THIS LETTER AND THE FORM 10-K COMPRISE THE ANNUAL REPORT TO
SHAREHOLDERS FOR 1996.
March 31, 1997
Dear Stockholders,
It is a true honor to present to you this inaugural annual report
to the stockholders of BlowOut Entertainment, Inc. Exciting,
best describes fiscal year 1996! We began the year as a group of
wholly and partially owned subsidiaries of Rentrak Corporation
featuring an eclectic collection of 157 videocassette rental and
sales stores having only one thing in common - a commitment to
the store-within-a-store concept. Through a series of mergers,
culling of weaker stores, adding 70 new stores, and a spin off
from Rentrak, we ended the year as an independent public company
operating a chain of 200 stores in 28 States. In fact, according
to one leading video trade publication, we are now the tenth
largest videocassette retailer in the country!
Rapid growth and independence did not come cheaply. Substantial
sums of capital were required to support our growth and operating
expenses which, including the cost of store acquisitions,
exceeded our gross margin. In addition, extra selling, general
and administrative expenses attributed to duplicative functions
for the first half of the year, interest expense on our borrowed
funds, the amortization of goodwill, and the cost of the spin off
resulted in a loss of $7,255,000 or $3.60 per share for the
fiscal year. Fortunately, our capital needs were met through new
commercial credit lines, capital infusions from two of our
directors, and trade credit from Rentrak. These capital sources
supplementing operating revenue should carry our company into
fiscal 1998.
During the second half of 1996, we succeeded in centralizing our
administrative, buying, store development and marketing functions
into our headquarters office. Previously, all of these functions
were carried out by as many as four separate management groups.
Critical economies of scale have been achieved in our SG&A
expense area through this centralization of functions. In 1996,
we also began the process of developing a single, recognizable
format for store design, promotion and operation. In developing
our business culture, we have established performance standards
that must be met by each of our stores. We will not tolerate
continuous weak performance by any single store. Our philosophy
does not contemplate using strong stores to supplement poor
performing stores solely to produce revenue growth and expansion
trends. We intend to hold each store to our performance
standards and routinely replace weaker stores with new and
hopefully stronger stores.
The backbone of our business is our commitment to the store-
within-a-store concept. This has led to our synergistic
relationship with two of the most powerful retailers in the
United States - Wal-Mart and Kmart as well as one of the largest,
most respected supermarket chains, Ralphs Grocery Company of
Southern California. We, and they, recognize that consumers are
time-driven, destination-oriented and convenience minded. One-
stop shopping is the key to retailing success in the 1990's.
This has led to the development of the mass merchant
"supercenter" as well as to larger sized supermarkets that can
offer consumers a variety of services over and above their core
business of food. BlowOut fits right into this program! We
provide a critical source of repeat customer traffic for our host
store and, in turn, our host store provides significant impulse
customer traffic to BlowOut. Perfect synergism!
We intend to repeat our program throughout the country as we
pursue store-within-a-store relationships with other host
retailers, grocers and discount chains. To build traffic flow in
our stores, we will routinely expand and rotate our inventory.
We also will modify the mix of videocassettes, games and other
ancillary products to keep our stores "fresh" in the minds of
consumers, and will closely look at the emerging DVD business to
ensure that BlowOut is positioned to take advantage of any
changing market conditions. Finally, we will work closely with
our host partners in an effort to gain greater efficiencies in
our marketing and promotional programs.
Fiscal 97 will not produce spectacular growth for our company.
We intend to use the year to absorb our 1996 expansion, and to
cull out some of our underachieving, acquired locations. We will
pursue only modest growth with our existing host vendors in 1997
and work with them in developing a new, larger footprint for
BlowOut stores for 1998 and beyond. In 1997, we also intend to
pursue additional capital that will foster our growth in years to
come. We believe that by focusing on these activities we will
strengthen our company and thereby enhance its reputation in the
financial community and improve its value to our stockholders.
Our plan is to be frugal. Don't expect expensive, picture-laden,
sugar-coated stockholder reports. Rather, you will receive from
us the same information that we provide to the financial
community, whether as annual and quarterly reports or as press
releases. You may wish to retain this report to serve as a
convenient depository of 1997 press releases and reports.
The first several months of operation as an independent public
company, as well as the aggressive growth that our company
experienced over the past 18 months was tremendously challenging
for our organization. I would be remiss if I did not take this
opportunity to acknowledge the people that make BlowOut happen.
I want to thank our Board of Directors, who bring to BlowOut many
years of combined experience in the videocassette rental and
sale, movie production and distribution business as well as
extensive financial savvy. The financial support of certain of
our directors during 1996 is sincerely appreciated.
Finally, I thank our dedicated force of more than 1,000 employees
nationwide that promote BlowOut to the people to whom we owe our
ultimate thanks - our customers.
Sincerely,
BlowOut Entertainment, Inc.
[SIGNATURE]
Steve Berns
President/CEO
SB/jag
