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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934 (No Fee Required)
Commission file number: 0-21327
BLOWOUT ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its Charter)
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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)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Title of each exchange on which registered
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None None
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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. |_|
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $1,452,796 based on the closing sale price
of $1.34 per share as quoted on the Nasdaq Stock Market on March 13, 1998.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 13, 1998 was 2,433,330.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated
herein by reference:
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Document Part of Form 10-K
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Proxy Statement for the 1998 annual meeting of stockholders III
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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
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 December 31, 1997, the Company operated 184 retail video stores, including
148 stores located in Wal-Mart SuperCenters, 24 stores located in Super Kmart
Centers, six stores in Ralphs under the name "Videos & More", and six stores
located in Food 4 Less under the name "BlowOut Video." In January 1998, the
Company signed an agreement with Fred Meyer Stores, Inc. ("Fred Meyer") to open
video rental departments inside select Fred Meyer stores. Fred Meyer,
headquartered in Portland, Oregon, is a major western retailer that currently
operates 113 large, one-stop-shopping centers in six western states. During the
first quarter of fiscal 1998, the Company opened three stores in Fred Meyer
retail centers under the name "Videos & More."
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
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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.
Prior to November 25, 1996, Rentrak owned 1,698,942 shares
(approximately 70%) of the issued and outstanding common stock, par value $.01
per share, of the Company (the "Common Stock"). On November 25, 1996, pursuant
to the terms of a Distribution Agreement between Rentrak and the Company,
Rentrak distributed 1,457,343 shares of Common Stock to the holders of Rentrak
common stock in the form of a special dividend.
The 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.
BUSINESS
The Videocassette Retail Industry
According to video industry trade publications, videocassette retail
industry revenues were approximately $16.8 billion in 1997. Of the total
videocassette retail industry revenues in 1997, videocassette rental revenues
were approximately $9.2 billion and videocassette sales revenues were
approximately $7.6 billion.
The industry is characterized by a high degree of fragmentation, with
only nine chains in 1997 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 videocassette 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 videocassette market has become the
single largest source of revenues for motion picture distributors, providing the
majority of total revenues in 1997. 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.
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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 videocassettes to between $10 and $20. In addition, a
relatively small number of titles that are believed to have broader consumer
appeal, such as Jerry Maguire, Liar, Liar and Jurassic Park - Lost World, 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, have recently been introduced and others 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, Ralphs and Food 4 Less grocery
stores, and Fred Meyer retail centers; and (iii) its existing relationship with
its host
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vendors. 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 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 11 new stores during fiscal 1997. The Company closed
12 stores in Super Kmart Centers and 15 in Wal-Mart Supercenters 1997. The
Company currently anticipates opening 13 additional stores in 1998, including
four in Fred Meyer, one in Ralph's and eight in Wal-Mart.
The Company intends to implement expansion and growth strategies for
opening additional "store within a store" outlets in Wal-Mart SuperCenters, and,
to a lesser extent, in Fred Meyer and Ralphs. The Company typically is offered
store locations 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, Fred Meyer 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 are required to open each new
store. Continued losses and limited capital caused the Company to open new
stores at a very moderate rate during fiscal 1997. The Company believes that its
existing operating cash flow and credit facilities, including a new $1.5 million
credit facility being provided by Culture Convenience Club Co. Ltd. ("CCC"), the
Company's largest stockholder, will provide the capital necessary to open the
new stores that are planned to be opened during fiscal 1998. See Liquidity and
Capital Resources below for further details. If the Company decides to open more
than 13 new stores during fiscal 1998, the Company may have to obtain other debt
or equity financing or expand more slowly than desired. After 1998, 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. 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.
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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 436 SuperCenters by December 31, 1997. 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. 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.
Fred Meyer. Fred Meyer Stores, Inc., headquartered in Portland, Oregon,
is a major western retailer that currently operates 113 large, one-stop shopping
centers in six western states. They are part of a larger Company which also
includes Smiths Food and Drug Centers, Quality Food Centers and Ralphs Grocery
Company. Together they form a $15 billion multi-regional supermarket chain. The
Company believes that it and Hollywood Entertainment Corporation are currently
the only two providers of "store within a store" retail video outlets to Fred
Meyer.
Stores
At December 31, 1997, the Company operated a total of 184 stores,
consisting of 148 stores in Wal-Mart and Wal-Mart SuperCenters, 24 Stores in
Super Kmart Centers, six stores in Food 4 Less under the name "BlowOut Video"
and six additional stores in Ralphs under the name "Videos & More." In 1997, the
Company closed 27 under-performing stores, 12 in Kmart and 15 in Wal-Mart.
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
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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:
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1997 1996 1995
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Stores open beginning of period 200 157 7
Stores opened or acquired in period 11 70 154
Stores closed in period (27) (27) (4)
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Stores open at end of period 184 200 157
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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 installation 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), 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 approximately 16 stores and each district is, in turn, organized into areas
of four stores. 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 or Sensormatic 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
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store has a telephone modem which is programmed to communicate rental and sales
information daily to the Company headquarters, where the data is processed to
provide inventory tracking, employee performance, and financial data to
management.
Each BlowOut Video store has in inventory an average of 3,500
videocassettes held for rental. Rental rates are based upon a tiered system: (i)
"new releases" are rented at rates ranging from $2.78 to $3.00 for one to two
days, (ii) "catalogue" items are rented at a rate of $1.50 to $1.78 for five to
seven days, and (iii) "children's" videos are rented at rates ranging from $0.98
to $1.78 for five to seven days, subject to adjustment for local conditions.
After 60 days, some of the videocassettes may be made available for sale as
"previously viewed" at prices ranging from $1.88 to $9.88. The Company promotes
sales by advertising, principally through local newspapers and distribution of
flyers inside the host stores, and direct mail. Although the Company is affected
somewhat by seasonal fluctuations in the release of videocassette 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.
Used videocassettes and video games 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 $240,975 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 primary supplier of new videocassettes for rental and
sale, with the exception of PPT videocassettes purchased from Rentrak, until the
later of (i) July 21, 1997, or (ii) repayment of such promissory note.
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 videocassette leased from Rentrak and a
"transaction fee" each time a videocassette is rented.
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During fiscal 1997, BlowOut's two primary videocassette distributors
supplied 55.1% and 20.9% of BlowOut's total tape purchases. No other
distributors provided more than 10% of the total videocassette purchases for
fiscal 1997.
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 93% 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 Wal-Mart, Kmart and Fred
Meyer 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 and Fred Meyer has leased space in certain
of its stores to Hollywood Entertainment Corporation. 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 15 stores in
Wal-Marts and 12 stores in Kmart) in 1997. The Company closed an additional four
stores, three in Wal-Mart and one in Kmart, in early 1998. 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 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 has signed an agreement with Fred Meyer to
open a small number of stores and 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.
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Competition
The videocassette and video game 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 videocassettes 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 the respective movie studios, 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 1998. 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.
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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, 1997, the Company employed approximately 213 persons
full-time and 843 persons part-time. None of the Company's employees is covered
by a collective bargaining agreement with the exception of non-management
employees in three Ralphs locations. The Company does not have more than 13
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 in 1996. 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 was January 1, 1997. During 1997 a total of 10,650 shares were
purchased in the open market under this plan.
Executive Officers of the Registrant
The executive officers of the Company are:
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Officer of
Name Age Position with the Company the Company Since
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Steve Berns 39 President 1992
Thomas D. Berkompas 36 Chief Financial Officer 1997
Harold Heyer 38 Vice President of Operations 1995
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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
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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.
Thomas D. Berkompas. Mr. Berkompas, a certified public accountant, has
served as Chief Financial Officer of the Company since April 23, 1997. Prior to
that he was employed as Vice President of Finance, Chief Financial Officer,
Secretary and Treasurer of Western Power & Equipment Corp. of Vancouver,
Washington, a corporation engaged in the sale, rental and servicing of light to
heavy construction equipment and related products. Prior to that, Mr. Berkompas
was a Senior Audit Manager with Price Waterhouse in San Jose, California and
Portland, Oregon. Mr. Berkompas earned his bachelor's degree in business
economics with an accounting emphasis from Calvin College in Grand Rapids,
Michigan in 1983.
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 Berns 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 changes
in 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. 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. The Berns
Agreement also requires the Company to pay Mr. Berns a severance payment of an
amount equal to the Berns Base Salary accrued through and including the date of
termination if Mr. Berns' employment is terminated due to his death or
disability. If, within two years after a Change of Control (as defined in the
Berns Agreement), termination is by the Company without cause or by Mr. Berns
for Good Reason (as defined in the Berns Agreement), the Company shall pay Mr.
Berns a lump sum payment in an amount equal to the greater of (i) the Berns Base
Salary through October 31, 1999, or (ii) twelve months' of the annual Berns Base
Salary. If termination is by the Company other than for cause or death or
disability of Mr. Berns, the Company will pay him an amount equal to the Berns
Base Salary through and including October 31, 1999 plus severance payments equal
to six months of the annual Berns Base Salary, subject to
12
<PAGE>
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 April 22, 1997, the Company entered into an employment
agreement with Thomas Berkompas, pursuant to which Mr. Berkompas serves as Chief
Financial Officer of the Company until April 30, 1999 or until otherwise
terminated pursuant to the terms thereof (the "Berkompas Agreement"). During the
term of the Berkompas Agreement, Mr. Berkompas is to receive a base annual
salary of $103,000 (the "Berkompas Base Salary"). The Berkompas Base Salary
adjusts automatically each May 1 to give effect to changes in the Consumer Price
Index. The Berkompas Agreement further provides that Mr. Berkompas 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 Berkompas Agreement also requires the Company to pay Mr. Berkompas a
severance payment of an amount equal to the Berkompas Base Salary accrued
through and including the date of termination if Mr. Berkompas's employment is
terminated due to his death or disability. If, within two years after a Change
of Control (as defined in the Berkompas Agreement), termination is by the
Company without cause or by Mr. Berkompas for Good Reason (as defined in the
Berkompas Agreement), the Company shall pay Mr. Berkompas a lump sum payment in
an amount equal to the greater of (i) the Berkompas Base Salary through April
30, 1999 or (ii) six months' of the annual Berkompas Base Salary. If termination
is by the Company other than for cause or Mr. Berkompas's death or disability,
the Company will pay him severance payments in an amount equal to six months of
the annual Berkompas Base Salary, subject to the demonstration by Mr. Berkompas
that he is using his best efforts to find other employment. Pursuant to the
Berkompas Agreement, Mr. Berkompas 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. Berkompas 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, 1999 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"). 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
13
<PAGE>
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, 1999,
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 common area maintenance
expenses, insurance and 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. The Company exercised its option to close 15 stores in Wal-Mart in
fiscal 1997 and eight stores in Wal-Mart in the first quarter of 1998 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, January 21, 1996 and November 7, 1996 (as amended, the "Kmart Master
Lease"), under which the Company, as it
14
<PAGE>
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 one new store under the Kmart Master Lease in 1997.
The Company exercised its option to close twelve stores in Kmart in fiscal 1997
and six stores in Kmart in the first quarter of 1998 for failure to achieve
minimum sales volume, and gave Kmart notice of its intention to close two
additional under-performing stores in or before June 1998. No stores have been
closed at the election of Kmart. The Company has not yet determined whether or
not it will exercise its option to extend the Kmart Master Lease before it
expires in September 1999.
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 and
Food 4 Less 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
with respect to any location. Ralphs may also terminate the Ralphs Master
License for any location if the Company fails to meet minimum revenue levels for
such location. As of December 31, 1997, to the best of its knowledge, the
Company has met such minimum revenue levels for all locations. The Company may
terminate the Ralphs Master License for any location with 60 days' written
notice. There has been no such termination of the Ralphs Master License for any
location to date.
Fred Meyer. In January 1998, the Company entered into separate lease
agreements for retail space in selected Fred Meyer retail centers in Oregon and
Washington. Each such lease is for an initial five-year term, 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 responsible for its pro
rata share of common area maintenance expenses, insurance and real estate taxes.
The leases contain an option for either party to terminate the lease if Gross
Sales (as defined in the
15
<PAGE>
lease agreement) during the second full lease year are less than a predetermined
amount. In the first quarter of 1998, the Company opened three stores in Fred
Meyer retail centers.
Executive Offices and Warehouse Space
The Company subleases from Rentrak office space in Rentrak's
headquarters under a sublease having a 10-year term beginning December 1996 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 subleases approximately 12,800 square feet of
warehouse space at Rentrak's Wilmington, Ohio warehouse for approximately $4,000
per month.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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, 1997.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Trading and Shareholder Information
The Company's common stock has traded on the Nasdaq Stock Market under
the symbol "BLWT" since November 19, 1996. The high and low bids, as quoted on
the Nasdaq Stock Market, for the period from November 19, 1996 through December
31, 1997 were as shown in the table below. There can be no assurance that the
Company will continue to meet the listing requirements of the Nasdaq Stock
Market. 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 Stock Market on March 13, 1998 was
$1.34.
16
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
November 19, 1996 through December 31, 1996 $5.000 $1.875
Fiscal 1997:
- -----------
1ST QUARTER - January 1, 1997 through March 31, 1997 $3.000 $1.250
2ND QUARTER - April 1, 1997 through June 30, 1997 $2.125 $1.250
3rd QUARTER - July 1, 1997 through September 30, 1997 $1.500 $1.000
4th QUARTER - October 1, 1997 through December 31, 1997 $1.625 $0.500
</TABLE>
At March 13, 1998, there were 2,433,330 shares of the Company's Common
Stock issued and outstanding which were held by 452 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.
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.
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.
17
<PAGE>
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.
<TABLE>
<CAPTION>
As of and for the Year Ended December 31 (1)
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Rental ....................... $ 23,807 $ 23,261 $ 7,689 $ 1,115 $ 467
Product Sales ................ 7,855 7,088 3,030 178 69
-------- -------- ------- ------- ------
Total Revenue .............. 31,662 30,349 10,719 1,293 536
Cost of Sales and Rental ... 12,251 14,291 5,220 563 281
-------- -------- ------- ------- ------
Gross Margin ................. 19,411 16,058 5,499 730 255
Operating Expenses ........... 17,638 17,618 6,275 852 632
Selling and Administrative ... 3,280 3,637 3,278 309 329
Other (Income) Expense ....... (55) 1,268 402 251 105
Interest Expense, net ........ 1,008 790 529 162 51
Income Taxes ................. 20 -- -- -- --
Net Loss ................... $ (2,480) $ (7,255) $(4,985) $ (844) $ (862)
Net Loss Per Common share:
Basic ...................... $ (1.02) $ (3.60) $ (3.41) $ (0.93) $(0.95)
Diluted .................... $ (1.02) $ (3.60) $ (3.41) $ (0.93) $(0.95)
Weighted Average Shares
Outstanding ............... 2,433 2,014 1,464 913 913
BALANCE SHEET DATA .............. Unaudited
---------
Working Capital (Deficit) (2) $ (6,608) $ (4,643) $ (823) $ (415) $ 97
Total Assets ................. 21,826 20,573 18,536 893 1,201
Long-term Debt ............... 4,878 4,286 3,441 1,375 1,120
Stockholders' Equity (Deficit) 5,340 7,820 10,095 (1,038) (194)
</TABLE>
(1) The selected data as of and for the years ended December 31, 1993,
1994, 1995, 1996 and 1997 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."
(2) See Liquidity and Capital Resources below for a discussion of the
working capital deficit.
18
<PAGE>
Quarterly Results of Operations (Unaudited)
The unaudited quarterly results for the years ended December 31, 1997
and 1996 are set forth in the following table:
<TABLE>
<CAPTION>
1997 by Quarter
---------------------------------------------------------------------------
First Second Third Fourth Total
------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $7,598,656 $7,663,285 $7,760,092 $8,640,074 $31,662,107
Loss from operations (647,072) (236,435) (576,747) (47,648) (1,507,902)
EBITDA(1) (140,618) 194,653 (300,827) 374,019 127,227
Net loss (849,284) (465,647) (837,109) (327,974) (2,480,014)
Earnings Per Share:
Basic $(0.35) $(0.19) $(0.34) $(0.13) $(1.02)
Diluted $(0.35) $(0.19) $(0.34) $(0.13) $(1.02)
</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 operations (1,515,326) (920,664) (666,245) (2,094,826) (5,197,061)
EBITDA(1) (1,100,515) (483,314) (1,161,927) (1,830,086) (4,575,842)
Net loss (1,593,549) (1,012,947) (1,739,351) (2,908,957) (7,254,804)
Earnings Per Share:
Basic $(0.87) $(0.55) $(0.86) $(1.32) $(3.60)
Diluted $(0.87) $(0.55) $(0.86) $(1.32) $(3.60)
</TABLE>
- ------------
(1) Earnings before interest, taxes, fixed asset depreciation and goodwill
amortization. Such data is not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net income or as an indicator of the Company's operating
performance or as an alternate to cash flows as a measure of liquidity.
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,
19
<PAGE>
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 1997, the
Company's store within a store retail video operations consisted of a total of
184 stores including 148 stores located in Wal-Mart and Wal-Mart SuperCenters,
24 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, and video games.
Product sales are derived from sale of new prerecorded videocassettes,
previously viewed excess rental inventory, and video games.
The following table sets forth the number of stores open for at least
12 months and average revenue for such stores for each of the fiscal years ended
December 31, 1995 through 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
No. of stores open 12 months 162 130 3
Average rental revenue $127,056 $129,440 $206,387
Average product sales $41,484 $39,442 $61,648
Average total revenue $168,540 $168,882 $268,035
</TABLE>
Average total revenue was level for the year ended December 31, 1997
compared to the year ended December 31, 1996 as gains in average per store
revenues realized from the closure of underperforming stores were offset by
weakness in the video retail industry as a whole throughout the first nine
months of 1997.
The Company acquires videocassettes, which includes video games, using
two types of supplier arrangements: purchase and revenue-sharing under the PPT
System. Videocassette rental inventory purchased for base stock is stated at
cost and amortized, beginning on the date the videocassettes are placed into
service, to a salvage value of $6 per videocassette over an estimated useful
life of 36 months. All copies of new release videocassettes are amortized on an
accelerated basis during their first four months to an average net book value of
$22 and then on a straight-line basis to their salvage value of $6 over the next
32 months.
20
<PAGE>
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 the Company with videocassettes released by certain studios. The
Company pays and capitalizes a handling fee of $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 and
end-of-term purchase fee are amortized to $6 during the first nine months.
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>
Percentage Percentage
Change in Change in
Dollar Amount Dollar Amount
Year Ended Year Ended Year Ended from 1996 to from 1995 to
12/31/97 12/31/96 12/31/95 1997 1996
---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental revenue 75.2% 76.6% 71.7% 2.3% 202.5%
Product sales 24.8 23.4 28.3 10.8 134.0
----- ----- ----- ----- -----
Total revenue 100.0 100.0 100.0 4.3 183.1
Cost of product sales and rental revenue 38.7 47.1 48.7 (14.3) 173.8
Operating expenses 55.7 58.0 58.6 0.1 180.8
Selling, general and administrative 10.4 12.0 30.6 (9.8) 11.0
----- ---- ---- ------ -----
Loss from operations (4.8)% (17.1)% (37.8)% (71.0)% (28.2)%
===== ====== ====== ====== ======
Number of stores open at end of period 184 200 157 -- --
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
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 ended December 31, 1997. The Company opened its first
"store within a store" outlet in January 1993. 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.
21
<PAGE>
Revenue. Total Revenue for fiscal year 1997 increased $1.3 million, or
4.3%, to $31.7 million from $30.3 million for fiscal 1996. The increase resulted
from an increase in product sales and number of video rentals per store as the
184 stores in operation at the end of 1997 was 16 less than the 200 in operation
at the end of 1996. During fiscal 1997, the Company opened 11 stores and closed
27 under-performing locations. As a percentage of revenues, product sales
increased from 23.4% in 1996 to 24.8% in 1997 primarily as a result of a
significant increase in the sale of video games in 1997 compared to 1996. It is
expected that the mix of product rental to product sales will remain relatively
constant in fiscal 1998.
Cost of Product Sales and Rental Revenue. Cost of product sales and
rental revenue decreased from 47.1% of revenue for fiscal 1996 to 38.7% of
revenue for fiscal 1997, while cost measured in dollars decreased from $14.3
million to $12.3 million. The decrease resulted primarily from a decrease in
product costs and the full realization in fiscal 1997 of the efficiencies in
buying created by the combination of the buying departments of the Company, E-1
and SCE in late fiscal 1996.
Operating Expense. As a percentage of revenue, operating expenses
decreased from 58.0% in fiscal 1996 to 55.7% in fiscal 1997 and were level in
absolute dollar terms at $17.6 million. The reduction in percentage terms was
the result of the achievement of greater efficiencies in operation on a per
store basis in 1997. The primary components of operating expenses include
employee compensation, occupancy, fixed asset depreciation, supplies, shipping
and communications.
Selling, General and Administrative Expenses. Despite significant costs
associated with being a public company incurred in fiscal 1997 but not in fiscal
1996, selling, general and administrative expenses decreased from $3.6 million,
or 12.0% of revenue, for fiscal 1996, to $3.3 million, or 10.4% of revenue, for
fiscal 1997. The decrease was primarily due to efficiencies gained in the
consolidation of functions of the separate corporate staffs of the Company, E-1,
and SCE in late fiscal 1996.
Nonoperating Expenses, Net. Nonoperating expenses, net decreased from
$2.1 million, or 6.8% of revenue, for fiscal 1996, to $1.0 million, or 3.1% of
revenue, for fiscal 1997. The improvement reflects the $1.0 million of expenses
in fiscal 1996 related to the spin-off from Rentrak.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
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, 1995 and 1996 are not meaningful.
22
<PAGE>
Revenue. Revenue for fiscal 1996 increased $19.6 million, or 183.3%, to
$30.3 million from $10.7 million for fiscal 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 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.
Cost of Product Sales and Rental Revenue ("Cost of Sales"). Cost of
sales 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 employee compensation, occupancy, fixed asset
depreciation, supplies, shipping and communications.
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.
Nonoperating Expenses, net. Nonoperating expenses, net increased from
$0.9 million, or 8.7% of revenue, for fiscal year 1995, to $2.1 million, or 6.8%
of revenue, for fiscal year 1996. The increase is primarily attributable to
incurring significant nonrecurring costs related to the spin-off of the Company
from Rentrak and an increase in interest expense resulting from increased debt
incurred by the Company to finance its growth and operations.
Liquidity and Capital Resources
The Company's principal capital needs are for the opening of new
stores. To date, the Company has funded its operations primarily through cash
from operations, advances from Rentrak, as more fully described below,
borrowings from and sales of stock to Directors and their affiliates, trade
credit from suppliers and financing arrangements with asset based lenders.
23
<PAGE>
In March and April 1996, the Company sold $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and Culture Convenience Club, Ltd.
("CCC"), a Japanese corporation of which Mr. Muneaki Masuda is Chairman (the
"Notes"). Messrs. LeVine and Masuda are Directors of the Company. On August 30,
1996, each of Mr. LeVine and CCC converted their Notes into 121,789 shares of
BlowOut Common Stock. Also on August 30, 1996, CCC purchased from the Company
for $2.98 million a total of 362,931 shares of BlowOut Common Stock at a
purchase price of approximately $8.21 per share.
In August 1996, Phoenix Leasing, Inc. ("Phoenix") agreed to provide
asset based financing in an aggregate principal amount of $2.0 million. Amounts
outstanding under the Phoenix facility bear interest at a fixed rate per annum
equal to 14.525% and are payable in monthly principal and interest installments
over a five-year term. The Phoenix facility may be used to finance the
construction and opening of (including acquisition of inventory) new Company
stores in Wal-Mart Stores and Wal-Mart SuperCenters. The Phoenix facility is
secured by (i) a continuing guaranty of Rentrak (which Phoenix, in its sole
discretion, may release once at least 36 payments of amounts outstanding under
the Phoenix Facility have been made or the Company's financial condition is, in
Phoenix's sole opinion, sufficient to justify such release), and (ii) the
Company's grant of a first continuing security interest in all assets at each
location to be financed with funds from the Phoenix facility. Under the Phoenix
facility, the Company cannot borrow more than $100,000 per store location, with
a minimum draw of $30,000 per store location. As of February 28, 1998, the
Company had drawn down the entire $2.0 million facility and had $1,620,680
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 draw only up to 80% of
the Orderly Liquidation Value (as defined by the CBC Line of Credit) of eligible
new and used videocassette inventory. As of February 28, 1998, 80% of the
Orderly Liquidation Value of the Company's inventory was approximately
$3,812,434. Advances under the CBC Line of Credit bear interest at a floating
rate per annum equal to the prime rate plus 2.75%. The term of the CBC Line of
Credit is three years. Rentrak has agreed, under certain circumstances in the
event of a default under the CBC Line of Credit, to repurchase BlowOut's
videocassette inventory at specified amounts. As of February 28, 1998, the
Company had $3,160,157 outstanding under the CBC Line of Credit.
On July 22, 1996, the Company entered into an agreement with Star Video
to provide the Company with videocassettes for rental and sale and with video
games for sale ("Star Video Agreement"). Star Video paid off the balance of a
promissory note in the amount of $240,975 made by the Company to its previous
supplier. As a result, the Company executed a new promissory note to Star Video,
pursuant to which the Company became obligated to pay Star Video $120,487 on
each of May 27, 1997 and 1998. Under the Star Video Agreement, Star
24
<PAGE>
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. At February 28, 1998, a balance of $120,487 remained
outstanding under this promissory note.
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 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 their 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 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 immediate forgiveness of
$1,044,487 in Rentrak debt.
During fiscal 1997, the Company opened 11 stores, primarily in Wal-Mart
SuperCenters, and remodeled two older stores which resulted in significant
increases in the revenues of the remodeled stores. 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 is aware
of one other retailer, Blockbuster Video, which operates "store within a store"
video outlets in Wal-Mart stores. The Company expects to open at least four
outlets in Fred Meyer stores in fiscal 1998. The Company currently does not
believe that it will be opening a significant number of stores in Ralphs in
fiscal 1998.
During fiscal 1997, the Company closed 27 stores that did not meet
certain performance levels (consisting of 15 stores in Wal-Mart and 12 stores in
Kmart). Since December 31, 1997,
25
<PAGE>
the Company has closed an additional eight Wal-Mart stores and six Kmart stores
that did not meet performance levels. In addition, the Company has notified
Kmart of its intention to close six additional underperforming stores by March
1998.
The Company had cash and cash equivalents of $1.7 million at December
31, 1997 and $.9 million at February 28, 1998. The Company expects to meet its
short-term liquidity requirements through net cash provided by operations, cash
on hand, the $1.5 million 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 December 31, 1997, the Company had a working capital deficit of $6.6
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 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.
26
<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.
Financial Instruments and Market Risk
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 Company's financial instruments are its CBC line of
credit and its notes payable to Phoenix and Rentrak. The fair value of all these
financial instruments approximated their carrying values at December 31, 1997
and 1996 given such instruments include a variable rate interest factor or a
fixed interest factor at a competitive rate.
27
<PAGE>
Impact of New Accounting Standards
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of and Enterprise and Related
Information," which are effective for fiscal years beginning after December 15,
1997. The Company believes the implementation of these statements will not have
a material effect on its results of operations or financial statement
disclosures.
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, the Board
approved, and the stockholders ratified the appointment of Price Waterhouse LLP
as the Company's new accountants and independent auditors effective December 18,
1996.
28
<PAGE>
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 1998
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 1998 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 1998 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 1998 Annual Meeting
of the Stockholders.
29
<PAGE>
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-18.
(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) None.
(c) See Item 14(a)(3) above.
(d) None.
30
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1)
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
BLOWOUT ENTERTAINMENT, INC.
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of BlowOut Entertainment, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
BlowOut Entertainment, Inc. at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997, 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
February 9, 1998, except as to Note 11, which is as of
February 22, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BlowOut Entertainment, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity (deficit) and cash flows of BlowOut Entertainment, Inc.
(a Delaware corporation) and subsidiaries for the year ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, changes in
stockholders' equity (deficit) and cash flows of BlowOut Entertainment, Inc. and
subsidiaries for the year 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)
F-3
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
-------------- --------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,710,868 $ 1,379,018
Trade receivables 142,386 62,183
Other receivables 77,458 111,922
Merchandise inventory 2,975,630 2,139,259
Other current assets 93,720 132,582
------------ ------------
Total current assets 5,000,062 3,824,964
RENTAL INVENTORY, net 9,158,819 7,793,416
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 3,678,593 4,494,933
INTANGIBLE ASSETS, net of accumulated amortization
of $1,218,009 and $746,480 respectively 3,988,291 4,459,820
------------ ------------
Total assets $ 21,825,765 $ 20,573,133
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit $ 3,020,366 $ 2,227,153
Accounts payable 3,796,213 4,342,395
Accrued liabilities 1,488,566 998,254
Accrued payroll 582,474 485,506
Current portion of long-term debt 576,583 414,451
------------ ------------
Total current liabilities 9,464,202 8,467,759
LONG-TERM DEBT 1,343,073 1,021,940
NOTES PAYABLE 5,678,647 3,263,575
------------ ------------
Total liabilities 16,485,922 12,753,274
---------- ----------
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 shares issued and
outstanding 24,336 24,336
Additional paid-in capital 21,947,864 21,947,864
Accumulated deficit (16,632,357) (14,152,341)
----------- -----------
Total stockholders' equity 5,339,843 7,819,859
--------- ---------
Total liabilities and stockholders' equity $ 21,825,765 $ 20,573,133
============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Rental revenue $ 23,807,163 $ 23,261,214 $ 7,689,018
Product and other sales 7,854,944 7,087,970 3,029,471
------------- ------------ ------------
31,662,107 30,349,184 10,718,489
OPERATING COSTS AND EXPENSES:
Cost of rental revenue 7,440,816 9,649,879 3,268,629
Cost of product and other sales 4,810,447 4,641,417 1,951,132
Operating expenses 17,638,373 17,617,705 6,274,661
Selling, general and administrative 3,280,373 3,637,244 3,277,818
------------- ------------ ------------
33,170,009 35,546,245 14,772,240
------------- ------------ ------------
LOSS FROM OPERATIONS: (1,507,902) (5,197,061) (4,053,751)
------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 983 17,115 3,540
Interest expense (1,008,804) (806,849) (532,836)
Other income (expense), net 55,605 (1,268,009) (401,627)
------------- ------------ ------------
(952,216) (2,057,743) (930,923)
------------- ------------ ------------
LOSS BEFORE INCOME TAXES (2,460,118) (7,254,804) (4,984,674)
INCOME TAXES 19,898 - -
------------- ------------ -----------
NET LOSS $ (2,480,016) $ (7,254,804) $ (4,984,674)
============= ============ ============
NET LOSS PER SHARE:
Basic $ (1.02) $ (3.60) $ (3.41)
============= ============ ============
Diluted $ (1.02) $ (3.60) $ (3.41)
============= ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
---------------------- Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C>
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
Net loss - - - (2,480,016) (2,480,016)
-------------- ------------ ---------------- ----------------- -----------------
BALANCE, December 31, 1997 2,433,330 $24,336 $21,947,864 $(16,632,357) $5,339,843
============== ============ ================ ================= =================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,480,016) $(7,254,804) $(4,984,674)
Adjustments to reconcile net loss to net cash provided
(used) in operating activities:
Amortization of video rental inventory 4,865,667 5,514,147 1,528,640
Depreciation and amortization of equipment and leasehold
improvements 1,107,012 1,169,906 456,293
Amortization and write off of intangible and other assets 471,529 702,207 272,921
Loss from sale of assets 1,233 29,926 --
Changes in assets and liabilities accounts, net of effect
of acquisitions of businesses:
Restricted cash -- 113,297 (113,297)
Receivables, net (45,739) 167,804 (270,007)
Merchandise inventory (836,371) (1,154,365) (886,546)
Other current assets 38,862 (73,605) (176,660)
Accounts payable (546,182) 1,063,842 1,247,835
Accrued liabilities 490,312 (219,639) 1,129,831
Accrued payroll 96,968 307,196 68,833
----------- ----------- -----------
Net cash provided by (used) in operating activities 3,163,275 365,912 (1,726,831)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassettes and video games, net of
videocassettes and video games acquired in acquisitions (7,457,370) (9,967,198) (4,322,348)
Capital expenditures, net of acquisitions (609,193) (2,272,214) (1,012,631)
Disposals of rental inventory 1,226,300 2,374,728 564,450
Disposals of equipment and leasehold improvements 317,288 88,683 290,554
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 (6,522,975) (9,620,478) (3,316,026)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (516,080) (523,295) --
Proceeds from issuance of debt and notes payable 3,414,417 1,456,185 7,470,236
Proceeds from line of credit, net 793,213 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 3,691,550 8,140,043 7,470,236
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 331,850 (1,114,523) 2,427,379
CASH AND CASH EQUIVALENTS, beginning of year 1,379,018 2,493,541 66,162
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $1,710,868 $1,379,018 $2,493,541
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-7
<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 and computer games 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, 1997, the Company operated a total of 184 stores including 148
stores in Wal-Mart and Wal-Mart SuperCenters, 24 stores in Super Kmart Centers,
six stores in Food 4 Less under the name "BlowOut Video" and six 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).
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
F-8
<PAGE>
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-term maturity
of those instruments.
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, 1997 and 1996 given such
instruments include a variable rate interest factor or a fixed interest factor
at a competitive rate.
Merchandise Inventory
Merchandise inventories, consisting primarily of previously viewed
videocassettes, are stated at the lower of cost or market. Cost is determined
using a rolling average of purchases which approximates the first-in, first-out
method.
Rental Inventory
The Company acquires videocassettes, which includes video games, using two types
of supplier arrangements: purchase and revenue-sharing under the PPT System.
Videocassette rental inventory purchased for base stock is stated at cost and
amortized, beginning on the date the videocassettes are placed into service, to
a salvage value of $6 per videocassette over an estimated useful life of 36
months. All copies of new release videocassettes are amortized on an accelerated
basis during their first four months to an average net book value of $22 and
then on a straight-line basis to their salvage value of $6 over the next 32
months.
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
the Company with videocassettes released by certain studios. The Company pays
and capitalizes a handling fee of $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 and end-of-term
purchase fee are amortized to $6 during the first nine months. Revenue-sharing
payments are expensed when incurred.
As of January 1, 1997, the Company changed the estimates used to amortize rental
inventory. Prior to January 1, 1997, the Company amortized new release
videocassettes purchased for more than $20 to a value of $15 over the first four
months, then to a $6 salvage value over the next 32 months. New release
videocassettes purchased for less than $20 were depreciated to $8 over the first
four months, then to a $6 salvage value over the next 32 months. The overall
effect of this change in estimate for the year ended December 31, 1997 was to
reduce the net loss by approximately $1,470,000.
At December 31, 1997 and 1996, the Company's video rental inventory consisted
of:
<TABLE>
<CAPTION>
1997 1996
------------------ ----------
<S> <C> <C>
Cost $ 16,284,617 $ 13,629,350
Less accumulated amortization (7,125,798) (5,835,934)
-------------- ------------
Video rental inventory, net $ 9,158,819 $ 7,793,416
============== ============
</TABLE>
Amortization expense related to video rental inventory was $4,865,667,
$5,514,147 and $1,528,640 in 1997, 1996 and 1995, respectively, and is included
in operating costs and expenses.
As video 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.
F-9
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 5-10 years
Furniture and fixtures 3-5 years
</TABLE>
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
$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 and
video games.
Advertising Expense
Advertising expense, net of cooperative advertising reimbursements, is expensed
when incurred and totaled $361,064, $571,945 and $432,627 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Store Opening Costs
Store opening costs, which consist of payroll, advertising and supplies are
expensed as incurred.
F-10
<PAGE>
Per Share Data
The Company calculates loss per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Accordingly, basic net loss
per share is computed by dividing loss available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share reflects potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. The following table reconciles basic and diluted weighted average shares:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ------------ --------
<S> <C> <C> <C>
Weighted Average Shares (basic) 2,433,330 2,014,134 1,463,973
Effect of Dilutive Stock Options - - -
--------- --------- ---------
Weighted Average Shares (diluted) 2,433,330 2,014,134 1,463,973
========= ========= =========
</TABLE>
Options to purchase 119,375 shares of common stock were outstanding at December
31, 1997 but were excluded from the computation of diluted weighted average
shares since the exercise price of the options was greater than the average
market price of common shares during 1997.
Statement of Cash Flows
The Company made the following cash payments for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest $ 737,904 $ 229,342 $ 44,316
=========== ========== ==========
Taxes $ 18,900 $ - $ -
=========== ========== ==========
</TABLE>
Non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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 --
</TABLE>
Impact of Recent Accounting Developments
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" and Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of and Enterprise and Related Information,"
which are effective for fiscal years beginning after December 15, 1997. The
Company believes the implementation of these statements will not have a material
effect on its results of operations or financial statement disclosures.
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.
F-11
<PAGE>
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 year 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.
<TABLE>
<CAPTION>
<S> <C>
Revenue $17,727,476
Net loss (8,255,722)
Net loss per common share:
Basic (4.52)
Diluted (4.52)
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements as of December 31, 1997 and 1996, consist
of:
<TABLE>
<CAPTION>
1997 1996
-------------- ----------
<S> <C> <C>
Leasehold improvements $ 155,042 $ 209,553
Furniture, fixtures and computers 6,030,202 5,846,781
-------------- -------------
6,185,244 6,056,334
Less accumulated depreciation ( 2,506,651) (1,561,401)
-------------- -------------
Equipment and leasehold improvements, net $ 3,678,593 $ 4,494,933
============== =============
</TABLE>
Maintenance and repair expenditures are expensed as incurred. Depreciation
and amortization expense related to property and equipment was $1,107,012,
$1,169,906 and $456,293 in 1997, 1996 and 1995, respectively.
F-12
<PAGE>
4. LINE OF CREDIT
At December 31, 1997, 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% (11.25% and 11.00% at December 31, 1997 and 1996,
respectively), and are collateralized by rental inventory. Pursuant to the line
of credit, the Company is required to comply with certain financial covenants.
At December 31, 1997 and 1996 there were $3.0 million and $2.2 million
outstanding, respectively, under this line.
5. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable consists of:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------
<S> <C> <C>
Notes payable to Phoenix Leasing, due August 2001 to
September 2002, bearing interest at 14.525% $ 1,673,248 $ 927,966
Notes payable to various vendors, due May 1998,
imputed interest at 11% 230,369 418,605
Notes payable to various vendors, due June 1997,
imputed interest at 11% - 62,895
Notes payable to Rentrak, due December 2004 5,678,647 3,263,575
Other, payable monthly, plus interest at
approximately 10% 16,039 26,925
-------------- -------------
7,598,303 4,699,966
Current portion of long-term debt 576,583 414,451
-------------- -------------
Long-term debt, less current portion $ 7,021,720 $ 4,285,515
============== =============
</TABLE>
In 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, 1997, the Company had drawn down the entire
$2.0 million Phoenix Facility and had an outstanding balance of $1,673,248.
See also Note 11 regarding a subsequent event involving a debt transaction.
Principal payments on long-term debt as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1998 $576,583
1999 392,393
2000 447,481
2001 408,358
2002 94,841
Thereafter 5,678,647
------------
$ 7,598,303
------------
------------
</TABLE>
F-13
<PAGE>
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, 1997,
including the agreement with Rentrak as described above, are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
1998 $ 144,081
1999 95,338
2000 87,168
2001 85,671
2002 91,908
Thereafter 375,291
----------
Total lease payments $ 879,457
=========
</TABLE>
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.
Occupancy expense was $3,736,725, $3,653,680 and $1,167,827 and included
$3,557,314, $3,560,024 and $1,071,032 of rents based on retail store revenues
for the years ended December 31, 1997, 1996 and 1995, 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.
7. INCOME TAXES:
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Benefit computed at statutory rates (34.0)% (34.0)% (34.0)%
Loss benefit accruing to Rentrak -- 29.9 --
Change in valuation allowance 33.9 3.6 33.8
Other .1 .5 .2
---- ---- ----
-- % -- % -- %
---- ---- ----
---- ---- ----
</TABLE>
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, 1996 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, 1997 and 1996 for net operating losses
relates to losses incurred subsequent to the date of the Distribution.
F-14
<PAGE>
Provision (benefit) for income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently payable
Federal $ -- $ -- $ --
State
19,898 -- --
----------- ----------- -----------
Deferred
Federal (837,958) 414,333 (1,455,548)
State (98,583) 48,745 (171,241)
----------- ----------- -----------
(936,541) 463,078 (1,626,789)
Increase (decrease) in valuation allowance 936,541 (463,078) 1,626,789
----------- ----------- -----------
Total provision $19,898 $ -- $ --
=========== =========== ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current:
Vacation accrual $27,656 $45,742
----------- -----------
Noncurrent:
Depreciation 7,603 355,018
Charitable contribution carryforward 950 --
Amortization on intangible assets 181,736 943,703
Net operating loss carryforwards 2,600,019 536,960
----------- -----------
Total noncurrent deferred tax assets 2,790,308 1,835,681
----------- -----------
Gross deferred tax asset 2,817,964 1,881,423
Deferred tax asset valuation allowance (2,817,964) (1,881,423)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
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, 1997, for federal tax return reporting purposes, the Company has
approximately $2,600,019 of tax loss carryovers that expire at various dates
through 2012.
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.
F-15
<PAGE>
Activity in the Company's stock options is as follows:
<TABLE>
<CAPTION>
Per Share
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1996 80,000 $2.325 - 3.625
Granted 54,375 $1.625 - 2.000
Exercised -
Canceled (15,000) $2.500 - 3.625
--------
Outstanding at December 31, 1997 119,375 $1.625 - 3.625
=======
</TABLE>
The weighted average fair value of options granted during the year was $1.862.
The following table summarizes information about fixed stock options at December
31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------- -----------------------------------------------
Number
Outstanding Weighted - Average Number Exercisable Weighted - Average
Exercise Price at 12/31/97 Remaining Contractual Life at 12/31/97 Exercise Price
-------------- ----------- -------------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
$2.375 15,000 8.9 4,125 $2.375
$2.500 35,000 8.8 10,500 $2.500
$3.625 15,000 8.9 4,125 $3.625
$2.000 34,375 0.9 34,375 $2.000
$1.625 20,000 9.3 3,500 $1.625
------- --------
119,375 56,625
======= ========
</TABLE>
The Company applies APB Opinion 25 and related interpretations in accounting for
its Plan. Accordingly, no compensation was recognized for its options granted.
The Company has determined that the pro forma effects of applying FAS 123 would
not have a material effect on the results of operations for 1997 and 1996. This
determination was made using the Black-Scholes option pricing model with the
following assumptions for 1997: 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 was
January 1, 1997. The Company purchases stock on the open market to contribute to
this plan. Therefore, the difference between the cost to the Company and the
proceeds from employees is charged to selling, general, and administrative
expenses. During 1997, the Company purchased 10,650 shares and recorded related
expenses of $2,200.
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 Co. Ltd. ("CCC") owns 605,102 shares of the Company as
of December 31, 1997, or 24.9% of the total outstanding shares. Muneaki Masuda,
Chairman of CCC, and Yoshinori Ogida, a Managing Director of CCC, are members 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 1,004,000 shares of Rentrak as of
December 31, 1997, or 9.30% of the total outstanding shares. He was paid Board
fees of $4,833 and $5,666 in 1997 and 1996, respectively. 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.
F-16
<PAGE>
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.
See also Note 11 for information regarding a subsequent event involving CCC.
Rentrak Corporation
Rentrak Corporation (Rentrak) owns 241,599 shares of the Company as of December
31, 1997, 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 1997, 1996 and 1995 were $133,104,
$72,473 and $138,593, 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, 1997. The Company
is also obligated to purchase enough merchandise from Rentrak such 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 for 1997, 1996 and 1995
were $2.6 million, $3 million and $2.7 million respectively. Rentrak also has a
note payable for $3.01 million plus accrued interest at a 9% rate, originally
due and payable on March 31, 1999. Accrued interest at December 31, 1997, 1996
and 1995 was $734.475, $463,575 and $433,189, 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. In 1997 and 1996 the Company paid Rentrak $50,684 and
$18,694, respectively for this guarantee. See also Note 11 for information
regarding a subsequent event involving the Rentrak debt.
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
212,647 shares of the Company as of December 31, 1997, or 8.74% 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 $4,833 and
$5,666 in 1997 and 1996, respectively. 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 videocassettes 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 videocassettes 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 videocassettes 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.
F-17
<PAGE>
11. SUBSEQUENT EVENT:
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 debt financing 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
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 and CBC lines of credit
discussed above (See Note 5). 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 immediate forgiveness of $1,044,487 in Rentrak
debt. Rentrak has also agreed to reduce the minimum amount of fees the Company
is required to pay for 1998 under the Pay Per Transaction Agreement from 11% to
7% of the Company's 1998 gross retail rental revenue.
F-18
<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 30, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Steve Berns* President and Director (Principal March 30, 1998
Executive Officer)
Eugene F. Giaquinto* Chairman of the Board of Directors March 30, 1998
Bill LeVine* Director March 30, 1998
Muneaki Masuda* Director March 30, 1998
Yoshinori Ogida* Director March 30, 1998
Seth A. Reames* Director March 30, 1998
Thomas D. Berkompas* Chief Financial Officer (Principal March 30, 1998
Financial and Accounting Officer)
*By: /s/ Steve Berns Individually and as Attorney-in-Fact March 30, 1998
------------------------
Steve Berns
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------
<S> <C>
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 [Incorporated by
reference to Exhibit 10.1 of Form 10-K for the fiscal year ended
December 31, 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 Employment Agreement between BlowOut Entertainment, Inc. and
Thomas D. Berkompas, dated April 22, 1997*
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, 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]
</TABLE>
- -------------------
* Filed herewith.
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------
<S> <C>
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 [Incorporated by reference to Exhibit 10.9 of
Form 10-K for the fiscal year ended December 31, 1996]
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
</TABLE>
- -------------------
* Filed herewith.
E-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------
<S> <C>
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. [Incorporated by reference to Exhibit 10.9
of Form 10-K for the fiscal year ended December 31, 1996]
10.22 Employee Stock Purchase Plan of BlowOut Entertainment, Inc.
dated as of December 18, 1996 [Incorporated by reference to
Exhibit 10.9 of Form 10-K for the fiscal year ended December
31, 1996]
10.23 Promissory Note issued by BlowOut Entertainment, Inc. to
Rentrak Corporation dated August 11, 1997*
10.24 Tri-Party Agreement between BlowOut Entertainment, Inc.,
Culture Convenience Club Co. Ltd. And Rentrak Corporation
dated as of February 22, 1998*
10.25 Convertible Promissory Note issued by BlowOut Entertainment,
Inc. to Culture Convenience Club Co. Ltd. dated February 22,
1998*
21.1 List of Subsidiaries [Incorporated by reference to Exhibit
21.1 to Registration Statement No. 0-21327]
24.1 Power of Attorney*
</TABLE>
- -------------------
* Filed herewith.
E-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -------------
<S> <C>
27.1 Financial Data Schedule*
</TABLE>
- -------------------
* Filed herewith.
E-4
<PAGE>
Exhibit 10.3.2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement")
is made and entered into as of April 22, 1997 by and between BLOWOUT
ENTERTAINMENT, INC., a Delaware corporation (hereinafter referred to as
"Employer"), and THOMAS BERKOMPAS (hereinafter referred to as "Employee").
W I T N E S S E T H:
WHEREAS, Employer is principally engaged in the business of marketing,
managing, and operating retail video outlets;
WHEREAS, Employer desires to employ Employee in the capacity of Vice
President, Treasurer and Chief Financial Officer, and Employee desires to be so
employed;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereby agree as follows:
SECTION 1. EMPLOYMENT.
1.1 Position and Title. Employer shall employ and engage the services
of Employee, in the positions of Vice-President, Treasurer and
Chief Financial Officer for the Term of this Agreement as defined
in Section 2, pursuant to the terms and conditions set forth in
this Agreement.
1.2 Duties and Place of Employment.
(a) Employee shall be responsible for, and perform duties
associated with his positions and other duties as may be
directed by the Employer, from time to time. Employee
shall: (i) devote his full business time during normal
business hours to the business and affairs of Employer;
(ii) use his best efforts to promote the interests of
Employer; and (iii) perform faithfully and efficiently his
responsibilities. Employee shall perform his duties at the
Employer's principal executive offices which are currently
located at 7700 NE Ambassador Place, One Airport Center,
Second Floor, Portland, Oregon 97220, or such other
locations as may be directed by Employer from time to
time. Subject to the terms of this Agreement, Employee
shall comply promptly and faithfully with all of
Employer's policies, instructions, directions, requests,
rules and regulations.
1
<PAGE>
(b) After a Change of Control (as defined below), during the
Term of this Agreement, Employee shall continue to serve
Employer in the same capacity and have the same authority,
responsibilities and status as he had as of the date
immediately prior to the Change of Control. After a Change
of Control, during the Term of this Agreement, Employee's
services shall be performed at the location where Employee
was employed as of the date immediately prior to the
Change of Control, or at such other location as may be
mutually agreed between Employer and Employee.
(c) For purposes of this Agreement, a "Change of Control"
shall be deemed to have occurred upon the first
fulfillment of the conditions set forth in any one of the
following three paragraphs:
(1) any "person" (as such term is defined in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), is
or becomes a beneficial owner (within the meaning
of Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of
Employer, representing thirty percent (30%) or
more of the combined voting power of Employer's
then outstanding securities; or
(2) a majority of the directors elected at any annual
or special meeting of stockholders' are not
individuals nominated by Employer's then
incumbent Board; or
(3) the stockholders of Employer approve and there is
consummated on or before the End Date (as defined
below): a merger or consolidation of Employer
with any other corporation, other than a merger
or consolidation which would result in the voting
securities of Employer outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into
voting securities of the surviving entity) more
than fifty percent (50%) of the combined voting
power of the voting securities of Employer or
such surviving entity outstanding immediately
after such merger or consolidation, or (ii) a
plan of complete liquidation of Employer or (iii)
an agreement for the sale or disposition by
Employer of all or substantially all of its
assets.
SECTION 2. TERM AND TERMINATION.
2.1 Initial Term. Employment of Employee shall commence on
April 22, 1997 and shall expire on April 30, 1999 or such
other date on which Employee's employment under this
Agreement is terminated pursuant
2
<PAGE>
to this Section 2 ("Term"). All references herein to End
Date shall mean April 30, 1999 or such later date to which
the Term of this Agreement may be extended by mutual
agreement of the parties or as provided in Section 2.2.
2.2 Extension. The Term of this Agreement shall be extended for
consecutive periods of one (1) year each beginning on May 1, 1999
and continuing on every May 1 thereafter unless and until either
(a) the Employer serves notice upon the Employee on or before the
February 1 immediately preceding the next End Date of its
intention not to extend the Term, or (b) the Employer and Employee
mutually agree to extend the Term to an End Date beyond the next
May 1. In the event of a notice under (a) above, the final End
Date and the expiration of the Term shall be April 30 following
the date of the notice.
2.3 At Will Termination. Not withstanding anything herein to the
contrary, but subject to Section 4.4, Employee's employment may be
terminated by Employer at any time during the first six months of
this Agreement without cause upon thirty (30) days written notice
to Employee.
2.4 For Cause Termination. Employee's employment may be terminated by
Employer for "Cause" without notice. Termination for "Cause" is
defined for purposes of this subsection as termination for: (i)
material failure of Employee to substantially perform the
reasonable and attainable instructions of Employer as to his
duties hereunder; or (ii) an act or acts of misconduct by Employee
which is determined by the Employer to be materially injurious to
Employer monetarily or otherwise; or (iii) material violation by
Employee of any provision of this Agreement. For purposes of this
subsection, termination for "Cause" shall not include any act or
failure to act on Employee's part if done or omitted to be done by
him in demonstrable good faith and with the reasonable belief that
his act or omission was in the best interest of the Employer or
pursuant to an express policy of Employer at the time of such act
or omission.
2.5 Disability or Death. Employee's employment shall be terminable
immediately upon Employee's death or disability. "Disability" is
defined for purposes of this subsection as absence from Employee's
full time duties with Employer as a result of Employee's
incapacity due to physical or mental illness for ninety (90) days
calculated on a cumulative basis during any two (2) year period
during the Term of this Agreement. Nothing in this Section 2.5 is
intended to violate any Oregon State law regarding parental or
family leave policies or any other applicable law.
2.6 Termination by Employee for Good Reason. Employee's employment may
be terminated by Employee at any time for "Good Reason" as that
term is defined below. Employee's continued employment shall not
constitute
3
<PAGE>
consent to, or a waiver of rights with respect to, any act or
failure to act constituting Good Reason hereunder. "Good Reason"
shall mean (i) a material breach by Employer of the terms of this
Agreement; provided that Employee shall have no right to
terminate this Agreement pursuant to this clause (i) unless
Employer has received written notice of the reason for
termination and had at least 15 days to cure such failure and
failed to do so, or (ii) the occurrence (without Employee's
express written consent), within two (2) years after any Change
of Control of any one of the following acts by Employer, or
failures by Employer to act:
(a) the assignment to Employee of any duties inconsistent with
Employee's status as an executive officer of Employer or a
substantial adverse alteration in the nature or status of
Employee's title, position, duties, functions, working
conditions or responsibilities from those in effect
immediately prior to the Change of Control other than any
such alteration primarily attributable to the fact that
Employer may no longer be a public company;
(b) a reduction by Employer in Employee's annual Base Salary
as in effect on the date hereof or as the same may be
increased from time to time;
(c) the relocation of Employer's principal executive offices
to a location more than thirty-five miles from the
location of such offices immediately prior to the Change
of Control or Employer's requiring Employee to be based
anywhere other than Employer's principal executive offices
except for required travel on Employer's business to an
extent substantially consistent with Employee's business
travel obligations immediately prior to the Change of
Control;
(d) the failure by Employer, without Employee's consent, to
pay to Employee any portion of Employee's current
compensation;
(e) the failure by Employer to continue in effect any
compensation plan in which Employee participates
immediately prior to the Change of Control which is
material to Employee's total compensation unless an
equitable arrangement (embodied in an ongoing substitute
or alternative plan) has been made with respect to such
plan, or the failure by Employer to continue Employee's
participation therein (or in such substitute or
alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits
provided and the terms and conditions of such benefits,
including, without limitation, the level of Employee's
participation relative to other participants, as such
relative level existed at the time of the Change of
Control;
4
<PAGE>
(f) the failure by Employer to continue to provide Employee
with benefits substantially similar to those enjoyed by
Employee under any of Employer's pension, life insurance,
medical, health and accident, or disability plans in which
Employee was participating immediately prior to the Change
of Control, the taking of any action by Employer which
would directly or indirectly materially reduce any of such
benefits or deprive Employee of any material fringe
benefit enjoyed by Employee immediately prior to the
Change of Control, or the failure by Employer to provide
Employee with the number of paid vacation days to which
Employee is entitled on the basis of years of service with
Employer in accordance with Employer's normal vacation
policy in effect immediately prior to the Change of
Control; or
(g) the failure of Employer to obtain a satisfactory agreement
from any successor to assume and agree to perform this
Agreement, as contemplated in Section 7.4.
2.7 Other Termination by Employee. Employee's employment may be
terminated by Employee at any time without Good Reason during the
first six months of this Agreement upon thirty (30) days' written
notice to Employer and thereafter upon one hundred eighty (180)
days written notice to Employer.
SECTION 3. COMPENSATION.
3.1 Base Salary. Employee shall be paid an annual base salary in the
amount of one hundred and three thousand dollars ($103,000.00)
("Base Salary"). The Base Salary shall be paid to Employee in
equal semi-monthly installments in arrears on the seventh (7th)
and twenty-second (22nd) day of each month. Should the seventh
(7th) or the twenty-second (22nd) day of any month not be a
business day, Employee's semi-monthly installment of the Base
Salary otherwise due on such date shall be paid to Employee on the
business day closest to the date such semi-monthly installment is
due (i.e., if the seventh (7th) day of the month falls on a
Saturday, the semi-monthly installment shall be paid on the
preceding business day or if the seventh (7th) day of the month
falls on a Sunday, the semi-monthly installment shall be paid on
the next following business day). Employee's Base Salary may be
increased in the discretion of Employer during the Term of this
Agreement.
3.2 Salary Increase. During the Term hereof, the Base Salary shall be
automatically increased on each May 1 beginning in 1998 by the
percentage increase since the prior May, if any, in the Consumer
Price Index for all Urban Consumers (CPI-U), U.S. City Average
(1982-84=100).
5
<PAGE>
3.3 Bonus Compensation. Nothing herein shall preclude the Employer
from authorizing the payment of additional compensation to
Employee over and above the Base Salary at any time payable to him
under his Agreement, whether as a bonus or otherwise. The payment
of such additional compensation shall not operate as an amendment
obligating Employer to make any similar payment or to pay
additional compensation at any future time or for any future
period, or be deemed to affect Employee's Base Salary in any
manner.
3.4 Benefits.
(a) Vacation and Holiday Pay. Employee shall accrue vacation
time and be eligible to receive pay for Employer-paid
holidays in accordance with Employer's policies and
procedures, as from time to time in effect.
(b) Insurance. Employee shall be entitled to medical, life,
worker's compensation, social security and state
unemployment insurance benefit as provided under
Employer's then current terms, policies and procedures.
Employee shall not be entitled to disability insurance
benefits. For five years following a Change of Control,
Employer shall use its best efforts to continue to provide
directors' and officers' liability insurance covering
Employee (with respect to events occurring prior to
termination of Employment) on terms no less favorable (in
terms of coverage and amounts) than those of such
insurance in effect immediately prior to the Change of
Control. Following a Change of Control, Employer will
indemnify and hold harmless Employee (and advance
expenses) to the full extent provided in the Articles of
Incorporation and Bylaws of Employer as in effect
immediately prior to the Change of Control.
(c) Miscellaneous Benefits. In addition to any other
compensation or benefits to be received by Employee
pursuant to the terms of this Agreement, Employee shall be
entitled to participate in any employee benefits which
Employer may from time to time provide its employees
generally.
(d) Policy Revisions. In the event new policies are adopted by
Employer which would modify the benefits to all employees,
and/or to the executives, Employee shall be allowed to
participate in such modified benefits regardless of any
limitation of such benefits contained in this Agreement.
6
<PAGE>
SECTION 4. PAYMENTS UPON TERMINATION OF EMPLOYEMENT.
4.1 Termination for Cause. In the event of the termination of
Employee's employment by Employer for Cause pursuant to
Section 2.4, within ten days of termination Employer shall
pay to Employee only the Base Salary accrued pursuant to
Section 3.1 through and including the date of termination.
No other compensation shall be due or payable under this
Agreement in the event of a termination for Cause.
4.2 Termination for Death or Disability. In the event of the
termination of Employee's employment pursuant to Section
2.5 due to his death or disability, within ten days of
termination Employer shall pay to Employee or Employee's
estate or legal representative, as the case may be, in a
lump sum, the Base Salary accrued pursuant to Section 3.1
through and including the date of termination. During the
period of Employee's disability, but prior to Employee's
termination of Employment, Employee shall be entitled to
receive all compensation as set forth in this Agreement.
No other compensation shall be due or payable under this
Agreement in the event of a termination due to the
Employee's death or disability.
4.3 Termination by Employer Without Cause After Change of
Control or by Employee for Good Reason. In the event of
the termination of Employee's employment by Employer for
any reason other than in Sections 2.4 or 2.5 within two
years after a Change of Control or by Employee pursuant to
Section 2.6, within ten days of termination Employer shall
pay to Employee, in a lump sum, the greater of (i) all
Base Salary which Employer's obligated to pay to Employee
pursuant to Section 3.1 through the End Date or (ii) six
months' Base Salary which Employer is obligated to pay to
Employee pursuant to Section 3.1 during the current fiscal
year.
4.4 Other Termination by Employer. In the event of termination
of Employee's employment by Employer pursuant to Section
2.3 prior to a Change of Control, Employer shall pay
Employee the Base Salary accrued pursuant to Section 3.1
as of the date of termination plus severance payments in
an amount equal to one month's Base Salary multiplied by
the number of months from the commencement date of this
Agreement through the date of termination but in no event
less than three (3) month's Base Salary nor more than six
(6) month's Base Salary, payable in installments as if
still employed; provided, however, that during the period
that Employer is making severance payments pursuant to
this Section 4.4, Employer shall have the right to request
Employee to provide reasonable evidence that he is using
his best efforts to obtain other employment, and in the
event that Employee
7
<PAGE>
fails to provide such reasonable evidence, then Employer
shall not be obligated to pay any severance payments;
and provided further that if Employee is successful in
obtaining such employment, the amount of severance
payments that would have been payable after the time
that Employee obtains such employment shall be reduced
by the amount of any remuneration received from such
employment. For the purposes of this Agreement,
"remuneration" shall be defined to include cash
payments, the face value of any promissory notes issued
to Employee regardless of the terms of payment or
whether payments are ever received, stock or stock
options valued as of the day granted, or any other
compensation given in any form whatsoever.
4.5 Other Termination by Employee. In the event of the
termination of Employee's employment by Employee pursuant
to Section 2.7, within ten days of termination Employer
shall pay to Employee only the amount of Base Salary
accrued pursuant to Section 3.1 through and including the
date of termination. No other compensation shall be due or
payable under this Agreement in the event of a such
termination.
4.6 Insurance Benefits. Employee is entitled to elect to
continue the insurance described in Section 3.4(b) during
a period of two (2) years following an event of
termination described in Section 2.6 and a period of six
(6) months following an event of termination described in
Section 2.3. Employee elects to continue such coverage,
Employer shall reimburse Employee for the premiums paid by
Employee for such insurance as such premiums are paid
until such time as the continued insurance terminates or
Employee obtains replacement full-time employment and is
covered by such new employer's group medical health and
life insurance plan with benefits substantially similar to
those provided by Employer's insurance plan and without
any pre-existing conditions, exclusions, limitations or
restrictions, whichever occurs first. Such reimbursement
shall be reduced for an amount equivalent to the amounts
charged Employee for health coverage immediately prior to
the occurrence of the Change of Control.
4.7 Other Compensation. Except as set forth in this Section 4,
no other compensation shall be due or payable to Employee
upon termination of his employment.
4.8 Right to Decline Payments. Employee, in his sole and
absolute discretion, shall have the right to decline all
or a portion of any payments under this Agreement.
SECTION 5. PERSONAL NATURE. This Agreement is personal, and is being
entered into based upon the singular skill, qualifications and experience of
Employee.
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Employee shall not assign this Agreement or any rights hereunder without the
express written consent of Employer which may be withheld with or without
reason. Employee hereby grants to Employer the right to use Employee's name,
likeness and/or biography in connection with the services performed by Employee
hereunder and in connection with the advertising or exploitation of any project
with respect to which Employee performs services hereunder.
SECTION 6. NOTICES. Any and all notices or other communications
required or permitted by this Agreement or by law shall be deemed duly served
and given when personally delivered to the party to whom such notice or
communication is directed or, in lieu of such personal service, when deposited
in the United States mail, certified, return receipt requested, first class
postage prepaid, addressed set forth on the signature page hereof. Each party
may change its address for purposes of this Section by giving written notice of
such change in the manner provided for in this Section.
SECTION 7. MISCELLANEOUS PROVISIONS.
7.1 Attorneys' Fees: Disputes Concerning Termination.
(a) Subject to Section 7.1(b), in the event that it should
become necessary for any party to bring an action,
including arbitration, either at law or in equity, to
enforce or interpret the terms of this Agreement, each
party shall pay its own attorneys' fees including those
incurred in resolving the dispute prior to in initiation
of any litigation and at trial and on any appeal.
(b) If within fifteen (15) days after any notice of
termination for Good Reason is given by Employee pursuant
to Section 2.6, Employer notifies Employee that a dispute
exists concerning the termination, the date of termination
of this Agreement shall be the date on which the dispute
is finally determined, either by mutual written agreement
of the parties or by a final determination; provided
further that the date of termination shall be extended by
a notice of dispute from Employer only if such notice is
given in good faith and Employer pursues the resolution of
such dispute with reasonable diligence. Following a Change
of Control, Employer shall provide all witnesses and
evidence reasonably required by Employee to present
Employee's case. If a purported termination by Employer
within two years after a Change of Control or by Employee
for Good Reason occurs and such termination is disputed,
Employer shall pay to Employee all reasonable expenses and
legal fees incurred by Employee as a result of a
termination in seeking to obtain or enforce any right or
benefit provided by this Agreement (whether or not
Employee is successful in obtaining or enforcing such
right or benefit).
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(c) If a purported termination by Employer within two years
after a Change of Control or by Employee for Good Reason
occurs and such termination is disputed, Employer shall do
either of the following.
(1) So long as Employee continues to provide
services, Employer shall continue to pay Employee
the full compensation in effect when the notice
giving rise to the dispute was given (including,
but not limited to, salary and estimated bonus)
and continue Employee as a participant in all
compensation, benefit and insurance plans in
which Employee was a participant when the notice
giving rise to the dispute was given, until the
dispute is finally resolved; provided that
Employee's right to continue to provide such
services is solely within the discretion of
Employer, and nothing herein shall prohibit
Employer from terminating such services.
(2) If Employee is no longer providing services,
Employer shall pay Employee fifty percent (50%)
of the amount specified in Sections 4.3 and
Employer will provide Employee with the other
benefits provided in Section 4.6, if, but only
if, Employee agrees in writing that if the
dispute is resolved against Employee, Employee
will promptly refund to Employer all payments
specified in Section 4.3 that Employee receives
under this paragraph (c) plus interest at the
rate provided in Section 1274(d) of the Internal
Revenue Code of 1986, as amended (the "Code"),
compounded quarterly. If the dispute is resolved
in Employee's favor, promptly after resolution of
the dispute Employer will pay Employee the sum
which was withheld during the period of the
dispute plus interest at the rate provided in
Section 1274(d) of the Code, compounded
quarterly.
Amounts paid under this paragraph (c) shall offset
against and reduce other amounts due under this
Agreement. If the dispute is resolved by a
determination that Employee did not have Good
Reason, this Agreement, in accordance with its
terms, will continue to apply to the circumstances
of Employee's employment by Employer and any
termination thereof.
7.2 Applicable Law and Venue. This Agreement is executed and
intended to be performed in the State of Oregon and the
laws of such State shall govern its interpretation and
effect. If suit is instituted by any party hereto or by
any other party for any cause or matter arising from or in
connection with the respective rights or obligations of
the parties hereunder, the sole jurisdiction and venue for
such action shall be the
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Circuit Court of the State of Oregon in and for the County
of Multnomah.
7.3 Integration. Employee has executed an Employee
Confidentiality and Noncompetition Agreement, as modified
(a copy of which is attached hereto as Exhibit A), which
remains in effect and is incorporated into the terms and
conditions of employment under this Agreement. Except as
set forth in the preceding sentence, this Agreement
constitutes the entire agreement of the parties with
respect to the subject matter of this Agreement and
supersedes all prior agreements, negotiations, or
understandings, whether oral or written between the
parties with respect thereto.
7.4 Heirs and Assigns. Subject to any restriction on
assignment contained herein, this Agreement shall be
binding upon and shall inure to the benefit of the
respective party's heirs, successors and assigns. Employer
will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all the business and/or assets of Employer,
by agreement in form and substance satisfactory to
Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that
Employer would be required to perform it if no such
succession had taken place. This Agreement shall not be
terminated by Employer's voluntary or involuntary
dissolution or by any merger or consolidation in which
Employer is not the surviving or resulting corporation, or
on any transfer of all or substantially all of the assets
of Employer. In the event of any such merger,
consolidation, or transfer of assets, the provisions of
this Agreement shall be binding on and inure the benefit
of the surviving business entity or the business entity to
which such assets shall be transferred.
7.5 Severability. Any provision in this Agreement which is, by
competent judicial authority, declared illegal, invalid or
unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such
illegality, invalidity or unenforceability without
invalidating the remaining provisions hereof or affecting
the legality, validity or enforceability or such provision
in any other jurisdiction. The parties hereto agree to
negotiate in good faith to replace any illegal, invalid or
unenforceable provision that, to the extent possible, will
preserve the economic bargain of this Agreement, or
otherwise to amend this Agreement.
7.6 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original,
and the counterparts shall together constitute one and the
same agreement, notwithstanding that
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all of the parties are not signatory to the original or
the same counterpart.
7.7 Captions. The headings and captions herein are inserted
solely for the purpose of convenience of reference and are
not intended to govern, limit, or aid in the construction
of any term or provision hereof.
7.8 Execution. Each of the parties hereto shall execute,
acknowledge and deliver any instrument necessary to carry
out the provisions of this Agreement.
7.9 Construction. This Agreement has been prepared by legal
counsel for Employer. Employee has been advised, and by
his execution hereof acknowledges, that he has the right
to and should have this Agreement reviewed by his own
separate legal counsel. This Agreement has been negotiated
at arm's-length with the benefit of or opportunity to seek
legal counsel and, accordingly, shall not be construed
against any of the parties.
7.10 Arbitration. Notwithstanding anything in this Agreement,
express or implied, to the contrary (including, without
limitation, in Sections 7.01 and 7.02), any dispute or
controversy between the parties hereto involving the
construction or application of any terms, covenants or
conditions of this Agreement, or any claim arising out of
or relating to this Agreement (other than matters for
which injunctive relief may be obtained) shall be settled
by arbitration in Portland, Oregon, in accordance with the
rules of the American Arbitration Association then in
effect, and judgment upon the award rendered by the
arbitrators may be entered in any court having
jurisdiction thereof. Any decision of the arbitrators
shall be final and binding upon the parties hereto. The
parties hereby subject themselves to the in personam
jurisdiction of the courts of the State of Oregon for the
purpose of confirming any such award and entering judgment
thereon. Except with respect to matters for which
injunctive relief may be obtained, arbitration hereunder
shall be a condition precedent to the right to maintain
any action or suit based upon the breach of any term of
this Agreement. Upon the request of either party, the
arbitrators shall issue to the parties a written decision
setting forth their findings of fact and conclusions of
law.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
EMPLOYER:
BLOWOUT ENTERTAINMENT, INC.
an Delaware corporation
7700 NE Ambassador Place
One Airport Center, Second Floor
Portland, Oregon 97220
Attention: President
By: /s/ STEVE BERNS
-------------------------------
Its: PRESIDENT & CEO
-------------------------------
I acknowledge that I have read and agree to the foregoing Agreement,
including, without limitation, the provision allowing termination of my
employment "at will" by Employer.
/s/ THOMAS BERKOMPAS
-------------------------------
Thomas Berkompas
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Exhibit 10.23
PROMISSORY NOTE
Note #83180 Portland, Oregon
Principal Date: August 11, 1997
Amount: $2,144,171.92
For value received, the undersigned BLOWOUT ENTERTAINMENT, INC.
("Maker") promises to pay to the order of RENTRAK CORPORATION ("Lender"), an
Oregon corporation, at the offices of Lender, located at One Airport Center,
7700 N.E. Ambassador Place, Portland, OR 97218, or such other location as Lender
may direct, the principal sum of TWO MILLION ONE HUNDRED FORTY-FOUR THOUSAND ONE
HUNDRED SEVENTY-ONE AND 92/100 DOLLARS ($2,144,171.92) as provided herein.
1. Payment of Principal and Interest. This Note is scheduled for
repayment in 12 monthly payments of not less than $178,680.99. The first payment
shall be due on January 1, 1998 with each subsequent payment due on the first
day of the following month. The entire remaining balance of principal shall
become due and payable and shall be paid to Lender on December 1, 1998. If the
Maker fails to pay when due any amount of principal under this Note or is
otherwise in default pursuant to Section 4, the Maker shall pay interest on the
unpaid principal amount of this Note at the rate of twelve percent (12%) per
annum compounded annually on such amount from the date due until the amount due
is paid in full; provided, however, that if such interest rate would result in
this Note being held to be usurious, the rate shall be reduced to the highest
rate allowed by law that would not be usurious.
2. Payments. Payments under this Note shall be made in full when due,
without notice, deduction, offset, or deferment, and regardless of any claim
Maker may have against Lender under this Note, or any other note, loan
agreement, pledge agreement, national account agreement, or other agreement of
understanding with Lender or otherwise, and without regard to any provisions of
law authorizing offsets, deferral, or forgiveness of payment each of which Maker
specifically waives as fully as permitted by applicable law. Time is of the
essence of all provisions of this Note.
3. Prepayment. The Maker may at any time and from time to time repay
the principal of this Note, in whole or in part, without penalty or premium, and
without prior notice to the Lender.
4. Acceleration of Indebtedness/Cross-Default. Upon the failure to pay
when due any payment on this Note or any part hereof, or upon the occurrence of
an event of default under any other note, loan agreement, pledge agreement,
national account agreement or any other agreement or understanding between
Lender and Maker, the entire indebtedness represented by this Note, including
accrued interest, if any, shall be immediately due and payable at the option of
Lender and without notice, and the Lender shall have all rights and remedies set
forth herein, in any other document referred to herein, or otherwise available
at law.
<PAGE>
5. Security and Cross-Collateralization. The indebtedness represented
by this Note is secured by any and all security agreements, pledge agreements,
national account agreements or any other agreements between Lender and Maker to
the extent that any such agreements create a security interest in any property
of Maker.
6. Costs and Attorneys' Fees. The Maker shall pay on demand the amount
of all expenses including, but not limited to, attorneys' fees, incurred by the
Lender in collecting on this Note, or collecting or attempting to collect any
indebtedness referred to in this Note, including expenses and fees incurred in
both trial and appellate courts or incurred without suit, and all court costs
and costs of public officials.
7. No Waiver by Lender. No failure on the part of the Lender to
exercise any of its rights hereunder shall be deemed a waiver on the part of the
Lender of any of its rights hereunder.
8. Waiver by Maker. The Maker hereby waives presentment, demand of
payment, protest, dishonor, notice of dishonor and notice of nonpayment, and any
and all other notices and demands whatsoever.
9. Governing Law. This Note shall be governed by and construed in
accordance with laws of the State of Oregon without regard to its conflicts of
laws principles.
10. Venue. Venue for any action brought under or relating to this Note
shall be in the federal or state courts located in Multnomah County, Oregon, and
Maker waives any right to contest such venue.
11. Related Agreements. Maker represents and warrants that the
execution, performance and enforcement of this Note does not in any way
violate, breach or conflict with the terms or conditions of any agreement to
which or by which Maker or any affiliate is or may be bound.
Made this 11th day of August, 1997.
BLOWOUT ENTERTAINMENT, INC.
By: /s/ STEVE BERNS
Title: PRESIDENT & CEO
<PAGE>
Exhibit 10.24
TRI-PARTY AGREEMENT
THIS AGREEMENT dated as of this 22nd day of February, 1998 is by and
among BLOWOUT ENTERTAINMENT, INC., a Delaware corporation ("BlowOut"), RENTRAK
CORPORATION, an Oregon corporation ("Rentrak"), and CULTURE CONVENIENCE CLUB
CO., LTD., a Japanese corporation ("CCC").
RECITALS
A. Rentrak and CCC are both shareholders of BlowOut.
B. BlowOut owes substantial amount of debt to Rentrak.
C. BlowOut also owes substantial amount of debt to Coast Business
Credit ("CBC") and Phoenix Leasing, Inc. ("Phoenix") and Rentrak guarantees to
CBC and Phoenix the repayment of such BlowOut's debt.
D. CCC is willing to provide certain loan ("CCC Loan") to BlowOut and
Rentrak is willing to forgive BlowOut's debt to Rentrak under the terms and
conditions of this Agreement.
AGREEMENTS
NOW THEREFORE, in consideration of the foregoing, the mutual promises
and covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Representation: Rentrak and BlowOut hereby represent as follows:
(a) On April 1, 1996 (amended August 30, 1996), and August 11, 1997,
respectively, BlowOut executed separate Promissory Notes for the benefit of
Rentrak in the original principal amounts of $3,800,000 (amended to $2,800,000
on August 30, 1996) ("Note A") and $2,144,171.92 ("Note B"), respectively,
copies of which Promissory Notes are attached hereto as Exhibits A and B
(collectively, the "BlowOut Notes").
(b) As of the date hereof, BlowOut owes Rentrak approximately
$5,633,496.92 in principal and accrued interest in the aggregate under the
BlowOut Notes.
(c) In September 1996, Rentrak executed a Guarantee (the "CBC Guarantee")
for the benefit of CBC pursuant to which Rentrak agreed to guarantee repayment
of up to $5,000,000 of a loan made by CBC to BlowOut (the "CBC Loan") pursuant
to that certain Loan and Security Agreement dated September 12, 1996 between CBC
and BlowOut (the "CBC Agreement"). The CBC Guarantee was replaced in November
1996 with Rentrak's Unconditional Agreement to Repurchase (the "CBC Repurchase
<PAGE>
Agreement") all BlowOut's inventory of videotapes to satisfy the CBC Loan in the
event BlowOut defaults on the CBC Loan.
(d) In July 1996, Rentrak executed a Guarantee (the "Phoenix Guarantee")
(the CBC Repurchase Agreement and the Phoenix Guarantee are herein collectively
referred to as the "Guarantees") for the benefit of Phoenix pursuant to which
Rentrak agreed to guarantee repayment of up to $2,000,000 of a loan made by
Phoenix to BlowOut pursuant to that certain Senior Loan and Security Agreement
dated July 23, 1996 between Phoenix and BlowOut (the Phoenix Agreement").
2. Release of Guarantees. If, and only if, CCC makes the CCC Loan, under Article
5 below, BlowOut shall continuously use its most reasonable efforts to obtain
the release of Rentrak from all or any part of the Guarantees.
3. Deferment. Rentrak hereby agrees to defer payment of all interest and
principal otherwise due and payable under the BlowOut Notes until December 31,
2004 (the "Deferment Period"), at which time such deferred payments of interest
and principal shall become fully due and payable, subject to Section 4 hereof.
The BlowOut Notes shall not accrue interest during the Deferment Period.
4. Forgiveness of Debt. Rentrak agrees as follows:
(a) Forgiveness of Debt Under Note A:
i. Upon the execution of this Agreement, Rentrak shall forgive
repayment of twenty percent (20%) of the amount of principal and accrued
interest on Note A as of the date of this Agreement; and,
ii. Further, if BlowOut pays any of its debt under CBC Agreement or
any of the liability of Rentrak under the CBC Repurchase Agreement is otherwise
reduced, Rentrak shall forgive repayment of then remaining amount of principal
and accrued interest on Note A multiplied by the ratio of the amount of the CBC
Agreement so paid or so reduced against the aggregate amount of BlowOut's debt
under the CBC Agreement immediately prior to such payment.
It is hereby confirmed that if BlowOut has paid all the debt under
CBC Agreement or the liability of Rentrak under the CBC Repurchase Agreement is
otherwise eliminated, then all the amount of principal and accrued interest on
Note A of BlowOut against Rentrak will be completely forgiven by Rentrak.
(b) Forgiveness of Debt Under Note B:
i. Upon the execution of this Agreement, Rentrak shall forgive
repayment of the amount of principal and accrued interest on Note B multiplied
by the ratio of the Two Million US Dollars (US$ 2,000,000) aggregate amount of
BlowOut's debt under Phoenix Agreement as of the date of this Agreement against
Two Million US Dollars (US$ 2,000,000);
ii. Further, if BlowOut pays its any of debt under Phoenix
Agreement or any of the liability of Rentrak under the Phoenix Guarantee is
otherwise reduced, then Rentrak shall forgive repayment of then remaining amount
of principal and accrued interest on Note B multiplied by the ratio of the
amount of the Phoenix Agreement so
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paid or reduced against the aggregate amount of BlowOut's debt under the Phoenix
Agreement immediately prior to such payment.
It is hereby confirmed that if BlowOut has paid all the debt under
Phoenix Agreement or any of the liability of Rentrak under the Phoenix Guarantee
is otherwise reduced, then all the amount of principal and accrued interest on
Note B of BlowOut against Rentrak will be completely forgiven by Rentrak.
(c) Any forgiveness of the BlowOut Notes pursuant to Section 3(a) or (b)
above shall occur without further action on the part of either Rentrak or
BlowOut upon delivery to Rentrak and BlowOut of written notice from either CBC
or Phoenix of any full or partial release or permanent reduction of the CBC
Agreement or the Phoenix Agreement, respectively, or of a copy of a guaranty
accepted by CBC or Phoenix in replacement or substitution for the guaranty of
Rentrak, in whole or in part. It is confirmed among the parties that at the time
Rentrak shall be released from all of the CBC Repurchase Agreement and the
Phoenix Guarantee in any manner whatsoever, all of the BlowOut's debt to Rentrak
under the BlowOut Notes shall be completely and absolutely forgiven by Rentrak.
5. Amendment of National Account Agreement.
Contemporaneously with the funding of the CCC Loan, BlowOut and Rentrak
agree to enter into an Amendment to that certain First Addendum to Rentrak
National Account Agreement dated March 15, 1996 to provide that for calendar
year 1998 the Annual Purchase Requirement for BlowOut shall be seven percent
(7%) of BlowOut's gross retail rental revenue, and that Rentrak shall give due
and fair consideration to a comparable Annual Purchase Requirement for calendar
year 1999. BlowOut understands that such and extension of the modified Annual
Purchase Requirement shall be in the sole discretion of Rentrak.
6. Loan Commitment.
(a) CCC hereby agrees to make the CCC Loan in an total amount of
$1,500,000, upon and subject to the terms and conditions of the Convertible
Promissory Note in the form attached hereto as Exhibit C. The CCC Loan shall be
funded by CCC in three equal installments of US $500,000 each. The first
installment shall be funded within thirty (30) days of the date hereof, the
second installment shall be funded on or before June 30, 1988, and the third
installment shall be funded on or before September 30, 1998. To fund the
installments of the CCC Loan, CCC shall remit the full amount of the installment
to BlowOut by wire transfer of same day funds to the account or accounts
designated in writing to CCC by BlowOut. CCC's obligation to fund the second and
third installments of the CCC Loan shall be subject to the absence of any Event
of Default by BlowOut under the Convertible Promissory Note on the dates such
installments are funded. In addition, CCC's obligation to fund the second and
third installments of the CCC Loan shall be subject to the receipt by CCC of a
written consent of Bill LeVine to the granting by BlowOut of the registration
rights to CCC set forth in Section 6(c) hereof.
(b) Concurrently with the execution of this Agreement, BlowOut shall
determine the conversion price of said Convertible Promissory Note, which
conversion price shall be the bid price of shares of BlowOut common stock
reported on the
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NASDAQ Small Cap Market at the close of trading on the trading day first
preceding the date of the execution of this Agreement (or, if the BlowOut common
stock shall not be quoted on the NASDAQ Small Cap Market at the time of
determination, at the average of the bid and ask prices of BlowOut common stock
on the NASDAQ Bulletin Board at the close of trading on the trading day first
preceding the date of the execution of this Agreement), and BlowOut shall date,
execute and deliver said Convertible Promissory Note to CCC.
(c) The parties agree that BlowOut shall grant to CCC substantially the
same registration rights regarding the Common Stock issuable upon the conversion
of the Convertible Promissory Note as have been previously provided to CCC. The
parties agree that promptly after executing and delivering this Agreement they
will negotiate and execute a separate registration rights agreement that will
set forth such registration rights.
(d) Rentrak and BlowOut agree to take any and all steps that shall be
necessary to enable CCC to exercise the right to convert under Section 6(a)
above under the terms and conditions of this Agreement and the Convertible
Promissory Note.
7. Covenants Regarding CBC Loan
(a) BlowOut hereby covenants and agrees that as long as the CBC Repurchase
Agreement is in effect, BlowOut shall not cause the outstanding principal
balance of the CBC Loan to exceed US$4,000,000 and that BlowOut shall not newly
borrow any amount from CBC even within the above amount after the period of
seven (7) years from the date of this Agreement.
(b) Rentrak hereby confirms that except as otherwise provided in the CBC
Repurchase Agreement, its obligations under the CBC Repurchase Agreement apply
to the entire CBC Loan notwithstanding any termination or expiration of the
agreement dated June 26, 1996, as amended, between Rentrak and BlowOut pursuant
to which said CBC Repurchase Agreement was issued. Rentrak shall take no action
to repudiate the CBC Repurchase Agreement in whole or in part. Upon reasonable
request of BlowOut, Rentrak will confirm this covenant directly to CBC.
8. Representations of BlowOut.
(a) Good Standing. BlowOut is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified to transact business in, and is in good standing under the laws
of, the State of Oregon.
(b) Corporate Authority. BlowOut has the requisite corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by BlowOut
has been duly authorized by all requisite corporate action on the part of
BlowOut.
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(c) Binding Effect. This Agreement has been duly executed and delivered by
BlowOut and constitutes the legal, valid and binding obligation of BlowOut,
enforceable against BlowOut in accordance with its terms, except to the extent
that enforceability may be limited by applicable bankruptcy, insolvency or
similar laws affecting enforcement of creditors' right generally and subject to
general principles of equity.
(d) No Conflict. Neither the execution and delivery of this Agreement by
BlowOut nor the performance of its obligations hereunder will conflict with or
result in a breach of any of the provisions of, or constitute a default under,
the Certificate of Incorporation or By-Laws of BlowOut, as amended to date, or
any agreement, mortgage, indenture, lease or other instrument relating to the
business of BlowOut to which BlowOut is a party or by which it is bound, or
result in the violation of any law to which BlowOut is subject.
9. Representations of Rentrak.
(a) Good Standing. Rentrak is a corporation duly organized, validly
existing and in good standing under the laws of the State of Oregon.
(b) Corporate Authority. Rentrak has the requisite corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by Rentrak
has been duly authorized by all requisite corporate action on the part of
Rentrak.
(c) Binding Effect. This Agreement has been duly executed and delivered by
Rentrak and constitutes the legal, valid and binding obligation of Rentrak,
enforceable against Rentrak in accordance with its terms, except to the extent
that enforceability may be limited by applicable bankruptcy, insolvency or
similar laws affecting enforcement of creditors' right generally and subject to
general principles of equity.
(d) No Conflict. Neither the execution and delivery of this Agreement by
Rentrak nor the performance of its obligations hereunder will conflict with or
result in a breach of any of the provisions of, or constitute a default under,
the Articles of Incorporation or By-Laws of Rentrak, as amended to date, or any
agreement, mortgage, indenture, lease or other instrument relating to the
business of Rentrak to which Rentrak is a party of by which it is bound, or
result in the violation of any law to which Rentrak is subject.
(e) Information. Rentrak, in its capacity as supplier, guarantor and
stockholder of BlowOut is sufficiently familiar with the business and financial
condition and prospects of BlowOut to evaluate the benefits and detriments of
the transactions provided for herein.
10. Representations of CCC
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(a) Good Standing. CCC is a corporation duly organized, validly existing
and in good standing under the laws of Japan.
(b) Corporate Authority. CCC has the requisite corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by CCC has
been duly authorized by all requisite corporate action on the part of CCC.
(c) Binding Effect. This Agreement has been duly executed and delivered by
CCC and constitutes the legal, valid and binding obligation of CCC, enforceable
against CCC in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, insolvency or similar
laws affecting enforcement of creditors' right generally and subject to general
principles of equity.
(d) No Conflict. Neither the execution and delivery of this Agreement by
CCC nor the performance of its obligations hereunder will conflict with or
result in a breach of any of the provisions of, or constitute a default under,
the corporate organizational documents and by-laws of CCC, as amended to date,
or any agreement, mortgage, indenture, lease or other instrument relating to the
business of CCC to which CCC is a party or by which it is bound, or result in
the violation of any law to which CCC is subject.
(e) Information. CCC, in its capacity as a major shareholder of BlowOut
and having representation on the BlowOut board of directors, is sufficiently
familiar with the business and financial conditions, prospects and management of
BlowOut to evaluate the benefits and detriments of the transactions provided for
herein. CCC has had access to all of the information it has requested of
BlowOut.
11. Waiver. A waiver by any party of any of the terms and conditions of this
Agreement in any instance shall not be deemed or construed to be a waiver of
such terms and conditions or the future, or of any subsequent breach thereof.
12. Notices. Any and all notices require or permitted to be given hereunder
shall be in writing and shall be deemed to have been given when personally
delivered or, if mailed, on the third business day after it is deposited in the
United States mails, certified or registered mail, postage prepaid and addressed
as follows:
To BlowOut: BlowOut Entertainment, Inc.
7700 N.E. Ambassador Place
Second Floor
Portland, Oregon 97120
Attention: Steve Berns, President
6
<PAGE>
To Rentrak: Rentrak Corporation
7700 N.E. Ambassador Place
First Floor
Portland, Oregon 97120
Attention: Ron Berger, Chairman
CCC: Culture Convenience Club Co., Ltd.
Sumitomo-seimei OBP Plaza Building 16F
4-70, Shiromi 1-chome, Chuo-ku
Osaka Japan
Attention: Kazuaki Terao,
Chief Executive Officer & President
Any party may change by notice the address to which notices to it are to be
addressed.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon without regard to the principles
of conflicts of laws thereof.
14. Amendments, Etc. The Agreement may not be varied, altered, modified,
changed, or in any way amended except by an instrument in writing, executed by
the parties hereto or their legal representatives.
15. Severability. Each section, paragraph, term and provision of this Agreement,
and any portion thereof, shall be considered severable and if for any reason any
such portion of this Agreement is held to be invalid, contrary to, or in
conflict with any applicable present or future law or regulation in a final,
unappealable ruling issued by any court, agency or tribunal with competent
jurisdiction in a proceeding to which the Company is a party, that ruling shall
not impair the operation of, or have any other effect upon, such other portions
of this Agreement as may remain otherwise intelligible, which shall continue to
be given full force and effect and bind the parties hereto.
16. Headings and Captions. Headings and paragraph captions used in this
Agreement are intended for convenience of reference only and shall not affect
the interpretation of this Agreement.
17. Execution in Counterparts. This Agreement may be executed in any number of
counterparts, which taken together shall be deemed to constitute one original.
18. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
BLOWOUT ENTERTAINMENT, INC.
BY: /s/ STEVE BERNS
------------------------------
Title: PRESIDENT & CEO
------------------------------
RENTRAK CORPORATION
By: /s/ F. KIM COX
------------------------------
Title: VICE PRESIDENT AND SECRETARY
------------------------------
CULTURE CONVENIENCE CLUB CO.,LTD.
BY: /s/YOSHINORI OGIDA
------------------------------
Title: Director
------------------------------
8
<PAGE>
Exhibit 10.25
CONVERTIBLE PROMISSORY NOTE
NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH IT MAY BE CONVERTED HAS BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS BEEN
REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
Portland, Oregon Issuance Date: February 22, 1998 US$1,500,000.00
BLOWOUT ENTERTAINMENT, INC.
Convertible Promissory Note
---------------------------
BLOWOUT ENTERTAINMENT, INC., a Delaware corporation (together with its
successors, the "Company"), for value received, hereby promises to pay to the
order of CULTURE CONVENIENCE CLUB CO., LTD., of Osaka, Japan and its permitted
registered assigns (herein referred to as a "Holder") the principal sum of One
Million Five Hundred Thousand and no/100 Dollars (US$1,500,000.00) or so much
thereof as shall have been funded by wire transfer of immediately available
funds to the Holder's account (the "Bank Account") at such bank in the United
States as may be specified in writing by the Holder to the Company, together
with interest on the principal amount of this Note outstanding from time to
time, as hereinafter provided. If no Bank Account shall be so designated,
payment shall be made at the address of the Holder as indicated in the Register
(as hereinafter defined).
Subject to the terms and provisions of this Note, the unpaid principal sum of,
an accrued but unpaid interest on, this Note shall be due and payable on
December 1, 2004 (the "Maturity Date"), in such coin or currency of the United
States of America as at the time of payment shall be legal render for the
payment of public and private debts.
Interest on the principal sum of this Note shall accrue at the rate of 7% per
annum commencing the date hereof. Interest on the principal sum of this Note
outstanding from time to time shall be payable monthly, in arrears, on the first
day of each month (unless such day is not a Business Day, in which event on the
next succeeding Business Day) (each an "Interest Payment Date") of each year in
which this Note remains outstanding, commencing with the first Interest Payment
Date of January 1, 2000. Interest on this Note shall be calculated on the basis
of a 365-day year and paid for the actual number of days elapsed. Interest shall
be paid by wire transfer of immediately available funds to the Bank Account.
<PAGE>
The principal balance of this Note shall be repaid, and any accrued but unpaid
interest accumulated in accordance with the terms of this Note shall be paid, in
sixty (60) equal monthly installments commencing on January 1, 2000 and
continuing through and including December 1, 2004.
The Company shall keep at its principal office a register (the "Register") in
which shall be entered the name and address of the registered Holder of the Note
and all transfers of the Note. The ownership of the Note shall be proven by the
Register.
1. Conversion by Holder. At any time after the full funding of
this Note and on or before the Maturity Date, the Holder may, at its sole option
and by written notice to the Company, convert this Note into that number of
shares of Common Stock, par value $0.01 per share of the Company ("Common
Stock") having a value equal to the then outstanding principal amount of, and
accrued but unpaid interest on, the Note, with such value determined using a
conversion price of $ One US Dollars (US$1.00) per share rounded to the nearest
whole share; provided, however, that in no event shall more than Four Hundred
Eighty Four Thousand One Hundred Sixty Seven (484,167) shares of Common Stock
(as adjusted by section 2 of this Note ) be issued upon conversion of the Note.
In the event of less than all of the Note is being converted into shares of
Common Stock, the principal amount of the Note deemed to be repaid by the
issuance of shares of Common Stock shall be deemed to be the number of shares of
Common Stock issued upon conversion multiplied by the conversion price and such
amount shall be deemed to be a repayment of the principal balance of this Note
and shall be applied to the next due installments of principal.
2. Anti-Dilution Provision In the event of any reclassification,
capital reorganization or other change in the Common Stock of the Company
(including any subdivision, combination or stock dividend, or any
reclassification, capital reorganization or other change that results from a
merger, consolidation or other change in control of the Company), then as a
condition of such reclassification, reorganization or change, lawful provision
shall be made, and duly executed documents evidencing the same shall be
delivered to Holder, so that Holder shall have the right at any time prior to
the payment of this Note to receive, at a total price equal to the balance
payable upon the conversion of this Note immediately prior to such event, the
kind and amount of shares of stock or other securities or property receivable in
connection with such reclassification, reorganization or change by a shareholder
of the Company holding the same number of shares of Common Stock as were
issuable to Holder immediately prior to such reclassification, reorganization or
change had holder converted this Note into shares of Common Stock of the
Company. In any such case appropriate provisions shall be made with respect to
the rights and interest of Holder so that the provisions hereof shall thereafter
be applicable with respect to any shares of stock or other securities or
property deliverable upon conversion hereof, and
2
<PAGE>
appropriate adjustments shall be made to the conversion price, provided the
aggregate amount payable with respect to the Note shall remain the same. The
Company covenants that it will at all times keep available such number of
authorized shares of Common Stock, free from all preemptive rights with respect
thereto, which will be sufficient to permit the conversion of this Note for the
full number of shares issuable upon such conversion. The Company further
covenants that such shares, when issued pursuant to the conversion of this Note,
will be duly and validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof.
3. Prepayment. At any time prior to the Maturity Date, upon not
less than thirty (30) Business Days written notice to Holder, the Company may
prepay this Note in whole or in part, in cash without penalty or premium;
provided, however, that the Holder may, at his sole option and by written notice
to the Company, before the prepayment date specified in such notice convert this
Note into shares of Common Stock as provided in Section 1 above.
4. Rights Upon Conversion. If this Note shall be converted into
Common Stock or prepaid, the amount of interest not converted under Section 1
above will be due and payable concurrently with any such conversion or
prepayment. All elections by Holder to convert this Note shall be made in
writing and shall be irrevocable. From and after the date for conversion, if
any, given in such elections, this Note shall evidence only the right to
receive, upon deliver of this Note to Company, Common Stock. In the event of a
conversion of less than the entire amount of then outstanding principal of Note,
the Company shall issue to Holder, a new note for the remaining unpaid principal
balance thereof.
5. Events of Default.
a. Event of Default Defined; Acceleration of Maturity; Waiver of
Default. Each of the following constitutes an Event of Default (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgement,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
i. default by the Company in the payment of all or any part
of the principal or unpaid accrued interest on the Note
as and when the same shall become due and payable at the
Maturity Date, by declaration or otherwise; or
3
<PAGE>
ii. default by the Company in the payment of any installment
of principal or of interest upon the Note as and when
the same shall become due and payable, and continuance
of such default for a period of thirty (30) days
following notice of non-payment from the Holder; or
iii. failure on the part of the Company duly to observe or
perform any other of the covenants or agreements
contained in the Notes if such failure shall continue
for a period of 30 days after the date on which written
notice specifying such failure, stating that such notice
is a "Notice of Default" hereunder and demanding that
the Company remedy the same, shall have been given
either by registered or certified mail, return receipt
requested, or by telecopy to the Company by the Holder
at the address or telecopy number, as the case may be,
of the Company; or
iv. the Company shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its
property, or shall consent to any such relief or to the
appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate
action to authorize any of the foregoing; or
v. any involuntary case or other proceeding shall be
commenced against the Company seeking liquidation,
reorganization or other relief with respect to it or its
debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any
substantial part of its property,
4
<PAGE>
and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of 90 days;
or an order for relief shall be entered against the
Company under the federal bankruptcy laws as now or
hereafter in effect.
In case one or more Events of Default shall have occurred and be continuing,
then, and in each and every such case (other than under clauses (iv) and (v)),
unless the principal of the Notes shall have already become due and payable, the
Holder, by notice in writing to the Company, may declare the entire unpaid
principal amount of the Note together with accrued interest thereon to be, and
upon the Company's receipt of such notice the entire unpaid principal amount of
the Note together with accrued interest thereon shall become, immediately due
and payable. If an Event of Default specified in clauses (iv) or (v) above
occurs, the principal of and accrued interest on the Note will be immediately
due and payable without any declaration or other act on the part of the Holder.
b. Delay or Omission Not Waiver Default. No delay or omission of
the Holder to exercise any right or power accruing upon any Event
of Default occurring and continuing as aforesaid shall impair any
such right or power or shall be construed to be a waiver of any
such Event of Default or an acquiescence therein; and every power
and remedy given by the Note or by law may be exercised from time
to time, and as often as shall be deemed expedient, by the Holder.
6. Miscellaneous. This Note shall be deemed to be a contract under
the laws of the State of Oregon, and for all purposes shall be construed in
accordance with the laws of said State. The parties hereto, including all
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance and
enforcement of this Note, and assent to extensions of the time of payment, or
forbearance or other indulgence without notice.
7. Binding Effect. The Holder by acceptance of this Note agrees to
be bound by the provisions of this Note which are expressly binding on such
Holder.
8. Costs and Expenses; Indemnification.
(a) Costs and Expenses. The Company agrees to pay within five days
after demand, whether or not the transactions contemplated hereby shall be
consummated, the reasonable out-of-pocket costs and expenses of the Holder in
connection with (i) the negotiation, preparation, execution, delivery and
administration of this Note and the related Tri-Party Agreement dated as of
February 22, 1998, among the Company, the Holder and Rentrak Corporation (which
Agreement together with
5
<PAGE>
this Note are referred to herein as the "Loan Documents"), any amendments,
modifications or waivers of the terms thereof, and any Default hereunder
(excluding the fees and disbursements of counsel to the Holder); and (ii) the
enforcement or attempted enforcement of, and preservation of any rights or
interests under, the Loan Documents and any out-of-court workout or other
refinancing or restructuring or any bankruptcy case.
(b) Indemnification. Whether or not the transactions contemplated
hereby shall be consummated, the Company hereby agrees to indemnify the Holder
and its officers, directors and affiliates (each an "Indemnified Person")
against, and hold each of them harmless from, any and all liabilities,
obligations, losses, claims, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever, including the
reasonable fees and disbursements of counsel to an Indemnified Person, which may
be imposed on, incurred by, or asserted against any Indemnified Person, (i) in
any way relating to or arising out of any of the Loan Documents, the use or
intended use of the proceeds of the Loan, the transactions contemplated hereby
or thereby, or (ii) with respect to any investigation, litigation or other
proceeding relating to any of the foregoing, irrespective of whether the
Indemnified Person shall be designated a party thereto (the "Indemnified
Liabilities"); provided that the Company shall not be liable to any Indemnified
Person for any portion of such Indemnified Liabilities to the extent they are
found by a final decision of a court of competent jurisdiction to have resulted
from such Indemnified Person's gross negligence or willful misconduct. If and to
the extent that the foregoing indemnification is for any reason held
unenforceable, the Company agrees to make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
as of the date of issuance set forth above.
BLOWOUT ENTERTAINMENT, INC.
By:
Name: /s/ STEVE BERNS
------------------------
Title: PRESIDENT & CEO
------------------------
6
<PAGE>
Exhibit 24.1
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
THOMAS D. BERKOMPAS, 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 1997, 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 22nd day of February, 1998.
/s/ THOMAS D. BERKOMPAS
- --------------------------------
THOMAS D. BERKOMPAS Chief Financial Officer - Principal
Financial and Accounting Officer)
/s/ STEVE BERNS
- --------------------------------
STEVE BERNS Director and President
(Principal Executive Officer)
/s/ GENE GIAQUINTO
- --------------------------------
EUGENE F. GIAQUINTO Chairman of the Board of Directors
/s/ BILL LEVINE
- --------------------------------
BILL LEVINE Director
/s/ MUNEAKI MASUDA
- --------------------------------
MUNEAKI MASUDA Director
/s/ YOSHINORI OGIDA
- --------------------------------
YOSHINORI OGIDA Director
/s/ SETH REAMES
- --------------------------------
SETH A. REAMES Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES F-1 THROUGH F-18 OF THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,710,868
<SECURITIES> 0
<RECEIVABLES> 142,386
<ALLOWANCES> 0
<INVENTORY> 12,134,449
<CURRENT-ASSETS> 5,000,062
<PP&E> 6,185,244
<DEPRECIATION> 2,506,651
<TOTAL-ASSETS> 21,825,765
<CURRENT-LIABILITIES> 9,464,202
<BONDS> 7,021,720
0
0
<COMMON> 24,336
<OTHER-SE> 5,315,507
<TOTAL-LIABILITY-AND-EQUITY> 21,825,765
<SALES> 31,662,107
<TOTAL-REVENUES> 31,662,107
<CGS> 12,251,263
<TOTAL-COSTS> 33,170,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,008,804
<INCOME-PRETAX> (2,460,118)
<INCOME-TAX> 19,898
<INCOME-CONTINUING> (2,480,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,480,016)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
