UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 001-15153
BLOCKBUSTER INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1655102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Elm Street
Dallas, Texas 75270
Telephone (214) 854-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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
--- ---
Number of shares of common stock outstanding at November 1, 2001:
Class A common stock, par value $.01 per share: 32,445,802
Class B common stock, par value $.01 per share: 144,000,000
BLOCKBUSTER INC.
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
Page
-----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited)--for the Three and Nine Months Ended
September 30, 2000 and 2001......................................................................... 3
Consolidated Balance Sheets--at December 31, 2000 and September 30, 2001 (Unaudited).................. 4
Consolidated Statements of Cash Flows (Unaudited)--for the Nine Months Ended September 30,
2000 and 2001....................................................................................... 5
Notes to Consolidated Financial Statements (Unaudited)................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 21
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................................... 24
2
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
---- ---- ---- ----
Revenues:
Rental revenues................................... $1,019.0 $1,083.3 $3,072.8 $3,235.9
Merchandise sales................................. 146.1 152.9 478.6 479.5
Other revenues.................................... 28.7 28.5 67.9 83.2
-------- -------- -------- --------
1,193.8 1,264.7 3,619.3 3,798.6
Cost of sales:
Cost of rental revenues........................... 364.2 682.4 1,097.3 1,441.8
Cost of merchandise sold.......................... 107.9 136.8 372.6 392.7
-------- -------- -------- --------
472.1 819.2 1,469.9 1,834.5
-------- -------- -------- --------
Gross profit...................................... 721.7 445.5 2,149.4 1,964.1
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative............... 602.6 655.9 1,766.8 1,895.6
Depreciation...................................... 57.4 62.0 180.7 183.2
Amortization of intangibles....................... 44.0 45.1 132.5 132.8
-------- -------- -------- --------
704.0 763.0 2,080.0 2,211.6
-------- -------- -------- --------
Operating income (loss)............................. 17.7 (317.5) 69.4 (247.5)
Interest expense.................................. (29.0) (17.4) (88.0) (61.9)
Interest income................................... 1.6 1.6 5.2 5.0
Other items, net.................................. 0.4 0.8 2.5 (1.0)
-------- -------- -------- --------
Loss before income taxes............................ (9.3) (332.5) (10.9) (305.4)
Benefit (provision) for income taxes.............. (10.1) 108.0 (40.7) 69.5
Equity in income (loss) of affiliated companies,
net of tax...................................... 0.1 (0.4) 0.3 0.1
-------- -------- -------- --------
Net loss............................................ $ (19.3) $ (224.9) $ (51.3) $ (235.8)
======== ======== ======== ========
Net loss per share:
Basic and diluted................................. $ (0.11) $ (1.28) $ (0.29) $ (1.35)
======== ======== ======== ========
Weighted-average shares outstanding:
Basic and diluted................................. 175.0 175.7 175.0 175.3
======== ======== ======== ========
Cash dividends per common share..................... $ 0.02 $ 0.02 $ 0.06 $ 0.06
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
3
BLOCKBUSTER INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
December 31, September 30,
2000 2001
------------ -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents......................................................... $ 194.2 $ 110.0
Receivables, less allowances of $8.6 (2000 and 2001).............................. 185.8 121.9
Merchandise inventories........................................................... 242.2 214.1
Prepaid assets and other current assets........................................... 177.3 189.1
-------- --------
Total current assets........................................................... 799.5 635.1
Rental library...................................................................... 646.7 294.8
Receivable from Viacom.............................................................. 134.9 34.4
Property and equipment, net......................................................... 1,079.4 926.5
Intangibles, net.................................................................... 5,809.2 5,670.5
Other assets........................................................................ 79.2 73.4
-------- --------
$8,548.9 $7,634.7
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................................. $ 592.7 $ 348.7
Accrued expenses.................................................................. 473.7 431.7
Current portion of long-term debt................................................. 8.0 113.6
Current portion of capital lease obligations...................................... 24.8 23.6
Deferred taxes.................................................................... 24.0 16.1
-------- --------
Total current liabilities...................................................... 1,123.2 933.7
Long-term debt, less current portion................................................ 1,039.0 755.2
Capital lease obligations, less current portion..................................... 97.5 86.5
Deferred taxes...................................................................... 207.2 35.6
Other liabilities................................................................... 73.6 72.6
-------- --------
2,540.5 1,883.6
-------- --------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.01 per share; 100.0 shares authorized; no shares
issued or outstanding........................................................... -- --
Class A common stock, par value $.01 per share; 400.0 shares authorized;
31.0 and 32.1 shares issued and outstanding (2000 and 2001, respectively)....... 0.3 0.3
Class B common stock, par value $.01 per share; 500.0 shares authorized;
144.0 shares issued and outstanding............................................. 1.4 1.4
Additional paid-in capital........................................................ 6,166.4 6,165.0
Retained deficit.................................................................. (86.8) (322.6)
Accumulated comprehensive loss.................................................... (72.9) (93.0)
-------- --------
Total stockholders' equity..................................................... 6,008.4 5,751.1
-------- --------
$8,548.9 $7,634.7
======== ========
See notes to unaudited consolidated financial statements.
4
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended September 30,
---------------------------------
2000 2001
---- ----
Cash flows from operating activities:
Net loss.......................................................................... $ (51.3) $(235.8)
Adjustments to reconcile net loss to net cash flow provided
by operating activities:
Depreciation and amortization.................................................. 843.3 971.8
Non-cash portion of special item charges and change in accounting estimates.... -- 319.3
Deferred taxes................................................................. 87.6 (174.8)
Equity in income (loss) of affiliated companies, net of tax.................... (0.3) 0.2
Common stock issued to non-employee directors.................................. 0.1 0.1
Gain on sales of store operations.............................................. (1.7) (0.6)
Gain on sale of non-core investment............................................ (1.9) --
Change in operating assets and liabilities:
(Increase) decrease in receivables............................................. (13.9) 63.1
(Increase) decrease in receivable from Viacom.................................. (55.8) 100.5
Decrease in merchandise inventories............................................ 63.1 7.8
(Increase) decrease in prepaid and other assets................................ 0.9 (29.3)
Decrease in accounts payable................................................... (77.0) (241.0)
Decrease in accrued expenses and other liabilities............................. (26.3) (49.4)
------- -------
Net cash flow provided by operating activities...................................... 766.8 731.9
------- -------
Cash flows from investing activities:
Rental library purchases.......................................................... (561.7) (568.4)
Capital expenditures.............................................................. (128.0) (45.3)
Cash used for acquisitions........................................................ (33.7) --
Proceeds from sales of store operations........................................... 4.8 2.3
Proceeds from sale of non-core investment......................................... 7.1 --
Investments in affiliated companies............................................... (4.0) (4.5)
------- -------
Net cash flow used in investing activities.......................................... (715.5) (615.9)
------- -------
Cash flows from financing activities:
Proceeds from credit agreement.................................................... 83.0 120.0
Repayments on credit agreement.................................................... (108.0) (292.0)
Proceeds from other notes......................................................... 26.5 --
Repayments on other notes......................................................... (3.5) (6.2)
Net proceeds from the exercise of stock options................................... -- 9.0
Cash dividends.................................................................... (10.5) (10.5)
Capital lease payments............................................................ (26.6) (18.6)
------- -------
Net cash flow used in financing activities.......................................... (39.1) (198.3)
------- -------
Effect of exchange rate changes on cash............................................. (3.9) (1.9)
------- -------
Net increase (decrease) in cash and cash equivalents................................ 8.3 (84.2)
Cash and cash equivalents at beginning of period.................................... 119.6 194.2
------- -------
Cash and cash equivalents at end of period.......................................... $ 127.9 $ 110.0
======= =======
Supplemental cash flow information:
Cash payments for interest........................................................ $ 83.7 $ 65.1
======= =======
Non-cash investing and financing activities:
Property and equipment acquired under capitalized leases.......................... $ 10.5 $ 6.5
======= =======
See notes to unaudited consolidated financial statements.
5
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Note 1--Basis of Presentation
Blockbuster Inc. and its subsidiaries (the "Company" or "Blockbuster") operate
and franchise entertainment-related stores in the United States and a number of
other countries. The Company offers pre-recorded videocassettes and DVDs
primarily for rental and also offers titles for purchase on a "sell-through"
(retail) basis. In addition, the Company offers video games for rental and sale
and sells other entertainment-related merchandise.
In the opinion of management, the accompanying consolidated financial
statements include all recurring adjustments and normal accruals necessary to
present fairly the Company's financial position and its results of operations
and cash flows for the dates and periods presented. Results for interim periods
are not necessarily indicative of the results to be expected during the
remainder of the current year or for any future period. All significant
intercompany accounts and transactions have been eliminated in consolidation.
These unaudited consolidated financial statements should be read in
conjunction with the more detailed audited consolidated financial statements for
the year ended December 31, 2000, included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission (the "SEC") on
March 29, 2001. Accounting policies used in the preparation of these unaudited
consolidated financial statements are consistent in all material respects with
the accounting policies described in the Notes to Consolidated Financial
Statements included in the Company's Form 10-K.
Use of Estimates
The preparation of consolidated 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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings (Net Loss) Per Share
Basic earnings (net loss) per share ("EPS") is computed by dividing the net
income (loss) applicable to common shares by the weighted-average number of
common shares outstanding during the period. Diluted EPS adjusts the basic
weighted-average number of common shares outstanding by the assumed exercise of
stock options only in periods in which such effect would have been dilutive.
Options to purchase approximately 14.3 million and 16.4 million shares of class
A common stock were outstanding as of September 30, 2000 and 2001, respectively,
and were excluded from the computation of the weighted-average shares for
diluted EPS because their inclusion would be anti-dilutive. The table below
presents a reconciliation of weighted-average shares used in the calculation of
basic and diluted EPS:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 2001 2000 2001
----- ----- ----- -----
Weighted-average shares for basic EPS...... 175.0 175.7 175.0 175.3
Incremental shares for stock options....... -- -- -- --
----- ----- ----- -----
Weighted-average shares for diluted EPS.... 175.0 175.7 175.0 175.3
===== ===== ===== =====
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and
losses affecting stockholders' equity that, under generally accepted accounting
principles, are excluded from net income (loss), such as unrealized gains and
losses on investments available for sale, foreign currency translation gains and
losses, the change in the fair values of items designated as a hedge and minimum
pension liability. Currency translation and the change in the fair values of
items designated as a hedge are the only items of
6
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
comprehensive income (loss) impacting the Company. The balances in accumulated
comprehensive loss consist of the following:
At December 31, 2000 At September 30, 2001
---------------------- ----------------------
Change in fair value of interest rate swaps, net of deferred
taxes......................................................... $ -- $ (7.3)
Foreign currency translation adjustment........................ (72.9) (85.7)
------ ------
Accumulated comprehensive loss................................. $(72.9) $(93.0)
====== ======
Comprehensive loss was as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
------ ------- ------ -------
Net loss........................................ $(19.3) $(224.9) $(51.3) $(235.8)
Change in fair value of interest rate swaps,
net of deferred taxes.......................... -- (6.5) -- (7.3)
Foreign currency translation adjustment......... (8.6) 1.5 (32.2) (12.8)
------ ------- ------ -------
Total comprehensive loss........................ $(27.9) $(229.9) $(83.5) $(255.9)
====== ======= ====== =======
Recent Pronouncements
On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended by Statements 137
and 138. These statements require companies to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. The statements also established new accounting rules for hedging
instruments which, depending on the nature of the hedge, require that changes in
the fair value of the derivatives either be offset against the change in fair
value of assets, liabilities or firm commitments through earnings, or be
recognized in other comprehensive income (loss) until the hedged item is
recognized in earnings. The impact of adoption was immaterial on the Company's
consolidated results of operations and financial position.
The Company is exposed to fluctuations in interest rates. The Company uses
derivative instruments, including swaps, to manage certain of these exposures.
Derivative instruments used by the Company in its hedging activities are viewed
as risk management tools, involve little complexity and are not used for trading
or speculative purposes. In the first quarter of 2001, the Company entered into
two interest rate swaps that qualified as cash flow hedges. Included as a
component of accumulated other comprehensive loss were after-tax losses of $6.5
million and $7.3 million for the three and nine months ended September 30, 2001,
respectively, associated with cash flow hedges.
On June 29, 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. The Company is required to implement SFAS 141 for business
combinations entered into on or after July 1, 2001.
On June 29, 2001, the FASB also approved SFAS 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Amortization of
goodwill and intangible assets with indefinite lives, including such assets
recorded in past business combinations, will cease upon adoption of this
statement. On an annual basis, and when there is reason to believe that their
values have been diminished or impaired, these assets must be tested for
impairment, and a write-down may be necessary. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives. The
Company is required to implement SFAS 142 on January 1, 2002 and it has not
determined the impact that this statement will have on its consolidated
financial position or results of operations.
7
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), effective for fiscal years beginning after December 15, 2001 and replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of". SFAS 144 establishes an accounting model for
long-lived assets to be disposed of by sale, including discontinued operations,
and replaces the provisions of APB Opinion No. 30 for the disposal of segments
of a business. The adoption of SFAS 144 will not have a material effect on the
Company's financial statements.
Note 2--Related Party Transactions
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom Inc. ("Viacom").
The Company purchases certain videocassettes and DVDs for rental and sale
directly from Paramount Pictures Corporation ("Paramount"). Total purchases from
Paramount were $20.8 million and $37.4 million for the three months ended
September 30, 2000 and 2001, respectively. Total purchases from Paramount were
$110.2 million and $77.9 million for the nine months ended September 30, 2000
and 2001, respectively.
All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein.
Note 3--Special Item Charges
During the third quarter of 2001, Blockbuster announced that it would execute
a strategic re-merchandising plan to allow for an expansion of store space for
DVD and other strategic product offerings. The Company initiated this plan with
the goal of optimizing its stores' revenues and gross profit based on an
evaluation of the Company's product mix and product offerings. This evaluation
also included analyses of industry trends and projections, such as the
accelerated consumer acceptance of the DVD format, as evidenced by Blockbuster's
increase in DVD rental revenues as a percentage of rental revenues from 7.3%
for the three months ended September 30, 2000 to 19.8% for the three months
ended September 30, 2001. Based on the Company's evaluation, and in connection
with the resulting plan, the Company disposed of approximately 25% of its VHS
rental library in its stores, certain VHS merchandise inventory primarily
located in its distribution center, and certain games from its rental library in
its stores. These activities resulted in non-cash charges of $193.7 million to
cost of rental revenues and $16.1 million to cost of merchandise sold, which
reflect the cost of the disposed library and inventory items, net of any
estimated proceeds. The Company also recorded a charge of $13.2 million in
incremental selling, general and administrative expenses, primarily related to
(i) labor incurred during the third quarter to execute the plan, (ii) supply and
disposal costs incurred to execute the plan and (iii) severance for certain
employees terminated as a result of a reorganization of the Company's marketing
and new media operations. Additionally, the Company recorded charges of $2.6
million and $1.1 million in depreciation expense and equity in income (loss) of
affiliated companies, respectively, related to the plan. The Company anticipates
that this plan will be completed by the end of 2001 through the destruction or
sale of the identified items.
Also during the third quarter of 2001, the Company recorded $27.6 million in
selling, general and administrative expenses related to two outstanding lawsuits
(see Note 6).
8
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Note 4--Change in Accounting Estimates for Rental Library
In connection with the strategic re-merchandising plan discussed in Note 3,
Blockbuster re-evaluated and changed the accounting estimates related to its
rental library, including residual values and useful lives. Effective July 1,
2001, the residual value of VHS rental products was reduced from $4 to $2, and
the residual value of game rental products was reduced from $10 to $5. In
addition, the Company reduced its estimate of the useful life of its base stock
VHS rental library from 36 months to 9 months. These changes in estimate reflect
the impact of changes in our rental business, such as an increase in DVD
rental revenues, a decrease in VHS rental revenues and trends affecting games,
which have led to a reduction in the average selling value of the Company's
previously rented VHS and game products and a reduction in the average life of
VHS rental products. As a result of these changes in estimate, cost of rental
revenues was $102.1 million higher, net loss was $64.7 million higher and net
loss per share was $0.37 higher for both the three and the nine months ended
September 30, 2001.
Note 5--Credit Agreement and Other Debt
On June 21, 1999, Blockbuster entered into a $1.9 billion unsecured credit
agreement (the "Blockbuster Credit Agreement") with a syndicate of banks. The
Blockbuster Credit Agreement was initially comprised of a $700 million long-term
revolver due July 1, 2004; a $600 million term loan due in quarterly
installments beginning April 1, 2002 and ending July 1, 2004; and a $600 million
short-term revolver, which was paid down during 2000. The repayment of the
short-term revolver permanently reduced the borrowing capacity under the
Blockbuster Credit Agreement from $1.9 billion to $1.3 billion. The Company had
$455.0 million of available borrowing capacity under the long-term revolver at
September 30, 2001. Interest rates under the Blockbuster Credit Agreement are
based on the prime rate in the United States or LIBOR (plus a margin, or "LIBOR
spread" based on leverage ratios, which is currently 1.25%), at Blockbuster's
option at the time of borrowing. The weighted-average interest rate at September
30, 2001 for borrowings under the Blockbuster Credit Agreement was 5.0%. A
variable commitment fee based on the total leverage ratio is charged on the
unused amount of the revolver (0.25% at September 30, 2001).
The Blockbuster Credit Agreement contains certain restrictive covenants,
which, among other things, relate to the payment of dividends, repurchase of
Blockbuster's common stock or other distributions and also require compliance
with certain financial covenants with respect to a maximum leverage ratio and a
minimum fixed charge coverage ratio. At September 30, 2001, the Company was in
compliance with all financial covenants under the Blockbuster Credit Agreement.
In March 2001, the Company entered into two interest rate swaps with Viacom
in order to obtain a fixed interest rate with respect to $400 million of the
Company's outstanding floating rate debt under the Blockbuster Credit Agreement,
and thereby reduce the Company's exposure to interest rate volatility. The swaps
fixed $200 million of the Company's outstanding debt at an interest rate of
5.01% for two years and the other $200 million at an interest rate of 5.12% for
two and one-half years. The Company's effective interest rates also include the
LIBOR spread payable under its credit facility. Including the effect of the
LIBOR spread, the effective interest rates of the swaps are currently 6.26% and
6.37%, respectively. The swaps are subject to termination in the event that (i)
Viacom ceases to own greater than 80% of the Company's outstanding common stock
or (ii) the Company no longer has any obligations under the term loan portion of
the Blockbuster Credit Agreement. The interest rate swaps qualify as fully
effective, cash-flow hedging instruments under SFAS 133. Therefore, the gain or
loss of the qualifying cash flow hedge is reported in other comprehensive income
(loss) and reclassified into earnings in the same period in which the hedged
transaction affects earnings.
9
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Note 6--Commitments and Contingencies
In October 1998, BLOCKBUSTER MUSIC stores ("Music") were sold to Wherehouse
Entertainment Inc. ("Wherehouse"). Certain leases transferred in connection with
the sale of Music to Wherehouse had previously been guaranteed either by Viacom
or its affiliates. The remaining lease terms expire on various dates through
2007. Blockbuster has agreed to indemnify Viacom with respect to any amount paid
under these guarantees. At the time of the sale, the contingent liability for
base rent approximated $84 million, on an undiscounted basis, with respect to
these guarantees. The Company has not recognized any reserves related to this
contingent liability in the accompanying consolidated financial statements. If
Wherehouse defaults, related losses could materially affect future operating
income.
As discussed in Blockbuster's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, a lawsuit is pending against Blockbuster in the United
States District Court for the Western District of Texas that includes federal
antitrust and California state law claims regarding its revenue sharing
arrangements, and a similar lawsuit is also pending in California state court.
On March 16, 2001, the federal judge in the United States District Court for the
Western District of Texas denied the plaintiffs' request for class certification
of both the federal antitrust and California state law claims. The California
state court plaintiffs are now seeking restitution and injunctive relief in
addition to treble damages. They also seek class certification. In addition to
any damage award to which Blockbuster might be directly subject, if Viacom is
required to pay any damage award as a result of the federal or state court
action, Viacom may seek indemnification for its losses from Blockbuster under
the release and indemnification agreement entered into between Viacom and
Blockbuster. Blockbuster believes the plaintiffs' positions in both actions are
without merit and intends to vigorously defend itself in the litigation.
On May 7, 1999, Lynn Adams, Khristine Schoggins, and Debbie Lenke, purporting
to act as class representatives on behalf of themselves and for a class
comprised of certain Blockbuster store managers who worked in California, filed
a complaint in District Court in Orange County, California against Blockbuster
(the "Wage and Hour Case"). The plaintiffs claim that they should be classified
as non-exempt and are thus owed overtime payments under California law. The
dollar amount that plaintiffs seek as damages to themselves and those similarly
situated is not set forth in the complaint. In January 2001, the trial court
judge certified a class. Blockbuster reached a preliminary settlement in this
case and, on October 1, 2001, the court preliminarily approved the parties'
proposed settlement agreement, which provides for a California state class and
does not admit liability by any party. Under the proposed settlement, the
maximum settlement amount Blockbuster would be required to pay would be $12
million. Final approval of the proposed settlement is subject to a final court
order.
Blockbuster is a defendant in 23 putative class action lawsuits filed by
customers in state courts in Illinois, California, Ohio, Maryland, Texas, New
York, New Jersey, Delaware, Massachusetts, Washington, D.C., Florida and
Pennsylvania between February 1999 and August 2001 (the "EVF Cases"). These
cases allege common law and statutory claims for fraud and/or deceptive
practices and/or unlawful business practices regarding Blockbuster's policies
for customers who choose to keep rental product beyond the prepaid initial
rental period. Some of the cases also allege that these policies impose unlawful
penalties and/or result in unjust enrichment. The dollar amounts that plaintiffs
seek as damages to themselves and those similarly situated are not set forth in
the complaints. Blockbuster reached a preliminary settlement in two of the Texas
cases, and on April 11, 2001, a Texas state court preliminarily approved the
parties' proposed settlement agreement, which provides for a national settlement
class and does not admit liability. The Texas court signed an order approving an
addendum to the settlement agreement on May 30, 2001. Under the proposed
settlement, Blockbuster would make certificates available to class members for
rentals and discounts and would pay up to $9.25 million in attorneys' fees in
connection with the settlement. Confirmation of a
10
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
settlement is subject to a final court order. Blockbuster has the right to
rescind the settlement agreement if more than 3,000 class members exclude
themselves from the settlement. Either party will have the right to terminate
the settlement agreement if (i) the court does not approve a settlement after
the fairness hearing or (ii) the court does approve a settlement, but enters a
final order that is not substantially in the form submitted to it, including
changes to the order relating to the payment of attorneys' fees. Several parties
intervened in the Texas state court action and appealed the court's preliminary
approval of the settlement. On April 23, 2001, an Illinois state court denied
Blockbuster's motion to stay the case based on the settlement in Texas. On April
25, 2001, the same Illinois state court entered a provisional order, subject to
further review and final determination, certifying plaintiff and defendant
classes in order that putative class counsel in Illinois would have an
opportunity to be heard regarding the national class settlement. On September
13, 2001, the Illinois Supreme Court denied Blockbuster's petition for leave to
appeal the Illinois trial court's denial of the motion to stay.
During the third quarter of 2001, the Company recorded $27.6 million in
selling, general and administrative expenses related to the Wage and Hour and
EVF Cases discussed above. The Company believes the plaintiffs' positions in
these cases are without merit and, if the proposed settlements are not approved,
the Company intends to vigorously defend itself in any litigation. The Company's
estimates of future costs are subject to change as circumstances change and
additional information becomes available during the course of litigation.
The Company is a defendant from time to time in other lawsuits incidental to
its business. Based on currently available information, the Company believes
that resolution of these known contingencies would not have a material adverse
impact on the Company's consolidated financial statements or liquidity. However,
there can be no assurances that future costs would not be material to results of
operations or liquidity of the Company for a particular period.
Note 7--Operating Segments and Geographic Area
Beginning in the fourth quarter of 1999, the Company began reporting in two
segments, (i) its video segment, which included its home videocassette, DVD and
video game rental and retail operations; and (ii) its new media segment, which
included its operations relating to its Internet site and to the exploration of
various forms of electronic entertainment delivery, including video-on-demand.
The Company's reportable operating segments are determined in accordance with
the Company's internal management of its operations. At the end of the fourth
quarter of 2000, the Company shifted the focus of its new media operations from
e-commerce offerings to other features designed to support its stores and
increase store revenues. As a result, effective January 1, 2001, the Company
began consolidating its new media operating results with its video operating
results, and no longer reports a separate segment for its new media operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and the related Notes.
Results of Operations
The following table sets forth consolidated results of operations and other
financial data (in millions, except margin and worldwide store data):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ---------------------------------
2000 2001 2000 2001
-------- -------- -------- --------
Statement of Operations Data:
Revenues................................................ $1,193.8 $1,264.7 $3,619.3 $3,798.6
Cost of sales........................................... 472.1 819.2 1,469.9 1,834.5
-------- -------- -------- --------
Gross profit............................................ 721.7 445.5 2,149.4 1,964.1
Operating expenses...................................... 704.0 763.0 2,080.0 2,211.6
-------- -------- -------- --------
Operating income (loss)................................. 17.7 (317.5) 69.4 (247.5)
Interest expense........................................ (29.0) (17.4) (88.0) (61.9)
Interest income......................................... 1.6 1.6 5.2 5.0
Other items, net........................................ 0.4 0.8 2.5 (1.0)
-------- -------- -------- --------
Loss before income taxes................................ (9.3) (332.5) (10.9) (305.4)
Benefit (provision) for income taxes.................... (10.1) 108.0 (40.7) 69.5
Equity in income (loss) of affiliated companies, net of 0.1 (0.4) 0.3 0.1
tax.................................................... -------- -------- -------- --------
Net loss................................................ $ (19.3) $ (224.9) $ (51.3) $ (235.8)
======== ======== ======== ========
Cash Flow Data:
Cash flows provided by operating activities............. $ 766.8 $ 731.9
Cash flows used in investing activities................. (715.5) (615.9)
Cash flows used in financing activities................. (39.1) (198.3)
Other Data:
Depreciation............................................ $ 57.4 $ 62.0 $ 180.7 $ 183.2
Amortization of intangibles............................. 44.0 45.1 132.5 132.8
EBITDA(1)............................................... 119.1 (210.4) 382.6 68.5
Net loss plus intangible amortization, net of tax(1)(2). 22.6 (182.7) 74.5 (109.9)
Margins:
Rental margin(3)........................................ 64.3% 37.0% 64.3% 55.4%
Merchandise margin(4)................................... 26.1% 10.5% 22.1% 18.1%
Gross margin(5)......................................... 60.5% 35.2% 59.4% 51.7%
Worldwide Store Data:
Same store revenues increase(6)......................... 1.5% 4.9% 5.0% 2.5%
Total system-wide stores at end of period............... 7,519 7,851 7,519 7,851
----------
(1) "EBITDA" and "Net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about Blockbuster's
operations. These items should be considered in addition to, but not as a
substitute for, or superior to, operating income, net income (loss), cash
flow and other measures of financial performance prepared in accordance with
generally accepted accounting principles. EBITDA may differ in the method of
calculation from similarly titled measures used by other companies.
(2) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.
(3) Rental gross profit as a percentage of rental revenues.
(4) Merchandise gross profit as a percentage of merchandise revenues.
(5) Gross profit as a percentage of total revenues.
(6) A store is included in the same store revenues calculation after it has been
opened and operated by us for more than 52 weeks. An acquired store becomes
part of the same store base in the 53rd week after its acquisition and
conversion. The percentage change is computed by comparing total net
revenues for same stores at the end of the applicable reporting period with
total net revenues from these same stores for the comparable period in the
prior year.
12
Change in Accounting Estimates for Rental Library and Special Item Charges
During the third quarter of 2001, we announced that we would execute a
strategic re-merchandising plan to capitalize on the higher margin and rapidly
growing DVD rental market. Our plan includes an expansion in DVD copy depth and
selection and a reconfiguration of our stores to highlight the digital format.
This initiative is designed to maintain customer satisfaction and is intended to
solidify our DVD leadership position. In addition, we believe our overall rental
margins should be enhanced by this plan. To accommodate the increase in DVD and
other products in our stores, we disposed of approximately 25% of our VHS rental
library in our stores, certain VHS merchandise inventory primarily located in
our distribution center, and certain games from our rental library in our
stores. As a result of this reduction, we recorded a non-cash charge of $209.8
million in cost of sales. We also recorded $13.2 million in incremental selling,
general and administrative expenses, primarily related to labor, supply and
disposal costs to execute the plan and severance associated with the
reorganization of our markeing and new media operations. Additionally, we
recorded charges of $2.6 million and $1.1 million in depreciation expense and
equity in income (loss) of affiliated companies, respectively, related to the
plan. We anticipate that this plan will be completed by the end of 2001 through
the destruction or sale of the identified items. Additionally, in connection
with the re-merchandising plan, and to address the impact of changes in the
rental business, effective July 1, 2001, as detailed in Note 4 to the financial
statements, we changed the accounting estimates related to our rental library,
including residual values and useful lives. As a result of the changes in
estimates, cost of sales was $102.1 million higher for both the three and nine
months ended September 30, 2001 than it would have been under the previous
method.
Also during the third quarter of 2001, we recorded $27.6 million in selling,
general and administrative expenses relating to two outstanding lawsuits.
The following is a summary of the impact of the above described special item
charges and change in accounting estimates on our operating results during the
periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
-------- -------- -------- --------
Operating income (loss)............. $ -- $(355.3) $ -- $(355.3)
Net loss............................ -- (226.0) -- (226.0)
Excluding the special item charges and the change in accounting estimates,
operating results would have been as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
-------- -------- -------- --------
Revenues............................ $1,193.8 $1,264.7 $3,619.3 $3,798.6
Cost of sales....................... 472.1 507.3 1,469.9 1,522.6
-------- -------- -------- --------
Gross profit........................ 721.7 757.4 2,149.4 2,276.0
Operating expenses.................. 704.0 719.6 2,080.0 2,168.2
-------- -------- -------- --------
Operating income (loss), excluding
special item charges and the
change in accounting estimates..... $ 17.7 $ 37.8 $ 69.4 $ 107.8
======== ======== ======== ========
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenues. Revenues of $1,264.7 million in the third quarter of 2001 increased
$70.9 million, or 5.9%, from $1,193.8 million in the third quarter of 2000. The
increase in revenues was primarily due to an increase in worldwide same store
revenues of 4.9%, a net increase in the number of company-operated stores of 176
to 6,348 at September 30, 2001 from 6,172 at September 30, 2000 and a royalty
payment for a technology licensing agreement, which expired during the third
quarter of 2001. These increases in the third quarter of 2001 were mitigated by
the recognition in the third quarter of 2000 of the remaining $12.3 million of
deferred revenue related to our U.S. promotional and customer database services
and licenses agreement. The increase in worldwide same store revenues reflects a
3.3% increase in same store revenues from our domestic operations and a 12.5%
increase in same store revenues from our international
13
operations. The increase in domestic same store revenues was primarily due to a
box office advantage between titles that became available in the third quarter
of 2001 as compared to the titles that became available in the third quarter of
2000. The increase in same store revenues from our international operations was
primarily due to the impact of copy depth programs in key international markets.
Rental Revenues. Rental revenues are generated from the rental of VHS, DVD
and games and any eventual sale of previously rented VHS, DVD and games.
Revenues generated from rental transactions include revenues received in
connection with the initial rentals of product, as well as revenues received
in connection with any continuations of such rentals past the initial rental
period, as contemplated by our membership agreement. Under our convenience
policy, which we implemented in February 2000, a customer pays for the initial
rental at the time product is rented and agrees to pay for any continuation of
the rental beyond the initial rental period. Generally, when a customer elects
to keep rental product beyond the initial rental period, the customer's rental
is successively continued for the same number of days and at the same price as
the initial rental period, until such point as the product is purchased under
the terms of the membership agreement.
Rental revenues of $1,083.3 million in the third quarter of 2001 increased
$64.3 million, or 6.3%, from $1,019.0 million in the third quarter of 2000.
Following is a summary of rental revenues by product category:
Three Months Ended September 30,
-------------------------------- Percent
2000 2001 Change
--------------- --------------- ----------
VHS Rental Revenues $ 826.9 $ 762.7 (7.8)%
DVD Rental Revenues 74.4 214.6 188.4%
Game Rental Revenues 117.7 106.0 (9.9)%
-------- --------
Rental Revenues $1,019.0 $1,083.3 6.3%
======== ========
The increase in rental revenues was primarily due to an increase in
worldwide same store rental revenues of 4.7% and the net increase in the
number of company-operated stores of 176. The increase in worldwide same store
rental revenues reflects an increase in domestic same store rental revenues of
3.5%, and an increase in international same store rental revenues of 11.1%.
The increase in worldwide same store rental revenues was primarily due to (i)
continued growth in DVD rental revenues, which increased from 7.3% of rental
revenues in the third quarter of 2000 to 19.8% of rental revenues in the third
quarter of 2001, (ii) the box office advantage and (iii) the impact of copy
depth programs in key international markets. These increases were partially
offset by a 7.8% decrease in VHS rental revenues and a 9.9% decrease in game
rental revenues.
Merchandise Sales. Merchandise sales of $152.9 million in the third quarter
of 2001 increased $6.8 million, or 4.7%, from $146.1 million in the third
quarter of 2000. The primary reasons for the increase in merchandise sales
were (i) an 18.7% increase in international same store merchandise sales
primarily due to an increase in international retail DVD sales, (ii) the net
increase in company-operated stores of 176, and (iii) a 1.8% increase in
domestic same store merchandise sales. The increase in domestic same store
merchandise sales was driven by an increase in domestic retail DVD sales,
which was partially offset by decreases: (i) in domestic retail VHS sales,
(ii) due to the discontinuation of music sales in our stores, and (iii) in
domestic phone card sales .
Cost of Sales. Cost of sales of $819.2 million in the third quarter of 2001
increased $347.1 million from $472.1 million in the third quarter of 2000.
Excluding the impacts of the change in accounting estimates and special item
charges of $311.9 million, cost of sales of $507.3 million in the third quarter
of 2001 increased $35.2 million, or 7.5%, from $472.1 million in the third
quarter of 2000, primarily due to the increase in company-operated stores of
176. Excluding the impacts of the change in accounting estimates and special
item charges, cost of sales as a percentage of total revenues increased to 40.1%
in the third quarter of 2001 from 39.5% in the third quarter of 2000. The
increase in cost of sales as a percentage of revenues was primarily due to a
decrease in international rental margins in the third quarter of 2001 as
compared to the third quarter of 2000, due to the increase in revenues generated
through copy depth program arrangements in key international markets. The
increase in cost of sales as a percentage of revenues was partially offset by
(i) an increase in the percentage of rental revenues from DVD rental product,
which on average has a lower overall cost than VHS rental product, (ii) an
increase in margins on domestic game rentals and (iii) an increase in margins on
previously viewed product sales generated by higher average unit selling prices
14
as a result of an increase in previously viewed DVD sales as a percentage of
total previously rented product sales.
Gross Profit. Gross profit of $445.5 million in the third quarter of 2001
decreased $276.2 million from $721.7 million in the third quarter of 2000.
Excluding the impacts of the change in accounting estimates and special item
charges, gross profit of $757.4 million in the third quarter of 2001 increased
$35.7 million, or 4.9%, from $721.7 million in the third quarter of 2000. For
2001, excluding the impacts of the change in accounting estimates and special
item charges, gross profit as a percentage of total revenues decreased to 59.9%
from 60.5% in the third quarter of 2000. The decrease in gross margin was due to
the increase in cost of sales as a percentage of revenues described above.
Operating Expenses. Total operating expenses of $763.0 million in the third
quarter of 2001 increased $59.0 million from $704.0 million in the third quarter
of 2000. Excluding the impact of special item charges, total operating expenses
of $719.6 million in the third quarter of 2001 increased $15.6 million, or 2.2%,
from $704.0 million in the third quarter of 2000. This increase was primarily
due to the net increase of 176 company-operated stores. Excluding the impact of
special item charges, total operating expenses as a percentage of total revenues
decreased to 56.9% in the third quarter of 2001 compared to 59.0% in the third
quarter of 2000. The decrease in operating expenses as a percentage of total
revenues was primarily related to a decrease in selling, general and
administrative expenses as a percentage of revenues, which was primarily due to
a decrease in bad debt expense and a decrease in consulting fees related to our
new media operations. The increase in total operating expenses, excluding
special item charges, also resulted from the following:
Selling, General and Administrative Expense. Selling, general and
administrative expense, which includes expenses incurred at the store,
regional, and corporate levels, as a percentage of total revenues decreased to
48.6% for the third quarter of 2001 from 50.5% in the third quarter of 2000.
Selling, general and administrative expense of $615.1 million in the third
quarter of 2001 increased $12.5 million, or 2.1%, from $602.6 million in the
third quarter of 2000. The dollar increase in the third quarter of 2001
resulted from the following items. Compensation increased $14.7 million
primarily related to additional personnel needed to support our store growth
and increased health insurance costs. Occupancy costs increased $2.4 million
primarily as a result of an increase in the number of company-operated stores
and leases that expired and were renewed at increased rates. These increases
were partially offset by a decrease in other corporate and store expenses of
$3.5 million due primarily to a reduction in bad debt expense and a decrease
in consulting fees incurred by our new media operations. Selling and
advertising expense also decreased by $1.1 million, primarily due to lower
spending on direct mail, partially offset by an increase in expenses related
to our BLOCKBUSTER Rewards (R) program.
Depreciation Expense. Depreciation expense of $62.0 million in the third
quarter of 2001 increased $4.6 million as compared to $57.4 million in the
third quarter of 2000. Excluding special item charges, depreciation expense of
$59.4 million in the third quarter of 2001 increased $2.0 million, or 3.5%, as
compared to $57.4 million in the third quarter of 2000. The increase in
depreciation expense was primarily attributable to the net increase of 176
company-operated stores. This reduction was partially offset by the reduction
of depreciation expense on certain hardware and software associated with the
e-commerce portion of blockbuster.com that was written down in the fourth
quarter of 2000.
Interest Expense. Interest expense of $17.4 million in the third quarter of
2001 decreased $11.6 million, or 40.0%, as compared to $29.0 million in the
third quarter of 2000. The decrease in interest expense was primarily due to
lower average interest rates on our credit facility and a lower average debt
balance outstanding.
Provision for Income Taxes. We recognized a benefit for income taxes of $108.0
million in the third quarter of 2001 as compared to a provision of $10.1 million
in the third quarter of 2000. The benefit for the third quarter of 2001 includes
a benefit of $129.8 million related to the impact of the change in accounting
estimates for rental library and special item charges. Excluding the impact of
the change in accounting estimates for rental library and special item charges,
we recognized a provision for income taxes of $21.8 million in the third quarter
of 2001 as compared to $10.1 million in the third quarter of 2000. The 2001 and
15
2000 provisions reflect the non-deductibility of goodwill amortization
associated with Viacom's acquisition of us in 1994. Additionally, we did not
recognize a benefit for losses recognized in certain foreign jurisdictions in
our 2000 and 2001 tax provisions as it is currently more likely than not that
the benefit will not be realized. The provision for income taxes excluding the
impact of the change in accounting estimates for rental library and special item
charges increased primarily due to higher earnings before taxes for both foreign
and domestic operations. We review our net operating losses on a country by
country basis and may determine in the future that some or all of the net
operating losses generated in the past will be utilized in the future, which
would result in a reduction of the related valuation allowance and an increase
in net income.
Net Loss. The consolidated net loss of $224.9 million for the third quarter of
2001 represents an increase in net loss of $205.6 million from the third quarter
of 2000. Excluding the impact of the change in accounting estimates for our
rental library and special item charges, the consolidated net income of $1.1
million in the third quarter of 2001 reflects an increase in net income of $20.4
million from a net loss of $19.3 million in the third quarter of 2000. This
increase in net income was due to the changes discussed above.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenues. Revenues of $3,798.6 million for the nine months ended September 30,
2001 increased $179.3 million, or 5.0%, from $3,619.3 million for the nine
months ended September 30, 2000. The increase in revenues was primarily due to
the net increase in the number of company-operated stores of 176, increases in
worldwide same store revenues of 2.5% and an increase in revenues from our
DIRECTV initiative. The increase in worldwide same store revenues reflects a
12.4% increase in same store revenues from our international operations and a
0.5% increase in same store revenues from our domestic operations. The increase
in same store revenues from our international operations was primarily due to
the impact of copy depth programs in key international markets. The increase in
domestic same store revenues was primarily due to a box office advantage between
titles that became available in the nine months ended September 30, 2001 as
compared to the titles that became available in the nine months ended September
30, 2000.
Rental Revenues. Rental revenues of $3,235.9 million for the nine months
ended September 30, 2001 increased $163.1 million, or 5.3%, from $3,072.8
million for the nine months ended September 30, 2000. Following is a summary
of rental revenues by product category:
Nine Months Ended September 30,
-------------------------------- Percent
2000 2001 Change
--------------- --------------- ----------
VHS Rental Revenues $2,533.7 $2,357.9 (6.9)%
DVD Rental Revenues 185.5 546.8 194.8%
Game Rental Revenues 353.6 331.2 (6.3)%
-------- --------
Rental Revenues $3,072.8 $3,235.9 5.3%
======== ========
The increase in rental revenues was primarily due to the net increase in
the number of company-operated stores of 176 and an increase in worldwide same
store rental revenues of 2.8%. The increase in worldwide same store rental
revenues reflects an increase in international same store rental revenues of
12.7% and an increase in domestic same store rental revenues of 1.0%. The
increases in same store rental revenues were primarily due to (i) continued
growth in DVD rental revenues, which increased from 6.0% of rental revenues
for the nine months ended September 30, 2000 to 16.9% of rental revenues for
the nine months ended September 30, 2001, (ii) the impact of copy depth
programs in key international markets, and (iii) the box office advantage.
These increases were partially offset by a 6.9% decrease in worldwide VHS
rental revenues and a 6.3% decrease in game rental revenues.
16
Merchandise Sales. Merchandise sales of $479.5 million for the nine months
ended September 30, 2001 increased $0.9 million, or 0.2%, from $478.6 million
for the nine months ended September 30, 2000. The primary reasons for the
increase in merchandise sales were a net increase in company-operated stores
of 176 and a 0.3% increase in worldwide same store merchandise sales. The
increase in worldwide same-store merchandise sales reflects an 11.2% increase
in international same store sales, primarily due to an increase in
international retail DVD sales. This increase was partially offset by a 4.0%
decrease in domestic same store merchandise sales. The decrease in domestic
same store merchandise sales was driven by (i) a decrease in retail VHS sales,
(ii) a decrease in licensed merchandise sales, and (iii) the discontinuation
of music sales in our stores. These decreases were partially offset by an
increase in domestic retail DVD sales.
Cost of Sales. Cost of sales of $1,834.5 million for the nine months ended
September 30, 2001 increased $364.6 million from $1,469.9 million for the nine
months ended September 30, 2000. Excluding the impacts of the change in
accounting estimates and special item charges of $311.9 million, cost of sales
of $1,522.6 million for the nine months ended September 30, 2001 increased $52.7
million, or 3.6%, from $1,469.9 million for the nine months ended September 30,
2000 primarily due to the net increase in the number of company-operated stores
of 176. Excluding the impacts of the change in accounting estimates and special
item charges, cost of sales as a percentage of total revenues improved to 40.1%
for the nine months ended September 30, 2001 from 40.6% for the nine months
ended September 30, 2000. The improvement in cost of sales as a percentage of
revenues was primarily due to (i) an increase in the percentage of rental
revenues from DVD rental product, which on average has a lower overall cost than
VHS rental product, (ii) an increase in margins on domestic game rentals, and
(iii) an increase in margins on previously viewed product sales generated by
higher average unit selling prices as a result of an increase in previously
viewed DVD sales as a percentage of previously viewed product sales. These items
were partially offset by a decrease in international rental margins for the nine
months ended September 30, 2001 as compared to the nine months ended September
30, 2000, due to the increase in revenues generated through copy depth program
arrangements in key international markets.
Gross Profit. Gross profit of $1,964.1 million for the nine months ended
September 30, 2001 decreased $185.3 million from $2,149.4 million for the nine
months ended September 30, 2000. Excluding the impacts of the change in
accounting estimates and special item charges, gross profit of $2,276.0 million
for the nine months ended September 30, 2001 increased $126.6 million, or 5.9%,
from $2,149.4 million for the nine months ended September 30, 2000. For 2001,
excluding the impacts of the change in accounting estimates and special item
charges, gross profit as a percentage of total revenues increased to 59.9% from
59.4% for the nine months ended September 30, 2000. The increase in gross margin
was due to the decrease in cost of sales as a percentage of revenues described
above.
Operating Expenses. Total operating expenses of $2,211.6 million for the nine
months ended September 30, 2001 increased $131.6 million from $2,080.0 million
for the nine months ended September 30, 2000. Excluding the impact of special
item charges, total operating expenses of $2,168.2 million for the nine months
ended September 30, 2001 increased $88.2 million, or 4.2%, from $2,080.0 million
for the nine months ended September 30, 2000. This increase was primarily due to
the net increase of 176 company-operated stores. Excluding the impact of special
item charges, total operating expenses as a percentage of total revenues were
57.1% for the nine months ended September 30, 2001 compared to 57.5% for the
nine months ended September 30, 2000. The decrease in total operating expenses,
excluding the impact of special item charges, resulted from the following:
Selling, General and Administrative Expense. Selling, general and
administrative expense, which includes expenses incurred at the store,
regional, and corporate levels, as a percentage of total revenues remained
consistent at 48.8% for both the nine months ended September 30, 2001 and
2000. Selling, general and administrative expense of $1,854.8 million for the
nine months ended September 30, 2001 increased $88.0 million, or 5.0%, from
$1,766.8 million for the nine months ended September 30, 2000. The dollar
increase for the nine months ended September 30, 2001 resulted from the
following items. Compensation increased $59.3 million primarily related to
additional personnel needed to support our store growth, increased customer
service initiatives and increased health insurance costs. Occupancy costs
increased $20.8 million primarily as a result of an increase in the number of
company-operated stores and leases that expired and were renewed at increased
rates. Selling and advertising expense increased $0.3 million primarily due to
increased expenses related to
17
our BLOCKBUSTER Rewards (R) program, which were partially offset by lower
spending on direct mail. Other corporate and store expenses increased $7.6
million due primarily to the growth of our business, including the increase in
the number of company-operated stores, and an increase in litigation expenses.
These increases were partially offset by a decrease in expenses associated
with blockbuster.com, primarily related to a reduction in consulting costs.
Depreciation Expense. Depreciation expense of $183.2 million for the nine
months ended September 30, 2001 increased $2.5 million as compared to $180.7
million for the nine months ended September 30, 2000. Excluding the impact of
special item charges, depreciation expense of $180.6 million for the nine
months ended September 30, 2001 decreased $0.1 million, or 0.1%, as compared
to $180.7 million for the nine months ended September 30, 2000. The decrease
was primarily attributable to the reduction of depreciation expense on certain
hardware and software associated with the e-commerce portion of
blockbuster.com that was written down in the fourth quarter of 2000. This
reduction was partially offset by depreciation expense related to the net
increase of 176 company-operated stores.
Interest Expense. Interest expense of $61.9 million for the nine months ended
September 30, 2001 decreased $26.1 million, or 29.7%, as compared to $88.0
million for the nine months ended September 30, 2000. The decrease in interest
expense was primarily due to lower average interest rates on our credit facility
and lower average debt outstanding.
Provision for Income Taxes. We recognized a benefit for income taxes of $69.5
million in the nine months ended September 30, 2001 as compared to a provision
of $40.7 million in the third quarter of 2000. The benefit for the third quarter
of 2001 includes a benefit of $129.8 million related to the impact of the change
in accounting estimates for rental library and special item charges. Excluding
the impact of the change in accounting estimates for rental library and special
item charges, we recognized a provision for income taxes of $60.3 million for
the nine months ended September 30, 2001 as compared to $40.7 million in the
nine months ended September 30, 2000. The 2001 and 2000 provisions reflect the
non-deductibility of goodwill amortization associated with Viacom's acquisition
of us in 1994. Additionally, we did not recognize a benefit for losses
recognized in certain foreign jurisdictions in our 2000 and 2001 tax provisions
as it is currently more likely than not that the benefit will not be realized.
The provision for income taxes excluding the impact of the change in accounting
estimates for rental library and special item charges increased primarily due to
higher earnings before taxes for both domestic and foreign operations. We review
our net operating losses on a country by country basis and may determine in the
future that some or all of the net operating losses generated in the past will
be utilized in the future, which would result in a reduction of the related
valuation allowance and an increase in net income.
Net Loss. The consolidated net loss of $235.8 million for the nine months
ended September 30, 2001 represents an increase in net loss of $184.5 million
from the nine months ended September 30, 2000. Excluding the impact of the
change in accounting estimates for our rental library and special item charges,
the consolidated net loss of $9.8 million in the third quarter of 2001 reflects
a decrease in net loss of $41.5 million from a net loss of $51.3 million in the
third quarter of 2000. This increase in net income was due to the changes
discussed above.
Liquidity and Capital Resources
Liquidity
We generate cash from operations predominantly from the rental and retail sale
of videocassettes, video games and DVDs and we have substantial operating cash
flow because most of our revenue is received in cash and cash equivalents. We
expect to fund our future anticipated cash requirements, including the
anticipated cash requirements for capital expenditures, joint ventures,
commitments and payments of principal and interest on any borrowings, with
internally generated funds, as well as with funds available under our credit
facility. We believe that these two sources of funds will provide us with
adequate liquidity and capital necessary for the next twelve months. However, we
may seek to issue debt and/or equity securities in the future to the extent we
determine that the issuance of securities would serve to maximize our capital
structure or would otherwise be advantageous to our company.
18
In October 1998, BLOCKBUSTER MUSIC stores were sold to Wherehouse
Entertainment Inc. Some of the leases transferred in connection with this sale
had previously been guaranteed either by Viacom or its affiliates. The remaining
terms of these leases expire on various dates through 2007. We have agreed to
indemnify Viacom with respect to any amount paid under these guarantees. At the
time of the sale, the contingent liability for base rent was about $84 million
on an undiscounted basis, with respect to these guarantees. We have not
recognized any reserves related to this contingent liability. If Wherehouse
defaults, related payments are expected to be funded from operating cash flow.
Related losses due to default could materially affect future operating income.
Capital Structure
On June 21, 1999, we entered into a $1.9 billion unsecured credit agreement
with a syndicate of banks. The credit agreement was initially comprised of a
$700 million long-term revolver due July 1, 2004; a $600 million term loan due
in quarterly installments beginning April 1, 2002 and ending July 1, 2004; and a
$600 million short-term revolver, which was paid down during 2000. The repayment
of the short-term revolver permanently reduced the borrowing capacity under the
credit agreement from $1.9 billion to $1.3 billion. We had $455.0 million of
available borrowing capacity under the long-term revolver at September 30, 2001.
Interest rates under the credit agreement are based on the prime rate in the
United States or LIBOR (plus a margin, or "LIBOR spread," based on leverage
ratios, which is currently 1.25%), at our option at the time of borrowing. The
weighted-average interest rate at September 30, 2001 for borrowings under the
credit agreement was 5.0%. A variable commitment fee based on the total leverage
ratio is charged on the unused amount of the revolver (0.25% at September 30,
2001).
The credit agreement contains certain restrictive covenants, which, among
other things, relate to the payment of dividends, repurchase of our common stock
or other distributions and also require compliance with certain financial
covenants with respect to a maximum leverage ratio and a minimum fixed charge
coverage ratio. At September 30, 2001, we were in compliance with all financial
covenants under the credit agreement.
In March 2001, we entered into two interest rate swaps with Viacom in order to
obtain a fixed interest rate with respect to $400 million of our outstanding
floating rate debt under our credit agreement, and thereby reduce our exposure
to interest rate volatility. The swaps fixed $200 million of our outstanding
debt at an interest rate of 5.01% for two years and the other $200 million at an
interest rate of 5.12% for two and one-half years. Our effective interest rates
also include the LIBOR spread payable under our credit facility. Including the
effect of the LIBOR spread, the effective interest rates of the swaps are
currently 6.26% and 6.37%, respectively. The swaps are subject to termination in
the event that (i) Viacom ceases to own greater than 80% of our outstanding
common stock or (ii) we no longer have any obligations under the term loan
portion of our credit agreement. The interest rate swaps qualify as fully
effective, cash-flow hedging instruments under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by Statements 137 and
138. Therefore, the gain or loss of the qualifying cash flow hedge is reported
in other comprehensive income (loss) and reclassified into earnings in the same
period in which the hedged transaction affects earnings.
The following table sets forth our current portion of long-term debt:
At December 31, At September 30,
2000 2001
----- ------
Current maturities of term loan.............................................. -- 100.0
Current maturities of equipment term loan.................................... 6.7 7.1
Current maturities of all other obligations.................................. 1.3 6.5
----- ------
Total current portion of long-term debt...................................... $ 8.0 $113.6
===== ======
19
The following table sets forth our long-term debt, less current portion:
At December 31, At September 30,
2000 2001
---- ----
Term loan, interest rate 7.9% and 5.0% at December 31, 2000 and
September 30, 2001, respectively, due in quarterly installments beginning
April 2002................................................................. $ 600.0 $ 500.0
Long-term revolving credit facility, interest rate 8.0% and 5.1% at December
31, 2000 and September 30, 2001, respectively, due July 2004................ 422.0 245.0
Equipment term loan, interest rate of 8.0% payable monthly through April
2005, secured by certain equipment.......................................... 15.5 10.2
All other obligations........................................................ 1.5 --
-------- -------
Total long-term debt, less current portion................................... $1,039.0 $ 755.2
======== =======
Consolidated Cash Flows
Operating Activities. Net cash flows from operating activities decreased $34.9
million, or 4.6%, from $766.8 million for the nine months ended September 30,
2000 to $731.9 million for the nine months ended September 30, 2001. Excluding
the impacts of the change in accounting estimates and special item charges, the
most significant reason for the decrease in cash flows from operating activities
was the $164.0 million difference in the decrease in accounts payable from a
$77.0 million decrease for the nine months ended September 30, 2000 to a $241.0
million decrease for the nine months ended September 30, 2001, mainly due to the
timing of payments. The decrease in cash flows provided by the decrease in
merchandise inventories of $55.3 million, from $63.1 million for the nine months
ended September 30, 2000 to $7.8 million for the nine months ended September 30,
2001 also contributed to the decrease in cash flows from operating activities.
These decreases were partially offset by an improvement in income before
depreciation and amortization, excluding the impacts of the change in accounting
estimates and special item charges, of $170.0 million.
Investing Activities. Net cash used in investing activities decreased $99.6
million from $715.5 million for the nine months ended September 30, 2000 to
$615.9 million in the nine months ended September 30, 2001. This decrease was
due to an $82.7 million decrease in capital expenditures and a $33.7 million
decrease in cash used for acquisitions. The decrease in capital expenditures
was primarily due to fewer new store openings and lower expenditures related to
initiatives associated with blockbuster.com in the nine months ended September
30, 2001 as compared to the nine months ended September 30, 2000. The decrease
in cash used for acquisitions was due to the fact that we did not have any
acquisitions in the nine months ended September 30, 2001.
Financing Activities. Net cash used in financing activities increased $159.2
million from $39.1 million for the nine months ended September 30, 2000 to
$198.3 million for the nine months ended September 30, 2001. This increase was
primarily due to a net pay-down of long-term debt under our credit facility of
$172.0 million for the nine months ended September 30, 2001 as compared to a net
pay-down of $25.0 million in long-term debt under our credit facility in the
nine months ended September 30, 2000, as we utilized our positive free cash flow
to pay down our debt.
Other Financial Measurements: Working Capital
At September 30, 2001, we had cash and cash equivalents of $110.0 million.
Working capital, however, reflected a deficit of $298.6 million due to the
accounting treatment of our rental library. Our rental library is accounted for
as a non-current asset and is excluded from the computation of working capital.
Liabilities associated with the acquisition costs of rental product, however,
are reported as current liabilities and, accordingly, are included in the
computation of working capital. Consequently, we believe working capital is not
as significant a measure of financial condition for companies in the home video
industry as it is for companies in some other industries. Because of this
accounting treatment, we may, from time to time, operate with a working capital
deficit.
Disclosure Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts and include, without limitation, statements relating
to: our re-merchandising plan and the anticipated financial impact of the plan;
our expectations regarding liquidity, including our anticipated needs for, and
sources of, funds; our plans for managing exposure to interest and currency
exchange rate
20
fluctuations; and our expectations and intentions relating to outstanding
litigation. Our forward-looking statements are based on management's current
intent, belief, expectations, estimates and projections regarding our company
and our industry. Forward-looking statements are not guarantees of future
performance and involve risks, uncertainties, assumptions and other factors that
could cause actual results to vary materially from what is expressed in or
indicated by such forward-looking statements. These factors include, among
others: our ability to effectively execute our re-merchandising plan and
consumer response to the re-merchandising; consumer demand for newly released
DVD and VHS rental product and other Blockbuster product and service offerings;
our ability to reach agreements with studios on acceptable commercial terms; the
impact of competitive product and service offerings and pricing; the degree of
future currency and interest rate fluctuations; the impact of unknown or
unforeseen developments affecting our outstanding litigation; and other factors,
as set forth under the heading "Cautionary Statements" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2000. We undertake no
obligation to update publicly any forward-looking statement for any reason, even
if new information becomes available or other events occur in the future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks including interest rates on our debt
and foreign exchange rates. In the normal course of business we employ
established policies and procedures to manage these risks.
Interest Rate Risk
Total outstanding borrowings under our credit agreement at September 30, 2001
were $845.0 million. Interest rates for the credit agreement are based on the
prime rate in the United States or LIBOR (plus a margin or "LIBOR spread," based
on leverage ratios, which is currently 1.25%) at our option at the time of
borrowing. The weighted-average interest rate at September 30, 2001 for these
borrowings was 5.0%.
In March 2001, we entered into two interest rate swaps with Viacom in order to
obtain a fixed interest rate with respect to $400 million of our outstanding
floating rate debt under our credit agreement, and thereby reduce our exposure
to interest rate volatility. The swaps fixed $200 million of our outstanding
debt at an interest rate of 5.01% for two years and the other $200 million at an
interest rate of 5.12% for two and one-half years. Our effective interest rates
also include the LIBOR spread payable under our credit facility. Including the
effect of the LIBOR spread, the effective interest rates of the swaps are
currently 6.26% and 6.37%, respectively. The swaps are subject to termination in
the event that (i) Viacom ceases to own greater than 80% of our outstanding
common stock or (ii) we no longer have any obligations under the term loan
portion of our credit agreement. We are primarily vulnerable to changes in
LIBOR, however, we do not believe this exposure to be material. A one percentage
point increase or decrease in LIBOR would affect our annual interest expense by
approximately $4.5 million.
Foreign Exchange Risk
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically also reflect economic
growth, inflation, interest rates, government actions and other factors. As
currency exchange rates fluctuate, translation of the statements of operations
of our international businesses into U.S. dollars may affect year-over-year
comparability and could cause us to adjust our financing and operating
strategies.
On January 1, 1999, eleven member countries of the European Union established
fixed conversion rates between their existing, or local, currencies and one
common currency, the Euro. The transition period for the introduction of the
Euro began January 1, 1999 and will continue until June 30, 2002. The Euro
trades on currency exchanges and may be used in business transactions.
Conversion to the Euro eliminates currency exchange risk between the
participating member countries.
Numerous issues are raised by the Euro currency conversion including the need
to adapt computer and financial systems and business processes and equipment.
Due to these uncertainties, we cannot reasonably estimate the long-term effects
one common currency may have on pricing, costs, and the resulting impact,
21
if any, on our financial condition or results of operations. However, we believe
that we have taken and will continue to take appropriate steps to assess and
address Euro conversion issues and currently do not expect that our business
will be adversely affected by such conversion in any material respect.
Our operations outside the United States constituted 20.1% and 19.7% of our
total revenues for the three and nine months ended September 30, 2001,
respectively. Our operations in Europe constituted 9.7% of our total revenues
for both the three and nine months ended September 30, 2001. The majority of
these sales are from Great Britain, which has not adopted the Euro.
Recent Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. We are required to implement SFAS 141 for business
combinations entered into on or after July 1, 2001.
On June 29, 2001, the FASB also approved SFAS 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Amortization of
goodwill and intangible assets with indefinite lives, including such assets
recorded in past business combinations, will cease upon adoption of this
statement. On an annual basis, and when there is reason to believe that their
values have been diminished or impaired, these assets must be tested for
impairment, and a write-down may be necessary. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives. We
are required to implement SFAS 142 on January 1, 2002 and we have not determined
the impact that this statement will have on our consolidated financial position
or results of operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), effective for fiscal years beginning after December 15, 2001 and replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of". SFAS 144 establishes an accounting model for
long-lived assets to be disposed of by sale, including discontinued operations,
and replaces the provisions of APB Opinion No. 30 for the disposal of segments
of a business. The adoption of SFAS 144 will not have a material effect on our
financial statements.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Blockbuster's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 and its Form 10-Q for the quarterly period ended March
31, 2001, a lawsuit is pending against Blockbuster in the United States District
Court for the Western District of Texas that includes federal antitrust and
California state law claims regarding its revenue sharing arrangements, and a
similar lawsuit is also pending in California state court. The California state
court plaintiffs are now seeking class certification. In addition to any damage
award to which Blockbuster might be directly subject, if Viacom is required to
pay any damage award as a result of the federal or state court action, Viacom
may seek indemnification for its losses from Blockbuster under the release and
indemnification agreement entered into between Viacom and Blockbuster.
Blockbuster believes the plaintiffs' positions in both actions are without merit
and intends to vigorously defend itself in the litigation.
As discussed in Blockbuster's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 and its Form 10-Q for the quarterly period ended March
31, 2001, on May 7, 1999, Lynn Adams, Khristine Schoggins, and Debbie Lenke,
purporting to act as class representatives on behalf of themselves and for a
class comprised of certain Blockbuster store managers who worked in California,
filed a complaint in District Court in Orange County, California against
Blockbuster. The plaintiffs claim that they should be classified as non-exempt
and are thus owed overtime payments under California law. The dollar amount that
plaintiffs seek as damages to themselves and those similarly situated is not set
forth in the complaint. In January 2001, the trial court judge certified a
class. Blockbuster reached a preliminary settlement in this case and, on October
1, 2001, the court preliminarily approved the parties' proposed settlement
agreement, which provides for a California state class and does not admit
liability by any party. Under the proposed settlement, the maximum settlement
amount Blockbuster would be required to pay would be $12 million. Final approval
of the proposed settlement is subject to a final court order. Blockbuster
believes the plaintiffs' position in this case is without merit and, if the
settlement is not approved, Blockbuster intends to vigorously defend itself in
any litigation.
As discussed in Blockbuster's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 and its Forms 10-Q for the quarterly periods ended March
31, 2001, and June 30, 2001, Blockbuster is a defendant in 23 putative class
action lawsuits filed by customers in state courts in Illinois, California,
Ohio, Maryland, Texas, New York, New Jersey, Delaware, Massachusetts,
Washington, D.C., Florida and Pennsylvania between February 1999 and August
2001. These cases allege common law and statutory claims for fraud and/or
deceptive practices and/or unlawful business practices regarding Blockbuster's
policies for customers who choose to keep rental product beyond the prepaid
initial rental period. Some of the cases also allege that these policies impose
unlawful penalties and/or result in unjust enrichment. The dollar amounts that
plaintiffs seek as damages to themselves and those similarly situated are not
set forth in the complaints. Blockbuster reached a preliminary settlement in two
of the Texas cases, and on April 11, 2001, a Texas state court preliminarily
approved the parties' proposed settlement agreement, which provides for a
national settlement class and does not admit liability. The Texas court signed
an order approving an addendum to the settlement agreement on May 30, 2001.
Under the proposed settlement, Blockbuster would make certificates available to
class members for rentals and discounts and would pay up to $9.25 million in
attorneys' fees in connection with the settlement. Confirmation of a settlement
is subject to a final court order. Blockbuster has the right to rescind the
settlement agreement if more than 3,000 class members exclude themselves from
the settlement. Either party will have the right to terminate the settlement
agreement if (i) the court does not approve a settlement after the fairness
hearing or (ii) the court does approve a settlement, but enters a final order
that is not substantially in the form submitted to it, including changes to the
order relating to the payment of attorneys' fees. Several parties intervened in
the Texas state court action and appealed the court's preliminary approval of
the settlement. On April 23, 2001, an Illinois state court denied Blockbuster's
motion to stay the case based on the settlement in Texas. On April 25, 2001, the
same Illinois state court entered a provisional order, subject to further review
and final determination, certifying plaintiff and defendant classes in order
that putative class counsel in Illinois
23
would have an opportunity to be heard regarding the national class settlement.
On September 13, 2001, the Illinois Supreme Court denied Blockbuster's petition
for leave to appeal the Illinois trial court's denial of the motion to stay.
Blockbuster believes the plaintiffs' positions in these cases are without merit
and, if the settlement reached in Texas is not approved, Blockbuster intends to
vigorously defend itself in any litigation.
Blockbuster is subject to various other legal proceedings in the course of
conducting its business, including its business as a franchisor. However, we
believe that these proceedings are not likely to result in judgments that will
have a material adverse effect on our business.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of
Blockbuster Inc. (1)
3.2 Bylaws of Blockbuster Inc. (2)
4.1 Specimen Class A Common Stock Certificate of Blockbuster
Inc. (3)
________
(1) Previously filed as an exhibit to Blockbuster Inc.'s Registration Statement
on Form S-1 (File No. 333-77899) and incorporated herein by reference.
(2) Previously filed as an exhibit to Blockbuster Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1999, and incorporated herein
by reference.
(3) Previously filed as an exhibit to Blockbuster Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999, and
incorporated herein by reference.
(b) Reports on Form 8-K
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Blockbuster Inc.
By: /s/ Larry J. Zine
------------------------------------------------
Larry J. Zine
Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
(on behalf of the Registrant and in his
capacity as principal financial officer)
Date: November 14, 2001
25
INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of Blockbuster
Inc. (1)
3.2 Bylaws of Blockbuster Inc. (2)
4.1 Specimen Class A Common Stock Certificate of Blockbuster Inc. (3)
________
(1) Previously filed as an exhibit to Blockbuster Inc.'s Registration Statement
on Form S-1 (File No. 333-77899) and incorporated herein by reference.
(2) Previously filed as an exhibit to Blockbuster Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1999, and incorporated herein
by reference.
(3) Previously filed as an exhibit to Blockbuster Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999, and
incorporated herein by reference.