<PAGE>
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 June 30, 2000
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 August 10, 2000:
Class A common stock, par value $.01 per share: 31,011,114
Class B common stock, par value $.01 per share: 144,000,000
<PAGE>
BLOCKBUSTER INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION
<S> <C>
Page
-----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited)--for the Three Months and Six Months ended
June 30, 1999 and June 30, 2000..................................................................... 3
Consolidated Balance Sheets--at December 31, 1999 and June 30, 2000 (Unaudited)....................... 4
Consolidated Statements of Cash Flows (Unaudited)--for the Six Months ended June 30,
1999 and June 30, 2000.............................................................................. 5
Notes to Consolidated Financial Statements (Unaudited)................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 23
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders............................................. 24
Item 6. Exhibits and Reports on Form 8-K................................................................ 25
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues............................................... $ 887.3 $1,029.4 $1,839.3 $2,053.8
Merchandise sales............................................. 131.6 162.0 274.6 332.5
Other revenues................................................ 22.8 23.0 40.8 39.2
-------- -------- -------- --------
1,041.7 1,214.4 2,154.7 2,425.5
Cost of sales:
Cost of rental revenues....................................... 299.2 372.4 626.2 733.1
Cost of merchandise sold...................................... 97.2 129.0 212.0 264.7
-------- -------- -------- --------
396.4 501.4 838.2 997.8
-------- -------- -------- --------
Gross profit.................................................. 645.3 713.0 1,316.5 1,427.7
-------- -------- -------- --------
Operating expenses:
General and administrative.................................... 480.1 535.8 952.2 1,048.6
Advertising................................................... 64.0 64.0 119.7 115.6
Depreciation.................................................. 54.5 62.2 106.3 123.3
Amortization of intangibles................................... 42.5 44.0 85.5 88.5
-------- -------- -------- --------
641.1 706.0 1,263.7 1,376.0
-------- -------- -------- --------
Operating income.................................................. 4.2 7.0 52.8 51.7
Interest expense.............................................. (30.7) (29.6) (59.9) (59.0)
Interest income............................................... 0.5 1.9 1.1 3.6
Other items, net.............................................. (0.2) 2.1 (0.2) 2.1
-------- -------- -------- --------
Loss before income taxes.......................................... (26.2) (18.6) (6.2) (1.6)
Provision for income taxes.................................... (11.3) (8.9) (34.7) (30.6)
Equity in income (loss) of affiliated companies, net of tax... (2.4) (0.4) (2.4) 0.2
-------- -------- -------- --------
Net loss.......................................................... $ (39.9) $ (27.9) $ (43.3) $ (32.0)
======== ======== ======== ========
Net loss per share:
Basic and diluted............................................. $ (0.28) $ (0.16) $ (0.30) $ (0.18)
======== ======== ======== ========
Weighted average shares outstanding:
Basic and diluted............................................. 144.0 175.0 144.0 175.0
======== ======== ======== ========
Cash dividends per common share................................... $ - $ 0.02 $ - $ 0.04
======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
BLOCKBUSTER INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
December 31, June 30,
1999 2000
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................................................... $ 119.6 $ 147.6
Receivables, less allowances of $11.4 (1999) and $9.7 (2000)..................... 130.8 152.9
Merchandise inventories........................................................... 281.3 212.7
Prepaid assets and other current assets........................................... 180.9 189.3
-------- --------
Total current assets........................................................... 712.6 702.5
Rental library 577.6 604.8
Tax receivable from Viacom.......................................................... 41.1 78.8
Property and equipment, net......................................................... 1,148.3 1,098.1
Intangibles, net.................................................................... 5,975.9 5,905.6
Other assets........................................................................ 85.3 76.8
-------- --------
$8,540.8 $8,466.6
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................................. $ 499.4 $ 455.0
Accrued expenses.................................................................. 422.5 385.4
Current portion of long-term debt................................................. 157.1 143.6
Current portion of capital lease obligations...................................... 29.7 30.1
Deferred taxes.................................................................... 22.7 21.2
-------- --------
Total current liabilities...................................................... 1,131.4 1,035.3
Long-term debt, less current portion................................................ 1,030.0 1,058.8
Capital lease obligations, less current portion..................................... 108.4 93.7
Deferred taxes...................................................................... 72.3 137.7
Other liabilities................................................................... 73.7 78.6
-------- --------
2,415.8 2,404.1
-------- --------
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 shares issued and outstanding.............................................. 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........................................................ 6,180.3 6,173.4
Retained deficit.................................................................. (10.9) (42.9)
Accumulated other comprehensive loss - foreign currency translation adjustment... (46.1) (69.7)
-------- --------
Total stockholders' equity..................................................... 6,125.0 6,062.5
-------- --------
$8,540.8 $8,466.6
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended June 30,
------------------------------
1999 2000
--------- -------
Cash flows from operating activities:
Net loss......................................................................... $ (43.3) $ (32.0)
Adjustments to reconcile net loss to net cash flow provided
by operating activities:
Depreciation and amortization................................................. 532.9 561.9
Deferred taxes................................................................ 63.6 63.9
Equity in (income) loss of affiliated companies, net of tax................... 2.4 (0.2)
Gain on sales of store operations, net........................................ (6.0) (1.7)
Gain on sale of non-core investment........................................... - (1.9)
Change in operating assets and liabilities:
(Increase) decrease in receivables............................................ 7.1 (23.1)
Increase in tax receivable from Viacom........................................ - (37.7)
Decrease in merchandise inventories........................................... 30.2 66.0
Increase in prepaid and other current assets and other assets................. (17.1) 2.3
Decrease in accounts payable.................................................. (155.3) (39.0)
Increase (decrease) in accrued expenses and other liabilities................. 21.1 (26.2)
--------- -------
Net cash flow provided by operating activities..................................... 435.6 532.3
--------- -------
Cash flows from investing activities:
Rental library purchases......................................................... (355.9) (381.0)
Capital expenditures............................................................. (159.6) (81.5)
Cash used for acquisitions....................................................... (93.9) (33.2)
Proceeds from sales of store operations.......................................... 14.2 4.8
Proceeds from sale of non-core investment........................................ - 7.1
Investments in affiliated companies.............................................. (0.8) (4.0)
--------- -------
Net cash flow used in investing activities......................................... (596.0) (487.8)
--------- -------
Cash flows from financing activities:
Proceeds from credit agreement................................................... 1,600.0 61.0
Repayments on credit agreement................................................... - (71.0)
Proceeds from equipment term loan................................................ - 26.5
Repayments on equipment term loan................................................ - (1.2)
Repayment of notes due to Viacom................................................. (1,576.4) -
Cash dividends................................................................... - (7.0)
Capital lease payments........................................................... (19.0) (23.2)
Capital contributions from Viacom, net........................................... 148.6 -
--------- -------
Net cash flow provided by (used in) financing activities........................... 153.2 (14.9)
--------- -------
Effect of exchange rate changes on cash............................................ (0.7) (1.6)
--------- -------
Net increase (decrease) in cash and cash equivalents............................... (7.9) 28.0
Cash and cash equivalents at beginning of period................................... 99.0 119.6
--------- -------
Cash and cash equivalents at end of period......................................... $ 91.1 $ 147.6
========= =======
Supplemental cash flow information:
Cash payments for interest.................................................. $ 52.4 $ 49.9
========= =======
Noncash investing and financing activities:
Property and equipment acquired under capitalized leases................... $ 5.2 $ 9.0
========= =======
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
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 videocassette rental and sales stores in the United States
and a number of other countries. The Company offers pre-recorded videocassettes
primarily for rental and also offers titles for purchase on a "sell-through"
(retail) basis. In addition, the Company offers DVDs and video games for rental
and sale and sells certain other entertainment-related merchandise.
The consolidated financial statements for the periods prior to the
Company's initial public offering (the "Offering") are presented on a carve-out
basis and reflect the historical results of operations, financial position and
cash flows of the Company, including entities owned by Blockbuster or purchased
from affiliates of Viacom Inc. ("Viacom") in the case of certain of its
international operations. In this context, no historical direct ownership
relationship existed among some of the various entities comprising Blockbuster
prior to the Offering; accordingly, Viacom and its subsidiaries' net investment
in Blockbuster was included in Viacom's net equity investment in the
consolidated financial statements prior to the Offering.
As a part of the reorganization transactions (discussed below), the Company
purchased stock and/or assets from affiliates of Viacom with cash funded by a
bank credit agreement or contributed by Viacom in order to acquire certain
international operations of the Company. Advances from Viacom to Blockbuster to
fund these operations were historically treated as intercompany notes in the
consolidated financial statements. The difference between the recorded
intercompany notes payable to Viacom and the ultimate amount of the purchase
price for the stock or assets of these operations was recognized as an
adjustment to stockholders' equity.
For all periods prior to the Offering, certain expenses reflected in the
consolidated financial statements include an allocation of corporate expenses
from Viacom. All such costs and expenses have been deemed to have been paid by
the Company to Viacom in the period in which the costs were recorded.
Allocations of current income taxes receivable or payable are deemed to have
been remitted, in cash, by or to Viacom in the period the related income taxes
were recorded. Management believes that the foregoing allocations were made on
a reasonable basis; however, the allocations of costs and expenses do not
necessarily indicate the costs that would have been or will be incurred by the
Company on a stand-alone basis. Also, the consolidated financial statements for
the periods prior to the Offering may not necessarily reflect the financial
position, results of operations and cash flows of the Company in the future or
what the financial position, results of operations or cash flows would have been
if the Company had been a separate, stand-alone company during the periods
presented.
Prior to the Offering, the following transactions were completed: (1) in
late 1998, numerous U.S. subsidiaries of Viacom International Inc., a wholly
owned subsidiary of Viacom, each of which were directly or indirectly involved
in the Company's operations, were merged with and into the Company, (2) on
December 31, 1998, the Company declared a $1.4 billion dividend payable to
Viacom International Inc. which was reflected as an interest-bearing note in the
December 31, 1998 consolidated balance sheet, (3) effective June 21, 1999, the
Company entered into a term and revolving credit agreement with a syndicate of
lenders which was used to repay debt owed to Viacom and to pay a portion of the
purchase price to acquire certain international operations from affiliates of
Viacom, (4) effective on or about June 23, 1999, the Company purchased certain
international operations of the Company from affiliates of Viacom, (5) effective
August 3, 1999, the Company was recapitalized with class A common stock and
class B common stock of which 144,000,000 shares of class B common stock were
simultaneously issued to Viacom International Inc. in exchange for 100 shares of
common stock of the Company (which represented all of the issued and outstanding
common stock of the Company at that time) and, (6) effective on the Offering
date, Blockbuster's intercompany cash transactions with Viacom were capitalized
into Viacom's net equity investment.
On August 10, 1999 the Company sold to the public 31 million shares of
class A common stock for $15 per share. Proceeds from the Offering aggregated
$430.1 million, net of underwriting discounts and commissions of $22.1 million
and Offering expenses of $12.8 million. Of the gross proceeds from the Offering,
$442.9 million was used to pay down the short-term revolver due December 14,
2000 as discussed in Note 5, and permanently reduced the Company's borrowing
capacity. Subsequent to the Offering, through Viacom International Inc.'s
ownership of 100 percent of the Company's class B common stock, Viacom owns
approximately 82 percent of the Company's common stock representing
approximately 96 percent of the combined voting power of all classes of voting
stock of
6
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Blockbuster. The holders of class A and class B common stock generally have
identical rights, except that holders of class A common stock are entitled to
one vote per share while holders of class B common stock are entitled to five
votes per share on matters to be voted on by stockholders.
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, 1999, included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission (the "SEC") on
March 24, 2000. 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.
Net Loss Per Share
Basic loss per share has been computed using the weighted average number of
shares of common stock of the Company (inclusive of class A and class B common
stock) outstanding for each period presented. Any dilutive effect of stock
options is included in the calculation of diluted earnings per share using the
treasury stock method.
The calculation of basic and diluted loss per share is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 2000 1999 2000
------ ------ ------ ------
Basic and diluted loss per share:
Net loss................................................ $(39.9) $(27.9) $(43.3) $(32.0)
Weighted average common shares outstanding (1) (2)...... 144.0 175.0 144.0 175.0
------ ------ ------ ------
Basic and diluted loss per share........................ $(0.28) $(0.16) $(0.30) $(0.18)
====== ====== ====== ======
</TABLE>
(1) Effective August 3, 1999, as discussed in Note 1, the Company was
recapitalized to provide for class A common stock and class B common stock.
In accordance with SEC Staff Accounting Bulletin No. 98, the capitalization
of class B common stock has been retroactively reflected for the purpose of
presenting net loss per share for the periods prior to the Offering.
(2) Options to purchase approximately 9,785,000 shares of class A common stock
were outstanding at June 30, 2000, but were not included in the computation
of diluted loss per share because the exercise prices of the options were
greater than the average market price of the Company's class A common stock
during the respective periods and any exercise would be anti-dilutive. No
Blockbuster options were outstanding prior to the Offering.
7
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Comprehensive Loss
Comprehensive loss for the three months and six months ended June 30 was as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 2000 1999 2000
------ ------ ------ ------
Net loss...................................................... $(39.9) $(27.9) $(43.3) $(32.0)
Foreign currency translation adjustment....................... 10.2 (23.2) 6.5 (23.6)
------ ------ ------ ------
Total comprehensive loss...................................... $(29.7) $(51.1) $(36.8) $(55.6)
====== ====== ====== ======
</TABLE>
Note 2--Related Party Transactions
Effective with the Offering, Blockbuster and Viacom entered into a
transition services agreement whereby Viacom is providing the Company with cash
management, accounting, management information systems, legal, financial and tax
services as well as employee benefit plan and insurance administration, as
needed. These services may change upon agreement between Viacom and the Company.
The fee for these services approximates Viacom's cost and could be subject to
adjustment. The Company has agreed to pay or reimburse Viacom for any out-of-
pocket payments, costs and expenses associated with these services. The services
agreement expires upon the closing of a split-off or similar transaction. Prior
to the Offering, the allocation of these expenses was generally based on actual
costs incurred by Viacom. The charges for such services for the three and six
months ended June 30, 1999 were $3.3 million and $6.4 million, respectively.
Management believes that the methodologies used to allocate the charges were
reasonable, however, these allocations of costs and expenses do not necessarily
indicate the cash and expenses that would have been or will be incurred by the
Company on a stand-alone basis.
Prior to the Offering, Viacom paid certain insurance premiums on behalf of
the Company for certain workers compensation, property, general liability and
group insurance policies. Insurance expense related to these policies for the
three and six months ended June 30, 1999 was $3.5 million and $7.1 million,
respectively, and is reflected as a component of general and administrative
expenses in the Consolidated Statements of Operations.
Viacom has a noncontributory defined benefit pension plan in which the
Company's employees were covered through December 31, 1999. Retirement benefits
were based principally on years of service and salary. Effective January 1,
2000, Blockbuster ceased to be a participating employer in Viacom's pension
plan. The Company's employees were also offered participation in Viacom's
401(k) savings plan through April 1999. At that time the Company set up its own
401(k) savings plan that generally mirrors the Viacom 401(k) savings plan.
Account balances in the Viacom plan were transferred to the new Blockbuster
401(k) savings plan. Through June 30, 2000, the Company invested matching
contributions in Viacom's class B common stock. Viacom charged the Company $1.5
million and $2.7 million for pension and 401(k) savings plan expenses for the
three and six months ended June 30, 1999, respectively. Viacom charged the
Company $0.6 million and $1.5 million for 401(k) savings plan expenses for the
three and six months ended June 30, 2000, respectively.
Viacom generally has not charged the Company interest on intercompany
balances except for intercompany debt associated with certain foreign
operations, the note associated with the $1.4 billion dividend payable to Viacom
International Inc. and the notes associated with the acquisition of franchise
operations discussed in Note 3. The notes payable to Viacom were refinanced on
June 23, 1999 with a third party credit agreement as more fully discussed in
Note 5. Interest expense related to intercompany debt was $24.3 million and
$49.1 million for the three and six months ended June 30, 1999, respectively.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom. The Company
purchases certain videocassettes for rental and sale directly from an affiliate
of Paramount Pictures Corporation. Total purchases were $19.5 million and $52.9
million for the three months ended June 30, 1999 and 2000, respectively, and
$33.5 million and $89.4 million for the six months ended June 30, 1999 and 2000,
respectively. The Company also purchases certain home video games from Midway
Games, Inc.
8
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Total amounts paid for purchases were $5.6 million and $0.8 million for the
three months ended June 30, 1999 and 2000, respectively, and $9.8 million and
$1.8 million for the six months ended June 30, 1999 and 2000, respectively.
The Company entered into a U.S. promotional and customer database services
and licenses agreement with MTV Networks ("MTVN"), a business unit of Viacom.
Pursuant to this agreement for one year, Blockbuster agreed to provide certain
promotional and database services to MTVN and granted a U.S. license to MTVN to
use the Company's U.S. customer database internally and/or sublicense the
database for internal use to affiliates of MTVN that are direct or indirect
wholly-owned subsidiaries of Viacom and to MTVi Group, L.P. and its direct and
indirect affiliates for internal use. In return, MTVN paid Blockbuster $18
million. MTVN had an option to pay an additional $5 million to extend in
perpetuity the license to use the customer database. MTVN elected not to
exercise this option subsequent to June 30, 2000. Blockbuster has previously
recognized revenue from this transaction over the estimated useful life of the
agreement, which was expected to exceed one year. As the option was not
exercised, the remaining deferred revenue will be recognized in the third
quarter of 2000.
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--Notes Payable to Viacom
On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom International Inc. in the form of an interest-
bearing promissory note. On January 24, 1999, Blockbuster acquired 69 stores
from a franchisee, which was funded with the proceeds of two notes payable to
Viacom, which approximated $77 million. These notes bore interest at LIBOR plus
1% and were repaid with proceeds from the Company's new credit agreement on or
about June 23, 1999 as discussed in Note 5.
On or about June 23, 1999, the Company purchased certain of its
international operations from affiliates of Viacom. The total amount paid for
the international operations was $222 million. Approximately $65 million of
funds were provided under the Company's new credit agreement, as discussed in
Note 5. The remaining $157 million was paid with cash from Viacom and was
recognized as a capital contribution by Viacom during the second quarter of
1999.
Note 4--Disposition
On May 4, 2000, the Company completed the sale of Golf & Games, an
amusement and theme park located in Florida, for approximately $7.1 million in
cash. The Company recorded a pre-tax gain of $1.9 million from the sale. This
gain is reflected as a component of Other items, net in the Consolidated
Statement of Operations for the three and six months ended June 30, 2000.
Note 5--Credit and Debt Agreements
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 is comprised of a $700 million long-term revolver
due July 1, 2004 and a $600 million term loan due in quarterly installments
beginning April 1, 2002 and ending July 1, 2004. The Blockbuster Credit
Agreement also includes a $600 million short-term revolver, which was reduced
with proceeds from the Offering, and was originally due on June 19, 2000. The
Blockbuster Credit Agreement was amended during the second quarter of 2000 by
extending the due date of the short-term revolver to the earlier of (i) December
14, 2000, or (ii) the date that Blockbuster is no longer a subsidiary of Viacom.
Interest rates under the Blockbuster Credit Agreement are based on the prime
rate or LIBOR at Blockbuster's option at the time of borrowing. A variable
commitment fee based on the total leverage ratio is charged on the unused amount
of the revolver (.25% at June 30, 2000). Blockbuster expects to fund the
repayment of the short-term revolver by using either internally generated cash
or various external sources,
9
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
including additional borrowings under the long-term revolver, an amendment to
the Blockbuster Credit Agreement, or the issuance of debt securities.
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 June 30, 2000, the Company was in
compliance with all financial covenants under the Blockbuster Credit Agreement.
On June 23, 1999, Blockbuster borrowed $1.6 billion, comprised of $400
million borrowed under the long-term revolver, $600 million borrowed under the
term loan, and $600 million borrowed under the short-term revolver. The proceeds
of the borrowings were used to pay amounts owed to Viacom. Blockbuster repaid
$442.9 million of the short-term revolver through proceeds from the Offering.
The Company repaid an additional $20.0 million of the short-term revolver during
the second quarter of 2000. These payments permanently reduced Blockbuster's
capacity under the Blockbuster Credit Agreement from $1.9 billion to
approximately $1.44 billion, by reducing the borrowing capacity under the short-
term revolver to $137.1 million. As of June 30, 2000, the Company had $137.1
million outstanding under the short-term revolver. The Company had $260.0
million of available borrowing capacity under the long-term revolver at June 30,
2000. The weighted average interest rate at June 30, 2000 for these borrowings
was 7.9%.
Blockbuster entered into two additional lines of credit with banks for an
aggregate of $75.0 million in the fourth quarter of 1999. There were no
outstanding amounts under these two lines of credit at June 30, 2000.
In April 2000, the Company borrowed $26.5 million in order to finance the
purchase of certain equipment. The financing bears interest at 8.0%, is payable
in monthly installments through April 2005, and is secured by a lien on the
equipment. As of June 30, 2000, the Company had $25.3 million outstanding on
this note.
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 terms of these leases 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.
Pursuant to a tax matters agreement entered into between the Company and
Viacom effective as of the consummation of the Offering, the Company is
generally responsible for, among other things, any taxes imposed on Viacom or
its subsidiaries as a result of a split-off from Viacom or other similar
transaction failing to qualify as a tax-free transaction on account of any
breach of the Company's representations or agreements or any action or failure
to act by the Company or any transactions involving the Company's assets, stock
or business (regardless of whether such transaction is within its control)
following the split-off or similar transaction.
As discussed in the Company's Annual Report on Form 10-K filed with the SEC
on March 24, 2000, on July 21, 1999, Ruben Loredo, doing business as Five Palms
Video, purporting to act as a class representative on behalf of himself and all
others similarly situated, filed a complaint in the District Court of Bexar
County, Texas against Blockbuster. In addition, as discussed in the Company's
Form 10-K, a substantially similar complaint with different class
representatives is pending in the United States District Court for the Western
District of Texas against Viacom and major motion picture studios and their home
video subsidiaries that have operated under revenue-sharing agreements with
Blockbuster. Since the filing of the Company's Form 10-K, Ruben Loredo
voluntarily dismissed the state court action without prejudice, and Ruben Loredo
and Blockbuster have been added as parties plaintiff and defendant,
respectively, in the federal court action. In addition to any damage award to
which Blockbuster might be
10
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
directly subject, if Viacom is required to pay any damage award as a result of
the federal court action, Viacom may seek indemnification for its losses from
Blockbuster under the release and indemnification agreement entered into between
Viacom and the Company. Blockbuster believes that the plaintiff's position is
without merit, and Blockbuster intends to vigorously defend itself in the
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. In addition, the
Company's estimates of future costs are subject to change as circumstances
change and additional information becomes available during the course of
litigation.
Note 7--Operating Segments and Geographic Area
Beginning in the fourth quarter of 1999, Blockbuster began reporting in two
segments: (i) home video, DVD and video game rental and retailing, which
Blockbuster refers to as the video segment, and (ii) new media (formerly called
new technologies).
(i) Video
As of June 30, 2000, the video segment operated 6,092 video stores and its
franchisees and/or joint ventures operated 1,284 video stores located
throughout the United States, its territories and 25 other countries.
(ii) New Media
Through the new media segment, Blockbuster operates its Internet site,
blockbuster.com, and its newly formed division, Digital Networks, which is
responsible for exploring various forms of electronic entertainment
delivery including video-on-demand.
The Company's reportable operating segments have been determined in
accordance with the Company's internal management structure, which is organized
based on products and services.
The following table sets forth the Company's financial results by operating
segments:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
1999 2000 1999 2000
-------- -------- -------- --------
Revenues:
Video........................................................ $1,041.7 $1,214.1 $2,154.7 $2,425.0
New media.................................................... -- 0.3 -- 0.5
-------- -------- -------- --------
Total revenues............................................ $1,041.7 $1,214.4 $2,154.7 $2,425.5
======== ======== ======== ========
Operating income (loss):
Video........................................................ $ 4.2 $ 22.6 $ 52.8 $ 81.3
New media.................................................... -- (15.6) -- (29.6)
-------- -------- -------- --------
Total operating income.................................... $ 4.2 $ 7.0 $ 52.8 $ 51.7
======== ======== ======== ========
Depreciation and amortization (including tape amortization):
Video........................................................ $ 266.7 $ 277.1 $ 532.9 $ 556.7
New media.................................................... -- 2.6 -- 5.2
-------- -------- -------- --------
Total depreciation and amortization..................... $ 266.7 $ 279.7 $ 532.9 $ 561.9
======== ======== ======== ========
Interest expense:
Video........................................................ $ 30.7 $ 28.4 $ 59.9 $ 57.0
New media.................................................... -- 1.2 -- 2.0
-------- -------- -------- --------
Total interest expense.................................... $ 30.7 $ 29.6 $ 59.9 $ 59.0
======== ======== ======== ========
Net loss:
Video........................................................ $ (39.9) $ (17.6) $ (43.3) $ (12.3)
New media.................................................... -- (10.3) -- (19.7)
-------- -------- -------- --------
Total net loss............................................ $ (39.9) $ (27.9) $ (43.3) $ (32.0)
======== ======== ======== ========
</TABLE>
11
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions, except per share amounts)
Note 8--Other Matters
On May 4, 2000, CBS Corporation merged with and into Viacom, with Viacom
being the surviving corporation.
Viacom has announced that it intends to split-off Blockbuster, subject to
the approval of Viacom's Board of Directors, which will be based on an
assessment of market conditions. Viacom intends to split-off Blockbuster by
offering to exchange all of its shares in Blockbuster for shares of Viacom's
common stock. However, Viacom has previously said that it does not intend to
commence the offer unless the Blockbuster class A common stock improves to a
price range significantly above its current value. Viacom has no obligation to
effect the split-off. Viacom has received a private letter ruling from the
Internal Revenue Service to the effect that such a split-off, if effected in
accordance with the representations made in Viacom's request for the ruling,
would be tax-free to Viacom and its stockholders.
Note 9--Subsequent Events
On July 19, 2000, Blockbuster and Enron Broadband Services ("Enron"), a
wholly-owned subsidiary of Enron Corp., announced a 20 year, exclusive agreement
to deliver a Blockbuster entertainment service, initially featuring movies on-
demand, via the Enron Intelligent Network. Under the agreement, the Company
will provide content for the Blockbuster on-demand service and market such
service to its customer base. Enron will encode and stream the entertainment
over its global broadband network infrastructure, provision bandwidth on demand
and store the entertainment content. Blockbuster intends to introduce its
entertainment on-demand service in some U.S. cities by year-end, and expects to
extend the service to other domestic and international markets beginning in
2001. The Company believes that its website, blockbuster.com, is an integral
part of this strategy to stream broadband content, and that by leveraging the
assets of its new alliances, the Company will be able to develop this strategy
without the need for outside investments in the near term. As a result, the
Company does not currently intend to sell an interest in blockbuster.com,
including the previously contemplated sale to America Online, Inc.
On July 26, 2000, options to purchase 4,641,555 shares of class A common
stock were granted to employees under the Blockbuster Inc. 1999 Long-Term
Management Incentive Plan. The exercise prices of these options range from
$11.00 to $15.00, with $11.00 being equal to the closing share price of the
class A common stock on July 26, 2000. The options generally vest over a four
year period, beginning on the first anniversary of the date of grant.
On July 26, 2000, the Company's Board of Directors declared a cash dividend
of $0.02 per share on the Company's class A and class B common stock, payable
September 18, 2000, to stockholders of record at the close of business on August
28, 2000. The total dividend payment will be approximately $3.5 million, of
which approximately $2.9 million will be paid to Viacom International Inc.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of the consolidated results of
operations and financial condition should be read in conjunction with the
Consolidated Financial Statements and the related Notes.
Business Segment Information
Our reportable operating segments have been determined in accordance with
our internal management structure, which is organized based on products and
services. Beginning in the fourth quarter of 1999, we began reporting in two
segments: (i) home video, DVD and video game rental and retailing, which we
refer to as our video segment, and (ii) new media (formerly called new
technologies).
(i) Video
As of June 30, 2000, our video segment operated 6,092 video stores and our
franchisees and/or joint ventures operated 1,284 video stores located
throughout the United States, its territories and 25 other countries.
(ii) New Media
Through our new media segment, we operate our Internet site,
blockbuster.com, and our newly formed division, Digital Networks, which is
responsible for exploring various forms of electronic entertainment
delivery including video-on-demand.
We evaluate performance based on many factors. Two of the primary measures
are EBITDA and operating income. EBITDA is defined as net income (loss) before
equity in income of affiliated companies (net of tax), benefit (provision) for
income taxes, interest income (expense), depreciation, amortization of
intangibles and other items, net. EBITDA may differ in the method of
calculation from similarly titled measures used by other companies. Operating
income is defined as income before interest income (expense), equity in income
of affiliated companies (net of tax) and benefit (provision) for income taxes.
The following table sets forth summarized financial information relating to
our segments:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Video.................................................. $1,041.7 $1,214.1 $2,154.7 $2,425.0
New media.............................................. -- 0.3 -- 0.5
-------- -------- -------- --------
Total revenues..................................... $1,041.7 $1,214.4 $2,154.7 $2,425.5
======== ======== ======== ========
EBITDA(1):
Video.................................................. $ 101.2 $ 126.1 $ 244.6 $ 287.8
New media.............................................. -- (12.9) -- (24.3)
-------- -------- -------- --------
Total EBITDA....................................... $ 101.2 $ 113.2 $ 244.6 $ 263.5
======== ======== ======== ========
Operating income (loss):
Video.................................................. $ 4.2 $ 22.6 $ 52.8 $ 81.3
New media.............................................. -- (15.6) -- (29.6)
-------- -------- -------- --------
Total operating income............................. $ 4.2 $ 7.0 $ 52.8 $ 51.7
======== ======== ======== ========
</TABLE>
(1) "EBITDA" is presented here to provide additional information about our
operations. EBITDA should be considered in addition to, but not as a
substitute for or superior to, operating income, net income, cash flow and
other measures of financial performance prepared in accordance with
generally accepted accounting principles.
13
<PAGE>
Results of Operations
Consolidated Results
The following table sets forth consolidated results of operations for the
three months and six months ended June 30, 1999 and 2000 and other financial and
store data:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 2000 1999 2000
-------- -------- -------- --------
(In millions, except margin and worldwide store data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................................. $1,041.7 $1,214.4 $2,154.7 $2,425.5
Cost of sales............................................ 396.4 501.4 838.2 997.8
-------- -------- -------- --------
Gross profit............................................. 645.3 713.0 1,316.5 1,427.7
Operating expenses....................................... 641.1 706.0 1,263.7 1,376.0
-------- -------- -------- --------
Operating income......................................... 4.2 7.0 52.8 51.7
Interest expense......................................... (30.7) (29.6) (59.9) (59.0)
Interest income.......................................... 0.5 1.9 1.1 3.6
Other items, net......................................... (0.2) 2.1 (0.2) 2.1
-------- -------- -------- --------
Loss before income taxes................................. (26.2) (18.6) (6.2) (1.6)
Provision for income taxes............................... (11.3) (8.9) (34.7) (30.6)
Equity in income (loss) of affiliated companies, net (2.4) (0.4) (2.4) 0.2
of tax.................................................. -------- -------- -------- --------
Net loss................................................. $ (39.9) $ (27.9) $ (43.3) $ (32.0)
======== ======== ======== ========
Cash Flow Data:
Cash flows from operating activities..................... $ 435.6 $ 532.3
Cash flows used for investing activities................. (596.0) (487.8)
Cash flows provided by (used for) financing activities... 153.2 (14.9)
Other Data:
Depreciation............................................. $ 54.5 $ 62.2 $ 106.3 $ 123.3
Amortization of intangibles.............................. 42.5 44.0 85.5 88.5
EBITDA(1)................................................ 101.2 113.2 244.6 263.5
Net loss plus intangible amortization, net of tax(1)(2).. $ 1.0 $ 13.8 $ 38.8 $ 51.9
Margins:
Rental margin(3)......................................... 66.3% 63.8% 66.0% 64.3%
Merchandise margin(4).................................... 26.1% 20.4% 22.8% 20.4%
Gross margin(5).......................................... 61.9% 58.7% 61.1% 58.9%
Worldwide Store Data:
Same store revenues increase(6).......................... 9.9% 11.0% 12.9% 6.9%
Total stores at end of period............................ 6,658 7,376 6,658 7,376
</TABLE>
-------------------
(1) EBITDA and Net loss plus intangible amortization, net of tax are presented
here to provide additional information about our operations. These items
should be considered in addition to, but not as a substitute for, or
superior to, operating income, net income, 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 revenue 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.
14
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999.
Revenues. Revenues of $1,214.4 million for the three months ended June 30,
2000 increased $172.7 million, or 16.6%, from $1,041.7 million for the three
months ended June 30, 1999. The increase in revenues was primarily due to
increases in worldwide same store revenues of 11.0% for the three months ended
June 30, 2000 as compared to the corresponding period in 1999 and a net increase
in the number of company-operated stores of 497 to 6,092 at June 30, 2000 from
5,595 at June 30, 1999. The increase in same store revenues was principally due
to an increase in the average domestic rental fee, a 16.6% increase in same
store revenues from our international operations, and a 21.3% increase in
domestic merchandise same store revenues.
Rental revenue of $1,029.4 million for the three months ended June 30,
2000, which also includes sales of previously viewed products, increased $142.1
million, or 16.0%, from $887.3 million for the three months ended June 30, 1999.
The increase in rental revenue was primarily due to an increase in worldwide
same store rental revenues of 10.1% and the net increase in the number of
company-operated stores of 497. Also, previously viewed product sales,
which includes previously viewed videotapes, video games and DVDs, increased
17.2% for the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999. The increase in worldwide same store rental
revenues was driven by an increase in domestic rental transactions, an increase
in the average domestic rental fee and a favorable box office advantage between
titles that became available in the three months ended June 30, 2000 as compared
to the titles that became available in the comparable period of 1999.
Beginning in February 2000 we implemented a new program to further increase
customer satisfaction. Under this program we have made it more convenient for
our customers to return rental product by extending the return time by twelve
hours. In addition, customers who choose to keep rental product beyond the
initial rental term automatically continue their rental for another rental
term. Previously, customers who kept rental product beyond the initial rental
term paid extended viewing fees for each additional day rental product was
kept. Extended viewing fees for the three months ended June 30, 1999 were
$164.7 million and represented 15.8% of total revenues. Revenues generated by
the continuation of rental terms for the three months ended June 30, 2000
contributed $203.2 million to rental revenues and represented 16.7% of total
revenues. This increase was primarily due to the increased convenience for
customers who chose to keep rental product for another rental term.
Merchandise sales of $162.0 million for the three months ended June 30,
2000 increased $30.4 million, or 23.1%, from $131.6 million for the three months
ended June 30, 1999. The two primary reasons for the increase in merchandise
sales were (i) increased sales of sell-through videotapes and DVDs and (ii) an
increase in the sales of blank tapes and other VCR accessories.
Cost of Sales. Cost of sales of $501.4 million for the three months ended
June 30, 2000 increased $105.0 million, or 26.5%, from $396.4 million for the
three months ended June 30, 1999. Cost of sales as a percentage of total
revenues in 2000 increased to 41.3% for the three months ended June 30, 2000
from 38.1% for the three months ended June 30, 1999. The increase in cost of
sales was primarily due to (i) an increase in revenues generated through
revenue-sharing arrangements as a percentage of our total revenues, as
revenue-sharing arrangements on average have lower gross margins than do
traditional buying arrangements, (ii) a decrease in margins on game rentals as
several platforms are nearing the end of their lifecycles, and (iii) a
decrease in margins on previously viewed product sales generated by lower
average unit selling prices as a result of increased copy depth.
Gross Profit. Gross profit of $713.0 million for the three months ended
June 30, 2000 increased $67.7 million, from $645.3 million for the three months
ended June 30, 1999. For 2000, gross profit as a percentage of total revenues
decreased to 58.7% from 61.9% for the three months ended June 30, 1999. The
decrease in gross margin was due to the increase in cost of sales described
above.
Operating Expenses. Total operating expenses of $706.0 million for the
three months ended June 30, 2000 increased $64.9 million, or 10.1%, from $641.1
million for the three months ended June 30, 1999. This increase
15
<PAGE>
was primarily due to a net increase of 497 company-operated stores. Total
operating expenses decreased as a percentage of total revenues from 61.5% for
the three months ended June 30, 1999 to 58.1% for the three months ended June
30, 2000, which reflects better leveraging of our operating expenses over an
increased revenue base. The increase in total operating expenses resulted from
the following:
General and Administrative Expense. General and administrative expense,
which includes expenses incurred at the store, regional, corporate and new
media level, decreased as a percentage of total revenues to 44.1% for the
three months ended June 30, 2000 compared to 46.1% for the same period of
1999. General and administrative expense of $535.8 million for the three
months ended June 30, 2000 increased $55.7 million from $480.1 million for the
three months ended June 30, 1999. The dollar increase for the three months
ended June 30, 2000 resulted from compensation increases of $30.4 million
related to additional personnel needed to support our store growth and to
support our new media business, a $10.7 million increase in occupancy costs
due to the increase in the number of company-operated stores and a $14.6
million increase in other corporate and store expenses due primarily to the
growth of our business.
Advertising Expense. Advertising expense of $64.0 million for the three
months ended June 30, 2000 was equal to advertising expense for the three
months ended June 30, 1999. As a percentage of total revenues, advertising
expense decreased to 5.3% for the three months ended June 30, 2000 from 6.1%
for the three months ended June 30, 1999. These decreases reflect our planned
decrease in promotional advertising. We are now focusing our advertising
dollars on specific product advertising, direct marketing vehicles such as
BLOCKBUSTER REWARDS(TM), marketing our database and the marketing of
blockbuster.com.
Depreciation Expense. Depreciation expense of $62.2 million for the three
months ended June 30, 2000 increased $7.7 million as compared to $54.5 million
for the same period of 1999. The increase in depreciation expense was primarily
attributable to the net increase of 497 company-operated stores. In addition,
our new media segment added $2.6 million to depreciation expense for the three
months ended June 30, 2000.
Interest Expense. Interest expense of $29.6 million for the three months
ended June 30, 2000 decreased $1.1 million as compared to $30.7 million for the
same period of 1999. The decrease in interest expense was due to lower debt
levels due primarily to the use of the net proceeds of our initial public
offering to pay down our credit facility, offset by the higher interest rates on
our credit facility compared to the interest rates on the notes payable to
Viacom.
Provision for Income Taxes. We recognized a provision for income taxes of
$8.9 million for the three months ended June 30, 2000 as compared to $11.3
million for the three months ended June 30, 1999. The 2000 and 1999 provisions
reflect permanent differences resulting from the non-deductibility of goodwill
amortization associated with Viacom's acquisition of us in 1994 and tax
operating losses from certain foreign countries. We did not recognize a benefit
for these foreign jurisdictions, which incurred losses, in our 1999 and 2000 tax
provisions. The provision for income taxes decreased due to lower operating
losses from foreign jurisdictions.
Equity in Income (Loss) of Affiliated Companies, Net of Tax. The equity in
income of affiliated companies, net of tax was a loss of $0.4 million for the
three months ended June 30, 2000 as compared to a loss of $2.4 million for the
three months ended June 30, 1999, primarily due to decreased losses from our
joint venture operations in Italy.
Net Loss. The consolidated net loss of $27.9 million for the three months
ended June 30, 2000 reflects a decrease in net loss of $12.0 million from a net
loss of $39.9 million for the second quarter of 2000. Excluding the losses
incurred by our new media business in the second quarter of 2000, our net loss
decreased by $22.0 million from $39.6 million to $17.6 million.
16
<PAGE>
SEGMENT RESULTS
Video
-----
Our video segment consists of rentable home videos, DVDs, video games and
retail products. Video revenues of $1,214.1 million for the three months ended
June 30, 2000 increased $172.4 million, or 16.5%, from $1,041.7 million for the
three months ended June 30, 2000. The increase in revenues was primarily due to
increases in worldwide same store revenues of 11.0% for the three months ended
June 30, 2000 as compared to the corresponding period in 1999 and a net increase
of 497 company-operated stores. The increase in same store revenues was
principally due to an increase in the average domestic rental fee, a 16.6%
increase in same store revenues from our international operations, and a 21.3%
increase in domestic merchandise same store revenues.
Operating income increased $18.4 million to $22.6 million for the three
months ended June 30, 2000 from $4.2 million in the prior year. Results for the
three months ended June 30, 2000 reflect the increased revenues discussed above
and the leveraging of our operating expenses over an increased revenue base. Our
operating expenses as a percentage of total video revenues decreased to 56.9%
for the three months ended June 30, 2000 from 61.5% for the same period in 1999.
New Media
---------
Our new media segment consists of Internet video sales, entertainment-
related news and information, and e-commerce offerings and is also focused on
developing relationships and infrastructure needed to deliver digital video
services across multiple networks to multiple devices. On November 22, 1999, we
re-launched blockbuster.com as a strategic first step towards delivery of
premium entertainment options to our customers. New media revenues of $0.3
million for the three months ended June 30, 2000 consisted primarily of sales
through the Internet of sell-through videocassettes and DVDs.
Operating loss for our new media segment was $15.6 million for the three
months ended June 30, 2000. This loss reflects costs incurred to advertise our
new website, hire additional people to support the new website, for consulting
and maintenance costs to enhance the website's functionality and to negotiate
and structure new ventures related to our video-on-demand and home delivery
services currently in the development stage. Blockbuster.com is expected to
become an integral part of our movies-on-demand service and an extension of our
stores through online rental reservations. We expect this segment to incur
continued losses in the immediate future. As a result, we are continually
evaluating capitalized costs associated with our new media segment. Total costs
capitalized, net of depreciation, were $34.7 million as of June 30, 2000.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999.
Revenues. Revenues of $2,425.5 million for the six months ended June 30,
2000 increased $270.8 million, or 12.6%, from $2,154.7 million for the six
months ended June 30, 1999. The increase in revenues was primarily due to
increases in worldwide same store revenues of 6.9% for the six months ended June
30, 2000 as compared to the corresponding period in 1999 and a net increase in
the number of company-operated stores of 497 to 6,092 at June 30, 2000 from
5,595 at June 30, 1999. The increase in worldwide same store revenues was
principally due to an increase in the average domestic rental fee, a 12.1%
increase in same store revenues from our international operations, and a 16.5%
increase in domestic merchandise same store revenues.
Rental revenue of $2,053.8 million for the six months ended June 30, 2000,
which also includes sales of previously viewed products, increased $214.5
million, or 11.7%, from $1,839.3 million for the six months ended June 30, 1999.
The increase in rental revenue was primarily due to an increase in international
same store rental revenues of 13.5%, the net increase in the number of company-
operated stores of 497, an increase in the average domestic rental fee and a
favorable box office advantage between titles that became available in the six
months ended June 30, 2000 as compared to the titles that became available in
the comparable period of 1999. Also, previously viewed product sales, which
includes previously viewed videotapes, video games and DVDs, increased 11.0%
for the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999.
17
<PAGE>
Beginning in February 2000 we implemented a new program to further increase
customer satisfaction. Under this program we have made it more convenient for
our customers to return rental product by extending the return time by twelve
hours. In addition, customers who choose to keep rental product beyond the
initial rental term automatically continue their rental for another rental
term. Previously, customers who kept rental product beyond the initial rental
term paid extended viewing fees for each additional day rental product was
kept. Extended viewing fees for the six months ended June 30, 1999 were
$344.1 million and represented 16.0% of total revenues. The combination of
extended viewing fees and the implementation of this program contributed
$395.7 million to rental revenues and represented 16.3% of total revenues for
the six months ended June 30, 2000. This increase was primarily due to the
increased convenience for customers who chose to keep rental product for
another rental term.
Merchandise sales of $332.5 million for the six months ended June 30, 2000
increased $57.9 million, or 21.1%, from $274.6 million for the six months ended
June 30, 1999. The three primary reasons for the increase in merchandise sales
were (i) increased sales of sell-through videotapes and DVDs, (ii) an increase
in licensed merchandise and confection sales and (iii) an increase in the sales
of blank tapes and other accessories.
Cost of Sales. Cost of sales of $997.8 million for the six months ended
June 30, 2000 increased $159.6 million, or 19.0%, from $838.2 million for the
six months ended June 30, 1999. Cost of sales as a percentage of total revenues
in 2000 increased to 41.1% for the first quarter of 2000 from 38.9% for the six
months ended June 30, 1999. The increase in cost of sales was primarily due to
(i) the increase in revenues generated through revenue-sharing arrangements as a
percentage of our total revenues, as revenue-sharing arrangements on average
have lower gross margins than do traditional buying arrangements, (ii) a
decrease in margins on game rentals as several platforms are nearing the end of
their lifecycles, (iii), a decrease in margins on previously viewed product
sales generated by lower average unit selling prices as a result of increased
copy depth and (iv) the increase in merchandise sales as a percentage of total
revenues from 12.7% of total revenues for the six months ended June 30, 1999 to
13.7% of total revenues for the six months ended June 30, 2000, as merchandise
sales have lower gross margins than rental revenues.
Gross Profit. Gross profit of $1,427.7 million for the six months ended
June 30, 2000 increased $111.2 million, from $1,316.5 million for the six months
ended June 30, 1999. For 2000, gross profit as a percentage of total revenues
decreased to 58.9% from 61.1% for the six months ended June 30, 1999. The
decrease in gross margin was due to the increase in cost of sales described
above.
Operating Expenses. Total operating expenses of $1,376.0 million for the
six months ended June 30, 2000 increased $112.3 million, or 8.9%, from $1,263.7
million for the six months ended June 30, 1999. This increase was primarily due
to a net increase of 497 company-operated stores. Total operating expenses
decreased as a percentage of total revenues to 56.7% for the six months ended
June 30, 2000 from 58.6% in the six months ended June 30, 1999, which reflects
better leveraging of our operating expenses over an increased revenue base. The
increase in total operating expenses resulted from the following:
General and Administrative Expense. General and administrative expense,
which includes expenses incurred at the store, regional, corporate and new
media level, decreased as a percentage of total revenues to 43.2% for the six
months ended June 30, 2000 compared to 44.2% for the same period of 1999.
General and administrative expense of $1,048.6 million for the six months
ended June 30, 2000 increased $96.4 million from $952.2 million for the six
months ended June 30, 1999. The dollar increase for the six months ended June
30, 2000 resulted from compensation increases of $50.6 million related to
additional personnel needed to support our store growth and to support our new
media business. Occupancy costs increased $23.3 million largely as a result of
an increase in the number of company-operated stores. Other corporate and
store expenses increased $22.5 million due primarily to the growth of our
business.
Advertising Expense. Advertising expense of $115.6 million for the six
months ended June 30, 2000 decreased $4.1 million from $119.7 million for the
six months ended June 30, 1999. As a percentage of total revenues, advertising
expense decreased to 4.8% for the six months ended June 30, 2000 from 5.6% for
the six months ended June 30, 1999. These decreases reflect our planned
decrease in promotional advertising. We are now focusing our advertising
dollars on specific product advertising, direct marketing vehicles such as
BLOCKBUSTER REWARDS(TM), marketing our database and the marketing of
blockbuster.com.
18
<PAGE>
Interest Expense. Interest expense of $59.0 million for the six months
ended June 30, 2000 decreased $0.9 million as compared to $59.9 million for the
same period of 1999. The decrease in interest expense was due to lower debt
levels due primarily to the use of the net proceeds of our initial public
offering to pay down our credit facility, offset by the higher interest rates on
our credit facility compared to the interest rates on the notes payable to
Viacom.
Depreciation Expense. Depreciation expense of $123.3 million for the six
months ended June 30, 2000 increased $17.0 million as compared to $106.3 million
for the same period of 1999. The increase in depreciation expense was primarily
attributable to the net increase of 497 company-operated stores. In addition
our new media segment added $5.2 million to depreciation expense for the six
months ended June 30, 2000.
Provision for Income Taxes. We recognized a provision for income taxes of
$30.6 million for the six months ended June 30, 2000 as compared to $34.7
million for the six months ended June 30,1999. The 2000 and 1999 provisions
reflect permanent differences resulting from the non-deductibility of goodwill
amortization associated with Viacom's acquisition of us in 1994 and tax
operating losses from certain foreign countries. We did not recognize a benefit
for these foreign jurisdictions, which incurred losses, in our 1999 and 2000 tax
provisions. The provision for income taxes decreased due to lower operating
losses.
Equity in Income (Loss) of Affiliated Companies, Net of Tax. The equity in
income of affiliated companies, net of tax was $0.2 million for the six months
ended June 30, 2000 as compared to a loss of $2.4 million for the six months
ended June 30, 1999, primarily due to an increase in income from our joint
venture operations in Italy.
Net Loss. The consolidated net loss of $32.0 million for the six months
ended June 30, 2000 reflects a decrease in net loss of $11.3 million from a net
loss of $43.3 million for the six months ended June 30, 1999. Excluding the
losses incurred by our new media business in the first six months of 2000, our
net loss decreased by $30.7 million from $43.0 million to $12.3 million.
SEGMENT RESULTS
Video
-----
Our video segment consists of rentable home videos, DVDs, video games and
retail products. Video revenues of $2,425.0 million for the six months ended
June 30, 2000 increased $270.3 million, or 12.5%, from $2,154.7 million for the
six months ended June 30, 2000. The increase in revenues was primarily due to
increases in worldwide same store revenues of 6.9% for the six months ended June
30, 2000 as compared to the corresponding period in 1999 and a net increase of
497 company-operated stores. The increase in same store revenues was principally
due to an increase in the average domestic rental fee, a 12.1% increase in same
store revenues from our international operations, and a 16.5% increase in
domestic merchandise same store revenues.
Operating income increased $28.5 million to $81.3 million for the six
months ended June 30, 2000 from $52.8 million in the prior year. Results for the
six months ended June 30, 2000 reflect the increased revenues discussed above
and the leveraging of our operating expenses over an increased revenue base. Our
operating expenses as a percentage of total video revenues decreased to 55.5%
for the three months ended June 30, 2000 from 58.6% for the same period in 1999.
New Media
---------
Our new media segment consists of Internet video sales, entertainment-
related news and information, and e-commerce offerings and is also focused on
developing relationships and infrastructure needed to deliver digital video
services across multiple networks to multiple devices. On November 22, 1999, we
re-launched blockbuster.com as a strategic first step towards delivery of
premium entertainment options to our customers. New media revenues of $0.5
million for the six months ended June 30, 2000 consisted primarily of sales
through the Internet of sell-through videocassettes and DVDs.
Operating loss for our new media segment was $29.6 million for the six
months ended June 30, 2000. This loss reflects costs incurred to advertise our
new website, hire additional people to support the new website, for consulting
and maintenance costs to enhance the website's functionality and to negotiate
and structure new ventures related to our video-on-demand and home delivery
services currently in the development stage. Blockbuster.com is expected to
become an integral part of our
19
<PAGE>
movies on demand service and an extension of our stores through online rental
reservations. We expect this segment to incur continued losses in the immediate
future. As a result, we are continually evaluating capitalized costs associated
with our new media segment. Total costs capitalized, net of depreciation, were
$34.7 million as of June 30, 2000.
Liquidity and Capital Resources
--------------------------------
Liquidity Prior to and Upon Blockbuster's Separation from Viacom
Prior to our initial public offering of class A common stock, our capital
investments and acquisitions were financed with a combination of cash flow from
operations and advances from Viacom. We generate cash from operations
predominantly from the rental 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. Prior to our initial public offering, Viacom
deposited sufficient cash in our bank accounts to meet our daily obligations and
withdrew excess funds from those accounts. These transactions were included in
capital contributions from Viacom, net in the Consolidated Statements of Cash
Flows. The amounts owed to Viacom prior to our initial public offering were
capitalized into Viacom's net equity investment.
Excess operating cash flow, additional funding from Viacom (prior to our
initial public offering) and borrowings under our credit facility were used
primarily for opening and acquiring new stores, the refurbishment, remodeling
and relocation of existing stores and the purchase of videocassette inventory.
Prior to our initial public offering, our capital structure was established
which replaced our reliance on Viacom's cash management system. At the time of
our initial public offering, all cash accounts were settled and, since such
time, we have no longer participated in Viacom's cash management system. As
such, no further amounts will be deposited in, or withdrawn from, our accounts
by Viacom.
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.
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, in addition to various external sources of funds
which may be available to us. The external sources of funds include our credit
agreement and amendments thereto and may include future issuances of debt,
equity or other securities. However, we cannot assure you that we will be able
to access capital markets in the future on terms that will be satisfactory to
us. We believe that such internally and externally generated funds will provide
us with adequate liquidity and capital necessary for the next twelve months.
Consolidated Cash Flows
Operating Activities. Net cash flows from operating activities increased
$96.7 million, or 22.2%, from $435.6 million for the six months ended June 30,
1999 to $532.3 million for the six months ended June 30, 2000. The most
significant reasons for the increase were (i) an improvement in operational
performance which resulted in a decrease of net losses of $11.3 million (or
$40.3 million excluding depreciation and amortization) and (ii) a $56.3 million
decrease in net cash used by changes in operating assets and liabilities.
Investing Activities. Net cash used in investing activities decreased
$108.2 million from $596.0 million for the six months ended June 30, 1999 to
$487.8 million in the comparable period of 2000 as a result of a decrease in
cash used for store acquisitions of $72.9 million and a $78.1 million decrease
in capital expenditures, offset by a $25.1 million increase in rental library
purchases. Our capital expenditures decreased primarily due to an upgrade of the
store point of sale system that occurred during 1999 and fewer new store
openings in 2000. The decrease in cash used for acquisitions was primarily due
to a large acquisition of 69 stores from a franchisee in the first quarter of
1999.
20
<PAGE>
The major components of investing activities are detailed below:
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended June 30,
-------------------------------
1999 2000
------- -------
Cash flows from investing activities: (In millions)
Rental library purchases...................................... $(355.9) $(381.0)
Capital expenditures.......................................... (159.6) (81.5)
Cash used for acquisitions.................................... (93.9) (33.2)
Proceeds from sales of store operations....................... 14.2 4.8
Proceeds from sale of non-core investment..................... - 7.1
Investment in affiliated companies............................ (0.8) (4.0)
------- -------
Net cash flow used for investing activities....................... $(596.0) $(487.8)
======= =======
</TABLE>
Financing Activities. Net cash used in financing activities for the six
months ended June 30, 2000 of $14.9 million represented a $168.1 million
decrease from net cash provided by financing activities of $153.2 million in
1999. The decrease in financing activities was primarily attributable to (i)
Viacom funding approximately $77.0 million to us in the first quarter of 1999
for the acquisition of 69 stores from a franchisee and (ii) capital
contributions of $157 million made by Viacom during 1999 for the purchase of
certain of our international operations from affiliates of Viacom in connection
with our initial public offering. These items were partially offset by
borrowings of $26.5 million during the second quarter of 2000.
Capital Structure
On June 21, 1999, we entered into a $1.9 billion unsecured credit agreement
with a syndicate of banks. This credit agreement is comprised of a $700 million
long-term revolver due July 1, 2004 and a $600 million term loan due in
quarterly installments beginning April 1, 2002 and ending July 1, 2004. The
credit agreement also includes a $600 million short-term revolver, which was
reduced with proceeds from our initial public offering and was originally due on
June 19, 2000. The credit agreement was amended during the second quarter of
2000 by extending the due date of the short-term revolver to the earlier of (i)
December 14, 2000, or (ii) the date that we are no longer a subsidiary of
Viacom. Interest rates under the credit agreement are based on the prime rate or
LIBOR at our option at the time of borrowing. A variable commitment fee based on
the total leverage ratio is charged on the unused amount of the revolver (.25%
at June 30, 2000). We expect to fund the repayment of the short-term revolver by
using either internally generated cash or various external sources, including
additional borrowings under the long-term revolver, an amendment to the credit
agreement, or the issuance of debt securities.
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 June 30, 2000 we were in compliance with all financial
covenants under the credit agreement.
On June 23, 1999, we borrowed $1.6 billion, comprised of $400 million
borrowed under the long-term revolver, $600 million borrowed under the term
loan, and $600 million borrowed under the short-term revolver. The proceeds of
the borrowings were used to pay amounts owed to Viacom. We repaid $442.9 million
of the short-term revolver through proceeds from our initial public offering. We
repaid an additional $20.0 million of the short-term revolver during the second
quarter of 2000. These payments permanently reduced our capacity under the
credit agreement from $1.9 billion to approximately $1.44 billion, by reducing
the borrowing capacity under the short-term revolver to $137.1 million. As of
June 30, 2000, we had $137.1 million outstanding under the short-term revolver.
We had $260.0 million of available borrowing capacity under the long-term
revolver at June 30, 2000. The weighted average interest rate at June 30, 2000
for these borrowings was 7.9%.
We entered into two additional lines of credit with banks for a total of
$75.0 million in the fourth quarter of 1999. There were no outstanding amounts
under these two lines of credit at June 30, 2000.
In April 2000, we borrowed $26.5 million in order to finance the
purchase of certain equipment. The financing bears interest at 8.0%, is payable
in monthly installments through April 2005, and is secured by a lien on the
equipment. As of June 30, 2000, we had $25.3 million outstanding under this
financing.
21
<PAGE>
The following table sets forth our current portion of long-term debt:
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 2000
-------- --------
<S> <C> <C>
Short-term revolving credit facility, interest rate 7.9% and 8.5% at
December 31, 1999 and June 30, 2000, respectively, due December 2000.. $ 157.1 $ 137.1
Equipment term loan, interest rate 8.0% at June 30, 2000, payable monthly
through April, 2005, secured by certain equipment..................... - 6.5
-------- --------
Total current portion of long-term debt $ 157.1 $ 143.6
======== ========
</TABLE>
The following table sets forth our long-term debt, less current portion:
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 2000
-------- --------
<S> <C> <C>
Term loan, interest rate 7.8% at December 31, 1999 and June 30,
2000 due in quarterly installments beginning April 2002................ $ 600.0 $ 600.0
Long-term revolving credit facility, interest rate 8.0% and 7.9% at
December 31, 1999 and June 30, 2000, respectively, due July 2004....... 430.0 440.0
Equipment term loan, interest rate 8.0% at June 30, 2000, payable monthly
through April, 2005, secured by certain equipment........................ - 18.8
-------- --------
Total long-term debt............................................... $1,030.0 $1,058.8
======== ========
</TABLE>
Other Financial Measurements: Working Capital
At June 30, 2000, we had cash and cash equivalents of $147.6 million.
Working capital, however, reflected a deficit of $331.1 million due to the
accounting treatment of our rental library. Rental inventories are accounted for
as non-current assets and are excluded from the computation of working capital.
The acquisition cost of rental inventories, however, is reported as a current
liability and, accordingly, is 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") effective for fiscal years beginning after June
15, 2000. We anticipate that, due to our limited use of derivative instruments,
the adoption of SFAS 133 effective January 1, 2001 will not have a material
affect on our consolidated financial statements.
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. Forward-looking statements relating to such
matters as our financial condition and operations are based on our management's
current intent, belief or expectations regarding us and our industry. These
forward-looking statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that are difficult to predict. In addition
some forward-looking statements are based on assumptions as to future events
that may not prove to be accurate. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. 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.
A variety of factors, including those set forth under the heading
"Cautionary Statements" in our Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, could cause our actual results to differ materially
from the anticipated results or other expectations expressed in our forward-
looking statements. There may be additional risks that we do not currently view
as material or that are not presently known.
22
<PAGE>
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
Historically, we have had no material interest rate risk associated with
debt used to finance our operations due to limited borrowings and our
relationship with Viacom. However, on June 23, 1999, we borrowed $1.6 billion
under our credit facility. Total outstanding borrowings at June 30, 2000 under
this credit agreement were $1,177.1 million. Interest rates are based on the
prime rate in the United States or LIBOR (plus a margin based on leverage
ratios) at our option at the time of borrowing. The weighted average interest
rate at June 30, 2000 for these borrowings was 7.9%. We anticipate managing our
future interest rate exposure by using a mix of fixed and floating interest rate
debt and, if appropriate, financial derivative instruments. We are primarily
vulnerable to changes in LIBOR, which is the rate currently used in existing
agreements, 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 $11.8 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 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 affects one common currency may have on pricing, costs, and the resulting
impact, if any, on our financial condition or results of operations. However, we
believe that we have 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 constitute 19.2% of our total
revenues. Our operations in Europe constitute 9.5% of our total revenues. The
majority of these sales are from Great Britain, which has not adopted the Euro.
23
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material developments have occurred in our legal proceedings
previously reported in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 24, 2000, as updated in our Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on May 15, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on May 23, 2000. The
stockholders voted on proposals to:
1. Elect two Class I Directors of Blockbuster for a term expiring in
2003;
2. Approve the Blockbuster Inc. 1999 Long-Term Management Incentive
Plan;
3. Approve the Blockbuster Inc. Senior Executive Short-Term
Incentive Plan; and
4. Ratify the appointment of PricewaterhouseCoopers LLP as our
independent accountants for fiscal 2000.
The proposals were approved by the following votes:
1. Election of Class I Directors
Votes Votes
Nominee For Withheld
------- ----- --------
Philippe P. Dauman 746,932,522 1,570,536
Thomas E. Dooley 746,933,122 1,569,936
2. Approval of the Blockbuster Inc. 1999 Long-Term Management
Incentive Plan
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstentions Non-Votes
----- ------- ----------- ---------
<S> <C> <C> <C>
730,928,407 8,795,910 48,724 8,730,017
3. Approval of the Blockbuster Inc. Senior Executive Short-Term Incentive Plan
Votes Votes Broker
For Against Abstentions Non-Votes
----- ------- ----------- ---------
733,050,532 6,664,435 58,074 8,730,017
4. Ratification of the appointment of PricewaterhouseCoopers LLP as
our independent accountants for fiscal 2000
Votes Votes Broker
For Against Abstentions Non-Votes
----- ------- ----------- ---------
748,436,804 23,323 42,931 0
</TABLE>
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
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)
10.1 Amendment No. 1, dated as of June 15, 2000, to the Credit Agreement, dated as of June
21, 1999, among Blockbuster Inc. and the banks named therein. (4)
27.1 Financial Data Schedule. (4)
</TABLE>
________
(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.
(4) Filed herewith.
(b) Reports on Form 8-K
None.
25
<PAGE>
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 and Chief
Financial Officer (on behalf of the
Registrant and in his capacity as principal
financial officer)
Date: August 14, 2000
26
<PAGE>
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)
10.1 Amendment No. 1, dated as of June 15, 2000, to the Credit Agreement, dated
as of June 21, 1999, among Blockbuster Inc. and the banks named therein.(4)
27.1 Financial Data Schedule. (4)
________
(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.
(4) Filed herewith.
