<PAGE> 1
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 March 31, 1994 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------- ----------
Commission file number: 0-12700
BLOCKBUSTER ENTERTAINMENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1849418
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Blockbuster Plaza
Fort Lauderdale, Florida 33301
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 832-3000
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
--- ---
On May 10, 1994, the registrant had 249,063,868 outstanding shares of
common stock, $.10 par value.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page(s)
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 3
Unaudited Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1994 and 1993 4
Unaudited Condensed Consolidated Statement of
Changes in Shareholders' Equity - Three Months
Ended March 31, 1994 5
Unaudited Condensed Consolidated Statements of Cash
Flows - Three Months Ended March 31, 1994 and 1993 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17-24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. Financial Statements
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 77,235 $ 95,254
Accounts and notes receivable,
less allowance 131,984 135,172
Merchandise inventories 347,045 350,763
Film costs and program rights, net 117,170 117,324
Other 36,466 50,210
---------- ----------
Total Current Assets 709,900 748,723
VIDEOCASSETTE RENTAL INVENTORY, NET 479,302 470,223
PROPERTY AND EQUIPMENT, NET 570,678 522,745
INTANGIBLE ASSETS, NET 863,491 856,318
INVESTMENTS IN VIACOM INC. 1,478,645 600,000
OTHER ASSETS 364,648 322,958
---------- ----------
$4,466,664 $3,520,967
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term debt and current portion
of long-term debt $1,000,000 $ 9,083
Accounts payable 205,965 369,815
Accrued liabilities 157,842 177,695
Accrued participation expenses 40,604 43,013
Income taxes payable 59,652 43,632
---------- ----------
Total Current Liabilities 1,464,063 643,238
LONG-TERM DEBT, LESS CURRENT PORTION 997,000 603,496
OTHER LIABILITIES 58,947 59,999
MINORITY INTERESTS IN SUBSIDIARIES 92,387 90,834
COMMITMENTS AND CONTINGENCIES --- ---
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; authorized
500,000 shares; none issued --- ---
Common stock, $.10 par value; authorized
300,000,000 shares; issued and
outstanding 249,061,093 and 247,380,069
shares, respectively 24,906 24,738
Capital in excess of par value 1,607,355 1,564,685
Cumulative foreign currency translation
adjustment (40,537) (38,143)
Unrealized holding loss on
available-for-sale securities (375,945) ---
Retained earnings 638,488 572,120
---------- ----------
Total Shareholders' Equity 1,854,267 2,123,400
---------- ----------
$4,466,664 $3,520,967
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1994 1993
---- ----
(Restated)
<S> <C> <C>
REVENUE:
Rental revenue $392,618 $291,398
Product sales 205,330 130,353
Other revenue 98,583 11,647
-------- --------
696,531 433,398
OPERATING COSTS AND EXPENSES:
Cost of product sales 133,387 86,014
Operating expenses 379,911 231,705
Selling, general and
administrative 63,634 38,751
-------- --------
OPERATING INCOME 119,599 76,928
INTEREST EXPENSE (11,619) (6,559)
INTEREST INCOME 1,396 1,781
OTHER INCOME (EXPENSE), NET 5,851 (1,778)
-------- --------
INCOME BEFORE INCOME TAXES 115,227 70,372
PROVISION FOR INCOME TAXES 42,634 25,686
-------- --------
NET INCOME $ 72,593 $ 44,686
======== ========
Net Income per Common Share -
assuming full dilution $ .29 $ .22
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1994
(In thousands)
<TABLE>
<CAPTION>
Capital in Cumulative Unrealized
Common Excess of Translation Holding Retained
Stock Par Value Adjustment Loss Earnings
------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 24,738 $1,564,685 $(38,143) $ --- $572,120
Net income for the period --- --- --- --- 72,593
Stock issued in acquisitions
and investments 136 36,512 --- --- ---
Sales of common stock 32 6,158 --- --- ---
Cash dividends --- --- --- --- (6,225)
Foreign currency
translation adjustment --- --- (2,394) --- ---
Unrealized holding loss
on available-for-sale
securities --- --- --- (375,945) ---
-------- ---------- -------- --------- --------
Balance at March 31, 1994 $ 24,906 $1,607,355 $(40,537) $(375,945) $638,488
======== ========== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1994 1993
---- ----
<S> <C> <C>
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 72,593 $ 44,686
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation and amortization 117,528 89,496
Amortization of film costs 39,875 ---
Additions to film costs and program rights (35,271) ---
Interest on subordinated convertible debt --- 2,339
Changes in operating assets and
liabilities, net of effects from
purchase transactions:
(Increase) decrease in accounts
receivable 1,800 (2,539)
Decrease in merchandise inventories 2,189 11,336
(Increase) decrease in other
current assets 12,649 (1,155)
Decrease in accounts payable and
accrued items (187,211) (90,034)
Increase in income taxes payable
and related items 25,910 11,672
Other (18,211) (1,851)
---------- ---------
31,851 63,950
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette
rental inventory (110,982) (86,239)
Disposals of videocassette
rental inventory 15,814 5,601
Purchases of property and equipment (71,906) (24,446)
Purchase of Viacom Inc. securities (1,250,000) ---
Net cash used in business combinations and
investments (14,311) (24,416)
Other (2,622) (9,810)
---------- ---------
(1,434,007) (139,310)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common
stock, net 6,190 7,054
Proceeds from debt 1,957,000 363,774
Repayments of debt (572,579) (301,583)
Cash dividends paid (6,185) (7,672)
Other (289) (3,959)
---------- ---------
1,384,137 57,614
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (18,019) (17,746)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 95,254 43,358
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,235 $ 25,612
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted in all tables except per share amounts)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Blockbuster Entertainment Corporation and subsidiaries (the "Company") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. However, the Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's most recent annual report to shareholders.
The financial statements reflect, in the opinion of management, all material
adjustments (which include only normal recurring adjustments) necessary to
present fairly the Company's financial position and results of operations.
In order to maintain consistency and comparability between periods presented,
certain amounts have been reclassified from the previously reported financial
statements in order to conform with the financial statement presentation of the
current period.
The accompanying financial statements also include the financial position and
results of operations of WJB Video Limited Partnership and certain of its
affiliates ("WJB"), with which the Company merged in August 1993. This
transaction has been accounted for under the pooling of interests method of
accounting and, accordingly, these financial statements and notes thereto have
been restated as if the companies had operated as one entity since inception.
See Note 15, Business Combinations and Investments, for a further discussion of
this transaction.
2. MERCHANDISE INVENTORIES
Merchandise inventories, consisting primarily of prerecorded music and
videocassettes, are stated at the lower of cost or market. Cost is determined
using the moving weighted average or the retail inventory method, the uses of
which approximate the first-in, first-out basis.
3. FILM COSTS AND PROGRAM RIGHTS
Film costs and program rights relate to the operations of the Company's filmed
entertainment business. See Note 15, Business Combinations and Investments.
Film costs and program rights include production or acquisition costs
(including advance payments to producers), capitalized overhead and interest,
prints, and advertising expected to benefit future periods. These costs are
amortized, and third party participations and residuals are accrued, in the
ratio that the current year's gross revenue bears to estimated future gross
revenue, calculated on an individual product basis.
7
<PAGE> 8
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Film costs and program rights are stated at the lower of cost, net of
amortization, or estimated net realizable value on an individual film basis.
Estimates of total gross revenue, costs and participation expenses are reviewed
quarterly and write-downs to net realizable value are recorded and future
amortization expense is revised as necessary.
The components of film costs and program rights, net of amortization, are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
Film costs:
Released $ 81,784 $ 77,204
In process and other 10,837 22,009
Program rights 91,678 89,690
--------- ---------
184,299 188,903
Less: non-current portion (67,129) (71,579)
--------- ---------
Current portion of film costs
and program rights $ 117,170 $ 117,324
========= =========
</TABLE>
The non-current portion of film costs and program rights is included in other
assets.
4. VIDEOCASSETTE RENTAL INVENTORY
Videocassettes are recorded at cost and amortized over their estimated economic
life with no provision for salvage value. Videocassettes which are considered
base stock are amortized over thirty-six months on a straight-line basis.
Videocassettes which are considered new release feature films frequently
ordered in large quantities to satisfy initial demand ("hits") are, except as
discussed below, amortized over thirty-six months on an accelerated basis.
"Hit" titles for which ten or more copies per store are purchased are, for the
tenth and any succeeding copies, amortized over nine months on an accelerated
basis.
Videocassette rental inventory and related amortization are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---------- -----------
<S> <C> <C>
Videocassette rental inventory $ 860,883 $ 841,488
Less: accumulated amortization (381,581) (371,265)
--------- ---------
$ 479,302 $ 470,223
========= =========
</TABLE>
8
<PAGE> 9
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization
expense is provided over the estimated lives of related assets using the
straight-line method. The components of property and equipment are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
Life 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Land and buildings 15-32 Years $ 88,186 $ 77,715
Leasehold improvements 2-10 Years 306,028 281,992
Furniture and fixtures 2-10 Years 188,592 178,578
Equipment 2-10 Years 219,431 194,125
--------- ---------
802,237 732,410
Less: accumulated depreciation
and amortization (231,559) (209,665)
--------- ---------
$ 570,678 $ 522,745
========= =========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets primarily consist of the cost of acquired businesses in
excess of the market value of net tangible assets acquired. The cost in excess
of the market value of net tangible assets is amortized on a straight-line
basis over periods ranging from 15 to 40 years.
Accumulated amortization of intangible assets at March 31, 1994 and December
31, 1993 was $52,095,000 and $45,286,000, respectively.
7. INVESTMENTS IN VIACOM INC.
In January 1994, the Company entered into a merger agreement pursuant to which
the Company agreed to merge with and into Viacom Inc. ("Viacom"), with Viacom
being the surviving corporation. The closing of the merger is subject to
customary conditions including, but not limited to, approval of the merger by
the Company's shareholders.
Concurrent with the merger agreement, the Company entered into a subscription
agreement pursuant to which, in March 1994, the Company purchased from Viacom
22,727,273 shares of non-voting Viacom Class B common stock for an aggregate
purchase price of approximately $1,250,000,000, or $55 per share.
Under the terms of the subscription agreement, the Company was granted certain
rights to a make-whole amount in the event that the merger agreement is
terminated and the highest average trading price of the non-voting Viacom Class
B common stock during any consecutive 30 trading day period prior to the first
anniversary of such termination is below $55 per share. Such make-whole amount
would be based on the difference between $55 per share and such highest average
trading price per share.
9
<PAGE> 10
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
However, the aggregate make-whole amount may not exceed $275,000,000.
Viacom is entitled to satisfy its obligation with respect to any such
make-whole amount, at Viacom's option, either through the payment to the
Company of cash or marketable equity or debt securities of Viacom, or a
combination thereof, with an aggregate value equal to the make-whole amount or
through the sale to the Company of the theme parks currently owned and operated
by Paramount Communications Inc., a subsidiary of Viacom. In the event that
Viacom were to elect to sell the theme parks to the Company, the purchase price
would be $750,000,000, payable through delivery to Viacom of shares of
non-voting Viacom Class B common stock valued at $55 per share.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, which requires the Company to carry its investment
in non-voting Viacom Class B common stock at fair value. Pursuant to the
provisions of SFAS No. 115, the Company has classified its investment in
non-voting Viacom Class B common stock as an "available-for-sale security".
Accordingly, based upon the quoted market price of such common stock and
assuming that Viacom would have elected to satisfy its make-whole obligation
using the method that results in the maximum unrealized holding loss to the
Company, at March 31, 1994 the carrying value of the Company's investment has
been reduced to $878,645,000. The corresponding unrealized holding loss
resulting from such reduction has been excluded from net income and reported
in a separate component of shareholders' equity.
In October 1993, the Company purchased 24,000,000 shares of newly-issued Series
A cumulative convertible preferred stock of Viacom for an aggregate purchase
price of $600,000,000, representing a purchase price of $25 per share. The
preferred stock provides for the payment of quarterly dividends at an annual
rate of 5% and is convertible into non-voting Viacom Class B common stock at a
conversion price of $70 per share. The preferred stock is redeemable at the
option of Viacom beginning in October 1998. Since the preferred stock is an
unlisted equity security, the provisions of SFAS No. 115 described above are
not applicable to this investment. However, based upon a valuation which
considered the terms and conditions of the preferred stock as well as
comparisons to other similar securities, the Company estimates the fair value
of such investment to be approximately $435,000,000 at March 31, 1994.
8. OTHER ASSETS
Other assets consist primarily of equity investments in less than
majority-owned businesses, the non-current portion of film costs and program
rights related to the Company's filmed entertainment business and the
non-current portion of accounts and notes receivable.
10
<PAGE> 11
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. ACCRUED PARTICIPATION EXPENSES
Accrued participation expenses relate to the Company's filmed entertainment
business and include amounts due to producers and other participants for their
share of programming and distribution revenue.
10. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------ -----------
<S> <C> <C>
Bank term loan, interest at eurodollar
rate plus .75% (4.375% at March 31, 1994) $1,000,000 $ ---
Payable to banks under an unsecured
revolving credit agreement, interest
at 4.20% at March 31, 1994 845,000 411,000
Unsecured senior notes, interest fixed
at 6.625% 150,000 150,000
Bank term loan, interest at eurodollar
rate plus 2% (5.62% at December 31, 1993) --- 49,579
Payable to others, interest at 10.00% 2,000 2,000
---------- ---------
Total debt 1,997,000 612,579
Less: current portion (1,000,000) (9,083)
---------- ---------
Long-term debt, less current portion $ 997,000 $ 603,496
========== =========
</TABLE>
In February 1994, the Company entered into a credit agreement with certain
banks pursuant to which such banks advanced the Company on an unsecured basis
$1,000,000,000 for a term of twelve months. This credit agreement requires,
among other items, that the Company maintain certain financial ratios and
comply with certain financial covenants. In March 1994, the Company used the
proceeds from such borrowing along with $250,000,000 of proceeds from
borrowings under its existing revolving credit agreement for the purchase of
shares of non-voting Viacom Class B common stock. See Note 7, Investments in
Viacom Inc., for a further discussion of such investment.
11
<PAGE> 12
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY
As of March 31, 1994, approximately 34,051,000 shares of the Company's
common stock, $.10 par value ("Common Stock") were reserved for issuance under
employee benefit and dividend reinvestment plans, upon exercise of certain
warrants and options, and in connection with potential acquisitions of other
businesses, properties or securities.
Cash dividends of two and one half cents per common share were declared during
the three months ended March 31, 1994.
During the three months ended March 31, 1994, an unrealized holding loss of
$375,945,000 resulting from a fair value adjustment to the Company's investment
in non-voting Viacom Class B common stock was reported in a separate component
of shareholders' equity. See Note 7, Investments in Viacom Inc., for a further
discussion of this fair value adjustment.
12. INCOME TAXES
Income taxes have been provided for based on the Company's anticipated annual
effective income tax rate.
13. NET INCOME PER SHARE
Net income per common share is based on the combined weighted average number of
common shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of warrants and options. In
computing net income per common share, the Company utilizes the treasury stock
method. For the three months ended March 31, 1993, computation of net income
per common share on a fully diluted basis assumes conversion of the Liquid
Yield Option Notes ("LYONs") which were outstanding during this period,
resulting in an adjustment to net income for the hypothetical elimination of
interest expense, net of tax, related to the LYONs.
12
<PAGE> 13
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The information required to compute net income per common share on a primary
and fully diluted basis is presented below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
Primary: 1994 1993
-------- --------
<S> <C> <C>
Weighted average number of
common equivalent shares 253,758 203,217
======== ========
Fully diluted:
Net income $ 72,593 $ 44,686
Interest expense related to
LYONs, net of tax --- 1,485
-------- --------
Adjusted net income $ 72,593 $ 46,171
======== ========
Weighted average number of
common equivalent shares 253,758 203,302
Shares issued upon assumed
conversion of LYONs --- 8,304
-------- --------
Shares used in computing
net income per common
share - assuming full dilution 253,758 211,606
======== ========
</TABLE>
13
<PAGE> 14
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. STOCK OPTIONS AND WARRANTS
A summary of stock option and warrant transactions for the three months ended
March 31, 1994 is as follows:
<TABLE>
<S> <C>
Options and warrants outstanding at
beginning of period 18,314
Granted 77
Exercised (146)
Cancelled (167)
------
Options and warrants outstanding at
end of period 18,078
======
Average price of options and warrants
exercised $12.43
Prices of options and warrants
outstanding at end of period $1.08 to $33.50
Average price of options and warrants
outstanding at end of period $15.96
Vested options and warrants at end
of period 12,452
Options available for future grants at
end of period 1,890
</TABLE>
15. BUSINESS COMBINATIONS AND INVESTMENTS
All business combinations discussed below, except for the merger with WJB, were
accounted for under the purchase method of accounting and, accordingly, are
included in the Company's financial statements from the date of acquisition.
During the three months ended March 31, 1994, the Company acquired businesses
that own and operate video stores and indoor recreational facilities for
children and invested in a business which develops, publishes and distributes
interactive software. The aggregate purchase price paid by the Company was
approximately $53,040,000 and consisted of cash and 1,358,706 shares of
Common Stock.
In November 1993, the Company acquired all of the outstanding capital stock of
Super Club Retail Entertainment Corporation and subsidiaries ("Super Club"),
which owns and operates video and music stores. The purchase price paid by the
Company was approximately $150,000,000 and consisted of 5,245,211 shares of
Common Stock and warrants to acquire shares of Common Stock. The warrants give
the holders the right to acquire 1,000,000 and 650,000 shares of Common Stock
at exercise prices of $31.00 and $32.42 per share, respectively.
In August 1993, the Company merged with WJB, its then largest franchise owner.
Under the terms of the agreement and plan of reorganization, the Company issued
7,214,192 shares of its Common Stock in exchange for the
14
<PAGE> 15
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
equity interests of WJB. This transaction has been accounted for under the
pooling of interests method of accounting and, accordingly, the Company's
financial statements have been restated for all periods as if the companies had
operated as one entity since inception.
During the second quarter of 1993, the Company acquired a majority of
the common stock of Spelling Entertainment Group Inc. and subsidiaries
("Spelling"), a producer and distributor of filmed entertainment. The
aggregate consideration paid by the Company totaled approximately $163,369,000
and consisted of cash and 9,278,034 shares of Common Stock. The Company also
issued to certain sellers of Spelling's common stock, warrants to acquire an
aggregate of 2,000,000 shares of its Common Stock at an exercise price of $25
per share. Additionally, in October 1993, the Company exchanged 3,652,542
shares of Common Stock for 13,362,215 newly-issued shares of Spelling's common
stock. As a result of the transactions described above, the Company owned
approximately 70.5% of the outstanding common stock of Spelling at March 31,
1994.
The Company's consolidated results of operations for the three months ended
March 31, 1993, on an unaudited pro forma basis assuming the acquisitions of
Super Club and Spelling had occurred as of January 1, 1993 are as follows:
<TABLE>
<S> <C>
Revenue $ 574,847
==========
Net income $ 48,221
==========
Net income per common share -
assuming full dilution $ .22
==========
</TABLE>
15
<PAGE> 16
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The purchase price allocations for business combinations and investments during
the three months ended March 31, 1994 and 1993, as described above, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1994 1993
-------- --------
<S> <C> <C>
Videocassette rental inventory $ 1,594 $ 1,551
Property and equipment 1,984 275
Intangible assets 14,825 7,258
Other assets 45,146 41,790
Working capital deficiency, excluding cash
acquired (3,912) (3,629)
Other liabilities (8,678) (1,056)
Common stock issued (36,648) (21,773)
-------- --------
Net cash used in business combinations
and investments $ 14,311 $ 24,416
======== ========
</TABLE>
The amounts presented above for the three months ended March 31, 1994 reflect
the preliminary purchase price allocations for business combinations.
16. LEGAL MATTERS
The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business, including its business as a
franchisor. The Company believes that such lawsuits, claims and other legal
matters should not have a material adverse effect on the Company's consolidated
results of operations or financial condition.
Spelling is involved in a number of legal actions including threatened claims,
pending lawsuits, contract disputes, environmental clean-up assessments,
damages from alleged dioxin contamination and other matters. While the outcome
of these suits and claims cannot be predicted with certainty, the Company
believes based upon its knowledge of the facts and circumstances and
applicable law that the ultimate resolution of such suits and claims will not
have a material adverse effect on the Company's consolidated results of
operations or financial condition. This belief is also based upon the adequacy
of approximately $30,000,000 of accruals that have been established for
probable losses on disposal of former operations and remaining Chapter 11
disputed claims and an insurance-type indemnity agreement which covers up to
$35,000,000 of certain possible liabilities in excess of a threshold amount of
$25,000,000, subject to certain adjustments.
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<PAGE> 17
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
VIACOM INC. AGREEMENTS
In January 1994, the Company entered into a merger agreement pursuant to which
the Company agreed to merge with and into Viacom Inc. ("Viacom"), with Viacom
being the surviving corporation. The closing of the merger is subject to
customary conditions including, but not limited to, approval of the merger by
the Company's shareholders.
The Company mailed a letter to its shareholders, dated May 4, 1994, updating
them as to the status of the proposed merger with Viacom. The letter noted that
since the date the merger agreement was entered into, there has been a
substantial drop in the market prices of Viacom stock. The letter stated that
although the Company's Board of Directors continues to believe that the
combination of the Company with Viacom and Paramount Communications, Inc.
represents an excellent strategic opportunity, given the current price levels
of the Viacom stock, there could be no assurance that the Company's Board of
Directors would be able to recommend the transaction at the time of any
shareholder meeting called to vote on the merger. The letter also stated that
the Company was unable to say whether or not the transaction would go forward
or whether or not any special meeting of the Company's shareholders would be
called to vote on the merger, but noted that in any event, as Viacom's second
largest shareholder and its largest customer, the Company would continue to
work closely with Viacom to assure that the relationship between the companies
would remain mutually beneficial and productive.
Concurrent with the merger agreement, the Company entered into a subscription
agreement pursuant to which, in March 1994, the Company purchased from Viacom
22,727,273 shares of non-voting Viacom Class B common stock for an aggregate
purchase price of approximately $1,250,000,000, or $55 per share.
Under the terms of the subscription agreement, the Company was granted certain
rights to a make-whole amount in the event that the merger agreement is
terminated and the highest average trading price of the non-voting Viacom Class
B common stock during any consecutive 30 trading day period prior to the first
anniversary of such termination is below $55 per share. Such make-whole amount
would be based on the difference between $55 per share and such highest average
trading price per share. However, the aggregate make-whole amount may not
exceed $275,000,000.
Viacom is entitled to satisfy its obligation with respect to any such
make-whole amount, at Viacom's option, either through the payment to the
Company of cash or marketable equity or debt securities of Viacom, or a
combination thereof, with an aggregate value equal to the make-whole amount or
through the sale to the Company of the theme parks currently owned and operated
by Paramount Communications Inc., a subsidiary of Viacom.
In the event that Viacom were to elect to sell the theme parks to the Company,
the purchase price would be $750,000,000, payable through delivery to Viacom of
shares of non-voting Viacom Class B common stock
17
<PAGE> 18
valued at $55 per share. If the theme parks were so purchased by the Company,
the subscription agreement further provides that the Company would grant an
option to Viacom, exercisable for a period of two years after the date of
grant, to purchase a 50% equity interest in the theme parks at a purchase price
of $375,000,000.
See "Financial Condition" and "Cash Flows" of Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 7,
Investments in Viacom Inc., of Notes to Unaudited Condensed Consolidated
Financial Statements for a further discussion related to these transactions.
BUSINESS COMBINATIONS AND INVESTMENTS
The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations.
All business combinations discussed below, except for the merger with WJB Video
Limited Partnership and certain of its affiliates ("WJB"), were accounted for
under the purchase method of accounting and, accordingly, are included in the
Company's financial statements from the date of acquisition.
During the three months ended March 31, 1994 the Company acquired businesses
that own and operate video stores and indoor recreational facilities for
children and invested in a business which develops, publishes and distributes
interactive software. The aggregate purchase price paid by the Company was
approximately $53,040,000 and consisted of cash and 1,358,706 shares of the
Company's common stock, $.10 par value ("Common Stock").
In November 1993, the Company acquired all of the outstanding capital stock of
Super Club Retail Entertainment Corporation and subsidiaries ("Super Club")
from certain subsidiaries of Philips Electronics N.V. ("Philips"). The
purchase price paid by the Company was approximately $150,000,000 and consisted
of 5,245,211 shares of Common Stock and warrants to acquire additional shares
of Common Stock. The warrants give Philips the right to acquire 1,000,000 and
650,000 shares of Common Stock at exercise prices of $31.00 and $32.42 per
share, respectively. As a result of the acquisition, the Company added 270
music stores and 120 video stores to its system operating primarily in the
southeastern United States.
In August 1993, the Company merged with WJB, its then largest
franchise owner with 209 stores operating in the southeastern United States.
In connection with the merger, the Company issued 7,214,192 shares of its
Common Stock in exchange for the equity interests of WJB. This transaction has
been accounted for under the pooling of interests method of accounting and,
accordingly, the Company's financial statements have been restated for all
periods as if the companies had operated as one entity since inception.
During the second quarter of 1993, the Company acquired a majority of the
common stock of Spelling Entertainment Group Inc. and subsidiaries
("Spelling"), a producer and distributor of filmed entertainment. The
aggregate consideration paid by the Company totaled approximately
$163,369,000 and
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<PAGE> 19
consisted of cash and 9,278,034 shares of Common Stock. The Company also
issued to certain sellers of Spelling's common stock, warrants to acquire an
aggregate of 2,000,000 shares of its Common Stock at an exercise price of $25
per share. Additionally, in October 1993, the Company exchanged 3,652,542
shares of Common Stock for 13,362,215 newly-issued shares of Spelling's common
stock. As a result of the transactions described above, the Company owned
approximately 70.5% of the outstanding common stock of Spelling at March 31,
1994.
The Company may from time to time invest in or acquire other businesses,
properties or securities.
RESULTS OF OPERATIONS
The Company continued its record of profitable growth during the three months
ended March 31, 1994. Revenue for the three months ended March 31, 1994 was
$696,531,000, an increase of 61% over the same period of the prior year. Net
income for the three months ended March 31, 1994 was $72,593,000, an increase
of 62% over the same period of the prior year. Net income per share for the
three months ended March 31, 1994 was $.29, an increase of 32% over the same
period of the prior year. The strong performance of a greater number of stores
in operation, including newly acquired video and music stores, the addition of
the Company's filmed entertainment business and an 11.3% increase in same store
revenue for video stores in operation for more than one year contributed to the
significant increases in revenue, net income and net income per share.
The following table sets forth the number of stores in operation as of March
31:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Video stores:
Company-owned 2,762 2,245
Franchise-owned 904 925
----- -----
3,666 3,170
===== =====
Music stores:
Company-owned 509 237
Joint venture 20 15
----- -----
529 252
===== =====
</TABLE>
RENTAL REVENUE
Rental revenue was $392,618,000 for the three months ended March 31, 1994
representing an increase of 35% over the same period of the prior year. The
significant increase in rental revenue is primarily the result of the increased
number of video stores in operation and increased same store rental revenue for
video stores in operation for more than one year.
PRODUCT SALES
Product sales revenue consists primarily of revenue generated from
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<PAGE> 20
product sales at video and music stores. Product sales at video stores consist
principally of sales of prerecorded videocassettes, confectionery items and
video accessories. Product sales at music stores consist principally of sales
of compact discs, audiocassettes and other music related items.
The following table sets forth the components of product sales revenue (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1994 1993
---- ----
<S> <C> <C>
Product Sales:
Music stores $120,940 $ 73,715
Video stores 74,687 48,277
Other 9,703 8,361
-------- --------
$205,330 $130,353
======== ========
</TABLE>
The significant increase in product sales at music stores for the three months
ended March 31, 1994 is due primarily to product sales generated at Super Club
music stores, which were acquired by the Company in November 1993.
The significant increase in product sales at video stores for the three months
ended March 31, 1994 is primarily due to a greater number of stores in
operation and an increase in product sales on a per store basis. This increase
reflects the Company's continued emphasis on sales of products in its video
stores, including increases in the number of prerecorded videocassettes,
confectionery items and video accessories available for sale. Revenue from
product sales at video stores represented approximately 16% of total video
store revenue for the three months ended March 31, 1994 as compared to 15% for
the same period of the prior year.
OTHER REVENUE
The following table sets forth the components of other revenue (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1994 1993
---- ----
<S> <C> <C>
Programming and distribution
revenue $ 80,413 $ ---
Royalties and other 18,170 11,647
-------- --------
$ 98,583 $ 11,647
======== ========
</TABLE>
Programming and distribution revenue relate to the Company's filmed
entertainment business, which was acquired in April 1993.
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<PAGE> 21
OPERATING COSTS AND EXPENSES
The following table sets forth the cost of product sales as a percentage of
product sales revenue and programming and distribution expenses as a percentage
of programming and distribution revenue. All other operating expenses and
selling, general and administrative expenses are shown as a percentage of total
revenue for the periods presented below:
<TABLE>
<CAPTION> Three Months Ended
March 31,
------------------
1994 1993
---- ----
<S> <C> <C>
Cost of product sales 65% 66%
Operating expenses:
Programming and distribution
expenses 69% ---
Compensation 16% 17%
Occupancy 13% 16%
Depreciation and amortization 17% 21%
Selling, general and administrative 9% 9%
</TABLE>
The above table represents consolidated percentages of operating costs and
expenses which include the Company's filmed entertainment business and a
significant increase in the number of music stores in operation for the 1994
period and, accordingly, affect the comparability of period-to-period data as
more fully described below.
COST OF PRODUCT SALES
Cost of product sales was $133,387,000 for the three months ended March 31,
1994 as compared to $86,014,000 for the same period of the prior year. The
increase is generally consistent with the increase in product sales revenue
during such period.
OPERATING EXPENSES
Programming and distribution expenses were $55,138,000 for the three months
ended March 31, 1994. Such expenses relate to the operations of the Company's
filmed entertainment business acquired in April 1993 and include amortization
of film costs and program rights, amounts paid or due to producers, and other
residual and profit participation expenses. See Note 3, Film Costs and Program
Rights, of Notes to Unaudited Condensed Consolidated Financial Statements for a
further discussion of programming and distribution expenses.
Compensation, occupancy, and depreciation and amortization expenses, as
percentages of revenue, declined in 1994 compared to 1993. These decreases
relate principally to the inclusion of the Company's filmed entertainment
business and a significant increase in the number of music stores in operation
for the 1994 period. The ratios of compensation, occupancy, and depreciation
and amortization expenses to the revenue of such acquired businesses are lower
than the ratios historically achieved at the Company's video stores.
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<PAGE> 22
Compensation expenses were $113,297,000 for the three months ended March 31,
1994 as compared to $74,283,000 for the same period of the prior year. This
increase is primarily a result of the continued expansion of the Company's
business through the development and acquisition of video and music stores.
Occupancy expenses were $93,948,000 for the three months ended March 31, 1994
as compared to $67,926,000 for the same period of the prior year. The increase
is primarily the result of the continued expansion of the Company's business
through the development and acquisition of video and music stores.
Depreciation and amortization expenses were $117,528,000 for the three months
ended March 31, 1994 as compared to $89,496,000 for the same period of the
prior year. This increase is primarily the result of the Company's continued
investment in capital additions, particularly videocassette rental inventory.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $63,634,000 for the three
months ended March 31, 1994 as compared to $38,751,000 for the same period of
the prior year. This increase primarily reflects expenditures associated with
the expansion of the Company's business through the development and acquisition
of video and music stores and certain professional fees incurred in connection
with the Company's agreement to merge with Viacom.
INTEREST EXPENSE
Interest expense was $11,619,000 for the three months ended March 31, 1994 as
compared to $6,559,000 for the same period of the prior year. This increase
relates primarily to an increase in the Company's indebtedness resulting from
the financing of its investments in Viacom. As a result, the Company expects
interest expense for future periods to remain higher as compared to prior
periods.
PROVISION FOR INCOME TAXES
The effective rates of income tax expense for the periods presented are based
upon the Company's anticipated annual effective income tax rate.
FINANCIAL CONDITION
The Company believes that its financial condition remains strong and that it
has sufficient operating cash flow and other financial resources necessary to
meet its anticipated capital requirements and obligations as they come due.
WORKING CAPITAL
Working capital at March 31, 1994 was a deficit of $754,163,000 as compared to
$105,485,000 at December 31, 1993. The decrease of $859,648,000 from the end
of last year was due primarily to increased short-term indebtedness related to
the Company's financing of its investment in non-voting Viacom Class B common
stock which is a non-
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<PAGE> 23
current asset. The Company believes it will be able to refinance such
indebtedness on a long-term basis prior to its maturity.
Accounts payable were $205,965,000 at March 31, 1994, a decrease of
$163,850,000 from December 31, 1993. This decrease reflects the completion of
the holiday selling cycle, including payments for a significant level of
product purchases typically made in the fourth quarter of each year and the
returns of certain seasonal products pursuant to prior agreements with vendors
which are consistent with current industry practices.
Accrued liabilities were $157,842,000 at March 31, 1994, a decrease of
$19,853,000 from December 31, 1993. This decrease is due primarily to the
reduction of sales tax and payroll accruals, and advanced license fees and
deferred revenue which are related to the Company's filmed entertainment
business.
INVESTMENTS IN VIACOM INC.
Investments in Viacom increased by $878,645,000 over December 31, 1993. This
increase is a result of the Company's purchase of non-voting Viacom Class B
common stock for approximately $1,250,000,000 and the subsequent reduction in
the carrying value of such investment to reflect fair value. See Note 7,
Investments in Viacom Inc., of Notes to Unaudited Condensed Consolidated
Financial Statements for a further discussion of the Viacom investments and
this fair value adjustment.
OTHER ASSETS
Other assets were $364,648,000 at March 31, 1994, an increase of $41,690,000
over December 31, 1993. This increase is primarily a result of the Company's
continued investment in less than majority-owned businesses.
CASH FLOWS
Cash and cash equivalents decreased by $18,019,000 during the three months
ended March 31, 1994 as compared to a $17,746,000 decrease in the comparable
1993 period. The major components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities decreased to $31,851,000 for the
first three months of 1994 from $63,950,000 for the comparable period of 1993.
This decrease is primarily a result of the reduction in accounts payable, which
include payments for a significant level of product purchases typically made in
the first quarter of each year. The seasonal reduction in accounts payable for
the three months ended March 31, 1994 exceeded the reduction for the comparable
period in 1993 due primarily to the increased number of video and music stores
in operation and the increased amount of product purchased per store. Cash
provided by operating activities combined with certain cash provided by
financing activities in each of the comparable periods of 1994 and 1993 were
used to fund capital additions and acquisitions as the Company's business
expanded during these periods.
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<PAGE> 24
CASH FLOWS FROM INVESTING ACTIVITIES
Capital additions for new and existing stores and cash used in business
acquisitions and investments comprise most of the Company's investing
activities. Capital additions, which primarily consist of purchases of
videocassette rental inventory and property and equipment, were $182,888,000
for the three months ended March 31, 1994 and $110,685,000 for the comparable
period in 1993.
During the first three months of 1994, the Company purchased approximately
$1,250,000,000 of non-voting Viacom Class B common stock. See "Viacom Inc.
Agreements" of Management's Discussion and Analysis of Financial Condition and
Results of Operations for a further discussion of this investment.
During the first three months of 1994 and 1993, the Company opened or acquired
a net of 64 and 30 video stores, respectively.
During the remainder of 1994, the Company believes that it will continue to
purchase videocassettes and property and equipment in a manner substantially
consistent with historical practices.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the three months ended March 31,
1994 and 1993 resulted from commercial bank borrowings, repayments of such bank
borrowings, a public debt offering, issuances of Common Stock and the payment
of cash dividends. The commercial bank borrowings in 1994 were primarily used
to fund the Company's investment in non-voting Viacom Class B common stock.
The other financing activities combined with cash provided by operating
activities were used to fund capital additions and acquisitions as the
Company's business expanded during these periods. The Company from time to
time may seek additional or alternate sources of financing.
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<PAGE> 25
PART II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(2) Agreement and Plan of Merger, dated as of
January 7, 1994, between the Registrant and
Viacom Inc. (incorporated by reference to
Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated January 7, 1994).
(10.1) Subscription Agreement, dated as of January 7, 1994,
between the Registrant and Viacom Inc. (incorporated
by reference to Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated January 7, 1994).
(10.2) Credit Agreement, dated as of February 15, 1994, by
and among the Registrant, BA Securities, Inc., as
Arranger, Bank of America Trust and Savings
Association, as Agent, and certain other financial
institutions (incorporated by reference to Exhibit 99
to the Registrant's Current Report on Form 8-K dated
February 15, 1994).
(10.3) Registrant's 1994 Stock Option Plan which is subject
to stockholder approval (incorporated by reference to
Exhibit 10.35 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1993).
(b) Reports on Form 8-K:
(1) Form 8-K dated January 7, 1994 relating to
the Company's Agreement and Plan of Merger
with Viacom Inc.
(2) Form 8-K dated February 15, 1994 relating to
the Company's Credit Agreement pursuant to
which certain financial institutions agreed
to advance the Company on an unsecured basis
an aggregate of $1,000,000,000 for the
purchase of shares of capital stock of Viacom
Inc. pursuant to the Subscription Agreement
dated January 7, 1994 between the Company and
Viacom Inc.
(3) Form 8-K dated March 10, 1994 relating to the
Company's completed purchase from Viacom Inc.
of 22,727,273 shares of Viacom Class B common
stock pursuant to the subscription agreement
dated January 7, 1994, between the Company
and Viacom for an aggregate purchase price of
$1.25 billion.
(4) Form 8-K dated May 5, 1994 relating to the
letter dated May 4, 1994 mailed to the
Company's shareholders, in connection with
the Company's annual meeting of shareholders
to be held May 24, 1994.
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<PAGE> 26
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLOCKBUSTER ENTERTAINMENT
CORPORATION
DATE: May 13, 1994 /s/ Gregory K. Fairbanks
------------------------
Gregory K. Fairbanks
Senior Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial Officer)
26
