to the Business based primarily upon the relationship of the Business' net
revenues to total net revenues. Management believes that allocation methods are
reasonable and reflects the utilization of corporate costs. The allocation
percentage and allocated costs for the Business were 31% and $421,306 in 1994,
and 10% and $96,786 in 1993. All allocated corporate costs were included in
selling and administrative expenses in the accompanying statements. Corporate
debt was allocated based on the ratio of the Company stores open during each of
the respective years to total stores.
The Business is highly dependent on its relationship with Wal-Mart. There can
be no assurance that Wal-Mart will open additional stores in locations which are
commercially viable for retail operations.
2. RENTRAK ACQUISITION AND SUBSEQUENT REORGANIZATION:
-------------------------------------------------
On August 31, 1994, Rentrak Corporation (Rentrak) acquired 169,230 newly issued
shares of common stock of the Company valued at $338,460 in lieu of a financing
fee associated with $1,700,000 of financing provided by Rentrak to the Company.
On December 1, 1994, Rentrak acquired 500,000 newly issued shares of common
stock in the Company at $2.00 per share. Following the acquisition, Rentrak
owned approximately 9.6% of the outstanding shares of the Company. On May 26,
1995, Rentrak purchased 3,200,000 shares of common stock of the Company from a
company stockholder at $.004 per share. Following the acquisition, Rentrak
owned approximately 57% of the outstanding shares of the Company.
On October 20, 1995, Rentrak purchased from the Company $985,591 principal
amount of convertible debentures, all of which were converted into 13,798,275
shares of common stock of the Company on December 15, 1995. Also on December
15, 1995, Rentrak converted a $2 million line of credit that it had provided to
the Company into 28,000,000 shares of common stock of the Company. Following
these transactions, Rentrak owned 92.6% of the outstanding shares of the
Company.
F-27
<PAGE>
In May 1996, Rentrak contributed its interest in the Company to one of its
wholly owned subsidiaries, BlowOut Entertainment, Inc. (BlowOut). Rentrak also
contributed its interest in two of its other wholly owned subsidiaries to
BlowOut. Following this reorganization, Rentrak owned 93.0% of BlowOut. The
minority shareholders of the Company obtained, in the aggregate, a 7.0%
ownership interest in BlowOut.
3. SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
Videocassette Rental Inventory
- ------------------------------
The Company classifies videocassette rental inventory into three categories, the
classification depends on the quantity of cassettes a store has of a particular
title. Each classification is amortized at a different rate.
The first three cassettes of a particular title in each store are considered
additions to their base stock and are amortized over 36 months at a straight-
line rate. The next six cassettes of the same title are considered new releases
and are amortized at an accelerated rate over 36 months. Finally, if a store
has more than nine cassettes, the title is considered a "hit" and the remaining
videotapes are amortized over nine months on a straight-line basis.
The Company's Videocassette Rental Inventory consists of the following:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Cost $ 904,170 $105,705
Less- Accumulated amortization (301,957) (44,881)
--------- --------
Videocassette inventory, net $ 602,213 $ 60,824
========= ========
</TABLE>
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost and depreciation is provided
on a straight-line basis using the estimated useful life. The following table
represents the estimated useful life of each category of fixed asset:
Leasehold improvements 5-10 years
Furniture and fixtures 5-7 years
Computers 5 years
Automobiles 3-5 years
Management Estimates
- --------------------
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 at 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.
F-28
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT, NET:
-----------------------------------
Property, plant and equipment, net, consists of:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Leasehold improvements $ 11,441 $ 13,922
Furniture, fixtures and computers 441,669 123,641
Automobiles 72,355 40,262
--------- --------
Total 525,465 177,825
Less- Accumulated depreciation (124,624) (24,240)
--------- --------
Property, plant and equipment, net $ 400,841 $153,585
========= ========
</TABLE>
5. OPERATING LEASES:
-----------------
The Business leases substantially all of its retail distribution and
administration facilities under noncancelable leases. These leases expire at
various times through the year 1999. Future minimum payments under these
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending July 31:
<S> <C>
1995 $471,858
1996 450,795
1997 418,634
1998 373,806
1999 118,869
</TABLE>
6. LONG-TERM DEBT:
---------------
<TABLE>
<CAPTION>
1994 1993
---------- --------
<S> <C> <C>
Central Bank (SBA Loan bearing a 10% interest rate) $ 883,793 $ -
Crossroads Bank (various loans bearing interest
rates ranging from 8% to 8.75%) 380,833 342,031
Dieterich First National Bank (loan bearing a 202,936 153,966
10% interest rate)
Westfield State Bank (loan bearing an 8% interest
rate) 110,641 20,000
Miscellaneous debt (bearing interest rates ranging
from 7% to 8.75%) 137,183 10,922
---------- --------
Total debt 1,715,386 526,919
Less- Allocated to C&M 492,870 126,966
---------- --------
Allocated to the Business 1,222,516 399,953
Less- Current portion 214,051 119,134
---------- --------
Total long-term debt $1,008,465 $280,819
========== ========
</TABLE>
Corporate debt was allocated based on the ratio of the Company stores open
during each of the respective years to total stores.
F-29
<PAGE>
Scheduled maturities of long-term debt for the year ending July 31, 1994:
<TABLE>
<S> <C>
1995 $ 214,051
1996 201,467
1997 184,789
1998 90,304
1999 87,972
Thereafter 443,933
----------
$1,222,516
==========
</TABLE>
The debt is secured by inventories, buildings and certain fixed assets.
7. INCOME TAXES:
------------
The Company and the Business have had cumulative losses since inception. Also,
as discussed further in Note 2, the assets and liabilities of the Business have
been sold subsequent to year-end. Due to the above circumstances and the lack
of earnings history for the Business, no current or deferred taxes have been
reflected in the accompanying financial statements.
8. RELATED-PARTY TRANSACTIONS:
--------------------------
The Company entered into an agreement with Rentrak on June 11, 1994, where the
Company has agreed to use Rentrak's PPT (pay-per-transaction) System.
Rentrak provides a portion of the videocassette rental inventory to each of the
Company's stores and in return, the Company pays a fixed "handling fee" for each
cassette and a "transaction fee" each time a Rentrak cassette is rented. Also,
the Company is required to use Rentrak approved computer hardware as well as
specific point-of-sale software for purposes of monitoring Rentrak related
transactions.
F-30
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- ------------------
<S> <C> <C>
ASSETS
Cash $ 1,463,480 $ 2,606,838
Accounts and Notes Receivable 165,193 341,909
Prepaid Expenses 288,173 -
Merchandise Videocassette Inventory 2,035,174 984,894
Other Current Assets 185,934 244,426
----------- -----------
Total Current Assets 4,137,954 4,178,067
Rental Inventory 11,325,665 7,152,838
Less: Accumulated Depreciation (3,805,351) (1,437,745)
----------- -----------
Rental Inventory, net 7,520,314 5,715,093
Leaseholds, Fixtures and Equipment 5,550,651 3,976,123
Construction in Progress 120,000 -
----------- -----------
5,670,651 3,976,123
Less: Accumulated Depreciation (1,026,274) (494,815)
----------- -----------
Property, net 4,644,377 3,481,308
Goodwill, net 4,693,468 4,896,092
Other Assets 444,717 265,935
----------- -----------
Total Assets $21,440,830 $18,536,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long Term Debt $ 328,807 $ 326,287
Accounts Payable 3,750,997 3,278,553
Accrued Liabilities 1,292,459 1,217,893
Accrued Payroll 456,097 178,310
Interest Payable 46,204 -
Payable to Rentrak 2,935,786 -
----------- -----------
Total Current Liabilities 8,810,350 5,001,043
Long Term Debt 5,136,181 3,440,789
Common Stock, par value $.01 per share; 18,000 18,000
10,000,000 shares authorized;
1,800,000 shares outstanding
Additional Paid in Capital 16,974,200 16,974,200
Accumulated Deficit (9,497,901) (6,897,537)
----------- -----------
Total Stockholders' Equity 7,494,299 10,094,663
----------- -----------
Total Liabilities and
Stockholders' Equity $21,440,830 $18,536,495
=========== ===========
</TABLE>
F-31
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1996 1995
-------------- -------------
REVENUE:
<S> <C> <C>
Rental revenue 5,738,198 756,775
Product sales 1,531,091 169,475
---------- ---------
Total Revenue 7,269,289 926,250
OPERATING COSTS AND EXPENSES:
Cost of product sales 3,133,323 713,956
Operating expenses 4,220,475 589,052
Selling, general and adminstrative 836,155 347,498
---------- ---------
Total Operating Costs and 8,189,053 1,650,506
Expenses
OPERATING LOSS (920,664) (724,256)
---------- ---------
NONOPERATING (INCOME) EXPENSE:
Interest income - -
Interest expense 112,232 24,341
---------
Other, net (19,949) (561,926)
---------- ---------
Total nonoperating 92,283 (537,585)
(income)/expense
LOSS BEFORE INCOME TAXES (1,012,947) (186,671)
INCOME TAX PROVISION - -
---------- ---------
NET LOSS (1,012,947) (186,671)
========== =========
LOSS PER SHARE (0.56) (0.21)
========== =========
SHARES USED IN PER SHARE CALCULATION 1,800,000 900,000
========== =========
</TABLE>
F-32
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1996 1995
------------- ------------
REVENUE:
<S> <C> <C>
Rental revenue 11,268,730 1,029,558
Product sales 2,882,151 227,173
---------- ---------
Total Revenue 14,150,881 1,256,731
OPERATING COSTS AND EXPENSES:
Cost of product sales 6,473,872 839,366
Operating expenses 8,118,661 811,648
Selling, general and adminstrative 1,994,338 497,182
---------- ---------
Total Operating Costs and 16,586,871 2,148,196
Expenses
OPERATING LOSS (2,435,990) (891,465)
---------- ---------
NONOPERATING (INCOME) EXPENSE:
Interest income - -
Interest expense 211,684 52,841
Other, net (53,477) (624,183)
---------- ---------
Total nonoperating 158,207 (571,342)
(income)/expense
LOSS BEFORE INCOME TAXES (2,594,197) (320,123)
INCOME TAX PROVISION 12,312 -
---------- ---------
NET LOSS (2,606,509) (320,123)
---------- ---------
LOSS PER SHARE (1.45) (0.30)
---------- ---------
SHARES USED IN PER SHARE CALCULATION 1,800,000 1,050,000
---------- ---------
</TABLE>
F-33
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1996 1995
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,606,481) $ (320,123)
Adjustments to reconcile net loss
to net cash used in operating
activities-
Amortization of video
cassette rental
inventory 2,367,606 61,046
Depreciation 531,459 63,051
Amortization of intangible 271,268 32,170
and other assets
Gain on sale of assets - (558,286)
Changes in assets and
liabilities accounts:
Receivables 176,716 (31,674)
Merchandise inventory (1,050,277) (74,864)
Prepaids (229,681) (3,053)
Accounts payable 3,408,230 (39,112)
Accrued liabilities 120,770 114,145
Accrued payroll 277,787 (60,882)
------------ -----------
Net cash provided
by (used in) operating
activities 3,267,397 (817,582)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video cassette tapes, net (4,172,827) (225,382)
Capital expenditures (1,688,413) (269,555)
Proceeds from sale of assets - 1,105,747
Other Assets (247,426) (47,409)
------------ -----------
Net cash (used in)
provided by operating
activities (6,108,666) 563,401
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings 1,697,911 1,565,825
------------ -----------
Net cash provided by financing 1,697,911 1,565,825
activities
NET DECREASE IN CASH (1,143,358) (1,311,644)
------------ -----------
CASH AND CASH EQUIVALENTS, beginning of 2,606,838 66,162
period
CASH AND CASH EQUIVALENTS, end of period $ 1,463,480 $ 1,377,806
============ ===========
</TABLE>
F-34
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A: Basis of Presentation
The accompanying consolidated financial statements of BlowOut Entertainment,
Inc., and subsidiaries ("BlowOut" or the "Company") for the three and six month
periods ended June 30, 1995 and June 30, 1996 are unaudited and, in the opinion
of management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's audited consolidated financial statements for the
year ended December 31, 1995. The results of operations for the three and six
month periods ended June 30, 1996 are not necessarily indicative of the results
expected for the full year.
NOTE B: Distribution
In June, 1996 the Company's principal stockholder, Rentrak Corporation
("Rentrak"), announced that it intends to distribute shares of Common Stock of
the Company to shareholders through a special dividend (the "Distribution").
Shareholders of Rentrak will receive one share in the Company for every ten
shares held in Rentrak on the applicable record date. The distribution is
conditioned upon, among other things, declaration of the special dividend by
Rentrak's board of directors. Once these conditions are met, the special
dividend is expected to be distributed during the fourth quarter of 1996.
NOTE C: Stock Split
It is expected that the Board of Directors of the Company will authorize a
1.01491-for-1 split of the Company's Common Stock prior to the Distribution.
The stock split will be effected by a distribution of .01491 additional shares
for each share owned by stockholders of record on the record date to be
established by the Board. Share and per share amounts presented in the
consolidated financial statements and related notes have not been restated to
reflect the stock split.
NOTE D: Net Loss Per Share
For the three and six months periods ended June 30, 1995 and 1996, net loss per
share of common stock is computed on the basis of the weighted average shares of
common stock outstanding.
F-35
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE E: Financing
Phoenix Credit Facility
By agreement dated as of July 23, 1996, Phoenix Leasing Incorporated
("Phoenix") agreed to provide to the Company a credit facility (the "Phoenix
Facility") in an aggregate principal amount of $2.0 million for a five-year
term. Amounts outstanding under the Phoenix Facility will bear interest at a
fixed rate per annum equal to 13.98%. The proceeds of the Phoenix Facility are
to be used to construct and open (including acquisition of inventory) new
Company stores in Wal-Mart Stores and Wal-Mart SuperCenters. The Phoenix
Facility is secured by (i) a continuing guaranty of Rentrak (which Phoenix, in
its sole discretion, may release once at least 36 payments of amounts
outstanding under the Phoenix Facility have been made or the Company's financial
condition is, in Phoenix's sole opinion, sufficient to justify such release),
and (ii) the Company's grant of a first continuing security interest in all
assets at each location to be financed with funds from the Phoenix Facility.
Under the Phoenix Facility, the Company cannot borrow more than $100,000 per
store location, with a minimum draw of $30,000 per store location. See "Rentrak
Guarantee." As of September 3, 1996, the Company had borrowed $583,000 under
the Phoenix Facility.
CBC Facility
In August 1996, Coast Business Credit ("CBC") agreed to provide to the
Company a revolving line of credit (the "CBC Line of Credit") in the maximum
principal amount at one time outstanding of $5.0 million. Under the CBC Line of
Credit, the Company may only draw up to 80% of the Orderly Liquidation Value (as
defined by the CBC Line of Credit) of eligible new and used video cassette
inventory. Advances under the CBC Line of Credit will bear interest at a
floating rate per annum equal to the Bank of America Reference Rate plus 2.75%
(11% as of August 31, 1996). The term of the CBC Line of Credit is three years.
The CBC Line of Credit will be guaranteed by Rentrak until the Company is "spun-
off" to the shareholders of Rentrak and the shares of BlowOut Common Stock are
publicly traded (i.e., the completion of the Distribution); thereafter, Rentrak
has agreed, under certain circumstances in the event of default under the CBC
Line of Credit, to repurchase BlowOut's video cassette inventory at specified
amounts. See "Rentrak Guarantee."
Notes
In March and April 1996, the Company issued $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and to Culture Convenience Club,
Ltd. ("CCC"), a Japanese corporation of which Mr. Muneaki Masuda is President
and Chairman (the "Notes"). Messrs. LeVine and Masuda are Directors of the
Company. These Notes were guaranteed by Rentrak, accrued interest at a rate of
9.0% per annum, and had a maturity date of August 31, 1997. On August 30, 1996,
each of Mr. LeVine and CCC converted their Notes into 121,789 shares of BlowOut
Common Stock.
F-36
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
CCC Stock Purchase
On August 30, 1996, CCC purchased 362,931 shares of BlowOut Common Stock
for $2,980,000 in cash in a private placement.
Rentrak Guarantee
On June 26, 1996, the Company entered into an agreement with Rentrak
pursuant to which Rentrak, on the terms and subject to the conditions contained
in such agreement, will guarantee up to $12.0 million in indebtedness of the
Company ("Rentrak Guarantee"). As of the date hereof, the Rentrak Board has
authorized Rentrak to guarantee $7.0 million under the Rentrak Guarantee. The
obligation of Rentrak to issue such guarantee is subject to a number of
conditions such as being current on all monetary obligations owed to Rentrak and
being in compliance with all agreements between Rentrak and the Company. The
Rentrak Guarantee expires on the earlier of (i) December 31, 1997 or (ii) such
time as the total indebtedness of the Company subject to the Rentrak Guarantee
is equal to $12.0 million. Under the Rentrak Guarantee, the Company must
maintain $12.0 million of key man insurance on the Company's President, Steve
Berns. Rentrak may terminate its obligation to issue new guarantees on 30-days'
prior written notice to the Company. The Company can also terminate such
agreement on 30 days' prior written notice, provided that the Company provides
evidence that all indebtedness subject to the Rentrak Guarantee has been paid
off and the Company obtains an unconditional release of Rentrak. The Company
has also agreed that (i) during the term of the agreement, as long as any
Rentrak Guarantee is outstanding and for 24 months thereafter, the Company will
not convey any of its stores to a third party unless such third party agrees to
assume and be bound by the PPT Agreement and the License Agreement, and (ii)
during the term of the agreement or as long as any Rentrak Guarantee is
outstanding, the Company will pay all amounts received from a sale or closure of
a store either to: (a) finance new Company stores or (b) to pay down
indebtedness subject to the Rentrak Guarantee. During the term of the
Agreement, and/or as long as any Rentrak Guarantee is outstanding, the Company
shall pay Rentrak a weekly fee at a rate equal to .02% per week of then-
currently outstanding indebtedness subject to a Rentrak Guarantee.
Rentrak has agreed to guarantee amounts outstanding under the Phoenix
Facility and the CBC Line of Credit up to an aggregate of $7.0 million. After
the Distribution, Rentrak will have a continuing monetary guaranty for amounts
outstanding under the Phoenix Facility. After the Distribution, Rentrak has
agreed, under certain circumstances in the event of a default under the credit
facility with CBC, to repurchase BlowOut's video cassette inventory in an amount
not to exceed the lesser of the amount owed under the CBC facility or $5.0
million. Rentrak is also guaranteeing certain trade payables of the Company and
amounts owed under promissory notes to certain of the Company's suppliers. At
September 3, 1996, the total amount
F-37
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
of obligations of the Company subject to the Rentrak Guarantee was approximately
$2.5 million.
NOTE E: Major Suppliers
For the quarter ended June 30, 1996, BlowOut had four video cassette
distributors who supplied 47.1%, 19.7%, 11.0% and 10.2% of total tape purchases.
For the six months ended June 30, 1996, BlowOut had three video cassette
distributors who supplied 39.6%, 30.4% and 14.3% of total tape purchases. No
other distributors provided more than 10% of the total tape purchases for either
the three months or six months ended June 30, 1996.
For the quarter ended June 30, 1995, BlowOut had two video cassette distributors
who supplied 38.9% and 32.6% of total tape purchases. For the six months ended
June 30, 1995, BlowOut had two video cassette distributors who supplied 41.1%
and 31.5% of total tape purchases. No other distributors provided more than 10%
of the total tape purchases for either the three months or six months ended June
30, 1995.
F-38
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
Introduction
The following pro forma combined consolidated statements of operations for
the period ended December 31, 1995 give effect to (i) the acquisition by SVI of
W-1 and K-1 to form BlowOut and (ii) the acquisition by BlowOut of the business
and operations of E-1 (collectively, the "BlowOut Consolidation"), all as if the
BlowOut Consolidation had occurred on January 1, 1995. Such pro forma data have
been prepared utilizing the separate historical consolidated financial
statements of BlowOut, the SCE Business and E-1 which are included elsewhere in
this Information Statement and should be read herewith in their entirety,
including the notes thereto. The following pro forma data are provided for
illustrative purposes only and are not necessarily indicative of the operating
results or financial condition that would have occurred if the BlowOut
Consolidation had been consummated during such historical periods, nor is such
data necessarily indicative of BlowOut's future operating results or financial
condition. No pro forma balance sheet has been presented as the BlowOut
Consolidation is already reflected in the audited December 31, 1995 balance
sheet included elsewhere in this Information Statement. Similarly, neither a pro
forma statement of operations for the six-month period ended June 30, 1996 sheet
nor a pro forma balance sheet as of June 30, 1996 has been presented as the
BlowOut Consolidation is already reflected in the unaudited statement of
operations and balance sheet included elsewhere in this Information Statement.
The pro forma financial data are based on the purchase method of accounting
for asset acquisitions with BlowOut as the acquiring entity as defined by
generally accepted accounting principles. Under this method of accounting, the
recorded values of BlowOut's assets and liabilities have been combined with the
estimated fair values of E-1's assets and liabilities at the consummation of the
BlowOut Consolidation.
Income taxes have not been provided for in the accompanying pro forma
combined consolidated statements of operations as the entities being
consolidated did not report combined income from operations during 1995, and any
tax benefit applicable to future periods was assumed to be fully reserved.
The number of shares outstanding for purposes of the pro forma earnings per
share calculation was computed as though shares issued in connection with the
acquisition of E-1 were issued on January 1, 1995 and were outstanding for the
entire year.
See "The Company -- History of the Company" for a more detailed description
of the formation of the Company, the acquisition of the SCE Business, the
consolidation of SVI, W-1 and K-1 and the acquisition of E-1.
F-39
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
The following table sets forth the unaudited pro forma statement of
operations for the fiscal year ended December 31, 1995 for (i) BlowOut (formerly
known as SVI, Inc.), W-1 and K-1 prior to the BlowOut Consolidation and (ii) E-1
and BlowOut after the BlowOut Consolidation.
<TABLE>
<CAPTION>
BlowOut BlowOut
Entertainment Entertainment
(Prior to (After
SVI K-1 and W-1 Consolidation) E-1 Consolidation)
----------- ------------ -------------- ------------ --------------
REVENUE
<S> <C> <C> <C> <C> <C>
Rental Revenue $ 968,111 $ 6,470,470 $ 7,438,581 $ 5,582,163 $13,020,744
Product and Other Sales 162,215 2,322,873 2,485,088 2,221,644 4,706,732
---------- ----------- ----------- ----------- -----------
Total Revenue 1,130,326 8,793,343 9,923,669 7,803,807 17,727,476
OPERATING COSTS AND EXPENSE
Cost of revenue 447,908 4,240,961 4,688,869 4,441,801 9,130,670
Operating expenses 622,880 5,656,314 6,279,194 5,087,456 11,366,650
Selling, general and administration 247,413 884,732 1,132,145 3,594,288 4,726,433
---------- ----------- ----------- ----------- -----------
Total Operating Costs and Expense 1,318,201 10,782,007 12,100,208 13,123,545 25,223,753
LOSS FROM OPERATIONS (187,875) (1,988,664) (2,176,539) (5,319,738) (7,496,277)
---------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Income -- -- -- 1,133 1,133
Interest Expense (174,000) (15,759) (189,759) (181,636) (371,395)
Other, net (267,326) (145,813) (413,139) 581,956 168,817
---------- ----------- ----------- ----------- -----------
Total other income (expense) (441,326) (161,572) (602,898) 401,453 (201,445)
LOSS BEFORE INCOME TAXES (629,201) (2,150,236) (2,779,437) (4,918,285) (7,697,722)
---------- ----------- ----------- ----------- -----------
Income Taxes - - - - -
NET LOSS $ (629,201) $(2,150,236) $(2,779,437) $(4,918,285) $(7,697,722)
========== =========== =========== =========== ===========
Net loss per common share $(0.70) N/A $(3.09) N/A $(4.28)
========== =========== ===========
</TABLE>
F-40
<PAGE>
ANNEX I
-------
OPINIONS OF HOULIHAN LOKEY HOWARD & ZUKIN
<PAGE>
DRAFT FORM OF OPINION
September ___, 1996
To The Board of Directors
Rentrak Corporation
Mr. Ron Berger
President and Chief Executive Officer
7227 N.E. 55th Avenue
Portland, OR 97218
Dear Directors
We understand the following regarding Rentrak Corporation ("Company" or
"Rentrak" hereinafter) and its subsidiaries. The Company's shares are publicly
traded on the NASDAQ market system. The Company's primary business is the
distribution of video cassettes to home video specialty stores. BlowOut
Entertainment Inc. ("BlowOut"), a 70% owned subsidiary of the Company, is
engaged in operating retail video outlets within larger department stores and
mass merchandisers. Pro Image, Inc. ("Pro Image"), a wholly owned subsidiary of
the company, is engaged in operating retail stores which sell professional and
college licensed sports apparel and merchandise.
The Company is considering a corporate reorganization whereby:
i) shares of BlowOut will be spun off to the Company's shareholders in a
taxable transaction, (the "BlowOut Spinoff") (with Rentrak's possible
retention of up to 19.9% of BlowOut);
ii) the Company's interest in Pro Image or its successor will be spun off
to the Company's shareholders in a taxable transaction (the "Pro Image
Spinoff") (with Rentrak's possible retention of up to 10% of Pro
Image); and
iii) the Company will continue to operate its core video distribution
business through its Rentrak Home Entertainment ("RHE") division.
The BlowOut Spinoff, and the Pro Image Spinoff and other related transactions
disclosed to Houlihan Lokey are referred to collectively herein as the
"Transaction."
You have requested our written opinion (the "Opinion") as to matters set forth
below. This Opinion values the Company as a going concern (including goodwill),
on a pro forma basis, immediately after and giving effect to the BlowOut
Spinoff.
For purposes of the Opinion, "fair value" shall be defined as the amount at
which the Company would change hands between a willing buyer and a willing
seller, each having reasonable knowledge of the relevant facts, neither being
under any compulsion to act, with equity to both and "present fair saleable
value" shall be defined as the amount that may be realized if the
<PAGE>
-2-
The Board of Directors
Rentrak Corporation
September ___, 1996
Company's aggregate assets (including goodwill), as applicable, are sold as an
entirety with reasonable promptness in an arm's length transaction under present
conditions for the sale of comparable business enterprises, as such conditions
can be reasonably evaluated by Houlihan Lokey. We have used the same valuation
methodologies in determining fair value and present fair saleable value for
purposes of rendering this Opinion. The term "identified contingent liabilities"
shall mean the stated amount of contingent liabilities identified to us and
valued by responsible officers of the Company upon whom we will rely without
independent verification; no other contingent liabilities have been considered.
Being "able to pay its debts as they become absolute and mature and due in the
usual course of business" shall mean that, assuming the BlowOut Spinoff has been
consummated as proposed, the Company's financial forecasts for the period ending
December 31, 1996 (through December 31, 1999 indicate positive cash flow for
such period, including (and after giving effect to) the payment of installments
due under loans made pursuant to the indebtedness incurred in the BlowOut
Spinoff, as such installments are scheduled at the close of the BlowOut Spinoff.
It is Houlihan Lokey's understanding, upon which it is relying, that the
Company's Board of Directors and any other recipient of the Opinion will consult
with and rely solely upon their own legal counsel with respect to said
definitions. No representation is made herein, or directly or indirectly by the
Opinion, as to any legal matter or as to the sufficiency of said definitions for
any purpose other than setting forth the scope of Houlihan Lokey's Opinion
hereunder.
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value," we have not been engaged to identify prospective purchasers or
to ascertain the actual prices at which and terms on which the Company can
currently be sold, and we know of no such efforts by others.
Because the sale of any business enterprise involves numerous assumptions and
uncertainties, not all of which can be quantified or ascertained prior to
engaging in an actual selling effort, we express no opinion as to whether the
Company would actually be sold for the amount we believe to be its fair value
and present fair saleable value.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on Form 10-K
for the three fiscal years ended March 31, 1996 and quarterly reports
on Form 10-Q for the quarter ended June 30, 1996, which the Company's
management has identified as the most current information available;
2. reviewed BlowOut's audited financial statements for the three fiscal
years ended December 31, 1995 and unaudited, interim financial
statements for the period ended June 30, 1996, which BlowOut's
management has identified as the most current information available;
<PAGE>
-3-
The Board of Directors
Rentrak Corporation
September ___, 1996
3. reviewed a draft copy of the Information Statement dated ________ to
be distributed to shareholders of the Company in connection with the
BlowOut Spinoff;
4. reviewed a copy of the Information Statement and Notice of Action
Without a Meeting, dated May 28, 1996, furnished to the stockholders
of Entertainment One, Inc. in connection with the consolidation of
Entertainment One, Inc.'s retain video operations with BlowOut;
5. met with certain members of the senior management of the Company and
BlowOut to discuss the operations, financial condition, future
prospects and projected operations and performance of BlowOut, and met
with representatives of the Company's counsel to discuss certain
matters;
6. visited certain facilities and business offices of the Company and
BlowOut;
7. reviewed forecasts and projections (the "Projections") prepared by the
Company's management with respect to the Company for the years ending
December 31, 1996 through 1999 (the "Projection Period");
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
9. reviewed other publicly available financial data for the Company and
BlowOut and certain companies that we deem comparable to the Company
and BlowOut;
10. reviewed copies of certain agreements, including, but not limited to:
i) The Senior Loan and Security Agreement dated July 23, 1996
between BlowOut and Phoenix Leasing Incorporated,
ii) a draft of the Loan and Security Agreement between BlowOut and
Coast Business Credit dated September ___, 1996, and
iii) the Agreement Between Culture Convenience Club ("CCC") and
BlowOut dated August __, 1996 regarding a $2.98 million
investment by CCC to purchase BlowOut shares; and
11. conducted such other studies, analyses and investigations as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and Projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material
adverse change in the assets, financial condition, business or prospects of the
Company since the date of the most recent financial statements made available to
us.
<PAGE>
-4-
The Board of Directors
Rentrak Corporation
September ___, 1996
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and BlowOut and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or BlowOut. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
[Language regarding the status of the ProImage Spinoff and the assumption that
the ProImage Spinoff will be completed is forthcoming.]
Based upon the foregoing, and in reliance thereon, it is our opinion as of the
date of this letter that, assuming the BlowOut Spinoff has been consummated as
proposed, immediately after and giving effect to the BlowOut Spinoff:
(a) on a pro forma basis, the fair value and present fair saleable value
of the Company's assets would exceed the Company's stated liabilities
and identified contingent liabilities;
(b) the Company should be able to pay its debts as they become absolute
and mature and due in the usual course of business; and
(c) the capital remaining in the Company after the BlowOut Spinoff would
not be unreasonably small for the business in which the Company is
engaged, as management has indicated it is now conducted and is
proposed to be conducted throughout the Projection Period following
the consummation of the BlowOut Spinoff.
This Opinion is furnished solely for your benefit and may not be relied upon by
any other person without our express, prior written consent. This Opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understanding set forth in this Opinion and our engagement
letter dated August 6, 1996, and subject to the understanding that the
obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by or on
behalf of you or your affiliates.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
<PAGE>
DRAFT FORM OF OPINION
September ___, 1996
To The Board of Directors
BlowOut Entertainment, Inc.
Mr. Steve Berns
President
BlowOut Entertainment, Inc.
7227 N.E. 55th Avenue
Portland, OR 97218
Dear Directors
We understand the following regarding BlowOut Entertainment, Inc. ("BlowOut"
hereinafter). BlowOut, a 70% owned subsidiary of Rentrak Corporation ("Company"
or "Rentrak" hereinafter), is engaged in operating retail video outlets within
larger department stores and mass merchandisers.
The Company is considering a corporate reorganization whereby shares of BlowOut
will be spun off to the Company's shareholders in a taxable transaction, (the
"BlowOut Spinoff") (with Rentrak's possible retention of up to 19.9% of
BlowOut).
The BlowOut Spinoff, and other related transactions disclosed to Houlihan Lokey
are referred to collectively herein as the "Transaction."
You have requested our written opinion (the "Opinion") as to matters set forth
below. This Opinion values BlowOut as a going concern (including goodwill), on
a pro forma basis, immediately after and giving effect to the Transaction and
the associated indebtedness.
For purposes of the Opinion, "fair value" shall be defined as the amount at
which BlowOut would change hands between a willing buyer and a willing seller,
each having reasonable knowledge of the relevant facts, neither being under any
compulsion to act, with equity to both and "present fair saleable value" shall
be defined as the amount that may be realized if BlowOut's aggregate assets
(including goodwill), as applicable, are sold as an entirety with reasonable
promptness in an arm's length transaction under present conditions for the sale
of comparable business enterprises, as such conditions can be reasonably
evaluated by Houlihan Lokey. We have used the same valuation methodologies in
determining fair value and present fair saleable value for purposes of rendering
this Opinion. The term "identified contingent liabilities" shall mean the
stated amount of contingent liabilities identified to us and valued by
responsible officers of BlowOut upon whom we will rely without independent
verification; no other contingent liabilities have been considered. Being "able
to pay its debts as they become absolute and mature and due in the usual course
of business" shall mean that, assuming the BlowOut Spinoff has been consummated
as proposed, BlowOut's financial forecasts for the period ending December 31,
1996 (through December 31, 1999 indicate positive cash flow for
<PAGE>
The Board of Directors -2-
BlowOut Entertainment, Inc.
September __, 1996
such period, including (and after giving effect to) the payment of installments
due under loans made pursuant to the indebtedness incurred in the Transaction,
as such installments are scheduled at the close of the Transaction. It is
Houlihan Lokey's understanding, upon which it is relying, that BlowOut's Board
of Directors and any other recipient of the Opinion will consult with and rely
solely upon their own legal counsel with respect to said definitions. No
representation is made herein, or directly or indirectly by the Opinion, as to
any legal matter or as to the sufficiency of said definitions for any purpose
other than setting forth the scope of Houlihan Lokey's Opinion hereunder.
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value," we have not been engaged to identify prospective purchasers or
to ascertain the actual prices at which and terms on which BlowOut can currently
be sold, and we know of no such efforts by others. Because the sale of any
business enterprise involves numerous assumptions and uncertainties, not all of
which can be quantified or ascertained prior to engaging in an actual selling
effort, we express no opinion as to whether the BlowOut would actually be sold
for the amount we believe to be its fair value and present fair saleable value.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on Form 10-K
for the three fiscal years ended March 31, 1996 and quarterly reports
on Form 10-Q for the quarter ended June 30, 1996, which the Company's
management has identified as the most current information available;
2. reviewed BlowOut's audited financial statements for the three fiscal
years ended December 31, 1995 and unaudited, interim financial
statements for the six month period ended June 30, 1996, which
BlowOut's management has identified as the most current information
available;
3. reviewed a draft copy of the Information Statement dated ________ to
be distributed to shareholders of the Company in connection with the
BlowOut Spinoff;
4. reviewed a copy of the Information Statement and Notice of Action
Without a Meeting, dated May 28, 1996, furnished to the stockholders
of Entertainment One, Inc. in connection with the consolidation of
Entertainment One, Inc.'s retain video operations with BlowOut;
5. met with certain members of the senior management of the Company and
BlowOut to discuss the operations, financial condition, future
prospects and projected operations and performance of BlowOut, and met
with representatives of the Company's counsel to discuss certain
matters;
<PAGE>
The Board of Directors -3-
BlowOut Entertainment, Inc.
September __, 1996
6. visited certain facilities and business offices of the Company and
BlowOut;
7. reviewed forecasts and projections (the "Projections") prepared by
BlowOut's management with respect to BlowOut for the years ending
December 31, 1996 through 1999 (the "Projection Period");
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
9. reviewed other publicly available financial data for the Company and
BlowOut and certain companies that we deem comparable to the Company
and BlowOut;
10. reviewed copies of certain agreements, including, but not limited to:
i) The Senior Loan and Security Agreement dated July 23, 1996
between BlowOut and Phoenix Leasing Incorporated,
ii) a draft of the Loan and Security Agreement between BlowOut and
Coast Business Credit dated September ___, 1996, and
iii) the Agreement Between Culture Convenience Club ("CCC") and
BlowOut dated August __, 1996 regarding a $2.98 million
investment by CCC to purchase BlowOut shares; and
11. conducted such other studies, analyses and investigations as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and Projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of BlowOut, and that there has been no material adverse
change in the assets, financial condition, business or prospects of BlowOut
since the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and BlowOut and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or BlowOut. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion as of the
date of this letter that, assuming the BlowOut Spinoff has been consummated as
proposed, immediately after and giving effect to the BlowOut Spinoff:
<PAGE>
The Board of Directors -4-
BlowOut Entertainment, Inc.
September __, 1996
(a) on a pro forma basis, the fair value and present fair saleable value
of BlowOut's assets would exceed BlowOut's stated liabilities and
identified contingent liabilities;
(b) BlowOut should be able to pay its debts as they become absolute and
mature and due in the usual course of business; and
(c) the capital remaining in BlowOut after the Transaction would not be
unreasonably small for the business in which BlowOut is engaged, as
management has indicated it is now conducted and is proposed to be
conducted throughout the Projection Period following the consummation
of the Transaction.
This Opinion is furnished solely for your benefit and may not be relied upon by
any other person without our express, prior written consent. This Opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understanding set forth in this Opinion and our engagement
letter dated August 6, 1996, and subject to the understanding that the
obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by or on
behalf of you or your affiliates.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
<PAGE>
ANNEX II
--------
AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF BLOWOUT ENTERTAINMENT, INC.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SVI, INC.
SVI, Inc., a corporation organized and existing under the laws of the State
of Delaware, does hereby certify as follows:
First: The corporation was originally incorporated under the name SMM,
Inc. pursuant to a Certificate of Incorporation filed with the Secretary of
State of Delaware on July 6, 1992.
Second: The corporation subsequently changed its name to SVI, Inc.
pursuant to a Certificate of Amendment filed with the Secretary of State of
Delaware on July 14, 1992.
Third: This Amended and Restated Certificate of Incorporation restates,
integrates and amends the Certificate of Incorporation of the corporation, as
amended, and has been duly adopted in accordance with the provisions of Sections
242 and 245 of the General Corporation Law of the State of Delaware and by
written consent of the stockholders pursuant to Section 228 of the General
Corporation Law of the State of Delaware.
Fourth: The text of the Certificate of Incorporation of the corporation,
as amended, is hereby further amended and restated, in full, to read as follows:
<PAGE>
Article I
The name of the corporation is:
BlowOut Entertainment, Inc.
Article II
The address of its registered office in the State of Delaware is 1013
Centre Road, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.
Article III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
Article IV
The total number of shares of all classes of stock which the corporation
shall have authority to issue is Eleven Million (11,000,000), consisting of Ten
Million (10,000,000) shares of common stock, par value $.01 per share (the
"Common Stock"), and One Million (1,000,000) shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). The designation, powers,
preferences and relative, participating, optional or other special rights,
including voting rights, qualifications, limitations or restrictions of the
Preferred Stock shall be established by resolution of the Board of Directors
pursuant to Section 151 of the General Corporation Law of the State of Delaware.
Article V
The business and affairs of the corporation shall be managed by or under the
direction of the Board of Directors. The number of directors shall be fixed
from time to
-2-
<PAGE>
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders acting in accordance with Article X herein.
Article VI
The Board of Directors shall be and is divided into three classes,
designated Class I, Class II and Class III. The number of directors in each
class shall be the whole number contained in the quotient arrived at by dividing
the authorized number of directors by three, and if a fraction is also contained
in such quotient then if such fraction is one-third (1/3) the extra director
shall be a member of Class III and if the fraction is two-thirds (2/3) one of
the extra directors shall be a member of Class III and the other shall be a
member of Class II. Each director shall serve for a term ending on the date of
the third annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors appointed in Class I shall serve
for a term ending on the date of the 1996 annual meeting of stockholders,
directors appointed in Class II shall serve for a term ending on the date of the
1997 annual meeting of stockholders and the directors appointed to Class III
shall serve for a term ending on the date of the 1998 annual meeting of
stockholders.
In the event of any increase or decrease in the authorized number of
directors, (a) each director then serving as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his prior death, retirement, resignation or removal, and (b)
the newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board of Directors to such class or classes
as shall, so far as possible, bring the number of directors in the respective
classes into conformity with the formula in this Article VI, as applied to the
new authorized number of directors.
-3-
<PAGE>
Notwithstanding any of the foregoing provisions of this Article VI, a
director shall hold office until the annual meeting of stockholders for the year
in which his or her term expires and until his or her successor is elected and
qualified or until his death, retirement, resignation or removal. Should a
vacancy occur or be created, the remaining directors (even though less than a
quorum) may fill the vacancy for the full term of the class in which the vacancy
occurs or is created.
Article VII
Elections of directors at an annual or special meeting of stockholders need
not be by written ballot unless the Bylaws of the corporation shall otherwise
provide.
Article VIII
The officers of the corporation shall be chosen in such a manner, shall
hold their offices for such terms and shall carry out such duties as are
prescribed by the Bylaws or determined by the Board of Directors, subject to the
right of the Board of Directors to remove any officer or officers at any time
with or without cause.
Article IX
A. The corporation shall indemnify to the full extent authorized or
permitted by law (as now or hereafter in effect) any person made, or threatened
to be made, a defendant or witness to any action, suit or proceeding (whether
civil or criminal or otherwise) by reason of the fact that he/she, his/her
testator or intestate, is or was a director or officer of the corporation or by
reason of the fact that such director or officer, at the request of the
corporation, is or was serving any other corporation, partnership, joint
venture, employee benefit plan or other enterprise, in any capacity. Nothing
contained herein shall affect any rights to indemnification to which employees
other than directors or
-4-
<PAGE>
officers may be entitled by law. No amendment or repeal of this Section A of
Article IX shall apply to or have any effect on any right to indemnification
provided hereunder with respect to any acts or omissions occurring prior to such
amendment or repeal.
B. No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty by such a director as a director. Notwithstanding the foregoing sentence,
a director shall be liable to the extent provided by applicable law (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
General Corporation Law of the State of Delaware, or (iv) for any transaction
from which such director derived an improper personal benefit. No amendment to
or repeal of this Section B of this Article IX shall apply to or have any effect
on the liability or alleged liability of any director of the corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
C. In furtherance and not in limitation of the powers conferred by
statute:
(i) the corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any
liability asserted against him/her and incurred by him/her in any such
capacity, or arising out of his/her status as such, whether or not the
corporation would have the power to indemnify him/her against such
liability under the provisions of law; and
-5-
<PAGE>
(ii) the corporation may create a trust fund, grant a security interest
and/or use other means (including, without limitation, letters of credit,
surety bonds and/or other similar arrangements), as well as enter into
contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to
any or all of the foregoing to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein, or
elsewhere.
Article X
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to adopt, repeal, alter, amend or
rescind the Bylaws of the corporation, unless the Bylaws shall otherwise
provide. In addition, the Bylaws of the corporation may be adopted, repealed,
altered, amended, or rescinded by the affirmative vote of stockholders owning a
majority in amount of the entire capital stock of the corporation issued and
outstanding and, entitled to vote.
Article XI
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under (S)291 of the
General Corporation Law of the State of Delaware or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
corporation under (S)279 of the General Corporation Law of the State of Delaware
order a meeting of the
-6-
<PAGE>
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been mae, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
Article XII
The corporation reserves the right to repeal, alter, amend, or rescind any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation.
-7-
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by a Vice President and attested to by
its Secretary this 20th day of March 1996.
BLOWOUT ENTERTAINMENT, INC.
By: /s/ Karl Wetzel
--------------------------------
Name: Karl Wetzel
Title: Vice President
ATTEST:
/s/ Kim Cox
- -----------------------
Secretary
<PAGE>
ANNEX III
---------
AMENDED AND RESTATED BYLAWS OF
BLOWOUT ENTERTAINMENT, INC.
<PAGE>
AMENDED AND RESTATED
BYLAWS OF
BLOWOUT ENTERTAINMENT, INC.
ARTICLE I
OFFICES
-------
Section 1. Registered Offices. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and outside the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of stockholders shall be held at
any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, meetings of stockholders
shall be held at the principal executive offices of the Corporation.
Section 2. Time and Business of Meetings. The annual meeting of
stockholders shall be held on such date and at such time and place as may be
fixed by the Board of Directors and stated in the notice of the meeting, for the
purpose of electing directors whose term expires at that meeting and for the
transaction of such other business as is properly brought before the meeting in
accordance with these Bylaws.
To be properly brought before the annual meeting, business must be either
(i) specified in the notice of annual meeting (or any supplement or amendment
thereto) given by or at the direction of the Board of Directors, (ii) otherwise
brought before the annual meeting by or at the direction of the Board of
Directors, or (iii) otherwise brought before the annual meeting by a stockholder
who is a stockholder of record at the time of giving of the notice provided for
in this Article II, Section 2, who shall be entitled to vote at such meeting and
who complies fully with all of the notice procedures and other requirements set
forth in this Article II, Section 2. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) calendar days nor more than ninety (90)
calendar days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is changed by more than thirty
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(30) calendar days from such anniversary date, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth
(10th) calendar day following the earlier of the day on which notice of the date
of the meeting was mailed or public disclosure was made. A stockholder's notice
to the Secretary of business proposed to be conducted at any annual or special
meeting of stockholders shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (i) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (ii) the name and record address of the
stockholder proposing such business and the name and address of the beneficial
owner, if any, on whose behalf the proposal is made, (iii) the class, series and
number of shares of the capital stock of the Corporation which are owned
beneficially and of record by such stockholder and by the beneficial owner, if
any, on whose behalf the proposal is made, and (iv) any material interest of the
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made in such business. Notwithstanding anything in the Bylaws to the contrary,
no business shall be conducted at a meeting of stockholders except in accordance
with the procedures set forth in this Article II, Section 2. The officer of the
Corporation presiding at a meeting of stockholders (the "Presiding Officer")
shall determine whether the proposed business is properly brought before the
meeting in accordance with the provisions of this Article II, Section 2. If the
Presiding Officer should determine that the proposed business is not properly
brought before the meeting, the Presiding Officer shall state such determination
to the meeting, whereupon any such business not properly brought before the
meeting shall not be transacted or otherwise brought before the meeting.
Notwithstanding the foregoing provisions of this Article II, Section 2, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder with respect to the matters set forth herein.
Section 3. Quorum; Adjourned Meetings. A majority of the stock issued and
outstanding and entitled to vote at any meeting of stockholders, the holders of
which are present in person or represented by proxy, shall constitute a quorum
for the transaction of business except as otherwise provided by law, by the
Certificate of Incorporation, or by these Bylaws. A quorum, once established,
shall not be broken by the withdrawal of enough votes to leave less than a
quorum and the votes present may continue to transact business until
adjournment. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, a majority of the voting stock represented in
person or by proxy may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote thereat.
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Section 4. Voting. When a quorum is present at any meeting for election
of directors, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy at the meeting and entitled to
vote on the subject mater shall decide any questions brought before such
meeting, unless the question is one upon which by express provisions of the
Delaware General Corporation Law, or the Certificate of Incorporation or these
Bylaws, a different vote is required in which case such express provision shall
govern and control the decision of such question; provided that directors of the
Corporation shall be elected by a plurality of the votes of the shares present
in person or represented by proxy at the meeting and entitled to vote on the
election of directors. Shares represented by proxies that reflect, with respect
to a proposal, abstentions or limited voting authority, including "broker non-
votes" (i.e., shares held by a broker or nominee which are represented at the
----
meeting, but with respect to which such broker or nominee is not empowered to
vote on a particular proposal or proposals) shall be counted as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. For purposes of determining the outcome of any proposal, shares
represented by such proxies will be treated as not entitled to vote with respect
to the proposal or proposals.
At a stockholders' meeting involving the election of directors, no
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of the stockholders' shares entitled to
vote on the election of directors).
Section 5. Proxies. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing subscribed
by such stockholder and bearing a date not more than three years prior to said
meeting, unless said instrument provides for a longer period. All proxies must
be filed with the Secretary of the Corporation at the beginning of each meeting
in order to be counted in any vote at the meeting. Each stockholder shall have
one vote for each share of stock having voting power, registered in his/her name
on the books of the Corporation on the record date set by the Board of Directors
as provided in this Article II, Section 10 hereof.
Section 6. Special Meetings. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or the Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning not less
than ten percent (10%) of the entire capital stock of the Corporation issued and
outstanding, and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting and shall comply with the provisions of Article
II, Section 2 hereof. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice. The meeting
shall be held at the principal executive offices of the Corporation at such date
and time and the President or Secretary may fix, provided that such date is not
less than ten (10) nor more than sixty (60) calendar days after receipt of such
request, and if the meeting is not so called, the person requesting the meeting
may fix the date and time of the meeting.
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Section 7. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which notice shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. The written notice of any meeting shall be given to each stockholder
entitled to vote at such meeting not less than ten (10) nor more than sixty (60)
days before the date of the meeting. If mailed, notice is given when deposited
in the United States mail, postage prepaid, directed to the stockholder at
his/her address as it appears on the records of the Corporation.
Section 8. Maintenance and Inspection of Stockholder List. The officer
who has charge of the stock ledger of the Corporation shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 9. Stockholder Action by Written Consent Without a Meeting.
Unless otherwise provided in the Certificate of Incorporation, any action
required to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the Corporation by delivery to its
registered office in Delaware, to its principal place of business, or to an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Every written consent
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty (60) days of the earliest dated consent delivered
in the manner required by this Section 9 to the Corporation, written consents
signed by a sufficient number of stockholders to take action are delivered to
the Corporation by delivery to its registered office in Delaware, to its
principal place of business or to an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery to the Corporation's registered office shall be by hand or
delivered by certified or registered mail, return receipt requested. Prompt
notice of the taking of the corporate action without a meeting by less than
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unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 10. Fixing Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting, nor more than sixty (60) days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, the Board of Directors may fix a new record date for
the adjourned meeting. In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than ten (10)
days after the date upon which the resolution fixing the record date is adopted
by the Board of Directors.
ARTICLE III
DIRECTORS
---------
Section 1. Number of Directors. The Corporation's Board of Directors
shall be composed of no less than five (5) directors nor more than nine (9)
directors, the exact number to be determined from time to time by resolution
adopted by the Board of Directors; provided that the Board of Directors may be
composed of less than five (5) until vacancies are filled. The directors need
not be stockholders. Directors shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election. Only persons who are nominated in accordance with
the following procedures shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
at any meeting of stockholders may be made by or at the direction of the Board
of Directors, by any committee of persons appointed by the Board of Directors or
at the meeting by any stockholder of the Corporation who is a stockholder of
record at the time of giving notice provided for in this Article III, Section 1,
who shall be entitled to vote for the election of directors at the meeting and
who complies fully with all of the notice procedures and other requirements set
forth in this Article III, Section. Nominations by any stockholder shall be
made pursuant to timely notice in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice shall be delivered to or mailed and
received at the principal executive offices of the Corporation (a) in the case
of annual meeting, not less than sixty (60) calendar days nor more than ninety
(90) calendar days prior to the first anniversary of the preceding year's annual
meeting; provided,
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however, that in the event that the date of the annual meeting is changed by
more than thirty (30) calendar days from such anniversary date, notice by the
stockholder to be timely must be so received not later than the close of
business on the tenth (10th) calendar day following the earlier of the day on
which notice of the date of the meeting was mailed or public disclosure was
made, and (b) in the case of a special meeting at which directors are to be
elected, not later than the earlier of (i) the close of business on the tenth
(10th) calendar day following the earlier of the day on which notice of the date
of the meeting was mailed or public disclosure was made or (ii) the close of
business on the fifth (5th) calendar day before the date of the meeting. Such
stockholder's notice to the Secretary shall set forth (i) as to each person whom
the stockholder proposes to nominate for election or reelection as a director,
(a) the name, age, business address and residence address of the person, (b) the
principal occupation or employment of the person, (c) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
person, and (d) any other information relating to the person that is or would be
required to be disclosed in solicitations for proxies for election of directors
pursuant to the Rules and Regulations of the Securities and Exchange Commission
under Section 14 of the Exchange Act (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (ii) as to the stockholder giving the notice (a) the name and
record address of the stockholder and (b) the class and number of shares of
capital stock of the Corporation which are beneficially owned by such
stockholder and also which are owned of record by such stockholder and (c) any
material interest or relationship such stockholder has in or with the proposed
nominee; and (iii) as to each beneficial owner, if any, on whose behalf the
nomination is made, (a) the name and address of such person, (b) the class and
number of shares of capital stock of the Corporation which are beneficially
owned by such person and (c) any material interest or relationship such person
has in or with the proposed nominee. The Corporation may require any proposed
nominee to furnish such other information as may reasonably be required by the
Corporation to determine the eligibility of such proposed nominee to serve as a
director of the Corporation. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth herein. The Presiding Officer shall determine whether the nomination
is made in accordance with the foregoing procedures. If the Presiding Officer
should determine that the nomination was not made in accordance with the
foregoing procedures, the Presiding Officer shall state such determination to
the meeting, whereupon any such defective nomination shall be disregarded and
not otherwise brought before the meeting. Notwithstanding the foregoing
provisions of this Article III, Section 1, a stockholder shall also comply with
all applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth herein.
Section 2. Vacancies. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute. Should a vacancy occur or be created, the
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director chosen to fill such vacancy shall serve for the full term of the class
in which the vacancy occurs or is created and until such director's successor
shall have been elected and qualified. In the event of any increase or decrease
in the authorized number of directors, (a) each director then serving as such
shall nevertheless continue as a director of the class of which he/she is a
member until the expiration of his/her current term, or his/her prior death,
retirement, resignation or removal, and (b) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors to such class or classes as shall, so far as possible,
bring the number of directors in the respective classes into conformity with the
formula set forth in the Corporation's Certificate of Incorporation, as applied
to the new authorized number of directors. If, at the time of filling any
vacancy or any newly created directorship, the directors then in office shall
constitute less than a majority of the whole Board (as constituted immediately
prior to any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office.
Section 3. Powers. The property and business of the Corporation shall be
managed by or under the direction of its Board of Directors. In addition to the
powers and authorities by these Bylaws expressly conferred upon them, the Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders.
Section 4. Place of Meetings. The directors may hold their meetings and
have one or more offices, and keep the books of the Corporation outside of the
State of Delaware.
Section 5. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board.
Section 6. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board on forty-eight (48) hours' notice to
each director, either personally or by facsimile; special meetings shall be
called by the Chairman of the Board or the Secretary in like manner and on like
notice on the written request of two directors unless the Board consists of only
one director; in which case special meetings shall be called by the Secretary in
like manner or on like notice on the written request of the sole director.
Section 7. Quorum. At all meetings of the Board of Directors a majority
of the authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which there is a quorum, shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these
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Bylaws. A quorum, once established, shall not be broken by the withdrawal of
enough directors to leave less than a quorum and the directors present may
continue to transact business until adjournment. If a quorum shall not be
present at any meeting of the Board of Directors the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum.
Section 8. Action Without a Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 9. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in a meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Section 10. Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he/she or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in a resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the Bylaws of the Corporation; and, unless a resolution
or the Certificate of Incorporation expressly so provides, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of any capital stock.
Section 11. Minutes of Committee Meetings. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
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Section 12. Compensation of Directors. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors which may be paid in such
forms and amounts as determined by the Board of Directors. Without limiting the
foregoing, the directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors and may be paid a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary as a
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
OFFICERS
--------
Section 1. Officers. The officers of the Corporation shall include a
President, Secretary and Treasurer. The Corporation may have such other
officers as are elected or appointed in accordance with these Bylaws, including
a Chairman of the Board, Chief Executive Officer, Chief Financial Officer, one
or more Vice Presidents and one or more Assistant Secretaries and Assistant
Treasurers. The executive officers of the Corporation shall be elected and
appointed by the Board of Directors. In the event there are two or more Vice
Presidents, then one or more may be designated as Executive Vice President,
Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of
their rank. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these Bylaws otherwise provide. Each officer of
the Corporation appointed in accordance with these Bylaws shall have the
authority to sign contracts, agreements, instruments and other documents for and
on behalf of the Corporation.
Section 2. Appointment of Officers. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the executive
officers and such other officers as it deems necessary or advisable.
Section 3. Subordinate Officers. The Board of Directors may appoint such
other officers and agents as it shall deem necessary or advisable who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors. In
addition, the Chief Executive Officer or, if there is no such officer, the
President may appoint such officers (other than executive officers) and agents
as he/she shall deem necessary or advisable who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Chief Executive Officer or there is no such
officer, the President.
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Section 4. Compensation of Officers. The Board of Directors shall
establish the compensation of all officers; provided, however, that the Chief
Executive Officer or, if there is no such officer, the President may establish
the salary of any officer appointed by him/her in accordance with these Bylaws
subject to the right of the Board of Directors to change such compensation.
Section 5. Term of Office; Removal and Vacancies. The officers of the
Corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed in accordance with these Bylaws
may be removed at any time by the affirmative vote of a majority of the Board of
Directors; provided, however, that the Chief Executive Officer or the President
may remove any officer appointed by him/her in accordance with these Bylaws. If
the office of any officer or officers becomes vacant for any reason, the vacancy
may be filled in accordance with these Bylaws.
Section 6. Chairman of the Board. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him/her by the Board of Directors or prescribed by
these Bylaws. The Chairman of the Board may be the Chief Executive Officer of
the Corporation and if so designated, shall have the powers and duties
prescribed in Section 7 of this Article IV.
Section 7. Chief Executive Officer. Subject to the control of the Board
of Directors and to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the Chief Executive Officer, if such an officer be elected, shall have general
supervision, direction and control of the business and officers of the
Corporation. He/she shall preside at all meetings of the stockholders and, in
the absence of the Chairman of the Board, or if there be none, at all meetings
of the Board of Directors. He/she shall be an ex-officio member of all
committees and shall have the general powers and duties of management usually
vested in the office of Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these Bylaws.
Section 8. President. Subject to the supervisory powers of the Chief
Executive Officer, if there be such an officer, and the Chairman of the Board,
if there be such an officer, the President shall have the general powers and
duties of management usually vested in the office of President of corporations,
and shall have such other powers and duties as may be prescribed by the Board of
Directors or these Bylaws. The President may be the Chief Executive Officer of
the Corporation and if so designated, shall have the powers and duties
prescribed in Section 7 of this Article IV.
Section 9. Chief Financial Officer. Subject to the supervisory powers of
the Chief Executive Officer, if there be such an officer, and the President, the
Chief Financial Officer shall have general supervision, direction and control of
the Corporation's financial matters and shall have such other powers and duties
as may be prescribed by the Board of Directors
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or these Bylaws. The Chief Financial Officer shall render to the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of the financial condition of the Corporation.
Section 10. Vice Presidents. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to
time may be prescribed for them, respectively, by the Board of Directors.
Section 11. Secretary. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He/She shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or these Bylaws. He/She
shall keep in safe custody the seal of the Corporation, and when authorized by
the Board, affix the same to any instrument requiring it, and when so affixed it
shall be attested by his/her signature or by the signature of an Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by
his/her signature.
Section 12. Assistant Secretary. The Assistant Secretary, or if there be
more than one, the Assistant Secretaries in the order determined by the Board of
Directors, or if there be no such determination, the Assistant Secretary
designated by the Board of Directors, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 13. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies, and other valuable effects in the name and to the credit of
the Corporation, in such depositories as may be designated by the Board of
Directors. He/She shall disburse the funds of the Corporation as may be ordered
by the executive officers of the Corporation, taking proper vouchers for such
disbursements, and shall render to the Board of Directors, when the Board of
Directors so requires, an account of all his/her transactions as Treasurer. If
required by the Board of Directors, he/she shall give the Corporation a bond, in
such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors, for the faithful performance of the duties of his/her office and
for the restoration to the Corporation, in case of his/her death, resignation or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his/her possession or under his/her control belonging to the
Corporation.
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Section 14. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
(a) The Corporation shall indemnify to the maximum extent permitted by law
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he/she is or was a director
or officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he/she
acted in good faith and in a manner he/she reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his/her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he/she reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his/her
conduct was unlawful.
(b) The Corporation shall indemnify to the maximum extent permitted by law
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he/she
is or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he/she acted
in good faith and in a manner he/she reasonably believed to be in or not opposed
to the best interests of the Corporation and except that no such indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only to the
extent that the Court of Chancery of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled
12
<PAGE>
to indemnity for such expenses which such Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director or officer of the Corporation shall be
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) and (b), or in defense of any claim,
issue or matter therein, he/she shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the director or officer is proper
in the circumstances because he/she has met the applicable standard of conduct
set forth in paragraphs (a) and (b). Such determination shall be made (1) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (2) if such a quorum
is not obtainable, or, even if obtainable, a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (3) by the
stockholders. The Corporation, acting through its Board of Directors or
otherwise, shall cause such determination to be made if so requested by any
person who is indemnifiable under this Article V.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he/she is not entitled to be indemnified by the
Corporation as authorized in this Article V.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other paragraphs of this Article V shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any other provision of these
Bylaws, as now or hereafter in effect, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his/her official
capacity and as to action in another capacity while holding such office.
If a claim for indemnification or payment of expenses under this Article V
is not paid in full within ninety (90) days after a written claim therefor has
been received by the Corporation, the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification or payment of expenses under
applicable law.
13
<PAGE>
(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the Corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his/her status as such, whether or not
the Corporation would have the power to indemnify him against such liability
under the provisions of this Article V.
(h) The Board of Directors may authorize the Corporation to enter into a
contract with any person who is or was a director or officer of the Corporation
or is or was serving at the request of the Corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise
providing for indemnification rights equivalent to or, if the Board of Directors
so determines, greater than those provided in this Article V.
(i) For the purposes of this Article V, references to the "Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers so that any
person who is or was a director or officer of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article V with respect to the resulting or surviving corporation as he/she would
have with respect to such constituent corporation if its separate existence had
continued.
(j) For purposes of this Article V, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; references
to "serving at the request of the Corporation" shall include service as a
director or officer of the Corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in a
manner he/she reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article V.
(k) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article V shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
(l) The Corporation shall be required to indemnify a person in connection
with a proceeding (or part thereof) initiated by such person only if the
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.
14
<PAGE>
ARTICLE VI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
---------------------------------------
The Corporation may indemnify every person who was or is a party or is or
was threatened to be made a party to any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
he/she is or was an employee or agent of the Corporation or, while an employee
or agent of the Corporation, is or was serving at the request of the Corporation
as an employee or agent or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, to the extent permitted by applicable law.
ARTICLE VII
CERTIFICATES OF STOCK
---------------------
Section 1. Certificates. Every holder of capital stock of the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman of the Board of Directors, or the President or a
Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer of the Corporation, certifying the number of shares
represented by the certificate owned by such stockholder in the Corporation.
Section 2. Signatures on Certificates. Any or all of the signatures on
the certificate may be by facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he/she were such officer, transfer agent, or registrar at the
date of issue.
Section 3. Statement of Stock Rights; Preferences; Privileges. If the
Corporation shall be authorized to issue more than one class of capital stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each
15
<PAGE>
stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 4. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his/her legal representative, to advertise the same in such
manner as it shall require and/or to give the Corporation a bond in such sum as
it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 5. Transfers of Stock. Upon surrender to the Corporation, or the
transfer agent of the Corporation, of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon the Corporation's books.
Section 6. Registered Stockholders. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim or interest in such share on the part of any other person, whether or not
it shall have express or other notice thereof, save as expressly provided by the
laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. Payment of Dividends; Directors' Duties. Before payment of any
dividend there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve fund to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall think conducive to
the interests of the Corporation, and the directors may abolish any such
reserve.
16
<PAGE>
Section 3. Checks. All checks of demands for money and notes of the
Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 5. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. Manner of Notice. Whenever, under the provisions of the
statutes or of the Certificate of Incorporation or of these Bylaws, notice is
required to be given to any director or stockholder, it shall not be construed
to mean personal notice, but such notice may be given in writing, by mail,
addressed to such director or stockholder, at his/her address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by facsimile.
Section 7. Waiver of Notice. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation or
of these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
Section 8. Annual Statement. The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.
ARTICLE IX
AMENDMENTS
----------
Section 1. Amendment by Directors or Stockholders. These Bylaws may be
altered, amended or repealed or new Bylaws may be adopted by the stockholders or
by the Board of Directors, when such power is conferred upon the Board of
Directors by the Certificate of Incorporation, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred
upon the Board of Directors by the Certificate of Incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal Bylaws.
17
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of Blowout
Entertainment, Inc., a Delaware corporation; and
(2) That the foregoing Amended and Restated Bylaws constitute the bylaws of
said Corporation as duly adopted by the written consent of the sole stockholder
of said Corporation as of March 20, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 20th day of
March, 1996.
/s/ Kim Cox
-----------
18
<PAGE>
ADDITIONAL INFORMATION
Recent Sales of Unregistered Securities
The following is a summary of transactions by the Company during the last three
years involving sales of the Company's securities that were not registered under
the Securities Act:
(i) In May 1996, the Company issued 913,468
shares of BlowOut Common Stock to
Entertainment One, Inc., a Delaware
corporation for all of the assets and
assumption of all of the liabilities of E-1.
Exemption from the registration provisions
of the Securities Act for such transaction
was claimed under Section 3(b) of the
Securities Act and Rule 505 promulgated
thereunder on the basis that the value of
the consideration received for such shares
did not exceed $5.0 million and that such
purchaser acquired such securities without a
view toward the distribution thereof.
(ii) In March and April 1996, the Company issued
$2.0 million aggregate principal amount of
subordinated convertible promissory notes to
Mr. Bill Levine and Culture Convenience
Club, Ltd, a Japanese corporation which is
an affiliate of Mr. Muneaki Masuda. Each
of Mr. Levine and Mr. Masuda is and at the
time of the transactions was a director of
the Company and of the Company's principal
shareholder, Rentrak Corporation. In August
1996, such notes were converted into an
aggregate of 243,578 shares of BlowOut
Common Stock (or $8.21 per share) for no
additional consideration. Exemption from
the registration provisions of the
Securities Act for such transactions was
claimed under Section 4(2) of the Securities
Act on the basis that such transactions did
not involve any public offering, the
purchasers were sophisticated with access to
the kind of information registration would
provide and
4
<PAGE>
that such purchasers acquired such
securities without a view toward the
distribution thereof.
(iii) In September 1996, the Company issued
362,931 shares of BlowOut Common Stock to
CCC for $2.98 million in cash. Exemption
from the registration of the Securities Act
for such transaction was claimed under
Section 4(2) of the Securities Act on the
basis that such transactions did not involve
any public offering, the purchaser was
sophisticated with access to the kind of
information registration would provide and
that such purchasers acquired such
securities without a view toward the
distribution thereof.
Exhibits
*2.1 Distribution Agreement dated September __, 1996 between BlowOut
Entertainment, Inc. and Rentrak Corporation and principal exhibits
thereto.
3.1 Amended and Restated Certificate of Incorporation (included as Annex II
to the Information Statement)
3.2 Amended and Restated Bylaws (included as Annex III to the Information
Statement)
*4.1 Specimen Common Stock Certificate
10.1 1996 Equity Participation Plan of BlowOut Entertainment, Inc.
*10.2 National Account Agreement between BlowOut Entertainment, Inc., and
Rentrak Corporation dated March 15, 1996 and First Addendum thereto
dated March 16, 1996.
*10.3.1 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Steve Berns, dated as of March 1, 1996.
*10.3.2 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Karl D. Wetzel, dated February 1, 1996.
*10.3.3 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Harold Heyer, dated April 22, 1996.
*10.4 Agreement dated July 22, 1996 between Star Video Entertainment L.P. and
BlowOut Entertainment, Inc.
*10.5 Guarantee Agreement dated June 26, 1996 between Rentrak Corporation and
BlowOut Entertainment, Inc.
*10.6 Senior Loan and Surety Agreement dated July 23, 1996 between BlowOut
Entertainment, Inc. and Phoenix Leasing Incorporated.
*10.7 Loan and Security Agreement dated September __, 1996 between BlowOut
Entertainment, Inc. and Coast Business Credit.
5
<PAGE>
*10.8 Combination Commercial Sublease dated January 1, 1996 among Rentrak
Corporation, BlowOut Entertainment, Inc., Skyport Industrial Park
Partnership and Airport Partners, L.L.C.
*10.9 Registration Rights Agreement dated as of May 28, 1996 by and among
BlowOut Entertainment, Inc., Rentrak Corporation Streamlined Solutions,
Inc., Mortco Inc. and the other persons named therein.
*10.10 Intercompany Note dated as of December 31, 1995 executed by BlowOut
Entertainment, Inc. as Maker and Rentrak Corporation as Payee.
*10.11 Form of Indemnity Agreement.
*10.12 Master Sublease Agreement dated September 21, 1994 between KMart
Corporation and SuperCenter Entertainment Corporation and First
Amendment thereto dated April 1, 1995 and Second Amendment thereto
dated January 21, 1996.
*10.13 Agreement dated May 1, 1995 between Ralphs Grocery Company and SVI,
Inc. and First Amendment thereto dated May 1, 1995.
*10.14 Master Shopping Center Lease Agreement dated as of November 19, 1994
between Wal-Mart Stores, Inc. and SuperCenter Entertainment, Inc. and
First Amendment thereto dated May 15, 1995 and Second Amendment thereto
dated May 14, 1996.
*10.15 License Agreement dated March 15, 1996 between Rentrak Corporation and
BlowOut Entertainment, Inc. and First Amendment thereto dated June 25,
1996.
*10.16 Subscription Agreement dated August __, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
*10.17 Note Conversion Agreement dated August __, 1996 between Bill Levine and
BlowOut Entertainment, Inc.
*10.18 Note Conversion Agreement dated August __, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
*10.19 Registration Rights Agreement dated August __, 1996 among Culture
Convenience Club Ltd., Bill Levine and BlowOut Entertainment, Inc.
21.1 List of Subsidiaries
27.1 Financial Data Schedule
- -------------------
* To be filed by amendment
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
BLOWOUT ENTERTAINMENT, INC.
By:/s/ Steve Berns
---------------
Steve Berns
President
Date: September 9, 1996
7
<PAGE>
EXHIBIT INDEX
*2.1 Distribution Agreement dated September __, 1996 between BlowOut
Entertainment, Inc. and Rentrak Corporation and principal exhibits
thereto.
3.1 Amended and Restated Certificate of Incorporation (included as Annex
II to the Information Statement)
3.2 Amended and Restated Bylaws (included as Annex III to the Information
Statement)
*4.1 Specimen Common Stock Certificate
10.1 1996 Equity Participation Plan of BlowOut Entertainment, Inc.
*10.2 National Account Agreement between BlowOut Entertainment, Inc., and
Rentrak Corporation dated March 15, 1996 and First Addendum thereto
dated March 16, 1996.
*10.3.1 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Steve Berns, dated as of March 1, 1996.
*10.3.2 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Karl D. Wetzel, dated February 1, 1996.
*10.3.3 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Harold Heyer, dated April 22, 1996.
*10.4 Agreement dated July 22, 1996 between Star Video Entertainment L.P.
and BlowOut Entertainment, Inc.
*10.5 Guarantee Agreement dated June 26, 1996 between Rentrak Corporation
and BlowOut Entertainment, Inc.
*10.6 Senior Loan and Surety Agreement dated July 23, 1996 between BlowOut
Entertainment, Inc. and Phoenix Leasing Incorporated.
*10.7 Loan and Security Agreement dated September __, 1996 between BlowOut
Entertainment, Inc. and Coast Business Credit.
*10.8 Combination Commercial Sublease dated January 1, 1996 among Rentrak
Corporation, BlowOut Entertainment, Inc., Skyport Industrial Park
Partnership and Airport Partners, L.L.C.
*10.9 Registration Rights Agreement dated as of May 28, 1996 by and among
BlowOut Entertainment, Inc., Rentrak Corporation Streamlined
Solutions, Inc., Mortco Inc. and the other persons named therein.
*10.10 Intercompany Note dated as of December 31, 1995 executed by BlowOut
Entertainment, Inc. as Maker and Rentrak Corporation as Payee.
*10.11 Form of Indemnity Agreement.
*10.12 Master Sublease Agreement dated September 21, 1994 between KMart
Corporation and SuperCenter Entertainment Corporation and First
Amendment thereto dated April 1, 1995 and Second Amendment thereto
dated January 21, 1996.
*10.13 Agreement dated May 1, 1995 between Ralphs Grocery Company and SVI,
Inc. and First Amendment thereto dated May 1, 1995.
*10.14 Master Shopping Center Lease Agreement dated as of November 19, 1994
between Wal-Mart Stores, Inc. and SuperCenter Entertainment, Inc. and
First
<PAGE>
Amendment thereto dated May 15, 1995 and Second Amendment thereto
dated May 14, 1996.
*10.15 License Agreement dated March 15, 1996 between Rentrak Corporation and
BlowOut Entertainment, Inc. and First Amendment thereto dated June 25,
1996.
*10.16 Subscription Agreement dated August __, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
*10.17 Note Conversion Agreement dated August __, 1996 between Bill Levine
and BlowOut Entertainment, Inc.
*10.18 Note Conversion Agreement dated August __, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
*10.19 Registration Rights Agreement dated August __, 1996 among Culture
Convenience Club Ltd., Bill Levine and BlowOut Entertainment, Inc.
21.1 List of Subsidiaries
27.1 Financial Data Schedule
- -------------------
* To be filed by amendment
<PAGE>
EXHIBIT 10.1
THE 1996 EQUITY PARTICIPATION PLAN
OF
BLOWOUT ENTERTAINMENT, INC.
Blowout Entertainment, Inc., a Delaware corporation (the "Company"),
has adopted The 1996 Equity Participation Plan of Blowout Entertainment, Inc.
(the "Plan"), effective March 21, 1996, for the benefit of its eligible
employees, consultants and directors. The Plan consists of two plans, one for
the benefit of key Employees (as such term is defined below) and consultants and
one for the benefit of Independent Directors (as such term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company.
ARTICLE 1
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan
-------
they shall have the meaning specified below, unless the context clearly
indicates otherwise.
1.2 Award Limit. "Award Limit" shall mean 150,000 shares of Common
-----------
Stock.
1.3 Board. "Board" shall mean the Board of Directors of the
-----
Company.
1.4 Change in Control
-----------------
"Change in Control" shall mean a change in ownership or control of the
Company effected through either of the following transactions:
(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities possessing
<PAGE>
more than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders which the Board does not
recommend such stockholders to accept; or
(b) there is a change in the composition of the Board over a period of
thirty-six (36) consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be
comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
1.5 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
1.6 Committee. "Committee" shall mean the Compensation Committee of
---------
the Board, or another committee or subcommittee of the Board, appointed as
provided in Section 6.1.
1.7 Common Stock. "Common Stock" shall mean the common stock of the
------------
Company, par value $.01 per share, and any equity security of the Company issued
or authorized to be issued in the future, but excluding any preferred stock and
any warrants, options or other rights to purchase Common Stock. Debt securities
of the Company convertible into Common Stock shall be deemed equity securities
of the Company.
1.8 Company. "Company" shall mean Blowout Entertainment, Inc., a
-------
Delaware corporation.
1.9 Corporate Transaction. "Corporate Transaction" shall mean any of
---------------------
the following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined
2
<PAGE>
voting power of the Company's outstanding securities are transferred to a
person or person different from those who held such securities immediately
prior to such merger.
1.10 Director. "Director" shall mean a member of the Board.
--------
1.11 Employee. "Employee" shall mean any officer or other employee
--------
(as defined in accordance with Section 3401(c) of the Code) of the Company, or
of any corporation which is a Subsidiary, or of Rentrak Corporation.
1.12 Exchange Act. "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended.
1.13 Fair Market Value. "Fair Market Value" of a share of Common
-----------------
Stock as of a given date shall be (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on such date, or if shares were not traded on such date,
then on the next preceding date on which a trade occurred; or (ii) if Common
Stock is not traded on an exchange but is quoted on NASDAQ or a successor
quotation system, the mean between the closing representative bid and asked
prices for the Common Stock on the trading day previous to such date as reported
by NASDAQ or such successor quotation system; or (iii) if Common Stock is not
publicly traded on an exchange and not quoted on NASDAQ or a successor quotation
system, the Fair Market Value of a share of Common Stock as established by the
Committee (or the Board, in the case of Options granted to Independent
Directors) acting in good faith.
1.14 Incentive Stock Option. "Incentive Stock Option" shall mean an
----------------------
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.15 Independent Director. "Independent Director" shall mean a
--------------------
member of the Board who is not an Employee of the Company.
1.16 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
--------------------------
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.17 Option. "Option" shall mean a stock option granted under
------
Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a Non-Qualified Stock Option or an
Incentive Stock Option; provided, however, that Options granted to Independent
-------- -------
Directors and consultants shall be Non-Qualified Stock Options.
1.18 Optionee. "Optionee" shall mean an Employee, consultant or
--------
Independent Director granted an Option under this Plan.
3
<PAGE>
1.19 Plan. "Plan" shall mean The 1996 Equity Participation Plan of
----
Blowout Entertainment, Inc.
1.20 QDRO. "QDRO" shall mean a qualified domestic relations order as
----
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
1.21 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such Rule may be amended from time to time.
1.22 Subsidiary. "Subsidiary" shall mean any corporation in an
----------
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
1.23 Termination of Consultancy. "Termination of Consultancy" shall
--------------------------
mean the time when the engagement of Optionee as a consultant to the Company or
a Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death or retirement; but
excluding terminations where there is a simultaneous commencement of employment
with the Company or any Subsidiary. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Consultancy, including, but not by way of limitation, the question of whether
a Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Consultancy. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate a
consultant's service at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in writing.
1.24 Termination of Directorship. "Termination of Directorship"
---------------------------
shall mean the time when an Optionee who is an Independent Director ceases to be
a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, death or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Directorship with respect to
Independent Directors.
1.25 Termination of Employment. "Termination of Employment" shall
-------------------------
mean the time when the employee-employer relationship between the Optionee and
the Company or any Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an Optionee by
the Company or any Subsidiary, (ii) at the discretion of the Committee,
terminations which result in a temporary severance of the employee-employer
relationship, and (iii) at the discretion of the Committee, terminations
4
<PAGE>
which are followed by the simultaneous establishment of a consulting
relationship by the Company or a Subsidiary with the former employee. The
Committee, in its absolute discretion, shall determine the effect of all matters
and questions relating to Termination of Employment, including, but not by way
of limitation, the question of whether a Termination of Employment resulted from
a discharge for good cause, and all questions of whether particular leaves of
absence constitute Terminations of Employment; provided, however, that, with
-------- -------
respect to Incentive Stock Options, a leave of absence, change in status from an
employee to an independent contractor or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that, such leave of absence, change in status or other change interrupts
employment for the purposes of Section 422(a)(2) of the Code and the then
applicable regulations and revenue rulings under said Section. Notwithstanding
any other provision of this Plan, the Company or any Subsidiary has an absolute
and unrestricted right to terminate an Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan. The shares of stock subject to Options
----------------------
shall be Common Stock, initially shares of the Company's Common Stock, par value
$.01 per share. The aggregate number of such shares which may be issued upon
exercise of such options under the Plan shall not exceed 500,000. The shares of
Common Stock issuable upon exercise of such options may be either previously
authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to options
granted under the Plan to any individual in any fiscal year shall not exceed the
Award Limit. To the extent required by Section 162(m) of the Code, shares
subject to Options which are cancelled continue to be counted against the Award
Limit and if, after grant of an Option, the price of shares subject to such
Option is reduced, the transaction is treated as a cancellation of the Option
and a grant of a new Option and both the Option deemed to be canceled and the
Option deemed to be granted are counted against the Award Limit.
2.2 Add-back of Options. If any Option expires or is cancelled
-------------------
without having been fully exercised, the number of shares subject to such Option
but as to which such Option was not exercised prior to its expiration or
cancellation may again be optioned hereunder, subject to the limitations of
Section 2.1. Furthermore, any shares subject to Options which are adjusted
pursuant to Section 7.3 and become exercisable with respect to shares of stock
of another corporation shall be considered cancelled and may again be optioned,
hereunder, subject to the limitations of Section 2.1. Shares of Common Stock
which are delivered by the Optionee or withheld by the Company upon the exercise
of any Option, in payment of the exercise price thereof, may again be optioned
or granted hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this
5
<PAGE>
Section 2.2, no shares of Common Stock may again be optioned, if such action
would cause an Incentive Stock Option to fail to qualify as an incentive stock
option under Section 422 of the Code.
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Employee or consultant selected by the
-----------
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be
granted Options at the times and in the manner set forth in Section 3.4(d).
3.2 Disqualification for Stock Ownership. No person may be granted
------------------------------------
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing subsidiary or parent thereof unless such Incentive Stock
Option conforms to the applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
Option shall be granted unless such Option, when granted, qualifies as an
"incentive stock option" under Section 422 of the Code. No Incentive Stock
Option shall be granted to any person who is not an Employee.
3.4 Granting of Options
-------------------
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees or consultants (including Employees or consultants
who have previously received Options under this Plan) such of them as in
its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees or
consultants;
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
-------- -------
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and
6
<PAGE>
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code.
All Options granted to Optionees subject to Section 162(m) of the Code with an
exercise price equal to or greater than the Fair Market Value of the Common
Stock on the date of such grant shall be intended to qualify as performance-
based compensation as described in Section 162(m)(4)(C) of the Code unless the
Committee otherwise determines.
(b) Upon the selection of a key Employee or consultant to be granted
an Option, the Committee shall instruct the Secretary of the Company to issue
the Option and may impose such conditions on the grant of the Option as it deems
appropriate. Without limiting the generality of the preceding sentence, the
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options or other rights which have been previously granted to him
under this Plan or otherwise. An Option, the grant of which is conditioned upon
such surrender, may have an option price lower (or higher) than the exercise
price of such surrendered Option or other right, may cover the same (or a lesser
or greater) number of shares as such surrendered Option or other right, may
contain such other terms as the Committee deems appropriate, and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, exercise period or any other term or condition of such
surrendered Option or other right.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) During the term of the Plan, each person who is an Independent
Director as of the date of the consummation of the initial public offering of
Common Stock automatically shall be granted (i) an Option to purchase 5,000
shares of Common Stock (subject to adjustment as provided in Section 7.3) on the
date of such initial public offering and (ii) an Option to purchase 1,000 shares
of Common Stock (subject to adjustment as provided in Section 7.3) on the date
of each annual meeting of stockholders after such initial public offering at
which the Independent Director is reelected to the Board. During the term of
the Plan, a person who is initially elected to the Board after the consummation
of the initial public offering of Common Stock and who is an Independent
Director at the time of such initial election automatically shall be granted (i)
an Option to purchase 5,000 shares of Common Stock (subject to adjustment as
provided in Section 7.3) on the date of such initial election and (ii) an Option
to purchase 1,000 shares of Common Stock (subject to adjustment as provided in
Section 7.3) on the date of each annual meeting of stockholders after such
initial election at which the Independent Director is reelected to the Board.
Members of the Board who are employees of the Company who subsequently retire
from the Company and remain on the Board will not receive an initial Option
grant pursuant to clause (i) of the preceding sentence, but to the extent that
they are otherwise eligible, will receive, after retirement from employment with
the Company, Options as described in clause (ii) of the
7
<PAGE>
preceding sentence. All the foregoing Option grants authorized by this Section
3.4(d) are subject to stockholder approval of the Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written
----------------
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock
Options shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each
------------
Option shall be set by the Committee; provided, however, that such price shall
-------- -------
be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code such price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date the Option
is granted; (ii) in the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
subsidiary or parent thereof such price shall not be less than 110% of the Fair
Market Value of a share of Common Stock on the date the Option is granted; and
(iii) in the case of Options granted to Independent Directors, such price shall
equal 100% of the Fair Market Value of a share of Common Stock on the date the
Option is granted; provided, however, that the price of each share subject to
-------- -------
each Option granted to Independent Directors on the date of the initial public
offering of Common Stock shall equal the initial public offering price (net of
underwriting discounts and commissions) per share of Common Stock.
4.3 Option Term. The term of an Option shall be set by the
-----------
Committee in its discretion; provided, however, that, (i) in the case of Options
-------- -------
granted to Independent Directors, the term shall be ten (10) years from the date
the Option is granted, without variation or acceleration hereunder, but subject
to Section 5.7, and (ii) in the case of Incentive Stock Options, the term shall
not be more than ten (10) years from the date the Incentive Stock Option is
granted, or five (5) years from such date if the Incentive Stock Option is
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary or parent thereof. Except as limited by
requirements of Section 422 of the Code and regulations and rulings thereunder
applicable to Incentive Stock Options,
8
<PAGE>
the Committee may extend the term of any outstanding Option in connection with
any Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
4.4 Option Vesting
---------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the Committee
may determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that, unless the
-------- -------
Committee otherwise provides in the terms of the Option or otherwise, no Option
shall be exercisable by any Optionee who is then subject to Section 16 of the
Exchange Act within the period ending six months and one day after the date the
Option is granted; and provided, further, that Options granted to Independent
Directors shall become exercisable in cumulative annual installments of 25% on
each of the first, second, third and fourth anniversaries of the date of Option
grant, without variation or acceleration hereunder except as provided in Section
7.3(c). At any time after grant of an Option, the Committee may, in its sole
and absolute discretion and subject to whatever terms and conditions it selects,
accelerate the period during which an Option (except an Option granted to an
Independent Director) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees or
consultants either in the Stock Option Agreement or by action of the Committee
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value
of stock shall be determined as of the time the Option with respect to such
stock is granted.
4.5 Consideration. In consideration of the granting of an Option,
-------------
the Optionee shall agree, in the written Stock Option Agreement, to remain in
the employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year (or
such shorter period as may be fixed in the Stock Option Agreement or by action
of the Committee or the Board following grant of the Option) after the Option is
granted (or until the next annual meeting of stockholders of the Company, in the
case of an Independent Director). Nothing in this Plan or in any Stock Option
Agreement hereunder shall confer upon any Optionee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the
9
<PAGE>
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Optionee at any time for any reason whatsoever, with or without good cause.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in
----------------
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee or the Board stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee or the Board,
in its absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act of 1933, as amended, and
any other federal or state securities laws or regulations. The Committee or
Board may, in its absolute discretion, also take whatever additional actions it
deems appropriate to effect such compliance including, without limitation,
placing legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 7.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However,
the Committee (or the Board, in the case of Options granted to Independent
Directors) may in its discretion (i) allow a delay in payment up to thirty (30)
days from the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common Stock
owned by the Optionee, duly endorsed for transfer to the Company with a Fair
Market Value on the date of delivery equal to the aggregate exercise price of
the Option or exercised portion thereof; (iii) subject to the timing
requirements of Section 5.3, allow payment, in whole or in part, through the
surrender of shares of Common Stock then issuable upon exercise of the Option
having a Fair Market Value on the date of Option
10
<PAGE>
exercise equal to the aggregate exercise price of the Option or exercised
portion thereof; (iv) allow payment, in whole or in part, through the delivery
of property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board, or (vi) allow payment
through any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv) and (v). In the case of a promissory note, the
Committee (or the Board, in the case of Options granted to Independent
Directors) may also prescribe the form of such note and the security to be given
for such note. The Option may not be exercised, however, by delivery of a
promissory note or by a loan from the Company when or where such loan or other
extension of credit is prohibited by law.
5.3 Certain Timing Requirements. At the discretion of the Committee
---------------------------
(or Board, in the case of Options granted to Independent Directors), shares of
Common Stock issuable to the Optionee upon exercise of the Option may be used to
satisfy the Option exercise price or the tax withholding consequences of such
exercise, in the case of persons subject to Section 16 of the Exchange Act, only
(i) during the period beginning on the third business day following the date of
release of the quarterly or annual summary statement of sales and earnings of
the Company and ending on the twelfth business day following such date or (ii)
pursuant to an irrevocable written election by the Optionee to use shares of
Common Stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes made at least six months prior
to the payment of such Option price or withholding taxes.
5.4 Conditions to Issuance of Stock Certificates. The Company shall
--------------------------------------------
not be required to issue or deliver any certificate or certificates for shares
of stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory body
which the Committee or Board shall, in its absolute discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee or Board shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or Board may establish from time to time
for reasons of administrative convenience; and
11
<PAGE>
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.5 Rights as Stockholders. The holders of Options shall not be,
----------------------
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.
5.6 Ownership and Transfer Restrictions. The Committee (or the
-----------------------------------
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The
Committee may require the Employee to give the Company prompt notice of any
disposition of shares of Common Stock acquired by exercise of an Incentive Stock
Option within (i) two years from the date of granting such Option to such
Employee or (ii) one year after the transfer of such shares to such Employee.
The Committee may direct that the certificates evidencing shares acquired by
exercise of an Option refer to such requirement to give prompt notice of
disposition.
5.7 Limitations on Exercise of Options Granted to Independent
---------------------------------------------------------
Directors. Unless earlier terminated pursuant to Section 7.3(c)(ii) or
- ---------
7.3(c)(viii), no Option granted to an Independent Director may be exercised to
any extent by anyone after the first to occur of the following events:
(a) the expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three-month period; or
(d) the expiration of ten years from the date the Option was granted.
ARTICLE VI
ADMINISTRATION
12
<PAGE>
6.1 Compensation Committee. The Compensation Committee (or another
----------------------
committee or subcommittee of the Board assuming the functions of the Committee
under this Plan) shall consist of two or more Independent Directors appointed by
and holding office at the pleasure of the Board, each of whom is both a
"disinterested person" as defined by Rule 16b-3 and an "outside director" for
purposes of Section 162(m) of the Code. Appointment of Committee members shall
be effective upon acceptance of appointment. Committee members may resign at
any time by delivering written notice to the Board. Vacancies in the Committee
may be filled by the Board.
6.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options are granted, and to adopt such rules
for the administration, interpretation, and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant under this
Plan need not be the same with respect to each Optionee. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
6.3 Majority Rule; Unanimous Written Consent. The Committee shall
----------------------------------------
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
6.4 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan or Options and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
13
<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Not Transferable. Options under this Plan may not be sold,
----------------
pledged, assigned, or transferred in any manner other than by will or the laws
of descent and distribution or pursuant to a QDRO, unless and until the shares
underlying such Options have been issued. No Option or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee
or his successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other means
whether such disposition be voluntary or involuntary or by operation of law by
judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect, except to the extent that such disposition is
permitted by the preceding sentence.
During the lifetime of the Optionee, only he may exercise an Option
(or any portion thereof) granted to him under the Plan, unless it has been
disposed of pursuant to a QDRO. After the death of the Optionee, any exercisable
portion of an Option may, prior to the time when such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement, be
exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's will or under the then applicable laws of descent
and distribution.
7.2 Amendment, Suspension or Termination of this Plan. Except as
-------------------------------------------------
otherwise provided in this Section 7.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Committee, no action of the Committee may, except as provided in Section
7.3, increase the limits imposed in Section 2.1 on the maximum number of shares
which may be issued under this Plan or modify the Award Limit, and no action of
the Committee may be taken that would otherwise require stockholder approval as
a matter of applicable law, regulation or rule. Notwithstanding the foregoing,
except as permitted by the applicable exemptive conditions of Rule 16b-3, the
provisions of this Plan relating to formula Option grants to Independent
Directors, including the amount, price and timing thereof, shall not be amended
more than once in any six-month period other than to comport with changes in the
Code, the Employee Retirement Income Security Act, or the respective rules
thereunder, and such amendments must be adopted by action of the Board. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, alter or impair any rights or obligations under any
Options, theretofore granted, unless the award itself otherwise expressly so
provides. No Options may be granted during any period of suspension or after
termination of this Plan, and in no event may any Incentive Stock Option be
granted under this Plan after the first to occur of the following events:
14
<PAGE>
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 7.4.
7.3 Changes in Common Stock or Assets of the Company, Acquisition or
----------------------------------------------------------------
Liquidation of the Company and Other Corporate Events.
- -----------------------------------------------------
(a) Subject to Sections 7.3(e), in the event that the Committee
determines that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, then the Committee (or the Board, in the case of Options granted
to Independent Directors) shall, in such manner as it may deem equitable, adjust
any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options may be granted under
the Plan (including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be issued
and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any Option.
(b) Subject to Sections 7.3(e), in the event of any corporate
transaction or other event described in Section 7.3(a) which results in shares
of Common Stock being exchanged for or converted into cash, securities
(including securities of another corporation) or other property, the Committee
will have the right to terminate this Plan as of the date of the event or
transaction, in which case all Options granted under this Plan shall become the
right to receive such cash, securities or other property, net of any applicable
exercise price.
(c) Subject to Sections 7.3(c)(vi) and 7.3(e), in the event of any
corporate transaction or other event described in Section 7.3(a) or any unusual
or nonrecurring transactions or events affecting the Company, any affiliate of
the Company, or the financial
15
<PAGE>
statements of the Company or any affiliate, or of changes in applicable laws,
regulations, or accounting principles, the Committee (or the Board, in the case
of Options granted to Independent Directors) in its discretion is hereby
authorized to take any one or more of the following actions whenever the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that such action is appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan or with respect to any Options under this Plan, to
facilitate such transactions or events or to give effect to such changes in
laws, regulations or principles:
(i) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either
automatically or upon the Optionee's request, for either the purchase of
any such Option for an amount of cash equal to the amount that could have
been attained upon the exercise of such Option or realization of the
Optionee's rights had such Option been currently exercisable or payable or
the replacement of such Option with other rights or property selected by
the Committee (or the Board, in the case of Options granted to Independent
Directors) in its sole discretion;
(ii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option or by action taken prior to the occurrence of such
transaction or event, that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option or by action taken prior to the occurrence of such
transaction or event, that for a specified period of time prior to such
transaction or event such Option, shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section
4.4 or (ii) the provisions of such Option;
(iv) In its discretion, and on such terms and conditions as it
deems appropriate, the Committee (or the Board, in the case of Options
granted to Independent Directors) may provide, either by the terms of such
Option or by action taken prior to the occurrence of such transaction or
event, that upon such event, such Option, be assumed by the successor
corporation, or a parent or subsidiary thereof, or shall be substituted for
by similar options, rights or awards covering the stock of the successor
corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; and
(v) In its discretion, and on such terms and conditions as it
deems appropriate, the Committee (or the Board, in the case of Options
granted to Independent Directors) may make adjustments in the number and
type of shares of
16
<PAGE>
Common Stock (or other securities or property) subject to outstanding
Options and/or in the terms and conditions of (including the grant or
exercise price), and the criteria included in, outstanding Options, which
may be granted in the future.
(vi) None of the foregoing discretionary terms of this Section
7.3(c) shall be permitted with respect to Options granted under Section
3.4(d) to Independent Directors to the extent that such discretion would be
inconsistent with the requirements of Rule 16b-3. In the event of a Change
in Control or a Corporate Transaction, to the extent that the Board does
not have the ability under Rule 16b-3 to take or to refrain from taking the
discretionary actions set forth above, each Option granted to an
Independent Director shall be exercisable as to all shares covered thereby
upon such Change in Control or during the five days immediately preceding
the consummation of such Corporate Transaction and subject to such
consummation, notwithstanding anything to the contrary in Section 4.4 or
the vesting schedule of such Options. In the event of a Corporate
Transaction, to the extent that the Board does not have the ability under
Rule 16b-3 to take or to refrain from taking the discretionary actions set
forth above, no Option granted to an Independent Director may be exercised
following such Corporate Transaction unless such Option is, in connection
with such Corporate Transaction, either to be assumed by the successor or
survivor corporation (or parent thereof) or to be replaced with a
comparable right with respect to shares of the capital stock of the
successor or survivor corporation (or parent thereof); provided, however,
-------- -------
that such termination shall not occur until after the related Corporate
Transaction has closed and appropriate arrangements shall be made to permit
any Options outstanding to be exercised in connection with such closing;
and provided, further, that any Option granted or deemed regranted within
-------- -------
six months of such Corporate Transaction shall remain exercisable until the
expiration of six months and one day from the later of the date such Option
was granted or the date such Option was deemed regranted unless such Option
earlier expires pursuant to Section 5.7.
(viii) A Stock Option Agreement, in the discretion of the
Committee, may provide that in the event of any Corporate Transaction, each
outstanding Option shall, immediately prior to the effective date of the
Corporate Transaction, automatically become fully exercisable for all of
the shares of Common Stock subject to such Option. A Stock Option
Agreement may, in the discretion of the Committee, further provide that the
Option subject to such agreement shall not so accelerate if and to the
extent: (i) such Option is, in connection with the Corporate Transaction,
either to be assumed by the successor or survivor corporation (or parent
thereof) or to be replaced with a comparable right with respect to shares
of the capital stock of the successor or survivor corporation (or parent
thereof), (ii) such Option is to be replaced with a cash incentive program
of the successor or survivor corporation which preserves the economic value
of the right at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable
to such right or (iii) the acceleration of exercisability of such Option is
subject to other limitations imposed by the Committee at the time of grant.
17
<PAGE>
The determination of comparability of rights under clause (i) above shall
be made by the Committee, and its determination shall be final, binding and
conclusive.
(d) Subject to Sections 7.3(e) and 7.8, the Committee (or the Board,
in the case of Options granted to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option agreement or
certificate, as it may deem equitable and in the best interests of the Company.
(e) With respect to Incentive Stock Options and Options intended to
qualify as performance-based compensation under Section 162(m), no adjustment or
action described in this Section 7.3 or in any other provision of the Plan shall
be authorized to the extent that such adjustment or action would cause the Plan
to violate Section 422(b)(1) of the Code or would cause such option to fail to
so qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would violate Section 16 or the exemptive
conditions of Rule 16b-3. The number of shares of Common Stock subject to any
option, right or award shall always be rounded to the next whole number.
7.4 Approval of Plan by Stockholders. This Plan will be submitted
--------------------------------
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options may be granted prior
to such stockholder approval, provided that such Options shall not be
exercisable prior to the time when this Plan is approved by the stockholders,
and provided further that if such approval has not been obtained at the end of
said twelve-month period, all Options previously granted under this Plan shall
thereupon be cancelled and become null and void.
7.5 Tax Withholding. The Company shall be entitled to require
---------------
payment in cash or deduction from other compensation payable to each Optionee of
any sums required by federal, state or local tax law to be withheld with respect
to the issuance, vesting or exercise of any Option. Subject to the timing
requirements of Section 5.3, the Committee (or the Board, in the case of Options
granted to Independent Directors) may in its discretion and in satisfaction of
the foregoing requirement allow such Optionee to elect to have the Company
withhold shares of Common Stock otherwise issuable under such Option (or allow
the return of shares of Common Stock) having a Fair Market Value equal to the
sums required to be withheld.
7.6 Loans. The Committee may, in its discretion, extend one or more
-----
loans to key Employees in connection with the exercise or receipt of an Option
granted under this Plan. The terms and conditions of any such loan shall be set
by the Committee.
7.7 Forfeiture Provisions. Pursuant to its general authority to
---------------------
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the requirements
of Rule 16b-3) to provide, in the terms of Options or other awards made under
the Plan, or to require the recipient to agree by separate written
18
<PAGE>
instrument, that (i) any proceeds, gains or other economic benefit actually or
constructively received by the recipient upon any receipt or exercise of the
award, or upon the receipt or resale of any Common Stock underlying such award,
must be paid to the Company, and (ii) the award shall terminate and any
unexercised portion of such award (whether or not vested) shall be forfeited, if
(a) a Termination of Employment, Termination of Consultancy or Termination of
Directorship occurs prior to a specified date, or within a specified time period
following receipt or exercise of the award, or (b) the recipient at any time, or
during a specified time period, engages in any activity in competition with the
Company, or which is inimical, contrary or harmful to the interests of the
Company, as further defined by the Committee (or the Board, as applicable).
7.8 Limitations Applicable to Section 16 Persons and Performance-
------------------------------------------------------------
Based Compensation. Notwithstanding any other provision of this Plan, this Plan,
- ------------------
and any Option granted to any individual who is then subject to Section 16 of
the Exchange Act, shall be subject to any additional limitations set forth in
any applicable exemptive rule under Section 16 of the Exchange Act (including
any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan and Options granted hereunder shall be deemed amended to the extent
necessary to conform to such applicable exemptive rule. Furthermore,
notwithstanding any other provision of this Plan, any Option intended to qualify
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall be subject to any additional limitations set forth in Section 162(m)
of the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
7.9 Effect of Plan Upon Options and Compensation Plans. The
--------------------------------------------------
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights
otherwise than under this Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
firm or association.
7.10 Compliance with Laws. This Plan, the granting and vesting of
--------------------
Options under this Plan and the issuance and delivery of shares of Common Stock
and the payment of money under this Plan or under Options granted hereunder are
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
19
<PAGE>
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Options granted hereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
7.11 Titles. Titles are provided herein for convenience only and are
------
not to serve as a basis for interpretation or construction of this Plan.
7.12 Governing Law. This Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of the Company on March 21, 1996.
Executed on this 21st day of March, 1996.
/s/ Kim Cox
-----------------------------
Secretary
* * *
I hereby certify that the foregoing Plan was duly adopted by the
written consent of holders of a majority of the outstanding shares of Common
Stock on March 21, 1996.
Executed on this 21 day of March, 1996.
/s/ Kim Cox
-----------------------------
Secretary
20
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
--------------------
1. C&M VIDEO, INC., an Illinois corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 2,606,838 1,463,480
<SECURITIES> 0 0
<RECEIVABLES> 65,585 0
<ALLOWANCES> 0 0
<INVENTORY> 984,894 2,035,174
<CURRENT-ASSETS> 4,178,067 4,137,954
<PP&E> 11,128,961 16,996,316
<DEPRECIATION> 1,932,560 4,831,625
<TOTAL-ASSETS> 18,536,495 21,440,830
<CURRENT-LIABILITIES> 5,001,043 8,684,350
<BONDS> 0 0
0 0
0 0
<COMMON> 18,000 18,000
<OTHER-SE> 16,974,200 16,974,200
<TOTAL-LIABILITY-AND-EQUITY> 18,536,495 21,440,830
<SALES> 10,718,489 14,150,881
<TOTAL-REVENUES> 10,718,489 14,150,881
<CGS> 5,219,761 6,473,872
<TOTAL-COSTS> 11,494,422 14,592,533
<OTHER-EXPENSES> 3,277,818 1,994,338
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 532,836 211,684
<INCOME-PRETAX> (4,984,674) (2,594,197)
<INCOME-TAX> 0 12,312
<INCOME-CONTINUING> (4,984,674) (2,594,197)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,984,674) (2,606,509)
<EPS-PRIMARY> (3.46) (1.45)
<EPS-DILUTED> (3.46) (1.45)
</TABLE>
