FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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)
DELAWARE 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 October 31, 1997, the Registrant had 2,433,330 shares of Common Stock
($.01 par value) outstanding.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheet
September 30, 1997 (Unaudited) and December 31, 1996 1
Consolidated Statement of Operations
Three months ended September 30, 1997 (Unaudited)
and September 30, 1996 (Unaudited) 2
Consolidated Statement of Operations
Nine months ended September 30, 1997 (Unaudited)
and September 30, 1996 (Unaudited) 3
Consolidated Statement of Cash Flows
Nine months ended September 30, 1997 (Unaudited)
and September 30, 1996 (Unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION> September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,101,620 $ 1,379,018
Miscellaneous receivables 10,893 174,105
Prepaid expenses 135,260 118,605
Merchandise videocassette inventory 2,015,297 2,139,259
Other current assets 24,588 13,977
----------- -----------
Total current assets 3,287,658 3,824,964
Rental videocassette inventory, net 9,401,594 7,793,416
Equipment and leasehold improvements, net 3,803,999 4,494,933
Other assets 77,484 -
Intangible assets, net 4,106,173 4,459,820
----------- -----------
Total assets $20,676,908 $20,573,133
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,273,290 $ 2,227,153
Accounts payable 2,679,384 4,342,395
Accrued liabilities 1,287,527 998,254
Accrued payroll 513,563 485,506
Current portion of notes payable 1,608,129 -
Current portion of long-term debt 506,520 414,451
----------- -----------
Total current liabilities 9,868,413 8,467,759
Notes payable 4,002,793 3,263,575
Long-term debt 1,137,883 1,021,940
----------- -----------
Total liabilities 15,009,089 12,753,274
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per
share;1,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, par value $.01 per share;
10,000,000 shares authorized;
2,433,330 issued and outstanding 24,336 24,336
Additional paid-in capital 21,947,864 21,947,864
Accumulated deficit (16,304,381) (14,152,341)
----------- -----------
Total stockholders' equity 5,667,819 7,819,859
----------- -----------
Total liabilities and stockholders'
equity $20,676,908 $20,573,133
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUE:
Rental revenue $5,993,482 $6,116,392
Product sales 1,766,610 1,817,868
---------- -----------
Total revenue 7,760,092 7,934,260
---------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 3,066,678 3,300,289
Operating expenses 4,493,006 4,542,245
Selling, general and administrative 777,155 757,971
---------- -----------
Total operating costs and expenses 8,336,839 8,600,505
---------- -----------
LOSS FROM OPERATIONS (576,747) (666,245)
---------- -----------
NONOPERATING (INCOME) EXPENSE:
Interest expense 234,648 132,999
Other, net 25,008 940,107
---------- -----------
Total nonoperating expense 259,656 1,073,106
---------- -----------
LOSS BEFORE INCOME TAXES (836,403) (1,739,351)
INCOME TAX PROVISION 706 -
---------- -----------
NET LOSS $ (837,109) $(1,739,351)
========== ===========
NET LOSS PER SHARE $ (0.34) $ (0.86)
========== ===========
WEIGHTED AVERAGE COMMON SHARES 2,433,330 2,024,679
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUE:
Rental revenue $17,688,396 $17,386,228
Product sales 5,333,637 4,698,913
----------- -----------
Total revenue 23,022,033 22,085,141
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 8,790,549 9,774,161
Operating expenses 13,258,308 12,660,906
Selling, general and administrative 2,433,430 2,752,309
----------- -----------
Total operating costs and expenses 24,482,287 25,187,376
----------- -----------
LOSS FROM OPERATIONS (1,460,254) (3,102,235)
----------- -----------
NONOPERATING (INCOME) EXPENSE:
Interest expense 707,834 337,870
Other, net (25,461) 893,443
----------- -----------
Total nonoperating expense 682,373 1,231,313
----------- -----------
LOSS BEFORE INCOME TAXES (2,142,627) (4,333,548)
INCOME TAX PROVISION 9,413 12,299
----------- -----------
NET LOSS $(2,152,040) $(4,345,847)
=========== ===========
NET LOSS PER SHARE $ (0.88) $ (2.30)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 2,433,330 1,893,266
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,152,040) $(4,345,847)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
(Gain) Loss on disposal of assets (1,233) 124,943
Amortization of videocassette
rental inventory 3,460,863 3,758,480
Depreciation 834,354 839,523
Amortization of intangible and
other assets 353,647 400,817
Changes in current assets and
liabilities:
Receivables 163,212 229,461
Merchandise videocassette inventory 123,962 (1,366,586)
Prepaids and other current assets (27,266) 13,636
Accounts payable (1,663,011) 1,473,507
Accrued liabilities 289,273 (429,599)
Accrued payroll 28,057 272,542
----------- ----------
Net cash provided by operating activities 1,409,818 970,877
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes, net (5,069,041) (6,053,788)
Capital expenditures, net (142,187) (2,062,923)
Other assets (77,484) -
----------- ----------
Net cash used in investing activities (5,288,712) (8,116,711)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 2,980,000
Line of credit, net 1,046,137 -
Additional borrowings 3,000,697 5,565,309
Repayment of long-term debt (445,338) -
----------- ----------
Net cash provided by financing
activities 3,601,496 8,545,309
----------- ----------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (277,398) 1,399,475
CASH AND EQUIVALENTS, beginning of period 1,379,018 2,606,838
----------- ----------
CASH AND EQUIVALENTS, end of period $ 1,101,620 $4,006,313
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: Basis of Presentation
The accompanying consolidated financial statements of BlowOut Entertainment,
Inc. and subsidiaries ("BlowOut" or the "Company") for the three-month and
nine-month periods ended September 30, 1997 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 annual report on Form 10-K for the
year ended December 31, 1996 filed with the Securities and Exchange Commission.
The results of operations for the three and nine-month periods ended September
30, 1997 are not necessarily indicative of the results expected for the full
year.
NOTE 2: Impact of Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards number 128, "Earnings Per Share" and
Statement of Financials Standards number 129, "Disclosure of Information
About Capital Structure", which are effective for fiscal years ending after
December 31, 1997. In June 1997, FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of and
Enterprise and Related Information" which are effective for fiscal years
beginning after December 15, 1997. The Company believes the implementation
of these statements will not have a material effect on its results of
operations or financial statement disclosures.
NOTE 3: Reclassifications
Certain amounts in the September 30, 1996 and December 31, 1996 consolidated
financial statements have been reclassified to be consistent with the September
30, 1997 presentation. These reclassifications had no effect on previously
reported net loss or stockholders' equity.
- 5 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this report.
General
The Company operates retail "store within a store" video outlets located in
large mass merchant supercenters and grocery chain stores throughout the
United States. The Company was formed in 1992 as a subsidiary of Rentrak
Corporation, and opened its first store within a store in January 1993. At
year-end 1993 and 1994, 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) the acquisition by Rentrak 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) the acquisition by Rentrak 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, Ralphs and Food 4 Less stores. During
1996, and through September 30, 1997, the Company continued to open stores, and
as of September 30, 1997, the Company operated 188 retail video stores,
including 150 stores located in Wal-Mart and Wal-Mart SuperCenters, 26 stores
located in Super Kmart Centers and 12 stores located in Ralphs and Food 4 Less
grocery stores.
As a result of the acquisitions of E-1 and the SCE business, the Company
recorded approximately $5.1 million in goodwill which is being amortized over
10 to 15 years resulting in annual amortization of approximately $.5 million.
Prior to November 25, 1996, Rentrak owned 1,698,942 shares (approximately 70%)
of the issued and outstanding common stock, par value $.01 per share, of the
Company (the "Common Stock"). On November 25, 1996, pursuant to the terms of a
Distribution Agreement between Rentrak and the Company, Rentrak distributed
1,457,343 shares of Common Stock to the holders of Rentrak common stock in the
form of a special dividend.
The Company's revenue consists of rental revenue and product sales. Rental
revenue includes rental of prerecorded videocassettes and video games.
Product sales are derived from the sale of new and previously viewed
videocassettes and video games and, to a lesser extent, ancillary items such as
blank tapes and candy.
- 6 -
<PAGE>
The Company acquires videocassettes using two types of supplier arrangements:
outright purchases of tapes from distributors, and revenue sharing under the
Rentrak Pay Per Transaction ("PPT") System (see below). Videocassettes
purchased for basic stock rental are stated at cost and amortized over 36
months with a provision for a $6 salvage value. New release videocassettes
purchased are amortized using methods reflecting the anticipated revenue
stream to a $6 salvage value.
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 videocassettes released by certain studios. The
Company pays a handling fee ($8 to $10) for each videocassette. 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. 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 videocassette. The
handling fee per videocassette is amortized on a straight-line basis over 36
months to a $6 salvage value. Revenue sharing costs are expensed when incurred.
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
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 Dollar
Three Months Ended September 30, Amount From
1997 1996 1996 to 1997
----- ----- ------------
<S> <C> <C> <C>
Rental revenue 77.2% 77.1% (2.0%)
Product sales 22.8% 22.9% (2.8%)
Total revenue 100.0% 100.0% (2.2%)
Cost of rental revenue and
product sales 39.5% 41.6% (7.1%)
Operating expenses 57.9% 57.2% (1.1%)
Selling, general and administrative 10.0% 9.6% 2.5%
Nonoperating expenses 3.3% 13.5% (75.8%)
Net loss (10.8%) (21.9%) (51.9%)
Number of stores open at end
of period 188 192
</TABLE>
- 7 -
<PAGE>
Revenue
Revenue for the three months ended September 30, 1997 decreased $174,168, or
2.2%, to $7,760,092 from $7,934,260 for the comparable three months of 1996.
The number of stores in operation decreased from 192 at September 30, 1996 to
188 at September 30, 1997 as the net result of the opening of 22 stores and the
closing of 26 underperforming stores during this period. The better revenue
performance achieved by the newly opened stores as compared to the stores that
were closed during the period was not sufficient to overcome the relatively
weak videocassette release schedule experienced during the quarter.
The following table sets forth the number of stores open for at least 12
months as of the end of the period and average rental and product sale
revenue for such stores for the last three years and the three-month periods
ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended December 31, Ended September 30,
1996 1995 1994 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
No. of stores open
12 months 130 3 4 159 159
Average rental revenue $129,440 $206,387 $114,640 $ 32,341 $ 33,113
Average product sales $ 39,442 $ 61,648 $ 17,505 $ 9,492 $ 9,946
Average total revenue $168,882 $268,035 $132,145 $ 41,833 $ 43,059
The decrease in average rental revenue for the three-month period ended
September 30, 1997 compared to the three-month period ended September 30, 1996
is attributed to a video release schedule that featured fewer popular movie
titles in the current year period compared to the prior year, which is believed
to have adversely affected the video rental industry as a whole. Average
product sales for the three-month period ended September 30, 1997 decreased
slightly from the three-month period ended September 30, 1996 reflecting the
impact of decreased rental activity on product sales.
Operating Costs and Expenses
Cost of Sales
Cost of sales decreased from $3,300,289, or 41.6% of revenue for the three
months ended September 30, 1996, to $3,066,678, or 39.5% of revenue, for the
three months ended September 30, 1997. The decrease in cost of sales in both
absolute dollars and percentage terms resulted from a decrease in product
acquisition costs and efficiencies in buying created by the combination of the
buying departments of the Company, E-1 and SCE during 1996.
- 8 -
<PAGE>
Operating Expenses
Operating expenses increased slightly as a percentage of revenue from 57.2% for
the three months ended September 30, 1996, to 57.9% for the three months ended
September 30, 1997. Although sales levels were down slightly in the 1997
period compared to the 1996 period, costs associated with the closing stores in
the 1997 period resulted in operating expenses that decreased at a slower rate
than sales. The primary components of operating expenses are employee
compensation, occupancy, fixed asset depreciation, supplies and communications.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased only slightly in
absolute dollars from $757,971 for the three months ended September 30, 1996,
to $777,155 for the three months ended September 30, 1997. The significant
costs associated with being a public company offset cost savings resulting from
management's successful focus on operational efficiency. The slight increase
in selling, general and administrative expense as a percentage of revenues from
9.6% for the 1996 period to 10.0% for the 1997 period was a result of SG&A
costs being spread over a slightly lower revenue base.
Nonoperating Expenses
Nonoperating expenses decreased from $1,073,106, or 13.5% of revenue, for the
three months ended September 30, 1996, to $259,656, or 3.3% of revenue, for the
three months ended September 30, 1997. The 1996 period was unfavorably
impacted by charges of approximately $950,000 related to the spin-off from
Rentrak. Taking this into account, nonoperating expenses actually increased
approximately $137,000, which is attributable to the increase in interest
bearing debt incurred by the Company to finance its growth and operations.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
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>
<TABLE>
<CAPTION>
Percentage
Change in Dollar
Nine Months Ended September 30, Amount From
1997 1996 1996 to 1997
-------- ------- ------------
<S> <C> <C> <C>
Rental revenue 76.8% 78.7% 1.7%
Product sales 23.2% 21.3% 13.5%
Total revenue 100.0% 100.0% 4.2%
Cost of rental revenue and
product sales 38.2% 44.3% (10.1%)
Operating expenses 57.6% 57.3% 4.7%
Selling, general and administrative 10.6% 12.5% (11.6%)
Nonoperating expenses 3.0% 5.6% (44.6%)
Net loss (9.3%) (19.7%) (50.5%)
Number of stores open at end
of period 188 192
</TABLE>
- 9 -
<PAGE>
Revenue
Revenue for the nine months ended September 30, 1997 increased $936,892, or
4.2%, to $23,022,033 from $22,085,141 for the comparable nine months of 1996.
Although the number of stores in operation decreased from 192 at September 30,
1996 to 188 at September 30, 1997, total revenues increased as the 26
underperforming stores closed during this period were replaced by 22 newly
opened stores with higher average revenues.
The following table sets forth the number of stores open for at least 12
months as of the end of the period and average rental and product sale
revenue for such stores for the last three years and the nine-month periods
ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended December 31, Ended September 30,
1996 1995 1994 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
No. of stores open
12 months 130 3 4 159 159
Average rental revenue $129,440 $206,387 $114,640 $ 95,389 $102,313
Average product sales $ 39,442 $ 61,648 $ 17,505 $ 28,757 $ 27,757
Average total revenue $168,882 $268,035 $132,145 $124,146 $130,070
</TABLE>
Average rental revenue for the nine-month period ended September 30, 1997
decreased from the nine-month period ended September 30, 1996 as a result of a
video release schedule that featured fewer popular movie titles in the current
year period compared to the prior year, which is believed to have adversely
affected the video rental industry as a whole, as well as unseasonably warm
weather for the first three months of 1997 in regions of the country where the
Company operates. Average product sales for the nine-month period ended
September 30, 1997 increased from the nine-month period ended September 30,
1996. The Company has pursued a more aggressive strategy in the marketing of
sell-through videocassette inventory to take advantage of the high traffic
volume in most of its locations and this emphasis has paid off in higher sales
of videocassettes.
Operating Costs and Expenses
Cost of Sales
Cost of sales decreased from $9,774,161, or 44.3% of revenue for the nine
months of 1996, to $8,790,549, or 38.2% of revenue, for the nine months of
1997. The decrease in cost of sales in both absolute dollars and percentage
terms resulted from a decrease in product acquisition costs and efficiencies
in buying created by the combination of the buying departments of the
Company, E-1 and SCE during 1996.
- 10 -
<PAGE>
Operating Expenses
Operating expenses increased in absolute dollars from $12,660,906, or 57.3% of
revenue, for the nine months ended September 30, 1996 to $13,258,308, or 57.6%
of revenue, for the nine months ended September 30, 1997. The higher sales
levels achieved in the 1997 period resulted in higher occupancy costs since the
rent paid for each location is based on a percentage of revenues. In addition,
costs associated with the closing of stores in the 1997 were higher than in the
comparable 1996 period. Recurring non-occupancy operating expenses on a per
store basis were down in the 1997 period due to greater efficiencies in
operation. The primary components of operating expenses are employee
compensation, occupancy, fixed asset depreciation, supplies and communications.
Selling, General and Administrative Expenses
Despite significant costs associated with being a public company incurred in
the 1997 period but not in the 1996 period, selling, general and
administrative expenses decreased from $2,752,309, or 12.5% of revenue, for
the nine months ended September 30, 1996, to $2,433,430, or 10.6% of revenue,
for the nine months ended September 30, 1997. The decrease was primarily the
result of efficiencies gained by combining the accounting and administrative
departments of the Company, E-1 and SCE in 1996.
Nonoperating Expenses, Net
Nonoperating expenses, net decreased from $1,231,313, or 5.6% of revenue, for
the nine months ended September 30, 1996, to $682,373, or 3.0% of revenue, for
the nine months ended September 30, 1997. The decrease is attributable to the
lack in the 1997 period of approximately $950,000 in expenses incurred in the
1996 period related to the spin-off from Rentrak, partially offset by an
increase in interest costs related to increased debt incurred by the Company to
finance its growth and operations.
Liquidity and Capital Resources
The Company's principal capital needs are for the opening of new stores. To
date, the Company has funded its expansion primarily through cash from
operations, advances from Rentrak, and, as more fully described below,
borrowings from and sales of stock to Directors, trade credit from suppliers
and financing arrangements with asset based lenders.
In March and April 1996, the Company sold $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and Culture Convenience Club,
Ltd. ("CCC"), a Japanese corporation of which Mr. Muneaki Masuda is Chairman
(the "Notes"). Messrs. LeVine and Masuda are Directors of the Company. On
August 30, 1996, each of Mr. LeVine and CCC converted their Notes into
121,789 shares of BlowOut Common Stock. Also 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.
- 11 -
<PAGE>
In August 1996, Phoenix Leasing, Inc. ("Phoenix") agreed to provide asset based
financing in an aggregate principal amount of $2.0 million. Amounts
outstanding under the Phoenix facility bear interest at a fixed rate per annum
equal to 14.525% and are payable in monthly principal and interest
installments over a five-year term. The Phoenix facility may be used to
finance the construction and opening of (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 October 31, 1997, the Company had $1,387,181 outstanding under
the Phoenix facility.
On September 12, 1996, Coast Business Credit ("CBC") entered into an
agreement with the Company to provide 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 draw only up to 80%
of the Orderly Liquidation Value (as defined by the CBC Line of Credit) of
eligible new and used videocassette inventory. As of October 31, 1997, 80% of
the Orderly Liquidation Value of the Company's inventory was approximately
$4,008,546. 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%. 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 videocassette inventory at specified amounts.
See "Rentrak Guarantee." As of October 31, 1997, the Company had $2,835,877
outstanding under the CBC Line of Credit.
On July 22, 1996, the Company entered into an agreement with Star Video to
provide the Company with videocassettes 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 $240,975 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 became obligated to pay Star Video
$120,487 on each of May 27, 1997 and 1998. Under the Star Video Agreement,
Star Video became the Company's exclusive supplier of new videocassettes 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, and (ii) the Company being
current in its payments to Star Video under the Star Video Agreement at such
time.
- 12 -
<PAGE>
During the first quarter of 1997 the Company entered into an agreement with
Rentrak whereby payables resulting from the Company's use of the Rentrak PPT
system during the first six months of 1997 are being deferred until January
1998 at which time such amounts totaling approximately $2.1 million will
become due and payable in twelve equal, interest-free, monthly installments.
During the first nine months of 1997, the Company opened 11 stores, primarily
in Wal-Mart SuperCenters. The Company does not expect to open a significant
number of additional stores during the remainder of 1997. The Company is aware
of one other retailer, Blockbuster, which operates store within a store video
outlets in Wal-Mart stores.
Also, during the first nine months of 1997, the Company closed 23 stores that
did not meet certain performance levels (consisting of 13 stores in Wal-Mart
and 10 stores in Kmart). Since September 30, 1997, the Company has closed an
additional 5 Kmart stores that did not meet performance levels. In addition,
the Company has notified Kmart of its intention to close 7 additional
underperforming stores by March 1998.
During the nine months ended September 30, 1997, cash and cash equivalents
decreased by $277,398 due to net losses incurred during the period, the
purchase of $5,069,041 in videocassette inventory and a $142,187 net investment
in capital items which was partially offset by a deferral of Rentrak payables
and additional borrowings under the CBC line of credit totaling $3,601,496.
The Company had cash and cash equivalents of $1,101,620 at September 30, 1997.
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 will be sufficient to meet its operating needs at least through February
1998. There can be no assurance that funds will be available in sufficient
amounts to finance the acquisition or opening of additional video outlets to
sustain the Company's growth or that funds will be available to satisfy the
Company's liquidity needs beyond February 1998.
At September 30, 1997, the Company had a working capital deficit of $6,580,755.
Videocassette rental inventories are treated as noncurrent assets under
generally accepted accounting principles because they are not assets that 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 videocassette rental inventories, however, is
reported as a current liability until paid and, accordingly, is 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. The Company expects to operate with a working capital deficit as
it expands its store base.
- 13 -
<PAGE>
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 "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "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 forward-looking statements. Reference
is made to the Company's Registration Statement on Form 10 and the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission for a discussion of such risk factors and uncertainties.
- 14 -
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
- 15 -
<PAGE>
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.
BLOWOUT ENTERTAINMENT, INC.
November 13, 1997
By: /s/Thomas D. Berkompas
------------------------------------
Thomas D. Berkompas
Vice President, Chief Accounting and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES 1 - 3 OF THE COMPANY'S FORM
10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,101,620
<SECURITIES> 0
<RECEIVABLES> 10,893
<ALLOWANCES> 0
<INVENTORY> 11,416,891
<CURRENT-ASSETS> 3,287,658
<PP&E> 6,062,350
<DEPRECIATION> 2,258,351
<TOTAL-ASSETS> 20,676,908
<CURRENT-LIABILITIES> 9,868,413
<BONDS> 5,140,676
0
0
<COMMON> 24,336
<OTHER-SE> 5,734,233
<TOTAL-LIABILITY-AND-EQUITY> 20,676,908
<SALES> 23,022,033
<TOTAL-REVENUES> 23,022,033
<CGS> 8,790,549
<TOTAL-COSTS> 24,482,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 707,834
<INCOME-PRETAX> (2,142,627)
<INCOME-TAX> 9,413
<INCOME-CONTINUING> (2,152,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,152,040)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
