FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number: 0-21327
BLOWOUT ENTERTAINMENT, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 87-0498950
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
7700 NE Ambassador Place
One Airport Center, 2nd Floor, Portland, Oregon 97220
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-331-2729
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
As of March 31, 1998, the Registrant had 2,433,330 shares of Common Stock
($.01 par value) outstanding.<PAGE>
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheet
March 31, 1998 (Unaudited) and December 31, 1997.. 1
Consolidated Statement of Operations
Three months ended March 31, 1998 (Unaudited)
and March 31, 1997 (Unaudited).................... 2
Consolidated Statement of Cash Flows
Three months ended March 31, 1998 (Unaudited)
and March 31, 1997 (Unaudited).................... 3
Notes to Consolidated Financial Statements.......... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 5 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................... N/A
Item 2. Changes in Securities..................... N/A
Item 3. Defaults Upon Senior Securities........... N/A
Item 4. Submission of Matters to a Vote of
Security Holders.......................... N/A
Item 5. Other Information......................... N/A
Item 6. Exhibits and Reports on Form 8-K.......... 11
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1998 1997
---------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....... $ 476,165 $ 1,710,868
Receivables ..................... 45,197 219,844
Merchandise videocassette inventory 3,014,042 2,975,630
Other current assets ............ 167,802 93,720
----------- -----------
Total current assets.......... 3,703,206 5,000,062
Rental videocassette inventory, net 8,987,597 9,158,819
Equipment and leasehold improvements,
net............................... 3,455,273 3,678,593
Intangible assets, net............. 3,870,409 3,988,291
----------- -----------
Total assets.................. $20,016,485 $21,825,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit .................. $ 3,163,151 $ 3,020,366
Accounts payable ................ 2,778,249 3,796,213
Accrued liabilities ............. 1,274,781 1,488,566
Accrued payroll ................. 594,165 582,474
Current portion of long-term debt 512,625 576,583
----------- -----------
Total current liabilities..... 8,322,971 9,464,202
Notes payable...................... 4,500,132 5,678,647
Long-term debt..................... 1,250,191 1,343,073
----------- -----------
Total liabilities............. 14,073,294 16,485,922
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per
share; 1,000,000 shares
authorized; no shares issued and
outstanding................... - -
Common stock, par value $.01 per
share;.......10,000,000 shares
authorized; 2,433,330 issued and
outstanding................... 24,336 24,336
Additional paid-in capital ...... 21,947,864 21,947,864
Accumulated deficit ............. (16,029,009) (16,632,357)
----------- -----------
Total stockholders' equity.... 5,943,191 5,339,843
----------- -----------
Total liabilities and stockholders'
equity....................... $20,016,485 $21,825,765
=========== ===========
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
1998 1997
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REVENUE:
Rental revenue .................. $5,692,238 $ 5,762,248
Product sales ................... 2,222,431 1,836,408
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Total revenue................. 7,914,669 7,598,656
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OPERATING COSTS AND EXPENSES:
Cost of rental and product sales 3,175,893 2,945,500
Operating expenses .............. 4,240,757 4,489,119
Selling, general and administrative 841,017 811,109
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Total operating costs and expenses 8,257,667 8,245,728
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LOSS FROM OPERATIONS.................... (342,998) (647,072)
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NONOPERATING (INCOME) EXPENSE:
Interest expense ................ 187,099 214,078
Other, net ...................... (80) (11,866)
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Total nonoperating expense.... 187,019 202,212
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LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM................................... (530,017) (849,284)
INCOME TAXES............................ - -
---------- -----------
LOSS BEFORE EXTRAORDINARY ITEM.......... (530,017) (849,284)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1,133,365 -
---------- -----------
NET INCOME (LOSS)....................... $ 603,348 $ (849,284)
========== ===========
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic ........................... $ (0.22) $ (0.35)
Diluted ......................... $ (0.22) $ (0.35)
EXTRAORDINARY GAIN PER SHARE:
Basic ........................... $ 0.47 $ -
Diluted ......................... $ 0.47 $ -
NET INCOME (LOSS) PER SHARE:
Basic ........................... $ 0.25 $ (0.35)
Diluted ......................... $ 0.25 $ (0.35)
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............... $ 603,348 $ (849,284)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Gain on disposal of assets.... - (1,233)
Gain on extinguishment of debt (1,133,365) -
Amortization of videocassette
rental inventory............. 1,298,886 1,070,698
Depreciation and amortization of
equipment and leasehold
improvements................. 268,614 376,705
Amortization of intangible and
other assets................. 117,882 117,883
Changes in current assets and
liabilities:
Receivables................... 174,647 57,854
Merchandise videocassette
inventory.................... (38,412) 212,728
Other current assets.......... (74,082) (58,972)
Accounts payable.............. (1,017,964) (953,140)
Accrued liabilities........... (144,244) (74,588)
Accrued payroll............... 11,691 27,896
---------- -----------
Net cash (used in) provided by
operating activities ........... 67,001 (73,453)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes (1,127,664) (1,421,459)
Capital expenditures ............ (159,985) (168,030)
---------- -----------
Net cash used in investing
activities ..................... (1,287,649) (1,589,489)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net ............. 142,785 878,232
Repayment of long-term debt ..... (156,840) 516,315
---------- -----------
Net cash (used in) provided by
financing activities ........... (14,055) 1,394,547
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,234,703) (268,395)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 1,710,868 1,379,018
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 476,165 $ 1,110,623
========== ===========
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: Basis of Presentation
The accompanying consolidated financial statements of BlowOut
Entertainment, Inc. and subsidiaries ("BlowOut" or the "Company") for the
three month periods ended March 31, 1998 and March 31, 1997 are unaudited
and, in the opinion of management, contain all adjustments that are of a
normal and recurring nature necessary to present fairly the financial
position and results of operations for such periods. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Company's annual
report on Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission. The results of operations for the
three month period ended March 31, 1998 are not necessarily indicative of
the results expected for the full year.
NOTE 2: Impact of Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board ("FASB") issues
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The Company has adopted the standard as of January
1, 1998. Total comprehensive income (loss) for the three months ended
March 31, 1998 and 1997 was $603,348 and $(849,284). In June 1997, the
FASB issued Statement of Financial Standards No. 131, "Disclosures About
Segments of and Enterprise and Related Information" which is effective for
fiscal years beginning after December 15, 1997. The Company believes the
implementation of this statement will not have a material effect on its
results of operations or financial statement disclosures.
NOTE 3: Reclassifications
Certain amounts in the March 31, 1997 consolidated financial statements
have been reclassified to be consistent with the March 31, 1998
presentation. The reclassifications had no effect on previously reported
net loss or stockholders' equity.
NOTE 4: Extinguishment of Debt
On February 22, 1998, the Company, Culture Convenience Club Co., Ltd.
("CCCc) and Rentrak Corporation ("Rentrak") signed an agreement (the "Tri-
Party Agreement") under which CCC agreed to provide the Company with $1.5
million in debt financing to fund projected 1998 expansion plans and
additional working capital. The first of three equal quarterly
installments of this financing in the amount of $500,000 was received on
April 1, 1998. The new financing accrues interest at 7% per annum and the
principal plus accrued interest is payable over a 60 month term beginning
in January 2000. Up to $484,167 of the loan may be converted into shares
of BlowOut common stock at $1.00 per share, the bid price on the Nasdaq
Stock Market at the time of the signing of the Tri-Party Agreement. Under
the terms of the Tri-Party Agreement, Rentrak agreed to defer principal and
interest payments on its notes payable by the Company until December 31,
2004 during which deferment period no interest accrues. Rentrak also
agreed to the forgiveness of all or a portion of the Rentrak notes as the
Company is able to lower Rentrak's contingent obligations under its
guaranties of the Phoenix Financial ("Phoenix") and Coast Business Credit
("CBC") lines of credit. The Company has agreed not to draw down in
excess of $4.0 million under the CBC line, which limitation, when combined
with the reduction in Rentrak's contingent liability under the Phoenix line
of credit due to principal payments made to date by the Company, under the
terms of the Tri-Party Agreement triggered the forgiveness of $1,133,365 in
Rentrak debt during the quarter. This forgiveness of debt has no tax effect
since the Company has a net operating loss carryforward in excess of the
gain.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this report.
BlowOut Entertainment, Inc. (the "Company") operates retail "store within a
store" videocassette and video game outlets located in large mass merchant
supercenters and grocery chain stores throughout the United States. As of
March 31, 1998, the Company operated 173 retail video stores, including 140
stores located in Wal-Mart SuperCenters, 18 stores located in Super Kmart
Centers, six stores in Ralphs under the name "Videos & More", six stores
located in Food 4 Less under the name "BlowOut Video", and three in Fred
Meyer stores under the "Videos & More" name.
The Company's revenue consists of rental revenue and product sales. Rental
revenue includes rental of prerecorded videocassettes and video games.
Product sales are derived from the sale of new and previously viewed
videocassettes and video games and, to a lesser extent, ancillary items
such as blank tapes and candy.
The Company was formed in 1992 as a subsidiary of Rentrak Corporation
("Rentrak"), and opened its first store within a store in January 1993.
At year-end 1993 and 1994, the Company operated seven stores. During these
periods, all of the Company's stores were located in grocery stores.
During 1995, the Company experienced accelerated growth in retail stores
and revenue, primarily through (i) the acquisition by Rentrak on May 26,
1995, of a controlling interest in Entertainment One, Inc. ("E-1"), a
company whose primary business was the operation of retail video outlets in
Wal-Mart SuperCenters, (ii) the acquisition by Rentrak on August 31, 1995,
of certain assets and assumption of certain liabilities which constituted
SuperCenter Entertainment, Inc.'s retail video business and consisted of
retail video outlets in Wal-Marts, Wal-Mart SuperCenters and Super Kmart
Centers (the "SCE Business") and (iii) new store openings in Wal-Mart
SuperCenters and, to a lesser extent, in Super Kmart Centers, Ralphs and
Food 4 Less stores.
As a result of the acquisitions of E-1 and the SCE business, the Company
recorded approximately $5.1 million in goodwill which is being amortized
over 10 to 15 years resulting in annual amortization of approximately $.5
million.
The combination of E-1 and SCE with the Company was intended to create
operating efficiencies that began to be realized during fiscal year 1997.
In addition, the greater number of stores permitted the Company to better
evaluate the contribution of each store to gross revenue and earnings
before interest, taxes, depreciation and amortization ("EBITDA"). Based on
those evaluations, the Company can identify under-performing stores for
consideration for closure. By eliminating under-performing stores, the
Company will be enhancing its average per store revenues and its EBITDA,
and reducing its net operating losses. However, store closures could
adversely affect gross revenue.
Prior to November 25, 1996, Rentrak owned 1,698,942 shares (approximately
70%) of the issued and outstanding common stock, par value $.01 per share,
of the Company (the "Common Stock"). On November 25, 1996, Rentrak
distributed 1,457,343 shares of Common Stock to the holders of Rentrak
common stock in the form of a special dividend (the "spin-off").
The principal executive offices of the Company are located at 7700 NE
Ambassador Place, One Airport Center, Second Floor, Portland, Oregon
97220, telephone (503) 331-2729.
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Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
The following table sets forth, for the periods indicated, (i) statement of
operations data expressed as a percentage of total revenue, (ii) the
percentage change from the prior period in this data and (iii) the number
of stores open at the end of each period.
Percentage
Change in dollar
Three Months Ended March 31, Amount From
1998 1997 1997 to 1998
Rental revenue 71.9% 75.8% -1.2%
Product sales 28.1% 24.2% 21.0%
Total revenue 100.0% 100.0% 4.2%
Cost of rental revenue and
product sales 40.1% 38.7% 7.8%
Operating expenses 53.6% 59.1% -5.5%
Selling, general and
administrative 10.6% 10.7% 3.7%
Loss from operations -4.3% -8.5% -47.0%
Number of stores open at end of
period 173 200
Revenue
Revenue for the three month period ended March 31, 1998 increased $316,013,
or 4.2%, to $7,914,669 from $7,598,656 for the comparable three months of
1997 despite an average of 20 fewer stores in operation in the 1998 period.
Gross rental revenue declined slightly as a result of the 10% reduction in
the number of average stores open throughout the period. Average rental
revenue per store increased approximately 10% during the quarter ended
March 31, 1998 compared to the same quarter of 1997 as a result of a return
to normal weather patterns and improved movie releases in the 1998 period.
Product sales also contributed significantly to the revenue improvement due
to an increase in sales of video games as well as the successful roll-out
of an auto-replenishment program for sell-through product which has
resulted in a much more consistent restocking of sell-through product in
our stores.
The following table sets forth the number of stores open for at least 12
months as of the end of the period and average rental and product sale
revenue for such stores for the last three years and the three month
periods ended March 31, 1997 and 1998.
Three Months
Fiscal Year Ended December 31, Ended March 31,
1997 1996 1995 1998 1997
No. of stores open
12 months 162 130 3 157 134
Average rental revenue $127,056 $129,440 $206,387 $33,306 $28,957
Average product sales $ 41,484 $ 39,442 $ 61,648 $12,299 $ 9,976
Average total revenue $168,540 $168,882 $268,035 $45,605 $38,933
Average rental revenue for the three month period ended March 31, 1998
increased from the three month period ended March 31, 1997 as a result of
the closing of a number of under-performing stores and improved rental
activity at continuing stores. The Company's stores operate primarily in
the South and Southeast regions of the country. These regions experienced
unseasonably warm weather for the first quarter of 1997 versus a return to
more _normal_ weather patterns for the first quarter of 1998. The result
was more out-of-home activities by families in the 1997 period. Finally,
the movie release schedule for the first quarter of 1998 was significantly
improved over the release schedule for the 1997 period. Average product
sales for the three month period ended March 31, 1998 increased from the
three month period ended March 31, 1997. As noted above, the Company
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has pursued a more aggressive strategy in the marketing and supply of
sell-through videocassette and game inventory to take advantage of the high
traffic volume in most of its locations and this emphasis has resulted in
higher sales of video games and videocassettes.
Operating Costs and Expenses
Cost of Product Sales and Rental Revenue ("Cost of Sales")
Cost of sales increased from $2,945,500, or 38.7% of revenue for the three
months of 1997, to $3,175,893, or 40.1% of revenue, for the three months of
1998. The increase in cost of sales in both absolute dollars and
percentage terms reflect the increased significance of sales of video games
which typically result in a lower margin than sales of videocassettes. For
the quarter ended March 31, 1998, product sales accounted for 28% of total
revenues compared to 24% for the comparable 1997 period.
Operating Expenses
Operating expenses decreased from $4,489,119, or 59.1% of revenue, for the
three months ended March 31, 1997 to $4,240,757, or 53.6% of revenue, for
the three months ended March 31, 1998. The decrease in operating expenses
in absolute dollars is directly attributable to the decrease in the number
of stores while the decrease in operating expenses as a percentage of sales
is attributable to the improvements in average revenues per store discussed
above. The primary components of operating expenses include employee
compensation, occupancy, fixed asset depreciation, supplies, shipping and
communications.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased only slightly in
absolute dollars from $811,109, for the three months ended March 31, 1997,
to $841,017, for the three months ended March 31, 1998. As a percentage of
revenues, selling, general and administrative expenses were flat at
approximately 10.7%, as the slight increase in absolute dollars was offset
by an increase in revenues.
Nonoperating Expenses, Net
Nonoperating expenses, net decreased from $202,212, or 2.7% of revenue, for
the three months ended March 31, 1997, to $187,019, or 2.4% of revenue, for
the three months ended March 31, 1998. The decrease is directly
attributable to the lack of interest expense in the 1998 period on certain
notes payable to Rentrak as further described below.
Extraordinary Gain on Extinguishment of Debt
In connection with a $1,500,000 partially convertible debt financing of
BlowOut by Culture Convenience Club Co., Ltd. ("CCC") described in detail
below, Rentrak agreed to forgive notes payable by BlowOut as the Company
reduces Rentrak's exposure on the Company's lines of credit. In the first
quarter of 1998, the Company recorded a gain of $1,133,365 from this debt
forgiveness.
Liquidity And Capital Resources
The Company's principal capital needs are for the opening of new stores.
To date, the Company has funded its expansion primarily through cash from
operations, advances from Rentrak, and, as more fully described below,
borrowings from and sales of stock to Directors, trade credit from
suppliers and financing arrangements with asset based lenders.
In March and April 1996, the Company sold $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and Culture Convenience Club
Co., Ltd. ("CCC"), a Japanese corporation of which Mr. Muneaki Masuda is
Chairman and Mr. Yoshinori Ogida is an officer (the "Notes"). Messrs.
LeVine, Masuda and Ogida are Directors of the Company. On August 30, 1996,
each of Mr. LeVine and CCC converted their Notes into 121,789 shares of
BlowOut Common Stock. Also on August 30, 1996, CCC purchased from the
Company for $2.98 million a total of 362,931 shares of BlowOut Common Stock
at a purchase price of approximately $8.21 per share.
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<PAGE>
In August 1996, Phoenix Leasing, Inc. ("Phoenix") agreed to provide asset
based financing in an aggregate principal amount of $2.0 million. Amounts
outstanding under the Phoenix facility bear interest at a fixed rate per
annum equal to 14.525% and are payable in monthly principal and interest
installments over a five-year term. The Phoenix facility may be used to
finance the construction and opening of (including acquisition of
inventory) new Company stores in Wal-Mart Stores and Wal-Mart SuperCenters.
The Phoenix facility is secured by (i) a continuing guaranty of Rentrak
(which Phoenix, in its sole discretion, may release once at least 36
payments of amounts outstanding under the Phoenix Facility have been made
or the Company's financial condition is, in Phoenix's sole opinion,
sufficient to justify such release), and (ii) the Company's grant of a
first continuing security interest in all assets at each location to be
financed with funds from the Phoenix facility. Under the Phoenix facility,
the Company cannot borrow more than $100,000 per store location, with a
minimum draw of $30,000 per store location. As of March 31, 1998, the
Company had drawn down the entire $2.0 million facility and had $1,593,918
outstanding under the Phoenix facility with maturity dates extending to
September 2002.
On September 12, 1996, Coast Business Credit ("CBC") entered into an
agreement with the Company to provide a revolving line of credit ("CBC Line
of Credit") in the maximum principal amount at one time outstanding of $5.0
million. Under the CBC Line of Credit, the Company may 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 March 31, 1998, 80%
of the Orderly Liquidation Value of the Company's inventory was
approximately $3,684,190. Advances under the CBC Line of Credit bear
interest at a floating rate per annum equal to the prime rate plus 2.75%
(11.25% as of March 31, 1998). The term of the CBC Line of Credit is three
years. Rentrak has agreed, under certain circumstances in the event of a
default under the CBC Line of Credit, to repurchase BlowOut's videocassette
inventory at specified amounts. As of March 31, 1998, the Company had
$3,163,151 outstanding under the CBC Line of Credit.
On July 22, 1996, the Company entered into an agreement with Star Video to
provide the Company with videocassettes for rental and sale and with video
games for sale ("Star Video Agreement"). Star Video paid off the balance
of a promissory note in the amount of $240,975 made by the Company to its
previous supplier. As a result, the Company executed a new promissory note
to Star Video, pursuant to which the Company is obligated to pay Star Video
$120,487 on each of May 27, 1997 and 1998. Under the Star Video Agreement,
Star Video became the Company's exclusive supplier of new videocassettes
for rental and sale not purchased from Rentrak until the later of (i) July
21, 1997, or (ii) repayment of such promissory note. This promissory note
is secured by a guaranty of Rentrak. As of March 31, 1998, a balance of
$120,487 remained outstanding under this promissory note. In May 1998, the
Company signed a two-year, non-exclusive extension of the distribution
agreement with Star Video.
During the first quarter of 1997 the Company entered into an agreement with
Rentrak whereby payables resulting from the Company's use of the Rentrak
PPT system during the first six months of fiscal 1997 were deferred until
January 1998, at which time such amounts totaling $2.1 million became due
and payable in twelve, equal, interest-free, monthly installments. The
Company also has a note payable due Rentrak in the amount of $3.01 million
arising from transactions which occurred prior to the spin-off from
Rentrak. This note together with accrued interest at 9% per annum was due
and payable on March 31, 1999.
On February 22, 1998, the Company, CCC and Rentrak signed an agreement
(the "Tri-Party Agreement") under which CCC agreed to provide the Company
with $1.5 million in three equal quarterly installments to fund projected
1998 expansion plans and additional working capital. The new financing
accrues interest at 7% per annum and the principal plus accrued interest is
payable over a 60 month term beginning in January 2000. Up to $484,167 of
the loan may be converted into shares of BlowOut common stock at $1.00 per
share, the bid price on the Nasdaq Stock Market at the time of the signing
of the Tri-Party Agreement. Under the terms of the Tri-Party Agreement,
Rentrak agreed to defer principal and interest payments on its notes until
December 31, 2004 during which deferment period no interest accrues.
Rentrak also agreed to the forgiveness of all or a portion of the Rentrak
notes as the Company lowers Rentrak's contingent obligations under
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their guaranties of the Phoenix and CBC lines of credit discussed above.
The Company has agreed not to draw down in excess of $4.0 million under the
CBC line, which limitation, when combined with the reduction in Rentrak's
contingent liability under the Phoenix line of credit due to principal
payments made to date by the Company, under the terms of the Tri-Party
Agreement triggered the forgiveness of $1,133,365 in Rentrak debt during
the three months ended March 31, 1998.
During the first quarter of 1998, the Company opened three stores in Fred
Meyer. The Company is evaluating stores that might benefit from a remodel
and expects to perform several remodels in fiscal 1998. The Company does
not know the number of new Wal-Mart SuperCenters, or Ralphs grocery store
locations which will be made available to the Company for the opening of
video stores in fiscal 1998. The Company expects to open at least one
additional outlet in Fred Meyer and at least one additional outlet in Food
4 Less in fiscal 1998.
Also, during the first quarter of 1998, in accordance with previously
announced plans, the Company closed 14 stores which did not meet certain
performance levels (consisting of eight stores in Wal-Mart and six stores
in Kmart).
The Company had cash and cash equivalents of $476,165 at March 31, 1998.
The Company expects to meet its short-term liquidity requirements through
net cash provided by operations, cash on hand, the $1,500,000 CCC financing
described above, and advances under the CBC Line of Credit. Management
believes that these sources of cash will be sufficient to meet its
operating needs through March 1999. 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 March 1999.
At March 31, 1998, the Company had a working capital deficit of $4,619,765.
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, is included in
the computation of working capital. Consequently, the Company believes
working capital is not as significant a measure of financial condition for
companies in the video retail industry as it is for companies in other
industries 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 the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on a recent assessment, the Company has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications to existing software and
conversions to new versions of software that are Year 2000 compliant, the
potential problems arising from the Year 2000 Issue can be mitigated.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
- 9 -
<PAGE>
The Company has initiated formal communications with all of its
significant suppliers and software vendors to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate the
Year 2000 Issue. The Company's total Year 2000 project cost and estimates
to complete include the estimated costs and time associated with the impact
of a third party's Year 2000 Issue, and are based on presently available
information. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
The Company will utilize both internal and external resources to reprogram
or replace and test the software for Year 2000 modifications. The Company
plans to complete the Year 2000 project within one year, or not later than
December 31, 1998. The total cost of the Year 2000 project is estimated at
approximately $50,000 and will be funded through operating cash flows. To
date, the Company has incurred no significant costs related to the
assessment of, and preliminary efforts in connection with, its Year 2000
project and the development of a remediation plan.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all computer codes, and similar uncertainties.
Statements made in this document that present information that is not
historic, including among other things, anticipated financial performance,
sources and extent of liquidity and capital, business prospects, new
products and markets, and anticipated store openings are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements can be identified by the use of forward-
looking terminology such as "may", "will", "expect", "anticipate",
"estimate" or "continue" or the negative thereof or other variations
thereon, or comparable terminology. There are numerous risks and
uncertainties that could cause actual results to differ materially from
those in such forward-looking statements. Reference is made to the
Company's Registration Statement on Form 10 and the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission for a
discussion of such risk factors and uncertainties.
- 10 -
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
- 11 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLOWOUT ENTERTAINMENT, INC.
May 14, 1998
By: /s/Thomas D. Berkompas
------------------------------------
Thomas D. Berkompas
Vice President, Chief Accounting and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES 1 - 3 OF THE COMPANY'S FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 476,165
<SECURITIES> 0
<RECEIVABLES> 45,197
<ALLOWANCES> 0
<INVENTORY> 12,001,639
<CURRENT-ASSETS> 3,703,206
<PP&E> 6,158,379
<DEPRECIATION> 2,703,106
<TOTAL-ASSETS> 20,016,485
<CURRENT-LIABILITIES> 8,322,971
<BONDS> 5,750,323
0
0
<COMMON> 24,336
<OTHER-SE> 5,918,855
<TOTAL-LIABILITY-AND-EQUITY> 20,016,485
<SALES> 7,914,669
<TOTAL-REVENUES> 7,914,669
<CGS> 3,175,893
<TOTAL-COSTS> 8,257,667
<OTHER-EXPENSES> (80)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187,099
<INCOME-PRETAX> (530,017)
<INCOME-TAX> 0
<INCOME-CONTINUING> (530,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,133,365
<CHANGES> 0
<NET-INCOME> 603,348
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
