SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 0-21327
BLOWOUT ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 87-0498950
(State or other jurisdiction (I.R.S. employer identification
no.)
of incorporation or organization)
7700 NE AMBASSADOR PLACE
ONE AIRPORT CENTER, 2ND FLOOR
PORTLAND, OREGON 97220 (503) 331-2729
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS TITLE OF EACH EXCHANGE ON WHICH
REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. <square>
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $2,633,698.13 based on the closing sale price
of $1 7/8 per share as quoted on the NASDAQ Small Cap Market on March 14, 1997.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 14, 1997 was 2,433,330.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated
herein by reference:
DOCUMENT PART
OF FORM 10-K
Proxy Statement for the 1997 annual meeting of stockholders III
<PAGE>
AS USED IN THIS REPORT, THE "COMPANY" MEANS BLOWOUT ENTERTAINMENT,
INC., ITS SUBSIDIARIES AND THEIR PREDECESSORS AND SUBSIDIARIES.
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.
PART I
ITEM 1 - BUSINESS
GENERAL
The Company is engaged in the business of operating "store within a
store" retail video outlets which rent and sell videocassettes, video
games, computer games and programs on CD-ROMs in Wal-Mart stores and Wal-
Mart SuperCenters operated by Wal-Mart Stores, Inc. ("Wal-Mart"), Super
Kmart Centers operated by Kmart Corporation ("Kmart"), Ralphs grocery
stores and Food 4 Less grocery stores (together referred to herein as
"Ralphs") pursuant to individual leases with each of these retailers. As
of December 31, 1996, the Company operated 153 stores in Wal-Mart and in
Wal-Mart SuperCenters, 35 stores in Super Kmart Centers, and six in Ralphs
under the name "BlowOut Video" pursuant to a license with Rentrak
Corporation, the Company's former parent ("Rentrak"), and six additional
stores in Ralphs, under the name "Videos & More." The principal executive
offices of the Company are located at 7700 Ambassador Place, One Airport
Center, Second Floor, Portland, Oregon 97220, telephone (503) 331-2729.
HISTORY OF THE COMPANY
FORMATION OF THE COMPANY. The Company was incorporated in July 1992
as SMM, Inc., a Delaware corporation, and shortly thereafter changed its
name to SVI, Inc. ("SVI"). On March 20, 1996, the Company changed its name
to BlowOut Entertainment, Inc.
ACQUISITION OF SCE. On August 31, 1995, Rentrak formed W-One,
Incorporated, an Oregon corporation ("W-1"), and K-One, Incorporated, an
Oregon corporation ("K-1"). On the same date, through W-1 and K-1, Rentrak
acquired the Wal-Mart and Kmart "store within a store" retail video
operations (the "SCE Business") from Supercenter Entertainment Corporation
("SCE"). As part of the acquisition, the leases pursuant to which SCE
operated its retail video outlets in Wal-Mart and Kmart stores were
assigned to W-1 and K-1, respectively. Effective September 1, 1995,
Rentrak assigned to W-1 all of the former SCE assets and liabilities
related to the operations of its Wal-Mart stores, and Rentrak assigned to
K-1 all of the former SCE assets and liabilities related to the operation
of its Kmart stores. In addition, on February 13, 1996, K-1 acquired
certain assets of nine video retail "store within a store" outlets located
in Super Kmart Centers from Record Town, Inc.
CONSOLIDATION OF SVI, W-1 AND K-1. In the spring of 1996, Rentrak
consolidated the businesses and operations of the Company, W-1 and K-1. To
effect consolidation, Rentrak contributed all of the outstanding capital
stock of W-1 and K-1 to SVI as a capital contribution. Following this
contribution, SVI amended its Certificate of Incorporation to (i) change
its name to BlowOut Entertainment, Inc., (ii) effect a reverse stock split
of its outstanding capital stock, and (iii) increase the authorized capital
stock to 11,000,000 shares, of which 10,000,000 shares were authorized for
issuance as common stock and 1,000,000 shares were authorized for issuance
as preferred stock.
ACQUISITION OF E-1. Between July 1994 and December 1995, Rentrak and
two of its wholly owned subsidiaries acquired 92.6% of the issued and
outstanding common stock of Entertainment One, Inc. ("E-1"), with the
remaining 7.4% of E-1's common stock being held by individuals unrelated to
Rentrak and entities controlled by such individuals (collectively, the "E-1
Minority"). E-1 operated "store within a store" video outlets in Wal-Marts
and Wal-Mart SuperCenters and was also engaged in the same line of business
as SVI, W-1 and K-1.
In May 1996, the Company acquired all of E-1's tangible and intangible
assets and assumed all of its liabilities in exchange for shares of the
Company's common stock. Following such sale of assets, E-1 dissolved and
liquidated its assets pursuant to a Plan of Liquidation that provided for
the distribution of the shares of the Company's common stock to Rentrak and
the E-1 Minority on a basis such that, as a result, Rentrak and the E-1
Minority, as a group, owned 93% and 7% of the Company's then-issued and
outstanding common stock, respectively.
SPIN-OFF OF THE COMPANY. 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 "Distribution").
BUSINESS
THE VIDEO RETAIL INDUSTRY
According to the Video Investor newsletter published by Paul Kagan
Associates, Inc., video retail industry revenues are believed by the
Company to have been approximately $14.8 billion in 1995, with industry
revenues projected to grow to $20.5 billion by 2005. Of the total video
retail industry revenues in 1995, video rental revenues were approximately
$7.5 billion and video sales revenues were approximately $7.3 billion.
The industry is characterized by a high degree of fragmentation, with
only five chains in 1995 operating in excess of 100 video specialty stores
and the average chain operating fewer than 50 stores. The Company believes
that in recent years the video retail industry has begun to consolidate as
regional chains and smaller video specialty store operations are acquired
by operators with greater access to capital.
The Company believes that the home video market has become the single
largest source of revenues for motion picture distributors, providing
approximately 53% of total revenues in 1995. Due to the high production
costs of films today, the Company believes that without home video
revenues, most films would be unprofitable. Furthermore, in order to
quickly recoup the large theatrical marketing budgets that often exceed the
film's production cost, most films are released simultaneously in a large
number of theaters. This broad exposure usually results in most theaters
only playing the film for a few weeks before replacing it with another
release.
Movie studios seek to maximize their revenues in sequential release
date windows to various movie distribution channels. These distribution
channels currently include, in release date order, first and second tier
movie theaters, video specialty stores, Pay-Per-View, pay television, basic
cable television, and network and syndicated television. The Company
believes that this method of sequential release has allowed movie studios
to increase their total revenues with relatively little adverse effect on
the revenue derived from previously established channels and that movie
studios will continue the practice of sequential release as new
distribution channels become available.
In the Company's experience, the movie studios typically set the
initial wholesale price of prerecorded videos at between $60 and $75, which
encourages rental rather than sale. To maximize revenues to the studios,
after approximately six to twelve months the studios will often lower the
selling price of these same videos to between $10 and $20. In addition, a
relatively small number of titles that are believed to have broader
consumer appeal, such as POCAHONTAS, MISSION IMPOSSIBLE and TWISTER, are
wholesaled initially by the studios at between $12 and $17 to encourage
their purchase rather than rental. While much of this type of product is
heavily promoted as "sell-through" titles by all types of mass market
retailers, the video specialty stores offer this product both for sale and
rental and thus also attract the customer who prefers to rent rather than
buy despite a title's relatively low purchase price.
Video specialty stores typically purchase a majority of the films that
were released in theaters regardless of their success in attracting
viewers. The Company believes that many of its customers are predisposed
to view a specific film as a result of its marketing campaign, but due to
its short playing time at a local theater, they will often rent or purchase
the prerecorded home video version of that film. In addition, the Company
believes consumers are more apt to view films that were not box office hits
on rented videos than on any other medium because video specialty stores
provide the opportunity to browse and make an impulse choice among a very
broad selection of film titles at a low price. Therefore, video specialty
stores represent a reliable revenue source for a majority of the film
output of the major movie studios.
New technologies for releasing film titles for home viewing, including
a digital video disc format, are currently being developed and such
technologies could ultimately result in a competitive alternative to
videocassettes.
BUSINESS STRATEGY
The Company's current business strategy is based on three key
advantages management believes the Company enjoys: (i) its position in the
retail video rental industry with its "store within a store" concept; (ii)
its ability to "piggyback" on what management believes will be the
continued success of Wal-Mart SuperCenters, Super Kmart Centers and Ralphs;
and (iii) its existing relationship with each of Wal-Mart, Kmart and
Ralphs. In addition, it is the Company's strategy to seek to open video
retail outlets in other mass retail and grocery stores. To capitalize on
these points, the Company has taken or intends to take the following steps:
(a) increase the number of videocassettes each store sells; (b) increase
the videocassette inventory of new releases that each store carries; (c)
change the mix of inventory of each store to increase the number of video
games and family and children's movies available; (d) continue to utilize
market research to improve the inventory mix of videocassettes, CD-ROM
programs and games; (e) endeavor to hold down marketing costs by using
common advertising for all locations; (f) use its centralized computer
system to track overnight reporting of results from individual stores; and
(g) use a common store design to reduce construction costs.
The Company opened 70 new stores during fiscal 1996. The Company
closed three stores in Super Kmart Centers in October 1996 and opened three
new stores in Super Kmart Centers during the fourth quarter of fiscal year
1996. The Company currently anticipates opening 11 additional stores in
1997, one in Kmart and 10 in Wal-Mart. The Company currently does not
believe that it will be opening a significant number of stores in Super
Kmart Centers or Ralphs in 1997. To achieve its expansion goal, the
Company will be required to use substantially all of its existing debt and
equity capital. Failure to have available a substantial portion of capital
will materially adversely affect the Company's ability to implement its
business strategy and expansion plan.
The Company intends to implement expansion and growth strategies for
opening additional "store within a store" outlets in Wal-Mart SuperCenters,
and, to a much lesser extent, in Super Kmart Centers and Ralphs. The
Company typically is offered store locations by Wal-Mart and Kmart six
months in advance of the target store opening date. The actual number of
store openings will depend upon a number of factors outside the Company's
control, including the expansion plans of Wal-Mart, Kmart and Ralphs, the
number of store locations offered to the Company and the opportunities to
open stores in other mass retail and grocery stores. Thus, the actual
number of store openings could vary significantly from the plan.
Capital outlays of approximately $100,000 will be required to open
each new store. Continued losses and accumulated deficit have caused the
Company to expand at a more moderate rate than previously expected. The
Company believes that its existing operating cash flow and credit
facilities will provide the capital necessary to open the new stores that
are planned. If the Company decides to open more than 11 new stores during
fiscal 1997, the Company may have to obtain other debt or equity financing
or expand more slowly than desired. After 1997, additional sources of debt
and equity capital may be required to continue to meet the Company's
expansion strategy. There can be no assurance that the Company will be
able to obtain any such additional financing on reasonable terms. Failure
to meet the expansion schedule of the host stores could have a material
adverse effect on the Company. Additional management resources will be
required to expand Company operations. There can be no assurance that the
Company will be able to attract and retain a sufficient number of skilled
store managers to implement its growth strategy.
SUPERCENTERS
Wal-Mart SuperCenters and Super Kmart Centers are large stores that
feature a full line of general merchandise and groceries as well as a
variety of ancillary services provided by independent third parties
including video rentals, dry cleaning, hair care, optical and floral shops,
all intended to provide customers with "one stop" shopping.
WAL-MART. According to Wal-Mart, Wal-Mart SuperCenters average
181,000 square feet in size. Wal-Mart opened its first SuperCenter in
1988. Wal-Mart was operating 335 SuperCenters by October 31, 1996. The
majority of the SuperCenters are located in Texas, Tennessee, Georgia and
Missouri, and the Company expects Wal-Mart to continue to concentrate store
openings in small towns in the southeastern, southwestern, and midwestern
United States. The Company believes that it and Blockbuster Entertainment,
Inc. are currently the only two providers of "store within a store" retail
video outlets to Wal-Mart.
KMART. According to Kmart, Super Kmart Centers range in size from
135,000 to 185,000 square feet. Kmart opened its first SuperCenter in
1991. Kmart was operating 87 Super Kmart Centers at January 31, 1995. The
Company believes that it is currently the sole provider of "store within a
store" retail video outlets to Kmart, although it believes that Kmart's
strategy is to have more than one such provider.
RALPHS. Ralphs operates approximately 300 supermarkets, principally
on the west coast of the U.S. Through an agreement with Ralphs entered
into on May 1, 1995, the Company is the exclusive operator of "store within
a store" retail video outlets for Ralphs.
STORES
At December 31, 1996, the Company operated a total of 200 stores,
consisting of 153 stores in Wal-Mart and Wal-Mart SuperCenters, 35 Stores
in Super Kmart Centers and six stores in Ralphs under the name "BlowOut
Video" and six additional stores in Ralphs under the name "Videos & More."
Since January 1, 1997, the Company has closed nine under-performing stores,
located primarily in Kmart. BlowOut Video stores in Wal-Mart stores and
Wal-Mart SuperCenters range from 840 square feet to approximately 1,300
square feet in size. Stores within Super Kmart Centers average
approximately 1,000 square feet in size. Locations within Ralphs occupy
between 800 and 2,800 square feet. In all locations, stores do not have
separate outside entryways, but open within the store in which they are
located. The majority of the Company's stores have "drop boxes" located
outside the building so that customers may return videocassettes without
having to come into the store.
The following table sets forth the store development activities of the
Company during the periods indicated:
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/96 12/31/95 12/31/94
Stores open beginning
of period 157 7 7
Stores opened or
acquired in period 70 154 0
Stores closed in period 27 4 0
Stores open at end of period 200 157 7
Wal-Mart, Kmart, and Ralphs each typically provides, at its expense,
semi-finished space, including walls, HVAC, utilities and paint, for
BlowOut Video stores. The Company then completes such stores, including
installment of carpeting, computers and other fixtures, at the Company's
expense. BlowOut Video stores use a common store design to control the
Company's construction costs. The Company contracts with third parties to
build out BlowOut Video stores across the United States. The cost to the
Company to construct and open a typical BlowOut Video store, including
inventory, fixtures (including any outside drop boxes at Wal-Mart
SuperCenters, Super Kmart Centers and Ralphs), and computers averages
approximately $100,000.
OPERATIONS
General operations of the Company's business are administered by the
Vice President of Operations with the assistance of an Assistant Director
of Operations. The Vice President of Operations reports directly to the
President.
Individual BlowOut Video stores are organized into districts
consisting of 16 locations and each district is, in turn, organized into
areas of four locations. One store manager in each area is appointed as
Area Manager to oversee his or her store and the other three stores in the
area. One Area Manager in the district is selected by the Company to serve
as the District Manager.
While the typical Wal-Mart SuperCenter and Super Kmart Center operates
24 hours per day every day of the year except Christmas Day, BlowOut Video
stores are typically open from 9:00 a.m. to 11:00 p.m., with a total of 135
"employee hours" required on all but a few of the busiest weeks of the
year.
All stores use a Ketec anti-theft security system, with all
merchandise inventories labeled to deter pilferage. Stores record rental
and sale transactions on a personal computer which uses an off-the-shelf
point-of-sale video inventory management system. Each store has a
telephone modem which is programmed to down load rental and sales
information daily to the Company headquarters, where the data is processed
to provide inventory tracking, employee performance, and financial
statements to management.
Each BlowOut Video store has in inventory an average of 3,500
cassettes held for rental. Rental rates are based upon a tiered system:
(i) "new releases" are rented at rates ranging from $2.50 to $3.00 for two
days, (ii) "catalogue" items are rented at a rate of $1.50 for five days,
and (iii) "children's" videos are rented at rates ranging from $0.98 to
$1.50 for five days, subject to adjustment for local conditions. After 60
days, some of the cassettes may be made available for sale as "previously
viewed" at prices ranging from $3.88 to $14.95. The Company promotes sales
by advertising, principally through local newspapers and promotional
techniques such as selecting one to three of the most popular titles each
year and guaranteeing the availability of such titles or the customer's
ability to rent any other video in stock for free. Although the Company is
affected somewhat by seasonal fluctuations in the release of home video
titles, customer traffic patterns in host stores and weather conditions,
the Company does not believe that the video retail industry is seasonal in
any material respect.
SUPPLIERS
Orders for merchandise are placed to Star Video Entertainment L.P.
("Star Video"), for traditional rental and new sale videocassettes, and
Rentrak for Rentrak's "pay per transaction" system (the "PPT System")
rental cassettes, games, and CD/ROMs. Used cassettes are purchased from a
number of vendors. The Company believes it could replace any of these
suppliers, except Rentrak, with suppliers whose pricing and availability
would be comparable. The Company directs virtually all of its suppliers of
merchandise, supplies, and fixtures to deliver the material directly to
each of its retail locations. In the past and currently, the Company has
purchased videocassettes from various suppliers other than Rentrak
including Ingram, Funatics and Movies 4 Sale. The Company does not have
any long-term contracts with any videocassette suppliers other than Rentrak
and Star Video.
On July 22, 1996, the Company entered into an agreement with Star
Video (the "Star Video Agreement") to provide the Company with
videocassettes for rental and sale and with video games for sale. Star
Video paid off the balance of a promissory note in the amount of
$240,974.75 made by the Company to its previous supplier. As a result, the
Company executed a new promissory note to Star Video, pursuant to which the
Company is obligated to pay Star Video $120,487.37 on each of May 27, 1997
and 1998. Under the Star Video Agreement, Star Video became the Company's
primary 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.
Under the PPT System, the Company leases videocassettes from Rentrak
under a revenue-sharing arrangement. Pursuant to this arrangement, the
Company pays a fixed "handling fee" for each cassette leased from Rentrak
and a "transaction fee" each time a cassette is rented.
At December 31, 1996, BlowOut had three videocassette distributors who
supplied 29.5%, 26.0% and 15.7% of total tape purchases. No other
distributors provided more than 10% of the total tape purchases for fiscal
1996.
DEPENDENCE ON HOST STORES
The Company is highly dependent on its relationships with its host
stores, particularly its relationships with Wal-Mart and Kmart, in whose
stores currently 94% of the Company's outlets are located. There can be no
assurance that the host stores will open additional stores in locations
which are commercially viable for retail video operations, or that the
number of future stores opened by the host stores will meet the Company's
expansion plans. Any host store could change its development or operation
plans at any time. The Company's management believes that the strategy of
both Wal-Mart and Kmart is to have more than one vendor operating "store
within a store" video rental and sales outlets. For example, Wal-Mart has
leased space in certain Wal-Mart stores to Blockbuster Video. The Company
has an exclusive arrangement to operate video retail outlets in Ralphs.
There can be no assurance that host stores will not operate their own video
rental and sale outlets.
The Company is party to master leases with Wal-Mart and Kmart,
respectively, for its stores. The Wal-Mart master lease expires on
November 18, 1999 and the Kmart master lease expires on September 20, 1999.
Each of these master leases provides for an initial five-year term for each
new store, with an additional five-year optional renewal term. Either
party to the Wal-Mart and Kmart leases can elect to close stores which fail
to generate a minimum level of revenues. Although there currently are
stores operated by the Company in both Wal-Mart and Kmart locations that
are not performing at such minimum levels, neither Wal-Mart nor Kmart has
exercised its right to close such stores. However, the Company elected to
close 27 stores (consisting of 23 stores in Wal-Marts and four stores in
Kmart) in 1996. The Company closed an additional nine stores, located
primarily in Kmart, in early 1997 and has given Kmart notice of its
intention to close two additional under-performing stores in or before
August 1997. The Company has no exclusive right to open stores in Wal-Mart
and Kmart stores and no control over the geographic area or market in which
the new stores will be located. The master leases also allow Wal-Mart or
Kmart, under certain conditions, to restrict the ability of the Company to
sell videocassette titles which are being sold in particular Wal-Mart or
Kmart stores, respectively. There can be no assurance that the Company
will be able to operate stores within either Wal-Mart or Kmart stores for
any period of time following the terms provided in the master leases.
Furthermore, although the Company plans to seek to open video retail
outlets in other mass retail and grocery stores, if either Wal-Mart or
Kmart terminates its relationship with the Company, there can be no
assurance that the Company could find a suitable local, regional or
national retail mass merchant with sufficient stores to support its "store
within a store" retail concept.
COMPETITION
The videocassette rental and sales industry is highly competitive,
with numerous national, regional and local video store operators.
Competitors such as Blockbuster Video have substantially greater financial
resources and marketing capabilities than those of the Company. The
Company believes that Wal-Mart has entered into an agreement with
Blockbuster Video to operate video "store within a store" outlets in
certain SuperCenters. Because a majority of the Wal-Mart and Kmart stores
in which the Company operates are located in rural areas, the video
operations also face competition from other supermarket rental operations,
a growing segment of the business. In addition, the Company competes with
a number of other leisure and retail entertainment providers, including
television, movie theaters, bowling alleys and sporting events.
In addition to the direct competition from video retailers described
above, the Company faces indirect competition from alternative delivery
technologies which are intended to provide video entertainment directly to
the consumer. These technologies include: (i) direct broadcast satellite
transmission systems, which broadcast movies in digital form direct from
satellites to small antennas in the home; (ii) cable systems, which may
transmit digital format movies to the home over cable systems employing
fiber optic technology; and (iii) pay cable television systems, which may
employ digital data compression techniques to increase the number of
channels available and hence the number of movies which can be transmitted.
Another source of indirect competition comes from program suppliers
releasing titles intended for "sell- through" rather than rental to
consumers at prices of approximately $10 to $30 per videocassette. To
date, such "sell-through" pricing has generally been limited to certain
newly released hit titles with wide general family appeal. As the
Company's business is dependent upon the existence of a home video rental
market, a substantial shift in the video business to alternative
technologies or "sell-through" policies could have a material adverse
effect on the Company's future operations. Such growth in sell-through
video tapes has been influenced, in part, by sales from discount merchants,
including Wal-Mart.
MARKETING AND ADVERTISING
With advertising credits and market development funds that it receives
from its video suppliers and movie studios, the Company uses radio
advertising, direct mail, newspaper advertising, discount coupons and
promotional materials to promote new releases, its video stores and its
tradename. Using copy prepared by the Company and Star Video, advertising
is primarily placed by the distributor. Expenditures for marketing and
advertising above the amount of the Company's advertising credits from its
suppliers and movie studios have been minimal. The Company anticipates
that marketing and advertising expenditures, net of credits from its
suppliers and allowances from movie studios, will remain minimal in fiscal
1997. The Company also benefits from the advertising and marketing by
studios and theatres in connection with their efforts to promote films and
increase box office revenues.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws,
including the Federal Videotape Privacy Protection Act and similar state
laws that govern the disclosure and destruction of video rental records.
The Company also must comply with various regulations affecting its
business, including state and local licensing, zoning, land use,
construction and environmental regulations.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 266
persons full-time and 820 persons part-time. None of the Company's
employees is covered by a collective bargaining agreement; however, in
three Ralphs locations, all non-management employees will be part of a
collective bargaining agreement. The Company does not expect to have more
than three employees subject to this agreement. The Company provides
medical insurance and other benefits for eligible employees. The Company
generally considers its relationships with its employees to be good.
The Company's Board of Directors approved an Employee Stock Purchase
Plan. This plan authorizes up to 200,000 shares of common stock to be
issued to its full-time employees and directors. Under the terms of this
plan, employees can choose each year to have up to 10% of their annual
total compensation withheld to purchase the Company's common stock. The
purchase price of the stock is 85 percent of the prevailing market price.
The effective date of this plan is January 1, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Position with the Company OFFICER OF
THE COMPANY Since
<S> <C> <C> <C>
Steve Berns 38 President 1992
Karl D. Wetzel 48 Chief Financial Officer 1996
Harold Heyer 37 Vice President of Operations 1995
</TABLE>
STEVE BERNS. Mr. Berns has been president of the Company since its
inception in July 1992, and has been a director of the Company since March
21, 1996. Mr. Berns was President of RKO Warner from 1986 to 1992, during
which period RKO Warner grew into the largest video retailer in the New
York/New Jersey market and one of the largest video retailers in the United
States. From 1979 until 1986, Mr. Berns held various positions with Video
Shack, eventually becoming its executive vice president of operations prior
to its acquisition by RKO Warner. From 1990 to 1992, Mr. Berns also served
as a member of the Board of Directors of the Video Software Dealers
Association.
KARL D. WETZEL. Mr. Wetzel has served as Chief Financial Officer of
the Company since February 1, 1996. He served as Chief Accounting Officer
of Rentrak from February 1, 1995 until February 1, 1996. From June 1, 1991
until February 1, 1995, Mr. Wetzel served as Vice President of Finance and
Chief Financial Officer of Rentrak. Prior to joining Rentrak in February
of 1990, Mr. Wetzel was Vice President of Finance and Chief Financial
Officer for Safeguard Security Systems, Inc.
HAROLD HEYER. Mr. Heyer has served as Vice President of Operations of
the Company since September 1995. From 1994 through August 31, 1995,
Mr. Heyer served as vice president of sales and retail operations for SCE
where he managed the growth of SCE to 70 units inside Wal-Mart and Kmart.
From 1982 until 1994, Mr. Heyer served in a number of management positions
with SuperClub, Blockbuster and Major Video. Prior thereto, he served as
general manager of Video 22, a six-store video specialty chain.
The Company entered into an amended and restated employment agreement
dated as of March 1, 1996 and amended as of November 4, 1996 (the "Berns
Agreement") with Steve Berns, pursuant to which Mr Berns is to serve as
President of the Company until October 31, 1999, or until otherwise
terminated pursuant to the terms thereof. During the term of the
Agreement, Mr. Berns is to receive a base annual salary of $150,000 (the
"Berns Base Salary"). The Berns Base Salary adjusts automatically each
October 1 to give effect to the Consumer Price Index. The Berns Agreement
provides that the Company may pay Mr. Berns a bonus or other additional
compensation above the Berns Base Salary at its discretion. A mandatory
bonus of $100,000 was paid to Mr. Berns in connection with the spin-off of
the Company from Rentrak. Under the Berns Agreement, the Company provides
Mr. Berns with vacation and holiday pay, medical and life insurance under
the Company's then-current terms, and a car allowance of $500 per month;
and the Company reimbursed Mr. Berns for expenses for relocating to
Portland, Oregon.
The Berns Agreement may be terminated with cause by either the Company
or Mr. Berns upon 30 days' written notice to the other party. If
termination is due to Mr. Berns' death or disability, the Company will pay
a lump sum severance payment of an amount equal to the Berns Base Salary
accrued through and including the date of termination. If termination is
by the Company other than for cause or death or disability of Mr. Berns,
the Company will pay him severance payments in an amount equal to six
months of the annual Berns Base Salary, subject to demonstration by
Mr. Berns that he is using his best efforts to find other employment. The
Agreement also contains a nonsolicitation covenant and agreement not to
disclose confidential information. On October 26, 1995, Mr. Berns and the
Company entered into a non-competition agreement, which was subsequently
amended on December 12, 1995. Under such agreement, during the period of
his employment with the Company, and for 24 months thereafter, Mr. Berns
will not engage in any business involving video store departments which are
inside either mass market or grocery retailers anywhere in the United
States or other geographical area where the Company conducts its business
or sells or distributes its products or services.
Effective February 1, 1996 and amended as of November 4, 1996, the
Company entered into an employment agreement with Karl Wetzel, pursuant to
which Mr. Wetzel is to serve as Chief Financial Officer of the Company
until January 31, 1999 or until otherwise terminated pursuant to the terms
thereof (the "Wetzel Agreement"). During the term of the Wetzel Agreement,
Mr. Wetzel is to receive a base annual salary of $100,000 (the "Wetzel Base
Salary"). The Company has agreed to review the Wetzel Base Salary on May 1
of each year and may, at such time and in its discretion, increase the
Wetzel Base Salary. The Wetzel Agreement further provides that Mr. Wetzel
will participate in any bonus plan adopted by the Company, including any
cash bonus pools established by the Company from time to time for its
corporate executives. The Wetzel Agreement also requires the Company to
pay Mr. Wetzel a severance payment of an amount equal to the Wetzel Base
Salary accrued through and including the date of termination if
Mr. Wetzel's employment is terminated due to his death or disability. If
termination is by the Company other than for cause or Mr. Wetzel's death or
disability, the Company will pay him severance payments in an amount equal
to six months of the annual Wetzel Base Salary, subject to the
demonstration by Mr. Wetzel that he is using his best efforts to find other
employment. Pursuant to the Wetzel Agreement, Mr. Wetzel and the Company
entered into a non-competition agreement pursuant to which during the
period of his employment with the Company, and for 24 months thereafter,
Mr. Wetzel will not engage in any business involving video store
departments which are inside either mass market or grocery retailers
anywhere in the United States or other geographical area where the Company
conducts its business or sells or distributes its products or services.
Effective April 22, 1996 and amended as of November 4, 1996, the
Company entered into an employment agreement (the "Heyer Agreement") with
Harold Heyer, pursuant to which Mr. Heyer is to serve as Vice President of
Operations of the Company until August 30, 1998 or until otherwise
terminated pursuant to the terms thereof. During the term of the Heyer
Agreement, Mr. Heyer receives an annual base salary of $90,000 (the "Heyer
Base Salary"). The Company reimbursed Mr. Heyer for expenses in relocating
to Portland, Oregon in the amount of $30,000. The Company has agreed to
employ Mr. Heyer for at least 12 months following his relocation to
Portland, Oregon, or, if Mr. Heyer is involuntarily terminated within such
12-month period, but not for cause, the Company will pay Mr. Heyer an
amount equal to 90 days of the Heyer Base Salary. If Mr. Heyer's
employment is terminated due to Mr. Heyer's death or disability, the
Company will pay Mr. Heyer a lump sum severance payment in an amount equal
to the Heyer Base Salary accrued through and including the date of
termination. If, within two years after a Change of Control (as defined in
the Heyer Agreement), termination is by the Company without cause or by
Mr. Heyer for Good Reason (as defined in the Heyer Agreement), the Company
shall pay Mr. Heyer a lump sum payment in an amount equal to the lesser of
(i) the Heyer Base Salary through August 30, 1998, or (ii) six-months of
the Heyer Base Salary. If termination is by the Company other than for
cause or Mr. Heyer's death or disability, the Company will pay him
severance payments in an amount equal to six months of the annual Heyer
Base Salary, subject to the demonstration by Mr. Heyer that he is using his
best efforts to find other employment, and further subject to reduction by
the amount of remuneration in any form received from such other employment
during such six-month period. The Heyer Agreement also contains
Mr. Heyer's agreement not to disclose confidential information and a non-
competition agreement, pursuant to which, during the period of his
employment with the Company and for 24 months thereafter, Mr. Heyer will
not engage in any business (i) involving the revenue sharing method of
wholesale distribution of home videocassettes, (ii) which is substantially
similar to leased store video operations, or (iii) which competes with any
business then engaged in by the Company or its affiliates any where in the
United States or other geographical area where the Company conducts its
business or sells or distributes its products or services.
ITEM 2 - PROPERTIES
STORE LEASES
The Company leases space for each of its BlowOut Video stores pursuant
to various master leases. The following summaries set forth the material
terms of such master leases.
WAL-MART. In January 1993, the Company entered into a non-exclusive
master lease with Wal-Mart, which was amended on May 15, 1995 and May 14,
1996 (as amended, the "Wal-Mart Master Lease"), under which the Company, as
it opens each store, executes a standard lease with Wal-Mart. Each such
lease is for a five-year period, with one option to renew for an additional
five-year period. Rent is calculated as a percentage of revenues generated
by the store. The Company is also liable for its pro rata share of real
estate taxes. If the volume of gross sales from a given store that has
been opened at least 12 months is less than a predetermined amount in any
consecutive 12-month period, either the Company or Wal-Mart, on 60 days'
written notice to the other, may terminate the standard lease with respect
to the store. In 1996, the Company exercised its option to close 23 stores
in Wal-Mart Stores for failure to achieve minimum sales volume. No stores
have been closed at the election of Wal-Mart.
KMART. Effective September 21, 1994, the Company entered into a non-
exclusive master sublease agreement with Kmart, which was amended on April
1, 1995 and January 21, 1996 (as amended, the "Kmart Master Lease"), under
which the Company, as it opens each store, executes a rider for a specified
term with Kmart. The Kmart Master Lease has a term of five years, with one
option to renew for an additional five-year term. The Company pays an
annual minimum rent of $3.75 per square foot, and additional rent
calculated as a percentage of gross revenues. If the volume of annual
gross revenues from a given store that has been open at least 12 months is
less than certain predetermined amounts, either the Company or K-Mart may,
on written notice to the other within 180 days following the anniversary
date of that store's rider, terminate the lease with respect to that store.
The Company opened three new stores under the Kmart Master Lease in fiscal
1996 and opened one new store under the Kmart Master Lease in January 1997.
The Company exercised its option to close four stores in Kmart in fiscal
1996 and seven stores in Kmart in January and February 1997 for failure to
achieve minimum sales volume, and gave Kmart notice of its intention to
close two additional under-performing stores in or before August 1997. No
stores have been closed at the election of Kmart.
RALPHS. The Company entered into a master license agreement with
Ralphs ("Ralphs Master License") effective May 1, 1995, pursuant to which
the Company has the right to operate retail video sales and rental
departments in Ralphs at locations to be agreed upon by both parties. The
Ralphs Master License has a term of four years with respect to each
location commencing on the date such location opens for business. The
Agreement may be renewed for two successive three-year periods for a given
location provided that such location realizes a predetermined level of
revenues. The Company pays a license fee to Ralphs calculated as a
percentage of gross revenues received in a given four-week period. The
Company has agreed not to operate a video store in any retail outlet
(including Wal-Mart SuperCenters and Super Kmart Centers) within a three-
mile radius of a Ralphs store in which the Company is operating a video
department. The Company has a right of first refusal to operate a video
store in all Ralphs locations. Ralphs has the right, subject to the
Company's right of first refusal, to lease space to another video rental
operation having a separate entrance. Upon 60 days' written notice and
payment to the Company of a predetermined termination fee, Ralphs may
terminate the Ralphs Master License. Ralphs may also terminate the Ralphs
Master License if the Company fails to meet minimum revenue levels. As of
December 31, 1996, to the best of its knowledge, the Company has met such
minimum revenue levels. The Company may terminate the Ralphs Master
License on 60 days' written notice. There has been no such termination of
the Ralphs Master License to date.
EXECUTIVE OFFICES AND WAREHOUSE SPACE
The Company subleases from Rentrak office space in Rentrak's new
headquarters under a sublease having a 10-year term and providing for rent
of approximately $7,100 per month for the first five years, and
approximately $7,650 per month for the last five years. The Company's
Board of Directors believes these rental terms to be competitive with those
in the Portland, Oregon rental market.
The Company currently sublets approximately 12,800 square feet of
warehouse space at Rentrak's Wilmington, Ohio warehouse for approximately
$4,000 per month.
ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
TRADING AND SHAREHOLDER INFORMATION
The Company has been listed on the NASDAQ Small Cap Market system
under the symbol "BLWT" since November 19, 1996. The high and low bids, as
quoted on the NASDAQ Small Cap Market system, for the period from November
19, 1996 through December 31, 1996 were 5 and 1 7/8. Such quotations
represent inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. The bid
price per share quoted on the NASDAQ Small Cap market on March 14, 1997 was
$1 7/8.
At March 14, 1997, there were 2,433,330 shares of the Company's Common
Stock issued and outstanding which were held by 379 holders of record.
DIVIDENDS
The Company's dividend policy will be established by the Company's
Board of Directors from time to time based on the results of operations and
financial condition of the Company, such other business considerations as
the Company's Board of Directors deems relevant, and the restrictions and
limitations imposed under financing documents binding upon the Company,
including a restriction on dividends contained in the CBC line of credit.
See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources." The Company
currently intends to retain earnings, if any, for use in the operation and
expansion of its business and, therefore, does not anticipate paying any
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On August 30, 1996, each of Mr. Bill LeVine and Culture Convenience
Club, Ltd. ("CCC") converted individually held $1.0 million principal
amount notes (the "Notes") made by the Company into 121,789 shares (or
$8.21 per share) of Common Stock. Mr LeVine and Mr. Muneaki Masuda,
Chairman and principal shareholder of CCC, are directors of the Company and
of Rentrak. The price per share was arrived at through the Company's
negotiations in March 1996 with Mr. LeVine and CCC, and agreed upon by
those parties in March and April 1996. The converted Notes were originally
issued in March and April 1996 to evidence sums advanced to the Company by
Mr. LeVine and CCC, accrued interest at the rate of 9% per annum, were
convertible into shares of Common Stock, and had a maturity date of August
31, 1997.
Payment under the Notes at the maturity date was guaranteed by
Rentrak, with any payment under the guaranty subject to a 20% premium. At
its option, Rentrak had the right to repay the Notes in cash or, subject to
certain conditions, in shares of Rentrak common stock or in a combination
of cash and shares of Rentrak common stock. In connection with the
conversion of the Notes into shares of Common Stock, the Note holders
released Rentrak of its obligations under this guaranty. Similarly, the
Company has been released of its undertaking to issue warrants to purchase
Common Stock to the Note holders under specified circumstances that did not
occur.
On August 30, 1996, CCC purchased from the Company for $2.98 million a
total of 362,931 shares of Common Stock at a purchase price of
approximately $8.21 per share.
None of the shares of Common Stock issued to Mr. LeVine and CCC, as
described in the preceding paragraphs, are registered and such shares are
subject to usual and customary restrictions on transferability. However,
Mr. LeVine and CCC have been granted rights to demand registration of the
shares of Common Stock owned by them, and Mr. LeVine and CCC have advised
the Company that they will be exercising their right to register their
shares of Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
The financial and operating data set forth herein should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations'' and the Financial Statements,
including the Notes thereto, and other financial data included elsewhere
herein. On October 9, 1996, the Board of Directors of the Company
authorized a 1.01491-for-1 stock split of the Company's Common Stock,
effected as a stock dividend. Share and per share data set forth on this
Table give effect to such split.
BLOWOUT ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31 (1)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net Revenues:
Rental $23,261 $ 7,689 $ 1,115 $ 467 $ 0
Product Sales 7,088 3,030 178 69 0
Total Net Revenue 30,349 10,719 1,293 536 0
Cost of Sales 14,291 5,220 563 281 0
Gross Margin 16,058 5,499 730 255 0
Operating Expenses 17,618 6,275 852 632 0
Selling and Administrative 3,637 3,278 309 329 206
Other Income (Expense) (1,268) (398) (251) (105) 0
Interest Expense (790) (533) (162) (51) 0
Net Loss $(7,255) $(4,985) $ (844) $ (862) $ (206)
Net Loss Per Common
Share $ (3.60) $ (3.41) $ (0.93) $ (0.95) $(0.45)
Weighted Average Shares
Outstanding 2,014 1,464 913 913 457
BALANCE SHEET DATA
Working Capital (Deficit) $(4,643) $ (823) $ (415) $ 97 $ 217
Total Assets 20,573 18,536 893 1,201 383
Long-term Debt 4,286 3,441 1,375 1,120 0
Stockholders' Equity 7,820 10,095 (1,038) (194) 319
(Deficit)
</TABLE>
(1) The selected data as of and for the years ended December 31, 1993,
1994, 1995 and 1996 are derived from the audited financial statements
of the Company. Results for such years are not comparable because of
the Company's acquisitions and store expansions that occurred in
1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "History of the Company."
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results for the years ended December
31, 1996 and 1995 are set forth in the following table:
<TABLE>
<CAPTION>
1996 by Quarter
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $6,881,592 $7,269,289 $7,934,260 $8,264,043 $30,349,184
(Loss) from (1,515,326) (920,664) (666,245) (2,094,826) (5,197,061)
operations
Net (loss) (1,593,549) (1,012,947) (1,739,351) (2,908,957) (7,254,804)
</TABLE>
<TABLE>
<CAPTION>
1995 by Quarter
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $330,481 $926,251 $3,113,682 $6,348,075 $10,718,489
(Loss) from (167,209) (724,255) (911,997) (2,250,290) (4,053,751)
operations
Net (loss) (133,452) (744,670) (967,330) (3,139,222) (4,984,674)
</TABLE>
ITEM 7 - MANAGEMENT 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.
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) the
Company's acquisition on May 26, 1995, of a controlling
interest in E-1, a company whose primary business was the
operation of retail video outlets in Wal-Mart SuperCenters,
(ii) the Company's acquisition on August 31, 1995 of the SCE
Business, and (iii) new store openings in Wal-Mart
SuperCenters and, to a lesser extent, in Super Kmart Centers
and Ralphs. Because of acquisitions and store openings,
comparisons among the years ended December 31, 1994, 1995 and
1996 are not meaningful. At year end 1996, the Company's
store within a store retail video operations consisted of 153
stores located in Wal-Mart and Wal-Mart SuperCenters, 35
stores located in Super Kmart Centers, six stores located in
Ralphs grocery stores and six stores located in Food 4 Less.
The Company's revenue consists of rental revenue and
product sales. Rental revenue includes rental of pre-recorded
videocassettes, video games and computer games and programs on
CD-ROMs. Product sales are derived from sale of prerecorded
videocassettes 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 each of the fiscal years ended December 31, 1994
through 1996.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
<S> <C> <C> <C>
1996 1995 1994
No. of Stores open 12 months 130 3 4
Average rental revenue $129,440 $ 206,387 $ 114,640
Average product sales $ 39,442 $ 61,648 $ 17,505
Average total revenue $168,882 $ 268,035 $ 132,145
</TABLE>
Average rental and sales revenue decreased from year
ended December 31, 1995 compared to the year ended
December 31, 1996 due to two different elements of the
Company's business. The three stores operated during the year
ended December 31, 1995 are located in high-end grocery stores
located in Southern California and have been under the
Company's management since inception. Substantially all of
the 130 stores operated during the year ended December 31,
1996 are located in Wal-Mart and Kmart SuperCenters in mid-
size to smaller communities, the majority of which were
acquired by the Company. Accordingly, the Company believes
that the average revenue data for the year ended December 31,
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 videocassettes using two types of
supplier arrangements: purchase and revenue-sharing under the
PPT System. 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 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
videocassettes 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 straight-line 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
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. The cost of
videocassettes 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.
The amortization expense is expected to be approximately $.5
million per year.
RESULTS OF OPERATIONS. The following table sets forth
for the period indicated (i) statement of operations data
expressed as a percentage of total revenue, (ii) the
percentage change from the prior period in this data and (iii)
the number of stores open at the end of each period.
<TABLE>
<CAPTION>
STATEMENT OF OPERATING DATA: Year Ended Year Ended Year Ended Percentage Percentage
12/31/96 12/31/95 12/31/94 Change in Change in
Dollar Amount Dollar Amount
from 1995 to from 1994 to
1996 1995
<S> <C> <C> <C> <C> <C>
Rental revenue 76.6% 71.7% 86.3% 202.5% 589.4%
Product sales 23.4 28.3 13.7 134.0 1606.2
Total revenue 100.0 100.0 100.0 183.1 729.1
Cost of product sales 47.1 48.7 43.6 173.8 827.2
and rental revenue
operating expenses 58.0 58.6 65.9 180.8 636.5
Selling, general and 12.0 30.6 23.9 11.0 960.8
administrative
Loss from operations (17.1%) (37.8%) (33.4%) (28.2%) 837.4%
Number of stores open at
end of period 200 157 7 --- ---
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
The audited consolidated financial statements of the
Company included elsewhere in this Form 10-K include the
results of operations of the Company for each of the three
years prior to December 31, 1996. The Company opened its
first "store within a store" outlet in January 1993. For the
year ended December 31, 1994, the Company's results of
operations included the operation of the seven retail video
outlets in grocery stores which were open for the entire year.
For the year ended December 31, 1995, the Company's results of
operations included (i) the operations of the Company's retail
video outlets in grocery stores, (ii) the operations of E-1
for the seven-month period ended December 31, 1995 and (iii)
the SCE Business for the four-month period ended December 31,
1995. For the year ended December 31, 1996, the operations
were included for the entire year plus the opening of 70 new
stores and the closing of 27 under-performing stores. Because
of acquisitions and store openings, comparisons among the
years ended December 31, 1994, 1995 and 1996 are not
meaningful.
REVENUE. Total Revenue for fiscal year 1996 increased
$19.6 million, or 183.3%, to $30.3 from $10.7 million for
fiscal year 1995. The increase resulted from an increase in
the number of stores in operation, from 157 at December 31,
1995 to 200 at December 31, 1996, as well as a full year of
operations for stores acquired or opened in 1995. During
fiscal year 1996, the Company opened 70 stores and closed 27
under-performing locations. As a percentage of revenues,
product sales decreased from 28.3% in 1995 to 23.4% in 1996.
It is expected that the mix of product rental to product sales
will remain relatively constant in fiscal 1997.
COST OF PRODUCT SALES AND RENTAL REVENUE. Cost of
product sales and rental revenue decreased from 48.7% of
revenue for fiscal 1995 to 47.1% of revenue for fiscal 1996, a
1.6% improvement, while cost measured in dollars increased
from $5.2 million to $14.3 million. The variation resulted
primarily from the significant increase in the number of
stores in operation as well as a full year of operations for
stores acquired or opened in 1995.
OPERATING EXPENSE. As a percentage of revenue, operating
expenses remained relatively level in fiscal 1996 in
comparison to fiscal 1995. Operating expenses increased from
$6.3 million, or 58.6% of revenue, for fiscal 1995, to $17.6
million, or 58.0% of revenue, for fiscal 1996. The primary
components of operating expenses include compensation,
occupancy and fixed asset depreciation. The increase in the
amount of operating expenses is directly related to the
opening of new stores and the inclusion of the stores from E-1
and SCE for a full year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses increased from $3.3
million, or 30.6% of revenue, for fiscal year 1995, to $3.6
million, or 12.0% of revenue, for fiscal year 1996. The
decrease in selling, general and administrative expenses as a
percentage of revenue was primarily due to the consolidation
of functions of the separate corporate staffs of the Company,
E-1, and SCE. The corporate functions were consolidated in
Portland, Oregon by March 31, 1996 with all duplicate
functions eliminated by June 30, 1996. The decrease as a
percentage of revenue is also attributable to revenue growing
at a much faster pace than overhead.
NET NONOPERATING EXPENSES. Net nonoperating expenses
increased from $0.9 million, or 8.7% of revenue, for fiscal
1995, to $2.1 million, or 6.8% of revenue, for fiscal 1996.
The increase is primarily attributable to incurring
significant one-time costs related to the spin-off of the
Company from Rentrak and an increase in interest expense.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER
31, 1994
The audited consolidated financial statements of the
Company included elsewhere in this report include the results
of operations of the Company for each of the two years in the
period ended December 31, 1995. The Company opened its first
"store within a store" outlet in January 1993. For the year
ended December 31, 1994, the Company's results of operations
included the operation of the seven retail video outlets in
grocery stores which were open for the entire year. For the
year ended December 31, 1995, the Company's results of
operations included (i) the operations of the Company's retail
video outlets in grocery stores, (ii) the operations of E-1
for the seven-month period ended December 31, 1995 and (iii)
the SCE Business for the four-month period ended December 31,
1995. Because of acquisitions and store openings, comparisons
among the years ended December 31, 1994 and 1995 are not
meaningful.
REVENUE. Revenue for fiscal year 1995 increased $9.4
million, or 729.1%, to $10.7 from $1.3 million for fiscal year
1994. The increase resulted from an increase in the number of
stores in operation, from four at December 31, 1994 to 157 at
December 31, 1995, due to the acquisitions of E-1 and the SCE
Business. The $10.7 million in 1995 revenue included $6.1
million from E-1 and $3.5 million from the SCE Business.
COST OF PRODUCT SALES. Cost of product sales increased
from $0.6 million, or 43.6% of revenue, for fiscal 1994 to
$5.2 million, or 48.7% of revenue, for fiscal year 1995. The
decrease in gross margin on sales resulted from an increase in
product acquisition costs, and increased emphasis of sales
from "sell through" products which carry lower margins than
rental product. The $5.2 million in fiscal year 1995 cost of
sales included $3.1 million from E-1 and $1.7 million from the
SCE Business. As a percentage of revenues, product sales
increased from 13.7% in 1994 to 28.3% in 1995. The increase
in product sales as a percentage of revenues was the result of
a deliberate effort by the Company to satisfy consumer demand
for previously viewed sales product. Prior to the acquisition
of E-1 and SCE in 1995, substantially all marketing efforts
were concentrated on video rentals. This shift in revenue mix
is not expected to continue on an annual basis.
OPERATING EXPENSE. Operating expenses increased from
$0.9 million, or 65.9% of revenue, for fiscal 1994 to $6.3
million, or 58.5% of revenue, for fiscal year 1995. The
increase resulted primarily from the significant increase in
the number of stores in operation. The primary components of
operating expenses include compensation, occupancy and fixed
asset depreciation. Depreciation and amortization increased
from $0.2 million, or 14.4% of revenue, for fiscal year 1994,
to $0.7 million, or 6.8% of revenue, for fiscal year 1995.
The increase was the result of the acquisitions of E-1 and the
SCE Business. Also, beginning in May and September 1995, the
goodwill acquired from the acquisitions of E-1 and the SCE
Business began to be amortized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses increased from $0.3
million, or 23.9% of revenue, for fiscal year 1994, to $3.3
million, or 30.6% of revenue, for fiscal year 1995. The
increase in selling, general and administrative expenses as a
percentage of revenue was primarily due to the overlapping
functions of the separate corporate staffs of the Company, E-
1, and SCE. The corporate functions were consolidated in
Portland, Oregon by March 31, 1996 with all duplicate
functions eliminated by June 30, 1996.
NET NONOPERATING EXPENSES. Net nonoperating expenses
increased from $0.4 million, or 31.9% of revenue, for fiscal
year 1994, to $0.9 million, or 8.7% of revenue, for fiscal
year 1995. The increase is primarily attributable to the loss
on closing a number of the video retail stores and increase in
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs are for the opening
of new stores. In 1996, the Company funded its operations
primarily through cash from operations, advances from Rentrak,
the proceeds of the Notes issued to Mr. LeVine and CCC which
were converted to equity, an additional equity investment by
CCC, and trade credit from suppliers.
For the year ended December 31, 1996, net cash used in
investment activities was $9.5 million, consisting primarily
of a $7.6 million net investment in retail inventory and a
$2.3 million investment in capital expenditures. During that
period, cash provided by operations was $0.4 million and the
Company received $2.0 million upon issuance of the Notes and
$2.98 million upon issuance of the Common Stock. In August
1996, the Notes were converted into shares of Common Stock
representing approximately 10% of the issued and outstanding
shares of Common Stock.
In August 1996, Phoenix Leasing Incorporated ("Phoenix")
provided the Company with 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
14.525%. The proceeds of the Phoenix Facility are to be used
to construct and open (including acquisition of inventory) new
BlowOut Video 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 December 31, 1996,
the Company had borrowed approximately $928,000 under the
Phoenix Facility. As of March 14, 1997, the Company has
borrowed approximately $1.4 million under the Phoenix
Facility.
On September 12, 1996, Coast Business Credit ("CBC")
provided the Company with 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 videocassette inventory. As of December 31, 1996,
80% of the Orderly Liquidation Value of the Company's
inventory was approximately $3.4 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 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 the Company's videocassette inventory at specified
amounts. As of December 31, 1996, the Company borrowed
approximately $2.2 million under the CBC Line of Credit. As
of February 28, 1997, the Company borrowed approximately $2.3
million under the CBC Line of Credit.
On July 22, 1996, the Company entered into the Star Video
Agreement with Star Video to provide the Company with
videocassettes for rental and sale and with video games for
sale. Star Video paid off the balance of a promissory note in
the amount of $240,974.75 made by the Company to its previous
supplier. As a result, the Company executed a new promissory
note to Star Video, pursuant to which the Company is obligated
to pay Star Video $120,487.37 on each of May 27, 1997 and
1998. Under the Star Video Agreement, Star Video became the
Company's exclusive supplier of new 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.
On August 30, 1996, CCC purchased from the Company for
$2.98 million a total of 362,931 shares of Common Stock at a
purchase price of approximately $8.21 per share.
During 1996, the Company opened 70 stores, primarily in
Wal-Mart SuperCenters. 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 11 new outlets
in Wal-Mart SuperCenters and one in a Super Kmart Center in
1997, although there can be no assurance as to the number of
locations that Wal-Mart or Kmart will make available to the
Company. The Company is aware of one other retailer,
Blockbuster Video, 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.
During 1996, the Company closed 27 stores which did not
meet certain performance levels (consisting of 23 stores in
Wal-Mart and 4 stores in Kmart). The Company has closed an
additional 9 stores, located primarily in Super Kmart Centers,
in early 1997 and has notified Kmart of its intention to close
2 additional under-performing stores by August 1997.
The Company had cash and cash equivalents of $1.4 million
at December 31, 1996 and $0.8 million at January 31, 1997.
The Company expects to meet its short-term liquidity
requirements through net cash provided by operations
(including the extension of trade credit in which Rentrak has
agreed to defer the payment of all invoices which may occur
during the normal process of business which are incurred
January 1, 1997 through June 30, 1997 until January 1, 1998),
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 through February 1998. 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
after February 1998.
At December 31, 1996, the Company had a working capital
deficit of $4.6 million. Videocassette 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 videocassette 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
videocassette rental inventory as a noncurrent asset. The
Company expects to operate with a working capital deficit as
it expands its store base.
IMPACT OF NEW ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards
Board issued Statement No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires the Company to review for
impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS 121
became effective for the Company's year ending December 31,
1996. The Company has studied the implications of SFAS 121
and has determined that, it does not have a material impact on
the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards
Board issued Statement No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," which establishes a fair value-
based method of accounting for stock-based compensation plans
and requires additional disclosures for those companies that
elect not to adopt the new method of accounting. The Company
will continue to account for employee purchase rights and
stock options under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS 123 disclosures are effective for
fiscal years beginning after December 31, 1995.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and
report of independent auditors are set forth under Item 14
hereto.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 18, 1996, the Company dismissed its
independent accountants, Arthur Andersen LLP ("Arthur
Andersen") upon the recommendation of the Company's Audit
Committee. The decision to change accountants was made to
ensure independence, both in appearance and in fact, from
Rentrak, the Company's former parent, whose independent
accountants are Arthur Andersen.
Arthur Andersen's reports on the financial statements of
the Company for Rentrak for the last two years did not contain
adverse opinions or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or
accounting principles. There were no disagreements with
Arthur Andersen on any matters of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure during Rentrak's and the Company's two most recent
fiscal years and any subsequent interim period preceding the
dismissal.
The Audit Committee of the Board of Directors
recommended, and the Board approved, the appointment of Price
Waterhouse, LLP. the Company's new accountants and independent
auditors effective December 18, 1996. The engagement of Price
Waterhouse, LLP for fiscal 1997 is subject to stockholder
ratification at the Company's Annual Meeting of Stockholders.
If such appointment is not ratified, the Board of Directors
will appoint another firm as the Company's accountants and
independent auditors for fiscal 1997.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is
incorporated herein by reference to the information under the
captions entitled "Board of Directors--Members and Nominees
for Election" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders.
Information with respect to executive officers of the
Company is included in Item 1, Part I hereof under the caption
"Executive Officers of the Registrant."
ITEM 11 - EXECUTIVE COMPENSATION
Information with respect to executive compensation is
incorporated herein by reference to the information under the
captions "Executive Compensation" and "Board of Directors--
Compensation of Directors" in the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain
beneficial owners and management of the Company is
incorporated herein by reference to the information under the
caption "Principal Stockholders" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and
transactions is incorporated herein by reference to the
information under the caption "Related Party Transactions" in
the Company's Proxy Statement for the 1997 Annual Meeting of
the Stockholders.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)The response to this section of Item 14 is submitted as
a separate section of this report on pages F-1 through F-
17.
(a)(2)None.
(a)(3)The exhibits, as listed in the Exhibit Index set forth
on pages E-1 through E-4, are submitted as a separate
section of this report.
(b) One current report on Form 8-K was filed during the
quarter ended December 31, 1996. The Company filed a
Form 8-K on December 26, 1996 to report a change in its
certifying accountant from Arthur Andersen to Price
Waterhouse, LLP. See also Item 9 above.
(c) See Item 14(a)(3) above.
(d) None.
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1)
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
BLOWOUT ENTERTAINMENT, INC.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of BlowOut Entertainment, Inc.
In our opinion, the accompanying consolidated balance sheet
and the related consolidated statements of operations, of
changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial
position of BlowOut Entertainment, Inc. at December 31, 1996,
and the results of their operations and their cash flows for
the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
February 7, 1997
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BlowOut Entertainment, Inc.:
We have audited the accompanying consolidated balance sheet of
BlowOut Entertainment, Inc. (a Delaware corporation) and
subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of BlowOut Entertainment, Inc. and subsidiaries as of
December 31, 1995, and the results of their operations and
their cash flows for each of the two years in the period ended
December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
May 28, 1996 (except with respect
to the stock dividend discussed
in Note 8, as to which the date
is October 9, 1996)
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 1,379,018 $ 2,493,541
Restricted cash -- 113,297
Trade receivables 62,183 65,585
Other receivables 111,922 276,324
Merchandise inventory 2,139,259 984,894
Other current assets 132,582 244,426
Total current assets 3,824,964 4,178,067
RENTAL INVENTORY, net 7,793,416 5,715,093
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 4,494,933 3,481,308
INTANGIBLE ASSETS, net of accumulated
amortization of $746,480 and $263,541
respectively 4,459,820 4,942,759
OTHER ASSETS -- 219,268
Total assets $ 20,573,133 $ 18,536,495
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
CURRENT LIABILITIES:
Line of credit $ 2,227,153 $ --
Accounts Payable 4,342,395 3,278,553
Accrued liabilities 998,254 1,217,893
Accrued payroll 485,506 178,310
Current portion of long-term debt 414,451 326,287
Total current liabilities 8,467,759 5,001,043
LONG-TERM DEBT 1,021,940 640,789
DEFERRED PAYABLES 3,263,575 2,800,000
Total liabilities $ 12,753,274 $ 8,441,832
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock ($.01 par value;
1,000,000 shares authorized;
no shares issued and
outstanding
Common stock ($.01 par value;
10,000,000 shares authorized;
2,433,330 and 1,800,000 shares
issued and outstanding in 1996
and 1995, respectively) 24,336 18,000
Additional paid-in capital 21,947,864 16,974,200
Accumulated deficit (14,152,341) (6,897,537)
Total stockholders' equity 7,819,859 10,094,663
Total liabilities and
stockholders' equity $20,573,133 $ 18,536,495
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1995 1994
REVENUE:
Rental revenue $ 23,261,214 $ 7,689,018 $ 1,115,316
Product and other sales 7,087,970 3,029,471 177,516
30,349,184 10,718,489 1,292,832
OPERATING COSTS AND EXPENSES:
Cost of rental revenue 9,649,879 3,268,629 408,566
Cost of product and other sales 4,641,417 1,951,132 154,750
Operating expenses 17,617,705 6,274,661 852,208
Selling, general and administrative 3,637,244 3,277,818 308,813
35,546,245 14,772,240 1,724,337
LOSS FROM OPERATIONS: (5,197,061) (4,053,751) (431,505)
OTHER INCOME (EXPENSE):
Interest income 17,115 3,540 --
Interest expense (806,849) (532,836) (161,700)
Other, net (1,268,009) (401,627) (250,819)
(2,057,743) (930,923) (412,519)
LOSS BEFORE INCOME TAXES (7,254,804) (4,984,674) (844,024)
INCOME TAXES -- -- --
NET LOSS $ (7,254,804) $ (4,984,674) $ (844,024)
NET LOSS PER COMMON SHARE $ (3.60) $ (3.41) $ (.93)
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
PAID-IN DEFICIT STOCKHOLDERS'
CAPITAL EQUITY
(DEFICIT)
<S> <C> <C> <C> <C> <C>
SHARES AMOUNT
BALANCE, December 31, 1993 900,000 $9,000 $ 866,000 $(1,068,839) $(193,839)
Net loss -- -- -- (844,024) (844,024)
BALANCE, December 31, 1994 900,000 9,000 866,000 (1,912,863) (1,037,863)
Capital contributed for
Entertainment One, Inc.
acquisition 900,000 9,000 4,369,260 -- 4,378,260
Capital contributed for
Supercenter Entertainment
Corporation acquisition -- -- 5,213,125 -- 5,213,125
Conversion of borrowings and
accrued interest due to
parent to equity -- -- 6,525,815 -- 6,525,815
Net loss -- -- -- (4,984,674) (4,984,674)
BALANCE, December 31, 1995 1,800,000 18,000 16,974,200 (6,897,537) 10,094,663
Issuance of common stock 357,600 3,576 2,976,424 -- 2,980,000
Conversion of debt 240,000 2,400 1,997,600 -- 2,000,000
Stock distribution 35,730 360 (360) -- --
Net loss -- -- -- (7,254,804) (7,254,804)
BALANCE, December 31, 1996 2,433,330 $24,336 $21,947,864 $(14,152,341) $7,819,859
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,254,804) $(4,984,674) $(844,024)
Adjustments to reconcile net
loss to net cash provided
(used) in operating activities:
Amortization of videocassette
rental inventory 5,514,147 1,528,640 179,293
Depreciation 1,169,906 456,293 166,545
Amortization and write off of
intangible and other assets 702,207 272,921 --
Loss from sale of assets 29,926 -- --
Changes in assets and liabilities
accounts, net of effect of
acquisitions of businesses:
Restricted cash 113,297 (113,297) --
Receivables, net 167,804 (270,007) (12,360)
Merchandise inventory (1,154,365) (886,546) (3,898)
Other current assets (73,605) (176,660) 783
Accounts payable 1,063,842 1,247,835 (58,343)
Accrued liabilities (219,639) 1,129,831 183,017
Accrued payroll 307,196 68,833 (4,903)
Net cash provided by (used)
in operating activities 365,912 (1,726,831) (393,890)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes,
net of tapes acquired in
acquisitions (9,967,198) (4,322,348) (202,545)
Capital expenditures, net
of acquisitions (2,272,214) (1,012,631) (10,438)
Disposals of rental inventory 2,374,728 564,450 30,382
Disposals of equipment
and leasehold improvements 88,683 290,554 107,420
Proceeds from the sale of
assets held for investment 155,523 -- --
Cash acquired in Entertainment One,
Inc. acquisition -- 64,235 --
Proceeds from disposal of
assets acquired in Entertainment
One, Inc. acquisition -- 1,099,714 --
Net cash used in investing activities(9,620,478) (3,316,026) (75,181)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (523,295) -- --
Proceeds from issuance of debt 1,456,185 7,470,236 416,422
Proceeds from line of credit, net 2,227,153 -- --
Proceeds from issuance of convertible
debt 2,000,000 -- --
Proceeds from the issuance of common
stock 2,980,000 -- --
Net cash provided by financing
activities 8,140,043 7,470,236 416,422
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,114,523) 2,427,379 (52,649)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 2,493,541 66,162 118,811
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,379,018 $ 2,493,541 $ 66,162
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, FORMATION OF COMPANY AND SIGNIFICANT ACCOUNTING
POLICIES:
NATURE OF BUSINESS
BlowOut Entertainment, Inc. and subsidiaries (the Company), are engaged in the
business of operating "store within a store" retail video outlets which rent
and sell motion picture videocassettes, video games, computer games and
programs on CD-ROMs in traditional Wal-Mart's, Wal-Mart SuperCenters, Super
Kmart Centers, Food 4 Less and Ralph's grocery stores pursuant to individual
leases with each retailer. As of December 31, 1996, the Company operated 153
stores in Wal-Mart and Wal-Mart SuperCenters, and 35 stores in Super Kmart
Centers and 6 stores in Food 4 Less under the name "BlowOut Video" and 6 stores
in Ralph's grocery stores under the name "Videos and More."
FORMATION OF COMPANY
On November 25, 1996, Rentrak Corporation (Rentrak), distributed 1,457,343
shares of BlowOut Entertainment, Inc. stock to holders of Rentrak common stock
(the Distribution). Prior to the Distribution, Rentrak held approximately 70%
of the Company's stock. The Company expensed the cost of the Distribution as
no proceeds were obtained from such Distribution. The Distribution costs
approximated $980,000 and are included in other expense per the accompanying
consolidated statement of operations.
In the spring of 1996, Rentrak consolidated the businesses and operations of
three direct or indirect wholly owned subsidiaries to form the Company. Prior
thereto, Rentrak operated its wholly owned "store within a store" retail video
outlets through those subsidiaries.
In July 1992, Rentrak formed SVI, Inc. (SVI) to operate "store within a store"
retail video outlets. On August 31, 1995, Rentrak formed W-One Incorporated
(W-1) and K-One Incorporated (K-1) to facilitate the acquisition of Supercenter
Entertainment Corporation (SCE). On the same date, Rentrak acquired the Wal-
Mart and Kmart "store within a store" retail video operations from SCE. As
part of the acquisition, the leases, pursuant to which SCE operated the Wal-
Mart and Kmart stores, were assigned to W-1 and K-1, respectively. Effective
September 1, 1995, Rentrak assigned to W-1, as a capital contribution, all of
the former SCE assets and liabilities related to the operations of its Wal-Mart
stores, and Rentrak assigned to K-1, as a capital contribution, all of the
former SCE assets and liabilities related to the operation of its Kmart stores.
To effect the consolidation of the Company, in the spring of 1996 Rentrak
contributed all of the outstanding capital stock of W-1 and K-1 to a wholly
owned subsidiary of Rentrak, which then contributed the stock of W-1 and K-1 to
SVI as a capital contribution. W-1 and K-1 then became wholly owned
subsidiaries of SVI. Following this contribution, SVI changed its name to
BlowOut Entertainment, Inc. and increased the authorized capital stock to
11,000,000 shares, of which 10,000,000 shares were authorized for issuance as
common stock and 1,000,000 shares were authorized for issuance as preferred
stock.
Between July 1994 and December 1995, Rentrak and two wholly owned subsidiaries
acquired 92.6 percent of the issued and outstanding common stock of
Entertainment One, Inc. (E-1), with the remaining 7.4 percent of E-1's common
stock being held by persons unrelated to Rentrak.
In May 1996, the Company acquired all of E-1's tangible and intangible assets
and assumed all of its liabilities in exchange for shares of its common stock.
Following such sale of assets, E-1 dissolved and liquidated its assets pursuant
to a Plan of Liquidation that provided for the distribution of the Company
shares to Rentrak and the remaining stockholders on a basis such that, as a
result, Rentrak and the remaining stockholders, as a group, own 93 percent and
7 percent, respectively, of the issued and outstanding common stock of the
Company.
The above reorganization was accounted for as a reorganization of entities
under common control, restating the Company's financial statements similar to
accounting for a pooling of interests and reflecting the elimination of all
intercompany transactions (see Note 2).
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to be consistent with the 1996 presentation. The
reclassifications had no effect on previously reported net loss or
stockholders' equity.
FINANCING
The Company has obtained financing in the form of a revolving line of credit
from Coast Business Credit in the maximum amount of $5 million or an amount not
to exceed 80% of eligible rental videocassette tape inventory. The line of
credit is due September 12, 1999 and bears interest at the rate of prime plus
2.75%.
In addition the Company has obtained $2 million under two security agreements
dated July 23, 1996 from Phoenix Leasing Incorporated. The current borrowings
under this agreement total $927,965 payable in equal monthly installments over
a five year term. Subsequent to December 31, 1996 the Company entered into
agreement to borrow an additional $480,000.
CERTAIN RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as short-term highly liquid investments
with original maturities of three months or less. The carrying amount of cash
and cash equivalents approximate fair value because of the short maturity of
those instruments.
Restricted cash at December 31, 1995 was maintained at South Trust Bank of
Alabama, N.A. and represented funds held in escrow. The original balance of
$110,000 was deposited in June 1995 and earned interest at a variable rate.
The Company withdrew the balance during 1996.
FINANCIAL INSTRUMENTS
A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation or right, to deliver, or receive, cash or another
financial instrument. The fair value of all material financial instruments
approximated their carrying values at December 31, 1996 and 1995.
MERCHANDISE INVENTORY
Merchandise inventories, consisting primarily of previously viewed
videocassettes, are stated at the lower of cost or market. Cost is determined
using the last three months rolling average of purchases which approximates the
first-in, first-out method.
VIDEOCASSETTE RENTAL INVENTORY
Videocassettes purchased for basic stock rental use are stated at cost and
amortized straight line over 36 months with a provision for a $6 salvage value.
The amortization methods used reflect the anticipated revenue stream.
Since 1992, the Company has obtained new release titles under a revenue sharing
agreement with Rentrak. Under this agreement, Rentrak provides the Company
with videocassettes released by certain studios. The Company pays and
capitalizes a handling fee of $8 to $10 for each videocassette. The handling
fee per videocassette is amortized on a straight-line basis over 36 months to a
$6 salvage value. During the revenue sharing period, which does not exceed two
years, the studio owns the videocassette, and the rental revenue is shared by
the studio, Rentrak and the Company on a predetermined basis (see Note 9).
The Company may sell excess copies of a video title obtained from Rentrak and
share the sale proceeds with Rentrak and the studio on a predetermined basis.
At the end of the revenue sharing period for a title, the Company may purchase
remaining copies of that title in the Company's inventory, generally for less
than $5 per copy.
At December 31, 1996 and 1995, the Company's videocassette rental inventory
consists of:
1996 1995
Cost $13,629,350 $7,152,838
Less accumulated amortization 5,835,934 1,437,745
Videocassette rental inventory, net $ 7,793,416 $5,715,093
Amortization expense related to videocassette rental inventory was
approximately $5,514,000, $1,528,000 and $179,000 in 1996, 1995 and 1994,
respectively, and is included in operating costs and expenses.
As videocassette rental inventory is sold or retired, the applicable cost and
accumulated amortization are eliminated from the accounts and any related gain
or loss is recognized through cost of rental and product sales.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful life of such
assets. The following table represents the estimated useful life of each
category of fixed asset:
Leasehold improvements 10 years
Furniture and fixtures 3-5 years
Expenditures for repairs and maintenance are charged to current operations, and
costs related to renewals and improvements that add significantly to the useful
life of an asset are capitalized. When depreciable properties are retired or
otherwise disposed of, the cost and related depreciation are removed from the
accounts and the resulting gain or loss is reflected in income.
INTANGIBLE ASSETS
As a result of the SCE and E-1 acquisitions, the Company has recorded
intangible assets consisting of goodwill and favorable lease contracts. The
goodwill of approximately $1,656,300 is amortized by the straight-line basis
over 15 years. The Company believes this useful life is appropriate based on
the factors influencing acquisition decisions. These factors include location
of stores, profitability and general industry outlook. The favorable lease
contract of approximately $3,500,000 is being amortized over the term of the
lease, 10 years.
The Company reviews its intangible assets for asset impairment at the end of
each quarter, or more frequently when events or changes in circumstances
indicate that the carrying amount of intangibles may not be recoverable. To
perform that review, the Company estimates the sum of expected future
undiscounted cash flows from operating activities. If the estimated net cash
flows are less than the carrying amount of intangibles, the Company recognizes
an impairment loss in an amount necessary to write the intangibles down to fair
value as determined from expected discounted future cash flows.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109. Accordingly, deferred income taxes are
provided at the current statutory rates for the difference between financial
statement and tax basis of assets and liabilities and are classified in the
consolidated balance sheet as current or long-term, consistent with the
classification of the related asset or liability giving rise to the deferred
income taxes.
REVENUE RECOGNITION
Revenue is recognized at the time of rental or sale of the videocassettes.
ADVERTISING EXPENSE
Advertising expense, net of cooperative advertising reimbursements, is expensed
when incurred and totaled $571,945, $432,627 and $33,183 for the years ended
December 31, 1996, 1995 and 1994, respectively.
STORE OPENING COSTS
Store opening costs, which consist of payroll, advertising and supplies are
expensed as incurred.
PER SHARE DATA
Loss per share is computed based on the weighted average number of common and
common equivalent shares (if dilutive) outstanding during the periods
presented. All per share amounts have been retroactively adjusted for the
effect of a 1.01491-for-1 stock dividend approved by the Company's board of
directors on October 9, 1996 (see Note 8).
STATEMENT OF CASH FLOWS
The Company made the following cash payments for the years ended December 31:
1996 1995 1994
Interest $ 229,342 $ 44,316 $ --
Noncash investing and financing activities are as follows:
1996 1995 1994
Acquisition of E-1 as contribution
from Rentrak $ -- $ 4,378,260 $ --
Acquisition of SCE as contribution
from Rentrak -- 5,213,125 --
Conversion of borrowings and accrued
interest due to Rentrak to equity -- 6,525,815 --
Conversion of convertible debt
to equity 2,000,000 -- --
2. ACQUISITIONS:
As noted in Note 1, the Company consolidated the businesses and operations of
SVI, SCE, and E-1. This reorganization was accounted for as entities under
common control, restating the Company's financial statements similar to
accounting for a pooling of interests. Accordingly, the acquisitions of E-1
and SCE by the Company, as described below, are reflected in these financial
statements.
E-1 ACQUISITION
On August 31, 1994, the Company acquired 169,230 newly issued shares of common
stock of E-1 valued at $338,460 in lieu of a financing fee associated with
$1,700,000 of financing provided by the Company to E-1. On December 1, 1994,
the Company acquired 500,000 newly issued shares of common stock in E-1 at
$2.00 per share. Following the acquisition, the Company owned approximately
9.6 percent of the outstanding shares of E-1. On May 26, 1995, the Company
purchased 3,200,000 shares of common stock of E-1 from an E-1 stockholder at
$.004 per share. Following the acquisition, the Company owned approximately
57 percent of the outstanding shares of E-1.
In connection with this acquisition, the five "stand-alone" video stores owned
by E-1 were sold in June 1995 for approximately $1,100,000. These assets were
valued at their net realizable value when allocating the purchase price to the
assets acquired and liabilities assumed.
On October 20, 1995, the Company purchased from E-1 $985,591 principal amount
of convertible debentures, all of which were converted into 13,798,275 shares
of common stock of E-1 on December 15, 1995. Also on December 15, 1995, the
Company converted a $2 million line of credit that it had provided to E-1 into
28,000,000 shares of common stock of E-1. Following these transactions, the
Company owned 93 percent of the outstanding shares of E-1.
The results of operations of the acquired stores have been included in the
results of operations of the Company for the seven-month period ended
December 31, 1995.
SCE ACQUISITION
On August 31, 1995, the Company acquired certain assets and assumed certain
liabilities of SCE which constituted the Wal-Mart and K-Mart "store within a
store" video retail operations of SCE.
The total cost of the SCE acquisition of $5.2 million was provided by issuing
878,000 shares of Rentrak common stock with an aggregate market value of
approximately $5.2 million.
The results of operations of the acquired stores are included in the results of
operations of the Company for the four-month period ended December 31, 1995.
The purchase method of accounting was used to record both the E-1 and SCE
acquisitions.
The following table presents the unaudited pro forma results of operations for
the years ended December 31, 1995 as if the E-1 acquisition and the SCE
acquisition had occurred at the beginning of the period. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisitions been made at the
beginning of the respective periods or of results which may occur in the
future.
YEAR ENDED DECEMBER 31,
(Unaudited)
1995 1994
Revenue $17,727,476 $6,092,995
Net loss (8,255,722) (4,384,855)
Net loss per common share (4.52) (2.44)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements as of December 31, 1996 and 1995, consist
of:
1996 1995
Leasehold improvements $ 209,553 $ 241,678
Furniture, fixtures and
computers 5,846,781 3,734,445
TOTAL 6,056,334 3,976,123
Less accumulated depreciation(1,561,401) (494,815)
Equipment and leasehold
improvements, net $ 4,494,933 $ 3,481,308
Maintenance and repair expenditures are expensed as incurred. Depreciation and
amortization expense related to property and equipment was $1,169,906, $456,293
and $166,545 in 1996, 1995 and 1994, respectively.
4. LINE OF CREDIT
At December 31, 1996, the Company had a $5,000,000 line of credit with Coast
Business Credit. Borrowings under the line are due on demand, bear interest
monthly at prime plus 2.75% (11.00% at December 31, 1996), and are
collateralized by rental inventory. Pursuant to the line of credit, the
Company is required to comply with certain financial covenants, including
ratios and tangible net worth. At December 31, 1996, the Company was not in
compliance with certain covenants; however, the Company has obtained a letter
from Coast Business Credit waiving any default under these covenants. At
December 31, 1995 and 1996 there were zero and $2.2 million outstanding,
respectively, under this line.
5. LONG-TERM DEBT:
Long-term debt consist of:
1996 1995
Note payable to Phoenix Leasing, due August 2001,
bearing interest at 14.525% $ 927,966 $ --
Notes payable to various vendors, due May 1998,
imputed interest at 11% 418,605 587,097
Mortgage payable to Crossroads Bank, paid in 1996,
bearing interest at 8%, secured by building -- 154,854
Notes payable to various vendors, due June 1997,
imputed interest at 11% 62,895 107,038
Notes payable to Softplay, due July 1996, bearing
interest at 24% -- 67,105
Other, payable monthly, plus interest at
approximately 10% 26,925 50,982
Total long-term debt 1,436,391 967,076
Current portion of long-term debt 414,451 326,287
Long-term debt, less current portion $ 1,021,940 $ 640,789
In August 1996, Phoenix Leasing Incorporated ("Phoenix") agreed to provide the
Company with 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
14.525%. The proceeds of the Phoenix Facility are to be used to construct and
open (including acquisition of inventory) new BlowOut Video 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 December 31, 1996, the Company had
borrowed approximately $928,000 under the Phoenix Facility.
Principal payments on long-term debt, including the Rentrak deferred payables,
as of December 31, 1996 are as follows:
1997 $ 414,451
1998 416,978
1999 3,471,862
2000 234,579
2001 162,096
$ 4,699,966
6. COMMITMENTS AND CONTINGENCIES:
The Company leases its office and retail facilities under operating leases, the
majority of which contain renewal and termination options.
The Company's office and warehouse facilities are operated under operating
leases. The Company entered into an eleven-year lease agreement with Rentrak.
Through December 31, 1996, rental payments under this agreement were calculated
as 3.71 percent of all of Rentrak's expenses of occupying their facility.
Beginning January 1, 1997, the lease was amended so that the Company has a
fixed monthly payment. Future minimum lease payments required under leases as
of December 31, 1996, including the agreement with Rentrak as described above,
are as follows:
YEAR ENDING
1997 $ 144,081
1998 96,081
1999 95,338
2000 87,168
2001 85,671
Thereafter 467,199
Total lease
payments $ 975,538
As discussed in Note 1, the majority of the Company's retail facilities are
operated under master lease agreements with Wal-Mart and Kmart. Each of these
master leases provides for an initial five-year term for each new store, with
an additional five-year optional renewal term.
Rental expense for the Wal-Mart, Kmart and Ralph's locations is computed as a
percentage of retail store revenue plus additional charges for maintenance,
property taxes and other common area charges.
Lease expense was $3,653,680, $1,167,827 and $120,014 and included $3,560,024,
$1,071,032 and $94,543 of rents based on retail store revenues for the years
ended December 31, 1996, 1995 and 1994, respectively.
Under the Wal-Mart lease, either the Company or Wal-Mart can elect to terminate
the lease with respect to stores which fail to generate a minimum level of
revenues. Currently, substantially all of the Company's stores are operating
in excess of the minimum revenue requirement.
Also under the Wal-Mart lease, all assets of the Company are pledged to secure
payment of all rentals due to Wal-Mart.
7. INCOME TAXES:
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
1996 1995 1994
Benefit computed at statutory rates (34.0)% (34.0)% (34.0)%
Loss benefit accruing to Rentrak 29.9 - -
Change in valuation allowance 3.6 33.8 33.7
Other .5 .2 .3
- % - % - %
For periods prior to the date of the Distribution, the Company is included in
the consolidated tax return of Rentrak. Net operating losses incurred prior to
the date of the Distribution are allocated and utilized in the consolidated tax
return of Rentrak. The deferred tax asset at December 31, 1995 related to net
operating losses and was allocated entirely to Rentrak as provided in the Tax
Sharing Agreement between Rentrak and the Company. As such, the entire amount
of the deferred tax asset at December 31, 1996 for net operating losses relates
to losses incurred subsequent to the date of the Distribution.
Provision (benefit) for income taxes:
1996 1995
Currently payable
Federal $ - $ -
State - -
Deferred
Federal 414,333 (1,455,548)
State 48,745 (171,241)
463,078 (1,626,789)
Increase (Decrease) in valuation
allowance (463,078) 1,626,789
Total provision $ - $ -
Deferred tax assets (liabilities) are comprised of the following components:
1996 1995
Current:
Inventory reserve $ - $ 4,167
Vacation accrual 45,742 6,720
Total current deferred tax assets 45,742 10,887
Noncurrent:
Depreciation 355,018 185,873
Amortization on intangible assets 943,703 919,144
Net operating loss carryforwards 536,960 1,228,597
Total noncurrent deferred tax assets 1,835,681 2,333,614
Gross deferred tax asset 1,881,423 2,344,501
Deferred tax asset valuation allowance (1,881,423) (2,344,501)
Net deferred tax asset $ - $ -
Due to the uncertainty of future income, the Company has provided a valuation
allowance for the entire amount of the deferred tax asset.
At December 31, 1996, for federal tax return reporting purposes, the Company
has approximately $1,413,052 of tax loss carryovers that expire at various
dates through 2011.
8. STOCKHOLDERS' EQUITY:
CONVERTIBLE DEBENTURES
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 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.
1996 EQUITY PARTICIPATION PLAN
During 1996, the Board of Directors approved the issuance of stock options to
certain employees, contractors and directors per the 1996 Equity Participation
Plan (the Plan), which Plan was then amended and restated later in 1996. As of
December 31, 1996, there were no options exercisable. Generally, options
granted under the Plan terminate in 10 years from the date of grant and vest
ratably over 4 years. The Plan is being administered by the Compensation
Committee of the Board of Directors, which has the authority to approve the
issuance of nonqualified and incentive stock options subject to the
requirements of the Plan.
Activity in the Company's stock options is as follows:
Per Share
SHARES OPTION PRICE
Outstanding at December 31, 1995 -
Granted 80,000 $2.375-3.625
Exercised -
Canceled -
--------
Outstanding at December 31, 1996 80,000 $2.375-3.625
The weighted average fair value of options granted during the year was $2.76.
The following table summarizes information about fixed stock options at
December 31,
1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Outstanding at Weighted - Average Number Exercisable
Exercise Price 12/31/96 Remaining Contractual at 12/31/96 Weighted - Average
Life Exercise Price
<S> <C> <C> <C> <C>
$2.375 15,000 9.9 - $ -
$2.500 45,000 9.8 - $ -
$3.625 20,000 8.7 - $ -
80,000 -
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plan. Accordingly, no compensation was recognized for its options
granted. Had compensation cost for the options granted been determined based
on the fair value at the grant dates consistent with the method of FASB 123,
the Company's net loss and loss per share would have been increased to the pro
forma amounts indicated below:
1996
Net Loss As reported $7,254,804
Pro forma $7,260,188
Loss per share As reported $3.60
Pro forma $3.60
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1996:
risk-free interest rate of 5.145%; dividend yield of zero; expected life of 10
years; and expected volatility of 65.35%.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors approved an Employee Stock Purchase Plan.
This plan authorizes up to 200,000 shares of common stock to be issued to its
full time employees and directors. Under the terms of this plan, employees can
choose each year to have up to 10% of their annual total compensation withheld
to purchase the Company's common stock. The purchase price of the stock is 85
percent of the prevailing market price. The effective date of this plan is
January 1, 1997.
STOCK DIVIDEND
On October 9, 1996, the Company's board of directors approved a 1.01491-for-1
stock dividend for all stockholders of record as of October 9, 1996. All per
share amounts for all periods in the Company's financial statements have been
retroactively adjusted for the effect of the stock dividend.
9. RELATED PARTY TRANSACTIONS:
CULTURE CONVENIENCE CLUB/MASUDA MUNEAKI:
Culture Convenience Club (CCC) Chairman and principal shareholder, Muneaki
Masuda, owns 605,102 shares of the Company as of December 31, 1996, or 24.9% of
the total outstanding shares. Muneaki Masuda is a member of the Board of
Directors of the Company. In April 1996, CCC purchased a $1 million
convertible note from the Company which was subsequently converted into 121,789
shares of the Company on August 31, 1996 Mr. Masuda also serves on the Board
of Directors of Rentrak Corporation where he owns 1,000,016 shares of Rentrak
as of December 31, 1996, or 8.2% of the total outstanding shares. He was paid
Board fees of $5,666.67 in 1996 with an additional $4,166.67 of Board fees
being deferred until the Company becomes profitable. In addition, Muneaki
Masuda received 5,000 options to purchase shares of the Company at $3.625 on
November 25, 1996. These options vest 25% per year and expire on November 24,
2006.
On August 30, 1996 CCC purchased from the Company for $2.98 million a total of
362,931 shares of common stock at a purchase price of approximately $8.21 per
share.
RENTRAK CORPORATION
Rentrak Corporation (Rentrak) owns 241,599 shares of the Company as of December
31, 1996, or 9.9% of the total outstanding shares. Prior to the Distribution
on November 25, 1996, Rentrak owned 1,698,942 of the Company, or 69.8% of the
total outstanding shares. Rentrak distributed 1,457,343 of the Company's
shares to its shareholders on a basis of 1 Company share for every 8.34 shares
of Rentrak. The Company leases its corporate offices and warehouse from
Rentrak. The corporate office lease is a 10 year lease commitment beginning
January 1997 and the warehouse is on a 1 year lease beginning January 1997.
Total rent payments to Rentrak for the office and warehouse space in 1996, 1995
and 1994 were $72,473, $138,593 and $140,532, respectively. The Company also
has a license arrangement with Rentrak for use of the Company name. The
Company is to pay a 1.667% royalty on aggregate net revenue, but not to exceed
20% of net income. The license agreement is for 20 years beginning March 1996.
If the Company does not have pre-tax income, as calculated in accordance with
generally accepted accounting principles, there is no royalty payment accruable
or payable to Rentrak. Accordingly, no royalties have been paid through
December 31, 1996. The Company is also obligated to purchase enough
merchandise from Rentrak that the fees payable by the Company under the Pay Per
Transaction (PPT) Agreement are at least 11% of the Company's annual gross
retail rental revenue. The PPT Agreement is for 20 years beginning March 1996.
Total PPT fees paid in 1996, 1995 and 1994 were $3 million, $2.7 million and
$144,000, respectively. Rentrak also has a note payable for $3.01 million plus
accrued interest at a 9% rate, all due and payable on March 31, 1999. Accrued
interest at December 31, 1996, 1995 and 1994 was $253,575, $433,189 and
$161,700, respectively. Finally, Rentrak has guaranteed certain liabilities of
the Company, including, the Coast Business Credit's line of credit, Phoenix
Financial notes, and five vendor notes. The Company pays a fee to Rentrak of
.02% per week on the outstanding balance on the guarantee liabilities effective
as of June 26, 1996. In 1996 the Company paid Rentrak $18,694 for this
guarantee.
In December 1995, Rentrak contributed intercompany payables and accrued
interest due from the Company to Rentrak of $6,525,815 as a capital
contribution to the Company.
BILL LEVINE:
Bill LeVine is a member of the Board of Directors of the Company and owns
173,447 shares of the Company as of December 31, 1996, or 7.1% of the total
outstanding shares. In April 1996, Bill LeVine purchased a $1 million
convertible note from the Company which was subsequently converted into 121,789
shares of the Company on August 31, 1996. Bill LeVine also serves on the
Rentrak Board of Directors. He owns 430,827 shares of Rentrak at December 31,
1996, or 3.5% of the total outstanding shares. He was paid Board fees of
$5,666 in 1996 with an additional $4,166 of Board fees being deferred until the
Company becomes profitable. In addition, Bill LeVine received 5,000 options to
purchase shares of the Company at $3.625 on November 25, 1996. These options
vest 25% per year and expire on November 24, 2006.
R&G COMMUNICATIONS:
In 1996, the Company purchased $90,960 of master tapes for tape duplications
from R&G Communications. R&G Communications is partially owned by Gene
Giaquinto who is the Company's Chairman of the Board.
SKURA INTERCONTINENTAL TRADING COMPANY:
In 1996, the Company purchased $52,000 of tapes from SITC which is partially
owned by Gene Giaquinto, the Company's Chairman of the Board.
PRISM:
In 1996, the Company purchased $400,210 of tapes from Prism. Prism was
partially owned by Rentrak at the time of the sale.
10. LITIGATION:
The Company has several legal actions pending incidental to the ordinary course
of business. In the opinion of management, the expected outcome of these
matters in the aggregate will not have a material adverse effect on the
financial position or results of operations of the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 28, 1997 BLOWOUT ENTERTAINMENT, INC.
By: /S/ STEVE BERNS
Steve Berns
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
Steve Berns* President and Director March 28, 1997
(Principal Executive Officer)
Eugene F. Giaquinto* Chairman of the Board of March 28, 1997
Directors
Bill LeVine* Director March 28, 1997
Muneaki Masuda* Director March 28, 1997
Seth A. Reames* Director March 28, 1997
Karl D. Wetzel* Chief Financial Officer March 28, 1997
(Principal Financial and
Accounting Officer)
*By: /S/ STEVE BERNS Individually and as March 28, 1997
Steve Berns Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation [Incorporated
by reference to Exhibit 3.1 to Registration Statement No. 0-
21327]
3.2 Amended and Restated Bylaws [Incorporated by reference to
Exhibit 3.2 to Registration Statement No. 0-21327]
4.1 Specimen Common Stock Certificate [Incorporated by reference to
Exhibit 4.1 to Registration Statement No. 0-21327]
10.1 Amended and Restated 1996 Equity Participation Plan of BlowOut
Entertainment, Inc. dated November 25, 1996*
10.2 National Account Agreement between BlowOut Entertainment, Inc.,
and Rentrak Corporation dated March 15, 1996 and First Addendum
thereto dated March 16, 1996 [Incorporated by reference to
Exhibit 10.2 to Registration Statement No. 0-21327]
10.3.1 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Steve Berns, dated as of March 1, 1996
[Incorporated by reference to Exhibit 10.3.1 to Registration
Statement No. 0-21327]
10.3.2 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Karl D. Wetzel, dated February 1, 1996
[Incorporated by reference to Exhibit 10.3.2 to Registration
Statement No. 0-21327]
10.3.3 Amended and Restated Employment Agreement between BlowOut
Entertainment, Inc. and Harold Heyer, dated April 22, 1996
[Incorporated by reference to Exhibit 10.3.3 to Registration
Statement No. 0-21327]
10.3.4 Summary of Amendments dated November 4, 1996 to Amended and
Restated Employment Agreements of Steve Berns, Karl D. Wetzel
and Harold Heyer [Incorporated by reference to Exhibit 10.3.4
to Registration Statement No. 0-21327]
10.4 Agreement dated July 22, 1996 between Star Video Entertainment
L.P. and BlowOut Entertainment, Inc. [Incorporated by reference
to Exhibit 10.4 to Registration Statement No. 0-21327
10.5 Guarantee Agreement dated June 26, 1996 between Rentrak
Corporation and BlowOut Entertainment, Inc. [Incorporated by
reference to Exhibit 10.5 to Registration Statement No. 0-
21327]
10.6 Senior Loan and Surety Agreement dated July 23, 1996 between
BlowOut Entertainment, Inc. and Phoenix Leasing Incorporated.
[Incorporated by reference to Exhibit 10.6 to Registration
Statement No. 0-21327]
10.7 Combination Commercial Sublease dated January 1, 1996 among
Rentrak Corporation, BlowOut Entertainment, Inc., Skyport
Industrial Park Partnership and Airport Partners, L.L.C.
[Incorporated by reference to Exhibit 10.7 to Registration
Statement No. 0-21327]
10.8 Loan and Security Agreement dated September 12, 1996 between
BlowOut Entertainment, Inc. and Coast Business Credit
[Incorporated by reference to Exhibit 10.7 to Registration
Statement No. 0-21327]
10.9 Registration Rights Agreement dated as of May 28, 1996 by and
among BlowOut Entertainment, Inc., Rentrak Corporation
Streamlined Solutions, Inc., Mortco Inc. and the other persons
named therein*
10.10 Intercompany Note dated as of December 31, 1995 executed by
BlowOut Entertainment, Inc. as Maker and Rentrak Corporation as
Payee [Incorporated by reference to Exhibit 10.10 to
Registration Statement No. 0-21327]
10.11 Form of Indemnity Agreement [Incorporated by reference to
Exhibit 10.11 to Registration Statement No. 0-21327]
10.12 Master Sublease Agreement dated September 21, 1994 between
Kmart Corporation and SuperCenter Entertainment Corporation and
First Amendment thereto dated April 1, 1995 and Second
Amendment thereto dated January 21, 1996 [Incorporated by
reference to Exhibit 10.12 to Registration Statement No. 0-
21327]
10.13 Agreement dated May 1, 1995 between Ralphs Grocery Company and
SVI, Inc. and First Amendment thereto dated May 1, 1995
[Incorporated by reference to Exhibit 10.13 to Registration
Statement No. 0-21327]
10.14 Master Shopping Center Lease Agreement dated as of November 19,
1994 between Wal-Mart Stores, Inc. and SuperCenter
Entertainment, Inc. and First Amendment thereto dated May 15,
1995 and Second Amendment thereto dated May 14, 1996
[Incorporated by reference to Exhibit 10.14 to Registration
Statement No. 0-21327]
10.15 License Agreement dated March 15, 1996 between Rentrak
Corporation and BlowOut Entertainment, Inc. and First Amendment
thereto dated June 25, 1996 [Incorporated by reference to
Exhibit 10.15 to Registration Statement No. 0-21327]
10.16 Subscription Agreement dated as of August 28, 1996 between
Culture Convenience Club Ltd. and BlowOut Entertainment, Inc.
[Incorporated by reference to Exhibit 10.16 to Registration
Statement No. 0-21327]
10.17 Note Conversion Agreement dated as of August 28, 1996 between
Bill Levine and BlowOut Entertainment, Inc. [Incorporated by
reference to Exhibit 10.17 to Registration Statement No. 0-
21327]
10.18 Note Conversion Agreement dated as of August 28, 1996 between
Culture Convenience Club Ltd. and BlowOut Entertainment, Inc.
[Incorporated by reference to Exhibit 10.18 to Registration
Statement No. 0-21327]
10.19 Registration Rights Agreement dated as of August 28, 1996
between Culture Convenience Club Ltd., Bill Levine and BlowOut
Entertainment, Inc. [Incorporated by reference to Exhibit 10.19
to Registration Statement No. 0-21327]
10.20 Distribution Agreement dated November 11, 1996 between BlowOut
Entertainment, Inc. and Rentrak Corporation and principal
exhibits thereto [Incorporated by reference to Exhibit 2.1 to
Registration Statement 0-21327]
10.21 Servicing, Warehousing and Distribution Agreement dated as of
January 1, 1997 between Streamlined Solutions Inc. and BlowOut
Entertainment, Inc.*
10.22 Employee Stock Purchase Plan of BlowOut Entertainment, Inc.
dated as of December 18, 1996.*
21.1 List of Subsidiaries [Incorporated by reference to Exhibit 21.1
to Registration Statement No. 0-21327]
24.1 Power of Attorney*
27.1 Financial Data Schedule*
* Filed Herewith
THE AMENDED AND RESTATED
1996 EQUITY PARTICIPATION PLAN
OF
BLOWOUT ENTERTAINMENT, INC.
Blowout Entertainment, Inc., a Delaware corporation (the "Company"),
adopted The 1996 Equity Participation Plan of Blowout Entertainment, Inc.,
effective March 21, 1996, for the benefit of its eligible employees,
consultants and directors and desires to amend and restate the same upon
the terms of this, The Amended and Restated 1996 Equity Participation Plan
of Blowout Entertainment, Inc. (the "Plans"). The Plan consists of two
plans, one for the benefit of key Employees (as such term is defined below)
and consultants and one for the benefit of Independent Directors (as such
term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of
the Company by personally benefiting through the ownership of Company
stock.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long
range success of the Company by offering them an opportunity to own stock
in the Company.
ARTICLE 1
DEFINITIONS
2.1.1 GENERAL. Wherever the following terms are used in this Plan
they shall have the meaning specified below, unless the context clearly
indicates otherwise.
2.1.2 AWARD LIMIT. "Award Limit" shall mean 150,000 shares of Common
Stock.
2.1.3 BOARD. "Board" shall mean the Board of Directors of the
Company.
2.1.4 CHANGE IN CONTROL. "Change in Control" shall mean a change in
ownership or control of the Company effected through either of the
following transactions:
(a) any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is
controlled by, or is under commoncontrol with, the Company) directly
or indirectly acquires beneficial (within the meaning of Rule 13d-3
under the Exchange Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made
directly to the Company's stockholders which the Board does not
recommend such stockholders to accept; or
(b) there is a change in the composition of the Board over a
period of thirty-six (36) consecutive months (or less) such that a
majority of the Board members (rounded up to the nearest whole number)
ceases, by reason of one or more proxy contests for the election of
Board members, to be comprised of individuals who either (i) have been
Board members continuously since the beginning of such period or
(ii) have been elected or nominated for election as Board members
during such period by at least a majority of the Board members
described in clause (i) who were still in office at the time such
election or nomination was approved by the Board.
2.1.5 CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.1.6 COMMITTEE. "Committee" shall mean the Compensation Committee of
the Board, or another committee of the Board, appointed as provided in
Section 6.1.
2.1.7 COMMON STOCK. "Common Stock" shall mean the common stock of the
Company, par value $.01 per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any
preferred stock and any warrants, options or other rights to purchase
Common Stock. Debt securities of the Company convertible into Common Stock
shall be deemed equity securities of the Company.
2.1.8 COMPANY. "Company" shall mean Blowout Entertainment, Inc., a
Delaware corporation.
2.1.9 CORPORATE TRANSACTION. "Corporate Transaction" shall mean any
of the following stockholder-approved transactions to which the Company is
a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the State in which the Company is incorporated,
form a holding company or effect a similar reorganization as to form
whereupon this Plan and all Options are assumed by the successor
entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete
liquidation or dissolution of the Company in a transaction not covered
by the exceptions to clause (a), above; or
(c) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities are transferred to a person or person different from those
who held such securities immediately prior to such merger.
2.1.10 DIRECTOR. "Director" shall mean a member of the Board.
2.1.11 EMPLOYEE. "Employee" shall mean any officer or other employee
(as defined in accordance with Section 3401(c) of the Code) of the Company,
or of any corporation which is a Subsidiary, or of Rentrak Corporation.
2.1.12 EXCHANGE ACT. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
2.1.13 FAIR MARKET VALUE. "Fair Market Value" of a share of Common
Stock as of a given date shall be (i) the closing price of a share of
Common Stock on the principal exchange on which shares of Common Stock are
then trading, if any (or as reported on any composite index which includes
such principal exchange), on such date, or if shares were not traded on
such date, then on the next preceding date on which a trade occurred; or
(ii) if Common Stock is not traded on an exchange but is quoted on NASDAQ
or a successor quotation system, the mean between the closing
representative bid and asked prices for the Common Stock on the trading day
previous to such date as reported by NASDAQ or such successor quotation
system; or (iii) if Common Stock is not publicly traded on an exchange and
not quoted on NASDAQ or a successor quotation system, the Fair Market Value
of a share of Common Stock as established by the Committee (or the Board,
in the case of Options granted to Independent Directors) acting in good
faith.
2.1.14 INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an
option which conforms to the applicable provisions of Section 422 of the
Code and which is designated as an Incentive Stock Option by the Committee.
2.1.15 INDEPENDENT DIRECTOR. "Independent Director" shall mean a
member of the Board who is not an Employee of the Company.
2.1.16 NON-OUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
2.1.17 OPTION. "Option" shall mean a stock option granted under
Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a Non-Qualified Stock Option or an
Incentive Stock Option; PROVIDED, HOWEVER, that Options granted to
Independent Directors and consultants shall be Non-Qualified Stock Options.
2.1.18 OPTIONEE. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
2.1.19 PLAN. "Plan" shall mean The 1996 Equity Participation Plan of
Blowout Entertainment, Inc.
2.1.20 QDRO. "QDRO" shall mean a qualified domestic relations order
as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
2.1.21 RULE 16B-3. "Rule 16b-3" shall mean that certain Rule 16b-3
under the Exchange Act, as such Rule may be amended from time to time.
2.1.22 SUBSIDIARY. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then
owns stock possessing 50 percent or more of the total combined* voting
power of all classes of stock in one of the other corporations in such
chain.
2.1.23 TERMINATION OF CONSULTANCY. "Termination of Consultancy" shall
mean the time when the engagement of Optionee as a consultant to the
Company or a Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, by resignation, discharge,
death or retirement; but excluding terminations where there is a
simultaneous commencement of employment with the Company or any Subsidiary.
The Committee, in its absolute discretion, shall determine the effect of
all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and
all questions of whether particular leaves of absence constitute
Terminations of Consultancy. Notwithstanding any other provision of this
Plan, the Company or any Subsidiary has an absolute and unrestricted right
to terminate a consultant's service at any time for any reason whatsoever,
with or without cause, except to the extent expressly provided otherwise in
writing.
2.1.24 TERMINATION OF DIRECTORSHIP. "Termination of Directorship"
shall mean the time when an Optionee who is an Independent Director ceases
to be a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, death or retirement.
The Board, in its sole and absolute discretion, shall determine the effect
of all matters and questions relating to Termination of Directorship with
respect to Independent Directors.
2.1.25 TERMINATION OF EMPLOYMENT. "Termination of Employment" shall
mean the time when the employee-employer relationship between the Optionee
and the Company or any Subsidiary is terminated for any reason, with or
without cause, including, but not by way of limitation, a termination by
resignation, discharge, death, disability or retirement; but excluding
(i) terminations where there is a simultaneous reemployment or continuing
employment of an Optionee by the Company or any Subsidiary, (ii) at the
discretion of the Committee, terminations which result in a temporary
severance of the employee-employer relationship, and (iii) at the
discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Committee, in its absolute
discretion, shall determine the effect of all matters and questions
relating to Termination of Employment, including, but not by way of
limitation, the question of whether a Termination of Employment resulted
from a discharge for good cause, and all questions of whether particular
leaves of absence constitute Terminations of Employment; PROVIDED, HOWEVER,
that, unless otherwise determined by the Committee in its discretion, a
leave of absence, change in status from an employee to an independent
contractor or other change in the employee-employer relationship shall
constitute a Termination of Employment if, and to the extent that, such
leave of absence, change in status or other change interrupts employment
for the purposes of Section 422(a)(2) of the Code and the then applicable
regulations and revenue rulings under said Section. Notwithstanding any
other provision of this Plan, the Company or any Subsidiary has an absolute
and unrestricted right to terminate an Employee's employment at any time
for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
ARTICLE 2
SHARES SUBJECT TO PLAN
2.2.1 Shares Subject to Plan.
(a) The shares of stock subject to Options shall be Common Stock,
initially shares of the Company's Common Stock, par value $.01 per
share. The aggregate number of such shares which may be issued upon
exercise of such options under the Plan shall not exceed 500,000. The
shares of Common Stock issuable upon exercise of such options may be
either previously authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to options
granted under the Plan to any individual in any fiscal year shall not
exceed the Award Limit. To the extent required by Section 162(m) of
the Code, shares subject to Options which are cancelled continue to be
counted against the Award Limit and if, after grant of an Option, the
price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option
and both the Option deemed to be canceled and the Option deemed to be
granted are counted against the Award Limit.
2.2.2 ADD-BACK OF OPTIONS. If any Option expires or is cancelled
without having been fully exercised, the number of shares subject to such
Option but as to which such Option was not exercised prior to its
expiration or cancellation may again be optioned hereunder, subject to the
limitations of Section 2.1. Furthermore, any shares subject to Options
which are adjusted pursuant to Section 7.3 and become exercisable with
respect to shares of stock of another corporation shall be considered
cancelled and may again be optioned, hereunder, subject to the limitations
of Section 2.1. Shares of Common Stock which are delivered by the
Optioneeor withheld by the Company upon the exercise of any Option, in
payment of the exercise price thereof, may again be optioned or granted
hereunder, subject to the limitations of Section 2.1. Notwithstanding the
provisions of this Section 2.2, no shares of Common Stock may again be
optioned, if such action would cause an Incentive Stock Option to fail to
qualify as an incentive stock option under Section 422 of the Code.
ARTICLE 3
GRANTING OF OPTIONS
2.3.1 ELIGIBILITY. Any Employee or consultant selected by the
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be
granted Options at the times and in the manner set forth in Section 3.4(d).
2.3.2 DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or any then existing subsidiary or parent thereof unless such
Incentive Stock Option conforms to the applicable provisions of Section 422
of the Code.
2.3.3 QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock
Option shall be granted to any person who is not an Employee.
2.3.4 GRANTING OF OPTIONS.
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select
from among the key Employees or consultants (including Employees
or consultants who have previously received Options under this
Plan) such of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected key
Employees or consultants;
(iii) Determine whether such Options are to be Incentive
Stock Options or Non-Oualified Stock Options; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; PROVIDED, HOWEVER, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code
shall include, but not be limited to, such terms and conditions
as may be necessary to meet the applicable provisions of
Section 162(m) of the Code.
All Options granted to Optionees subject to Section 162(m) of the
Code with an exercise price equal to or greater than the Fair Market
Value of the Common Stock on the date of such grant shall be intended
to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code unless the Committee otherwise
determines.
(b) Upon the selection of a key Employee or consultant to be
granted an Option, the Committee shall instruct the Secretary of the
Company to issue the Option and may impose such conditions on the
grant of the Option as it deems appropriate. Without limiting the
generality of the preceding sentence, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a
condition on the grant of an Option to an Employee or consultant that
the Employee or consultant surrender for cancellation some or all of
the unexercised Options or other rights which have been previously
granted to him under this Plan or otherwise. An Option, the grant of
which is conditioned upon such surrender, may have an option price
lower (or higher) than the exercise price of such surrendered Option
or other right, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other right, may contain such
other terms as the Committee deems appropriate, and shall be
exercisable in accordance with its terms, without regard to the number
of shares, price, exercise period or any other term or condition of
such surrendered Option or other right.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as
an "incentive stock option" under Section 422 of the Code.
(d) (i) During the term of the Plan, each person who is an
Independent Director as of the date of the consummation of the initial
public offering of Common Stock automatically shall be granted (A) an
Option to purchase 5,000 shares of Common Stock (subject to adjustment
as provided in Section 7.3) on the date of such initial public
offering and (B) an Option to purchase 1,000 shares of Common Stock
(subject to adjustment as provided in Section 7.3) on the date of each
annual meeting of stockholders after such initial public offering at
which the Independent Director is reelected to the Board. During the
term of the Plan, a person who is initially elected to the Board after
the consummation of the initial public offering of Common Stock and
who is an Independent Director at the time of such initial election
automatically shall be granted (A) an Option to purchase 5,000 shares
of Common Stock (subject to adjustment as provided in Section 7.3) on
the date of such initial election and (B) an Option to purchase 1,000
shares of Common Stock (subject to adjustment as provided in
Section 7.3) on the date of each annual meeting of stockholders after
such initial election at which the Independent Director is reelected
to the Board. Members of the Board who are employees of the Company
who subsequently retire from the Company and remain on the Board will
not receive an initial Option grant pursuant to clause (A) of the
preceding sentence, but to the extent that they are otherwise
eligible, will receive, after retirement from employment with the
Company, Options as described in clause (B) of the preceding sentence.
All the foregoing Option grants authorized by this Section 3.4(d)(i)
have been approved by the stockholders of the Company. For purposes
of this Plan, "initial public offering" shall include the distribution
(the "Distribution") to holders of the common stock of Rentrak
Corporation, an Oregon corporation ("Rentrak"), pursuant to which such
holders will receive as a dividend one share of Common Stock for every
8.34 shares of common stock of Rentrak on or about November 25, 1996
(the "Distribution Date").
(ii) The Board may from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
(A) Determine whether, in its opinion, the Independent
Directors (or any of them) should be granted Non-Qualified Stock
Options in addition to the Options granted pursuant to
Section 3.4(d)(i);
(B) Subject to the Award Limit, determine the number of
shares to be subject to such Non-Qualified Stock Options granted
to selected Independent Directors; and
(C) Determine the terms and conditions of such NonQualified
Stock Options, consistent with this Plan.
ARTICLE 4
TERMS OF OPTIONS
2.4.1 OPTION AGREEMENT. Each Option shall be evidenced by a written
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted
to Independent Directors) shall determine, consistent with this Plan.
Stock Option Agreements evidencing Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall contain such terms and conditions as may be necessary to meet
the applicable provisions of Section 162(m) of the Code. Stock Option
Agreements evidencing Incentive Stock Options shall contain such terms and
conditions as may be necessary to meet the applicable provisions of
Section 422 of the Code.
2.4.2 OPTION PRICE. The price per share of the shares subject to each
Option shall be set by the Committee (or the Board, the case of Options
granted to Independent Directors); PROVIDED, HOWEVER, that such price shall
be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performancebased compensation as
described in Section 162(m)(4)(C) of the Code such price shall not be less
than 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted; (ii) in the case of Incentive Stock Options granted
to an individual then owning (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary or parent thereof such price shall
not be less than 110% of the Fair Market Value of a share of Common Stock
on the date the Option is granted; and (iii) in the case of Options granted
to Independent Directors pursuant to Section 3.4(d)(i), such price shall
equal 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted; PROVIDED, HOWEVER, that the price of each share
subject to each Option granted to Independent Directors pursuant to
Section 3.4(d)(i) on the date of the initial public offering of Common
Stock shall equal the initial public offering price (net of underwriting
discounts and commissions) per share of Common Stock or the Fair Market
Value of a share of Common Stock on the Distribution Date.
2.4.3 OPTION TERM. The term of an Option shall be set by the
Committee (or the Board, in the case of Options granted to Independent
Directors) in its discretion; PROVIDED, HOWEVER, that, (i) in the case of
Options granted to Independent Directors pursuant to Section 3.4(d)(i), the
term shall be ten (10) years from the date the Option is granted, without
variation or acceleration hereunder, but subject to Section 5.6, and
(ii) in the case of Incentive Stock Options, the term shall not be more
than ten (10) years from the date the Incentive Stock Option is granted, or
five (5) years from such date if the Incentive Stock Option is granted to
an individual then owning (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary or parent thereof. Except as
limited by requirements of Section 422 of the Code and regulations and
rulings thereunder applicable to Incentive Stock Options, the Committee may
extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a
termination.
2.4.4 OPTION VESTING.
(a) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee
(or the Board, in the case of Options granted to Independent
Directors) and the Committee (or the Board, in the case of Options
granted to Independent Directors) may determine that an Option may not
be exercised in whole or in part for a specified period after it is
granted; PROVIDED, HOWEVER, that, unless the Committee (or the Board,
in the case of Options granted to Independent Directors) otherwise
provides in the terms of the Option or otherwise, no Option shall be
exercisable by any Optionee who is then subject to Section 16 of the
Exchange Act within the period ending six months and one day after the
date the Option is granted; and provided, further, that Options
granted to Independent Directors pursuant to Section 3.4(d)(i) shall
become exercisable in cumulative annual installments of 25% on each of
the first, second, third and fourth anniversaries of the date of
Option grant, without variation or acceleration hereunder except as
provided in Section 7.3(c). At any time after grant of an Option, the
Committee (or the Board, in the case of Options granted to Independent
Directors) may, in its sole and absolute discretion and subject to
whatever terms and conditions it selects, accelerate the period during
which an Option (except an Option granted to an Independent Director
pursuant to Section 3.4(d)(i)) vests.
(b) No portion of an Option which is unexercisable at Termination
of Employment, Termination of Directorship or Termination of
Consultancy, as applicable, shall thereafter become exercisable,
except as may be otherwise provided by the Committee (or the Board, in
the case of Options granted to the Independent Directors) either in
the Stock Option Agreement or by action of the Committee (or the
Board, as the case may be) following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock
with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the
Code) are exercisable for the first time by an Optionee during any
calendar year (under the Plan and all other incentive stock option
plans of the Company and any Subsidiary) exceeds $100,000, such
Options shall be treated as Nonequalized Options to the extent
required by Section 422 of the Code. The rule set forth in the
preceding sentence shall be applied by taking Options into account in
the order in which they were granted. For purposes of this
Section 4.4(c), the Fair Market Value of stock shall be determined as
of the time the Option with respect to such stock is granted.
2.4.5 CONSIDERATION. In consideration of the granting of an Option,
the Optionee shall agree, in the written Stock Option Agreement, to remain
in the employ of (or to consult for or to serve as an Independent Director
of, as applicable) the Company or any Subsidiary for a period of at least
one year (or such shorter period as may be fixed in the Stock Option
Agreement or by action of the Committee or the Board following grant of the
Option) after the Option is granted (or until the next annual meeting of
stockholders of the Company, in the case of an Independent Director).
Nothing in this Plan or in any Stock Option Agreement hereunder shall
confer upon any Optionee any right to continue in the employ of, or as a
consultant for, the Company or any Subsidiary, or as a director of the
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to
discharge any Optionee at any time for any reason whatsoever, with or
without good cause.
ARTICLE 5
EXERCISE OF OPTIONS
2.5.1 PARTIAL EXERCISE. An exercisable Option may be exercised in
whole or in part. However, an Option shall not be exercisable with respect
to fractional shares and the Committee (or the Board, in the case of
Options granted to Independent Directors) may require that, by the terms of
the Option, a partial exercise be with respect to a minimum number of
shares.
2.5.2 MANNER OF EXERCISE. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the
Secretary of the Company or his office:
(a) A written notice complying with the applicable rules
established by the Committee or the Board stating that the Option, or
a portion thereof, is exercised. The notice shall be signed by the
Optionee or other person then entitled to exercise the Option or such
portion;
(b) Such representations and documents as the Committee or the
Board, in its absolute discretion, deems necessary or advisable to
effect compliance with all applicable provisions of the Securities Act
of 1933, as amended, and any other federal or state securities laws or
regulations. The Committee or Board may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect
such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer notices to agents and
registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 7.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise
the Option; and
(d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is
exercised. However, the Committee (or the Board, in the case of
Options granted to Independent Directors), may in its discretion
(i) allow a delay in payment up to thirty (30) days from the date the
Option, or portion thereof, is exercised; (ii) allow payment, in whole
or in part, through the delivery of shares of Common Stock owned by
the Optionee, duly endorsed for transfer to the Company with a Fair
Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the surrender of shares of Common Stock
then issuable upon exercise of the Option having a Fair Market Value
on the date of Option exercise equal to the aggregate exercise price
of the Option or exercised portion thereof; (iv) allow payment, in
whole or in part, through the delivery of property of any kind which
constitutes good and valuable consideration; (v) allow payment, in
whole or in part, through the delivery of a full recourse promissory
note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon
such terms as may be prescribed by the Committee or the Board;
(vi) allow payment, in whole or in part, through the delivery of a
notice that the Optionee has placed a market sell order with a broker
with respect to shares of Common Stock then issuable upon exercise of
the Option, and that the broker has been directed to pay a sufficient
portion of the net proceeds of the sale to the Company in satisfaction
of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a
promissory note, the Committee (or the Board, in the case of Options
granted to Independent Directors) may also prescribe the form of such
note and the security to be given for such note. The Option may not
be exercised, however, by delivery of a promissory note or by a loan
from the Company when or where such loan or other extension of credit
is prohibited by law.
2.5.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall
not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion
thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Committee or Board shall, in
its absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee or Board
shall, in its absolute discretion, determine to be necessary or
advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or Board may establish from
time to time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
2.5.4 RIGHTS AS STOCKHOLDERS. The holders of Options shall not be,
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an
Option unless and until certificates representing such shares have been
issued by the Company to such holders.
2.5.5 OWNERSHIP AND TRANSFER RESTRICTIONS. The Committee (or the
Board, in the case of Options granted to Independent Directors), in its
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as
it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the
certificates evidencing such shares. The Committee may require the
Employee to give the Company prompt notice of any disposition of shares of
Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting such Option to such Employee or
(ii) one year after the transfer of such shares to such Employee. The
Committee may direct that the certificates evidencing shares acquired by
exercise of an Option refer to such requirement to give prompt notice of
disposition.
2.5.6 LIMITATIONS ON EXERCISE OF OPTIONS GRANTED TO INDEPENDENT
DIRECTORS. Unless earlier terminated pursuant to Section 7.3(c)(ii) or
7.3(c)(viii), no Option granted to an Independent Director pursuant to
Section 3.4(d)(i) may be exercised to any extent by anyone after the first
to occur of the following events::
(a) the expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and
total disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such
Optionee's death or his permanent and total disability, unless the
Optionee dies within said three-month period; or
(d) the expiration of ten years from the date the Option was
granted.
ARTICLE 6
ADMINISTRATION
2.6.1 COMPENSATION COMMITTEE. The Compensation Committee (or another
committee of the Board assuming the functions of the Committee under this
Plan) shall consist solely of two or more Independent Directors appointed
by and holding office at the pleasure of the Board, each of whom is both a
"non-employee director" as defined by Rule 16b-3 and an-"outside director"
for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee may be filled by the Board.
2.6.2 DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the
Committee to conduct the general administration of this Plan in accordance
with its provisions. The Committee shall have the power to interpret this
Plan and the agreements pursuant to which Options are granted, and to adopt
such rules for the administration, interpretation, and application of this
Plan as are consistent therewith and to interpret, amend or revoke any such
nobles. Notwithstanding the foregoing, the full Board, acting by a
majority of its members in office, shall conduct the general administration
of the Plan with respect to Options granted to Independent Directors. Any
such grant under this Plan need not be the same with respect to each
Optionee. Any such interpretations and rules with respect to Incentive
Stock Options shall be consistent with the provisions of Section 422 of the
Code. In its absolute discretion, the Board may at any time and from time
to time exercise any and all rights and duties of the Committee under this
Plan.
2.6.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall
act by a majority of its members in attendance at a meeting at which a
quorum is present or by a memorandum or other written instrument signed by
all members of the Committee.
2.6.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS.
Members of the Committee shall receive such compensation for their services
as members as may be determined by the Board. All expenses and liabilities
which members of the Committee incur in connection with the administration
of this Plan shall be borne by the Company. The Committee may, with the
approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers, or other persons. The Committee, the Company and the
Company's officers and Directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee or the Board in
good faith shall be final and binding upon all Optionees, the Company and
all other interested persons. No members of the Committee or Board shall
be personally liable for any action, determination or interpretation made
in good faith with respect to this Plan or Options and all members of the
Committee and the Board shall be fully protected by the Company in respect
of any such action, determination or interpretation.
ARTICLE 7
MISCELLANEOUS PROVISIONS
2.7.1 NOT TRANSFERABLE. Options under this Plan may not be sold,
pledged, assigned, or transferred in any manner other than by will or the
laws of descent and distribution or pursuant to a QDRO, unless and until
the shares underlying such Options have been issued. No Option or interest
or right therein shall be liable for the debts, contracts or engagements of
the Optionee or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including
bankruptcy), and any attempted disposition thereof shall be null and void
and of no effect, except to the extent that such disposition is permitted
by the preceding sentence.
During the lifetime of the Optionee, only he may exercise an Option
(or any portion thereof) granted to him under the Plan, unless it has been
disposed of pursuant to a QDRO. After the death of the Optionee, any
exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable under the Plan or the applicable Stock Option
Agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
2.7.2 AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN. Except as
otherwise provided in this Section 7.2, this Plan may be wholly or
partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Board or the Committee. However, without
approval of the Company's stockholders given within twelve months before or
after the action by the Board or the Committee, no action of the Board or
the Committee may, except as provided in Section 7.3, increase the limits
imposed in Section 2.1 on the maximum number of shares which may be issued
under this Plan or modify the Award Limit, and no action of the Board or
the Committee may be taken that would otherwise require stockholder
approval as a matter of applicable law, regulation or rule. No amendment,
suspension or termination of this Plan shall, without the consent of the
holder of Options, alter or impair any rights or obligations under any
Options, theretofore granted, unless the award itself otherwise expressly
so provides. No Options may be granted during any period of suspension or
after termination of this Plan, and in no event may any Incentive Stock
Option be granted under this Plan after the first to occur of the following
events:
(a) The expiration of ten years from the date the Plan is adopted
by the Board; or
(b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 7.4.
2.7.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS.
(a) Subject to Sections 7.3(e), in the event that the Committee
determines that any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer,
exchange or other disposition of all or substantially all of the
assets of the Company, or exchange of Common Stock or other securities
of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or
in the case of Options granted to Independent Directors, the Board's
sole discretion), affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan or with respect to an Option, then
the Committee (or the Board, in the case of Options granted to
Independent Directors) shall, in such manner as it may deem equitable,
adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options may be
granted under the Plan (including, but not limited to,
adjustments of the limitations in Section 2.1 on the maximum
number and kind of shares which may be issued and adjustments of
the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any
Option.
(b) Subject to Sections 7.3(e), in the event of any corporate
transaction or other event described in Section 7.3(a) which results
in shares of Common Stock being exchanged for or converted into cash,
securities (including securities of another corporation) or other
property, the Committee will have the right to terminate this Plan as
of the date of the event or transaction, in which case all Options
granted under this Plan shall become the right to receive such cash,
securities or other property, net of any applicable exercise price.
(c) Subject to Sections 7.3(c)(vi) and 7.3(e), in the event of
any corporate transaction or other event described in Section 7.3(a)
or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of
the Company or any affiliate, or of changes in applicable laws,
regulations, or accounting principles, the Committee (or the Board, in
the case of Options granted to Independent Directors) in its
discretion is hereby authorized to take any one or more of the
following actions whenever the Committee (or the Board, in the case of
Options granted to Independent Directors) determines that such action
is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the
Plan or with respect to any Options under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent Directors)
may provide, either automatically or upon the Optionee's request,
for either the purchase of any such Option for an amount of cash
equal to the amount that could have been attained upon the
exercise of such Option or realization of the Optionee's rights
had such Option been currently exercisable or payable or the
replacement of such Option with other rights or property selected
by the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent Directors)
may provide, either by the terms of such Option or by action
taken prior to the occurrence of such transaction or event, that
it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent Directors)
may provide, either by the terms of such Option or by action
taken prior to the occurrence of such transaction or event, that
for a specified period of time prior to such transaction or event
such Option, shall be exercisable as to all shares covered
thereby, notwithstanding anything to the contrary in
(i) Section 4.4 or (ii) the provisions of such Option;
(iv) In its discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by
the terms of such Option or by action taken prior to the
occurrence of such transaction or event, that upon such event,
such Option, be assumed by the successor corporation, or a parent
or subsidiary thereof, or shall be substituted for by similar
options, rights or awards covering the stock of the successor
corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; and
(v) In its discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may make adjustments in
the number and type of shares of Common Stock (or other
securities or property) subject to outstanding Options and/or in
the terms and conditions of (including the grant or exercise
price), and the criteria included in, outstanding Options, which
may be granted in the future.
(vi) None of the foregoing discretionary terms of this
Section 7.3(c) shall be permitted with respect to Options granted
under Section 3.4(d) to Independent Directors to the extent that
such discretion would be inconsistent with the requirements of
Rule 16b-3. In the event of a Change in Control or a Corporate
Transaction, to the extent that the Board does not have the
ability under Rule 16b-3 to take or to refrain from taking the
discretionary actions set forth above, each Option granted to an
Independent Director shall be exercisable as to all shares
covered thereby upon such Change in Control or during the five
days immediately preceding the consummation of such Corporate
Transaction and subject to such consummation, notwithstanding
anything to the contrary in Section 4.4 or the vesting schedule
of such Options. In the event of a Corporate Transaction, to the
extent that the Board does not have the ability under Rule 16b-3
to take or to refrain from taking the discretionary actions set
forth above, no Option granted to an Independent Director may be
exercised following such Corporate Transaction unless such Option
is, in connection with such Corporate Transaction, either to be
assumed by the successor or survivor corporation (or parent
thereof) or to be replaced with a comparable right with respect
to shares of the capital stock of the successor or survivor
corporation (or parent thereof); PROVIDED, HOWEVER, that such
termination shall not occur until after the related Corporate
Transaction has closed and appropriate arrangements shall be made
to permit any Options outstanding to be exercised in connection
with such closing; and PROVIDED, FURTHER, that any Option granted
or deemed regranted within six months of such Corporate
Transaction shall remain exercisable until the expiration of six
months and one day from the later of the date such Option was
granted or the date such Option was deemed regranted unless such
Option earlier expires pursuant to Section 5.6.
(vii) A Stock Option Agreement, in the discretion of the
Committee, may provide that in the event of any Corporate
Transaction, each outstanding Option shall, immediately prior to
the effective date of the Corporate Transaction, automatically
become fully exercisable for all of the shares of Common Stock
subject to such Option. A Stock Option Agreement may, in the
discretion of the Committee, further provide that the Option
subject to such agreement shall not so accelerate if and to the
extent: (i) such Option is, in connection with the Corporate
Transaction, either to be assumed by the successor or survivor
corporation (or parent thereof) or to be replaced with a
comparable right with respect to shares of the capital stock of
the successor or survivor corporation (or parent thereof),
(ii) such Option is to be replaced with a cash incentive program
of the successor or survivor corporation which preserves the
economic value of the right at the time of the Corporate
Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to such right or (iii) the
acceleration of exercisability of such Option is subject to other
limitations imposed by the Committee at the time of grant. The
determination of comparability of rights under clause (i) above
shall be made by the Committee, and its determination shall be
final, binding and conclusive.
(d) Subject to Sections 7.3(e) and 7.8, the Committee (or the
Board, in the case of Options granted to Independent Directors) may,
in its discretion, include such further provisions and limitations in
any Option agreement or certificate, as it may deem equitable and in
the best interests of the Company.
(e) With respect to Incentive Stock Options and Options intended
to qualify as performance-based compensation under Section 162(m), no
adjustment or action described in this Section 7.3 or in any other
provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1)
of the Code or would cause such option to fail to so qualify under
Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be
authorized to the extent such adjustment or action would violate
Section 16 or the exemptive conditions of Rule 16b-3. The number of
shares of Common Stock subject to any option, right or award shall
always be rounded to the next whole number.
2.7.4 APPROVAL OF PLAN BY STOCKHOLDERS. On March 21, 1996, The 1996
Equity Participation Plan of Blowout Entertainment, Inc. was approved by
the written consent of holders of a majority of the outstanding shares of
Common Stock.
2.7.5 TAX WITHHOLDING. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each
Optionee of any sums required by federal, state or local tax law to be
withheld with respect to the issuance, vesting or exercise of any Option.
Subject to the timing requirements of Section 5.3, the Committee (or the
Board, in the case of Options granted to Independent Directors) may in its
discretion and in satisfaction of the foregoing requirement allow such
Optionee to elect to have the Company withhold shares of Common Stock
otherwise issuable under such Option (or allow the return of shares of
Common Stock) having a Fair Market Value equal to the sums required to be
withheld.
2.7.6 LOANS. The Committee may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an
Option granted under this Plan. The terms and conditions of any such loan
shall be set by the Committee.
2.7.7 FORFEITURE PROVISIONS. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the
requirements of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by
separate written instrument, that (i) any proceeds, gains or other economic
benefit actually or constructively received by the recipient upon any
receipt or exercise of the award, or upon the receipt or resale of any
Common Stock underlying such award, must be paid to the Company, and
(ii) the award shall terminate and any unexercised portion of such award
(whether or not vested) shall be forfeited, if (a) a Termination of
Employment, Termination of Consultancy or Termination of Directorship
occurs prior to a specified date, or within a specified time period
following receipt or exercise of the award, or (b) the recipient at any
time, or during a specified time period, engages in any activity in
competition with the Company, or which is inimical, contrary or harmful to
the interests of the Company, as further defined by the Committee (or the
Board, as applicable).
2.7.8 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND
PERFORMANCE-BASED COMPENSATION. Notwithstanding any other provision of
this Plan, this Plan, and any Option granted to any individual who is then
subject to Section 16 of the Exchange Act, shall be subject to any
additional limitations set forth in any applicable exemptive rule under
Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of
the Exchange Act) that are requirements for the application of such
exemptive rule. To the extent permitted by applicable law, the Plan and
Options granted hereunder shall be deemed amended to the extent necessary
to conform to such applicable exemptive rule. Furthermore, notwithstanding
any other provision of this Plan, any Option intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall be subject to any additional limitations set forth in
Section 162(m) of the Code (including any amendment to Section 162(m) of
the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, and this Plan shall be
deemed amended to the extent necessary to conform to such requirements.
2.7.9 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The
adoption of this Plan shall not affect any other compensation or incentive
plans in effect for the Company or any Subsidiary. Nothing in this Plan
shall be construed to limit the right of the Company (i) to establish any
other forms of incentives or compensation for Employees, Directors or
consultants of the Company or any Subsidiary or (ii) to grant or assume
options or other rights otherwise than under this Plan in connection with
any proper corporate purpose including but not by way of limitation, the
grant or assumption of options in connection with the acquisition by
purchase, lease, merger, consolidation or otherwise, of the business, stock
or assets of any corporation, partnership, firm or association.
2.7.10 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of
Options under this Plan and the issuance and delivery of shares of Common
Stock and the payment of money under this Plan or under Options granted
hereunder are subject to compliance with all applicable federal and state
laws, rules and regulations (including but not limited to state and federal
securities law and federal margin requirements) and to such approvals by
any listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith.
Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested
by the Company, provide such assurances and representations to the Company
as the Company may deem necessary or desirable to assure compliance with
all applicable legal requirements. To the extent permitted by applicable
law, the Plan and Options granted hereunder shall be deemed amended to the
extent necessary to conform to such laws, rules and regulations.
2.7.11 TITLES. Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of this
Plan.
2.7.12 GOVERNING LAW. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State
of Delaware without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of the Company on November 25, 1996.
Executed on this 25th day of November, 1996.
/s/ Karl D. Wetzel
Karl D. Wetzel
REGISTRATION RIGHTS AGREEMENT
BY AND AMONG
BLOWOUT ENTERTAINMENT, INC.
AS ISSUER AND
RENTRAK CORPORATION
AND THE OTHER INVESTORS
AND THE STOCKHOLDERS
DATED AS OF MAY 28, 1996
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into as of May 25, 1996, by and among Blowout Entertainment, Inc.,
a Delaware corporation (the "Issuer"), Rentrak Corporation, an Oregon
corporation ("Rentrak"), Streamlined Solutions, Inc., an Oregon
corporation, Mortco Inc., an Oregon corporation, and the persons named on
Attachment A hereto as the "Stockholders".
This Agreement is made pursuant to an Asset Purchase Agreement (the
"Asset Purchase Agreement") by and between the Issuer and Entertainment
One, Inc., a Delaware corporation ("E-One"), pursuant to which (i) E-One
sold all of its assets to the Issuer and the Issuer assumed all of E-One's
liabilities in exchange for shares of Common Stock of the Issuer (the
"Closing Shares") and (ii) E-One adopted a plan of liquidation pursuant to
which the Closing Shares were distributed to the Stockholders. In order to
induce E-One to consummate the transactions contemplated by the Asset
Purchase Agreement, the Issuer has agreed to provide the registration
rights set forth in this Agreement.
In consideration of the mutual covenants and agreements contained
herein, the parties hereto agree as follows:
1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
AFFILIATE: Any other Person directly or indirectly controlling
or controlled by or under direct or indirect common control with such
specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect
to any Person, shall mean the Possession, directly or indirectly, of
the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; PROVIDED that beneficial
ownership of 10% or more of the voting securities of a Person shall be
deemed to be control.
BOARD: The Board of Directors of the Issuer.
COMMON STOCK: The Common Stock, par value $0.01 per share, of
the Issuer.
DEMAND NOTICE: See Section 3(a) hereof.
DEMAND REGISTRATION: A registration pursuant to Section 3(a)
hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended
from time to time.
HOLDER: Any party hereto (other than the Issuer) and any holder
of Registrable Securities who agrees in writing to be bound by the
provisions of this Agreement.
INVESTORS: Rentrak and any of its direct or indirect
Subsidiaries that hold Registrable Securities, collectively.
IPO: The Issuer's initial public offering of Common Stock
pursuant to an effective registration statement or any Spin-Off.
NASD: National Association of Securities Dealers, Inc.
PERSON: An individual, partnership, limited liability company, joint
venture, corporation, trust or unincorporated organization, a
government or any department, agency or political subdivision thereof
or other entity.
PIGGYBACK NOTICE: See Section 4(a) hereof.
PIGGYBACK REGISTRATION: A registration pursuant to Section 4
hereof.
PROSPECTUS: The prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement
with respect to the terms of the offering of any portion of the
Registrable Securities covered by such Registration Statement and by
all other amendments and supplements to the prospectus, including
post-effective amendments and all material incorporated by reference
in such prospectus.
REGISTRABLE SECURITIES: All shares of Common Stock (a) held on
the date hereof by the Investors and the Stockholders as set forth in
Attachment A, (b) any shares of Common Stock issuable to Investors or
the Stockholders pursuant to warrants which may be granted after the
date hereof the Investors and the Stockholders pursuant to Section 4.4
of the Asset Purchase Agreement and (c) any securities of the Issuer
that may be issued or distributed with respect to, or in exchange or
substitution for, or conversion of, such Common Stock described in (a)
or (b) above and such other securities pursuant to a stock dividend,
stock split or other distribution, merger, consolidation,
recapitalization or reclassification or otherwise; PROVIDED, HOWEVER,
that any Registrable Securities shall cease to be Registrable
Securities when (i) a Registration Statement with respect to the sale
of such Registrable Securities has been declared effective under the
Securities Act and such Registrable Securities have been disposed of
in accordance with the plan of distribution set forth in such
Registration Statement, (ii) such Registrable Securities are
distributed pursuant to Rule 144 (or any similar provision then in
force) under the Securities Act or (iii) such Registrable Securities
shall have been otherwise transferred and new certificates for them
not bearing a legend restricting further transfer under the Securities
Act shall have been delivered by the Issuer; and PROVIDED, FURTHER,
that any securities that have ceased to be Registrable Securities
cannot thereafter become Registrable Securities and any security that
is issued or distributed in respect of securities that have ceased to
be Registrable Securities is not a Registrable Security.
REGISTRATION: A Demand Registration or a Piggyback Registration.
REGISTRATION EXPENSES: See Section 7 hereof.
REGISTRATION STATEMENT: Any registration statement of the Issuer
that covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such Registration Statement, including post-effective
amendments, all exhibits and all material incorporated by reference in
such Registration Statement.
SEC: The Securities and Exchange Commission.
SECURITIES ACT: The Securities Act of 1933, as amended from time
to time.
SPIN-OFF: A spin-off by Rentrak to its stockholders of all or
substantially all of Rentrak's ownership interest in Issuer.
STOCKHOLDERS: All former stockholders of E-One (other than an
Investor) who received shares of Common Stock pursuant to the
dissolution and liquidation of E-One.
SUBSIDIARY: "Subsidiary" means, with respect to any Person,
(i) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Voting Stock
thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person
(or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only general partners
of which are such Person or of one or more Subsidiaries of such Person
(or any combination thereof).
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A sale of
securities of the Issuer to an underwriter for reoffering to the
public.
2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) REGISTRABLE SECURITIES. The securities entitled to the
benefits of this Agreement are the Registrable Securities.
(b) HOLDERS OF REGISTRABLE SECURITIES. A Person is deemed to be
a Holder of Registrable Securities whenever such Person owns of record
Registrable Securities or has the right to acquire such Registrable
Securities, whether or not such acquisition has actually been affected
and disregarding any legal restrictions upon the exercise of such
right.
3. DEMAND REGISTRATION
(a) RIGHT TO DEMAND; DEMAND NOTICES. Subject to the provisions
of this Section 3 at any time and from time to time commencing
6 months after an IPO, any Investor may make a written request to the
Issuer for registration under and in accordance with the provisions of
the Securities Act of all or part of the Registrable Securities held
by the Investors. Promptly upon receipt of any such request (but in
no event more than five business days thereafter), the Issuer shall
serve written notice (the "Demand Notice") of such registration
request to all Holders, and the Issuer shall include in such
registration all Registrable Securities of any Holder with respect to
which the Issuer has received written requests for inclusion therein
within 10 days after the Demand Notice has been given to the
applicable Holders. All requests made pursuant to this Section 3 will
specify the aggregate amount of Registrable Securities to be
registered and shall also specify the intended methods of disposition
thereof.
(b) ISSUER'S RIGHT TO DEFER REGISTRATION. If the Issuer is
requested to effect a Demand Registration and the Issuer furnishes to
the Investors a copy of a resolution of the Board certified by the
secretary of the Issuer stating that in the good faith judgment of the
Board it would be adverse to the Issuer and its securityholders for
such registration statement to be filed on or before the date such
filing would otherwise be required hereunder, the Issuer shall have
the right to defer such filing for a period of not more than 90 days
after receipt of the request for such registration from the Investors.
If the Issuer shall so postpone the filing of a registration statement
and if the Investors within 30 days after receipt of the notice of
postponement advise the Issuer in writing that the Investors have
determined to withdraw such request for registration, then such Demand
Registration shall be deemed to be withdrawn and such request shall be
deemed not to have been exercised for purposes of determining whether
the Holders included in such Demand Registration are required to pay
their PRO RATA portion of the Registration Expenses pursuant to
Section (3)(d) hereof.
(c) REGISTRATION STATEMENT FORM. Registrations under this
Section 3 shall be on such appropriate registration form of the SEC
(i) as shall be selected by the Issuer and as shall be reasonably
acceptable to the Investors and (ii) as shall permit the disposition
of such Registrable Securities in accordance with the intended method
or methods of disposition specified in the Investors' request for such
registration. If, in connection with any registration under this
Section 3 that is proposed by the Issuer to be on Form S-3 or any
successor form to such Form, the managing underwriter, if any, shall
advise the Issuer in uniting that in its opinion the use of another
permitted form is of material importance to the success of the
offering, then such registration shall be on such other permitted
form.
(d) EXPENSES. The Issuer will pay all Registration Expenses in
connection with the first two (2) Demand Registrations of Registrable
Securities pursuant to this Section 3 upon the written request of the
Investors. All expenses for any subsequent Demand Registrations of
Registrable Securities pursuant to this Section 3 shall be paid PRO
RATA by the Issuer and all other Persons (including the Holders)
participating in such Demand Registration on the basis of the relative
number of shares of Common Stock of each such Person included in such
registration.
(e) EFFECTIVE REGISTRATION STATEMENT. The Issuer shall be deemed
to have effected a Demand Registration if (i) the Registration
Statement relating to such Demand Registration is declared effective
by the SEC; PROVIDED, HOWEVER, that no Demand Registration shall be
deemed to have been effected if (x) such registration, after it has
become effective, is interfered with by any stop order, injunction or
other order or requirement of the SEC or other governmental agency or
court by reason of an act or omission by the Issuer or (y) the
conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such
registration are not satisfied because of an act or omission by the
Issuer (other than a failure of the Issuer or any of its
representatives to execute or deliver any closing certificate by
reason of facts or circumstances not within the control of the Issuer
or such representatives) or (ii) at any time after the Investors
request a Demand Registration and prior to the effectiveness of the
Registration Statement, the preparation of such Registration Statement
is discontinued or such Registration Statement is withdrawn or
abandoned at the request of the Holders of a majority of Registrable
Securities sought to be registered in such Registration Statement
unless such Holders have elected to pay and have paid to the Issuer in
full the Registration Expenses in connection with such Registration
Statement.
(f) PRIORITY ON DEMAND REGISTRATIONS. If the managing
underwriter or agent of a Demand Registration (or, in the case of a
Demand Registration not being underwritten, any of the Investors),
advises the Issuer in writing that in its opinion the number of
securities requested to be included in such Demand Registration
exceeds the number that can be sold in the offering covered by such
Demand Registration without a significant adverse effect on the price,
timing or distribution of the securities offered, the Issuer shall
include in such registration only the number of securities that, in
the opinion of such underwriter or agent (or any of the Investors, as
the case may be), can be sold without a significant adverse effect on
the price, timing or distribution of the securities offered, selected
PRO RATA among the Holders that have requested to be included in such
Demand Registration based upon the relative aggregate amount of gross
proceeds to be received by such Holders in such offering to the extent
necessary to reduce the total amount of securities to be included in
such offering to the amount recommended by such underwriters or agent
(or any of the Investors, as the case may be); PROVIDED, HOWEVER, that
if any such other Person or Persons shall have been granted rights of
registration upon demand substantially similar to those contained
herein, as permitted in paragraph (h) below, then the inclusion of
Registrable Securities in such registration shall be subject to
reduction in the manner provided in the instrument granting such
rights (which shall in no event be more disadvantageous to the Holders
of Registrable Securities than that provided in Section 3 is to other
Holders participating in a registration pursuant to this Section 3(f).
The Issuer and other holders of securities of the Issuer may
include such securities in such Registration if, but only if, such
underwriter or agent (or any of the Investors, as the case may be)
concludes that such inclusion will not interfere with the successful
marketing of all the Registrable Securities requested to be included
in such registration.
(g) SELECTION OF UNDERWRITERS. If any offering pursuant to a
Demand Registration involves an Underwritten Offering, the Holders of
a majority of the Registrable Securities included in such Demand
Registration shall have the right to select the managing underwriter
or underwriters to administer the offering, which managing underwriter
or underwriters shall have nationally recognized standing and be
reasonably satisfactory to the Issuer.
(h) SUBSEQUENT REGISTRATION RIGHTS. Issuer may grant subsequent
investors in Issuer rights of registration upon demand (such as those
provided in Section 3(a) hereof) and piggyback registration rights
(such as those provided in Section 4 hereof); PROVIDED, HOWEVER, that
(i) such rights are limited to shares of Common Stock (including in
the case of any Underwritten Offering, shares issuable upon the
conversion of convertible securities or upon the exercise of warrants
if such conversion or exercise is effected by the sellers or the
underwriters prior to the sale to the public in such offering),
(ii) such rights are not inconsistent with the provisions hereof, and
(iii) the instrument granting such rights specifically confirms the
rights of the Holders of Registrable Securities hereunder.
4. PIGGYBACK REGISTRATIONS
(a) PARTICIPATION. Subject to Sections 4(b) and 10 hereof, if at
any time after the date hereof the Issuer files a registration
statement under the Securities Act with respect to an offering of any
equity securities by Issuer for its own account or for the account of
any of its equity holders (other than (i) a registration on Form S-4
or S-8 or any successor form to such Forms, (ii) any registration
relating to a Spin-Off or (iii) any registration of securities as it
relates to an offering and sale to management of the Issuer pursuant
to any employee stock plan or other employee benefit plan arrangement)
with respect to an offerings that includes any shares of Common Stock,
then the Issuer shall give prompt notice (the "Piggyback Notice") to
the Holders of Registrable Securities and each Holder of Registrable
Securities shall be entitled to include in such registration statement
the Registrable Securities held by it. The Piggyback Notice shall
offer the Holders of Registrable Securities the opportunity to
register such number of shares of Registrable Securities as each
Holder may request and shall set forth (i) the anticipated filing date
of such registration statement and (ii) the number of shares of Common
Stock that is proposed to be included in such registration statement.
The Issuer shall include in such registration statement such shares of
Registrable Securities for which it has received written requests to
register such shares within 7 days after the Piggyback Notice has been
given.
(b) UNDERWRITER'S CUTBACK. Notwithstanding the foregoing, if a
registration pursuant to this Section 4 hereof involves an
Underwritten Offering and the managing underwriter or underwriters of
such proposed Underwritten Offering delivers an opinion to the Holders
that the total or kind of securities that such Holders and any other
person or entity intends to include in such offering would be
reasonably likely to adversely affect the price, timing or
distribution of the securities offered in such offering then the
Issuer shall include in such Registration (i) 100% of the securities
that the Person (which may be the Issuer) initiating such Registration
proposes to sell, and (ii) second, to the extent of the amount of
securities that all other Holders have requested to be included in
such Registration, which, in the opinion of the managing underwriter
or underwriters, can be sold without such adverse effect referred to
above, such amount to be allocated PRO RATA among all other Holders
based upon the relative aggregate amount of gross proceeds to be
received by any other Holders in the offering.
(c) EXPENSES. The Issuer will pay all Registration Expenses in
connection with each registration of Registrable Securities requested
pursuant to this Section 4.
(d) ISSUER CONTROL. The Issuer may decline to file a
registration statement after giving the Piggyback Notice, or withdraw
a registration statement after filing and after such Piggyback Notice,
but prior to the effectiveness of the Registration Statement, provided
that the Issuer shall promptly notify each Holder in writing of any
such action and provided further that the Issuer shall bear all
reasonable expenses incurred by such Holder or otherwise in connection
with such withdrawn registration statement.
(e) NO EFFECT ON DEMAND REGISTRATIONS. No registration effected
under this Section 4 shall be deemed to have been effected pursuant to
Section 3 hereof or shall relieve the Issuer of its obligation to
effect any registration upon request under Section 3 hereof.
5. HOLD-BACK AGREEMENTS
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE
SECURITIES. Each Holder whose Registrable Securities are covered by a
Registration Statement filed pursuant to Sections 3 and 4 hereof
agrees, if requested by the managing underwriter or underwriters in an
Underwritten Offering, not to effect any public sale or distribution
of securities of the Issuer the same as or similar to those being
registered, or any securities convertible into or exchangeable or
exercisable for such securities, in such Registration Statement,
including a sale pursuant to Rule 144 under the Securities Act (except
as part of such Underwritten Registration), during the 7-day period
prior to, and during the 90-day period (or such longer period of up to
180 days as may be required by such underwriter) beginning on, the
effective date of any Registration Statement in which such Holders are
participating (except as part of such Registration) or the
commencement of the public distribution of securities, to the extent
timely notified in writing by the Issuer or the managing underwriters.
(b) NO INCONSISTENT AGREEMENTS. The Issuer will not hereafter
enter into, and is not presently a party to, any agreement with
respect to its securities which is inconsistent with the rights
granted to the holders of Registrable Securities by this Agreement or
otherwise conflicts with the provisions hereof.
6. REGISTRATION PROCEDURES
In connection with the Issuer's Registration obligations pursuant to
Sections 3 and 4 hereof, the Issuer will use its best efforts to effect
such Registration to permit the sale of such Registrable Securities in
accordance with the intended method or methods of distribution thereof, and
pursuant thereto the Issuer will as expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements relating to the applicable Demand Registration
or Piggyback Registration including all exhibits and financial
statements required by the SEC to be filed therewith, and use its best
efforts to cause such Registration Statement to become effective;
PROVIDED that before filing a Registration Statement or Prospectus or
any amendments or supplements thereto, the Issuer will furnish to the
Holders of Registrable Securities covered by such Registration
Statement and their counsel and to each underwriter or agent, if any,
copies of such Registration Statement or Prospectus substantially in
the form proposed to be filed at least 5 business days, with respect
to any Demand Registration, or 2 business days, with respect to any
Piggyback Registration, prior to the filing date and copies of any
amendments or supplements substantially in the form proposed to be
filed with respect to a Demand Registration at least 2 business days
prior to the filing date, which documents will be subject to the
reasonable review of such Holders and underwriter or agent and their
respective counsel, and the Issuer will not file any Registration
Statement or Prospectus or, with respect to any Demand Registration,
any amendment or supplement thereto (including such documents
incorporated by reference) to which the majority of the Holders
covered by such Registration Statement shall reasonably object; and
PROVIDED, FURTHER, that the Issuer will furnish copies of any
amendments or supplements in the form filed with respect to any
Piggyback Registration, simultaneously with the filing of such
amendments or supplements;
(b) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for a period of
not less than 180 days (or such shorter period which will terminate
when all Registrable Securities covered by such Registration Statement
have been sold or withdrawn), or, if such Registration Statement
relates to an Underwritten Offering, such longer period as in the
opinion of counsel for the underwriters a Prospectus is required by
law to be delivered in connection with sales of Registrable Securities
by an underwriter or dealer; cause the Prospectus to be supplemented
by any required Prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Securities Act; and comply with
the provisions of the Securities Act, the Exchange Act, and the rules
and regulations promulgated thereunder with respect to the disposition
of all securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
(c) notify the selling Holders and the managing underwriters, if
any, and (if requested) confirm such advice in writing, as soon as
practicable after notice thereof is received by the Issuer (i) when
the Registration Statement or any amendment thereto has been filed or
becomes effective, the Prospectus or any amendment or supplement to
the Prospectus has been filed, and, to furnish such selling Holders
and managing underwriters with copies thereof, (ii) of any request by
the SEC for amendments or supplements to the Registration Statement or
the Prospectus or for additional information, (iii) of the issuance by
the SEC of any stop order suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use
of any preliminary Prospectus or Prospectus or the initiation or
threatening of any proceeding for such purposes, (iv) if at any time
the representations and warranties of the Issuer contemplated by
paragraph (m) below cease to be true and correct and (v) of the
receipt by the Issuer of any notification with respect to the
suspension of the qualification of the Registrable Securities for
offering or sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose;
(d) promptly notify the selling Holders and the managing
underwriters, if any, at any time during the effectiveness of the
Registration Statement when the Issuer becomes aware of the happening
of any event as a result of which the Prospectus included in such
Registration Statement (as then in effect) contains any untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein (in the case of the
Prospectus and any preliminary Prospectus, in light of the
circumstances under which thee were made) when such Prospectus was
delivered not misleading or, if for any other reason it shall be
necessary during such time period to amend or supplement the
Prospectus in order to comply with the Securities Act and, in either
case as promptly as practicable thereafter, prepare and file with the
SEC, and furnish without charge to the selling Holders and the
managing underwriters, if any, a supplement or amendment to such
Prospectus that shall correct such statement or omission or effect
such compliance;
(e) make every reasonable effort to obtain the withdrawal of any
stop order or other order suspending the use of any preliminary
Prospectus or Prospectus or suspending any qualification of the
Registrable Securities;
(f) if requested by the managing underwriter or underwriters or a
Holder of Registrable Securities being sold in connection with an
Underwritten Offering, promptly incorporate in a Prospectus supplement
or post-effective amendment such information as the managing
underwriters and the Holders of a majority of the Registrable
Securities being sold agree should be included therein relating to the
plan of distribution with respect to such Registrable Securities,
including, without limitation, information with respect to the number
of Registrable Securities being sold to such underwriters, the
purchase price being paid therefor by such underwriters and with
respect to any other terms of the Underwritten (or best efforts
underwritten) Offering of the Registrable Securities to be sold in
such offering; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or
post-effective amendment;
(g) furnish to each selling Holder and each managing underwriter,
without charge, one executed copy and as many conformed copies as they
may reasonably request, of the Registration Statement and any
post-effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference and all
exhibits (including those incorporated by reference);
(h) deliver to each selling Holder and the underwriters, if any,
without charge, as many copies of the Prospectus (including each
preliminary Prospectus) and any amendment or supplement thereto as
such Persons may reasonably request (it being understood that the
Issuer consents to the use of the Prospectus or any amendment or
supplement thereto by each of the selling Holders and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by the Prospectus or any amendment or
supplement thereto) and such other documents as such selling Holder
may reasonably request in order to facilitate the disposition of the
Registrable Securities by such Holder;
(i) on or prior to the date on which the Registration Statement
is declared effective, use its best efforts to register or qualify,
and cooperate with the selling Holders, the managing underwriter or
agent, if any, and their respective counsel in connection with the
registration or qualification of such Registrable Securities for offer
and sale under the securities or blue sky laws of each state and other
jurisdiction of the United States as any such seller, underwriter or
agent reasonably requests in writing and do any and all other acts or
things reasonably necessary or advisable to keep such registration or
qualification in effect for so long as such Registration Statement
remains in effect and so as to permit the continuance of sales and
dealings therein for as long as may be necessary to complete the
distribution of the Registrable Securities covered by the Registration
Statement; PROVIDED that the Issuer will not be required to qualify
generally to do business in any jurisdiction where it in not then so
qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so
subject;
(j) cooperate with the selling Holders and the managing
underwriter or agent, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be
sold and not bearing any restrictive legends; and enable such
Registrable Securities to be in such denominations and registered in
such names as the managing underwriters may request at least two
business days prior to any sale of Registrable Securities to the
underwriters;
(k) use its best efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with
or approved by such other governmental agencies or authorities as may
be necessary to enable the seller or sellers thereof or the
underwriters, if any, to consummate the disposition of such
Registrable Securities;
(l) not later than the effective date of the applicable
Registration, provide a CUSIP number for all Registrable Securities
and provide the applicable trustee or transfer agent with printed
certificates for the Registerable Securities that are in a form
eligible for deposit with The Depository Trust Company;
(m) make such representations and warranties to the Holders of
Registrable Securities being registered, and the underwriters or
agents, if any, in form, substance and scope as are customarily made
by issuers in primary underwritten public offerings;
(n) enter into such customary agreements (including an
underwriting agreement) and take all such other actions as the
majority of the Holders of any Registrable Securities being sold or
the managing underwriter or agent, if any, reasonably request in order
to expedite or facilitate the Registration and disposition of such
Registrable Securities;
(o) obtain for delivery to the Holders of Registrable Securities
being registered and to the underwriter or agent an opinion or
opinions from counsel for the Issuer, upon consummation of the sale of
such Registrable Securities to the underwriters (the "Closing Date")
in customary form and in form, substance and scope reasonably
satisfactory to such Holders, underwriters or agents and their
counsel;
(p) obtain for delivery to the Issuer and the underwriter or
agent, with copies to the Holders, a cold comfort letter from the
Issuer's independent public accountants in customary form and covering
such matters of the type customarily covered by cold comfort letters
as the managing underwriter or the Holders of a majority of the
Registrable Securities being sold reasonably request, dated the
effective date of the Registration Statement and brought down to the
Closing Date;
(q) cooperate with each seller of Registrable Securities and each
underwriter or agent participating in the disposition of such
Registrable Securities and their respective counsel in connection with
any filings required to be made with the NASD;
(r) make available for inspection by a representative of the
Holders of a majority of the Registrable Securities, any underwriter
participating in any disposition pursuant to such Registration, and
any attorney or accountant retained by such Holders or underwriter,
all financial and other records, pertinent corporate documents and
properties of the Issuer, and cause the Issuer's officers, directors
and employees to supply all information reasonably requested by any
such representative, underwriter, attorney or accountant in connection
with such Registration; provided that any records, information or
documents that are designated by the Issuer in writing as confidential
shall be kept confidential by such Persons unless disclosure of such
records, information or documents is required by law;
(s) use its best efforts to comply with all applicable rules and
regulations of the SEC and make generally available to its security
holders, as soon as reasonably practicable (but not more than eighteen
months) after the effective date of the Registration Statement, an
earnings statement satisfying the provisions of Section 11(a) of the
Securities Act and the rules and regulations promulgated thereunder;
(t) as promptly as practicable after filing with the SEC of any
document that is incorporated by reference into the Registration
Statement or the Prospectus, provide copies of such document to
counsel for the selling Holders and to the managing underwriters, if
any; and
(u) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such Registration
Statement from and after a date not later than the effective date of
such Registration Statement.
The Issuer may require each seller of Registrable Securities as to
which any Registration is being effected to furnish to the Issuer such
information regarding the distribution of such securities and such other
information relating to such Holder and its ownership of Registrable
Securities as the Issuer may from time to time reasonably request in
writing. Each Holder agrees to furnish such information to the Issuer and
to cooperate with the Issuer as necessary to enable the Issuer to comply
with the provisions of this Agreement.
Each Holder agrees by acquisition of such Registrable Securities that,
upon receipt of any notice from the Issuer of the happening of any event of
the kind described in Section 6(d) hereof, such Holder will forthwith
discontinue disposition of Registrable Securities pursuant to such
Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 6(d) hereof, or
until it is advised in writing by the Issuer that the use of the Prospectus
may be resumed, and has received copies of any additional or supplemental
filings that are incorporated by reference in the Prospectus, and, if so
directed by the Issuer, such Holder will deliver to the Issuer (at the
Issuer's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice.
7. REGISTRATION EXPENSES
All expenses incident to the Issuer's performance of or compliance
with this Agreement, including without limitation (i) all registration and
filing fees, and any other fees and expenses associated with filings
required to be made with any stock exchange, the SEC and the NASD
(including, if applicable, the fees and expenses of any "qualified
independent underwriter" and its counsel as may be required by the rules
and regulations of the NASD), (ii) all fees and expenses of compliance with
state securities or blue sky laws (including fees and disbursements of
counsel for the underwriters or selling Holders in connection with blue sky
qualifications of the Registrable Securities and determination of their
eligibility for investment under the laws of such jurisdictions as the
managing underwriters or the majority of the Holders of the Registrable
Securities being sold may designate), (iii) all printing and related
messenger and delivery expenses (including expenses of printing
certificates for the Registrable Securities in a form eligible for deposit
with The Depositors Trust Company and of printing prospectuses), (iv) all
fees and disbursements of counsel for the Issuer and of all independent
certified public accountants of the Issuer (including the expenses of any
"cold comfort" letters required by or incident to such performance),
(v) Securities Act liability insurance if the Issuer so desires or the
underwriters so require, (vi) all fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange
and all rating agency fees, (vii) all reasonable fees and disbursements of
one counsel selected by the Holders of the Registrable Securities being
registered to represent such Holders in connection with such registration,
(viii) all fees and disbursements of underwriters customarily paid by the
issuers or sellers of securities, excluding underwriting discounts and
commissions and transfer taxes, if any, and fees and disbursements of
counsel to underwriters (other than such fees and disbursements incurred in
connection with any registration or qualification of Registrable Securities
under the securities or blue sky laws of any state), and (ix) fees and
expenses of other Persons retained by the Issuer (all such expenses being
herein called "Registration Expenses"), will be borne by the Issuer,
regardless of whether the Registration Statement becomes effective (except
as provided in Section 3(e) hereof). The Issuer will, in any event, pay
its internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting
duties), the expense of any audit and the fees and expenses of any Person,
including special experts, retained by the Issuer.
8. INDEMNIFICATION
(a) INDEMNIFICATION BY ISSUER. The Issuer agrees to indemnify
and hold harmless, to the full extent permitted by law, each Holder,
its officers, directors and employees and each Person who controls
such Holder (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities and expenses caused by any untrue
or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary Prospectus or any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in
any information furnished in writing to the Issuer by such Holder
expressly for use therein; PROVIDED, HOWEVER, that the Issuer shall
not be liable in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in any such preliminary Prospectus if (i) such Holder
failed to deliver or cause to be delivered a copy of the Prospectus to
the Person asserting such loss, claim, damage, liability or expense
after the Issuer had furnished such Holder with a sufficient number of
copies of the same and (ii) the Prospectus completely corrected in a
timely manner such untrue statement or omission; and PROVIDED,
FURTHER, that the Issuer shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises
out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission in the Prospectus, if such
untrue statement or alleged untrue statement, omission or alleged
omission is completely corrected in an amendment or supplement to the
Prospectus and the Holder thereafter fails to deliver such Prospectus
as so amended or supplemented prior to or concurrently with the sale
of the Registrable Securities to the Person asserting such loss,
claim, damage, liability or expense after the Issuer had furnished
such Holder with a sufficient number of copies of the same in a timely
manner. The Issuer will also indemnify underwriters, selling brokers,
dealer managers and similar securities industry professionals
participating in the distribution, their officers and directors and
each Person who controls such Persons (within the meaning of the
Securities Act) to the same extent as provided above with respect to
the indemnification of the Holders, if requested.
(b) INDEMNIFICATION BY SELLING HOLDER OF UNDERLYING SECURITIES.
In connection with each Registration, each Selling Holder shall
furnish to the Issuer in writing such information and affidavits as
the Issuer reasonably requests for use in connection with any
Registration Statement or Prospectus and agrees to indemnify and hold
harmless, to the full extent permitted by law, the Issuer, its
directors and officers and each Person who controls the Issuer (within
the meaning of the Securities Act) against any losses, claims, damages
or liabilities and expenses resulting from any untrue statement of a
material fact or any omission of a material fact required to be stated
in the Registration Statement or Prospectus or preliminary Prospectus
or necessary to make the statements therein not misleading, to the
extent, but only to the extent, that such untrue statement or omission
is contained in any information or affidavit so furnished in writing
by such selling Holder to the Issuer specifically for inclusion in
such Registration Statement or Prospectus and has not been corrected
in a subsequent writing prior to or concurrently with the sale of the
Registrable Securities to the Person asserting such loss, claim,
damage, liability or expense. In no event shall the liability of any
selling Holder hereunder or under any underwriting agreement be
greater in amount than the dollar amount of the proceeds received by
such Holder upon the sale of the Registrable Securities giving rise to
such indemnification obligation. The Issuer shall be entitled to
receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating
in the distribution, to the same extent as provided above with respect
to information so furnished in writing by such Persons specifically
for inclusion in any Prospectus or Registration Statement.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled
to indemnification hereunder will (i) give prompt (but in any event
within 30 days after such Person has actual knowledge of the facts
constituting the basis for indemnification) written notice to the
indemnifying party of any claim with respect to which it seeks
indemnification and (ii) permit such indemnifying party to assume the
defense of such claim with counsel reasonably satisfactory to the
indemnified party; PROVIDED, HOWEVER, that any delay or failure to so
notify the indemnifying party shall relieve the indemnifying party of
its obligations hereunder only to the extent, if at all, that it is
prejudiced by reason of such delay or failure; PROVIDED, FURTHER
HOWEVER, that any Person entitled to indemnification hereunder shall
have the right to select and employ separate counsel and to
participate in the defense of such claim, but the fees and expenses of
such counsel shall be at the expense of such Person unless (a) the
indemnifying party has agreed in writing to pay such fees or expenses,
or (b) the indemnifying party shall have failed to assume the defense
of such claim within a reasonable time after receipt of notice of such
claim from the Person entitled to indemnification hereunder and employ
counsel reasonably satisfactory to such Person or (c) in the
reasonable judgment of any such Person, based upon advice of its
counsel, a conflict of interest may exist between such Person and the
indemnifying party with respect to such claims (in which case, if the
Person notifies the indemnifying party in writing that such Person
elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such claim on behalf of such Person). If such defense is
not assumed by the indemnifying party, the indemnifying party will not
be subject to any liability for any settlement made without its
consent (but such consent will not be unreasonably withheld), PROVIDED
that an indemnified party shall not be required to consent to any
settlement involving, the imposition of equitable remedies or
involving the imposition of any material obligations on such
indemnified party other than financial obligations for which such
indemnified party will be indemnified hereunder. No indemnifying
party will be required to consent to entry of any judgment or enter
into any settlement that does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified
party of a release from all liability in respect to such claim or
litigation. Whenever the indemnified party or the indemnifying party
receives a firm offer to settle a claim for which indemnification is
sought hereunder, it shall promptly notify the other of such offer.
If the indemnifying party refuses to accept such offer within
20 business days after receipt of such offer (or of notice thereof),
such claim shall continue to be contested and, if such claim is within
the scope of the indemnifying party's indemnity contained herein, the
indemnified party shall be indemnified pursuant to the terms hereof.
If the indemnifying party notifies the indemnified party in writing
that the indemnifying party desires to accept such offer, but the
indemnified party refuses to accept such offer within 20 business days
after receipt of such notice, the indemnified party may continue to
contest such claim and, in such event, the total maximum liability of
the indemnifying party to indemnify or otherwise reimburse the
indemnified party hereunder with respect to such claim shall be
limited to and shall not exceed the amount of such offer, plus
reasonable out-of-pocket costs and expenses (including reasonable
attorneys' fees and disbursements) to the date of notice that the
indemnifying party desires to accept such offer, PROVIDED that this
sentence shall not apply to any settlement of any claim involving the
imposition of equitable remedies or to any settlement imposing any
material obligations on such indemnified party other than financial
obligations for which such indemnified party will be indemnified
hereunder. An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay
the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim,
unless in the written opinion of counsel to the indemnified party,
reasonably satisfactory to the indemnifying party, use of one counsel
would be expected to give rise to a conflict of interest between such
indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be
obligated to pay the fees and expenses of one such additional counsel.
(d) OTHER INDEMNIFICATION. Indemnification similar to that
specified in this Section (8) (with appropriate modifications) shall
be given by the Issuer and each seller of Registrable Securities with
respect to any required registration or other qualification of
securities under federal or state law or regulation of governmental
authority other than the Securities Act.
(e) CONTRIBUTION. If for any reason the indemnification provided
for in the preceding clauses (a) and (b) is unavailable to an
indemnified party or insufficient to hold it harmless as contemplated
by the preceding clauses (a) and (b), then the indemnifying party
shall contribute to the amount paid or payable by the indemnified
party as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative benefits
received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying
party, as well as any other relevant equitable considerations,
provided that no selling Holder shall be required to contribute in an
amount greater than the dollar amount of the proceeds received by such
selling Holder with respect to the sale of any securities. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent
misrepresentation.
9. RULE 144
From and after an IPO, the Issuer covenants that it will file the
reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder,
and it will take such further action as any Holder may reasonably request,
all to the extent required from time to time to enable such Holder to sell
Registrable Securities without registration under the Securities Act within
the limitation of the exemption provided by (a) Rule 144 under the
Securities Act, as such Rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC. Upon the request
of any Holder, the Issuer will deliver to such Holder a written statement
as to whether it has complied with such information and requirements.
Notwithstanding anything contained in this Section 9, the Issuer may
deregister under Section 12 of the Exchange Act if it then is permitted to
do so pursuant to the Exchange Act and the rules and regulations
thereunder.
10. ADDITIONAL PARTIES
The Issuer may enter into various stockholder's and stock option
agreements on or subsequent to the date hereof with certain key employees
of the Issuer or one of its subsidiaries (the "Management Investors")
pursuant to which the Management Investors will agree to purchase and/or
will receive options to purchase shares of Common Stock. Such agreements
may provide that (i) in the event the Issuer registers shares of Common
Stock held by the Investors, the Management Investors have the right,
subject to certain conditions, to require the Issuer to register under the
Securities Act shares of Common Stock held by them, and (ii) the Management
Investors will agree to be bound by all of the terms, conditions and
obligations of this Agreement. Each of the parties hereto acknowledges the
registration rights of the Management Investors and agrees that the
Issuer's obligations under this Agreement, including, in particular, its
obligations under Section 4(b) hereof, coincide with its obligations to the
Management Investors, with respect to registration rights. The parties
hereto agree that (i) each Management Investor is a third-party beneficiary
of Sections 3(d), 4(c) and 7 hereof to the extent such Management Investor
has the right to require the Issuer to register under the Securities Act
shares of Common Stock held by him upon receiving notice of a Registration
requested by the Investors pursuant to Sections 3 or 4 hereof, and
(ii) such Management Investors shall have no rights to request Registration
under Section 3 hereof.
11. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Person may participate in any Underwritten Registration hereunder
unless such Person (a) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents required under the terms of such underwriting
arrangements. Nothing in this Section 11 shall be construed to create any
additional rights regarding the Registration of Registrable Securities in
any Person otherwise than as set forth herein.
12. LOCK UP AGREEMENT
Each of the Investors hereby irrevocably agrees that, for a period of
6 months after the date of an IPO, and each Stockholder hereby irrevocably
agrees that, for a period of 6 months after the date of an IPO, such Person
will not offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of any Registrable Securities, or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Registrable Securities, without the prior written
consent of the managing underwriter for such offering, except for
(i) transfers of shares of Registrable Securities to another Investor or
other Holder or to any affiliate of such Investor or Holder existing on the
Closing Date or to members of his family or entities controlled by such
family members who agree to be bound by the foregoing restrictions or
(ii) pledges of Registrable Securities by such Investor or Holder, provided
the pledgee of such shares agrees in writing to be bound by the foregoing
restrictions.
Each Investor and Stockholder agrees that this Section 12 shall be
binding upon the successors, assigns, heirs and legal representatives of
such Investor or Stockholder.
In furtherance of the foregoing, the Issuer and its transfer agent are
hereby authorized to decline to make any transfer of securities if such
transfer would constitute a violation or breach of this Section 12.
13. MISCELLANEOUS
(a) REMEDIES. Remedies for breach by the Issuer of its
obligations to register the Registrable Securities shall be as set
forth herein. Each Holder, in addition to being entitled to exercise
all rights provided herein or granted by law, including recovery of
damages, shall be entitled to specific performance of its rights under
this Agreement. The Issuer agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by
it of the provisions of this Agreement and hereby agrees to waive the
defense in any action for specific performance that a remedy at law
would be adequate.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Issuer has obtained
the written consent of the Holders of a majority of the outstanding
Registrable Securities; PROVIDED, HOWEVER, that the Issuer and the
Investors may amend, modify or supplement the provisions of this
Agreement and may waive or consent to departures from the provisions
hereof, without the consent of the Holders of a majority of the
outstanding Registrable Securities so long as such amendment,
modification, supplement, waiver or consent does not materially
adversely affect the rights of Holders of Registrable Securities
hereunder, or so long as such amendment, modification, supplement,
waiver or consent affects the rights of the Investors and other
Holders of Registrable Securities hereunder equally.
(c) NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery,
registered first-class mail, telex, telecopier, or air courier
guaranteeing overnight delivery:
(i) if to a Holder, to the most current address given by
such Holder to the Issuer in accordance with the provisions of
this Section 13(c), which address initially is, with respect to
Rentrak, 7227 Northwest 55th Ave., Portland, Oregon 97218,
Attention: F. Kim Cox; and if to the Stockholders, to the
addresses set forth in Attachment A hereto; and
(ii) if to the Issuer, to 7227 Northwest 55th Ave.,
Portland, Oregon 97218, Attention: President.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered;
4 business days after being deposited in the mail, postage prepaid, if
mailed; when answered back, if telexed; when receipt acknowledged by
addressee, if by facsimile transmission; and on the next business day
if timely delivered to an air courier guaranteeing overnight delivery.
(d) SUCCESSORS AND ASSIGNS. This Agreement, including, without
limitation, all registration rights in connection with the ownership
of all or a portion of the Registrable Securities pursuant to
Sections 3 and 4 hereof, shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties, including,
without limitation and without the need for an express assignment,
subsequent Holders of Registrable Securities who agree in writing to
be bound by the provisions of this Agreement.
(e) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and
all of which taken together shall constitute one and the same
agreement.
(f) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning
hereof.
(g) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware,
without regard to the principles of conflicts of laws.
(h) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity,
legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be
affected or impaired thereby.
(i) ENTIRE AGREEMENT. This Agreement is intended by the parties
as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein.
There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein with respect to the
registration rights granted by the Issuer with respect to the
securities issued pursuant to the Asset Purchase Agreement. This
Agreement supersedes all prior agreements and understandings between
the parties with respect to such subject matters.
(j) ADDITIONAL RIGHTS. If the Issuer at any time grants to any
other holder of Common Stock any rights to request the Issuer to
effect the Registration of any shares of Common Stock, or any
"piggyback" registration rights with respect to shares of Common
Stock, on terms that are more favorable to such holders than the terms
set forth herein, then the terms of this Agreement shall be deemed
amended or supplemented to the extent necessary to provide the Holders
such more favorable rights and benefits.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE ISSUER: BLOWOUT ENTERTAINMENT, INC.
By:
Its:
INVESTORS: RENTRAK CORPORATION
By:
Its:
STREAMLINED SOLUTIONS, INC.
By:
Its:
MORTCO, INC.
By:
Its:
/s/ Terry H. Monroe
TERRY H. MONROE
/s/ Henry H. Stephens
HENRY H. STEPHENS
/s/ James M. Schultz
JAMES M. SCHULTZ
/s/ Laura E. Schultz
LAURA E. SCHULTZ
/s/ Pamela G. Dammerman
PAMELA G. DAMMERMAN
/s/ Laurie Claar
LAURIE CLAAR
/s/ Mary Hoffman
MARY HOFFMAN
/s/ Greg Smith
GREG SMITH
TELEMIND CORPORATION
By:
Its:
/s/ David J. Doedtman
DAVID J. DOEDTMAN
/s/ Lori L. Tucker
LORI L. TUCKER
/s/ Janice Wear
JANICE WEAR
O'FALLON, INC.
By:
Its:
/s/ John M. Schultz
JOHN M. SCHULTZ
J. M. SCHULTZ INVESTMENTS
By:
Its:
/s/ Roger Roberson
ROGER ROBERSON
/s/ John H. Schultz
JOHN H. SCHULTZ
/s/ Scott Daugherty
SCOTT DAUGHERTY, AS TRUSTEE OF THE
SCOTT DAUGHERTY PROFIT SHARING PLAN
DELAWARE CHARTER GUARANTEE TRUSTEE
FBO KATHERIN MEYER IRA
/s/ Guy Woodbury
GUY WOODBURY
/s/ Doug Collins
DOUG COLLINS
/s/ Dan Patton
DAN PATTON
/s/ Tom Henderson
TOM HENDERSON
/s/ Ronald C. Murfee
RONALD C. MURFEE
/s/ Ann Schultz-Deters
ANN SCHULTZ-DETERS
/s/ Carolyn M. Solder
CAROLYN M. SOLDER
/s/ Deb Sanders
DEB SANDERS
SERVICING, WAREHOUSING & DISTRIBUTION AGREEMENT
THIS SERVICING, WAREHOUSING AND DISTRIBUTION AGREEMENT (the
"Fulfillment Agreement" or "Agreement") is made this 1st day of
January, 1997, by and between STREAMLINED SOLUTIONS INC., a corporation
organized and existing under the laws of Oregon, and doing business as
The Warehouse, hereinafter referred to as "The Warehouse," and BLOWOUT
ENTERTAINMENT, INC., a Delaware corporation, hereinafter referred to as
"Client."
R E C I T A L S:
The Warehouse provides customers with, among other things,
warehousing, distribution, and inventory services.
Client is a distributor of goods and merchandise (hereinafter,
"Stock") and desires to contract with The Warehouse for certain of The
Warehouse's services under the covenants, terms, and restrictions contained
herein.
THEREFORE, for valuable consideration as set forth herein, Client and
The Warehouse agree as follows:
SECTION 1
THE WAREHOUSE'S SERVICES
1.1 FULFILLMENT SERVICES. The Warehouse agrees to provide certain
warehouse space, labor, and operational equipment, in order to provide the
following services to Client at the Client's request:
a) Making space available to Client for Client's storage of
Client's Stock; and
b) Electronic manifesting, transfer to delivery carrier,
transportation monitoring, and quality assurance reporting regarding
Client's Stock sent or delivered from The Warehouse's warehouses.
Appendix I contains a description of these services and fees selected
by Client and the terms and conditions of Appendix I are incorporated
herein as if fully set forth.
1.2 PROVISION OF SERVICES. All services provided by The Warehouse
are subject to the provisions of this Fulfillment Agreement, including any
Exhibits and Appendices hereto.
SECTION 2
TERM
2.1 TERM. This Agreement shall be effective as of the date first set
forth above and shall continue in full force and effect for one (1) year
from the date hereof unless terminated by either party as provided in
Section 6.2 hereof.
SECTION 3
PRICING AND PAYMENT
3.1 PAYMENT. Client shall pay for the services performed by The
Warehouse in accordance with the schedule of fees, rates, or charges set
forth on the attached Appendix I.
3.2 ADDITIONAL CHARGES. If The Warehouse is requested to perform
services not listed in Appendix I, the parties shall agree in a prior
writing as to the services to be performed and the charges to be paid for
the services.
3.3 ELECTRONIC COMMUNICATIONS. If Client and The Warehouse agree to
establish an electronic communications system for some or all of the
services provided under this Agreement, Client shall pay for any and all
fees, expenses, software, and hardware as are necessary to establish such
system. The parties will jointly determine what system requirements are
necessary.
3.4 PRICING CHANGES. The Warehouse will not change charges under
this Agreement without notice to Client. The Warehouse reserves the right
to increase all fees, rates, or charges set forth herein and in Appendix I,
at any time and from time to time in the same percentage amounts and at the
same times as such fees, rates or charges are increased to The Warehouse by
the provider of such goods or services to The Warehouse.
3.5 INVOICES. All services provided hereunder shall be invoiced by
The Warehouse to Client and are due net thirty (30) days.
3.6 NONWAIVER. The failure of The Warehouse to invoice Client for
services during any month is not a waiver of The Warehouse's right to
payment for such services.
3.7 DELINQUENCY. The Warehouse encourages prompt payment by its
clients. Payment must be received by The Warehouse within thirty (30) days
of date of invoice or The Warehouse may elect to declare Client in default
hereunder without any further notice being required. Until such default is
cured, an interest shall be assessed on the balance owed in the amount of
one and one-half percent (1 1/2 %) per month or the maximum amount allowed
by applicable law, which is lower. Assessment of such a charge shall not
be deemed a waiver of such default or of any other remedy The Warehouse may
have hereunder or at law.
3.8 CURRENCY. All currency is stated in United States Dollars and
shall be paid in United States Dollars.
SECTION 4
WAREHOUSING
4.1 RECEIPT. All Stock submitted for The Warehouse's services under
this Agreement shall be delivered at Client's expense to The Warehouse's
dock at 3300 State Route 73 South, Wilmington, Ohio, 45177, or such other
location as may be designated by The Warehouse form time to time. All such
Stock shall be in good condition, properly marked, sized, and packaged in
manageable containers as determined in The Warehouse's sole discretion.
The Client shall inform The Warehouse prior to or at delivery of any
special precautions necessitated by the nature, conditions, or packaging of
the Stock and of all statutory requirements specific to the Stock with
which The Warehouse does or may need to comply.
4.2 NONACCEPTABLE STOCK. The Warehouse will not accept
"Nonacceptable Stock" for warehousing, inventory, or distribution.
"Nonacceptable Stock" is defined as and shall include, but is not limited
to, the following:
a) Improperly identified Stock or Stock not in compliance
with any of the provisions of this Agreement;
b) Alcoholic beverages, drugs, perishables, refrigerated
items, live animals, firearms, negotiable items, explosives,
hazardous materials, hazardous liquids, hazardous gases, or
hazardous wastes, personal effects, plants, pornographic
materials, seeds (except popcorn seeds), tobacco, highly
flammable materials or liquids, bio-hazardous materials, human
body parts, fluids, or remains;
c) Any Stock which is prohibited from ownership, storage,
shipment, or sale by law or regulation of any national, state, or
local government in the country of origin, at The Warehouse's
warehouse or in the intended destination;
d) Stock to which Client does not have clear, unencumbered
title or which is moving under COD, FCR, FCT or cash against
documents;
e) All Stock identified on the International Association for
Transportation by Air ("IATA") List of Dangerous Goods (as
revised from time to time), or which by its nature is liable to
cause death, injury or damage;
f) Stock exceeding any size or weight restrictions which may
be set forth by The Warehouse or its distribution carriers for
shipment; and
g) Stock not accepted by The Warehouse's distribution
carriers for shipment; and
h) Stock intended for distribution to Canada (The Warehouse
specifically will not ship or distribute Stock to Canada).
The Warehouse may at any time with notice to the Client, amend the
list of items which are Nonacceptable. The Warehouse's determination that
Stock is Nonacceptable is final and in its sole discretion. The Warehouse
may reject any Nonacceptable Stock at any time. All Nonacceptable Stock
will be returned to or held for the Client at the Client's expense and at
The Warehouse's discretion.
4.3 INSPECTION. The Warehouse reserves the right to open and inspect
any packages of Stock received by it for warehousing or distribution.
Client's representative shall be permitted to enter into The Warehouse's
warehouse at all times during working hours for the sole purpose of
inspecting Client's Stock at Client's expense, provided such representative
is accompanied by a The Warehouse employee. The Client shall be liable for
and shall indemnify and hold The Warehouse harmless from any and all
damages, injuries, or consequential damages, caused to or caused by its
representative.
4.4 HOURS. Inbound shipments to The Warehouse's warehouse and
distribution center shall be from 8:00 a.m. to 11:30 p.m. Eastern Standard
Time, Monday through Friday, subject to change from time to time unless
alternative arrangements have been made with The Warehouse prior to
arrival.
4.5 FREIGHT CHARGES. Distribution shall be at the Client's expense
at the prices and rates set forth in this Agreement and the appendices
hereto, and shall be made upon The Warehouse's receipt of valid written
authorization from Client.
4.6 DISTRIBUTION. "Distribution" in this Agreement shall mean that
The Warehouse shall deliver such outbound Stock to a carrier chosen by
Client for delivery in accordance with the authorized instruction of
Client. All finished, packed and properly labeled cartons of Stock made
available to The Warehouse for shipment will be delivered to carrier within
twenty-four (24) hours (weekends, holidays and other closures of The
Warehouse excepted) of delivery of availability. All such shipments must
include a written carton count, description of contends and any and all
such other information as The Warehouse may require. In the event
distribution cannot be made solely as a result of The Warehouse's conduct,
The Warehouse will waive the handling charges for such shipment.
4.7 COMPLIANCE WITH CUSTOMS REGULATIONS. The Warehouse intends to
comply with all applicable U.S. Customs regulations relating to Stock for
which it provides services under this Agreement. Client shall provide The
Warehouse with written notification of all Stock which is or will be the
subject of any U.S. Customs rules or regulations including the requirements
of such rules or regulations and such other information as The Warehouse
shall request. Client shall further identify to The Warehouse in advance
all distribution shipments destined for shipment outside the U.S. and
provide all information and cooperation necessary to ensure The Warehouse's
compliance with conformance to such rules and regulations.
SECTION 5
LIABILITY/INDEMNIFICATION/INSURANCE/SECURITY
5.1 INSURANCE. At the Client's written request and upon the Client's
agreement to pay the applicable premium, The Warehouse will request
insurance coverage under The Warehouse's insurance policy to cover Client's
Stock. If so requested, Client hereby accepts the amounts and types of
coverage so provided. Except as specifically set forth in this
Section 5.2, Stock stored or warehoused by The Warehouse, its subsidiaries,
or affiliates, is not insured against loss or damage.
5.2 LIABILITY. The Warehouse shall not be liable to Client for any
damage, loss, demurrage, or injury to Stock of Client unless such loss is
the result of The Warehouse' reasonably careful person would exercise under
like circumstances, and The Warehouse shall not be liable for damages that
could not have been avoided by the exercise of such care. Client agrees
that it shall bear the burden of proving that The Warehouse failed to
exercise such care. The Warehouse shall not under any circumstances be
liable to Client for any damage, injury, loss, demurrage, or default in its
obligations of any kind which arise directly or indirectly from the
following:
a) fire, war, act of God, or any natural disaster or calamity;
b) power outages;
c) strikes, lock-outs or labor disputes at The Warehouse, its
carrier(s), or at any party providing services to The Warehouse;
d) any governmental action; or
e) any other circumstances beyond the reasonable control of The
Warehouse.
5.3 CONSEQUENTIAL DAMAGES. The Warehouse shall not be liable to
Client or any third party for any indirect or consequential loss or
damages, however arising, including but not limited to, loss of income,
loss of profit, loss of opportunity, or other loss or damage as a result of
the requests of the Client as to the Stock or distribution thereof.
5.4 LIABILITY LIMIT. The maximum liability of The Warehouse for any
item of Stock in its possession shall be the lesser of $100 or the Client's
actual cost of the item. Prior to payment by The Warehouse of any claim
for loss or damage, Client shall provide proof of Client's cost to The
Warehouse. In addition, The Warehouse shall be entitled to, at The
Warehouse's election, set-off and/or subrogation for any insurance proceeds
recovered or recoverable by the Client regardless of whether the Client
files an insurance claim or not.
5.5 CLAIM. Any Client claim to The Warehouse shall be presented in
writing by the Client within a reasonable time, but in no event later than
fifteen (15) days after the loss or damage was identified by the Client or
notification of the loss or damage was provide to the Client.
5.6 LIABILITY FOR INVENTORY SHRINKAGE. Client shall retain primary
control of Stock held in The Warehouse's warehouse. The Warehouse shall
not be liable for any Client losses as a result of inventory shrinkage, and
Client shall hold The Warehouse harmless therefrom.
SECTION 6
MISCELLANEOUS
6.1 ASSIGNMENT. The rights and obligations of the Client created
under this Agreement may not be transferred, or assigned to a third party,
or for the benefit of a third party, either directly or indirectly, without
the prior written consent of The Warehouse. The Warehouse may transfer any
or all of its rights and obligations under this Agreement at any time and
without notice of any kind.
6.2 TERMINATION. The Warehouse may terminate this Agreement at
expiration of the term, upon sixty (60) days' written notice to Client.
Client may terminate this Agreement at expiration of the term after first
providing The Warehouse with sixty (60) days' written notice, provided
that, if Client intends to obtain all or any of the services provided by
The Warehouse under this Agreement from an alternate source, then Client
shall provide The Warehouse with sixty (60) days' written notice of intent
to seek other alternate sources for fulfillment services. At the end of
such sixty (60) day period, Client must provide The Warehouse with complete
detailed descriptions of all alternate bids to provide all or any portion
of such services and The Warehouse shall have sixty (60) days to meet such
bids for any such services The Warehouse may choose to offer. To the
extent The Warehouse's bids are equal to or better than the alternate
fulfillment source, Client may not terminate this Agreement and shall
engage The Warehouse to provide such services for the remaining term of
this Agreement. Client agrees that, upon giving notice to The Warehouse of
such termination, the terms of this Agreement shall be automatically
amended to require payment for all services hereunder on a net ten (10) day
basis. Upon termination, all confidential information held by either party
shall be promptly returned to the other.
6.3 NOTICE. All notices or notification required hereunder shall be
deemed sufficient if in writing and sent via first class mail, postage
prepaid, to the attention and address as set forth as follows:
The Warehouse: Streamlined Solutions, Inc.
d/b/a The Warehouse
c/o 3300 State Route 73 S.
Wilmington, Ohio 45177
Attn: Ed Barnick
Client: Blowout Entertainment, Inc.
P.O. Box 13280
Portland, Oregon 97213
Attn: Steve Berns
6.4 THIRD-PARTY INTERESTS. Client shall at all times notify The
Warehouse of any and all other corporations, persons, or entities that have
any interest in the Stock which is warehoused, deposited, or stored with
The Warehouse.
6.5 SEVERABILITY. In the event that any of the terms of this
Agreement shall be deemed invalid, unlawful, or unenforceable to any
extent, such term shall be severed from the remaining terms which shall
continue to be valid to the fullest extent permitted by law.
6.6 TAXES. The Client agrees to pay and/or indemnify The Warehouse
from all taxes, including but not limited to sales, use, personal,
franchise, gross receipts, excise, tariff, franchise and business taxes,
together with any penalties, fines, or interest thereon, imposed by any
federal, state, province, local government, or any other taxing authority
with respect to the sale, delivery, shipment, or storage of the Client's
Stock.
6.7 GOVERNING LAW. This Agreement and all controversies, claims and
causes of action relating hereto shall be governed by and construed in
accordance with the laws of the state of Oregon without regard to its
conflicts of laws principles.
6.8 JURISDICTION. The parties of this Agreement, their successors or
assigns, agree that any disputes under or relating to this Agreement shall
only be resolved in the Circuit Court for Multnomah County, Oregon or the
U.S. District Court for the District of Oregon, and Client waives any
objection to such jurisdiction.
6.9 CONFIDENTIALITY/NONCOMPETE. Client and The Warehouse each
acknowledge the sensitivity and importance of information and documents
exchanged or acquired pursuant to this Agreement. Client's customers'
names, Stock, ordering and shipping quantities are confidential and the
property of Client. The details of this Agreement, The Warehouse's
logistics, software, quotations, operations, costs, customers' names, price
schedules, and all other related documents, information, and appendixes are
confidential and owned by The Warehouse. Neither party shall disclose any
of the other parties' confidential information to any third party except
such party's attorneys and accountants without first obtaining the prior
express written authorization of the other party. Neither party shall use
the name or trademarks of the other in any advertisement without first
obtaining the prior express written permission of such party. The Client
shall further not enter into any competitive warehousing and distribution
business, or any competitive agreements with The Warehouse's
subcontractors, carriers, or other The Warehouse customers during the term
of this Agreement. The parties agree that this clause shall survive the
termination of this Agreement.
6.10 MEASURE UNITS. Unless expressly stated otherwise in this
Agreement, all units of measure shall be United States Standard
Measurement.
6.11 REPRESENTATIONS. Client represents and warrants that it is a
Delaware corporation in good standing and that its Officers are authorized
by its articles of organization, and its Board of Directors and
Shareholders to enter into this Agreement. If further warrants that there
have been no adverse changes in its financial condition since the date of
the latest financial statements supplied to The Warehouse and that it is
able to meet all financial obligations created herein and Client represents
and warrants that nothing herein violates any other obligations or
agreements of Client or creates any situation or circumstance for which The
Warehouse is or may become liable to any third party.
6.12 ENTIRE AGREEMENT. This Agreement and its appendices and exhibits
contains the entire agreement and understanding of the parties as to the
subject matter herein, and supersedes all other prior agreements,
understandings and arrangements, written or oral, between the parties
relating to the subject matter hereof.
THE WAREHOUSE: CLIENT:
STREAMLINED SOLUTIONS, INC., BLOWOUT ENTERTAINMENT, INC.
d/b/a The Warehouse
By: /s/ By: /s/ Karl Wetzel
Title: VP Distribution Title: Chief Financial Officer
<PAGE>
APPENDIX I
TO
SERVICING, WAREHOUSING & DISTRIBUTION AGREEMENT
BETWEEN
STREAMLINED SOLUTIONS, INC., D/B/A THE WAREHOUSE
AND
BLOWOUT ENTERTAINMENT, INC.
FACILITY SPACE
Facility Space Reserved: 12,800 square feet--unimproved, heated, shell
warehouse space without racks with electricity
provided through existing 100 VAC and 200 VAC
outlets.
Rate for Facility Space: $3.75 per square foot, per year, billed in equal
monthly amounts.
Availability Date: Upon execution.
FULFILLMENT SERVICES
Nature of Stock: Video cassettes
Stock Handling Charges: $.02 per cassette (includes shipping, manifesting
and application of shipping labels). This rate
contemplates 100 cassettes per carton, full carton
lots. Charges will vary if quantities vary.
Freight Charges: 3% reduction from UPS published rates for outbound
freight.
Airborne Express as set forth on the attached
Exhibit A [ATTACH 10/30/96 PROPOSAL]
INVOICE TERMS
All charges due net thirty (30) days from date of invoice.
ADDITIONAL SERVICES
Available at negotiated rates.
EMPLOYEE STOCK PURCHASE PLAN
OF
BLOWOUT ENTERTAINMENT, INC.
Section 1. PURPOSE OF THE PLAN. The purpose of the Employee Stock
Purchase Plan (the "Plan") of Blowout Entertainment, Inc. (the "Company")
is to secure for the Company and its shareholders the benefits of the
incentive inherent in the ownership of the Company's common stock by
present and future employees of the Company and, if applicable, those of
its wholly-owned subsidiaries selected by the Board of Directors of the
Company (individually a "Subsidiary" and collectively, "Subsidiaries").
The Plan is intended to comply with the provisions of Section 423 of the
Internal Revenue Code of 1986, as amended, (the "Code"), and it shall be
administered, interpreted and construed in accordance with such provisions.
Section 2. ADMINISTRATION.
A. Until otherwise determined by the Board of Directors, the Plan
shall be administered by the Compensation Committee of Board of
Directors of the Company (the "Committee"). Meetings of the Committee
for purposes of administering the Plan shall be held at such times and
places as its Chairman may determine, and the Committee shall
establish its own rules for taking action.
B. Among other things, subject to the express provisions of the
Plan, the Committee shall have the authority to determine the
eligibility of employees to participate in the Plan, which of any
future subsidiaries of the Company shall participate in the Plan, and
the procedures by which employees shall obtain and file an election to
participate in the Plan ("Election"). A procedure for systematic
payroll deductions will be established for employees who file such an
Election (herein referred to as "Participating Employees") and for the
proper accounting thereof. The Committee shall select an investment
firm to maintain the shares purchased by Participating Employees and
shall interpret the Plan, supervise its administration and take all
other actions in connection therewith as it deems necessary or
advisable. The interpretation by the Committee of any provisions of
the Plan or of any rights granted under it shall be final. No member
of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any rights granted
thereunder.
Section 3. SHARES RESERVED FOR THE PLAN. There shall be reserved for
issuance and purchase by Participating Employees under the Plan an
aggregate of Two Hundred Thousand 200,000 shares of common stock of the
Company, par value $.001 per share. Shares subject to the Plan may be
either authorized but unissued shares or shares that were previously issued
and subsequently reacquired by the Company, including shares purchased in
the open market.
Section 4. ELIGIBLE EMPLOYEES. All present and future employees of
the Company and its Subsidiaries shall be eligible to participate in the
Plan; provided that each such employee (a) has been employed by the Company
or a Subsidiary for at least six (6) months prior to an Election Date;
(b) is customarily employed by the Company at least 20 hours per week; and
(c) does not own, directly or indirectly, immediately after any Investment
Date (as defined in subsection 8A herein), stock possessing five percent
(5%) or more (including stock subject to outstanding options or purchase
rights held by such employee) of the total combined voting power or value
of all classes of stock of the Company or any of its subsidiaries. The
rules set forth in Section 424(d) of that Code shall apply for purposes of
calculating the foregoing percentage limitation. An "Election Date" means
either January 1 or July 1 of each Plan Year so long as the Plan shall
exist.
Section 5. ELECTION TO PARTICIPATE.
A. Each employee satisfying the requirements for eligibility set
forth in Section 4 above may elect to participate in the Plan by
filing with the Company prior to any Election Date a Notice of
Election authorizing (1) specified regular payroll deductions during
the Plan Year (as defined in Section 16 hereof) beginning on such
Election Date, not to exceed an amount which would equal 10 percent of
his Total Compensation (as defined below) during each such Plan Year,
and (2) the utilization of such deductions to purchase shares of the
Company's common stock pursuant to Section 8 hereof. A Notice of
Election shall take effect upon the first Election Date after it is
filed with the Company and shall remain in effect until revoked or
modified by the Participating Employee as provided in subsection 5C
below. The term "Total Compensation" shall mean the total of all
forms of direct remuneration paid to a Participating Employee during
any Plan Year, including salary and commissions, but excluding any
additional sums such as payments for overtime, bonuses, shift
differential, profit sharing or Section 401(k) contributions, or
reimbursement for business expenses; provided, however, that at the
time an employee first becomes eligible to participate in the Plan, he
shall be entitled to make a one-time contribution to the Plan equal to
10 percent of his Total Compensation for the six month period
immediately preceding the Election Date on which his participation in
the Plan becomes effective. Notwithstanding anything to the contrary
herein, payroll deductions must be in equal amounts of not less than
Ten Dollars ($10.00) per pay period.
B. The Company shall withhold from each payroll check issued to a
Participating Employee the amount specified in such Employee's most
recent Notice of Election, and the amount so withheld shall be
credited to the Participating Employee's payroll deduction account.
Amounts credited to a Participating Employee's payroll deduction
account shall earn no interest and shall be held by the Company as a
"debtor" of the Participating Employee and not as a "trustee." Prior
to utilizing such amounts to purchase shares of the Company's common
stock pursuant to Section 8 hereof, the Company may use these sums for
any proper corporate purpose as determined by the Committee and the
Committee shall not be obligated to segregate such amounts.
C. Upon written notice to the Company, a Participating Employee
may at any time revoke his Notice of Election to participate in the
Plan. Unless such employee also elects in writing to withdraw the
balance of his payroll deduction account not theretofore utilized to
purchase shares, such balance shall thereafter be utilized to purchase
shares as provided herein, notwithstanding that such employee has
otherwise ceased to be a Participating Employee in the Plan. In such
case, the employee may participate in the Plan during any subsequent
Plan Year, provided that he files a new Notice of Election with the
Company. A revocation of a Notice of Election to Participate shall be
effective beginning with the first regular payroll period of the
Company or Subsidiary (as the case may be) following receipt of the
notice required by this subsection 5C. A Participating Employee may
also modify his Notice of Election as of January l and July 1 of each
Plan Year, to increase or decrease the amount of his payroll
deduction, by filing a new Notice of Election specifying the new
deduction percentage not latter than the proposed effective date of
the change.
D. The Committee shall establish a procedure whereby a
Participating Employee, who is on a temporary leave of absence and
wishes to continue his participation in the Plan through the remainder
of the Plan Year, shall be permitted to make voluntary contributions
to purchase shares hereunder. Such contributions shall be subject to
the same terms and provisions of the Plan as payroll deductions.
Section 6. LIMITATIONS UPON NUMBER OF SHARES WHICH AN EMPLOYEE MAY
PURCHASE AND PERIOD DURING WHICH SHARES MAY BE PURCHASED. No Participating
Employee shall be granted the right to purchase stock under this Plan or
any other employee stock purchase plans maintained by the Company and its
subsidiaries which accrues at an annual rate which exceeds the twenty five
thousand dollars ($25,000) limitation contained in Section 423(b)(8) of the
Code or that may be exercised after the expiration of the period set forth
in Section 423(b)(7) of the Code.
Section 7. COMPANY CONTRIBUTION TO PURCHASE PRICE. The Company shall
be obligated to pay 15 percent of the purchase price of the shares
purchased on behalf of Participating Employees under this Plan. To satisfy
this obligation the Company shall pay to the investment firm designated by
the Committee, within the time period specified in Section 8.B. below, an
amount equal to 17.64705 percent of the total amount contributed by
Participating Employees to the Plan under Section 5 herein as of each
Investment Date (as specified in Section 8 below).
Section 8. METHOD OF PURCHASE AND INVESTMENT ACCOUNTS.
A. On the last day of March, June, September and December, (each
of such dates being referred to herein as an "Investment Date"), each
Participating Employee shall be deemed to have exercised an option to
purchase the maximum number of shares of the Company's common stock
that can be purchased under the procedures set forth in this Section 8
with the amounts then credited to such Employee's payroll deduction
account.
B. Within ten (10) business days after each Investment Date, the
Company shall transfer both the balance in each Participating
Employee's payroll deduction account and the Company's contribution as
determined pursuant to Section 7 above (the "Available Funds"), to the
investment firm designated by the Committee. Subject to
subsections 8C and 8E below, on or before the 15th business day after
each Investment Date, the investment firm shall purchase in the market
on behalf of all of the Participating Employees the maximum number of
whole shares of the Company's common stock that can be purchased with
the Available Funds at the then prevailing market price.
C. Each purchase of shares under this Section 8 shall be
effective only to the extent that the total number of shares reserved
for the Plan pursuant to Section 3 hereof is not exceeded. If the
amount of Available Funds as of any Investment Date exceeds the amount
needed to purchase all of the shares remaining under the Plan, the
available shares shall be allocated among the Participating Employees
in proportion to the balances standing in their payroll deduction
accounts on such Investment Date. Any amounts transferred to the
investment firm which are not expended to purchase shares shall be
refunded to the Participating Employees and the Company in proportion
to the amounts contributed by each of them.
D. The shares which are purchased pursuant to this Section 8
shall be maintained by the investment firm in a separate investment
account for each Participating Employee. A Participating Employee is
for all purposes the beneficial owner of the shares held in his or her
investment account and may sell the shares therein at any time.
Certificates may be registered only in the name of the Participating
Employee, or, if the Participation Employee so indicates on his Notice
of Election, in the Participating Employee's name jointly with a
member of the Participating Employee's family as joint tenants with
the right of survivorship. All dividends paid with respect to the
shares in a Participating Employee's investment account shall be paid
directly to such Employee by the investment firm.
E. No fractional shares shall be purchased for the account of any
Participating Employee. Any portion of a Participating Employee's
payroll deduction account which cannot be utilized to purchase an
additional whole share of the Company's common stock shall be credited
to such Employee's payroll deduction account and retained by the
investment film to purchase additional shares on future Investment
Dates.
Section 9. TITLE OF ACCOUNTS. Each account with the designated
investment firm shall be in the name of the Participating Employee, or if
he so indicates in his Notice of Election, in his name jointly with a
member of his family as joint tenants with the right of survivorship.
Section 10. RIGHTS AS A SHAREHOLDER. When amounts in a Participating
Employee's payroll deduction account are utilized to purchase shares of
common stock of the Company pursuant to Section 8 hereof, he shall have all
the rights and privileges of a shareholder of the Company with respect to
such shares. Neither the establishment of the Plan, the grant or the
exercise of any rights to purchase shares of common stock under the Plan
nor anything else in this Plan shall impose upon the Company or any
Subsidiary any obligation to employ or continue to employ any employee.
The right of the Company or any Subsidiary to terminate any Participating
Employee shall not be diminished or affected because any rights to purchase
shares of the Company's common stock have been granted to such
Participating Employee.
Section 11. RIGHTS NOT TRANSFERABLE. The rights granted under the
Plan are not transferable by a Participating Employee and are exercisable
only by him during his lifetime.
Section 12. RETIREMENT, TERMINATION AND DEATH. In the event of a
Participating Employee's retirement, termination of employment, or death,
his participation in the Plan shall immediately cease, and the balance in
his payroll deduction account not previously utilized to purchase stock
shall be refunded to him. In the event of his death, such refund shall be
paid to his estate.
Section 13. BROKERAGE COMMISSIONS AND EXPENSES OF THE PLAN. No
brokerage commissions or related fees shall be charged to Participating
Employees in connection with the purchase of shares of the Company's common
stock under the Plan. All costs and expenses incurred in administering the
Plan shall be borne by the Company. Any costs and expenses incurred in
connection with the sale of shares purchased pursuant to this Plan shall be
the responsibility of the Participating Employee.
Section 14. AMENDMENT OR TERMINATION OF THE PLAN. At any time, the
Board of Directors may amend or terminate the Plan; provided that no
amendment shall take effect prior to the Election Date which immediately
follows the date the amendment was adopted unless the Board of Directors
specifies an earlier effective date; and provided further that no such
amendment may, without timely approval of the shareholders of the Company
(a) increase the maximum number of shares reserved for the Plan (as
specified in Section 3 hereof), (b) change the persons or categories of
employees eligible to participate in the Plan (as specified in Section 4
hereof), unless such change is occasioned by an amendment to Section 423 of
the Code for which no shareholder approval is required, or (c) materially
increase the benefits accruing to participants in the Plan.
Section 15. RECAPITALIZATION, DISSOLUTION OR MERGER.
A. If at any time there shall be an increase or decrease in the
number of outstanding shares or common stock of the Company by reason
of a recapitalization, reclassification, stock split up, combination
of shares, or dividend or other distribution payable in capital stock,
or in the event of any other corporate reorganization within the
meaning of Section 424 or any other relevant provision of the Code, an
appropriate adjustment shall be made by the Committee in the number
and kind of shares reserved for the Plan. The Committee shall take
appropriate action to ensure that the purchase price specified in
Section 7, the number of shares subject to outstanding options and any
other affected provisions of the Plan are appropriately adjusted so as
not to constitute a "modification" as that term is defined in
Section 424 of the Code. The adjustments made by the Committee shall
be final, binding and conclusive; provided that no rights granted
pursuant to the Plan shall be adjusted in a manner which causes them
to fail to qualify as rights created pursuant to an Employee Stock
Purchase Plan within the meaning of Section 423 of the Code.
B. In the event of a dissolution or liquidation of the Company or
merger, consolidation or other reorganization in which the Company is
not the surviving corporation, the Plan shall terminate upon the date
of approval of such dissolution, liquidation, merger, consolidation or
other reorganization by the Company's shareholders. Upon such
termination, all payroll deductions authorized under the Plan shall
cease and any deductions which have not yet been utilized shall be
returned to the Participating Employee.
Section 16. EFFECTIVE DATE OF THE PLAN. This Plan shall be effective
as of January 1, 1997. A "Plan Year" shall be that 12 month period which
begins on January 1 or any anniversary date thereafter, so long as the Plan
shall exist.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of BLOWOUT ENTERTAINMENT, INC., a Delaware
corporation (the "Company"), does hereby constitute and appoint STEVE BERNS
and KARL D. WETZEL, with full power to each of them to act alone, as the
true and lawful attorneys and agents of the undersigned, with full power of
substitution and resubstitution to each of said attorneys to execute, file
or deliver any and all instruments and to do all acts and things which said
attorneys and agents, or any of them, deem advisable to enable the Company
to comply with the Securities Exchange Act of 1934, as amended, and any
requirements or regulations of the Securities and Exchange Commission in
respect thereof, in connection with the Company's filing of an annual
report on Form 10-K for the Company's fiscal year 1996, including
specifically, but without limitation of the general authority hereby
granted, the power and authority to sign his name as a director or officer,
or both, of the Company, as indicated below opposite his signature, to the
Form 10-K, and any amendment thereto; and each of the undersigned does
hereby fully ratify and confirm all that said attorneys and agents, or any
of them, or the substitute of any of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of this 28th day of February, 1997.
/S/ STEVE BERNS
STEVE BERNS Director and President
(Principal Executive Officer)
/S/ EUGENE F. GIAQUINTO
EUGENE F. GIAQUINTO Chairman of the Board of Directors
/S/ BILL LEVINE
BILL LEVINE Director
/S/ MUNEAKI MASUDA
MUNEAKI MASUDA Director
/S/ SETH A. REAMES
SETH A. REAMES Director
/S/ KARL D. WETZEL
KARL D. WETZEL Chief Financial Officer
(Principal Financial and Accounting
Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27 - Financial Data
This schedule contains summary financial information extracted from
the financial statements (unaudited) for the fiscal quarter ended September
30, 1996 and is qualified in its entirety by reference to such financial
statements.
ITEM NO.
5-02(1) 1,379,016
5-02(2) --
5-02(3)(a)(1) 62,183
5-02(4) --
5-02(6) 2,139,259
5-02(9) 3,824,964
5-02(13) 4,494,933
5-02(14) (1,561,401)
5-02(18) 20,573,133
5-02(21) 8,467,759
5-02(22) 4,285,515
5-02(28) --
5-02(29) --
5-02(30) 24,336
5-02(31) 7,795,523
5-02(32) 20,573,133
5-03(b)1(a) 7,087,970
5-03(b)1 30,349,184
5-03(b)2(a) 4,641,417
5-03(b)2 35,546,245
5-03(b)3 2,057,743
5-03(b)5 --
5-03(b)(8) 806,849
5-03(b)(10) (7,254,804)
5-03(b)(11) --
5-03(b)(14) (7,254,804)
5-03(b)(15) --
5-03(b)(17) --
5-03(b)(18) --
5-03(b)(19) (7,254,804)
5-03(b)(20) (3.60)
5-03(b)(20) (3.60)
</TABLE>
