FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for Quarter Ended:
September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Transition Period
from_____to______
Commission file number: 0-21327
BLOWOUT ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
OREGON 87-0498950
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
7700 NE Ambassador Place
One Airport Center, 2nd Floor, Portland, Oregon 97220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 331-2729
________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (x) No ( )
As of December 18, 1996, the Registrant had 2,433,330 shares of Common Stock
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three month periods ended
September 30, 1996 and September 30, 1995
Consolidated Statements of Operations for the nine month periods ended
September 30, 1996 and September 30, 1995
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1996 and September 30, 1995
Notes to Consolidated Financial Statements
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
Three Months Ended September 30,
1996 1995
REVENUE:
Rental revenue 6,116,392 2,513,832
Product sales 1,817,868 599,850
Total Revenue 7,934,260 3,113,682
OPERATING COSTS AND EXPENSE:
Cost of sales 3,300,289 1,473,391
Operating expenses 4,542,245 2,082,030
Selling, general and admin. 757,971 470,258
Total Operating Costs and Expenses 8,600,505 4,025,679
OPERATING LOSS (666,245) (911,997)
NONOPERATING (INCOME) EXPENSE:
Interest income (6,813) --
Interest expense 132,999 57,627
Other, net 946,920 (2,294)
Total Nonoperating Expense 1,073,106 55,333
LOSS BEFORE INCOME TAXES (1,739,351) (967,330)
INCOME TAX PROVISION - --
NET LOSS (1,739,351) (967,330)
LOSS PER SHARE (0.86) (0.53)
SHARES USED IN PER SHARE CALCULATION 2,024,679 1,826,838
The accompanying notes are an integral part of these statements.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
Nine Months Ended September 30,
1996 1995
REVENUE:
Rental revenue 17,386,228 3,543,390
Product sales 4,698,913 827,024
Total Revenue 22,085,141 4,370,414
OPERATING COSTS AND EXPENSE:
Cost of sales 9,774,161 2,312,757
Operating expenses 12,660,906 2,893,678
Selling, general and admin. 2,752,309 967,440
Total Operating Costs and Expenses 25,187,376 6,173,875
OPERATING LOSS (3,102,235) (1,803,461)
NONOPERATING (INCOME) EXPENSE:
Interest income (6,813) --
Interest expense 344,683 110,468
Other, net 893,443 (68,477)
Total Nonoperating Expense 1,231,313 41,991
LOSS BEFORE INCOME TAXES (4,333,548) (1,845,452)
INCOME TAX PROVISION 12,299 --
NET LOSS (4,345,847) (1,845,452)
LOSS PER SHARE (2.30) (1.40)
SHARES USED IN PER SHARE CALCULATION 1,893,266 1,321,613
The accompanying notes are an integral part of these statements.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited) (Unaudited)
ASSETS September 30, 1996 December 31, 1995
Cash and Cash Equivalents $ 4,006,313 $ 2,606,838
Accounts and Notes Receivable 112,448 341,909
Prepaid Expenses 44,856 -
Merchandise Videocassette Inventory 2,351,482 984,894
Other Current Assets 185,934 244,426
Total Current Assets 6,701,033 4,178,067
Rental Inventory 12,826,568 7,152,838
Less: Accumulated Depreciation (4,816,168) (1,437,745)
Rental Inventory, net 8,010,400 5,715,093
Leaseholds, Fixtures and Equipment 5,733,131 3,976,123
Construction in Progress 121,718
Less: Accumulated Depreciation (1,268,970) (494,815)
Property, net 4,585,879 3,481,308
Intangible Assets, net 4,575,587 4,896,092
Other Assets 185,622 265,935
Total Assets $ 24,058,521 $ 18,536,495
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long Term Debt $ 899,171 $ 326,287
Line of Credit 2,509,932 -
Accounts Payable - Trade 3,670,675 3,278,553
Accrued Liabilities 786,925 1,217,893
Accrued Payroll 450,852 178,310
Interest Payable 1,369 -
Accounts Payable - Rentrak 1,081,385 -
Total Current Liabilities 9,400,309 5,001,043
Note Payable Rentrak 2,800,000 2,800,000
Other Long Term Debt 1,123,267 640,789
Total Long Term Debt 3,923,267 3,440,789
Common Stock, par value $.01 per share; 24,336 18,268
10,000,000 shares authorized; 2,433,330
and 1,826,838 issued and outstanding,
respectively
Preferred Stock, par value $.01 per share; - -
1,000,000 shares authorized; no shares
issued and outstanding
Additional Paid in Capital 21,947,864 16,973,932
Accumulated Deficit (11,237,255) (6,897,537)
Total Stockholders' Equity 10,734,945 10,094,663
Total Liabilities and Stockholders'
Equity $24,058,521 $ 18,536,495
The accompanying notes are an integral part of
these balance sheets
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
(Unaudited)
Nine Months Ended September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,345,847) $ (1,845,452)
Adjustments to reconcile net loss
to net cash used in operating activities -
Loss on disposal of assets 124,943 -
Amortization of video cassette rental
inventory 3,758,480 1,409,574
Depreciation 839,523 266,233
Amortization of intangible and other assets 400,817 17,084
Changes in current assets and liabilities accounts
Receivables 229,461 (59,674)
Merchandise inventory (1,366,586) (757,821)
Prepaid Expenses 13,636 (91,269)
Accounts payable - Trade 392,122 315,828
Accrued liabilites (429,599) 114,393
Accrued payroll 272,542 166,809
Accounts payable - Rentrak 1,081,385 -
Net cash provided by (used in) operating
activities 970,877 (464,295)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video cassette tapes, net (6,053,788) (2,119,026)
Capital expenditures (2,062,923) (363,213)
Proceeds from sale of assets - 1,105,747
Other Assets - (94,524)
Net cash (used in) provided by investing
activities (8,116,711) (1,471,016)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 4,980,000 -
Additional borrowings 3,565,309 2,605,862
Net cash provided by financing activities 8,545,309 2,605,862
NET INCREASE IN CASH 1,399,475 670,551
CASH AND CASH EQUIVALENTS, beginning
of period 2,606,838 66,162
The accompanying notes are an integral part of these statements.
<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 nine month periods ended September 30, 1995 and September 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 nine month periods ended September 30,
1996 are not necessarily indicative of the results expected for the full year.
NOTE B: Distribution
In June, 1996 the Company's then principal stockholder, Rentrak
Corporation ("Rentrak"), announced its intention to distribute shares of
Common Stock of the Company to shareholders through a special dividend (the
"Distribution"). On November 25, 1996 shareholders of Rentrak on November 18,
1996 received one share of Common Stock of the Company for every 8.34 shares
of Rentrak.
NOTE C: Stock Split
On October 9, 1996, the Board of Directors of the Company authorized a
1.01491-for-1 split of the Company's Common Stock. The stock split was
effected by a distribution of .01491 additional shares for each share owned by
stockholders of record on the record date established by the Board. Share and
per share amounts presented in the consolidated financial statements and
related notes have been restated to reflect the stock split.
NOTE D: Net Loss Per Share
For the three and nine months periods ended September 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.
<PAGE>
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(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 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 30, 1996, the Company had borrowed $962,700 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 bear interest at a
floating rate per annum equal to the Bank of America Reference Rate plus 2.75%
(11% as of September 30, 1996). The term of the CBC Line of Credit is three
years. The CBC Line of Credit was guaranteed by Rentrak until the completion
of the Distribution. 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." As of
September 30, 1996, the Company had borrowed $2.51 million under the CBC Line
of Credit.
Notes Payable
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.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(unaudited)
NOTE E: Financing - (Continued)
Star Video
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.
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 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 distribution agreement with Rentrak and the license agreement
with Rentrak for the use of the "BlowOut Video" name, and (ii) during the term
of the agreement or as long as any Rentrak Guarantee is outstanding, the
Company will use 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 30, 1996, the total amount of funded obligations of
the Company subject to the Rentrak Guarantee was approximately $3.5 million.
NOTE E: Major Suppliers
For the quarter ended September 30, 1996, BlowOut had three video
cassette distributors who supplied 41.0%, 27.3% and 12.2% of total tape
purchases. For the nine months ended September 30, 1996, BlowOut had three
video cassette distributors who supplied 39.7%, 29.2% and 11.8% of total tape
purchases. No other distributors provided more than 10% of the total tape
purchases for either the three months or nine months ended September 30, 1996.
For the quarter ended September 30, 1995, BlowOut had three video
cassette distributors who supplied 28.7%, 24.3% and 22.1% of total tape
purchases. For the nine months ended September 30, 1995, BlowOut had three
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 nine months ended September 30, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Financial Statements and the Notes thereto included elsewhere in
this report. 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 and the Notes thereto.
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 Entertainment One, Inc. ("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 SuperCenter
Entertainment, Inc.'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. 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 within 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. During
the first nine months of 1996, the Company continued to expand the number of
stores it operates, and as of September 30, 1996, the Company operated 192
retail video stores, including 145 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 prerecorded 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 following table sets forth the number of stores open for at least 12
months and average rental revenue for such stores for the nine month periods
ended September 30, 1995 and 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Fiscal Year Ended Nine Months Ended
December 31 September 30
___________________________ __________________
1995 1994 1993 1996 1995
No. of Stores open
12 months 3 4 0 112 3
Average rental
revenue $209,067 $114,640 0 $ 96,666 $156,526
Average product
sales $ 58,968 $ 17,505 0 $ 27,265 $ 44,444
Average total
revenue $268,035 $132,145 0 $123,931 $202,020
Average rental and sales revenue decreased from nine months ended
September 30, 1995 compared to the nine months ended September 30, 1996 due to
two different elements of BlowOut's business. The three stores operated
during the nine months ended September 30, 1995 are located in high-end
grocery stores located in Southern California and have been under BlowOut
management since inception. Substantially all of the 112 stores operated
during the nine months ended September 30, 1996 are located in Wal-Mart and
Kmart SuperCenters in mid-size to smaller communities, the majority of which
were acquired by BlowOut. Accordingly, the Company believes that the average
revenue data for the nine months ended September 30, 1996 is more indicative
of the Company's current and future activities than is the average revenue
data for preceding accounting periods.
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. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
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.
Percentage
Change in
Dollar
Amount
From
Three Three
Months Months 1995
Ended Ended to
9/30/96 9/30/95 1996
Statement of Operations Data:
Rental revenue 77.1% 80.7% 58.9%
Product sales 22.9 19.3 67.0
_____ _____ _____
Total revenue 100.0 100.0 60.8
Cost of rental revenue and product 41.6 47.3 55.4
sales
Operating expenses 57.2 66.9 54.2
Selling, general and admin 9.6 15.1 38.0
Loss from operations (8.4)% (29.3)% (36.9)%
Number of stores open at end of period 192 134
Revenue
Revenue for the three months of 1996 increased $4.8 million, or 60.8%, to $7.9
million from $3.1 million for the three months of 1995. The increase resulted
from an increase in the number of stores in operations, from 50 after the E-1
acquisition at June 30, 1995, to 127 after the SCE acquisition at September 1,
1995 to 192 at September 30, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Operating Costs and Expenses
Cost of Sales
Cost of sales increased from $1.5 million, or 47.3% of revenue for the three
months of 1995, to $3.3 million, or 41.6% of revenue, for the three months of
1996. The increase in gross margin on sales resulted from an decrease in
product acquisition costs and efficiencies created by the combination of the
buying departments of the Company, E-1 and SCE.
Operating Expenses
Operating expenses increased from $2.1 million, or 66.9% of revenue, for the
three months of 1995 to $4.5 million, or 57.2% of revenue, for the three
months 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 - Compensation and related expenses
increased from $1.1 million, or 33.9% of revenue, for the three months of 1995
to $2.5 million or 32.1% of revenue for the three months of 1996. The
increase was the result from the continued expansion of Blowout's business
through the opening of video retail stores. The decrease in compensation and
related expenses as a percentage of revenue was primarily due to the
installation of a labor monitoring program to match workforce hours with
demand and minimize overtime.
Occupancy Expense - Occupancy expense increased from $.3 million, or 10.7% of
revenue, for the three months of 1995 to $.9 million, or 11.2% of revenue, for
the three months of 1996. The increase was the result of the continued
expansion of Blowout's business through the acquisition and opening of video
retail stores. 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 when compared to the
original Blowout retail stores.
Depreciation - Depreciation increased from $.14 million, or 4.6% of revenue,
for the three months of 1995, to $.27 million, or 3.4% of revenue, for the
three months of 1996. The increase was the result of the E-1 and SCE
acquisitions. The decrease in depreciation as a percentage of revenue was
primarily due to the increase in same store revenue from prior year and due to
the fixtures for the E-1 and SCE stores not costing as much as the original
Blowout stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $.5 million, or
15.1% of revenue, for the three months of 1995, to $.8 million, or 9.6% of
revenue, for the three months of 1996. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Nonoperating Expenses, Net
Nonoperating expenses, net increased from of $.05 million, or 1.7% of revenue,
for the three months of 1995, to $1.1 million, or 13.5% of revenue, for the
three months of 1996. The increase in nonoperating expenses resulted from the
Company closing 24 stores between July 1996 and September 1996, increased
interest expense, and the expense of costs associated with the spin-off from
Rentrak.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
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.
Percentage
Change in
Dollar
Amount From
Nine Nine
Months Months 1995
Ended Ended to
9/30/96 9/30/95 1996
Statement of Operations Data:
Rental revenue 78.7% 81.1% 390.7%
Product sales 21.3 18.9 468.2
______ ______ ______
Total revenue 100.0 100.0 405.3
Cost of rental revenue and product
sales 44.3 52.9 322.6
Operating expenses 57.3 66.2 337.5
Selling, general and admin 12.5 22.1 184.5
______ ______ ______
Loss from operations (14.1)% (41.2)% (72.0)%
====== ====== ======
Number of stores open at end of period 192 134
=== ===
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Revenue
Revenue for the first nine months of 1996 increased $17.7 million, or 405.3%,
to $22.1 million from $4.4 million for the first nine months of 1995. The
increase resulted from an increase in the number of stores in operations, from
seven at May 1995, to 50 after the E-1 acquisition at June 30, 1995, to 134
after the SCE acquisition at September 30, 1995 to 192 at September 30, 1996.
Operating Costs and Expenses
Cost of Sales
Cost of sales increased from $2.3 million, or 52.9% of revenue for the first
nine months of 1995, to $9.8 million, or 44.3% of revenue, for the first nine
months of 1996. The increase in gross margin on sales resulted from an
decrease in product acquisition costs and efficiencies created by the
combination of the buying departments of the Company, E-1 and SCE.
Operating Expenses
Operating expenses increased from $2.9 million, or 66.2% of revenue, for the
first nine months of 1995 to $12.7 million, or 57.3% of revenue, for the first
nine months 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 - Compensation and related expenses
increased from $1.7 million, or 38.5% of revenue, for the first nine months of
1995 to $7.2 million or 32.8% of revenue for the first nine months of 1996.
The increase was the result from the continued expansion of Blowout's business
through the opening of video retail stores. The decrease in compensation and
related expenses as a percentage of revenue was primarily due to the
installation of a labor monitoring program to match workforce hours with
demand and minimize overtime.
Occupancy Expense - Occupancy expense increased from $.5 million, or 10.5% of
revenue, for the first nine months of 1995 to $2.4 million, or 10.8% of
revenue, for the first nine months of 1996. The increase was the result of
the continued expansion of Blowout's business through the acquisition and
opening of video retail stores. 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
then compared to the original Blowout retail stores.
Depreciation - Depreciation increased from $.3 million, or 5.7% of revenue,
for the first nine months of 1995, to $8 million, or 3.5% of revenue, for the
first nine months of 1996. The increase was the result of the E-1 and SCE
acquisitions. The decrease in depreciation as a percentage of revenue was
primarily due to the increase in same store revenue from prior year and due to
the fixtures for the E-1 and SCE stores not costing as much as the original
Blowout stores.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $1.0 million, or
22.1% of revenue, for the first nine months of 1995, to $2.8 million, or 12.5%
of revenue, for the first nine months of 1996. 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.
Non-operating Expenses, Net
Non-operating expenses, net increased from of $.05 million, or 1.0% of
revenue, for the first nine months of 1995, to $1.2 million, or 5.6% of
revenue, for the first nine months of 1996. The increase in non-operating
expenses resulted from the Company closing 24 stores between July 1996 and
September 1996, increased interest expense, and the expense of costs
associated with the spin-off from Rentrak.
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 nine months ended September 30, 1996, net cash used in
investment activities was $8.1 million, consisting primarily of a $6.0 million
investment in retail inventory and a $2.1 million investment in capital
expenditures. During that period, cash provided by operations was $1.0
million and the Company received $1.1 million of advances from Rentrak, $2.0
million upon issuance of the Notes, and $2.98 million upon issuance of the
BlowOut Common Stock. The $1.1 million advance from Rentrak was repaid in
October 1996. In August, 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 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 30, 1996,
the Company had borrowed approximately $962,700 under the Phoenix Facility.
As of December 18, 1996, the Company has borrowed approximately $940,000 under
the Phoenix Facility.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
On September 12, 1996, CBC entered into an agreement with the Company 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. As of September 30, 1996,
80% of the Orderly Liquidation Value of the Company's inventory was
approximately $4.25 million. Advances under the CBC Line of Credit bear
interest at a floating rate per annum equal to the Bank of America Reference
Rate plus 2.75% (11% as of September 30, and December 18, 1996). The term of
the CBC Line of Credit is three years. 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 September 30, 1996, the
Company borrowed approximately $2.5 million under the CBC Line of Credit. As
of December 18, 1996, the Company borrowed approximately $3.0 million 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 nine months of 1996, the Company opened 59 stores,
primarily in Wal-Mart SuperCenters. An additional eleven stores were opened
through December 18, 1996. The Company does not expect to open any additional
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 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)
Also, during the first nine months of 1996, the Company closed 24 stores
which did not meet certain performance levels (consisting of 23 stores in
Wal-Mart and 1 store in Kmart). In October 1996, the Company closed three
stores which did not meet certain performance levels in Kmart. The Company
has notified Kmart of its intention to close 10 additional underperforming
stores by April 1997.
As a result of the equity investment by CCC, cash from operations and
borrowings, the Company had cash and cash equivalents of $4.0 million at
September 30, 1996 and $1.7 million at November 30, 1996. The Company expects
to meet its short-term liquidity requirements through net cash provided by
operations (including the extension of trade credit), 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. 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 September 30, 1996, the Company had a working capital deficit of $2.7
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.
Statements made in this document that present information that is not
historic, including among other things, anticipated financial performance,
sources and extent of liquidity and capital, business prospects, new products
and markets, and anticipated store openings are "foreword looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements can be identified by the use of foreword-looking terminology
such as "may", "will", "except", "anticipate", "estimate" or "continue" or the
negative thereof or other variations thereon, or comparable terminology.
There are numerous risks and uncertainties that could cause actual results to
differ materially from those in such foreword looking statements. Reference
is made to the Company's Registration Statement on Form 10 as filed with the
Securities and Exchange Commission for a discussion of such risk factors and
uncertainties.
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a Vote of Security Holders
None
Item 5. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date this 18th day of December, 1996
BLOWOUT ENTERTAINMENT, INC.
By: /s/ Karl Wetzel
___________________________________
Name: Karl Wetzel
Title: Chief Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,675,698
<SECURITIES> 330,615
<RECEIVABLES> 112,448
<ALLOWANCES> 0
<INVENTORY> 8,010,400
<CURRENT-ASSETS> 14,711,433
<PP&E> 5,854,849
<DEPRECIATION> 1,768,970
<TOTAL-ASSETS> 24,058,521
<CURRENT-LIABILITIES> 9,400,309
<BONDS> 3,923,267
0
0
<COMMON> 24,336
<OTHER-SE> 10,710,609
<TOTAL-LIABILITY-AND-EQUITY> 24,058,521
<SALES> 22,085,141
<TOTAL-REVENUES> 22,085,141
<CGS> 9,774,161
<TOTAL-COSTS> 12,660,906
<OTHER-EXPENSES> 2,752,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344,683
<INCOME-PRETAX> (4,333,548)
<INCOME-TAX> 12,299
<INCOME-CONTINUING> (4,345,847)
<DISCONTINUED> 0
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<NET-INCOME> (4,345,847)
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