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 June 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 July 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
June 30, 1997 (Unaudited) and December 31, 1996 1
Consolidated Statement of Operations
Three months ended June 30, 1997 (Unaudited)
and June 30, 1996 (Unaudited) 2
Consolidated Statement of Operations
Six months ended June 30, 1997 (Unaudited)
and June 30, 1996 (Unaudited) 3
Consolidated Statement of Cash Flows
Six months ended June 30, 1997 (Unaudited)
and June 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 - 11
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 12
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,070,000 $ 1,379,018
Miscellaneous receivables 45,239 174,105
Prepaid expenses 229,954 118,605
Merchandise videocassette inventory 1,980,121 2,139,259
Other current assets 16,546 13,977
----------- -----------
Total current assets 3,341,860 3,824,964
Rental videocassette inventory, net 9,059,105 7,793,416
Equipment and leasehold improvements, net 4,055,515 4,494,933
Other assets 46,373 -
Intangible assets, net 4,224,055 4,459,820
----------- -----------
Total assets $20,726,908 $20,573,133
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,145,253 $ 2,227,153
Accounts payable 2,597,953 4,342,395
Accrued liabilities 1,188,571 998,254
Accrued payroll 505,877 485,506
Current portion of notes payable 842,631 -
Current portion of long-term debt 520,847 414,451
----------- -----------
Total current liabilities 8,801,132 8,467,759
Notes payable 4,241,656 3,263,575
Long-term debt 1,179,192 1,021,940
----------- -----------
Total liabilities 14,221,980 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 (15,467,272) (14,152,341)
----------- -----------
Total stockholders' equity 6,504,928 7,819,859
----------- -----------
Total liabilities and stockholders'
equity $20,726,908 $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 June 30,
---------------------------
1997 1996
--------- -----------
<S> <C> <C>
REVENUE:
Rental revenue $5,932,666 $ 5,738,198
Product sales 1,730,619 1,531,091
---------- -----------
Total revenue 7,663,285 7,269,289
---------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 2,778,371 3,133,323
Operating expenses 4,276,183 4,220,475
Selling, general and administrative 845,166 836,155
---------- -----------
Total operating costs and expenses 7,899,720 8,189,953
---------- -----------
LOSS FROM OPERATIONS ( 236,435) (920,664)
---------- -----------
NONOPERATING (INCOME) EXPENSE:
Interest expense 259,108 112,232
Other, net ( 38,603) (19,949)
---------- -----------
Total nonoperating expense 220,505 92,283
---------- -----------
LOSS BEFORE INCOME TAXES ( 456,940) (1,012,947)
INCOME TAX PROVISION 8,707 -
---------- -----------
NET LOSS $( 465,647) $(1,012,947)
========== ===========
NET LOSS PER SHARE $ (0.19) $ (0.55)
========== ===========
WEIGHTED AVERAGE COMMON SHARES 2,433,330 1,826,838
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUE:
Rental revenue $11,694,914 $11,268,715
Product sales 3,567,027 2,882,166
----------- -----------
Total revenue 15,261,941 14,150,881
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 5,723,871 6,473,872
Operating expenses 8,765,302 8,118,661
Selling, general and administrative 1,656,275 1,994,338
----------- -----------
Total operating costs and expenses 16,145,448 16,586,871
----------- -----------
LOSS FROM OPERATIONS ( 883,507) (2,435,990)
----------- -----------
NONOPERATING (INCOME) EXPENSE:
Interest expense 473,186 211,684
Other, net (50,469) ( 53,477)
----------- -----------
Total nonoperating expense 422,717 158,207
----------- -----------
LOSS BEFORE INCOME TAXES (1,306,224) (2,594,197)
INCOME TAX PROVISION 8,707 12,299
----------- -----------
NET LOSS $(1,314,931) $(2,606,496)
=========== ===========
NET LOSS PER SHARE $ (0.54) $ (1.43)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 2,433,330 1,826,838
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months Ended June 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,314,931) $(2,606,496)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Gain on disposal of assets (1,233) -
Amortization of videocassette
rental inventory 2,152,073 2,367,621
Depreciation 651,308 531,459
Amortization of intangible and other
assets 235,765 271,268
Changes in current assets and
liabilities:
Receivables 128,866 176,716
Merchandise videocassette inventory 159,138 (1,050,277)
Prepaids and other assets (113,918) (229,681)
Accounts payable (1,744,442) 3,408,230
Accrued liabilities 190,317 120,770
Accrued payroll 20,371 277,787
----------- -----------
Net cash provided by operating activities 363,314 3,267,397
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes, net (3,417,762) (4,172,827)
Capital expenditures, net (210,657) (1,688,413)
Other assets (46,373) (247,426)
----------- -----------
Net cash used in investing activities (3,674,792) (6,108,666)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net 918,100 -
Additional borrowings 2,476,695 2,000,000
Repayment of long-term debt (392,335) (302,089)
----------- -----------
Net cash provided by financing
activities 3,002,460 1,697,911
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (309,018) (1,143,358)
CASH AND CASH EQUIVALENTS, beginning of period 1,379,018 2,606,838
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,070,000 $ 1,463,480
=========== ===========
</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
six month periods ended June 30, 1997 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 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 six month
periods ended June 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 June 30, 1996 consolidated financial statements have
been reclassified to be consistent with the June 30, 1997 presentation. The
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,
Inc., 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 SuperCenters
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 June 30, 1997, the Company continued to expand the number
of stores it operates, and as of June 30, 1997, the Company operated 200
retail video stores, including 159 stores located in Wal-Mart and Wal-Mart
SuperCenters, 29 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 approximately 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 approximately 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, to a lesser extent, ancillary items such as blank tapes
and candy.
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 payments are expensed when
incurred.
- 6 -
<PAGE>
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 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 June 30, Amount From
1997 1996 1996 to 1997
----- ----- ------------
<S> <C> <C> <C>
Rental revenue 77.4% 78.9% 3.4%
Product sales 22.6% 21.1% 13.0%
Total revenue 100.0% 100.0% 5.4%
Cost of rental revenue and
product sales 36.3% 43.1% (11.3%)
Operating expenses 55.8% 58.1% 1.3%
Selling, general and administrative 11.0% 11.5% 1.1%
Net loss (6.1%) (13.9%) (54.0%)
Number of stores open at end
of period 200 202
</TABLE>
Revenue
Revenue for the three months ended June 30, 1997 increased $393,996, or 5.4%,
to $7,663,285 from $7,219,289 for the comparable three months of 1996. The
number of stores in operation decreased from 202 at June 30, 1996 to 200 at
June 30, 1997 as the net result of the opening of 34 stores and the closing
of 36 underperforming stores during this period. The increase in sales
resulted from better revenue performance achieved by the newly opened stores
as compared to the stores that were closed during the period.
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 June 30, 1996 and 1997.
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended December 31, Ended June 30,
1996 1995 1994 1997 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
No. of stores open
12 months 130 3 4 164 164
Average rental revenue $129,440 $206,387 $114,640 $29,768 $31,861
Average product sales $ 39,442 $ 61,648 $ 17,505 $ 9,504 $ 8,342
Average total revenue $168,882 $268,035 $132,145 $39,272 $40,203
The decrease in average rental revenue for the three month period ended June
30, 1997 compared to the three month period ended June 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 adversely affected the
video rental industry as a whole. Although same store sales were down 2% in
the second quarter as a whole, comparative sales for the months of May and
June were up 3% reflecting improvements in sales for both rental and sell-
through product. Average product sales for the three-month period ended June
30, 1997 increased from the three-month period ended June 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.
- 7 -
<PAGE>
Operating Costs and Expenses
Cost of Sales
Cost of sales decreased from $3,133,323, or 43.1% of revenue for the three
months ended June 30, 1996, to $2,778,371, or 36.3% of revenue, for the three
months ended June 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.
Operating Expenses
Operating expenses decreased as a percentage of revenue from 58.1%
($4,220,475) for the three months ended June 30, 1996 to 55.8% ($4,276,183)
for the three months ended June 30, 1997. Although 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, 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
Selling, general and administrative expenses increased only slightly in
absolute dollars from $836,155 for the three months ended June 30, 1996, to
$845,166 for the three months ended June 30, 1997. The significant costs
associated with being a public company offset cost savings resulting from
management's successful focus on operational efficiency. The decrease in
selling, general and administrative expense as a percentage of revenues from
11.5% for the 1996 period to 11.0% for the 1997 period was a result of SG&A
costs being spread over a higher revenue base.
Nonoperating Expenses
Nonoperating expenses increased from $92,283, or 1.3% of revenue, for the
three months ended June 30, 1996, to $220,505, or 2.9% of revenue, for the
three months ended June 30, 1997. The increase is attributable to the
increase in interest bearing debt incurred by the Company to finance its
growth and operations.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 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
Six Months Ended June 30, Amount From
1997 1996 1996 to 1997
-------- ------- ------------
<S> <C> <C> <C>
Rental revenue 76.6% 79.6% 3.8%
Product sales 23.4% 20.4% 23.8%
Total revenue 100.0% 100.0% 7.9%
Cost of rental revenue and
product sales 37.5% 45.7% (11.6%)
Operating expenses 57.4% 57.4% 8.0%
Selling, general and administrative 10.9% 14.1% (17.0%)
Net loss (8.6%) (18.4%) (49.6%)
Number of stores open at end
of period 200 202
</TABLE>
- 8 -
<PAGE>
Revenue
Revenue for the six months ended June 30, 1997 increased $1,111,060, or 7.9%,
to $15,261,941 from $14,150,881 for the comparable six months of 1996. As
noted in the three month period discussion above, although the number of
stores in operation decreased from 202 at June 30, 1996 to 200 at June 30,
1997, total revenues increased as the 36 underperforming stores closed during
this period were replaced by 34 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 six month periods
ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended December 31, Ended June 30,
1996 1995 1994 1997 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
No. of stores open
12 months 130 3 4 164 164
Average rental revenue $129,440 $206,387 $114,640 $60,239 $67,219
Average product sales $ 39,442 $ 61,648 $ 17,505 $19,232 $17,600
Average total revenue $168,882 $268,035 $132,145 $79,471 $84,818
</TABLE>
Average rental revenue for the six month period ended June 30, 1997 decreased
from the six month period ended June 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 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. Although same
store sales were down 5% in the second quarter, comparative sales for the
months of May and June were up 3% reflecting improvements in sales for both
rental and sell-through product. Average product sales for the six-month
period ended June 30, 1997 increased from the six-month period ended June 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 $6,473,872, or 45.7% of revenue for the six
months of 1996, to $5,723,871, or 37.5% of revenue, for the six 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.
Operating Expenses
Operating expenses increased in absolute dollars from $8,118,661, or 57.4% of
revenue, for the six months ended June 30, 1996 to $8,765,302, or 57.4% of
revenue, for the six months ended June 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, 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 $1,994,338, or 14.1% of revenue, for
the six months ended June 30, 1996, to $1,656,275, or 10.9% of revenue, for
the six months ended June 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.
- 9 -
<PAGE>
Nonoperating Expenses, Net
Nonoperating expenses, net increased from $158,207, or 1.1% of revenue, for
the six months ended June 30, 1996, to $422,717, or 2.8% of revenue, for the
six months ended June 30, 1997. The increase is attributable to the increase
in interest bearing 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.
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 July 31, 1997, the Company had $1,450,311 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 June 30, 1997, 80% of
the Orderly Liquidation Value of the Company's inventory was approximately
$3,896,710. 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% (11.25% as of June 30, 1997). 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 July 31,
1997, the Company had $2,391,592 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 is 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.
- 10 -
<PAGE>
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.
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 $1.8 million will
become due and payable in twelve equal, interest-free, monthly installments.
During the first six months of 1997, the Company opened 9 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 six months of 1997, the Company closed 9 stores that
did not meet certain performance levels (consisting of 2 stores in Wal-Mart
and 7 stores in Kmart). The Company has notified Kmart of its intention to
close 5 additional underperforming stores by October 1997.
During the six months ended June 30, 1997, cash and cash equivalents
decreased by $309,018 primarily due to net losses incurred during the period,
the purchase of $3,417,763 in videocassette inventory and a $210,655
investment in capital items which was partially offset by a deferral of
Rentrak payables and additional borrowings under the CBC line of credit of
$918,099. The Company had cash and cash equivalents of $1,070,000 at June
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 June 30, 1997, the Company had a working capital deficit of $5,459,272.
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.
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.
- 11 -
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 1997, the Company held its 1996 Annual Meeting of Stockholders (the
"Annual Meeting") during which Seth A. Reames was elected to an initial term
as director of the Company (1,721,455 votes in favor, 434,901 votes
withheld). Votes were also cast, and proposals approved, for (i) the
ratification of the reappointment of Price Waterhouse, LLP as the Company's
independent auditors for the 1997 fiscal year (2,294,654 votes in favor,
1,144 votes against and 291,459 abstentions) and (ii) the approval of the
Company's Employee Stock Purchase Plan (1,202,077 votes in favor, 107,970
votes against, 294,329 abstentions, and 551,800 broker non-votes).
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
- 12 -
<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.
August 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 AND 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,070,000
<SECURITIES> 0
<RECEIVABLES> 45,239
<ALLOWANCES> 0
<INVENTORY> 11,039,226
<CURRENT-ASSETS> 3,341,860
<PP&E> 6,063,807
<DEPRECIATION> 2,008,292
<TOTAL-ASSETS> 20,726,908
<CURRENT-LIABILITIES> 8,801,132
<BONDS> 5,420,848
0
0
<COMMON> 24,336
<OTHER-SE> 6,480,592
<TOTAL-LIABILITY-AND-EQUITY> 20,726,908
<SALES> 15,261,941
<TOTAL-REVENUES> 15,261,941
<CGS> 5,723,871
<TOTAL-COSTS> 16,145,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 473,186
<INCOME-PRETAX> (1,306,224)
<INCOME-TAX> 8,707
<INCOME-CONTINUING> (1,314,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,314,931)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
