FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number: 0-21327
BLOWOUT ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0498950
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
7700 NE Ambassador Place
One Airport Center, 2nd Floor, Portland, Oregon 97220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-331-2729
__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of July 31, 1998, the Registrant had 2,433,330 shares of Common Stock ($.01
par value) outstanding.
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BLOWOUT ENTERTAINMENT, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheet
June 30, 1998 (Unaudited) and December 31, 1997 1
Consolidated Statement of Operations
Three months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited) 2
Consolidated Statement of Operations
Six months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited) 3
Consolidated Statement of Cash Flows
Six months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited) 4
Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
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BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents....... $ 104,052 $ 1,710,868
Receivables..................... 351,982 219,844
Merchandise videocassette
inventory...................... 2,833,152 2,975,630
Other current assets............ 213,206 93,720
----------- -----------
Total current assets ......... 3,502,392 5,000,062
Rental videocassette inventory, net 8,988,368 9,158,819
Equipment and leasehold
improvements, net............... 3,332,479 3,678,593
Intangible assets, net ............ 3,752,527 3,988,291
----------- -----------
Total assets ................. $19,575,766 $21,825,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................. $ 2,731,792 $ 3,020,366
Accounts payable................ 2,864,348 3,796,213
Accrued liabilities............. 1,225,794 1,488,566
Accrued payroll................. 595,321 582,474
Current portion of long-term debt . 368,096 576,583
----------- -----------
Total current liabilities .... 7,785,351 9,464,202
Notes payable ..................... 4,411,733 5,678,647
Long-term debt .................... 2,670,716 1,343,073
----------- -----------
Total liabilities ............ 14,867,800 16,485,922
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per
share; 1,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, par value $.01 per share;
10,000,000 shares authorized;
2,433,330 issued and outstanding 24,336 24,336
Additional paid-in capital...... 21,947,864 21,947,864
Accumulated deficit............. (17,264,234) (16,632,357)
----------- -----------
Total stockholders' equity ... 4,707,966 5,339,843
----------- -----------
Total liabilities and stockholders'
equity ...................... $19,575,766 $21,825,765
=========== ===========
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
REVENUE:
Rental revenue $4,724,771 $5,932,666
Product sales 1,707,139 1,730,619
----------- ----------
Total revenue 6,431,910 7,663,285
----------- ----------
OPERATING COSTS AND EXPENSES:
Cost of rental and product sales 2,730,703 2,778,371
Operating expenses 4,003,218 4,276,183
Selling, general and administrative 825,215 845,166
----------- ----------
Total operating costs and expenses 7,559,136 7,899,720
----------- ----------
LOSS FROM OPERATIONS (1,127,226) (236,435)
----------- ----------
NONOPERATING (INCOME) EXPENSE:
Interest expense 203,342 259,108
Other, net (22,660) (38,603)
----------- ----------
Total nonoperating expense 180,682 220,505
----------- ----------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,307,908) (456,940)
INCOME TAX PROVISION 15,715 8,707
----------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (1,323,623) (465,647)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 88,398 -
----------- ----------
NET LOSS $(1,235,225) $ (465,647)
=========== ==========
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic $ (0.55) $ (0.19)
=========== ==========
Diluted $ (0.55) $ (0.19)
=========== ==========
EXTRAORDINARY GAIN PER SHARE:
Basic $ 0.04 $ -
=========== ==========
Diluted $ 0.04 $ -
=========== ==========
NET LOSS PER SHARE:
Basic $ (0.51) $ (0.19)
=========== =========
Diluted $ (0.51) $ (0.19)
=========== =========
WEIGHTED AVERAGE COMMON SHARES 2,433,330 2,433,330
=========== =========
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
REVENUE:
Rental revenue $10,417,009 $11,694,914
Product sales 3,929,570 3,567,027
----------- -----------
Total revenue 14,346,579 15,261,941
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of rental and product sales 5,906,596 5,723,871
Operating expenses 8,240,401 8,765,302
Selling, general and administrative 1,669,806 1,656,275
----------- -----------
Total operating costs and expenses 15,816,803 16,145,448
----------- -----------
LOSS FROM OPERATIONS (1,470,224) (883,507)
----------- -----------
NONOPERATING (INCOME) EXPENSE:
Interest expense 390,441 473,186
Other, net (22,968) (50,469)
----------- -----------
Total nonoperating expense 367,473 422,717
----------- -----------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,837,697) (1,306,224)
INCOME TAX PROVISION 15,943 8,707
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,853,640) (1,314,931)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1,221,763 -
----------- -----------
NET LOSS $ (631,877) $(1,314,931)
=========== ===========
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic $ (0.76) $ (0.54)
=========== ===========
Diluted $ (0.76) $ (0.54)
=========== ===========
EXTRAORDINARY GAIN PER SHARE:
Basic $ 0.50 $ -
=========== ===========
Diluted $ 0.50 $ -
=========== ===========
NET LOSS PER SHARE:
Basic $ (0.26) $ (0.54)
=========== ===========
Diluted $ (0.26) $ (0.54)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 2,433,330 2,433,330
=========== ===========
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months Ended June 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (631,877) $(1,314,931)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Gain on disposal of assets - (1,233)
Gain from extinguishment of debt (1,221,763) -
Amortization of videocassette
rental inventory 2,628,463 2,152,073
Depreciation 531,382 651,308
Amortization of intangible and other
assets 235,764 235,765
Changes in current assets and
liabilities:
Receivables (132,138) 128,866
Merchandise videocassette inventory 142,478 159,138
Prepaids and other assets (119,486) (113,918)
Accounts payable (931,865) (1,744,442)
Accrued liabilities (33,660) 190,317
Accrued payroll 12,847 20,371
----------- -----------
Net cash provided by operating activities 480,145 363,314
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes, net (2,458,012) (3,417,762)
Capital expenditures, net (414,380) (210,657)
Other assets - (46,373)
----------- -----------
Net cash used in investing activities (2,872,392) (3,674,792)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net (288,574) 918,100
Additional borrowings 1,500,000 2,476,695
Repayment of long-term debt (425,995) (392,335)
----------- -----------
Net cash provided by financing
activities 785,431 3,002,460
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,606,816) (309,018)
CASH AND CASH EQUIVALENTS, beginning of period 1,710,868 1,379,018
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 104,052 $ 1,070,000
=========== ===========
See accompanying notes to consolidated financial statements.
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BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: Basis of Presentation
The accompanying consolidated financial statements of BlowOut Entertainment,
Inc. and subsidiaries ("BlowOut" or the "Company") for the three month and six
month periods ended June 30, 1998 and June 30, 1997 are unaudited and, in the
opinion of management, contain all adjustments that are of a normal and
recurring nature necessary to present fairly the financial position and results
of operations for such periods. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
contained in the Company's annual report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission. The
results of operations for the three and six month periods ended June 30, 1998
are not necessarily indicative of the results expected for the full year.
NOTE 2: Impact of Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The Company has adopted the standard as of January 1, 1998. Total comprehensive
loss for the three months ended June 30, 1998 and 1997 was $1,235,225 and
$465,647, respectively and for the six months ended June 30, 1998 and 1997 was
$631,877 and $1,314,931, respectively.
In June 1997, the FASB issued Statement of Financial Standards No. 131,
"Disclosures About Segments of and Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. The Company
believes the implementation of this statement will not have a material effect on
its results of operations or financial statement disclosures.
NOTE 3: Extinguishment of Debt
On February 22, 1998, the Company, Culture Convenience Club Co., Ltd. ("CCC")
and Rentrak Corporation ("Rentrak") signed an agreement (the "Tri-Party
Agreement") under which CCC agreed to provide the Company with $1.5 million in
debt financing to fund projected 1998 expansion plans and additional working
capital. By June 30, 1998, the entire $1.5 million funding had been received by
the Company. The new financing accrues interest at 7% per annum and the
principal plus accrued interest is payable over a 60 month term beginning in
January 2000. Up to $484,167 of the loan may be converted into shares of
BlowOut common stock at $1.00 per share, the bid price on the Nasdaq Stock
Market at the time of the signing of the Tri-Party Agreement. Under the terms
of the Tri-Party Agreement, Rentrak agreed to defer principal and interest
payments on its notes payable by the Company until December 31, 2004 during
which deferment period no interest accrues. Rentrak also agreed to the
forgiveness of all or a portion of the Rentrak notes as the Company is able to
lower Rentrak's contingent obligations under its guaranties of the Phoenix
Financial ("Phoenix") and Coast Business Credit ("CBC") lines of credit. The
Company has agreed not to draw down in excess of $4.0 million under the CBC
line, which limitation, when combined with the reduction in Rentrak's contingent
liability under the Phoenix line of credit due to principal payments made to
date by the Company, under the terms of the Tri-Party Agreement has triggered
the forgiveness of $1,221,763 in Rentrak debt through June 30, 1998. This
forgiveness of debt has no tax effect since the Company has a net operating loss
carryforward in excess of the gain.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this report.
BlowOut Entertainment, Inc. (the "Company") operates retail "store within a
store" videocassette and video game outlets located in large mass merchant
supercenters and grocery chain stores throughout the United States. As of June
30, 1998, the Company operated 165 retail video stores, including 134 stores
located in Wal-Mart SuperCenters, 16 stores located in Super Kmart Centers, 6
stores in Ralphs under the name "Videos & More", 6 stores located in Food 4 Less
under the name "BlowOut Video", and 3 stores in Fred Meyer under the "Videos &
More" name.
The Company's revenue consists of rental revenue and product sales. Rental
revenue includes rental of prerecorded videocassettes and video games. Product
sales are derived from the sale of new and previously viewed videocassettes and
video games and, to a lesser extent, ancillary items such as blank tapes and
candy.
The Company was formed in 1992 as a subsidiary of Rentrak Corporation
("Rentrak"), and opened its first store within a store in January 1993. At
year-end 1993 and 1994, the Company operated seven stores. During these
periods, all of the Company's stores were located in grocery stores. During
1995, the Company experienced accelerated growth in retail stores and revenue,
primarily through (i) the acquisition by Rentrak on May 26, 1995, of a
controlling interest in Entertainment One, Inc. ("E-1"), a company whose primary
business was the operation of retail video outlets in Wal-Mart SuperCenters,
(ii) the acquisition by Rentrak on August 31, 1995, of certain assets and
assumption of certain liabilities which constituted SuperCenter Entertainment,
Inc.'s retail video business and consisted of retail video outlets in Wal-Marts,
Wal-Mart SuperCenters and Super Kmart Centers (the "SCE Business") and (iii) new
store openings in Wal-Mart SuperCenters and, to a lesser extent, in Super Kmart
Centers, Ralphs and Food 4 Less stores.
As a result of the acquisitions of E-1 and the SCE business, the Company
recorded approximately $5.1 million in goodwill which is being amortized over 10
to 15 years resulting in annual amortization of approximately $.5 million.
The combination of E-1 and SCE with the Company was intended to create operating
efficiencies that began to be realized during fiscal year 1997. In addition,
the greater number of stores permitted the Company to better evaluate the
contribution of each store to gross revenue and earnings before interest, taxes,
fixed asset depreciation and amortization ("EBITDA"). Based on those
evaluations, the Company can identify under-performing stores for consideration
for closure. By eliminating under-performing stores, the Company seeks to
enhance its average per store revenues and its EBITDA, and reducing its net
operating losses. However, store closures could adversely affect gross revenue.
Prior to November 25, 1996, Rentrak owned 1,698,942 shares (approximately 70%)
of the issued and outstanding common stock, par value $.01 per share, of the
Company (the "Common Stock"). On November 25, 1996, Rentrak distributed
1,457,343 shares of Common Stock to the holders of Rentrak common stock in the
form of a special dividend (the "spin-off").
The principal executive offices of the Company are located at 7700 NE Ambassador
Place, One Airport Center, Second Floor, Portland, Oregon 97220, telephone
(503) 331-2729.
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Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The following table sets forth, for the periods indicated, (i) statement of
operations data expressed as a percentage of total revenue, (ii) the percentage
change from the prior period in this data and (iii) the number of stores open at
the end of each period.
Percentage
Change in dollar
Three Months Ended June 30, Amount From
1998 1997 1997 to 1998
---- ---- ------------
Rental revenue 73.5% 77.4% (20.4%)
Product sales 26.5% 22.6% (1.4%)
Total revenue 100.0% 100.0% (16.1%)
Cost of rental revenue and product
sales 42.5% 36.3% (1.7%)
Operating expenses 62.2% 55.8% (6.4%)
Selling, general and administrative 12.8% 11.0% (2.4%)
Net loss (19.2%) (6.1%) (165.3%)
Number of stores open at end of period 165 200
Revenue
Revenue for the three months ended June 30, 1998 decreased $1,231,375, or 16.1%,
to $6,431,910 from $7,663,285 for the comparable three months of 1997. The
number of stores in operation decreased from 200 at June 30, 1997 to 165 at June
30, 1998 as the net result of the opening of 5 stores and the closing of 40
underperforming stores between June 30, 1997 and June 30, 1998. The decrease in
revenues resulted almost entirely from a decline in videocassette rentals.
Contributing to the decline, the new releases for the quarter ended June 30,
1998 were not as strong as the comparable 1997 period. This situation was
exacerbated by the availability in the 1997 period of several popular titles
under Rentrak's PPT system which allowed for the purchase in 1997 of a
significantly higher number of additional copies when compared to the copy depth
in the 1998 period. This reduction in copy depth at the Company's stores
occurred concurrent with national competitors implementing revenue sharing
programs with most of the major Hollywood studios allowing these competitors to
significantly increase the number of copies in their stores. The significant
increase in the number of copies available to satisfy customer demand has also
resulted in a significantly shorter rental demand period for new releases which
has negatively affected the Company's rental revenues.
The following table sets forth the number of stores open for at least 12 months
as of the end of the period and average rental and product sale revenue for such
stores for the last three years and the three month periods ended June 30, 1997
and 1998.
Three Months
Fiscal Year Ended December 31, Ended June 30,
1997 1996 1995 1998 1997
---- ---- ---- ---- ----
No. of stores open 12 months 162 130 3 156 156
Average rental revenue $127,056 $129,440 $206,387 $28,540 $32,354
Average product sales $ 41,484 $ 39,442 $ 61,648 $ 9,807 $ 9,138
Average total revenue $168,540 $168,882 $268,035 $38,347 $41,492
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<PAGE>
The decrease in average rental revenue for the three month period ended June 30,
1998 compared to the three month period ended June 30, 1997 is the result of the
factors noted above. Average product sales for the three-month period ended
June 30, 1998 increased from the three-month period ended June 30, 1997. The
Company has pursued a more aggressive strategy in the marketing of sell-through
videocassette inventory and video games to take advantage of the high traffic
volume in most of its locations and this emphasis has resulted in higher sales
of videocassettes and video games.
Operating Costs and Expenses
Cost of Rental and Product Sales
Cost of rental and product sales decreased slightly in absolute dollars from
$2,778,371 for the three months ended June 30, 1997, to $2,730,703 for the three
months ended June 30, 1998 as a direct result of a decrease in the number of
stores in operation. Cost of rental and product sales as a percentage of
revenues has increased from 36.3% to 42.5% as a result of the fixed nature of
the rental product acquisition costs and decreased revenue. Rental product is
purchased based on projected demand. When demand does not meet expectations as
occurred in the second quarter of fiscal 1998, the resulting amortization of the
rental product costs as a percentage of revenues increases. Cost of rental and
product sales as a percentage of revenues was also negatively affected by the
increased proportion of lower margin video game sales to total sell-through
revenues.
Operating Expenses
Operating expenses decreased in absolute dollars from $4,276,183 (55.8% of
revenues) for the three months ended June 30, 1997, to $4,003,218 (62.2%)for the
three months ended June 30, 1998 as a direct result of the net decrease in the
number of stores between these periods. The increase in operating expenses as a
percentage of sales is the result of the largely fixed operating expenses being
spread over a comparatively smaller revenue base in the 1998 period. The
primary components of operating expenses are employee compensation, occupancy,
fixed asset depreciation, supplies and communications.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased in absolute
dollars from $845,166 for the three months ended June 30, 1997, to $825,215 for
the three months ended June 30, 1998 as a result of management's continued focus
on operational efficiency. As a percentage of revenues SG&A increased from 11.0%
for the 1997 period to 12.8% for the 1998 period as a result of the largely
fixed selling, general and administrative expenses being spread over a
comparatively smaller revenue base in the 1998 period.
Nonoperating Expenses, Net
Nonoperating expenses, net decreased from $220,505, or 2.9% of revenue, for the
three months ended June 30, 1997, to $180,682, or 2.8% of revenue, for the three
months ended June 30, 1998. The improvement is attributable to the decrease in
interest expense related to the Rentrak debt as more fully described under
Liquidity and Capital Resources below.
Extraordinary gain on Extinguishment of Debt
In connection with at $1,500,000 partially convertible debt financing of BlowOut
by Culture Convenience Club Co., Ltd. ("CCC") described below, Rentrak agreed to
forgive notes payable by BlowOut as the Company reduces Rentrak's exposure on
the Company's lines of credit. In the second quarter of 1998, the Company
recorded a gain of $88,398 as a result of a decrease during the quarter in
Rentrak's exposure.
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<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
The following table sets forth, for the periods indicated, (i) statement of
operations data expressed as a percentage of total revenue, (ii) the percentage
change from the prior period in this data and (iii) the number of stores open at
the end of each period.
Percentage
Change in dollar
Six Months Ended June 30, Amount From
1998 1997 1997 to 1998
---- ---- ------------
Rental revenue 72.6% 76.6% (10.9%)
Product sales 27.4% 23.4% 10.2%
Total revenue 100.0% 100.0% (6.0%)
Cost of rental revenue and product
sales 41.2% 37.5% 3.2%
Operating expenses 57.4% 57.4% (6.0%)
Selling, general and administrative 11.6% 10.9% 0.8%
Net loss (4.4%) (8.6%) (51.9%)
Number of stores open at end of period 165 200
Revenue
Revenue for the six months ended June 30, 1998 decreased $915,362, or 6.0%, to
$14,346,579 from $15,261,941 for the comparable six months of 1997. As more
fully described in the three month period discussion above, a decline in rental
revenue in the second quarter of 1998 more than offset the gains made in the
first quarter. Year to date same store sales for the six months ended June 30,
1998 were up 1.7% despite a decrease in the second quarter of 7.6% while rolling
twelve month same store sales were up 3.1%.
The following table sets forth the number of stores open for at least 12 months
as of the end of the period and average rental and product sale revenue for such
stores for the last three years and the six month periods ended June 30, 1997
and 1998.
Six Months
Fiscal Year Ended December 31, Ended June 30,
1997 1996 1995 1998 1997
---- ---- ---- ---- ----
No. of stores open 12 months 162 130 3 156 156
Average rental revenue $127,056 $129,440 $206,387 $62,146 $63,251
Average product sales $ 41,484 $ 39,442 $ 61,648 $22,133 $19,493
Average total revenue $168,540 $168,882 $268,035 $84,279 $82,744
Average rental revenue for the six month period ended June 30, 1998 decreased
from the six month period ended June 30, 1997 as a result of the decline in
rental revenue in the second quarter of 1998 as described throughout this
report. Average product sales for the six-month period ended June 30, 1998
increased from the six-month period ended June 30, 1997. The Company has
pursued a more aggressive strategy in the marketing of sell-through
videocassette inventory to take advantage of the high traffic volume in most of
its locations and this emphasis has paid off in higher sales of videocassettes.
Operating Costs and Expenses
Cost of Rental and Product Sales
Cost of rental and product sales increased from $5,723,871, or 37.5% of revenue
for the six months of 1997, to $5,906,596, or 41.2% of revenue, for the six
months of 1998. Cost of rental and product sales as a percentage of revenues
has increased as a result of the fixed nature of the rental product acquisition
costs. Rental product is purchased based on projected demand. When demand does
not meet expectations, as occurred in the second quarter of fiscal 1998, the
amortization of the rental product costs as a percentage of revenues increases.
Cost of rental and product sales as a percentage of revenues was also adversely
affected by the increased proportion of lower
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<PAGE>
margin video game sales to total sell-through revenues. The increase in cost of
sales in absolute dollars reflects the increase in sales of video games which
typically result in a lower margin than sales of videocassettes.
Operating Expenses
Operating expenses decreased in absolute dollars from $8,765,302 for the six
months ended June 30, 1997 to $8,240,401 for the six months ended June 30, 1998.
The decrease in operating expenses in absolute dollars is directly attributable
to the decrease in the number of stores. 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 remained flat at $1,669,806 for the
six months ended June 30, 1998 compared to $1,656,275 for the six months ended
June 30, 1997. As a percentage of revenues, selling, general and administrative
expenses increased from 10.9% for the six months ended June 30, 1997 to 11.6%
for the comparable 1998 period as a result of the decrease in revenues
experienced in the 1998 period as discussed above.
Nonoperating Expenses, Net
Nonoperating expenses, net decreased from $422,717, or 2.8% of revenue, for the
six months ended June 30, 1997, to $367,473, or 2.6% of revenue, for the six
months ended June 30, 1998. The decrease is attributable to the decrease in
interest expense related to the Rentrak debt as more fully described under
Liquidity and Capital Resources below.
Liquidity and Capital Resources
As a result of the decline in revenue experienced beginning in the second
quarter of 1998, the Company's principal capital needs have shifted from the
opening of new stores to the continuation of operations. To date, the Company
has funded its expansion primarily through cash from operations, advances from
Rentrak, and, as more fully described below, borrowings from and sales of stock
to Directors, trade credit from suppliers and financing arrangements with asset
based lenders.
In March and April 1996, the Company sold $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and Culture Convenience Club Co.,
Ltd. ("CCC"), a Japanese corporation of which Mr. Muneaki Masuda is Chairman and
Mr. Yoshinori Ogida is an officer (the "Notes"). Messrs. LeVine, Masuda and
Ogida are Directors of the Company. On August 30, 1996, each of Mr. LeVine and
CCC converted their Notes into 121,789 shares of BlowOut Common Stock. Also on
August 30, 1996, CCC purchased from the Company for $2.98 million a total of
362,931 shares of BlowOut Common Stock at a purchase price of approximately
$8.21 per share.
In August 1996, Phoenix Leasing, Inc. ("Phoenix") agreed to provide asset based
financing in an aggregate principal amount of $2.0 million. Amounts outstanding
under the Phoenix facility bear interest at a fixed rate per annum equal to
14.525% and are payable in monthly principal and interest installments over a
five-year term. The Phoenix facility may be used to finance the construction
and opening of (including acquisition of inventory) new Company stores in Wal-
Mart Stores and Wal-Mart SuperCenters. The Phoenix facility is secured by (i) a
continuing guaranty of Rentrak (which Phoenix, in its sole discretion, may
release once at least 36 payments of amounts outstanding under the Phoenix
Facility have been made or the Company's financial condition is, in Phoenix's
sole opinion, sufficient to justify such release), and (ii) the Company's grant
of a first continuing security interest in all assets at each location to be
financed with funds from the Phoenix facility. Under the Phoenix facility, the
Company cannot borrow more than $100,000 per store location, with a minimum draw
of $30,000 per store location. As of July 31, 1998, the Company had drawn down
the entire $2.0 million facility and had $1,483,590 outstanding under the
Phoenix facility with maturity dates extending to September 2002.
- 10 -
<PAGE>
On September 12, 1996, Coast Business Credit ("CBC") entered into an agreement
with the Company to provide a revolving line of credit ("CBC Line of Credit") in
the maximum principal amount at one time outstanding of $5.0 million. Under the
CBC Line of Credit, the Company may only draw up to 80% of the Orderly
Liquidation Value (as defined by the CBC Line of Credit) of eligible new and
used videocassette inventory. As of July 31, 1998, 80% of the Orderly
Liquidation Value of the Company's inventory was approximately $3,552,784.
Advances under the CBC Line of Credit bear interest at a floating rate per annum
equal to the prime rate plus 2.75% (11.25% as of July 31, 1998). The term of
the CBC Line of Credit is three years. Rentrak has agreed, under certain
circumstances in the event of a default under the CBC Line of Credit, to
repurchase BlowOut's videocassette inventory at specified amounts. As of July
31, 1998, the Company had $2,774,315 outstanding under the CBC Line of Credit.
The Company and CBC recently agreed to modify the computation of the borrowing
base which, as of August 7, 1998 had the effect of increasing the borrowing base
by approximately $400,000.
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
which has subsequently been paid in full. In May 1998, the Company signed a
two-year, non-exclusive extension of the distribution agreement with Star Video.
Recently, Star Video agreed to defer approximately $700,000 of trade payables
due from the Company. In return, the Company has agreed to pay in advance for
videocassettes purchased from Star Video.
During the first quarter of 1997 the Company entered into an agreement with
Rentrak whereby payables resulting from the Company's use of the Rentrak PPT
system during the first six months of fiscal 1997 were deferred until January
1998, at which time such amounts totaling $2.1 million became due and payable in
twelve, equal, interest-free, monthly installments. The Company also has a note
payable due Rentrak in the amount of $3.01 million arising from transactions
which occurred prior to the spin-off from Rentrak. This note together with
accrued interest at 9% per annum was originally 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 and has provided 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 its notes until December 31, 2004 during which deferment period no
interest accrues. Rentrak also agreed to the forgiveness of all or a portion of
the Rentrak notes as the Company lowers Rentrak's contingent obligations under
their guaranties of the Phoenix and CBC lines of credit discussed above. The
Company has agreed not to draw down in excess of $4.0 million under the CBC
line, which limitation, when combined with the reduction in Rentrak's contingent
liability under the Phoenix line of credit due to principal payments made to
date by the Company, under the terms of the Tri-Party Agreement triggered the
forgiveness of $1,221,763 in Rentrak debt during the six months ended June 30,
1998.
During the first quarter of 1998, the Company opened three stores in Fred Meyer.
The Company does not know the number of new Wal-Mart SuperCenters, or Ralphs
grocery store locations which will be made available to the Company for the
opening of video stores in fiscal 1998. The Company expects to open at least one
additional outlet in Fred Meyer and at least two additional outlets in Ralphs or
Food 4 Less in the remainder of fiscal 1998.
Also, during the second quarter of 1998, in accordance with previously announced
plans, the Company closed 8 stores which did not meet certain performance levels
(consisting of 6 stores in Wal-Mart and 2 stores in Kmart).
- 11 -
<PAGE>
The Company had cash and cash equivalents of $104,052 at June 30, 1998. The
Company expects to meet its short-term liquidity requirements through net cash
provided by operations, cash on hand, advances under the CBC Line of Credit and
deferrals of trade payables to Star Video. However, as a result of the
significant decline in rental revenue experienced in the second quarter as
discussed above, as well as the continuance of this adverse trend in the third
quarter, unless the Company is able to obtain new equity and/or debt capital, or
is able to refinance its existing debt to generate additional cash flows,
Management believes that the existing sources of cash may not be sufficient to
meet its operating needs after December 31, 1998. Management is actively
exploring alternatives to raise additional capital.
At June 30, 1998, the Company had a working capital deficit of $4,282,959.
Videocassette rental inventories are treated as noncurrent assets under
generally accepted accounting principles because they are not assets which are
reasonably expected to be completely realized in cash or sold in the normal
business cycle. Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of these assets as
noncurrent excludes them from the computation of working capital. The
acquisition cost of videocassette rental inventories, however, is reported as a
current liability until paid and, accordingly, is included in the computation
of working capital. Consequently, the Company believes working capital is not
as significant a measure of financial condition for companies in the video
retail industry as it is for companies in other industries because of the
accounting treatment of videocassette rental inventory as a noncurrent asset.
The Company expects to operate with a working capital deficit as it expands its
store base.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs and business systems 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 adverse effect on the operations of the
Company.
The Company has initiated formal communications, in the form of questionnaires
with 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. At this time, the Company cannot predict the level of Year
2000 readiness of its suppliers or host vendors. 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.
- 12 -
<PAGE>
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 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, as available. 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. The Company
has not yet developed contingency plans should its Year 200 program not be
implemented to the extent necessary to assure undisrupted operation through the
turn of the century.
Statements made in this document that present information that is not historic,
including among other things, anticipated financial performance, sources and
extent of liquidity and capital, business prospects, new products and markets,
and anticipated store openings are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements can be identified by the use of forward-looking terminology such as
"may", "will", "expect", "anticipate", "estimate" or "continue" or the negative
thereof or other variations thereon, or comparable terminology. There are
numerous risks and uncertainties that could cause actual results to differ
materially from those in such forward-looking statements. Reference is made to
the Company's Registration Statement on Form 10 and the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission for a
discussion of such risk factors and uncertainties.
- 13 -
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 5, 1998, the Company held its 1997 Annual Meeting of
Stockholders (the "Annual Meeting") during which Bill LeVine
(2,335,541 votes in favor, 97,798 votes withheld) and Muneaki Masuda
(2,345,868 votes in favor, 87,462 votes withheld) were reelected to
terms as directors of the Company. Votes were also cast for the
ratification of the reappointment of Price Waterhouse, LLP as the
Company's independent auditors for the 1998 fiscal year (2,350,648
votes in favor, 495 votes against and 1,316 abstentions).
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
- 14 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLOWOUT ENTERTAINMENT, INC.
August 14, 1998
By: /s/Thomas D. Berkompas
------------------------------------
Thomas D. Berkompas
Vice President, Chief Accounting and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES 1 AND 3 OF THE COMPANY'S FORM
10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 104,052
<SECURITIES> 0
<RECEIVABLES> 351,982
<ALLOWANCES> 0
<INVENTORY> 11,821,520
<CURRENT-ASSETS> 3,502,392
<PP&E> 6,143,929
<DEPRECIATION> 2,811,450
<TOTAL-ASSETS> 19,575,766
<CURRENT-LIABILITIES> 7,785,351
<BONDS> 7,082,449
0
0
<COMMON> 24,336
<OTHER-SE> 4,683,630
<TOTAL-LIABILITY-AND-EQUITY> 19,575,766
<SALES> 14,346,579
<TOTAL-REVENUES> 14,346,579
<CGS> 5,906,596
<TOTAL-COSTS> 15,816,803
<OTHER-EXPENSES> (22,968)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390,441
<INCOME-PRETAX> (1,837,697)
<INCOME-TAX> 15,943
<INCOME-CONTINUING> (1,853,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,221,763
<CHANGES> 0
<NET-INCOME> (631,877)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
